IRS' Accounts Receivable Inventory

Published by the Government Accountability Office on 1990-10-18.

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

                   United States General Accounting OfEke

For Release        ' IRS'   Accounts   Receivable         Inventory
on Delivery

October 18, 1990

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

                     Before    the Subcommittee on Oversight
                     Committee    on Ways and Means
                     House of Representatives

GAO/T-GGU-91-07                             ,I    h,lGl
                       SUMMARY OF STATEMENT BY
                           PAUL L. POSNER
As part of its continuing             work on IRS' accounts            receivable
inventory,      GAO examined the composition              and disposition          of two
groups of accounts comprising               10 percent     of the first         quarter
1990 accounts         receivable    inventory      of $67.7 billion--the             98
largest     accounts and (2) accounts            receivable       from federal
agencies     for employment taxes.             GAO found that,         for both groups
of accounts,        the    amount  owed   declined     substantially         from the
first    quarter      of 1990 through       August,    but very little          of this
decrease could be attributed              to collections        from these taxpayers.
Rather,     nearly      all of the decrease was the result                of amounts
written     off by adjusting        taxpayers'       accounts     due to taxpayer        or
 IRS errors.        The complex and confusing            nature of the federal           tax
deposit     system is at least partly            responsible        for these errors.
This system, as well as IRS' accounting                   and information
 processing      systems,      needs improvement       to reduce erroneous
 receivables       in the inventory.
GAO cannot determine             how much of the remaining         amount due as of
August 1990 can be collected.                 With regard to the 98 largest
accounts,        the total     amount owed declined         44 percent,     or $2.7
billion.         While nearly      all this    amount was written        off by IRS
through       account adjustments,         some of the remaining         accounts may
yield      substantially      more in actual      collections      once IRS' pending
actions       come to fruition.        IRS has installment         or settlement
agreements         in process with 15 of these 98 taxpayers,                which may
yield      collections     in coming months.          In addition,      IRS may get
further       collections      from some of the 20 accounts          currently      in
litigation         or appeals.
With regard to federal           agencies,        the total      amount owed declined
by 79 percent,         or $145.6    million,        through     August 1990, with only
$4.3 million       representing      actual       collections.         GAO expects only a
small portion       of the remainder           to be collectible         since most of
these receivables          are overstated         as a result       of accounting      and
tax processing         errors   by both IRS and the agency taxpayers.                    Some
of these errors         occurred    because federal            agencies    filed  their    tax
returns    late,    while others        were due to a payment process
requiring      federal     agencies     to issue checks through the Treasury
to IRS --a cumbersome system,              ill-designed         for intragovernmental
Mr. Chairman                  and Members of the                    Subcommittee:

We are pleased                   to be here          today          to assist         the subcommittee                   in its
continuing               inquiry        into       IRS'       accounts         receivable            inventory.             As
you requested,                   Mr. Chairman,                our      testimony        today        focuses          on IRS'
accounts        receivable               from       federal          government          agencies             for
employment               taxes       and IRS’        largest            accounts       receivable--accounts
comprising               10    percent         of the $67.7              billion       receivables
inventory.           l

In   the     first            quarter      of      1990,        federal         agency      receivables
accounted            for       $185 million               while        the     98 largest        receivables
accounted            for       $6.2     billion.          2     To help         determine        how much of this
amount       was truly               owed by taxpayers,                      we tracked         their         disposition
through       August             1990 and found                 that      most of        the    amounts             resolved
as of August                  were erroneously                  recorded           as receivables              because         of
bookkeeping                errors,        such as misapplying                       payments,         caused          by both
IRS and taxpayers.                        IRS resolved                 these       amounts      by making
adjustments                to its        records,             and the        taxpayers         did      not     have to pay
additional               taxes.

lThese amounts for the first        quarter                                    of 1990       exclude interest                   and
penalties.    The accounts    receivable                                     inventory        is $90 billion                   when
interest   and penalties   are included.
2With regard to the largest        receivables,      we analyzed    the largest
98, rather    than the largest     100,    as requested   by the
Subcommittee.       We asked IRS for a list       of the 100 largest
receivables,     but the list   IRS provided      only included    98
taxpayers.      In some instances,      the same taxpayer      is in two IRS
databases,    and therefore    appeared among the 100 largest
receivables     twice when we combined information          from the databases.
Nevertheless,               when we looked                at the 63 largest                   federal          accounts,
we did         find       that     6 of    the accounts                  resolved       so far        consisted           of
late      agency          payments        on employment                  taxes.       For the unresolved
accounts,             some other          agencies           may be found              to owe additional
taxes      once IRS finishes                     its    investigation.                  Not only         do federal
agencies          have an obligation                    to be model                taxpayers,         but      their
failure          to make timely              tax payments                 causes       the Social             Security
Trust      Fund to lose              interest           revenue           as well.


