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Tax Administration: IRS Can Strengthen Its Efforts to See That Taxpayers
Are Treated Properly (Letter Report, 10/26/94, GAO/GGD-95-14).

Several initiatives have been undertaken in recent years to better
protect taxpayers--particularly the enactment of the Taxpayer Bill of
Rights in 1988 and the Internal Revenue Service's (IRS) continuing
efforts to improve its operations and treat taxpayers as customers. IRS
also has a wide range of procedures and oversight governing the behavior
of its employees in the millions of contacts they have with taxpayers
each year. However, because IRS has failed to define or track taxpayer
abuse, it is hard to assess IRS efforts to protect taxpayers from
abusive enforcement, unnecessarily long conflict resolution, or
unauthorized "snooping" into taxpayers' files.

--------------------------- Indexing Terms -----------------------------

     TITLE:  Tax Administration: IRS Can Strengthen Its Efforts to See 
             That Taxpayers Are Treated Properly
      DATE:  10/26/94
   SUBJECT:  Management information systems
             Personnel management
             Internal controls
             Confidential records
             Tax returns
             Telecommunications operations
             Information gathering operations
             Information dissemination operations
             Tax administration systems
IDENTIFIER:  IRS Tax System Modernization Program
             IRS Problem Resolution Program
             IRS Integrated Data Retrieval System
             IRS Compliance 2000 Initiative
             Taxpayers Bill of Rights Act
             Taxpayers Bill of Rights Act 2
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================================================================ COVER

Report to the Subcommittee on Treasury, Postal Service and General
Committee on Appropriations
House of Representatives

October 1994



IRS Treatment of Taxpayers

=============================================================== ABBREV

  FBI - Federal Bureau of Investigation
  DO - district office
  IGP - Information Gathering Projects
  IDRS - Integrated Data Retrieval System
  IRS - Internal Revenue Service
  OIG - Office of Inspector General
  PRO - Problem Resolution Officer
  SC - service center
  TSM - Tax Systems Modernization

=============================================================== LETTER


October 26, 1994

The Honorable Steny H.  Hoyer
The Honorable James R.  Lightfoot
Ranking Minority Member
Subcommittee on Treasury, Postal
 Service and General Government
Committee on Appropriations
House of Representatives

This report responds to the Subcommittee's request, made as part of
the Appropriations Committee's report to accompany the 1992 Treasury
Appropriation bill, that we determine whether the Internal Revenue
Service (IRS) has adequate controls and other measures to prevent the
abuse of taxpayers and, if warranted, that we recommend additional
measures to reduce the potential for taxpayer abuse.  The
Subcommittee also asked if we believe that additional appropriations
are needed to strengthen IRS' ability to prevent the mistreatment of

------------------------------------------------------------ Letter :1

IRS is responsible for administering our nation's voluntary tax
system in a fair and efficient manner.  To do so, IRS has a staff of
about 115,000 employees who work at hundreds of locations in the
United States and in several foreign countries.  These employees (1)
process over 200 million tax returns each year, (2) examine returns
to determine whether additional taxes are owed, (3) collect
delinquent taxes, and (4) investigate civil and criminal violations
of the tax laws. 

To aid in carrying out these responsibilities, Congress has provided
IRS with a broad set of discretionary enforcement powers.  These
enforcement powers include (1) examining taxpayers' returns and
assessing additional tax, interest, and penalties for underreported
income or failure to file a return, (2) enforcing the collection of
unpaid taxes by such actions as seizing taxpayers' property, and (3)
conducting criminal investigations of taxpayers and recommending
prosecution for violations of the tax laws.  In fiscal year 1992, IRS
examined over 1 million individual taxpayers' returns, took about 4.7
million enforced collection actions for delinquent taxes, and
initiated over 6,000 criminal investigations.  Each of these actions
had the potential to create an adversarial relationship between the
affected taxpayers and IRS staff. 

In 1988, concerned about allegations of taxpayer abuse, Congress
enacted the Taxpayer Bill of Rights, a law containing numerous
provisions to strengthen and clarify taxpayers' rights in their
dealings with IRS.  In 1992, additional taxpayers' rights
legislation, identified as "Taxpayer Bill of Rights 2," was passed by
Congress as part of broader tax legislation but was not signed into
law by the President.  Very similar legislation, still identified as
Taxpayer Bill of Rights 2, was introduced in the 103rd Congress as S. 
542 and H.R.  22.  In addition, some provisions of H.R.  22 were
included in H.R.  3419, introduced in November 1993.  As of September
1994, Congress had not passed these bills. 

------------------------------------------------------------ Letter :2

At the outset, we learned that IRS has a wide range of controls and
procedures to govern its relationships with taxpayers.  But IRS has
neither a specific definition of nor management information on the
nature and extent of taxpayer abuse.  Thus, it was not possible to
select a representative sample of IRS actions to determine if
taxpayer abuse had occurred and, if so, to estimate how frequently or
attempt to determine if there were patterns of abuse in the many IRS
divisions and offices throughout the country. 

Given the lack of an IRS definition of taxpayer abuse, we found it
necessary to develop our own.  On the basis of interviews with IRS
officials and representatives of tax practitioners and taxpayer
advocate organizations, we developed a definition of abuse that
encompassed a broad range of situations potentially harmful to
taxpayers.  We attempted to define abuse from the taxpayer's point of
view, not from IRS' viewpoint.  Therefore, we defined it to include
situations in which taxpayers were, or perceived they were, harmed
when (1) an IRS employee violated a law, regulation, or IRS' Rules of
Conduct;\1 (2) an IRS employee was unnecessarily aggressive in
applying discretionary enforcement power; or (3) IRS' information
systems broke down.  By "harmed" we meant primarily financial harm. 
But, we also recognized and incorporated into our definition the fact
that frustration and the resulting burden arising from lengthy delays
in resolving problems, time spent in dealing with IRS, and fear of
the IRS can be factors in taxpayers' situations that may contribute
to their perception of abuse even though--from IRS' perspective--the
taxpayer may not have been abused. 

Next, we identified the controls and related measures IRS uses to
prevent instances that would meet our definition of taxpayer abuse
and to respond to allegations of such instances occurring.  We also
researched various IRS data sources and focused on Problem Resolution
Program files, congressional correspondence files, and internal audit
and internal security reports and files to find possible examples of
abuse that would fall within our definition.  We judgmentally
selected 26 such examples and used them to analyze the effectiveness
of IRS' controls and processes to prevent such abuse.  While we did
not follow up on all 26 examples to determine whether taxpayers were
actually harmed by IRS, we cited the circumstances of these examples
in our discussions with IRS managers to learn the range of controls
in place that should have prevented these circumstances from
occurring.  We selected these examples without regard to when the
incidents occurred, resulting in examples spanning the period 1987
through 1993.  However, we evaluated the controls that were in place
during the period of our review, from April 1992 to January 1994. 

To illustrate our approach, we found an example in which an IRS
employee, after accepting a cash payment from a taxpayer, stole the
cash payment and falsified the document used to credit the taxpayer's
account.  This led us to review the adequacy of IRS' controls over
taxpayers' cash payments.  Our review of the controls then led us to
a conclusion that they could be strengthened and a recommendation
about what should be done. 

During our review, an allegation of potential taxpayer abuse received
considerable media attention because it involved reports of possible
improper contacts with IRS by staff of the White House and the
Federal Bureau of Investigation (FBI).  We included an analysis of
both the allegation and the adequacy of IRS' controls to deal with
such contacts in our report. 

The details of our objectives, scope, and methodology are discussed
in appendix I.  Appendix II provides a detailed description of IRS'
controls, processes, and oversight offices, as well as recent
congressional and IRS initiatives that govern IRS' interaction with
taxpayers.  Appendix III provides a summary of the provisions in the
1988 Taxpayer Bill of Rights.  Appendix IV is a summary of GAO
products that cover issues related to those discussed in this report. 
The Acting Commissioner of Internal Revenue provided written comments
on a draft of this report.  Those comments are presented and
evaluated on pages 21 to 26 and are reprinted in appendix V. 

\1 At the time we began our work, IRS' Rules of Conduct described the
appropriate behavior for IRS employees to follow when carrying out
IRS' mission.  The Rules of Conduct covered such areas as conflicts
of interest, relationships with taxpayers, and personal activities. 
In February 1993, the Office of Government Ethics' "Standards of
Ethical Conduct for Employees of the Executive Branch" superseded
IRS' and other agencies' Rules of Conduct. 

------------------------------------------------------------ Letter :3

Several initiatives have been undertaken in recent years to better
protect taxpayers--particularly enactment of the Taxpayer Bill of
Rights in 1988 and IRS' continuing efforts to improve its operations
and treat taxpayers as customers.  And, IRS has a wide range of
controls, processes, and oversight offices to govern the behavior of
its employees in the millions of contacts they have with taxpayers
each year.  However, we were not able to reach a conclusion as to the
overall adequacy of this "system" of controls in protecting taxpayers
from abuse primarily because of IRS' lack of a definition of abuse
and related management information about its frequency and nature. 

Despite the many controls intended to protect taxpayers, we found
examples that fell within our definition of taxpayer abuse.  Such
instances show that IRS can take action to strengthen its procedures. 
The most fundamental action needed is for IRS to specifically define
taxpayer abuse and develop management information about it.  This
would help ensure that future instances of abuse are identified and
that steps are taken to minimize their frequency.  It would also
provide the information needed for IRS and Congress to better
evaluate IRS' performance in carrying out its responsibility for
protecting taxpayers' rights. 

Additional steps are needed to strengthen specific IRS controls and
procedures to reduce the potential for (1) unauthorized access to
computerized tax information by IRS employees, (2) inappropriate
selection of tax returns during information gathering projects, (3)
embezzlement of taxpayers' cash payments to IRS, (4) questionable
application of trust fund recovery penalties\2 to company officials
when taxes withheld from employees have not been paid, and (5)
information-handling problems that contribute to taxpayer frustration
and perception of abuse. 

A provision included in the Taxpayer Bill of Rights 2 introduced in
Congress in 1992 and again in 1993, if enacted, would aid in
providing taxpayers with information needed to better deal with the
trust fund recovery penalty.  We believe that IRS can address the
remaining issues administratively. 

We concluded that the allegation of potential abuse that involved
possible improper contacts with IRS by staff of the White House was
unfounded.  In this instance, we found no evidence that either the
White House or the FBI had made improper contact with IRS or that IRS
employees had violated a taxpayer's rights.  In response to the
allegation, the White House provided explicit guidance for staff
regarding contacts with IRS.  Similarly, we believe IRS should
develop specific guidance for its employees for handling White House

We do not believe that Congress will need to provide additional
appropriations to enable IRS to implement the actions we recommend,
with one possible exception.  Additional funding may be needed for
IRS to deal with a variety of information-handling problems as part
of its Tax Systems Modernization (TSM) program, a long-term effort to
modernize its computer and telecommunication systems.  We do not know
how much funding may be needed because IRS has yet to specify its
requirements or develop a cost/benefit analysis for them.  We believe
that the steps we are recommending to correct the remaining
problems--while not cost free--will not require additional

\2 When employers do not pay IRS the income and social security taxes
(trust fund taxes) withheld from employees' salaries, IRS may impose
this penalty--which is actually the unpaid tax--against the person(s)
responsible for making the payments. 

