Efforts to Develop a Successful Collection Contract
Support Program Could Be Enhanced
March 2003
Reference
Number: 2003-30-075
This report has
cleared the Treasury Inspector General for Tax Administration disclosure review
process and information determined to be restricted from public release has been
redacted from this document.
March 14, 2003
MEMORANDUM FOR COMMISSIONER, SMALL
BUSINESS/SELF-EMPLOYED DIVISION
FROM: Gordon C.
Milbourn III /s/ Gordon C. Milbourn III
Acting
Deputy Inspector General for Audit
SUBJECT: Final Audit Report - Efforts to Develop a
Successful Collection Contract Support Program Could Be Enhanced (Audit # 200230030)
This report presents the
results of our review of the Internal Revenue Service’s (IRS) Collection
Contract Support (CCS) Program. The
IRS’ records indicate that from the end of Fiscal Year (FY) 1996 through the
end of FY 2001, gross accounts receivable due from unpaid taxes rose from $216 billion
to $276 billion. Since the IRS has
stated it does not have enough resources to work all accounts, it is exploring
contracting out some collection activity to private contractors. The overall objective of this review was to
determine whether the IRS has taken effective steps to plan for the proposed
use of CCS companies.
In summary, the IRS’
preliminary planning related to the use of CCS companies was extensive and
included a detailed evaluation of similar existing programs at other federal
and state government entities. In
addition, the IRS contacted subject matter experts for input regarding industry
practices. These efforts should help
leverage the use of existing best practices and aid in ensuring that the design
of the IRS’ CCS program fully uses the benefits of private collection services.
The IRS also prepared a
draft Request for Quotation (RFQ) for the CCS initiative, which it plans to
issue during the second quarter of FY 2003.
The purpose of the draft RFQ is to promote awareness about this
initiative, as well as to solicit feedback/ questions from potential contractors
regarding the IRS’ requirements.
Although the IRS’
preliminary planning efforts have been good, their effectiveness overall could
be enhanced by taking the following actions:
·
The IRS should provide
greater specificity in the draft RFQ regarding the management information, such
as weekly telephone reports, the IRS will require from contractors. By requiring CCS companies to provide key
reports in a standardized electronic format, the IRS will effectively begin to
lay the groundwork for the development of the management information it will
need in the future. Also, providing
these additional specifications will help clarify potential contractors’
understanding of the IRS’ requirements.
·
The IRS’ preliminary
projections regarding the volume of cases to be initially released to CCS
companies needs to be reexamined.
Specifically, a more measured initial release of delinquent tax account
cases to CCS companies would help minimize the likelihood of an overload of
case referrals back to the IRS. Since
baselines have not yet been established for the average level of support needed
by the IRS on each case released, annual volume estimates should be adjusted to
reflect this level of uncertainty.
We informed project
management of our concerns regarding the need to add additional information to
the draft RFQ during the audit, and they began to initiate corrective
actions. For example, project
management has already updated the draft RFQ with more specifics regarding the
management information they will require from contractors. We further recommended that the IRS ensure
the development of management information is integrated into all relevant
design decisions as the project progresses.
Project management also
informed us that they would add more information relating to the protection of
taxpayer rights to the draft RFQ before it is issued. Finally, management informed us they would significantly reduce
the initial volume of delinquent tax account cases placed with CCS companies
until baselines can be established.
Because the detailed design
for this project, including the system which will be responsible for selecting,
controlling, and updating cases assigned to CCS companies, has not yet been
developed, our review primarily focused on the IRS’ preliminary planning
efforts. Accordingly, we will initiate
another review of this area once more substantial progress on the development
of the detailed design for the project has been made.
Management’s Response: The
Commissioner, Small Business/Self-Employed (SB/SE) Division, agreed to the
recommendations presented and indicated that they have already implemented
corrective actions to address the problems identified in our report. Specifically, management updated the draft
RFQ with specific references to providing management information in an
electronic format. The draft RFQ was
also updated with specific information regarding taxpayer protections in
anticipation that the statutory requirements concerning taxpayer protections
will become part of the CCS’ enabling legislation. Finally, the draft RFQ was updated to show a staggered
implementation.
Management’s complete
response to the draft report is included as Appendix IV.
