Opportunities to Improve Timeliness of IRS Lien Releases
(10-JAN-05, GAO-05-26R).
Among the Internal Revenue Service's (IRS) many tools to collect
outstanding taxes is its ability to use the property of a
taxpayer as security for an outstanding tax debt. IRS exercises
this power when it files a federal tax lien against the property
of a taxpayer. As part of its tax collection activities, IRS
reported filing more than 548,000 tax liens against taxpayer
property in fiscal year 2003. Since a lien encumbers taxpayer
property, IRS's ability to file a lien is a powerful tool in
enforcing the tax laws. With this power, however, comes the
responsibility to ensure that liens are released timely once
taxpayers satisfy their tax debt. The Internal Revenue Code (IRC)
addresses timeliness by requiring IRS to release liens within 30
days of the tax debt's satisfaction. If IRS fails to timely
release federal tax liens, taxpayers can suffer undue hardship
and burden. Because federal tax liens appear on commercial credit
reports, (1) businesses may be unable to obtain necessary credit
because lenders may assume they are bad credit risks, (2)
individuals may miss an opportunity to buy a home or an
automobile because they are unable to obtain financing, and (3)
individuals may be unable to sell their home because of the
presence of a tax lien on their property.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-26R
ACCNO: A15499
TITLE: Opportunities to Improve Timeliness of IRS Lien Releases
DATE: 01/10/2005
SUBJECT: Federal taxes
Financial statements
Taxpayers
IRS Automated Collection System
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-05-26R
United States Government Accountability Office Washington, DC 20548
January 10, 2005
The Honorable Mark W. Everson Commissioner of Internal Revenue
Subject: Opportunities to Improve Timeliness of IRS Lien Releases
Dear Mr. Everson:
Among the Internal Revenue Service's (IRS) many tools to collect
outstanding taxes is its ability to use the property of a taxpayer as
security for an outstanding tax debt. IRS exercises this power when it
files a federal tax lien against the property of a taxpayer.1 As part of
its tax collection activities, IRS reported filing more than 548,000 tax
liens against taxpayer property in fiscal year 2003.2 Since a lien
encumbers taxpayer property, IRS's ability to file a lien is a powerful
tool in enforcing the tax laws. With this power, however, comes the
responsibility to ensure that liens are released timely once taxpayers
satisfy their tax debt. The Internal Revenue Code (IRC) addresses
timeliness by requiring IRS to release liens within 30 days of the tax
3
debt's satisfaction.
If IRS fails to timely release federal tax liens, taxpayers can suffer
undue hardship and burden. Because federal tax liens appear on commercial
credit reports,
o businesses may be unable to obtain necessary credit because lenders
may assume they are bad credit risks,
o individuals may miss an opportunity to buy a home or an automobile
because they are unable to obtain financing, and
o individuals may be unable to sell their home because of the presence
of a tax lien on their property.
1Under section 6321 of the Internal Revenue Code, IRS has the authority to
file a lien upon all property and rights to property, whether real or
personal, of a delinquent taxpayer.
2IRS can file multiple liens against a taxpayer to cover property the
taxpayer owns in different geographical locations.
3Under section 6325 of the Internal Revenue Code, IRS is required to
release a federal tax lien within 30 days after the tax liability has been
satisfied, has become legally unenforceable, or the Secretary of the
Treasury has accepted a bond for the assessed tax.
Failure to timely release liens thus conflicts with IRS's mission of
providing topquality service to the nation's taxpayers.
Every year since our audit of IRS's fiscal year 1999 financial statements,
we have reported on IRS's inability to consistently release tax liens
within 30 days of the tax debt's satisfaction, as required by law. When we
first identified the lack of timely release of tax liens as a compliance
issue, we recommended that IRS monitor the release of tax liens to ensure
that they were released within 30 days of the date the related tax
liability was fully satisfied.4 In our April 2004 report to IRS on the
status of our financial management-related recommendations, IRS agreed
with us that this issue had still not been effectively addressed.5
Subsequently, we continued to find a high level of noncompliance with the
lien release requirements of the IRC during our audit of IRS's fiscal year
2004 financial statements. In the first 9 months of fiscal year 2004, IRS
identified 103,000 taxpayers who had satisfied their tax liability and
should have had a lien released. Based on a statistical sample of
taxpayers who had resolved their tax debt during the first 9 months of
fiscal year 2004, performed as part of our audit of IRS's fiscal year 2004
financial statements, we estimated that 22 percent-almost 23,000-of
taxpayers with liens who resolved their tax debt in fiscal year 2004 did
not have their liens released within 30 days.6
In our recent audit report on IRS's fiscal year 2004 financial statements,
we again highlighted the issue, and we identified as a contributing factor
IRS's failure to timely resolve problems noted on certain lien exception
reports. Lien exception reports are generated when (1) lien data are
transmitted from one system to another and the data do not match and (2)
accounts have manually calculated interest or penalties. If used
effectively, exception reports can serve as a critical internal control to
help IRS ensure that liens are accounted for and timely released and that
outstanding tax debt has been collected before liens are released. If
exception reports are not resolved promptly, however, the lien release
process is delayed.