------------------------------------------------------------ Letter :4

IRS has a wide range of controls, processes, and oversight offices
designed to govern how its employees interact with taxpayers. 
Specifically, IRS has operational controls governing examination,
collection, and criminal investigation activities to prevent taxpayer
abuse.  IRS also has a Problem Resolution Office to handle taxpayer
complaints, if a taxpayer feels that these operational controls have
broken down.  In addition, IRS' Internal Security Division
investigates taxpayer complaints involving potential criminal
misconduct by IRS employees. 

In recent years, legislation and IRS initiatives have aided taxpayers
in dealing with IRS.  In 1988, Congress passed the Taxpayer Bill of
Rights (P.L.  100-647) containing numerous provisions that expanded
taxpayer rights.  IRS has begun quality management, ethics and
integrity, and tax systems modernization initiatives, as well as a
limited collection appeals project.  And, a key element of IRS'
current strategy is emphasis on treating taxpayers as "customers."
All of these initiatives should help IRS to better serve taxpayers
and to prevent their mistreatment. 

------------------------------------------------------------ Letter :5

Despite IRS' efforts to prevent violations of taxpayers' rights, we
found various instances of what we consider to be taxpayer abuse by
IRS.  Some instances involved situations in which IRS employees
violated either the law or IRS' Rules of Conduct and the taxpayer
abuse may have been intentional.  Other instances involved situations
in which IRS employees violated neither the law nor a regulation, but
used discretionary enforcement power in a way that appeared to
unnecessarily create a financial or other hardship for the taxpayers. 
Still others involved IRS computer system problems that engaged
taxpayers in lengthy efforts to resolve their tax problems, leaving
them with the perception that they were abused by IRS. 

The following sections of this report discuss (1) the need for better
information to aid in protecting taxpayers' rights and (2) the
specific areas where we believe IRS' controls can be strengthened. 

------------------------------------------------------------ Letter :6

Although IRS collects data on taxpayer complaints, it has neither a
definition of nor management information for tracking and measuring
taxpayer abuse.  As a result, IRS is unable to determine the nature
and extent of abuse by its employees or systems, and whether existing
controls need to be strengthened.  A specific definition of taxpayer
abuse is essential to provide a basis for collecting consistent
information about it and to assist IRS staff in identifying abuse
when it occurs and preventing its reoccurrence. 

IRS has several management information systems that collect data on
taxpayer complaints.  Complaints handled by IRS' Problem Resolution
Program or investigated by its Internal Security Division are entered
into their respective management information systems.  IRS' Labor
Relations Division also has a management information system that
includes the results of investigations of IRS employees and indicates
any disciplinary actions taken against them, including those
investigations that may have originated from taxpayer complaints. 

Each of these management information systems uses codes to track and
measure various issues considered important to the respective
offices, but none of them has a specific code for taxpayer abuse. 
For example, the Labor Relations system tracks such issues as
criminal misconduct and misuse of authority by IRS employees.  In
some instances these particular issues may involve taxpayer abuse,
but in other instances they do not.  We found similar situations with
both the Problem Resolution Program and Internal Security management
information systems.  Without a definition of taxpayer abuse and
specific codes related to that definition, these systems are not
currently able to record incidents of abuse to track their nature and

To better ensure that violations of taxpayers' rights are minimized,
we believe that IRS should establish a service-wide definition of
taxpayer abuse and then identify and gather management information to
systematically track its nature and extent.  Although this may
require IRS to modify some of its existing data bases, we believe
that this can be accomplished without requiring additional
appropriations.  IRS is currently involved in an effort to develop
broad-based performance indicators to allow top IRS, Treasury, other
administration officials, Congress, and the public to better assess
its performance in key areas.  Developing the information needed to
assess performance in controlling taxpayer abuse would seem to fit
well into that effort. 

Taxpayer surveys IRS has conducted in recent years are another
potential source of information about taxpayer abuse.  As discussed
in appendix II, these surveys have collected information from
taxpayers about their views on how they were treated by IRS
representatives.  These surveys have not, however, included questions
designed to identify possible abusive incidents for further analysis. 
Once IRS has defined and is systematically tracking abuse, these
types of surveys could be used as another indicator of IRS' progress. 

------------------------------------------------------------ Letter :7

Public Law, Treasury Directives, and Internal Revenue Manual
guidelines require that IRS protect the integrity, availability, and
privacy of taxpayer information in its computer systems. 
Consequently, IRS employees are prohibited from obtaining access to
taxpayer accounts without authorization.  The Integrated Data
Retrieval System (IDRS) is IRS' primary computer system for accessing
and adjusting taxpayer accounts.  Authorized IRS staff obtain access
to taxpayer information through IDRS terminals located at the service
centers and the regional and district offices.  There are
approximately 56,000 staff nationwide authorized to use IDRS. 
Eventually, IRS plans to replace IDRS as part of its TSM initiative. 
According to IRS, under the new system, users will be able to obtain
more taxpayer information than they can through IDRS. 

IRS has procedures and controls in place to aid in preventing and
detecting unauthorized access and use of taxpayer information
contained in IDRS.  Specifically, each IDRS user is given a unique
password that allows access to the system.  Users are also assigned a
profile of command codes--codes that, among other things, enable
users to make changes in taxpayers' accounts--based on the user's job
requirements.  The profile limits the user to only those command
codes needed to do his or her job effectively. 

IDRS also provides a means to identify all employees who access
taxpayer accounts, as IDRS records each employee access of taxpayer
information in a daily audit trail.  IRS can search these audit
trails to investigate specific allegations of unauthorized access, as
well as to look for patterns of use that could indicate unauthorized
access.  In addition, IDRS automatically generates security reports
when employees access their own accounts, their spouses' accounts, or
the accounts of other employees.  Each IRS office has security
personnel who are responsible for monitoring all IDRS activities,
including monitoring security reports, adding and removing IDRS
users, and assigning profiles for IDRS users. 

We learned through discussions with IRS Internal Audit staff and a
review of an October 1992 Internal Audit report\3 that these controls
and procedures provide IRS with limited capability to (1) prevent
employees from unauthorized access to taxpayers' accounts and (2)
detect an unauthorized access once it occurs.  Even though IRS
employees can access IDRS only with a password, once in the system,
they cannot be prevented from accessing the account of any taxpayer
living within their service center area.  Furthermore, even though
IDRS records every employee access of IDRS in its daily audit trail,
these audit trails are so voluminous and detailed that they cannot be
used efficiently to identify inappropriate access and misuse of IDRS

In addition to these weaknesses, the security reports monitored by
security personnel are not adequate to help them identify potential
browsing, disclosure, or other integrity problems.  Finally,
according to the Internal Audit report, ".  .  .  the IDRS Security
Handbook and related training materials do not provide proper
guidance to security personnel on how to detect potential employee
misuse of IDRS."

In one of our examples of alleged abuse, an IRS employee, after a
personal dispute with a contractor, gained access to the contractor's
account without authorization.  The employee then allegedly used this
information to threaten the contractor with enforcement action in an
effort to favorably resolve the dispute.  Because of the weaknesses
in IDRS security as described above, the unauthorized access to the
contractor's account described in this example would not
automatically have been detected by security personnel.  Rather, it
was only because the taxpayer complained that IRS management was made
aware of this specific instance of taxpayer abuse. 

IRS management is aware of its overall problems with IDRS security
because of the Internal Audit report mentioned above.  According to
the report, 368 IRS employees in one region had used IDRS to gain
access to nonwork-related taxpayer accounts, including those of
friends, relatives, neighbors, and celebrities.  In most instances,
the access did not result in changes to taxpayer's accounts, but
rather enabled the IRS employees to merely view the taxpayer's
account information.  Ultimately, information on 79 employees was
referred to Internal Security for investigation of potential criminal
violations.  Internal Security determined that six employees prepared
fraudulent returns for taxpayers and then monitored the accounts on
IDRS.  The actions of some of these employees are being reviewed by
the appropriate U.S.  Attorney for potential criminal prosecution. 

On the basis of these findings, Internal Audit recommended that IRS
management take actions to strengthen existing IDRS security
controls.  Internal Audit recommended seven steps to enhance security
controls over IDRS, one of which was to ensure that the security
system for TSM will have similar controls to those recommended for
the current IDRS security system. 

We also discussed these problems in a September 1993 report\4 that
recommended several actions IRS needs to take to strengthen its
general controls over computerized information systems.  We and IRS
are continuing to study ways to solve these problems.  IRS is
currently working on a program to help detect unauthorized access to
IDRS.  Specifically, the goal is to implement standardized IDRS
reviews periodically in each service center.  To prevent unauthorized
access to taxpayer accounts, IRS wants to limit some employees'
access to only specified accounts authorized by a manager for
official purposes.  IRS has also indicated that it plans to build
security controls to minimize unauthorized access of taxpayer
information into the system that will eventually replace IDRS. 
Although IRS has yet to develop a cost/benefit analysis for these
security controls, IRS officials said that the cost of these controls
will be included in future requests for TSM appropriations. 

\3 Review of Controls Over IDRS Security (Internal Audit Reference
Number 030103, Oct.  23, 1992). 

\4 IRS Information Systems:  Weaknesses Increase Risk of Fraud and
Impair Reliability of Management Information (GAO/AIMD-93-34, Sept. 
22, 1993). 

------------------------------------------------------------ Letter :8

When selecting taxpayers' returns for examination, IRS often uses
computer-generated lists to identify returns with examination
potential.  However, because computer-aided selection techniques rely
solely on information in filed returns, IRS collects information from
outside sources to identify other areas of potential taxpayer
noncompliance.  Information Gathering Projects (IGP) are one
technique that IRS uses to collect outside information and to
identify returns with examination potential.  In fiscal years 1990
and 1991, district office examinations of individual taxpayers
resulting from IGPs were about 4.5 percent of the total of such

An IGP is a study or survey undertaken to identify noncompliance with
the tax laws.  It usually involves a limited number of taxpayers
within such categories as an occupation, an industry, a geographic
area, or a specific economic activity.  IRS requires that an IGP be
authorized by a district director or higher level management official
for a specified length of time during which specific tax-related
information is to be collected from third party sources. 

Once authorized, IGPs normally include an information gathering phase
and an examination phase.  During the information gathering phase, a
project team--revenue agents and a project coordinator--collect and
analyze information on a particular group of taxpayers.  On the basis
of this analysis, the project team will identify tax returns that
have potential for tax changes and therefore should be examined
during the project.  Examination staff then review the returns to
identify those with the greatest potential for tax changes.  The
returns selected will then be sent to an examination group designated
to conduct the examinations. 

Although IRS procedures provide general guidelines for identifying,
approving, initiating, and coordinating IGPs, the controls and
procedures are not adequate to prevent examination staff from
selectively targeting individual taxpayers for examination.  For
example, although IRS requires project coordinators to develop
general work plans for each IGP, there is no requirement in IRS'
procedures that specific criteria be established for selecting tax
returns to be examined during the project.  Furthermore, IRS'
procedures do not require a separation of duties--a key examination
control against potential abuse--between project staff responsible
for identifying potential returns to be included in the project and
staff responsible for selecting the tax returns to be examined. 

As a result, an examination employee working on the project could be
involved in (1) the project's information gathering phase, which
results in the selection of a group of tax returns that have
potential for tax changes and (2) selecting those returns from that
group believed to have the greatest potential for tax changes, which
will be examined.  This makes it possible for such an employee to
selectively target an individual taxpayer for examination during the
project.  In one of our examples, a revenue agent working on an IGP
included the returns of two taxpayers for examination against whom
the revenue agent had initiated legal action stemming from a personal
business dispute. 

