Tax Administration:

Little Evidence of Procedural Errors in Collection Due Process Appeal Cases, but Opportunities Exist to Improve the Program

GAO-07-112: Published: Oct 6, 2006. Publicly Released: Nov 6, 2006.

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As a result of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998, taxpayers facing liens or levies can request a Collection Due Process (CDP) appeal hearing with IRS's Office of Appeals (Appeals). By 2005, CDP cases represented about one-quarter of Appeals' workload. GAO was asked to provide information on (1) whether the IRS Collection function (Collection) erred in processing liens and levies and how often CDP case results changed after the appeal, (2) the arguments raised and the communication between IRS and taxpayers, (3) the characteristics of CDP taxpayers, and (4) potential improvements to the CDP program. To develop this information, GAO analyzed a random sample of 208 CDP cases closed by Appeals during fiscal year 2004.

GAO estimates that Appeals found Collection did not follow proper procedures in 2 percent of CDP cases closed during fiscal year 2004. About 27 percent of taxpayers received a different outcome than the lien filing or levy after appealing, including those that negotiated collection alternatives or ended up with no balance due to IRS. For about 60 percent of taxpayers, Appeals upheld the collection action often because taxpayers did not file all the required tax returns necessary to qualify for a collection alternative. GAO's estimates show that nearly 90 percent of CDP taxpayers raised arguments permitted by statute with both Collection and Appeals, such as requesting a collection alternative. An estimated 5 percent of taxpayers raised frivolous arguments--arguments without legal basis per IRS guidance--with either Collection or Appeals. When taxpayers raised the same argument with Collection and Appeals, Appeals reached the same conclusion as Collection in more than 80 percent of cases. In general, the median number of IRS-initiated contacts with taxpayers was twice as high as the median number of taxpayer-initiated contacts with IRS. CDP taxpayer characteristics varied among individual and business filers. Both did not pay taxes for multiple return filing periods. Total tax liability varied considerably, with trust fund recovery penalty and employment tax cases having the highest liabilities. Allowing certain taxpayers like those that offer arguments without a legal basis to use the CDP program may not be consistent with the program's goal of ensuring due process. Also, Appeals resources are not used efficiently when taxpayers request collection alternatives yet have not (1) submitted financial documentation with their CDP requests, (2) worked with specialized Collection units, or (3) filed all required tax returns needed to qualify for a collection alternative. IRS has taken steps to revise the CDP regulations and hearing request form, but has not established responsibility for analyzing program outcome data to determine if these changes will be effective.

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

    Matters for Congressional Consideration

    Matter: In order to leverage IRS resources more efficiently, Congress may wish to consider requiring taxpayers that seek collection alternatives, such as OICs or IAs, and that raise no other allowable issues to comply with the basic eligibility criteria, that is, file all required tax returns before Appeals reviews their cases.

    Status: Closed - Not Implemented

    Comments: No legislative action has occurred as of September 2012.

    Matter: Since the Restructuring Act permits any taxpayer who receives a lien or levy notice to request a CDP hearing, Congress may wish to consider amending the statute to remove eligibility for CDP appeal for selected categories of taxpayers or types of cases if it judges that they have characteristics that are inconsistent with the Restructuring Act's goal of ensuring due process. These categories may include self-reported tax liabilities, including employment and unemployment taxes, or other categories deemed inconsistent with the goal of the Restructuring Act provisions.

    Status: Closed - Not Implemented

    Comments: In December 2006, Congress included a provision to increase the penalty for filing frivolous income tax returns from $500 to $5,000 in the Tax Relief and Health Care Act (P.L. 109-432). The Joint Committee on Taxation estimated the provision will increase tax revenue by approximately $13.7 million over a five-year period. In May 2007, Congress enacted an appropriations bill (P.L. 110-28) that included a provision to deny a pre-levy Collection Due Process (CDP) hearing for employment tax liability cases and authorizing IRS to continue with collection activity. The Joint Committee on Taxation estimated the provision will increase tax revenue by approximately $146.3 million over a five-year period. However, no action has been taken on these proposals.

    Matter: Congress may wish to consider requiring taxpayers that raise only collection alternatives to submit the supporting financial information needed to consider the alternative of choice, and if seeking an OIC without raising any liability issues, to submit the OIC application form within a reasonable time following their CDP request.

    Status: Closed - Not Implemented

    Comments: No legislative action has occurred as of September 2012.

    Recommendations for Executive Action

    Recommendation: To ensure that Appeals uses its resources in line with its mission as well as more efficiently, the Commissioner of Internal Revenue should establish responsibility for analyzing future CDP appeal case outcome data in order to determine whether revisions to the hearing request form and program regulations will result in meeting their objectives.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: For case outcome data that cannot be gathered electronically through Appeals Centralized Database System, such as the taxpayer's appropriate use of Form 12153 Request for Collection Due Process (CDP) hearing, Appeals has determined that additional data will be gathered by joint reviews conducted with the Collections area of IRS. With respect to computer generated data, in January 2008 Appeals implemented changes to its centralized database to enhance tracking CDP appeal cases, and determined that Appeals division of Tax Policy Procedure will be responsible for analyzing future CDP appeal case outcome data.

    Recommendation: To ensure that Appeals uses its resources in line with its mission as well as more efficiently, the Commissioner of Internal Revenue should instruct Appeals to transfer CDP cases where taxpayers seek an OIC as a collection alternative and raise no liability issues to IRS's specialized processing units for investigation and evaluation of OICs before consideration by Appeals.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In September of 2008, IRS officially modified its procedures to instruct Appeals to transfer Collection Due Process (CDP) cases where taxpayers seek an OIC as a collection alternative and raise no liability issues to IRS's specialized processing units for investigation and evaluation of offers-in-compromise before consideration by Appeals.

    Recommendation: To ensure that Appeals uses its resources in line with its mission as well as more efficiently, the Commissioner of Internal Revenue should determine--for taxpayers seeking only a collection alternative--a reasonable amount of additional time beyond the current 30-day period for requesting a CDP hearing for these taxpayers to submit the required supporting financial information necessary for Appeals to consider the alternative of choice, and if seeking an OIC, to submit the OIC application form.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: Agency implementation of this recommendation is contingent upon congressional action on GAO's third Matter for Congressional Consideration related to this report. As a result, IRS has deferred taking any additional corrective action unless the Congress modifies the Collection Due Process (CDP) statute and we will continue to monitor Congressional activity. No additional legislative modifications have been made as of September 2012.

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