Copies of this report are
also being sent to IRS managers who are affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Philip Shropshire, Acting Assistant
Inspector General for Audit (Small Business and Corporate Programs), at (215)
516‑2341.
Preliminary Planning Efforts for the Use of Contract Companies Were Very Extensive
Requiring Key Reports in a Standardized Electronic Format Will Enhance Future Program Oversight
Better Development of Detailed Requirements Will Help Ensure Taxpayer Rights Are Protected
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix
IV – Management’s Response to the Draft Report
The Internal Revenue
Service (IRS) has historically been faced with a large and growing population
of delinquent tax accounts. For
example, the IRS’ records indicate that from the end of Fiscal Year (FY) 1996
through the end of FY 2001, gross accounts receivable due from unpaid taxes
rose from $216 billion to $276 billion.
The number of taxpayers with unpaid liabilities in the Collection
function’s unassigned inventory also increased, from 317,865 with $3 billion in
liabilities as of the end of FY 1996, to 542,406 with $18.5 billion in
liabilities as of the end of FY 2001.
Finally, during the period October 2001 through June 2002, $2 billion in
unpaid taxpayer accounts were removed as excess inventory.
Since the IRS has stated that it does not have enough
resources to work all accounts, it is exploring contracting out some collection
activity to Collection Contract Support
(CCS) companies, which are private (non-government) collection businesses. The last time the IRS attempted to use CCS
companies was in 1996. Based on the
results of the 1996 project, the IRS concluded that the use of CCS companies
was not economically viable at that time.
The IRS’ present
approach to the use of CCS companies differs significantly from the approach
used in 1996. Most importantly, the IRS
plans to request the authority to fund the use of CCS companies directly from
the proceeds collected by those companies.
Project management indicated that unless CCS companies can be funded
from tax proceeds, their use would remain an uneconomical option for the IRS. The 1996 CCS project was paid for through
the IRS’ appropriated funds.
At present, the
legislation needed to support the contracting out of collection cases by the
IRS does not yet have Congressional approval.
If the legislation were approved, project management informed us that
the earliest they could begin providing cases to CCS companies would be late
2004.
This review was
conducted at the CCS Project Team Headquarters in New Carrollton,
Maryland. We performed the audit from
July through November 2002 in accordance with Government Auditing Standards. Detailed information on our audit objective,
scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Because the detailed
design for this project, including the system which will be responsible for
selecting, controlling, and updating cases assigned to CCS companies, has not
yet been developed, our review primarily focused on the IRS’ preliminary
planning efforts. Accordingly, we will
initiate another review of this area once substantial progress on the
development of the detailed design for the project has been made.
The IRS CCS project team met with representatives from five state revenue departments and two Federal agencies with recent experience in administering programs involving collection contract companies. The IRS also analyzed the structure and administration of contracts for the private collection of outstanding receivables. In addition, state officials provided insights regarding data security, data transfer protocol, and the protection of taxpayer rights. The collection and analysis of data related to proposed operations is essential to sound planning and should help leverage the use of existing best practices.
The IRS also identified three commercial collection companies with whom they met on a regular basis to solicit input throughout the development of the preliminary project design. The IRS met with the collection companies five times during the period May through October 2002. Some of the areas in which feedback was solicited included case screening criteria, electronic data sharing capabilities, data security requirements, and potential compensation models. This effort should aid in ensuring that the design of the IRS’ CCS program is compatible with industry strengths.
The IRS also prepared a draft Request for Quotation (RFQ) for the CCS initiative, which management plans to issue during the second quarter of FY 2003. The purpose of the draft RFQ is to promote awareness about this initiative, as well as to solicit feedback/questions from potential contractors regarding the IRS’ requirements. While the issuance of a draft RFQ should help the IRS perfect its contract specifications, some critical requirements could be enhanced.
In developing the draft RFQ, management did not include a requirement that collection contractors provide key data, such as telephone reports and production reports, in a standardized electronic format. The IRS plans to eventually award up to 12 task orders to contract collection companies. Volume estimates are 110,000 total cases per month for the first 3 months after initial placement, with a total of 2.6 million cases annually by the end of the first year. Project management informed us that this effort might eventually involve as many as 2,500 collection contract employees.
