Tax Administration: Millions of Dollars Could Be Collected If IRS
Levied More Federal Payments (20-JUL-01, GAO-01-711).
The Internal Revenue Service (IRS) seeks to apply the law fairly
to all taxpayers. Under the continuous levy program, however,
taxpayers who receive federal payments are treated differently
depending on whether the payments are made by the Federal
Management Service (FMS) on behalf of other agencies or directly
by the agencies themselves. Delinquent taxpayers receiving
payments from FMS generally are subject to continuous levy, while
those receiving payments directly from federal agencies are not.
Although it may prove impractical to treat similarly all
delinquent taxpayers who receive federal payments, progress--and
substantial additional revenues--could be achieved in this area.
FMS plans to include salaries at the U.S. Postal Service and
salaries and retirement payments at the Defense Department (DOD)
in the continuous levy program. There are similar plans to
include all vendor payments from the Postal Service, DOD, and the
Centers for Medicare and Medicaid Services. Discussions among
FMS, IRS, and the agencies could ensure that all of these
payments all included in the continuous levy program as soon as
possible. These discussions could also speed the inclusion of
some categories of vendor payments. The continuous levy program
could also benefit if IRS were to begin sharing with FMS the
different names that businesses use for tax purposes--an approach
that IRS already uses for individual taxpayers in the program. In
the meantime, until the program is expanded to include more
direct payments from agencies, IRS could take steps to ensure
that all delinquent taxpayers receiving payments are subject to
potential collection activity. DOD and CMS have data on hand that
they could share with IRS to strengthen IRS' ability to identify
taxpayers whose federal payments could be levied under the
program.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-711
ACCNO: A01307
TITLE: Tax Administration: Millions of Dollars Could Be
Collected If IRS Levied More Federal Payments
DATE: 07/20/2001
SUBJECT: Compensation
Contractor payments
Debt collection
Delinquent taxes
Federal employees
Interagency relations
Tax law
Taxpayers
DOD Defense Procurement Payment System
HCFA Integrated General Ledger
Accounting System
IRS Continuous Levy Program
Treasury Offset Program
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GAO-01-711
Report to Congressional Requesters
United States General Accounting Office
GAO
July 2001 TAX ADMINISTRATION
Millions of Dollars Could Be Collected If IRS Levied More Federal Payments
GAO- 01- 711
Page i GAO- 01- 711 Increasing Use of Federal Tax Levies Letter 1
Results in Brief 3 Background 5 IRS Could Recover at Least $270 Million
Annually From Delinquent
Taxpayers Receiving USPS, DOD, and CMS Payments 6 Some Payments Could Be
Included in the Continuous Levy
Program Sooner Than Others 10 IRS Could Use Its General Levy Authority for
USPS, DOD, and CMS
Vendor Payments Until They Are Available to the Continuous Levy Program 15
Conclusions 16 Recommendations for Executive Action 17 Agency Comments and
Our Evaluation 18
Appendix I Objectives, Scope, and Methodology 21
Appendix II Comments From the Internal Revenue Service 23
Appendix III Comments From the Financial Management Service 27
Appendix IV Comments From the Department of Defense 30
Appendix V GAO Contacts and Staff Acknowledgments 31
Table
Table 1: Potential Taxpayers Affected and Potential Annual Tax Recoveries 8
Contents
Page ii GAO- 01- 711 Increasing Use of Federal Tax Levies Abbreviations
CMS Centers for Medicare & Medicaid Services DFAS Defense Finance and
Accounting Service DOD Department of Defense FMS Financial Management
Service IRS Internal Revenue Service TIN taxpayer identification number USPS
United States Postal Service
Page 1 GAO- 01- 711 Increasing Use of Federal Tax Levies
July 20, 2001 The Honorable William M. Thomas Chairman, Committee on Ways
and Means House of Representatives
The Honorable Amo Houghton Chairman, Subcommittee on Oversight Committee on
Ways and Means House of Representatives
Federal agencies pay billions of dollars each year to thousands of taxpayers
that owe delinquent federal taxes. The Department of the Treasury?s
Financial Management Service (FMS) makes payments on behalf of most
agencies. However, more than $900 billion in payments are disbursed directly
by other federal agencies each year. 1 These payments are not currently
subject to a tax levy 2 through the continuous federal tax levy program,
which the Internal Revenue Service (IRS) operates in conjunction with FMS. 3
Authorized under the Taxpayer Relief Act of 1997 4 the continuous levy
program enables IRS to continuously levy up to 15 percent of certain federal
payments made to delinquent taxpayers. 5 The program provides IRS with an
automated process for serving tax levies and collecting delinquent taxes
through FMS, which matches federal payment data against IRS? accounts
receivable data in order to identify payments that IRS could levy. For
payments disbursed by FMS, the amount to be levied
1 Non- FMS disbursements are estimated based on our analysis of FMS
financial information and represent unaudited data. 2 A levy under Internal
Revenue Code section 6331 is the legal process by which IRS orders a third
party to turn over property in its possession that belongs to the delinquent
taxpayer named in a notice of levy. Generally, a levy applies only to
property possessed and obligations existing at the time of the levy.