This follow-on report discusses in greater detail deficiencies that we
identified in IRS's use of exception reports, and includes our
recommendations for corrective action.
4GAO, Internal Revenue Service: Recommendations to Improve Financial and
Operational Management, GAO-01-42 (Washington D.C.: Nov. 17, 2000).
5GAO, Internal Revenue Service: Status of Recommendations from Financial
Audits and Related Financial Management Reports, GAO-04-523 (Washington
D.C.: Apr. 28, 2004).
6GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial
Statements, GAO-05-103 (Washington D.C.: Nov. 10, 2004). We are 95 percent
confident that the error rate does not exceed 33 percent.
Results in Brief
We found problems with IRS's use of three types of exception reports.
First, IRS produces a weekly exception report for lien filings that fail
to post to taxpayer accounts. The key is to timely resolve any items on
the exception report so that the lien can be released. As of May 21, 2004,
IRS had more than 8,500 liens that could not post to taxpayer accounts, 74
percent of which predated 2004. IRS produces a second exception report
weekly when taxpayer accounts with liens have been fully satisfied and
identified for lien release but the taxpayer accounts do not match
accounts in IRS's lien system. We found that IRS was also not timely
resolving these "unmatched exception reports" and, as a result, the number
of unresolved lien cases from these reports had increased, from almost
1,800 at the end of 2003 to 3,180 by mid-June 2004. A third weekly
exception report lists all taxpayer accounts identified for lien release
that have manually calculated interest or penalties.7 We found that IRS
was also not timely resolving items on this exception report.
In addition to untimely resolution of lien cases on these exception
reports, all of which ultimately affect the timely release of tax liens,
we found that one report had a serious design flaw in that it was not
cumulative, meaning that accounts from one week's report that were not
resolved did not carry over to the following week's report. This flaw in
the design of the unmatched exception report contributed significantly to
the fact that 99 percent of the taxpayer accounts listed on the report at
the end of 2003 were still unresolved as of the end of June 2004.
We were unable to definitively quantify the extent to which IRS's failure
to resolve cases showing up on these exception reports contributed to the
overall number of liens IRS failed to timely release. Based on the nature
of IRS's delays in releasing liens that we found in our fiscal year 2004
sample, however, we estimate that about 30 percent of the delayed releases
likely resulted from IRS's failure to effectively resolve exception
reports.8
IRS's inability to promptly resolve the lien exception reports has
contributed to its inability to ensure that tax liens are timely released.
This condition can negatively affect taxpayers, adversely affect IRS's
mission of providing top-quality customer service, and result in
noncompliance with the legal requirement that liens be released within 30
days after satisfaction of the related tax debt. Although IRS has begun to
take steps to address untimely resolution of lien exception reports,
critical steps
7Some interest and penalties must be manually calculated because the
capability to calculate interest and penalties in accordance with certain
legal requirements has not been programmed into IRS systems. IRS refers to
this as "restricted" interest or penalties.
8We are 95 percent confident that the actual figure does not exceed 58
percent of the untimely released liens. This estimate applies only to the
exception reports that are produced by the ALS system, namely, the
unmatched lien exception report and the manual interest or penalties
exception report. We were unable to estimate the effect that the unposted
liens exception report had on the timeliness of lien releases.
Additionally, at this time, we are unable to determine the cause of the
untimely lien releases for the remaining cases in our fiscal year 2004
sample.
remain to be taken and backlogs of unresolved exception reports remain to
be resolved.
We are making nine recommendations to IRS to assist it in strengthening
controls over the lien release process.