Requiring collection contractors to submit key reports in an electronic format would facilitate automated analysis of the data and allow the IRS to quickly identify trends, such as calls made outside timeframes as prohibited by the Fair Debt Collection Practices Act. In addition, requesting key reports in an electronic format would allow the IRS to combine data from all contractors and provide the summary-level management information needed to effectively oversee the program. Conversely, not having timely and comprehensive management information would reduce the IRS’ ability to make effective program decisions. Providing these additional specifications will also help clarify the IRS requirements to potential contractors.
Project planning to date has been primarily focused on case processing actions, data privacy and security, and contractor compensation. Because of the critical nature of management information, planning for information needs should be performed concurrently with program planning. After we informed management of our concerns regarding the need for management information to be in a standardized electronic format, the CCS project team quickly revised the draft RFQ to specifically require collection contractors to submit management reports in a standardized electronic format.
1.
The
Commissioner, Small Business/Self-Employed (SB/SE) Division, should ensure that
the development of management information is integrated into all relevant
design decisions as the project progresses.
Management’s Response: SB/SE
Division management updated the draft RFQ with specific references to providing
management information data in an acceptable electronic format before they
released it to the industry for comment.
The IRS did not
include in its draft CCS RFQ any information or requirements regarding how the
IRS Restructuring and Reform Act of 1998 (RRA 98) Sections 1203 and 1204 should
be implemented and monitored. RRA 98 Section 1203 establishes 10 provisions which, if
violated by an IRS employee, will result in their termination. Some examples include falsifying documents
to cover a mistake concerning a taxpayer, or violating the IRS regulations concerning
taxpayer harassment. RRA 98 Section 1204
prohibits the use of tax enforcement results or establishment of production
quotas for evaluating employee performance within the IRS.
Although the IRS included the RRA 98 in the listing of statutes applicable to CCS contractors, it did not specify those actions that constitute violations of Section 1203 or what is required of the contractor in those instances where a violation is found. Similarly, the draft RFQ offered no information as to what would constitute a Section 1204 violation and what actions will be required to monitor for such violations. Providing detailed information regarding this area is especially important given that the taxpayer protection provisions in the RRA 98 presently apply only to the IRS.
Project management
informed us that they expect contractors reviewing the draft RFQ to have a
number of questions regarding the RRA 98.
Any information regarding Sections 1203 and 1204 will be disseminated in
response to those questions. Project
management also noted that they were concerned about making the draft RFQ too
lengthy.
In the proposed
legislation allowing contracting out, the IRS noted that private contractors
will be required to comply with all provisions of the Internal Revenue Code
that afford taxpayers protections during the tax collection process. The absence of specific information in the
draft RFQ regarding the protections that need to be afforded to taxpayers under
the RRA 98 significantly increases the likelihood of confusion among potential
contractors as to the IRS’ requirements.
It could also deprive the IRS of early feedback from potential CCS
contractors regarding obstacles in implementing the taxpayer protections
contained in the RRA 98. Ultimately,
this could result in CCS contractors unevenly applying the taxpayer protections
in the RRA 98, or not applying them at all.
After we discussed our concerns in this area with CCS
project management, they informed us that more information relating to the
protection of taxpayer rights will be added to the draft RFQ before it is
issued.
2. The
Commissioner, SB/SE Division, should follow through with plans to provide more
direction regarding RRA 98 Sections 1203 and 1204 to potential CCS contractors
in the draft RFQ. This could include,
for example, a listing of the applicable provisions of RRA 98 Sections 1203 and
1204, consequences of violations, and procedures related to monitoring for
violations. To the extent specific
details regarding the application of the RRA 98 are considered too voluminous,
general criteria and principle protections of the RRA 98 could be provided
along with a notification of where more specific information can be found if
needed.
Management’s Response: In
anticipation that statutory requirements regarding taxpayer protections will
become part of the enabling legislation, SB/SE Division management updated the
draft RFQ with specific information about taxpayer protections before they
released it to industry for comment.
In some instances the CCS companies will not be able to resolve the accounts and will need to refer the cases back to the IRS. IRS personnel assigned to work these referrals may be quickly overwhelmed with cases based on the current inventory release schedule. First year annual volume estimates do not reflect the present uncertainty and risk regarding the average level of IRS support needed on each case released.