IRS is currently implementing Compliance 2000, an initiative designed
to increase taxpayer compliance by (1) identifying market segments
believed to be in noncompliance, (2) determining the reasons for such
noncompliance, and (3) improving taxpayer compliance using assistance
and education methods before initiating more traditional enforcement
methods.  According to IRS officials, as IRS implements Compliance
2000, it will likely increase the use of special enforcement projects
and, therefore, increase the number of returns selected for
examination using locally-derived and possibly subjective criteria,
such as those used during IGPs. 

To help ensure that taxpayers are not improperly targeted for
examination by IRS employees during IGPs, we believe that IRS should
revise its guidelines to require that specific criteria be
established for selecting taxpayers' returns to be examined during
these projects.  We also believe there should be a separation of
duties between project staff who identify returns with potential for
tax changes, and staff who select the returns to be examined.  Since
these are basically procedural changes, we do not believe that IRS
would incur substantial costs in implementing them. 

------------------------------------------------------------ Letter :9

IRS officials told us that IRS prefers that taxpayers settle their
tax bills with a check or money order.  However, IRS is required by
law to accept cash if a taxpayer insists on this method of payment.\5
When a taxpayer pays with cash, an IRS collection employee is
required to provide the taxpayer with a cash receipt--IRS Form 809. 
At the end of each day, collection support staff are to process the
payments and reconcile all Form 809 receipts they receive with daily
collection activity reports submitted to them by collection staff. 
In addition to the daily reconciliation, collection managers are to
do an annual reconciliation of all Form 809 receipts issued to
collection staff to ensure that all receipts are accounted for.  Any
discrepancies noted during either the daily or annual reconciliations
are to be discussed by the appropriate collection employee and his or
her supervisor. 

We found that IRS did not consistently mention its preference for tax
payments by check or money order in its forms, notices, and
publications.  For example, IRS Publication 594 "Understanding the
Collection Process" says that taxpayers must receive an IRS Form 809
receipt for cash payments to the IRS, but does not say that IRS
prefers either a check or money order. 

We also found that the controls to prevent IRS employees from
embezzling taxpayers' cash payments relied to a great extent on
employee integrity and taxpayer complaints.  Although Form 809
receipts provided to taxpayers are to be reconciled with daily
collection reports, there are no management reviews of all Form 809
receipts other than the annual reconciliation.  As a result, if a
collection employee embezzled a taxpayer's cash payment and the
embezzlement was not detected through the daily reconciliation, IRS
might not detect this until the next annual reconciliation.  In the
interim, IRS relies on taxpayer complaints to identify when employees
embezzle taxpayers' cash remittances. 

In one of our examples, we found that a taxpayer complained to IRS
that her bank account was levied after she fully paid her tax
liability with cash.  Internal Security investigated her complaint
and determined that the IRS collection employee whom she paid had
embezzled most of her cash payment by altering the amount on the cash
receipt he submitted to the collection support staff.  This employee
also embezzled other taxpayers' cash payments for which he had not
submitted any cash receipts.  Unfortunately for the taxpayer in this
example, the situation was not detected until the taxpayer complained
about the erroneous bank account levy made by IRS.  Reconciling
outstanding cash receipts more often may have detected this problem
before the taxpayer was subjected to the additional IRS collection

To better protect against possible embezzlement of cash payments, we
believe that IRS should reconcile all outstanding Form 809 cash
receipts more often than once a year.  We also believe that IRS
should consistently stress in its forms, notices, and publications
that taxpayers should use checks or money orders whenever possible,
rather than cash to pay their tax bills.  In our view, IRS could
implement these changes at minimal cost, as they are basically
procedural changes and modifications to existing forms and

\5 31 U.S.C.  5103. 

----------------------------------------------------------- Letter :10

When businesses fail to collect or pay withheld income, employment,
or excise taxes, IRS may assess a trust fund recovery penalty against
the responsible officers and employees.  This penalty amounts to 100
percent of the unpaid taxes.  IRS may also charge interest from the
date the penalty was assessed.  In determining who should be assessed
the penalty, IRS is required to show that the employee being assessed
was responsible for and willfully failed to collect or pay the taxes
to IRS.  Although IRS may assess the penalty against all responsible
officers and employees, it is to collect only the amount of tax owed. 
That is, if taxes owed amount to $100, IRS may hold various company
officials responsible, but it is to collect no more than $100 (plus
interest) in total from these officials.  We reported on IRS' process
for collecting 100-percent penalties in August 1989.\6

Relatively large trust fund recovery penalties have caused financial
hardships for the individuals involved.  Some individuals have
complained that they were wrongfully assessed the penalty and then
required by IRS to show why they were not liable for the penalty.  In
one of the cases we reviewed, a bookkeeper for a company that had
declared bankruptcy was assessed penalties and interest on the
business's unpaid taxes.  After long and exhaustive proceedings, the
state tax agency determined that the bookkeeper was not an operating
officer and did not owe the state penalty.  Nonetheless, IRS
continued to pursue the bookkeeper for payment of the federal
penalty.  Six months later, with the help of his Congressman, the
bookkeeper convinced IRS that he was not responsible for paying the
trust fund taxes. 

Some responsible employees may not be aware that they could be
assessed the penalty if they fail to ensure that the taxes are paid
to IRS.  Moreover, under current law--Internal Revenue Code Section
6103--IRS is prohibited from disclosing to a responsible person the
names of other responsible persons held liable for the penalty and
the general nature of collection actions taken against them. 

IRS has recognized weaknesses in its controls and procedures for
identifying the responsible person for this type of penalty.  As a
result, IRS instituted policy changes aimed at ensuring that
responsibility for paying the penalty remained with the responsible
person.  The revised policy requires IRS managers to ensure that
their staffs conduct quality investigations to identify responsible
persons and prove willful intent. 

Taxpayer rights legislation introduced in Congress in 1992 and 1993
contained provisions that, if enacted, would assist individuals in
getting information about the trust fund recovery penalty.  The bills
would require IRS to increase awareness of the penalty through
special information packets and printed warnings on tax documents. 
The bills would also allow each individual assessed the penalty to
find out from IRS the names of others against whom IRS had assessed
the penalty.  Also, the bills would allow these assessed individuals
to find out the nature of any collection actions being taken against
the other assessed individuals so that all involved parties would
have complete information with which to deal with IRS and each other. 
We support the intent of this provision of the proposed legislation. 

To help responsible officials and employees become more aware of
their responsibilities to collect and forward trust fund taxes to
IRS, we believe that IRS should provide better information about
their responsibilities and the penalty for failure to meet these
responsibilities by providing special information packets.  IRS is
already implementing changes to its trust fund recovery penalty
assessment process, which will remedy some of these problems.  As a
result, we do not believe that IRS would incur significant costs to
implement the additional changes. 

\6 Tax Administration:  IRS Can Improve the Process for Collecting
100-Percent Penalties (GAO/GGD-89-94, Aug.  21, 1989). 

----------------------------------------------------------- Letter :11

We found examples of situations in which taxpayers repeatedly
received tax deficiency notices and payment demands despite continual
contacts with IRS over a period of months and even years in an
attempt to resolve problems with their accounts.  IRS' inability to
correct the underlying problems in such situations resulted in
taxpayers feeling frustrated.  In these instances, although no IRS
employee appeared to have intentionally abused them, the taxpayers'
correspondence with IRS indicated they felt they were abused by the
"tax system." In one instance, a taxpayer required intervention from
her Senator to prevent IRS taking more than $50,000 to pay for taxes
on a sale of property that the taxpayer had not owned or sold.  The
problem arose because two taxpayers had the same social security
number and the same name.  Initially, IRS released the levy it had
placed on the taxpayer's salary to allow her time to prove that she
was not the seller of the property.  Although the taxpayer tried to
resolve the problem by obtaining a letter from the Social Security
Administration explaining the problem with the duplicate social
security number and same name, IRS would not accept the letter as
proof of who sold the property.  The taxpayer's efforts to resolve
the problem by working with the bank that had handled the property
sale also failed.  Finally, the taxpayer contacted her Senator and
eventually was able to get the levy released. 

In another instance, a taxpayer who promptly paid an additional tax
assessment in early 1991 got help from his Senator to get IRS to
acknowledge that he had paid his assessment in a timely manner.  Soon
after the taxpayer sent his payment to IRS, it sent the taxpayer a
check in an amount very close to the amount he had originally sent
IRS.  Later, IRS wrote the taxpayer, asking payment for the original
tax assessment and adding a penalty for late payment.  Correspondence
continued for months back and forth between the taxpayer and IRS. 
Finally, in early 1992, nearly a year after the taxpayer had made his
payment, the matter was resolved with IRS noting that the problem
occurred because the taxpayer's payment was posted to his account
before the additional tax assessment had been recorded. 

A more general type of problem affects divorced or separated spouses. 
Divorced or separated taxpayers who had previously filed joint
returns may subsequently be assessed a tax deficiency.  In these
instances, IRS' procedure is to send notices of deficiency to the
last known address of the spouse whose name and social security
number appeared first on the joint return.  Once enforcement action
begins, the other spouse may be subjected to such actions as a levy
on his or her salary without having been informed by IRS of the tax

IRS' procedures require that duplicate notices of deficiency be sent
by certified or registered mail to each spouse, if the spouses notify
IRS that separate residences have been established.  However, IRS'
computer system is not capable of searching taxpayer files each time
a notice of deficiency is issued for a joint return to determine
whether spouses have subsequently filed separate returns with new
addresses or otherwise provided separate addresses.  IRS Problem
Resolution Program officials in IRS' Southeast Region told us they
frequently became involved in situations where a separated or
divorced taxpayer, typically a woman, says that the first notice she
received for a joint return deficiency was a notice of lien or levy
on her property. 

In a February 1992 congressional hearing on S.  2239, Taxpayer Bill
of Rights 2, Treasury's Assistant Secretary for Tax Policy said that
IRS would begin sending a notice of deficiency to both parties in
such situations ".  .  .  as soon as modernization of its computer
system makes it feasible to do so." More recently, IRS Problem
Resolution staff told us that IRS' TSM program will improve existing
computer capabilities and make it possible for IRS to begin providing
notices to both parties. 

The three examples discussed above, and others we have reviewed, have
the common thread of occurring and continuing primarily because of
information handling problems.  We believe that IRS' implementation
of the various elements of TSM, together with IRS' emphasis on
improving operations and providing better service to taxpayers,
should go a long way toward eliminating these types of problems. 
With adequate controls to guard against misuse, TSM should make
taxpayer information more accurate and more readily available to IRS
employees and, consequently, should increase IRS' ability to help
taxpayers resolve their problems.  However, TSM is a massive,
long-term effort, extending into the next century, so it may be some
time before the technological capability to resolve these problems is
in place. 

Given that, we believe IRS needs to do as much as it can to identify
possible interim solutions and to assure that TSM deals with these
problems.  First, IRS can systematically identify, inventory, and
categorize the various kinds of information handling problems that
lead to taxpayer frustration and perceptions of abuse.  Analysis of
these data in connection with IRS' operational improvement efforts
may help identify some short term remedies.  Second, IRS can use the
data in its current operational improvement effort to define TSM
business requirements to make sure that TSM has the capabilities
needed to deal with these types of problems.  We recently testified
about the need for IRS to define its business requirements for TSM in
detail.\7 Carrying out these steps would require some analytical
resources but, since the steps are consistent with TSM and
operational improvement efforts already underway, we do not believe
substantial incremental costs would be incurred. 