In its comments, IRS agreed with our recommendations and described actions
it was taking or planned to take to address the control weaknesses
described in this report. At the end of our discussion of each of these
issues, we have summarized IRS's related comments and provided our
evaluation.
Background
Congress granted IRS the power to file a lien against the property of
taxpayers who neglect or refuse to pay all their assessed federal taxes.
The lien becomes effective when IRS provides notice of its lien interest
by filing the lien with a designated office, such as a courthouse in the
county where the taxpayer's property is located. The lien serves to
protect the interest of the federal government and as a public notice to
current and potential creditors of the government's interest in the
taxpayer's property.
IRS has established separate offices, known as lien units, to handle lien
processing, including the release of tax liens. The lien units'
responsibilities also include answering inquiries from taxpayers and other
IRS personnel regarding liens and lien releases. As of June 1, 2004, IRS
had 33 lien units located throughout the United States. IRS is currently
reorganizing the physical structure and management of its lien units. By
mid-2005, IRS plans to have consolidated the lien units into one physical
location at its Cincinnati Campus. IRS's goal in centralizing these units'
core functions and standardizing lien processing is to reduce operating
costs, increase efficiency, and improve customer service. IRS believes the
consolidation will enhance management of lien processing and provide for
uniform guidance and operations for all lien processing.
The collection of unpaid taxes begins with IRS sending up to three notice
letters to the taxpayer advising the taxpayer of the debt and requesting
payment. If after proper notification the taxpayer fails to pay the tax
debt, and the delinquency does not meet the criteria that require IRS to
make in-person contact with the taxpayer,9 IRS sends the taxpayer another
notice letter explaining that a lien will be filed if the taxes owed are
not promptly paid. If the taxpayer fails to promptly pay the taxes, IRS
generally files a lien. IRS personnel initiate the creation of a lien with
IRS's Automated Collection System (ACS),10 which sends the information
necessary to file a lien, such
9Such criteria include the type of tax (e.g., estate or excise) and
whether the dollar amount owed exceeds a certain amount. See I.R.M. S:
5.19.5.3.1 Exh. 5.19.5-10 (Jan. 1, 2000).
10ACS is a computerized system that maintains balance-due accounts and tax
return delinquency investigations; it is designed to allow cases to be
worked by priority. (ACS is also a major collection function at IRS.)
as the taxpayer's name and address and the dollar amount of the lien, to
IRS's Automated Lien System (ALS).11 If the delinquency meets the criteria
requiring IRS to make in-person contact with the taxpayer and after such
contact IRS decides to file a lien, IRS personnel initiate creation of a
lien with IRS's Integrated Collection System (ICS),12 which sends the
information necessary to file a lien to ALS. ALS generates a physical lien
document. After ALS prints the lien, the lien unit mails it to the
taxpayer's local courthouse,13 where it is recorded as a legal lien
against the taxpayer's property. Until the lien is recorded at the
courthouse, it is not legally enforceable and does not preserve IRS's
rights with respect to the taxpayer's property. Concurrent with generating
the lien document, ALS electronically updates the taxpayer's account in
IRS's Masterfile14 to show that a lien was filed.15 A weekly exception
report is generated for liens that cannot post to Masterfile because the
ALS and Masterfile account data do not match. Figure 1 provides an
overview of the lien recording process.
11ALS is a comprehensive database that prints federal tax liens and lien
releases, stores taxpayer information, and documents lien activity.
12ICS is the computer system used by revenue officers to track collection
actions taken on taxpayer accounts.
13The local courthouse is the courthouse in the county where the
taxpayer's property is located. Liens can also be filed elsewhere as
determined by state law.
14Masterfile is the IRS database that stores various types of taxpayer
account information. It includes individual, business, employee plan, and
exempt organization data.
15ALS first updates the lien information in taxpayer accounts in the
Integrated Data Retrieval System (IDRS), which is an online data retrieval
and entry system. Once a week, IDRS updates the taxpayer accounts in
Masterfile with this information. For simplicity, we discuss this as one
step-ALS updating Masterfile.
Figure 1: Overview of the Lien Recording Process
IRS's automated lien release process begins when a taxpayer's Masterfile
account is paid in full or otherwise settled. Each week, Masterfile
automatically downloads to ALS all the satisfied taxpayer accounts with
liens. The taxpayer's account in Masterfile must have a lien recorded
against it in order to trigger the automated lien release process. When
notified via the Masterfile download that a taxpayer account with a lien
has been fully paid or otherwise satisfied, ALS generates a lien release
document.16 Upon generating the lien release document, ALS updates the
taxpayer's account in Masterfile to show that the lien has been released.