Currently,              federal      agencies,              like     other         employers,          are     required
to deposit              withheld          income       and social            security          taxes        as well        as
their      portion           of social           security           taxes         through       the Federal             Tax
Deposit          (FTD) System,              and to file              quarterly          returns.              Many
federal          agencies          pay their           taxes        by authorizing               the Treasury              to
issue      checks.               They must         also       submit        an FTD coupon              with      each
payment          like      other     employers.                However,            federal       agencies,             unlike
other      employers,              are     not     liable          for    paying       penalties            and interest
if      they     fail       to meet deposit                 and filing             requirements             because        they
cannot          legally          use funds         appropriated              for      other      purposes         to pay
penalties             and interest.

IRS records               showed that            676 federal              entities--more               than      a quarter
of      those      reporting        --owed         $185 million              in back          taxes     as of

February         24,      1990.3              Every        Cabinet         department          was represented,                   as
were a number of                     independent               agencies,           including       the General
Accounting             Office,          which         was reported               as owing       $52,000.             Sixty-
three      federal           entities            had balances                due of $100,000             or more,
totaling         about         $178 million,                   or about          96 percent        of      the amount
due from          federal            entities.               Therefore,            we chose      to track             actions
taken      on receivables                     from      these        63 entities.              The 63 included                    49
defense-related                    entities.

Tracking          the disposition                     of     these         63 accounts         through          August
helps      reveal         how many actually                         owed additional             taxes.           As the
table      in attachment                    I shows,           the    vast       majority       of the resolved
amount--         $141 million                 for     48 of         the 63 entities--was                   not       caused        by

owed taxes             but     rather          was resolved                 by IRS bookkeeping                  adjustments
such as abatements                      of tax          assessments                and corrections              of
misapplied             payments             caused           by IRS or        taxpayer         errors.           However,              6
of   these        63 entities                 actually             paid     $4.3     million       in additional                  tax
to resolve             their         accounts.                It    would     be     helpful       to discuss              each
of   these        cases            at this          point:

--   The United               States          Information                 Agency     owed nearly           $1.4         million
     for     one quarter                 in      1988,        representing             16 percent          of     its
     liability               for     that      quarter.              Officials          admitted         that        the

3We refer      to entity       rather   than agency because         a federal    agency
may have numerous taxpaying               entities,     including     employee
associations,         reporting      to IRS.      Each entity     has its own
identification          number and accounts.           IRS’ records      are maintained
by entity,      not agency, and, in some instances,                 information     in
IRS’ records        is not descriptive           enough to identify       which agency
the entity       belongs to.
     underpayment                was caused                   when a payment                        for        nearly           $1.4     million
     was mistakenly                     cancelled                  by Treasury.                     This        underpayment                  was
     satisfied            by applying                      a $1 million                   overpayment                  still           on IRS'
     books       and a check                   from         the agency                  for        the rest.

--   The Portsmouth                     Naval          Shipyard                 owed $282,000                   for         a 1988       quarter
     (2 percent             of         its      liability)                  and $2.2               million            dollars           for     a
     1989       quarter           (14 percent                      of     its        liability).                 The agency
     claimed         that         it         had already                  paid         these         taxes,           but       that     the
     payments         did         not post                 to its           accounts.                 The agency
     subsequently                 issued              new checks                 to cover             these           delinquencies.

--   The Defense             Logistics                     Agency           sent         a late           payment              for     almost       $1
     million,         14 percent                      of     its         liability             for        the quarter                  in which
     it     was due,         that             resulted               from        not         returning            a payment              IRS
     send back            in error                   nearly          15 months                earlier.

--   The Army Communications                                  Command, Ft.                     Monmouth,                New Jersey,
     made a late                 tax         payment           for         the       first         quarter            of       1988     that        IRS
     did      not    receive                 until         the          second         quarter            of     that          year.          IRS
     recorded         the payment                       in the             taxpayer's                account            for          the second
     quarter.             This           caused            the          second         quarter's               account               to be
     overpaid         and,             as a result,                      IRS issued                the       taxpayer                a refund.
     The taxpayer                 returned                 the          refunded             amount          to IRS almost                    a year
     later,         thereby              clearing                the delinquency.

--   The Environmental                       Protection              Agency       underpaid           its     taxes        by

     $283,000         for      four          quarters          between          December           1987     and March
     1989.        The agency                 ultimately              paid       the amount due in June                          1990

     some 2-l/2             years       following              the      first        delinquency            period.              IRS'
     detection          of     these           insufficient                 payments         was delayed                because
     the     agency         filed       its         returns          up to 9 months                late      for        these

--   The State          Department                  owed $45,000                in taxes          because          of
     insufficient              deposits              for      the periods             ending        December             1985        and
     December          1987.           This         amount       was paid            in June        1990.