\7 Tax Systems Modernization:  Status of Planning and Technical
Foundation (GAO/T-AIMD-GGD-94-104, Mar.  2, 1994)

----------------------------------------------------------- Letter :12

IRS controls for dealing with third party contacts that provide
information on possible tax violations call for the information to be
referred to the appropriate IRS unit for evaluation as to what
action, if any, to take.  For example, if someone contacts IRS with
information that a taxpayer has not reported a substantial amount of
his or her income and suggests that an audit could be warranted, that
information would be referred to the Examination Division in the IRS
field office that has jurisdiction.  Examination staff would then
evaluate the information for credibility and specificity, including
reviewing the taxpayer's return--assuming one was filed--to see if
there were indications of underreporting as part of the decision on
whether to examine the taxpayer's return.  Since IRS' National Office
is prohibited from initiating an examination, field office managers
make final decisions in such cases. 

IRS has specific procedures to handle requests from the White House
for matters such as preparing tax check reports on prospective
appointees, but there are no specific procedures to handle a White
House contact offering information about potential tax violations. 
According to IRS officials, such information would be handled in the
same manner as any other third party communication in that it would
be evaluated for potential tax examination and/or criminal
investigation purposes by Examination Division or Criminal
Investigation Division staff. 

In May 1993, the White House announced that seven employees of the
White House Travel Office had been fired because of concerns about
the office's management and financial integrity.  (These and related
issues are discussed in detail in our report entitled White House
Travel Office Operations (GAO/GGD-94-132, May 2, 1994).\8 Soon after,
related allegations arose that the White House and/or the FBI made
improper contacts with IRS, resulting in improper IRS contacts with a

These allegations have been reviewed by three organizations. 

  A White House team, led by the former Chief of Staff to the
     President, reported that there was no evidence of White House
     contact with IRS in connection with the Travel Office issue. 

  The IRS Inspection Service investigated the allegations involving
     IRS and concluded that no White House contact had been made with
     IRS concerning this matter and that IRS employees had carried
     out their duties properly.  Although IRS released a heavily
     edited copy of its report, most of the report cannot be made
     public because it contains tax return information protected from
     disclosure by section 6103 of the Internal Revenue Code and the
     taxpayer declined to grant a waiver from this provision of the
     law so IRS could comment publicly on this matter. 

  At the request of a Member of Congress, the Office of Inspector
     General (OIG), Department of the Treasury, also investigated the
     allegations involving IRS.\9 The OIG report was issued on March
     31, 1994.  The OIG, in its report, also concluded that the White
     House had not contacted IRS about the Travel Office matter and
     that it found no evidence of taxpayer abuse by IRS employees. 
     Disclosure of tax return information in the OIG's report also
     was limited by section 6103. 

We reviewed the three reports and supporting documentation and
discussed their findings with representatives of the three
organizations.  We also interviewed key White House, IRS, and FBI
personnel involved in the events leading up to the allegations of
abuse by IRS.  Finally, we interviewed representatives of the
taxpayer involved. 

On the basis of our review, we believe that (1) neither the White
House nor the FBI made improper contact with IRS, (2) IRS employees
carried out their duties properly and in accordance with IRS
guidelines and procedures, and (3) abuse did not occur.  Section 6103
provides us with access to tax return information to enable us to
carry out our work, but it also limits the information we may
disclose.  Thus, we are not able to provide the details of our review
in this report. 

In July 1993, the White House Counsel issued guidance to White House
staff on contacts with the FBI and the IRS, which supplemented
guidelines issued earlier in the year.  The July guidelines stated
that "It is never appropriate for White House personnel to initiate
an investigation or audit by directly contacting the Internal Revenue
Service." The guidelines further provided that any information about
possible violations of law or wrongful activities were to be
communicated by White House staff to the Counsel to the President,
who would decide whether the information should be provided to senior
Justice or Treasury Department officials. 

As noted above, IRS has specific procedures for handling White House
contacts about tax checks for appointees and for other administrative
matters, and general procedures for handling third-party contacts
from any source offering information that may lead to examinations or
investigations.  IRS does not, however, have specific procedures to
deal with a White House contact offering information about possible
tax violations. 

We emphasize that we found no evidence of taxpayer abuse in this
situation.  However, we believe IRS can expand its procedures by
adding guidance to its employees on how to handle White House
contacts other than those involving tax checks and routine
administrative matters.  Developing and issuing such guidance should
not impose any significant incremental costs on IRS. 

\8 Public Law 103-50 required GAO to conduct a review of the actions
taken with respect to the White House Travel Office. 

\9 Because the OIG investigation was being done at the same time as
our review, and consistent with the cooperation expected between
Inspectors General and GAO under the Inspector General Act of 1978,
we established a cooperative working arrangement with the OIG staff
that included sharing workpapers and related information. 

----------------------------------------------------------- Letter :13

IRS has a wide range of controls, processes, and oversight offices
designed to govern how its employees interact with taxpayers.  While
this "system" of controls has many elements designed to protect
taxpayers from abuse, including IRS' initiatives and numerous
protections provided by law, it lacks the key element of timely and
accurate information about when, where, how often, and under what
circumstances taxpayer abuse occurs.  This information would greatly
enhance IRS' ability to pull together its various efforts to deal
with abuse into a more effective system for minimizing it.  The
information would also be valuable to Congress and taxpayers in
general in assessing IRS' progress in treating taxpayers as
customers--an often cited IRS goal.  Therefore, we believe IRS should
define taxpayer abuse and develop the management information needed
to identify its nature and extent. 

In addition, we believe IRS can strengthen its controls in several
specific areas and provide additional information to taxpayers that
will increase their ability to protect their rights.  Specifically,
we believe IRS can (1) ensure that the information systems now being
developed under its TSM initiative include the capability to minimize
unauthorized access to taxpayer information, (2) clarify its
guidelines for selecting tax returns during IGPs, (3) reconcile its
cash receipts more often and encourage taxpayers to avoid using cash
whenever possible in making payments to IRS, (4) provide individuals
who may be subject to trust fund recovery penalties with more
information about their responsibilities, (5) attempt to identify
short-term remedies to minimize the problems caused taxpayers by IRS'
information handling weaknesses and ensure that the TSM program
includes requirements designed to solve those problems as the new
information systems are implemented over the next several years, and
(6) develop specific guidance for IRS employees on how they are to
handle White House contacts. 

Finally, we believe that legislation is needed to provide IRS with
authority to disclose information to all responsible officers
involved in IRS efforts to collect a trust fund recovery penalty. 
This authority was included in legislation titled Taxpayer Bill of
Rights 2, (S.  542 and H.R.  22) introduced in the 103rd Congress. 

We do not believe that Congress needs to provide additional
appropriations to enable IRS to implement these recommendations, with
one possible exception.  Although additional funding may be needed so
that IRS can deal with the information management problems discussed
in this report as it proceeds with the TSM program, IRS does not know
the amount of funds that will be needed because it has yet to decide
on specific requirements and develop a cost/benefit analysis for
these requirements.  Any funding needed should be included in budget
requests for IRS' TSM program.  We believe that the steps we are
recommending to correct the remaining problems will not require
additional appropriations. 

----------------------------------------------------------- Letter :14

To improve IRS' ability to manage its interactions with taxpayers, we
recommend that the Commissioner of Internal Revenue establish a
service-wide definition of taxpayer abuse or mistreatment and
identify and gather the management information needed to
systematically track its nature and extent. 

To strengthen controls for preventing taxpayer abuse within certain
areas of IRS operations, we recommend that the Commissioner of
Internal Revenue

  ensure that TSM provides the capability to minimize unauthorized
     employee access to taxpayer information in the computer system
     that eventually replaces IDRS;

  revise the guidelines for IGPs to require that specific criteria be
     established for selecting taxpayers' returns to be examined
     during each project and to require that there is a separation of
     duties between staff who identify returns with potential for tax
     changes and staff who select the returns to be examined;

  reconcile all outstanding Form 809 cash receipts more often than
     once a year, and stress in forms, notices, and publications that
     taxpayers should use checks or money orders whenever possible to
     pay their tax bills, rather than cash;

  better inform taxpayers about their responsibility and potential
     liability for the trust fund recovery penalty by providing
     taxpayers with special information packets;

  seek ways to alleviate taxpayers' frustration in the short-term by
     analyzing the most prevalent kinds of information-handling
     problems and ensuring that requirements now being developed for
     TSM information systems provide for long-term solutions to those
     problems; and

  provide specific guidance for IRS employees on how they should
     handle White House contacts other than those involving tax
     checks of potential appointees or routine administrative

----------------------------------------------------------- Letter :15

To better enable taxpayers and IRS to resolve trust fund liabilities,
we recommend that Congress amend the Internal Revenue Code to allow
IRS to provide information to all responsible officers regarding its
efforts to collect the trust fund recovery penalty from other
responsible officers. 

----------------------------------------------------------- Letter :16

The Acting Commissioner of Internal Revenue commented on a draft of
this report by letter dated August 26, 1994.  (See app.  V.) We also
discussed the draft report several times with IRS officials.  Our
evaluation of IRS' written comments on our proposed recommendations
in the draft report follows. 

IRS disagreed with our recommendation that it establish a definition
of taxpayer abuse and identify and gather the information needed to
systematically track the nature and extent of such incidents.  IRS
said use of the term "taxpayer abuse" was misleading, inaccurate, and
inflammatory; disagreed with parts of the definition of abuse used in
our study; challenged the assumption that there was any need to
collect additional information about abuse because its existing
systems already identify and gather sufficient information to track
and manage cases of improper treatment of taxpayers; suggested that
our methodology was flawed because it did not show a statistically
significant frequency of abuse; and asserted that the problem, to the
extent it exists, was well under control.  In summary, IRS said that
the problem of taxpayer abuse, to the extent that it exists, is best
defined, monitored, and corrected within the context of its
definitions and current management information systems. 
Consequently, IRS planned no action on our recommendation. 

IRS' disagreement with our definition of taxpayer abuse centered on
two of the three components we used to define this issue in the
absence of an IRS definition.  While agreeing that taxpayers can be
abused when IRS employees violate laws, regulations, or rules of
conduct, IRS did not agree that harm resulting from employees
aggressively applying discretionary enforcement power or information
system breakdowns constituted taxpayer abuse. 

We believe that it is commendable when IRS employees aggressively
respond to taxpayers who do not comply with the tax laws,
particularly if the noncompliance appears to be intentional. 
However, we noted instances when taxpayers who may not have complied
because they did not understand the tax laws also received
aggressive--perhaps overly aggressive--treatment by IRS employees. 
Throughout our study, it was our intent to focus on these latter
instances.  We have clarified our definition to explicitly specify
unnecessarily aggressive application of discretionary enforcement
power.  We also noted instances when taxpayers were thoroughly
frustrated due to the time and cost they had to expend in order to
resolve misunderstandings resulting from IRS information handling
problems.  In both types of situations, we can understand why
taxpayers would feel abused by IRS even though there was no violation
of laws, regulations, or rules of conduct. 