Lien unit personnel then access ALS to print a lien release certificate,
which they then mail to the courthouse, where it is recorded in the public
record and provides conclusive evidence that the lien has been
extinguished.
Two types of exception reports are generated when Masterfile downloads to
ALS all the satisfied taxpayer accounts with liens. One report lists
taxpayer accounts whose Masterfile information (e.g., taxpayer
identification number, Masterfile tax code, tax period) does not match
taxpayer account information in ALS. The second exception report consists
of taxpayer accounts with manually calculated interest or penalties. IRS
removes these accounts from the automated lien release process because the
interest and penalty calculations are more prone to error. For these
accounts, IRS
16Liens can cover debt arising from one or more tax periods. ALS does not
generate a lien release until all the tax periods covered by a lien are
satisfied.
must verify that taxpayers have paid the full amount of interest and
penalties due. The lien units must manually research and resolve these
exception reports before the liens on the taxpayer accounts listed on the
reports can be released. Therefore, timely processing of these exception
reports is an important control in ensuring the timely release of liens.
Figure 2 provides an overview of the automated lien release process.
Figure 2: Overview of the Automated Lien Release Process
Scope and Methodology
We reviewed the tax lien release process in conjunction with our audits of
IRS's fiscal years 2003 and 2004 financial statements to better understand
the potential causes of continuing delays in IRS's release of tax liens.
We focused our review on the use of exception reports by IRS lien units
because of their integral role in identifying issues that would affect the
timely release of tax liens. We did not review activities affecting liens
that occur before or after the activities that take place within the lien
units. For example, we did not review processes in Masterfile that can
cause delays in releasing tax liens, nor did we review the process of
transport and delivery of lien releases from lien units to courthouses.
In conducting our review, we selected the 3 lien units with the most lien
release activity,17 and we selected 2 additional lien units judgmentally.
In total, the 5 lien units we reviewed were responsible for resolving
exception reports for 11 lien units
17The lien release activity per lien unit was based on fiscal year 2002
data.
(including themselves),18 and these 11 units released 39 percent of the
reported tax liens released in fiscal year 2003.
At the three lien units we reviewed, we interviewed management and key
staff and observed the various lien processes. In addition to these
interviews at the lien units, we interviewed other IRS officials
associated with the lien process, such as ALS programmers, lien compliance
policy analysts, and lien unit consolidation coordinators, to gain an
understanding of the lien process. We also reviewed detailed lien
information by analyzing the results of data queries obtained from IRS
systems to identify potential causes of delays in releasing tax liens. We
also reviewed IRC provisions related to IRS's lien authority and lien
release requirements and relevant sections of the Internal Revenue Manual,
which contains IRS's formalized policies and procedures. Additionally, we
obtained and reviewed the various exception reports used in the lien
release process.
We conducted our work in conjunction with our fiscal years 2003 and 2004
financial statement audits, completing our work in October 2004. We
conducted our audit in accordance with generally accepted government
auditing standards. We requested comments on a draft of this report from
the Commissioner of the Internal Revenue Service. We received written
comments from the Commissioner and have reprinted the comments in
enclosure I.
Lien Exception Reports Are Not Being Timely Resolved
As discussed previously, several exception reports are generated from
IRS's systems to assist IRS in identifying and resolving problems related
to lien processing. A weekly report is generated for liens that fail to
post to the Masterfile due to taxpayer account data in Masterfile and ALS
not matching. Additionally, two other exception reports are generated when
Masterfile downloads to ALS all satisfied taxpayer accounts with existing
liens, one for taxpayer accounts whose Masterfile information does not
match the taxpayer account information in ALS and another for taxpayer
accounts with manually calculated interest or penalties, which require
manual review. If used effectively, these exception reports provide a
critical control to assist IRS in resolving issues so that tax liens can
be timely resolved.