However, a continuous levy remains in effect from the date the levy is first
made until the tax debt is fully paid or IRS releases the levy.
3 In this report, we will refer to this program as the continuous levy
program. IRS does levy some of the payments made by other federal agencies
using its general levy authority under Internal Revenue Code section 6331.
4 P. L. 105- 34. 5 See Internal Revenue Code section 6331( h).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 01- 711 Increasing Use of Federal Tax Levies
and credited to IRS is deducted before FMS disburses the payment. For
payments disbursed directly by other federal agencies, FMS would have to
notify the respective payment agency to deduct the amount to be levied and
credited to IRS before the agency disbursed the payment.
Over half of all non- FMS disbursed federal payments are made by the United
States Postal Service (USPS); the Department of Defense (DOD); and the
Centers for Medicare & Medicaid Services (CMS), 6 which disburses Medicare
fee- for- service payments. 7 These particular payments constitute a large
portion of non- FMS disbursed payments, and thus, you requested that we (1)
determine the number of delinquent taxpayers receiving federal payments from
USPS, DOD, and CMS that would be affected and the amount of tax debt that
might be recovered if they were to be included in the continuous levy
program; (2) determine whether these types of payments could be included in
the continuous levy program and the timeframes for doing so; and (3)
identify other actions that could be taken to enhance IRS? ability to levy
federal payments to delinquent individuals and businesses that are not
currently included in the continuous levy program.
To meet our objectives, we obtained and matched payments made by the three
agencies to IRS? accounts receivable records; discussed whether and when
these types of payments could be included in IRS? continuous levy program
with IRS and FMS officials, as well as with officials from the three
agencies and Medicare contractors; and discussed the general levy procedures
with IRS officials and reviewed the related tax law governing these
procedures. Our estimates of the tax debt that might be recovered are
understated because Medicare contractors did not provide us with data on
over 50 percent of the Medicare vendor payments made for the time period we
reviewed. In addition, we were unable to match about $3.4 billion in DOD
vendor payments against IRS? accounts receivable data because the payment
records did not contain a taxpayer identification
6 In June 2001, the Health Care Financing Administration was renamed the
Centers for Medicare and Medicaid Services. 7 Fee- for- service payments are
made to individuals and businesses, such as doctors, hospitals, and nursing
homes that provide health care services to Medicare beneficiaries. In this
report, we will refer to these payments as vendor payments.
Page 3 GAO- 01- 711 Increasing Use of Federal Tax Levies
number (TIN). 8 Our work was done between June 2000 and May 2001 in
accordance with generally accepted government auditing standards. (App. I
describes our overall objectives, scope, and methodology.)
About 70,400 individuals and businesses that received about $1.9 billion in
federal payments collectively from USPS, DOD, and CMS owed over $1 billion
in federal taxes as of June 30, 2000. We estimate that IRS could recover at
least $270 million annually in delinquent federal taxes if these payments
were included in the continuous levy program. However, the amount of
delinquent taxes recovered annually through this program could be somewhat
lower because some taxpayers might make other arrangements with IRS to
resolve their tax debts. We further estimate that an additional $16 million
could be recovered annually if IRS were to provide FMS with the different
names vendors have used for tax purposes, such as prior business names, so
that FMS could include them in the continuous levy program.