Some other            agencies          may be found                   to owe additional                    taxes        once IRS
and the agencies                    finish          their       investigation                of    the remaining
$32.3       million         not yet            resolved          through            either        payments          or
adjustments.                For example,                   IRS collection               officials            indicate            that
Walter       Reed Army Medical                       Center          may owe $300,000.

As noted         earlier,            the       great         majority           of agency          accounts             examined
were erroneously                    recorded           as receivables                  because        of accounting,
clerical,         and tax            processing               mistakes           caused       by    both        IRS and the
agencies.             GAO's case               is     instructive.                  The agency            was
 incorrectly           recorded              as owing           tax when tax deposits                        were applied
either        to the wrong               tax        period       or to the wrong                   account          number
 (GAO maintained                three          accounts           for       three      separate           entities),
partly       because          of clerical                   errors      on GAO's part.                    According             to
 IRS officials,               GAO's accounts                    will        be resolved            with      no taxes            due.

In fairness,             the     opportunity            for      errors        in the            tax deposit
process        is great.            The Department                of Labor           alone         makes over 200
tax     deposits         per quarter           for      payroll        and numerous                     interim
payments        made to its              employees.              Even IRS revenue                       officers             have
difficulty             understanding           account           activity           because             of     its
complexity             and volume.            In addition,             fully         one-third                 of the
nation’s         private         employers           were penalized                 for     violating                  the
complex        rules       governing          tax deposits                in 1988.

However,         in addition              to clerical            and bookkeeping                       errors,          we
observed         a more disturbing                   pattern--        late      filing            of tax             returns.
More than          two-thirds             of the 63 federal                  entities             filed          tax
returns        late.        IRS’        detection        of late            and insufficient                         payments
is delayed            when returns            are not         filed         on time.

We believe             changes          in the payment            requirements                   for         federal
agencies         would      help         to avoid       unnecessary             administrative                         problems
for     IRS and the             agencies.            Currently,             problems             stem from              applying
the     same deposit             and collection               process          designed                for     private
taxpayers          to federal             agencies.           This        results          in such anomalies                        as
federal        agencies           issuing      checks         through          the Department                        of the
Treasury         to pay another               federal         agency--IRS--for                         taxes.           In one
case,        the State          Department           said     that        checks          for     over         $2 million
have been lost                 twice,      causing          a delay         of over             2 years          in
resolving          discrepancies              in this         agency's          account                and costing              many
staff        hours.

Recognizing            the unique               nature      of federal             agency         tax     payments         as
intragovernmental                     transfers,           the Treasury              should        administratively
streamline         its          payment         and filing          process          by adopting             simpler
procedures         for          processing          federal         payments             and return
information            such as using                bookkeeping              adjustment            or electronic
funds      transfer.


Let     me now briefly                 describe           the     results          IRS has obtained                 from    its
focus      on the          largest         receivables.                 As shown in the                  table      in
attachment          II,         the     total      amount         due from          the 98 largest
receivables            decreased            by $2.7          billion         (44 percent)                between         March
and August          1990.             Nearly       all     of the decrease                  was due to
abatements          and adjustments                      of amounts          resulting            from      erroneous
assessments            and misapplied                    payments,          with     only        $40 million             due to

As of the end of August,                           over      $3.5       billion          was still          owed by 74
of    the original               98 taxpayers.                   IRS has already                 made progress             in
collecting          some of             these      receivables              by establishing                 installment
or settlement               agreements.                  For example,              the    table         in attachment
III      showing          the    status         of these          remaining          largest            receivables
indicates          that         agreements           have been reached                    with      15 taxpayers            for
at    least     partial               payment      on assessed              taxes        of $1.8         billion.          As a
result        of a recent               bankruptcy              case,     a taxpayer             with     one of the

largest       accounts          has agreed              to     pay about           30 percent           of    the amount
owed.        Thus,      we believe             that      it      is reasonable              to expect          that
substantial            amounts         eventually              will      be   collected.

IRS faces        considerable                 difficulties               in collecting               from other
taxpayers       who have no assets                       or cannot            be    located.            One example
is     a drug dealer            whom IRS assessed                       $29 million           in back taxes              for
1981      through       1983     based on his                  court      testimony.               IRS seized           his
known assets--            including            luxury          cars,      vessels,          aircraft,          and a
minesweeper--           and sold             them for          $360,000.            IRS'     prospects             of
collecting           the remaining               taxes         are slight           because          the     taxpayer          is
now deceased            and no other               assets         have been located.                        The table          in
attachment           IV lists          the     types          of taxpayers             comprising            the 98
largest       accounts          receivable.