We found that IRS is not timely resolving problems identified on certain
lien-related exception reports and, in some cases, is not addressing
information in the reports at all. We were unable to definitively quantify
the extent to which IRS's failure to resolve these exception reports
contributed to the overall number of liens IRS failed to timely release in
fiscal year 2004. However, based on the nature of the delays in releasing
liens that we found in our statistical sample of liens during our fiscal
year 2004
18The five lien units we selected for review were responsible for
resolving exception reports for specific IRS "areas," four of which
consisted of more than one lien unit.
financial audit, we estimate that about 30 percent of the delayed releases
likely resulted from IRS's failure to effectively resolve certain
exception reports.19
The failure to timely resolve exception reports results in untimely
release of liens, which places undue hardship and burden on taxpayers,
conflicts with IRS's mission of providing top-quality service to U.S.
taxpayers, and leads to noncompliance with the IRC. It also directly
increases lien units' workloads. Because liens that appear on exception
reports are not released until the reports are resolved, affected
taxpayers may be forced to contact the lien units for assistance in order
for their liens to be released. According to IRS personnel, providing
assistance to taxpayers is one of the most time-consuming lien unit
functions. During our review, one of the reasons most commonly cited by
lien unit staff for taxpayer calls was to have IRS release a lien that
should have been previously released. If IRS timely resolved lien-related
exception reports, more liens could be timely released, resulting in fewer
taxpayers contacting the lien units to resolve their lien problems and
thereby lessening lien units' workloads.
Unpostable Liens Are Not Being Timely Resolved
When a lien is generated, ALS updates the taxpayer's account in Masterfile
to indicate that a lien has been filed. If a lien cannot post to the
taxpayer's Masterfile account, usually because the taxpayer identification
number or account name in ALS does not match the one in Masterfile, the
lien is included in a weekly exception report that lists unpostable liens.
If a lien is not posted to a taxpayer's Masterfile account, IRS does not
have the information it needs to identify the taxpayer account for lien
release when the tax debt is fully satisfied. Therefore, timely resolution
of this exception report is an important control to ensure that liens are
recorded on taxpayers' accounts and, consequently, to ensure that liens
are timely released. The Internal Revenue Manual requires that exceptions
listed in this report be resolved within 5 days of the report's
generation.20
As of May 21, 2004, IRS had a total of 8,529 liens that could not post to
taxpayer accounts in Masterfile.21 Despite the requirement that the
exceptions listed in the report be resolved within 5 days, 99 percent of
the 8,529 unpostable liens had initially appeared in exception reports
generated more than 5 days earlier, and 74 percent had initially appeared
in exception reports generated prior to calendar year 2004.
19We are 95 percent confident that the actual figure does not exceed 58
percent of the untimely released liens. This estimate applies only to the
exception reports that are produced by the ALS system, namely, the
unmatched lien exception report and the manual interest or penalties
exception report. We were unable to estimate the effect that the unposted
liens exception report had on the timeliness of lien releases.
20I.R.M S: 5.12.6.9(1)(F) (Oct. 1, 2003).
21IRS performed a special query of its system to determine the number of
unpostable liens accounts. However, the listing of unpostable liens did
not go back prior to January 2002.
Taxpayers who had satisfied their tax debt but whose liens were unpostable
would not have had their liens automatically identified for release. As a
result, if the exception reports listing the liens were not timely
resolved, such liens would not have been released timely, if at all.
In May 2004, managers at four of the five lien units we reviewed told us
that they were not receiving (and therefore were not resolving) the
exception report that lists unpostable liens, and the manager of the fifth
lien unit told us that she was instructed to stop processing the exception
report because of the upcoming consolidation of the lien units to a single
physical location at IRS's Cincinnati Campus.22 This is consistent with
what we had previously found. At the time of our initial review of these
lien units in 2003, we determined that the units were not receiving this
report because it had been placed on IRS's Electronic Online/Output
Network System (EONS)23 and was no longer being sent to lien units. The
lien units, however, had not been notified of the change. In subsequent
discussions with IRS officials in June 2004, they told us that the
exception report had been placed on EONS during the IRS reorganization and
that IRS had taken action to address this issue. Specifically, they
informed us that this report had been centralized in the new lien unit in
Cincinnati and that the other lien units were no longer responsible for
reviewing and resolving the exception report.
IRS is now taking steps to address issues associated with this exception
report and is currently reviewing exception reports in a timely manner.
However, these issues were long-standing and therefore resulted in a
significant backlog of unpostable liens. According to IRS, as of October
2004, about half of the backlog of 8,529 unpostable liens that existed on
May 21, 2004, had been resolved. We were able to confirm this through a
review of more recent exception reports, and we will continue to follow up
on IRS's progress during our fiscal year 2005 financial audit.