Another area in which we and IRS disagree is whether mistreatment of
taxpayers, whatever its frequency and whether intentional or not, is
an issue of sufficient significance to merit specific management
attention based on systematic information gathering, reporting, and
tracking over time.  IRS clearly believes it is not unless it can be
shown that the problem is statistically significant relative to the
total number of IRS contacts with the public.  IRS argues in its
comments that (1) our study did not show that abuse, as we defined
it, occurred with statistically verifiable frequency; and (2) other
IRS information gathering activities give IRS management sufficient
information to track these situations.  In other words, IRS said that
we have not shown that there is a significant problem, but if there
is, IRS believes it has all the information needed to deal with it. 

We believe the issue of taxpayer mistreatment deserves attention, not
because we found it to occur frequently, but because we could not
determine how frequently it occurs, and neither can IRS without
modifying its existing management information systems.  More
fundamentally, we believe the issue inherently deserves attention. 
Congress has provided IRS with broad powers to carry out demanding
and difficult responsibilities, but Congress also continues to be
concerned about protecting taxpayers from arbitrary or overzealous
IRS employees and from administrative systems that sometimes go awry. 
It does not seem unreasonable to us that IRS should have information
available about such incidents for its own use in working to
strengthen preventative measures and to be able to report
periodically on the issue. 

It is true that our study does not present a statistical analysis of
the incidence of abuse.  That is the point.  We say early in our
report that IRS does not have the information readily available to
estimate the frequency of such incidents.  Our concern is not that we
found a high--or low--frequency of abuse.  Our concern is that the
information needed to allow either us or IRS to determine the
frequency of such incidents and to assess the effectiveness of IRS'
controls to prevent such incidents over time is not presently

We agree, and our draft report recognized, that IRS has numerous
information gathering efforts that collect a great deal of
information related to the mistreatment of taxpayers.  These include
an attempt to measure taxpayer burden, defined as time, cost, and
dissatisfaction, through such means as an annual report to the tax
committees and periodic customer surveys.  We do not agree, however,
that these efforts and the management information derived from them,
as presently structured, allow IRS to adequately measure and track
incidents of taxpayer mistreatment. 

IRS says, for example, that it has in place definitions and an
information system to track and manage cases where IRS employees have
violated a law, regulation, or the Office of Government Ethics'
Standards of Ethical Conduct for Employees of the Executive Branch. 
This system contains information on all cases investigated by IRS'
Internal Security Division, ranging from allegations of violating
travel regulations to accepting bribes. 

While we were able to select some cases out of the system that met
our study definition of taxpayer abuse, we found it extremely time
consuming and cumbersome because the system is structured to identify
employee violations of policies and procedures, rather than to
identify cases of abuse or taxpayer mistreatment from the taxpayer's
perspective.  In any event, IRS has no definition of taxpayer
perception of mistreatment or abuse and the system has no code or
category to identify such cases.  As a result, although the cases
that are entered in this system may involve taxpayer mistreatment, at
present no reporting or tracking of such cases can occur. 

In summary, IRS believes it has adequate information to deal with
what it believes are rare instances of taxpayer mistreatment.  We do
not agree that IRS has adequate information for the reasons noted
above.  We believe, however, that IRS could readily develop adequate
information from its existing management information systems by
developing a definition of "taxpayer mistreatment," or such other
term as IRS chooses, and modifying one or more of its present systems
to identify incidents with the characteristics called for by the
definition.  Similarly, IRS could develop questions for use in its
customer surveys to serve as indicators of the frequency of taxpayer
mistreatment and progress in preventing it. 

We believe IRS should reconsider its decision not to implement this

IRS disagreed with a recommendation we made in a draft of this report
that it revise its Rules of Conduct to deal with situations that can
arise when IRS employees have dealings with taxpayers with whom the
employees have recently completed an examination, investigation, or
collection enforcement action.  IRS said that it believed the Office
of Government Ethics' Standards of Ethical Conduct for Employees of
the Executive Branch--which superseded IRS' and other agencies' Rules
of Conduct--are sufficient to address the issues involved.  On the
basis of our discussions with IRS ethics officials and Office of
Government Ethics officials, we agree and have dropped this
recommendation and related material from our final report. 

IRS' comments on our other recommendations and our recommendation to
Congress, along with our evaluation, are briefly summarized below. 

  IRS agreed with our recommendation to provide the capability to
     minimize unauthorized employee access to taxpayer information in
     the new computer systems now being developed.  IRS summarized
     several of the security and privacy capabilities these systems
     are to provide. 

  In response to our recommendation to revise the guidelines for
     IGPs, IRS said it would issue a memorandum to the field updating
     a similar memorandum issued on September 21, 1989.  IRS said the
     guidance would, among other things, address the need for (1)
     establishing criteria for selecting returns to be examined and
     (2) for separating duties of employees who identify returns to
     be included in the project from those who select the specific
     returns to be examined.  While this may serve to temporarily
     heighten field staff awareness of the importance of this issue,
     we believe that including such guidance in the Internal Revenue
     Manual would result in a more permanent emphasis on this issue
     in light of the potential for greater use of IGPs under
     Compliance 2000. 

  IRS agreed with our recommendation to reconcile cash receipts more
     often than once a year and said it would consider doing random
     and unannounced reconciliations in addition to the annual
     reconciliations.  We believe this is an excellent approach.  IRS
     said that it supported the other part of this recommendation
     calling for it to emphasize in forms, notices, and publications
     that taxpayers should, whenever possible, pay their tax bills
     with checks or money orders instead of cash. 

  In response to our recommendation that IRS better inform taxpayers
     about their responsibility and potential liability for trust
     fund recovery penalties, IRS said that it had already done a
     great deal in this area, including placing warnings on tax
     deposit coupons, on almost 30 forms, and in publications used by
     business taxpayers, and does not plan future changes in the
     coupons because it is moving away from the paper coupons and
     encouraging electronic payments.  IRS did say it would consider
     using special information packets or taxpayer education
     materials for small businesses to alert taxpayers to this

  In response to our recommendation that IRS seek ways to alleviate
     information-handling problems that frustrate taxpayers, IRS said
     it continually does this as it gathers data through Quality
     Review Programs.  IRS said that as it moves into TSM's Document
     Processing System, the capture of images of returns and other
     tax documents will improve communications with taxpayers.  IRS
     also said that the Taxpayer Ombudsman's Problem Resolution
     Program provides recommendations to the Tax Systems
     Modernization Program for ways to alleviate systemic problems
     that cause problems for taxpayers. 

  IRS disagreed with our recommendation that it provide guidance for
     IRS employees on how they should handle White House contacts,
     other than those involving tax checks of potential appointees or
     routine administrative matters.  IRS said that its current
     procedures regarding third-party contacts who provide
     information that could lead to an audit or investigation are
     adequate to cover any contacts from the White House.  Those
     procedures essentially call for IRS field office personnel to
     evaluate the information provided and decide if an audit or
     investigation is warranted. 

We continue to believe that IRS and taxpayers would be better served
by specific, tailored guidance on this topic.  Retaining only the
current procedures for all third-party contacts will allow IRS
employees to (1) accept any information from any White House staffer
suggesting that an IRS audit or investigation be done, whether or not
the information was received through the senior level channels
prescribed by the White House guidance to its employees and (2) allow
that information to be evaluated and a decision made as to whether to
conduct an audit or investigation by a relatively low-level IRS

  IRS supported our recommendation to Congress calling for amending
     the Internal Revenue Code to allow IRS to inform all of the
     responsible officers in a business about IRS' efforts to collect
     a trust fund recovery penalty from other responsible officers. 

--------------------------------------------------------- Letter :16.1

As agreed with the Subcommittee, we will send copies of this report
to other interested congressional committees, the Secretary of the
Treasury, the Commissioner of Internal Revenue, and other interested
parties.  Copies will be made available to others upon request. 

The major contributors to this report are listed in appendix VI.  If
you have any questions, please call me at (202) 512-5407. 

Jennie S.  Stathis
Director, Tax Policy and
 Administration Issues

=========================================================== Appendix I

The Subcommittee on Treasury, Postal Service and General Government,
House Committee on Appropriations, asked us to determine if IRS has
adequate controls and procedures to prevent IRS from abusing
taxpayers' rights.  To attempt this determination, we identified
various examples of potential taxpayer abuse that were of concern to
the public, Congress, and the media.  From these examples, we
developed a range of taxpayer abuse issues for which we examined IRS'
procedures, guidelines, and management oversight to determine if
these controls appeared adequate to protect taxpayers from abuse by
IRS employees, procedures, or systems. 

At the outset of our review, we found that IRS had no definition of
taxpayer abuse.  We discussed the topic of taxpayer abuse with
managers of various IRS offices, including the Collection,
Examination, and Criminal Investigation Divisions; the Inspection
Service; and the Problem Resolution Office.  Although some managers
offered their opinions as to what situations might be considered
"abusive," none was aware of any specific IRS definition of taxpayer

To get other perspectives on the issue, we contacted a number of
groups representing both tax practitioners and taxpayers.  These
groups included the American Bar Association, the American Institute
of Certified Public Accountants, the Tax Executive Institute, the
Federation of Tax Administrators, and the National Coalition of IRS
Whistleblowers.  As was the case with IRS managers, the officials
from these groups did not have a standard definition of taxpayer
abuse.  However, they raised a number of concerns, centering not only
on what they believed to be specific instances of IRS employees'
excessive use of discretionary enforcement power, but also on IRS'
systemic problems, which they felt caused harm to taxpayers in
general and which we believe could be perceived by taxpayers to be

To assist our data collection efforts regarding taxpayer abuse, we
developed a working definition of abuse that encompassed a broad
range of situations that were potentially harmful to taxpayers.  We
defined abuse from the taxpayers' viewpoint, rather than from IRS'
viewpoint.  We then listed various issues related to specific
examples of potential abuse that we identified by reviewing recent
congressional hearings and reports, newspaper and magazine articles,
IRS Problem Resolution Office files, IRS district office and service
center congressional correspondence files, and IRS Internal Audit and
Internal Security files and reports. 

Our working definition of taxpayer abuse had three parts that
described general categories of potential taxpayer abuse on the part
of IRS and its employees.  The three categories, as well as related
issues of taxpayer abuse, were as follows: 

  An IRS employee is alleged to have violated a law, regulation, or
     the IRS rules of conduct, resulting in possible harm to a
     taxpayer; a related issue is the use of discretionary
     enforcement power for personal reasons. 

  An IRS employee aggressively uses discretionary enforcement power
     in such a way that a taxpayer perceives that he or she is
     harmed, as does the media, Congress, or the general public;
     related issues include the use of enforcement power against
     certain persons who, although not directly responsible for a
     failure to pay a tax liability, may be technically liable for
     the tax, such as when an innocent spouse is assessed a joint tax
     liability or when a company employee is assessed a trust fund
     recovery penalty. 

  An IRS computer system fails in such a way that a taxpayer
     perceives that he or she is abused, as does the media, Congress,
     or the general public; a related issue is the use of
     discretionary enforcement power against a taxpayer because the
     IRS has mistakenly assessed the taxpayer for a debt that the
     taxpayer does not owe. 

Within IRS, in addition to the lack of a service-wide definition of
taxpayer abuse, we also learned that IRS does not have specific
management information to enable the Service to track and measure
abuse.  Rather, there are files maintained by various IRS offices
that may contain taxpayer complaint information, such as
congressional correspondence files maintained at the IRS National
Office, district offices, and service centers, and Problem Resolution
Office files maintained in IRS' district offices and service centers. 