Even for       those       accounts            with      potential            collections,              89 percent
are over       5 years          old,         so IRS may not               be able          to realize            the
revenue       potential          unless          extensions              to the g-year               statutory
collection           period      are obtained.


Our study        of     these      two groups                 of receivables               again      points        to the
importance           of IRS’       taking          action             to determine          the      real     value      of
the     accounts        receivable              inventory,              including          federal          agency      and
largest       dollar       receivables.                  We believe             that       IRS needs          to    ad just
its     inventory         to account             for     those          cases      that     do not          represent

real      receivables.                  Further,        IRS should           focus      its     collection
efforts       on receivables                   that     have the greatest                potential           to result
in     additional             revenue.

Such actions                 as simplifying             the    federal         tax deposit           system         for
federal       agencies               and all       taxpayers             and enhancing          efforts        to
reduce       the number of erroneous                          assessments             and misapplied
payments        will          go a long         way toward               the prevention          of overstated
receivables.                  For example,             in a July           1990     report,      we recommended
a broad       reform            of federal            tax    deposit        requirements           that      could
help      reduce            errors      and delinquencies                  caused      by the      complexity             of
the     current             process.4          However,          until      other      alternatives            are
available,             it      is our view            that    agencies         must     meet     their
responsibility                  to file        tax     returns           on time      and make prompt               tax

This      concludes             my    prepared         statement.             I would         be pleased        to
answer       any questions                 you may have.

4Tax Policy:    Federal  Tax Deposit Requirements                                             Should      Be
Simplified   (GAO/GGD-90-102,  July 31, 1990).
AT'I!ACfElENTI                                                                  ATI!&XMENI'I

                      FDERALJGEKYREZEIWBLES OVER $100,000
                                  24, 1990,                  21,   1990
                                  (Dollars   in millions)
Balance due on February 24, 1990                  $177.9           63 entities     totala
Iess payments                                     (   4.3)         6 entities     involved
subtotal                                          $173.6

less abatenents & adjustments                     (141.3)          48 entities     involved
Balance dcle on August 21, 1990     $32.        36 entities involved
aSome entities made pyments and also ha3 anomts abat& or adjusted.
Further, saw entities that had anounts abated or adjusted still had
balances due as of August 21, 1990. merefore, the nunber of entities
in this colum do not add to 63.
+I3    million dollars of this balance is currently                 expected to h
written-off    through adjustments and abatanents.

ATTACHMENT II                                                   ATTACEMENT II

              BE'IWEEN         I     I     UG        I
                               (Dollars        in billions)
     Balance     due March 31,          1990                  $6.22

     Less payments                                            (0.04)

     bss     statutes   expired                               (0.17)

     Less abatements      & adjustments                       (2.51)

     Balance      due August      21,     1990

ATTACHMENT III                                                     ATTACHMENT III

                     STATUS OF THE 98 LARGEST ACCOUNTS
             RECEIVABLE PER IRS' RECORDS AS OF AUGUST 21,            1990

                                (Dollars   in billions)
Status                                       Number of taxpayers            Balance
Installment   or settlement
   agreements  pending/reached                            15                 $1.78

Insolvent,    unable       to locate
   or incarcerated                                        18                     .60

Litigation      or IRS appeals                            20                     .50

Collection      being     pursued   by
  revenue      officers                                    6                     . 36

IRS expects soon to clear
  balance due                                             10                     . 21
Under review by IRS exadn or
  criminal  divisions                                       5                    .07

No balance      due                                       -24                (   002)

Total                                                                        $3.50

ATTACHMENT IV                                                               ATTACHMENT IV

                      THE 98 LARGEST ACCOUNTS RECEIVABLE
                  AS OF MARCH 31, 1990 , AND AUGUST 21, 1990 I
                              BY 2
                                  (Dollars     in billions)

                                        March      1990              August     1990
                                    Number          Balance       Number          Balance
Petroleum                              10             $0.9                        $0.4
Energy-related                          3              0.3              ;          0.3
Financial                               5              0.1              4          0.1
Investment     companies                5              0.2              2          0.1
Transportation                          6              0.4              5
Other                                                                              ii*"3
Subtotal                                                            G              e

Drug dealing/
   money laundering                      4
Incarcerated                             4
Deceased                                 3             0.1
Subtotal      -
Foreign                                  1             o.oa             0          0.0
Federal                                  4             1.0              0          0.0
State & local                            2                              1          o.oa
Subtotal                                 7                              i          0.0
Estates                                  5.            0.2           s
aLess     than    $50 million.
Note:        Totals   may not    add because     of   rounding.