Recommendations
To improve the effectiveness of controls over posting liens to taxpayer
accounts, we recommend that you direct the Cincinnati lien unit managers
to
o expedite efforts to resolve the backlog of unpostable liens, releasing
liens as appropriate; and
o keep current on all new unpostable liens.
22During our initial review of the lien units, from July through September
2003, the managers of four of the five same lien units were unaware of
this exception report and were not addressing it.
23EONS enables reports that would normally have been available in printed
form only to be viewed on a personal computer.
IRS's Comments and Our Evaluation
IRS agreed with our recommendations. In its response, IRS stated that it
established a team at the Cincinnati campus's Centralized Lien Processing
Unit to resolve the unpostable lien exception reports. IRS added that lien
transactions that do not post to a taxpayer's account will now be resolved
weekly. IRS also stated that it established a separate team to resolve the
backlog of unpostable liens and that it expects the backlog to be resolved
by September 30, 2005. We will evaluate the effectiveness of IRS's efforts
in future audits.
Unmatched Exceptions from the Automated Lien Release Process Are Not Being
Timely Resolved
Each week, Masterfile automatically downloads to ALS all taxpayer accounts
with liens that have been fully paid or otherwise satisfied. ALS uses this
information to generate lien releases. Any downloaded taxpayer accounts
whose Masterfile information does not match taxpayer account information
in ALS are listed on an exception report. Processing of the liens
associated with these accounts cannot proceed until the exceptions are
resolved, and the liens cannot be released until processing is complete.
Prompt resolution of this exception report is therefore a key control to
ensure that liens are timely released. Both the Internal Revenue Manual
and the ALS User Guide require that liens on this exception report be
resolved weekly.24 Prior to the planned consolidation of IRS lien units in
mid-2005, individual units continue to be responsible for resolving the
unmatched exception report.
We found that IRS was not timely resolving weekly unmatched exception
reports. As of June 14, 2004, taxpayer accounts totaling 3,180 that had
previously appeared on the unmatched exception report had not been
resolved.25 More than 1,400 of these unresolved cases were added during
the first 6 months of calendar year 2004. Ninetyeight percent of the 3,180
accounts had appeared in reports generated more than 7 days earlier, and
88 percent had appeared in reports generated more than 30 days earlier.
Because these unmatched accounts were not timely resolved, taxpayer liens
were not timely processed and released.
For the five lien units we reviewed, we found that two were not timely
resolving unmatched exception reports as of June 2004.26 One unit manager
informed us that the unit was at least 4 months behind in resolving these
reports, and we found that
24I.R.M. S: 5.12.6.9(1)(A) (Oct. 1, 2003) and the ALS User Guide (July
2002).
25IRS performed a special query of its system to determine the number of
unresolved accounts. However, the listing did not go back further than
August 2002.
26During our initial review of the lien units, from July through September
2003, none of the five same lien units were timely resolving the unmatched
exception report.
the other lien unit did not resolve these reports at all.27 Staff
responsible for resolving the report at these two lien units stated, and
the unit managers confirmed, that the staff had not been trained on how to
resolve the report, which contributed to the units' failure to resolve the
report.28 We identified all the taxpayer accounts from the February 11,
2004, and May 5, 2004, reports that belonged to these two lien units and
found that of the 32 taxpayer accounts identified, 29 remained unresolved
as of June 2, 2004.29
Recommendations
To improve the effectiveness of controls over taxpayer accounts rejected
from the automated lien release process, we recommend that you direct lien
unit managers to
o research and resolve the current backlog of unresolved unmatched
exception reports;
o research and resolve unmatched exception reports weekly; and
o provide training to designated staff on how to resolve exception
reports.
IRS Comments and Our Evaluation
IRS agreed with our recommendations. In its response, IRS stated that
accounts on the unmatched exception report will be resolved by matching
information between the Master File and the ALS. IRS also stated that it
is working to resolve the current backlog and that it expects the backlog
to be resolved by September 30, 2005. Additionally, to improve overall
processing of the unmatched exception reports, IRS stated that it will
provide additional training and move the report resolution process to the
Centralized Lien Processing Unit at the Cincinnati Campus. We will
evaluate the effectiveness of IRS's efforts in future audits.