Whether federal payments made by USPS, DOD, and CMS could be included in the
continuous levy program and, if so, when varied by agency and type of
payment. FMS plans to receive and include USPS and DOD salary and wage
payments, as well as military retirement payments, in the Treasury Offset
Program within the next 3 years, thus making them available for continuous
levy and enabling IRS to begin collecting about half of the $270 million in
potential annual tax recoveries mentioned earlier. Vendor payments could
also be included in the continuous levy program, with the full range of USPS
payments possibly included in less than a year; DOD payments possibly
included within about 3 years; and CMS payments possibly included within
about 5 years. However, with the exception of some DOD vendor payments,
officials from FMS, IRS, and the three agencies have not discussed when and
how all of these agencies? vendor payments could be included in the
continuous levy program and whether practical options exist to include some
portion of the vendor payments in the program before all such payments are
available.
Although billions of dollars in vendor payments disbursed by USPS, DOD, and
CMS are not scheduled to be included in the continuous levy program
8 A TIN is a unique nine- digit identifier assigned to each individual and
business that files tax returns. For individuals, the social security number
assigned by the Social Security Administration serves as the TIN. For
businesses, the employer identification number assigned by IRS serves as the
TIN. Results in Brief
Page 4 GAO- 01- 711 Increasing Use of Federal Tax Levies
at this time, IRS does have general authority under the tax law to levy such
payments by issuing a levy notice directly to the agency responsible for the
payments. However, IRS does not have current information concerning these
agencies? vendors, which IRS needs to identify levy sources, even though the
agencies could provide IRS with such information.
To aid FMS in identifying vendor payments currently included in the
continuous levy program made to vendors that owe federal taxes, as well as
any future vendor payments that may be included in this program, we are
recommending that IRS provide FMS with a file of the different names used by
these vendors for tax purposes. Since it is likely to be years before the
full range of USPS, DOD, and CMS vendor payments could practically be
included in the continuous levy program, we are also recommending that IRS
and FMS initiate discussions with the three payment agencies on a timetable
for including all such payments in the program and on options for
accelerating some portion of these agencies? payments. Finally, as an
interim measure for enhancing IRS? ability to levy vendor payments directly
through those agencies using its general levy authority, we are recommending
that IRS work individually with DOD and CMS on ways for them to periodically
provide IRS with current vendor information, thus enabling IRS to identify
potential levy sources.
We obtained written comments on a draft of this report from the Commissioner
of Internal Revenue (see app. II) and the Commissioner of the Financial
Management Service (see app. III), which are discussed at the end of this
report. The Commissioner of Internal Revenue generally agreed with our
recommendations. The Commissioner of the Financial Management Service
disagreed with our recommendation that FMS take the lead in initiating
discussions with other agencies in an effort to include federal vendor
payments in the continuous levy program, and we have revised the
recommendation to reflect that IRS and FMS should jointly initiate such
discussions.
We also received written comments from the Deputy Chief Financial Officer,
Office of the Under Secretary of Defense (see app. IV), and oral comments
from a representative of the United States Postal Service, in which they
generally agreed with our recommendations. In addition, we received
technical comments from the Acting Deputy Administrator of the Centers for
Medicare & Medicaid Services, in which he stressed that CMS vendor payments
could not be included in the continuous levy program until a new CMS
integrated accounting system is completed.
Page 5 GAO- 01- 711 Increasing Use of Federal Tax Levies
FMS receives payment records from and makes payments on behalf of most
federal agencies. However, a number of federal agencies have their own
disbursing authority. For example, USPS paid about $42 billion in salary and
benefits to almost 800,000 career employees in calendar year 1999, and
entered into more than 47,000 contracts with vendors in calendar year 1998,
totaling almost $8 billion. DOD disbursed over $295 billion in fiscal year
2000, including about $150 billion in contractor and vendor payments and
about $100 billion in salary and retirement payments. In addition, Medicare
contractors processed over 900 million fee- for- service claims during
fiscal year 2000, totaling nearly $175 billion.