Present CCS plans call for the placement of 110,000 cases per month for the first 3 months of the project, with a total of 2.6 million cases annually by the end of the first year. To support this effort, the CCS project team informed us that they initially plan to hire a staff of 20 to 30 Collection function personnel to work referrals of taxpayers from the CCS companies back to the IRS. However, based on the 67 percent referral rate experienced by the IRS in the 1996 CCS project, the current projected placement population would require a supporting IRS staff of over 300 Collection function personnel. The analysis of all potential risks is an essential part of effective project management.
While the IRS is working on a number of strategies that should help reduce the population of cases that need to be referred, even a 20 percent referral rate would require a support staff of roughly 100 IRS Collection function personnel. In addition, depending on the experience level of the personnel hired for the referral unit, there may be a significant learning curve that would further affect the unit’s initial productivity.
The IRS’ review of the results of the 1996 CCS project identified that contractors referred cases for a variety of actions, including responding to taxpayer questions which the CCS companies were unable to answer and evaluating options in instances in which the CCS companies determined that the taxpayer refused to pay. Initial case release estimates were based on an analysis of accounts receivable from unpaid taxes and an assessment of the maximum number of collection contractors that the IRS could reasonably manage at one time. An overload of case referrals could result in delays in case processing and a reduction in quality of customer service.
After we discussed our concerns in this area with CCS project management, they informed us that the initial volume of delinquent tax account cases placed with CCS companies will be reduced until baselines can be established.
3. The
Commissioner, SB/SE Division, should follow through with plans to reduce
initial tax delinquent account case placement until a baseline for referrals
can be established. In addition, first
year annual volume estimates should be adjusted to reflect the reduced initial
placement and uncertainty regarding the level of support needed on each case
released.
Management’s
Response: SB/SE Division management updated the draft
RFQ to show a staggered implementation before they released it to the industry
for comment.
Appendix I
The overall
objective of this review was to determine whether the Internal Revenue Service
(IRS) has taken effective steps to plan for the proposed use of Collection
Contract Support (CCS) companies.
To accomplish this
objective we:
I.
Determined
what steps the IRS took to ensure that the current CCS project leverages the
use of existing industry best practices and avoids the difficulties encountered
in the 1996 project.
II.
Ascertained
whether the protection of taxpayer rights was effectively addressed in the
development of the current CCS project.
A.
Interviewed
the Taxpayer Advocate to identify specific concerns regarding the interaction
of CCS companies with taxpayers.
B.
Determined
how the protections afforded to taxpayers by the IRS Restructuring and Reform Act of 1998 (RRA 98) Sections 1203 and
1204 will be applied to CCS company contacts with
taxpayers.
C.
Evaluated
any internal controls CCS companies will be required to implement to ensure
taxpayer rights are protected.
D.
Evaluated
how the IRS plans to monitor contractor activities to ensure the overall
protection of taxpayer rights.
E.
Determined
whether a background check will be required for all CCS company personnel
involved in the collection of delinquent federal tax debt.
III.
Determined
whether the appropriateness of case closure actions was addressed in the
development of the current CCS project.
A.
Evaluated
the methodology the IRS plans to use to ensure CCS company case actions are
appropriate.
B.
Determined
which case actions will be subject to approval by the IRS.
IV.
Determined
whether the CCS project included the development of sufficient management
information to allow for effective monitoring of the project.
A.
Evaluated
the completeness and reliability of the management information the CCS project
team will use to monitor the business results of CCS companies.
B.
Determined
whether access for both the IRS and the Treasury Inspector General for Tax
Administration to CCS company facilities, personnel, and records is
incorporated into all CCS contracts.
Appendix II
Major Contributors to This Report
Philip Shropshire, Acting Assistant Inspector
General for Audit (Small Business and Corporate Programs)
Parker F. Pearson,
Director
Gary L. Swilley,
Audit Manager
Todd M. Anderson,
Senior Auditor
Anthony J. Choma,
Senior Auditor
Seth Siegel,
Auditor
Appendix III
Acting Commissioner N:C
Deputy Commissioner, Small Business/Self-Employed Division S
Deputy Commissioner for Modernization and Chief Information Officer M
Associate Commissioner, Business Systems Modernization M:B
Deputy Associate Commissioner, Systems Integration M:B:SI
Director, Strategy and Finance S:SF
Director, Compliance S:C
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O
Office of Management Controls N:CFO:F:M
Audit Liaison: Commissioner, Small Business/Self-Employed Division S
Appendix IV
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.