GAO Reports  
GAO-05-26R January 10, 2005

Opportunities to Improve Timeliness of IRS Lien Releases

Among the Internal Revenue Service's (IRS) many tools to collect outstanding taxes is its ability to use the property of a taxpayer as security for an outstanding tax debt. IRS exercises this power when it files a federal tax lien against the property of a taxpayer. As part of its tax collection activities, IRS reported filing more than 548,000 tax liens against taxpayer property in fiscal year 2003. Since a lien encumbers taxpayer property, IRS's ability to file a lien is a powerful tool in enforcing the tax laws. With this power, however, comes the responsibility to ensure that liens are released timely once taxpayers satisfy their tax debt. The Internal Revenue Code (IRC) addresses timeliness by requiring IRS to release liens within 30 days of the tax debt's satisfaction. If IRS fails to timely release federal tax liens, taxpayers can suffer undue hardship and burden. Because federal tax liens appear on commercial credit reports, (1) businesses may be unable to obtain necessary credit because lenders may assume they are bad credit risks, (2) individuals may miss an opportunity to buy a home or an automobile because they are unable to obtain financing, and (3) individuals may be unable to sell their home because of the presence of a tax lien on their property. Failure to timely release liens this conflicts with IRS's mission of providing top-quality service to the nation's taxpayers. This report discusses deficiencies we identified in IRS?s use of exception reports.

We found problems with IRS's use of three types of exception reports. First, IRS produces a weekly exception report for lien filings that fail to post to taxpayer accounts. The key is to timely resolve any items on the exception report so that the lien can be released. As of May 21, 2004, IRS had more than 8,500 liens that could not post to taxpayer accounts, 74 percent of which predated 2004. IRS produces a second exception report weekly when taxpayer accounts with liens have been fully satisfied and identified for lien release but the taxpayer accounts do not match accounts in IRS's lien system. We found that IRS was also not timely resolving these "unmatched exception reports" and, as a result, the number of unresolved lien cases from these reports had increased, from almost 1,800 at the end of 2003 to 3,180 by mid-June 2004. A third weekly exception report lists all taxpayer accounts identified for lien release that have manually calculated interest or penalties. We found that IRS was also not timely resolving items on this exception report. In addition to untimely resolution of lien cases on these exception reports, all of which ultimately affect the timely release of tax liens, we found that one report had a serious design flaw in that it was not cumulative, meaning that accounts from one week's report that were not resolved did not carry over to the following week's report. This flaw in the design of the unmatched exception report contributed significantly to the fact that 99 percent of the taxpayer accounts listed on the report at the end of 2003 were still unresolved as of the end of June 2004. We were unable to definitively quantify the extent to which IRS's failure to resolve cases showing up on these exception reports contributed to the overall number of liens IRS failed to timely release. Based on the nature of IRS's delays in releasing liens that we found in our fiscal year 2004 sample, however, we estimate that about 30 percent of the delayed releases likely resulted from IRS's failure to effectively resolve exception reports. IRS's inability to promptly resolve the lien exception reports has contributed to its inability to ensure that tax liens are timely released. This condition can negatively affect taxpayers, adversely affect IRS's mission of providing top-quality customer service, and result in noncompliance with the legal requirement that liens be released within 30 days after satisfaction of the related tax debt. Although IRS has begun to take steps to address untimely resolution of lien exception reports, critical steps remain to be taken and backlogs of unresolved exception reports remain to be resolved.

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