After discussions with IRS officials concerning data sources within
the Service that we might use to find examples of potential taxpayer
abuse, we decided to review three sources in particular:  (1) Problem
Resolution Office files maintained at each district office and
service center, (2) congressional correspondence files maintained at
the National Office and at each district office and service center,
and (3) Internal Security investigative case files maintained at the
National Office.  We judgmentally selected and reviewed 421 fiscal
year 1992 Problem Resolution Office files and 201 fiscal year 1992
congressional correspondence files from the field locations shown in
table I.1. 

                          Table I.1
           Summary of Problem Resolution Office and
              Congressional Correspondence Files

District office/              resolution
service center                    office       Congressional
--------------------  ------------------  ------------------
Albany DO                            120                   0
Atlanta DO                           115                   0
Atlanta SC                             0                  25
Manhattan DO                          48                 112
Brookhaven SC                        138                  64
Total                                421                 201

DO: District office.
SC: Service center. 

Source:  GAO analysis of IRS files. 

In addition, at the National Office we reviewed summaries of all 909
Internal Security investigations closed during fiscal year 1992. 

From these three sources, we subjectively selected examples of
taxpayer complaints that appeared to illustrate various issues within
our definition of taxpayer abuse.  Initially, we selected 139
examples that we believed indicated potential taxpayer abuse.  From
those, we further selected 24 that we used as a basis for evaluating
IRS' specific procedures, guidelines, and management oversight to
protect against taxpayer abuse.  We did the same for two additional
potential examples of taxpayer abuse, one we identified in an IRS
Internal Audit report, and a second we included because of extensive
media coverage and its sensitivity.  Although we did not follow up on
each individual example to determine whether these taxpayers were
actually abused by IRS, we cited them in our discussions with IRS
managers to learn about the range of controls in place to prevent
this type of taxpayer abuse. 

Further, our selection of these examples was intended for
illustrative purposes only and did not indicate a frequency of
occurrence.  In our review, we made no attempt to statistically
sample the files that we reviewed because they did not solely
represent instances of potential taxpayer abuse.  For example, we did
not include taxpayer complaints concerning delays in receiving refund
checks as an instance of taxpayer abuse.  Therefore, we were unable
to quantify the extent of potential taxpayer abuse by IRS employees. 
This was due to both the absence of information on the total universe
of situations that may have involved taxpayer abuse and the
difficulty of finding specific data concerning instances that could
conclusively be defined as taxpayer abuse. 

As noted above, in our discussions with IRS managers, we used the
examples we selected from IRS files to determine whether there were
controls in place over IRS operations to prevent taxpayer abuse. 
Thus, we talked with officials knowledgeable about IRS operations,
particularly those of the Collection, Examination, and Criminal
Investigation Divisions, to determine the specific processes and
procedures currently required in their respective enforcement
efforts.  In so doing, we attempted to get an understanding of the
general controls applicable to these separate operations.  The
examples we selected, in some instances, enabled us to identify
weaknesses in IRS' current controls and procedures. 

In addition to discussions concerning specific issues and controls,
we reviewed documentation related to IRS' efforts to improve its
treatment of taxpayers since we testified on this issue in 1982.  We
looked at initiatives mandated by Congress, such as the 1988 Taxpayer
Bill of Rights, as well as initiatives set forth by IRS in its
strategic business plan, such as the Compliance 2000 initiative, in
which IRS plans to work closely with taxpayers to aid them in
complying with the tax laws. 

We also reviewed a highly publicized allegation that a taxpayer was
abused by IRS because of improper contacts from the White House and
FBI.  Due to the sensitivity of this allegation, we also looked into
IRS' controls related to contacts by the White House and FBI and
determined whether taxpayer abuse actually occurred in this instance. 
To do this, we discussed the issue of controls with IRS officials and
reviewed the related Internal Revenue Manual procedures.  We also
reviewed a White House Chief of Staff Management Review, an IRS
Inspection report and supporting documents, and a Treasury OIG report
and supporting workpapers, concerning their respective investigations
of the abuse allegations.  Finally, we discussed the allegations with
officials of the White House, FBI, IRS Inspection Service, Treasury
OIG, and representatives of the taxpayer. 

Because our review overlapped the OIG inquiry, both in terms of the
time when the two reviews were being carried out and the issues they
addressed, we established a joint working relationship, consistent
with the cooperation expected between Inspectors General and GAO
under the Inspector General Act of 1978.  Through this relationship,
we obtained access to the results of and workpapers supporting the
OIG's work, and we provided similar access to pertinent results and
workpapers from our work.  We relied heavily on OIG workpapers and
interviews with OIG staff to corroborate information from IRS'
Inspection Service's report concerning IRS employees' actions. 

We did our work from April 1992 through January 1994 at IRS' National
Office; the North Atlantic and Southeast Regions; the Albany,
Atlanta, Brooklyn, and Manhattan Districts; and the Atlanta and
Brookhaven Service Centers.  We also met with White House and FBI
officials and with representatives of a taxpayer involved in one of
the examples we reviewed.  We did our work in accordance with
generally accepted government auditing standards.  The Acting
Commissioner of Internal Revenue provided written comments on a draft
of this report, and those comments are reprinted in appendix V. 

========================================================== Appendix II

IRS has many operational controls in place to help govern its
interactions with taxpayers that should aid in the prevention of
taxpayer abuse.  In recent years, IRS has also undertaken various
initiatives to help improve how it deals with taxpayers.  The key
elements of IRS' approach for preventing taxpayer abuse, such as (1)
operational controls governing the actions of IRS' enforcement
functions, (2) processes for handling taxpayer complaints, and (3)
offices for overseeing IRS' operations, as well as recent IRS and
congressional initiatives to better ensure that taxpayers are treated
fairly in their dealings with IRS, are summarized below. 

-------------------------------------------------------- Appendix II:1

IRS has a wide range of operational controls to govern its primary
enforcement activities--examination, collection, and criminal
investigation.  Among these controls are some that IRS considers
crucial in its overall efforts to safeguard taxpayers' rights and
prevent abuse.  For example, a key control over examination
activities is a separation of duties between IRS staff who identify
tax returns with potential for a tax change and staff who conduct the
actual tax examination.  A key control over collection activities is
a series of tax delinquency notices warning of pending enforcement
actions that IRS sends to taxpayers before it actually initiates such
actions.\1 For criminal investigations, a key control is the required
approval by a management official before IRS criminal investigators
initiate such investigations. 

Specific operational controls and procedures are required when a
taxpayer's return is examined by IRS.  Before an examination is done,
IRS often has used a computer program to identify returns with
potential for tax changes.  Some of these computer-identified returns
are to be automatically examined, such as those resulting in a refund
of $200,000 or more.  Others, such as those identified by IRS'
Discriminant Function formula, are to be screened by examination
classifiers to further determine those with the greatest potential
for tax changes.  The returns selected through this screening process
would be stored in inventory at the service center until requested by
a district office examination manager, who would assign them to
either a district office tax examiner or revenue agent to conduct the
tax examination.  Generally, noncomputer-identified returns, such as
referrals from other IRS offices and state tax agencies, would also
be (1) further screened by examination classifiers to identify those
with the greatest potential for tax changes, (2) stored in inventory
until requested by district office examination managers, and (3)
assigned to be examined by a district office tax examiner or revenue
agent.  However, we identified some flaws in the controls for IGPs--a
particular type of examination activity involving returns not
selected by computer.  Controls over IGPs are discussed in our report
on page 10. 

When IRS notifies the taxpayer that his or her return will be
examined, the taxpayer is to be provided with IRS Publication 1,
"Your Rights as a Taxpayer," describing the taxpayer's rights related
to the examination process.  At the start of the examination, IRS
examiners are to ask taxpayers if they received Publication 1.  IRS
Publication 1 informs taxpayers that they have the right to (1)
representation, (2) record interviews with IRS personnel, (3) have
their personal and financial information kept confidential, (4)
receive an explanation of any changes to their taxes, and (5) appeal
IRS' findings through an IRS appeals office or through the court
system.  The appeals process provides an independent review of IRS
examinations and protects against taxpayer abuse by helping to ensure
that the taxpayer pays the correct tax. 

Similar controls and procedures are to be followed when IRS seeks to
collect unpaid taxes from taxpayers.  For example, IRS is to send
taxpayers a series of computer-generated notices before taking any
collection enforcement action, thereby enabling taxpayers to
voluntarily settle their tax liabilities.  IRS also is to send
Publication 594, "Understanding the Collection Process," with its
first and last payment delinquency notices.  This publication
explains taxpayers' payment alternatives and rights during the
collection process, as well as the sequence of enforcement actions
that IRS may use if the taxpayers fail to comply. 

When contacted by IRS collection staff, a taxpayer may seek an
installment agreement or submit an offer-in-compromise\2 as
alternatives to full payment on demand.  If the taxpayer believes
that paying the tax would create a hardship, he or she can file an
Application for Taxpayer Assistance Order, whereby IRS may agree to
allow the taxpayer to defer payment until the taxpayer's finances
improve.  If the taxpayer disagrees with the results of IRS'
collection action, he or she may seek an informal administrative
review with an IRS manager.  Taxpayers who disagree with certain
collection actions, such as the assessment of a trust fund recovery
penalty, may also pursue a formal appeal through an IRS Regional
Director of Appeals or the court system. 

Various controls and procedures are also to be followed by the IRS
when a taxpayer is the subject of an IRS criminal investigation.  For
example, the investigation is to be based on evidence of a possible
criminal violation of the Internal Revenue law and it is to be
approved by an IRS manager before it is started.  At the first
meeting between IRS agents and the taxpayer, IRS agents are required
to explain the taxpayer's rights, including the right to
representation.  If the taxpayer requests representation, the IRS
agents are to terminate the meeting.  Once the investigation is
completed, IRS is required to notify the taxpayer.  If IRS plans to
recommend prosecution, the taxpayer may seek a conference with an IRS
manager to determine the basis for such a recommendation. 
Prosecution recommendations are to be reviewed and approved by both
the IRS District Counsel and the local U.S.  Attorney before a case
against the taxpayer is presented to a grand jury. 

\1 We have recommended that IRS provide much faster notice to
taxpayers by making early telephone contact.  By resolving cases
sooner, IRS may avoid some written notices that become progressively
harsher in tone.  See Tax Administration:  New Delinquent Tax
Collection Methods for IRS (GAO/GGD-93-67, May 11, 1993). 

\2 Section 7122 of the Internal Revenue Code allows IRS to settle an
unpaid tax delinquency for less than the full amount of the balance
due when there is doubt as to the liability or to the collectibility
of the balance due. 

-------------------------------------------------------- Appendix II:2

Taxpayers have several ways to obtain help if they believe they have
been abused by IRS staff.  Taxpayers may seek help from supervisors,
Problem Resolution Officers (PRO), or the directors of IRS' local
district offices and service centers.  They may also complain
directly to IRS' National Office.  IRS Publication 1 contains
information on filing complaints with supervisors, PROs, and local
office directors.  Serious complaints involving potential integrity
issues are to be referred to IRS' Internal Security Division for
investigation.  Complaints of misconduct made against upper-level
managers, senior executives, and IRS' Inspection Service staff are to
be referred to the OIG in the Department of the Treasury. 