In addition to disbursing payments for various federal agencies, FMS
provides centralized debt collection services for most federal agencies. To
aid in federal debt collection, FMS has in place the Treasury Offset
Program, which uses a centralized database of delinquent debts that have
been referred for offset against federal payments. This database includes
federal nontax debts and federal tax debts, as well as state tax debts and
child support debts. FMS currently matches federal tax refunds, federal
retirement and vendor payments, and certain federal salary and social
security benefit payments against its database of delinquent debts, and when
a match of both TIN and name control 9 occurs, FMS offsets the payment,
thereby reducing or eliminating the debt. FMS plans to include some non- FMS
disbursed federal salary payments in the Treasury Offset Program in the
latter half of 2001.
A provision included in the Taxpayer Relief Act of 1997 enhanced IRS?
ability to collect delinquent federal tax debt by authorizing IRS to
continuously levy up to 15 percent of certain federal payments made to
delinquent taxpayers. FMS modified the Treasury Offset Program to enable IRS
to electronically serve a tax levy to FMS once IRS has notified the
delinquent taxpayer of the pending levy. In July 2000, IRS began adding tax
debts to FMS? database of delinquent federal debts, thus initiating the
continuous levy program. For this program, FMS compares federal payee
information from agency payment records with IRS? accounts receivable
records. When a match of both the TIN and name control occur, FMS informs
IRS of the match and IRS then notifies the taxpayer of the pending
9 The name control is the first four characters of an individual?s last name
or the first four characters of a business name. Background
Page 6 GAO- 01- 711 Increasing Use of Federal Tax Levies
tax levy. 10 If the taxpayer fails to make an effort to satisfy the tax debt
within 30 days, 11 such as by payment in full or entering into an
installment agreement, IRS will then instruct FMS to begin levying 15
percent of subsequent payments made to the taxpayer or the exact amount of
tax owed if it is less than 15 percent of the next payment. For payments
disbursed on behalf of other agencies, FMS deducts the amount to be levied
before making the payment, and the levied amount is then credited to IRS. 12
In an April 2000 report, we estimated that IRS could potentially collect as
much as $478 million annually through this program. 13
Based on matching federal payments made by the agencies to IRS? accounts
receivable data, we estimate that including payments disbursed by USPS, DOD,
and CMS in the continuous levy program could result in recovering at least
$270 million annually from about 70,000 delinquent taxpayers. An additional
$16 million in delinquent taxes could be recovered annually from about 656
vendors if IRS were to provide FMS with the different names these vendors
have used for tax purposes when FMS matches vendor payment data against IRS?
accounts receivable data.
Our analysis of IRS? accounts receivable data as of June 30, 2000, showed
that about 70,400 taxpayers received about $1.9 billion in payments-- about
$8.2 billion on a annualized basis-- from either USPS, DOD, or CMS, and the
TIN and name on their payment records exactly matched the TIN and name on
IRS? accounts receivable records. These taxpayers owed over $1 billion in
delinquent taxes at the time they received these payments and
10 According to IRS, if a taxpayer had already received notification of a
pending tax levy before the FMS match process, IRS would then immediately
serve the levy to FMS, and an additional notice would not be sent.
11 For social security payments, a second notification letter is sent to
taxpayers, and they will receive an additional 30 days before a levy is
imposed. 12 When levying payments disbursed directly by other federal
agencies, such as USPS and DOD, FMS plans to identify the amount to be
levied and to then notify the respective payment agency to deduct this
amount from the payment before it is made to the payee.