Liens with Manually Calculated Interest or Penalties Are Not Being Timely
Resolved
Some taxpayer accounts contain tax debt with interest or penalties that
are manually calculated. Exception reports are generated for such accounts
when there exists a tax lien because procedures contained in internal IRS
guidance call for a review of the calculations before the liens are
released. Because liens on these taxpayers' properties will not be
released until this report is resolved, its prompt resolution is a key
control to help ensure that liens are timely released. Both the Internal
Revenue
27We were unable to determine how long it has been since this lien unit
has resolved the unmatched exception report, but we know that the unit has
not resolved the report for at least the last 7 years.
28Since our review of the lien units in June 2004, the person responsible
for resolving the report at the unit with the 4-month backlog has received
training and, consequently, is now resolving the report.
29Since both lien units have backlogs of at least 4 months, we chose a
report that is part of the older component of the backlog and another
report that is part of the recent component of the backlog.
Manual and the ALS User Guide require that this report be resolved
weekly.30 Prior to the planned consolidation of IRS lien units in
mid-2005, individual units continue to be responsible for resolving this
exception report.
We found that IRS was not reviewing the report and taking actions
necessary to allow the liens on the exception report to be timely
released. As of June 14, 2004, the number of accounts that appeared on the
exception report totaled 1,047.31 Of these, 93 percent had initially been
listed on reports generated more than 7 days earlier, and 75 percent had
initially been listed on reports generated more than 30 days earlier. Of
854 unresolved taxpayer accounts on the exception reports containing liens
with manually calculated interest or penalties as of December 31, 2003,
326 (38 percent) were still unresolved as of June 14, 2004, more than 5
months later.
Four of the five lien units we reviewed were taking actions necessary to
timely release liens appearing on exception reports for liens with
manually calculated interest or penalties.32 The fifth unit, however, was
not taking action to release liens appearing on these exception reports.
The individual at this lien unit who was responsible for resolving the
report had not been trained on how to resolve it, which contributed to the
unit's failure to resolve the report. For this lien unit, we reviewed the
first 10 taxpayer accounts from the March 3, 2004, exception report and
found that all 10 remained unresolved as of June 2, 2004. Of the 10
accounts selected, 6 had appeared on the report prior to 2004, with the
earliest having appeared in August 2003. In 1 of the 10 cases we reviewed,
the taxpayer fully satisfied his tax debt in December 2003 and the account
was identified for lien release. However, because the account had manually
calculated penalties, it was rejected from the automated lien release
process and appeared on the exception report containing liens with
manually calculated interest or penalties. As of June 2004, this account
was still unresolved and, as a consequence, the lien on this taxpayer's
property had not been released.
Recommendations
To improve the effectiveness of controls over taxpayer accounts rejected
from the automated lien release process, we recommend that you direct lien
unit managers to
o research and resolve the current backlog of unresolved manual interest
or penalties reports;
o research and resolve exception reports containing liens with manually
calculated interest or penalties weekly, as called for in the Internal
Revenue Manual and the ALS User Guide; and
30I.R.M. S: 5.12.6.9(1)(A) (Oct. 1, 2003) and ALS User Guide (July 2002).
31IRS performed a special query of its system to determine the number of
unresolved accounts with manual interest or penalty calculations. However,
the listing did not go back further than January 2003.
32During our initial review of the lien units, from July through September
2003, one of these five lien units was timely resolving this report.
o provide training to designated staff on how to resolve exception
reports containing accounts with manually calculated interest or
penalties.
IRS Comments and Our Evaluation
IRS agreed with our recommendations. In its response, IRS stated that to
improve the overall processing of the exception reports, it will provide
additional training and move the report resolution process to the
Centralized Lien Processing Unit at the Cincinnati Campus. Additionally,
IRS stated that accounts listed on the exception report containing
manually calculated interest or penalties will now be sent to the
Examination Case Processing function for computation and then returned to
the Centralized Lien Processing Unit for either lien release or other
appropriate action. IRS also stated that it is working to resolve the
current backlog and that it expects the backlog to be resolved by
September 30, 2005. We will evaluate the effectiveness of IRS's efforts in
future audits.
Unmatched Exception Reports Are Not Cumulative
As discussed earlier, unmatched exception reports contain Masterfile
taxpayer accounts for which outstanding tax debt has been satisfied but
that do not match an account in ALS. Further processing of the lien
release cannot continue until exceptions are manually reviewed and
resolved by IRS personnel.