------------------------------------------------------ Appendix II:2.1

IRS has a nationwide Problem Resolution Program, headed by the
Taxpayer Ombudsman at the National Office and carried out by PROs in
IRS' 63 district offices and 10 service centers.  PROs can help
taxpayers who have been unable to resolve their problems after
repeated attempts with other IRS staff.  For example, PROs can help
taxpayers who believe (1) their tax accounts are incorrect, (2) a
significant item was overlooked, or (3) their rights were violated. 
PROs can ensure that action is taken when taxpayers' rights were not
protected, correct procedures were not followed, or incorrect
decisions were made.  PROs can also use authority provided by the
Taxpayer Bill of Rights to order that an enforcement action be
stopped or other action be taken when a taxpayer faces a significant
hardship as a result of an IRS enforcement action.  A significant
hardship may occur when, as a result of the enforcement action, a
taxpayer cannot maintain necessities such as food, clothing, shelter,
transportation, or medical treatment. 

PROs do not resolve technical or legal questions.  Such questions, as
well as taxpayer complaints of harassment and discourteous treatment
by IRS staff, are to be referred to IRS managers.  PROs are to refer
complaints involving potential employee integrity issues to Internal
Security or, if a senior IRS official is involved, to the Treasury

------------------------------------------------------ Appendix II:2.2

IRS' Internal Security Division is required to investigate taxpayer
complaints involving potential criminal misconduct, such as
embezzlement by IRS staff and potential administrative misconduct,
such as unauthorized access to a taxpayer's account.  Internal
Security is to report its investigative results to IRS management for
its use in determining appropriate personnel action.  In addition,
Internal Security can refer criminal violations to the local U.S. 
Attorney for prosecution. 

Internal Security is to refer other allegations of misconduct, such
as discourteous treatment of taxpayers, to management officials. 
When handling these referrals and other less serious taxpayer
complaints, supervisors are required to obtain a full explanation
from both the taxpayer and employee before deciding how to resolve
the problem.  If they cannot determine how to resolve the problem,
supervisors are to refer the unresolved complaints to the PRO. 

Although IRS' Internal Audit Division usually neither receives nor
investigates taxpayer complaints, in addition to performing its
mission of reviewing IRS' operations, it can review the results of
Internal Security investigations.  Both types of reviews could
identify potential internal control weaknesses, some of which may
identify possible taxpayer abuse.  When such weaknesses are
identified, Internal Audit can recommend that IRS management
strengthen the controls in question.  Internal Audit findings are to
be disseminated to IRS' district offices, so that similar potential
control problems in other offices can be identified and acted upon. 
Thus, Internal Audit can serve as an important aid to management

------------------------------------------------------ Appendix II:2.3

The OIG in the Department of the Treasury is to play an oversight
role in protecting taxpayers from abuse.  Soon after the OIG was
established by Congress, allegations of misconduct by IRS officials
led the Commissioner of Internal Revenue to transfer staff and funds
to the OIG for investigating allegations involving IRS officials
above grade 14 of the General Schedule.  The OIG also conducts
reviews of IRS' Internal Security and Internal Audit Divisions, and
it has the authority to review any IRS activity the Inspector General
believes warrants such attention. 

-------------------------------------------------------- Appendix II:3

In the 1980s, both new laws and new IRS initiatives improved
taxpayers' ability to resolve problems with IRS.  This has been
particularly noticeable since 1988, when Congress passed the Taxpayer
Bill of Rights.  We believe this legislation, coupled with various
IRS initiatives, such as those involving quality management, ethics
and integrity, a collection appeals process, and modernizing its
computer systems, has improved the potential for fair and reasonable
treatment of taxpayers in their dealings with IRS.  These efforts
should also lessen the potential for taxpayer abuse by IRS employees. 

------------------------------------------------------ Appendix II:3.1

In 1988, Congress passed the Taxpayer Bill of Rights, which caused
IRS to take steps to improve its interaction with taxpayers.  The Act
contained 21 provisions affecting a wide range of issues.  For
example, it clarified certain basic rights of taxpayers and required
IRS to provide taxpayers with a statement of these rights.  To
fulfill this requirement, IRS developed Publication 1, "Your Rights
as a Taxpayer," which is to be given to all taxpayers who are subject
to examination and collection actions.  Among other provisions, the
act clarifies a taxpayer's right to representation in dealing with
IRS and provides additional methods to resolve disputes over IRS'
interpretation and administration of the tax laws. 

A key provision of the act authorizes the Taxpayer Ombudsman or any
designee of the Ombudsman--who reports only to the Commissioner of
Internal Revenue--to issue Taxpayer Assistance Orders to rescind or
change enforcement actions that caused or might cause a significant
hardship for the taxpayer.  Although few of these formal orders have
been issued, the authority provided by the act and three key
decisions IRS made to implement the act greatly strengthened the
ability of the PROs to assist taxpayers.  IRS decided to (1) expand
the act's definition of "hardship" to include not only hardships
caused by its administration of the tax laws, but all hardships that
it could reasonably relieve; (2) provide assistance, when reasonable,
to hardship applicants who did not meet IRS' hardship criteria, but
who could be helped, either through the Problem Resolution Program or
by another IRS unit; and (3) instruct its employees to initiate
hardship applications on behalf of taxpayers when employees
encountered situations that might warrant assistance. 

We discussed IRS' implementation of this, and other provisions of the
act in a 1991 report.\3 Our report confirmed that IRS had assisted
taxpayers who applied for hardship whether or not they met the
hardship criteria.  IRS statistics showed that over 32,000
taxpayers--about 70 percent of all applicants--had received
assistance.  (See appendix III for a detailed description of the
provisions of the act.)

\3 Tax Administration:  IRS' Implementation of the 1988 Taxpayer Bill
of Rights (GAO/GGD-92-23, Dec.  10, 1991). 

------------------------------------------------------ Appendix II:3.2

In 1985, IRS established a Commissioner's Quality Council and began
developing a service-wide quality improvement initiative designed to
identify and satisfy customers' needs.  Since that time, Internal
Revenue Commissioners have defined IRS' objectives in terms of both
increasing customer service and reducing taxpayer burden.  As a
result of the emphasis on meeting customers' needs, IRS developed
customer service training that focuses on improving staff interaction
with taxpayers in an effort to attain greater customer satisfaction
and confidence. 

In addition to customer service training, IRS has also recently
conducted customer satisfaction surveys, including surveys of those
taxpayers who had been subjected to IRS' examination and collection
actions.  Overall, these surveys have shown that there were more
respondents who believed that IRS had treated them fairly than
respondents who believed that IRS had treated them unfairly.  For
example, in one survey of taxpayers in general, 32 percent of the
respondents gave IRS a high rating for fairly applying the tax laws
and 17 percent gave IRS a low rating.  In another survey of taxpayers
who had been audited by IRS, 50 percent gave IRS a high rating for
fair treatment and 16 percent gave IRS a low rating.  In a survey of
taxpayers who had been subjected to IRS collection action, 42 percent
of those who responded gave IRS a high rating for fairness and 28
percent gave IRS a low rating. 

As a continuation of its emphasis on treating taxpayers as customers,
IRS has embarked on a service-wide initiative called Compliance 2000,
in which IRS staff are to use assistance and education to aid
taxpayers in complying with the tax laws.  A goal of this initiative
is to reduce the need for examination and collection actions against
those taxpayers who would voluntarily comply with the tax laws if
they fully understood how to do so, thus enabling IRS to concentrate
its enforcement efforts against those who intentionally fail to
comply with the tax laws.  If this initiative has the intended
effect, more taxpayers may avoid noncompliance with the tax laws,
thus reducing their interaction with IRS and the potential for
taxpayer abuse. 

------------------------------------------------------ Appendix II:3.3

Congressional hearings in 1989 and 1990 questioned IRS' overall
standards of ethics and integrity.  To address these concerns, IRS
began a long-term effort to enhance its ethics and integrity programs
and to improve staff awareness of integrity issues throughout the
Service.  As part of this effort, IRS published an Ethics Plan that
called for IRS to develop and deliver ethics training to all its
employees.  As of September 30, 1992, 14,000 IRS managers had
completed an ethics training course developed for IRS by the
Josephson Institute of Ethics.  As of the end of Fiscal Year 1993,
IRS had provided ethics training to the remainder of its employees. 

In addition to developing an Ethics Plan, IRS responded to
congressional concerns about whether it could adequately and
independently investigate ethical misconduct on the part of its
senior employees by permanently transferring 21 staff years and $1.9
million to the OIG of the Department of the Treasury.  The OIG
planned to use these resources to oversee IRS' Office of Inspection,
investigate allegations of misconduct by IRS senior employees, and
conduct special reviews of IRS operations.  Over time, IRS' emphasis
on ethics and integrity should have a positive impact on how IRS
employees conduct themselves when dealing with the public. 

------------------------------------------------------ Appendix II:3.4

When IRS collects unpaid taxes, it is to distinguish between those
taxpayers who show a sincere effort to meet their tax obligations and
those who do not.  If full payment is not possible, IRS collection
officials are required to consider each of the payment options
available to taxpayers, and attempt to find the best way for them to
voluntarily pay the taxes they owe.  If a taxpayer does not make an
attempt to pay a tax bill, IRS may take actions to enforce the notice
and demand for payment, such as (1) file a notice of federal tax
lien,\4 (2) serve a notice of levy, and (3) seize and sell a
taxpayer's property. 

IRS collection officials can recommend enforcement actions on the
basis of contact with the taxpayer and analysis of his or her income,
expenses, and assets.  They have discretionary power in carrying out
these actions, and their decisions often result as much from their
judgment as from the payment history of the taxpayer.  In reaching
their determinations, collection staff are to consider such issues as
whether (1) the taxpayer has a history of unreasonably delaying the
collection process, (2) the taxpayer is a tax protestor, and (3)
collection of the tax is threatened or in jeopardy. 

If a taxpayer disagrees with a revenue officer's collection decision,
he or she may raise the issue with the revenue officer's supervisor. 
Alternatively, the taxpayer may contact the Problem Resolution Office
to complain about collection actions.  Problem Resolution officials
have the authority to overturn collection decisions when issues of
hardship arise.  Currently, there is no formal appeals procedure for
taxpayers who disagree with IRS' collection actions, with the
exception of cases involving the trust fund recovery penalty,
rejected offers-in-compromise, and specified penalty issues. 

One provision of the taxpayer rights legislation introduced in
Congress in 1992 and again in 1993 called for a pilot program to
study the merits of a formal appeal procedure for taxpayers who
disagree with collection enforcement actions.  IRS established such a
pilot program in the Indianapolis District on March 30, 1992, later
expanded it, and is currently evaluating its effectiveness.  IRS is
gathering data on how often taxpayers appealed IRS' collection
actions, how often its decisions were upheld or reversed, the costs
of such a program and its benefits to IRS and taxpayers, and the
effects such a program would have on the number of IRS' collection
actions.  IRS recently expanded the program to other locations and
plans to eventually determine the need for a formal collection
appeals process. 

\4 A lien represents the government's claim against and rights to
taxpayers' property and may have an adverse effect on their credit

------------------------------------------------------ Appendix II:3.5

IRS is currently implementing TSM, which is a long-term strategy to
modernize IRS' computer and telecommunications systems.  While some
phases of TSM are already underway, it is expected to be fully
implemented early next century and should greatly enhance IRS'
capability to serve taxpayers and reduce their burden when dealing
with IRS. 