13 See Tax Administration: IRS? Levy of Federal Payments Could Generate
Millions of Dollars (GAO/ GGD- 00- 65, Apr. 7, 2000). IRS Could Recover at
Least $270 Million Annually From Delinquent Taxpayers Receiving USPS, DOD,
and CMS Payments
The Number of Taxpayers Affected and Delinquent Taxes Recovered Annually
Could Be Substantial
Page 7 GAO- 01- 711 Increasing Use of Federal Tax Levies
met IRS? criteria to be included in the continuous levy program. 14 As shown
in table 1, we estimate that IRS could recover as much as $277.5 million
annually if these payments were included in the continuous levy program.
Almost half of the $277.5 million in delinquent taxes that could be
recovered would come from vendor payments. The rest would come from wage and
salary payments to employees and retirement payments.
The amount of delinquent taxes recovered annually could be somewhat lower
because some taxpayers might make other arrangements with IRS to resolve
their tax debts once they receive a notice of levy. For example, in an
effort to avoid a pending tax levy, some taxpayers might contact IRS to
arrange to pay their delinquent tax in full or through entering into an
installment agreement or submitting an offer- in- compromise. 15 However,
such actions on the part of the taxpayer in response to the levy notice
would be an added benefit of the program.
14 To meet the program criteria, a tax delinquent account must include a
valid TIN and must not be in one of several exclusion categories, such as
under criminal investigation, bankruptcy, litigation, or a pending
installment agreement, or classified as currently not collectible due to
hardship.
15 An offer- in- compromise is a taxpayer proposal to settle a tax debt for
less than the amount owed.
Page 8 GAO- 01- 711 Increasing Use of Federal Tax Levies
Table 1: Potential Taxpayers Affected and Potential Annual Tax Recoveries
Dollars in Millions Type of payment
Potential taxpayers affected
Delinquent tax liability
Potential annual federal payments a
Potential annual tax recoveries b
USPS wages & salary 10,039 $100.1 $228.8 $33.8 USPS vendor pay 417 18.3
263.6 4. 3
USPS total 10,456 $118.4 $492.4 $38.1
DOD military active duty pay 7, 951 $28.4 $192.0 $28.0 DOD civilian pay 6,
758 75.0 166.4 24.6 DOD military retirement 28,209 405.2 374.4 55.7 DOD
military reserve pay 12,114 81.5 27.6 4. 1 DOD vendor pay 1,445 142.2 4,
206.0 49.2
DOD total 56,477 $732.3 $4,966.4 $161.6
CMS vendor pay 3,504 $172.6 $2,734.8 $77.8
CMS total 3, 504 $172.6 $2,734.8 $77.8 Overall total 70,437 $1,023.3
$8,193.6 $277.5
a Vendor payments were for the third quarter of fiscal year 2000; USPS wage
and salary payments and DOD civilian payments were for one biweekly pay
period in June 2000; and DOD military active duty, retirement, and reserve
payments were for the month of June 2000. These payments totaled $1,865.8
million. To annualize the potential federal payments we multiplied vendor
payments by 4; USPS wage and salary payments and DOD civilian payments by
26; and DOD military active duty, retirement, and reserve payments by 12. b
To determine the amount that could be levied for each payment, we calculated
either 15 percent of
the payment amount or the actual amount of tax owed if it was less than 15
percent of the payment. To annualize the potential tax recoveries, we
multiplied the amount of levied vendor payments by 4; the amount of levied
USPS wage and salary payments and DOD civilian payments by 26; and the
amount of levied DOD military active duty, retirement, and reserve payments
by 12. The potential annual tax recoveries could vary depending on the
extent to which the number of tax delinquent accounts that meet the program
criteria either increase or decrease each year.
Source: GAO analysis of agency payment records and IRS? accounts receivable
records.
Although the amount of delinquent taxes recovered could be somewhat lower,
as noted earlier, our estimates of the amount of delinquent taxes that might
be recovered are understated because we did not receive data for over 50
percent of the Medicare vendor payments made for the time period we
reviewed. In addition, we were unable to match about $3.4 billion in DOD
vendor payments against IRS? accounts receivable data because DOD?s payment
records did not contain a TIN. According to DOD officials, DOD has recently
increased its emphasis on requiring vendors to provide a TIN when
registering to do business with DOD.
