Tax Debt Collection:

IRS Needs to Complete Steps to Help Ensure Contracting Out Achieves Desired Results and Best Use of Federal Resources

GAO-06-1065: Published: Sep 29, 2006. Publicly Released: Oct 30, 2006.

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In 2005, the inventory of tax debt with collection potential had grown to $132 billion. The Internal Revenue Service (IRS) has not pursued some tax debt because of limited resources and higher priorities. Congress has authorized IRS to contract with private collection agencies (PCA) to help collect tax debts. IRS has developed a Private Debt Collection (PDC) program to start with a limited implementation in September 2006 and fuller implementation in January 2008. As requested, GAO is reporting whether (1) IRS addressed critical success factors before limited implementation, (2) IRS will assess lessons learned before fuller implementation, and (3) IRS's planned study will help determine if using PCAs is the best use of federal funds.

IRS made major progress in addressing the 5 critical success factors and 17 related subfactors for the PDC program before sending cases to PCAs. GAO reviewed program documents and interviewed officials to identify IRS's approaches and steps taken to address the factors. Taken together, IRS's actions were intended to ensure that the PCAs will be able to do the job and work the range of cases assigned, IRS will have the necessary resources and caseload ready, and taxpayer rights and data will be protected. Even with this progress, IRS has not completed work for three subfactors--setting results-oriented goals and measures, determining all PDC program costs, and evaluating the program based on the results-oriented goals and measures, once they are established. As a result, IRS risks not providing complete information that decision makers would find useful. Finishing work on the factors could help achieve but cannot guarantee program success, which also depends, in part, on how IRS addresses the factors and identifies and resolves any problems in the limited implementation phase. Although IRS officials indicated that a purpose of the limited implementation phase is to assure readiness for full implementation to up to 12 PCAs, IRS has not yet documented how it will identify and use the lessons learned to ensure that each critical success factor is addressed before expanding the program starting in January 2008. Because program success will be affected by how well IRS makes adjustments, assessing the lessons learned in limited implementation is critical. Also, IRS has not documented criteria that it will use to determine whether the limited implementation performance warrants program expansion. IRS officials indicated that they are considering criteria that could trigger a go/no go decision, such as the amount of taxes collected and indications of PCAs abusing taxpayers or misusing taxpayer data. IRS has not decided on whether these targets will include comparing the taxes collected to program costs, which was a key reason for canceling a 1996 PCA pilot program. Finally, IRS will have a little more than a half year to identify the lessons learned before incorporating them into the next contract solicitation, which IRS intends to release in March 2007. Related to such decisions on expansion is IRS's planned comparative study of using PCAs. That study is to compare using PCAs to investing IRS's PDC-related operating costs into having IRS staff work IRS's "next best" collection cases. Under the documented study design, IRS would exclude the fees paid to PCAs from the costs and subtract those fees from the tax debts collected by PCAs. While such a study might produce useful information, it will not compare the results of using PCAs with the results IRS could get if given the same amount of resources, including the fees to be paid to PCAs, to use in what IRS officials would judge to be the best way to meet tax collection goals. Adequately designing and implementing the study is important to ensure policymakers are aware of the true costs of contracting with PCAs and know whether PCAs offer the best use of federal funds.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To ensure that IRS decision makers will timely have the information needed to make informed, data-based decisions about the private debt collection program, as soon as possible, and certainly before any expansion of the PDC program beyond the initial round of cases sent to PCAs, the Commissioner of Internal Revenue should complete establishing clear criteria and processes for assessing how IRS addressed the critical success factors in the limited implementation phase and whether PDC program performance warrants program expansion.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: IRS developed a plan with time lines for finishing work on the criteria and processes for assessing how well IRS has addressed the critical success factors and whether IRS is ready for expansion of the Private Debt Collection (PDC) program. The operational data analysis (ODA) study was to work on this recommendation. IRS had hoped to finalize work by December 2007 before IRS's planned expansion of the PDC program by March 2008. By November 2007, IRS had created a decision plan for program expansion but IRS never expanded the program because of political limitations on its funding and delays in developing systems to help process more private collection agencies' (PCA) cases. Further, rather than expanding from 3 PCAs to 12, as envisioned in 2006, IRS let one of the three PCAs go given the limitations/pressures put on PDC. Although IRS's decision plan for program expansion identified the types of information IRS would consider--including performance measures, trends in performance, and its planned cost-effectiveness study--our review of the plan showed that it did not established clear criteria. Also, the process laid out in the plan did not show how the information IRS would consider related to how IRS addressed the critical success factors identified in our report. IRS released the cost effectiveness study and announced discontinuation of PCA contracting in March 2009. Given IRS's decisions to reduce the number of PCAs and end the program, IRS provided no additional criteria and processes for assessing how IRS addressed the critical success factors and whether the program should be expanded.