TSM has already benefited some taxpayers.  For example, one aspect of
TSM--Electronic Filing--allows taxpayers to file their returns more
quickly and accurately and also to receive their refunds more
quickly.  In the future, TSM is expected to eliminate mailing
unnecessary computer generated correspondence to taxpayers who have
already responded to prior notices.  In addition, with proper
controls, by making more information readily available to IRS staff,
TSM should reduce the time it takes to answer taxpayers' questions
and resolve taxpayers' problems, both of which could be a source of
frustration and may be perceived by some taxpayers to be a form of

========================================================= Appendix III

Provision                                      Act Section\a  date
--------------------------------------------  --------------  ------------------
Disclosure of Taxpayers' Rights                         6227  May 9, 1989
Requires Internal Revenue Service (IRS) to
 prepare a simple statement of taxpayer
 rights. Must be provided to all taxpayers
 contacted regarding the determination and
 collection of taxes.
Procedures Involving Taxpayer Interviews                6228  Feb. 8, 1989
Defines taxpayer and IRS responsibilities
 regarding interviewing and audio recordings
 of in-person interviews.
Taxpayers' Reliance on IRS Written Advice               6229  Jan. 1, 1989
Requires IRS to abate penalty or additional
 tax attributable to erroneous written
 advice of IRS if the advice was requested
 in writing, was relied upon by the
 taxpayer, and the taxpayer provided
 adequate information.
Taxpayer Assistance Orders                              6230  Jan. 1, 1989
Grants a Taxpayer Ombudsman authority to
 issue assistance orders when taxpayers
 suffer or are about to suffer significant
 hardship as a result of the manner in which
 Internal Revenue laws are administered.
Basis for Evaluation of IRS Employees                   6231  Jan. 1, 1989
Prohibits IRS from using records of tax
 enforcement results to evaluate employees
 or to impose production quotas.
Procedures Relating to IRS Regulations                  6232  Nov. 20, 1988
Requires that temporary regulations be
 issued as proposed regulations and expire
 within 3 years after they are issued. It
 also requires that regulations be submitted
 to the Small Business Administration for
 comment before
Content of Tax Due, Deficiency, and Other               6233  Jan. 1, 1990
Requires that certain notices to taxpayers
 describe the basis for and identify the
 amounts of taxes due as well as interest
 and penalties.
Installment Payment of Tax Liability                    6234  Nov. 11, 1988
Provides statutory authority for installment
 agreements and specifies reasons to amend
 or revoke such agreements.
Assistant Commissioner for Taxpayer Services            6235  May 9, 1989
Establishes an Assistant Commissioner for
 Taxpayer Services and requires a joint
 annual report with the Taxpayer Ombudsman
 to Congress on the quality of services
Levy and Distraint                                      6236  July 1, 1989
Revises the tax laws relating to notice of                    (levies)
 intent to levy, exemptions from levy,                         Jan. 1, 1989
 limitations on levy, release of levy, and                     (sales)
 the sale of seized property. Extends the
 period during which a levy may not be made
 following notice from 10 to 30 days. It
 also requires banks to hold levied funds 21
 days before remitting them to IRS.
Review of Jeopardy Levy and Assessment                  6237  July 1, 1989
Grants concurrent jurisdiction to the Tax
 and U.S. District Courts to determine
 whether a jeopardy assessment was
Administrative Appeal of Liens                          6238  July 12, 1989
Requires IRS to provide an administrative
 appeal procedure for liens. If the notice
 of lien was erroneous, a certificate of
 release must be issued.
Awarding of Costs and Certain Fees in                   6239  Nov. 11, 1988
 Administrative and Court Proceedings
Authorizes the recovery of costs incurred on
 or after the receipt of an appeals decision
 or the date of the statutory notice of
 deficiency, whichever is earlier.
Civil Cause of Action for Damages Sustained             6240  Jan. 1, 1989
 Due to Failure to Release Lien
Allows taxpayer to sue in District Court for
 damages resulting when IRS fails to release
 a lien.
Civil Cause of Action for Damage Due to                 6241  Nov. 11, 1988
 Unauthorized IRS Action
Permits taxpayers to sue if IRS recklessly
 or intentionally violates the law.
Assessable Penalty for Improper Disclosure              6242  Jan. 1, 1989
 or Use of Information by Preparers
Provides for a civil penalty of $250 for
 each unauthorized disclosure or use of
 taxpayer information by preparers.
Jurisdiction to Restrain Certain Premature              6243  Nov. 11, 1988
Grants the Tax Court concurrent jurisdiction
 to restrain assessments and collections for
 some cases pending before the court.
Jurisdiction to Enforce Overpayment                     6244  Feb. 8, 1989
Grants the Tax Court jurisdiction to order
 the refund, with interest, of any
 overpayment if IRS fails to refund within
 120 days an overpayment determined by the
Jurisdiction to Review Sale of Seized                   6245  Feb. 8, 1989
Grants the Tax Court jurisdiction during the
 pendency of proceedings before it is to
 review an IRS determination to sell seized
Jurisdiction to Redetermine Interest on                 6246  Nov. 11, 1988
Authorizes taxpayers to request the Tax
 Court to reopen proceedings to redetermine
 the interest charged by IRS on a
Jurisdiction to Modify Decisions in Estate              6247  Nov. 10, 1988
 Tax Cases
Gives the Tax Court authority to reopen an
 estate tax proceeding in order to modify
 decisions regarding deductions for
\a Refers to a section of the Technical and Miscellaneous Revenue Act
of 1988, which contained the Omnibus Taxpayer Bill of Rights as
Subtitle J (P.L.  100-647). 

========================================================== Appendix IV

GAO has conducted several studies in the past that, while not
designed to identify instances of taxpayer abuse, cover related
issues, such as safeguarding taxpayers' rights and taxpayer
information, IRS' collection methods, and employee integrity and
ethics.  Following are summaries of these studies. 

-------------------------------------------------------- Appendix IV:1

Tax Administration:  IRS' Implementation of the Taxpayer Bill of
Rights (GAO/T-GGD-92-09, Dec.  10, 1991). 

Tax Administration:  IRS' Implementation of the 1988 Taxpayer Bill of
Rights (GAO/GGD-92-23, Dec.  10, 1991). 

This testimony and report assessed IRS' implementation of seven key
provisions of the 1988 Taxpayer Bill of Rights and stated that while
IRS had successfully implemented them in general, there were areas in
which IRS could more consistently treat taxpayers, such as notifying
them when IRS cancels installment agreements. 

IRS Policies and Procedures to Safeguard Taxpayer Rights and the
Effects of Certain Provisions of the 1976 Tax Reform Act (Testimony -
Apr.  26, 1982). 

This testimony concluded that while there may have been instances in
which IRS violated a taxpayer's rights, we found no evidence to
indicate that such instances were widespread or systemic. 

-------------------------------------------------------- Appendix IV:2

IRS Information Systems:  Weaknesses Increase Risk of Fraud and
Impair Reliability of Management Information (GAO/AIMD-93-34, Sept. 
22, 1993). 

This report identified weaknesses in IRS' general controls over its
computer systems which resulted in various problems, such as
unauthorized access to taxpayers' account information by IRS

Tax Systems Modernization:  Concerns Over Security and Privacy
Elements of the Systems Architecture (GAO/IMTEC-92-63, Sept.  21,

This report raised concerns about the need for IRS to clearly
delineate responsibility for protecting the privacy of taxpayer

-------------------------------------------------------- Appendix IV:3

Tax Administration:  New Delinquent Tax Collection Methods for IRS
(GAO/GGD-93-67, May 11, 1993). 

This report highlighted improvements that IRS could make in its
lengthy and rigid collection process for delinquent tax debts. 

Tax Administration:  IRS' Management of Seized Assets
(GAO/T-GGD-92-65, Sept.  24, 1992). 

This testimony stated that IRS has inadequate controls to protect
taxpayer property it seizes and that IRS' practices for disposing of
seized property do not always provide the best return for the

Tax Administration:  Extent and Causes of Erroneous Levies
(GAO/GGD-91-9, Dec.  21, 1990). 

This report showed that IRS initiated over 16,000 erroneous levies
against taxpayers in Fiscal Year 1986 and recommended that IRS
institute a nationwide levy verification program to significantly
reduce the number of erroneous levies. 

Tax Administration:  IRS Can Improve the Process for Collecting
100-Percent Penalties (GAO/GGD-89-94, Aug.  21, 1989). 

This report analyzed IRS' process for collecting the 100-percent
penalty and recommended several actions IRS should take to make the
process more efficient and effective. 

-------------------------------------------------------- Appendix IV:4

Tax Administration:  IRS Should Expand Financial Disclosure
Requirements (GAO/GGD-92-117, Aug.  17, 1992). 

This report recommended that IRS could better detect and prevent
employee conflicts of interest by expanding its financial disclosure

Tax Administration:  IRS' Progress on Integrity and Ethics Issues
(GAO/T-GGD-92-62, July 22, 1992). 

Internal Revenue Service:  Status of IRS' Efforts to Deal With
Integrity and Ethics Issues (GAO/GGD-92-16, Dec.  31, 1991). 

This testimony and report dealt with the progress IRS has made in
addressing problems we had identified related to ethics and integrity
issues and suggested that IRS make better use of its management
information system to monitor disciplinary actions against its

IRS' Efforts to Deal With Integrity and Ethics Issues
(GAO/T-GGD-91-58, July 24, 1991). 

Internal Revenue Service:  Employee Views on Integrity and
Willingness to Report Misconduct (GAO/GGD-91-112FS, July 24, 1991). 

This testimony and fact sheet outlined IRS' efforts, in conjunction
with the Treasury Inspector General, to deal with concerns about
integrity and ethics at IRS. 

IRS Data on Investigations of Alleged Employee Misconduct
(GAO/T-GGD-89-38, July 27, 1989). 

Tax Administration:  IRS' Data on Its Investigations of Employee
Misconduct (GAO/GGD-89-13, Nov.  18, 1988). 

This testimony and report pointed out various weaknesses with IRS'
Internal Security Management Information System related to the
outcomes of employee misconduct investigations and also highlighted
IRS' plans to develop a new and improved management information

(See figure in printed edition.)Appendix V
========================================================== Appendix IV

See p.  21. 

See pp.  21-24. 

Now on p.  2. 

(See figure in printed edition.)

See pp.  21-24. 

(See figure in printed edition.)

See pp.  21-24. 

(See figure in printed edition.)

See pp.  21-24. 

(See figure in printed edition.)

See p.  24. 

(See figure in printed edition.)

See pp.  24-25. 

(See figure in printed edition.)

See p.  24. 

(See figure in printed edition.)

See p.  25. 

See p.  25. 

(See figure in printed edition.)

See p.  25. 

See pp.  25-26. 

(See figure in printed edition.)

See p.  26. 

========================================================== Appendix VI


John Lovelady, Assistant Director, Tax Policy and Administration
Nancy Peters, Assignment Manager
Robert L.  Giusti, Senior Evaluator


Carl Harris, Regional Assignment Manager
Michelle Bowsky, Evaluator
Ron Jones, Evaluator


Andrew Macyko, Regional Assignment Manager
Robert McKay, Evaluator-in-Charge
Richard Borst, Senior Evaluator
Bryon Gordon, Evaluator