Page 9 GAO- 01- 711 Increasing Use of Federal Tax Levies
Under procedures for vendor payments that are paid by FMS and currently
subject to continuous levy, IRS? file of accounts receivable data provided
to FMS includes only the most recent name a vendor has used for tax
purposes. As a result, FMS? ability to exactly match the vendor name on
payment records against IRS? tax debts is limited.
IRS already makes additional names for individual taxpayers included in its
databases available to FMS for use in the existing continuous levy program.
For example, if taxpayers change their name when they marry, the name used
as a single person would be sent to FMS along with their married name. This
is not the case for businesses. For vendor payments currently paid by FMS
and thus included in the continuous levy program, if a business were to
change its name on its federal tax return, IRS would provide FMS with the
most current name in its records, but not the prior name.
When making our overall estimates of delinquent taxes that could be
recovered if USPS, DOD, and CMS Medicare vendor payments were included in
the continuous levy program, we determined the amount of additional revenue
that could be raised if IRS changed its policy and provided FMS with all of
the names it has for vendors. In addition to the 70,400 taxpayers whose TIN
and name on the payment records exactly matched the TIN and name on IRS?
accounts receivable records, we found 1,228 instances in which the TIN on
the vendor payment records exactly matched the TIN on IRS? accounts
receivable records, but the name on the payment records did not exactly
match the name on IRS? records. For 656 of the 1, 228 vendors, we found
different names used by these vendors in an IRS database that showed they
were in fact the delinquent taxpayers. There were no additional names in the
IRS database for the remaining 572 vendors. The 656 taxpayers for which
there were additional names owed about $26 million in delinquent taxes. We
estimate that IRS could recover about $16 million annually if the different
names it has for vendors were provided to FMS for the continuous levy
program.
If IRS were to provide FMS with the different names it has for business
taxpayers, this would benefit the current continuous levy program by
increasing the instances in which FMS could match the name in both records,
as required before a levy can be made. 16 IRS officials agreed and
16 In our April 2000 report (GAO/ GGD- 00- 65), we identified over 32, 000
mismatches on taxpayers? names that we estimated could result in an
additional $74 million annually if such mismatches were corrected.
Additional Delinquent
Taxes Could Be Collected If FMS Had the Different Names Used by Vendors for
Tax Purposes
Page 10 GAO- 01- 711 Increasing Use of Federal Tax Levies
indicated that providing such a file of additional business names to FMS
could be done and would be well worth the effort. FMS officials indicated
they were in favor of receiving additional business names for use in the
continuous levy program.
Whether federal payments made by USPS, DOD, and CMS could be included in the
continuous levy program and, if so, when varied by agency and type of
payment. FMS plans to receive and include USPS and DOD salary and wage
payments, as well as military retirement payments, in the Treasury Offset
Program within the next 3 years, thus making them available for continuous
levy and enabling IRS to begin collecting about half of the $277.5 million
in potential annual tax recoveries mentioned earlier. Vendor payments could
also be included in the continuous levy program, with the full range of USPS
payments possibly included in less than a year, DOD payments possibly
included within 3 years, and CMS payments possibly included within about 5
years. However, with the exception of some DOD vendor payments, officials
from FMS, IRS, and the three agencies have not discussed when and how all of
these agencies? vendor payments could be included in the continuous levy
program and whether practical options exist to include some portion of the
vendor payments in the program before all such payments are available.
FMS officials stated that their discussions with USPS have focused on
including salary payments in the Treasury Offset Program rather than vendor
payments. USPS plans to provide employee salary payments to FMS for
inclusion in the Treasury Offset Program, and FMS is working with USPS to
develop a specific implementation date. According to FMS officials, once
USPS salary payments are available for the Treasury Offset program, they
could be included in the continuous levy program about a month later.