    Recommendation: To ensure that IRS decision makers will timely have the information needed to make informed, data-based decisions about the private debt collection program, as soon as possible, and certainly before any expansion of the PDC program beyond the initial round of cases sent to PCAs, the Commissioner of Internal Revenue should complete establishing plans for evaluating the results of the program in terms of expected costs, goals, and desired results.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS established plans to evaluate the results of the program in terms of expected costs, goals, and desired results prior to any expansion of the program. By November 2007, IRS had planned quarterly Operational Data Analysis studies to compare actual program performance to goals and targets using the measures IRS established for the program's desired results, such as the case resolution rate, dollars collected, and the costs of commissions paid to PCAs. In addition, IRS's planned cost effectiveness study was to evaluate the results of the program--include its PDC budget costs and PCAs' commissions--and compare these results with alternative using measures established for the program. Although IRS originally had planned to expand the PDC program to contract with up to 12 PCAs, in February 2007, IRS reduced the number of contracted PCAs from the original 3 to 2. IRS retained only these 2 PCAs until its March 2009 decision to end the program.

    Recommendation: To ensure that IRS decision makers will timely have the information needed to make informed, data-based decisions about the private debt collection program, as soon as possible, and certainly before any expansion of the PDC program beyond the initial round of cases sent to PCAs, the Commissioner of Internal Revenue should complete establishing reliable, verifiable information on all the costs of the program, to the extent possible.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS implemented it new cost tracking system in October 2007 in order to capture all costs going forward. To the extent possible, IRS also has developed some information on historic costs (i.e., pre-2007 costs), even though IRS officials said the effort was difficult and could not collect all types of historic cost data. That is, they have confidence about the historic data on labor and contract costs but not about other historic costs. They promised to provide these costs data when they issue their cost effectiveness study (our fifth recommendation), which is in draft and is now been delayed until January 2009.

    Recommendation: To ensure that IRS decision makers will timely have the information needed to make informed, data-based decisions about the private debt collection program, as soon as possible, and certainly before any expansion of the PDC program beyond the initial round of cases sent to PCAs, the Commissioner of Internal Revenue should complete establishing results-oriented goals and measures for the program based on the best available information.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: As of June 2007, IRS believes it will complete work on this recommendation by September 2007. IRS is validating the measures that we cited in the IRS response to our 2006 report and has plans to develop goals for fiscal year 2008. Fiscal year 2007 experience with the program will serve as the baseline for setting these goals. IRS finalized its initial round of PDC measures in November 2007 by putting them into the Procedural Guide. The measures include those that are Operational (6 dealing w/number of cases, resolution rate, and various cycle times), Financial (8 dealing w/dollars placed, dollar collected through various means, commissions paid, collections retained by IRS, and two types of installment agreements), and Quality (7 dealing w/ taxpayer, IRS, and PCA satisfaction, two accuracy measures, timeliness, professionalism, and validated complaints). Goals were set or being planned for 10 of these 21 measures as of then, and IRS pointed out that collection goals (4 of the measures) could not be set due to section 1204 of RRA of 1998.

    Recommendation: As IRS continues planning its comparative study of using PCAs, the Commissioner of Internal Revenue should ensure that the study methodology and the IRS reports on the study results will inform decision makers of the full costs of the PDC program, including the fees paid to PCAs and the best use of those federal funds.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: The IRS hired a contractor (Booz Allen Hamilton) to help design this study as IRS finished development of the private collection agencies (PCAs) program. The program was scheduled to start on a limited basis by June 2006. Due in part to protests of initial contract awards, IRS did not send cases to the three PCAs until September 2006. Our September 2006 report (GAO-06-1065) disclosed that IRS was still working on designing the study after we shared a number of comments on the direction it was taking (i.e., it was not fully meeting the intent of our recommendation). Our comments dealt with designing the study to account for all costs and to focus on the best use of federal funds to meet IRS's tax collection goals. IRS started the study during March 2007. Based on a meeting in June 2007, IRS hoped to have the study completed by March 2008 and the report issued by August 1, 2008. The study was done but the report was delayed multiple times being pushed back to November 2008, December 2008, and January 2009. IRS released the study and announced discontinuation of PCA contracting in March 2009. In October 2009, GAO initiated a review of the study and IRS's decision to stop the program, which included work to determine the study methodology and report implemented the recommendation. We found that although the study had methodological errors and a narrow scope, IRS met the recommendation in that the PDC study included fees paid to PCAs as program costs and therefore more fully informed decision makers on the costs of the PDC program.

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