During our review, we identified a significant flaw in the design of this
important control. Specifically, we found that the unmatched exception
reports are not cumulative. They contain only accounts that have been
rejected in the current week and do not include the unresolved accounts
identified in prior weeks' reports. For example, although at least 3,100
unmatched taxpayer accounts were unresolved as of June 2, 2004, the weekly
unmatched exception report on that day showed only 109 rejected taxpayer
accounts.
Lack of a cumulative report makes it more difficult to ensure that all
taxpayer accounts rejected from the automated lien release process are
resolved in a timely manner, or at all, because rejected accounts are
reported only once, in a single week's exception report, regardless of
whether or when they get resolved. We believe that this flaw in the design
of the exception report contributed significantly to the fact that at
least 99 percent of the unresolved taxpayer accounts at the end of 2003
remained unresolved as of the end of June 2004. Having a cumulative report
is consistent with GAO's Standards for Internal Control in the Federal
Government, which requires that internal control activities help ensure
that management's directives to mitigate risk are carried out.33 Without
an effective tool to ensure that all taxpayer accounts rejected from the
automated lien release process are identified and resolved, the backlog of
unresolved cases will likely increase without the
33GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
knowledge of lien unit management,34 thereby increasing the potential for
liens to not be promptly released.
Recommendation
To better ensure that taxpayer accounts rejected from the automated lien
release process are timely reviewed and resolved, we recommend that IRS
improve the current unmatched exception report by including a cumulative
list of all unmatched taxpayer accounts that have not been resolved to
date.
IRS Comments and Our Evaluation
IRS agreed with our recommendation. In its response, IRS stated that it
will modify its system so that rejected items are retained on the
exception report until resolved. We will evaluate the effectiveness of
IRS's efforts in future audits.
_ _ _ _ _
This letter contains nine recommendations to you. The head of a federal
agency is required by 31 U.S.C. S: 720 to submit a written statement on
actions taken on these recommendations. You should submit your statement
to the Senate Committee on Governmental Affairs and the House Committee on
Government Reform within 60 days of the date of this letter. A written
statement must also be sent to the House and Senate Committees on
Appropriations with the agency's first request for appropriations made
more than 60 days after the date of the letter.
This letter is intended for use by the management of IRS. We are sending
copies to the Chairmen and Ranking Minority Members of the Senate
Committee on Appropriations; Senate Committee on Finance; Senate Committee
on Governmental Affairs; Senate Committee on the Budget; Subcommittee on
Transportation, Treasury, and General Government, Senate Committee on
Appropriations; Subcommittee on Taxation and IRS Oversight, Senate
Committee on Finance; Subcommittee on Oversight of Government Management,
the Federal Workforce, and the District of Columbia, Senate Committee on
Governmental Affairs; House Committee on Appropriations; House Committee
on Ways and Means; House Committee on Government Reform; House Committee
on the Budget; Subcommittee on Transportation, Treasury, and Independent
Agencies, House Committee on Appropriations; Subcommittee on Government
Efficiency and Financial Management, House Committee on Government Reform;
and the Subcommittee on Oversight, House Committee on Ways and Means. In
addition, we are sending copies of this letter to the Chairman and
Vice-Chairman of the Joint Committee on Taxation, the Secretary of the
Treasury, the Director of the Office of Management and Budget, the
Chairman of the IRS Oversight Board, and other interested parties. Copies
will be
34ALS programmers had to perform a special query to determine the backlog
of unresolved cases. The backlog of unresolved cases is not readily
available to lien unit management.
made available to others upon request. This report is available at no
charge at GAO's
Web site at http://www.gao.gov.
We acknowledge and appreciate the cooperation and assistance provided by
IRS
officials and staff during our audit. If you have any questions or need
assistance in
addressing these matters, please contact me at (202) 512-3406 or
[email protected].
Additional contacts and staff acknowledgments are provided in enclosure
II.
Sincerely yours,
Steven J. Sebastian
Director
Financial Management and Assurance
Enclosures - 2
Enclosure I
Comments of the Internal Revenue Service
Enclosure I
Enclosure II
GAO Contacts and Staff Acknowledgments
GAO Contacts
Paul Foderaro, (202) 512-2535 William J. Cordrey, (404) 679-1873
Acknowledgments
Staff who made key contributions to this report were David Shoemaker, Mark
Yoder, and Esther Tepper.
(196022)
*** End of document. ***