USPS officials stated that, although they have not had any recent
discussions with FMS about including vendor payments in the Treasury Offset
Program, they do not believe any obstacles would prevent making vendor
payments available to FMS, since all USPS vendor payments are disbursed from
one payment center. Officials indicated that within about 4 months of FMS?
requesting them to do so, they could likely be ready to provide vendor
payments to FMS and to levy payments for which FMS indicates a match with
IRS? accounts receivable data. USPS officials did say that levying vendor
payments could present some challenges. For example, USPS vendor payments
generally are not made on a particular Some Payments
Could Be Included in the Continuous Levy Program Sooner Than Others
USPS Payments Could Be Included in the Continuous Levy Program Relatively
Soon
Page 11 GAO- 01- 711 Increasing Use of Federal Tax Levies
schedule, but rather, are controlled by terms specified in individual
contracts. As a result, unlike biweekly salary payments, USPS disburses
vendor payments daily throughout the business week. Therefore, vendor data
exchanges between USPS and FMS would likely have to occur with greater
frequency than salary data exchanges. However, USPS officials stated that
the Prompt Payment Act requires that vendor payments be deferred until the
pay cycle immediately preceding the payment due date. This should provide an
adequate interval to offset such payments, particularly if the vendor data
exchanges with FMS were to occur either weekly or biweekly.
USPS officials also stated that USPS does not currently offset vendor
payments to recover debts owed to USPS, 17 and therefore, specific offset
procedures would have to be developed. However, these officials were
confident that they could modify the USPS system to enable them to flag any
vendor payments requiring offset identified through the Treasury Offset
Program. They further stated that such an offset would require manual
intervention to make the offset and reconcile the vendor?s account.
Although USPS officials said that they could make vendor payments available
to FMS within about 4 months of FMS? requesting such data, USPS and FMS
officials have not discussed specific arrangements for doing so, such as
when FMS could be ready to receive USPS vendor payment data or how long it
might take USPS to develop procedures for performing such offsets.
FMS is working with DOD to include civilian, military retirement, and
military active duty payments in the Treasury Offset Program, thus
eventually making these types of payments available for the continuous levy
program. According to DOD officials, the approximate timeframes that have
been established for providing DOD payments to FMS are as follows:
DOD civilian salary payments in the latter part of 2001,
DOD military retirement payments in 2002, and
DOD military active duty payments in 2003. 17 USPS establishes an accounts
receivable file and bills its vendors to recover debts, such as
overpayments. DOD Salary, Retirement,
and Some Vendor Payments Could Be Included in the Continuous Levy Program
Within 3 Years
Page 12 GAO- 01- 711 Increasing Use of Federal Tax Levies
DOD has also initiated preliminary discussions with FMS about providing some
vendor payments to FMS. These payments are all made from one payment system
maintained at one DOD Defense Finance and Accounting Service (DFAS) location
and accounted for about 48 percent of all DOD vendor payments made in fiscal
year 2000. However, DOD officials have not specifically discussed providing
other vendor payments to FMS in the near future, and they have concerns
regarding the current capability to make other vendor payments available for
the continuous levy program because of DOD?s decentralized vendor payment
systems. For example, vendors providing goods and services to three of the
military branches- Army, Air Force, and Navy 18 -are paid from separate
vendor payment systems maintained at various DFAS locations. In addition,
there are separate vendor payment systems for processing certain specialty
items, such as fuels and commissary resale products. DOD officials stated
that DFAS staff do not currently have the capability to track multiple
payments made from the various vendor payment systems to a particular
vendor. As a result, if they were to provide vendor payments to FMS from
these decentralized payment systems, DOD officials were concerned that there
would be a risk of offsetting more in payments than a vendor might owe in
delinquent taxes.
Although DOD officials expressed concerns about offsetting more in payments
than a vendor might owe in delinquent taxes, IRS officials indicated there
are controls in the continuous levy program to prevent such overpayments.
For example, IRS provides FMS with a weekly file updating the balance due
for each account subject to continuous levy. In addition, FMS has the
capability to update the balance due for each account after each payment is
levied, thus enabling FMS to identify when a tax debt has been reduced to
zero. In addition, selected staff in each IRS office are authorized to
directly access FMS? levy database to rescind a levy if necessary, such as
for taxpayers subject to a continuous levy that decide to either fully pay
the tax debt or enter into an installment agreement. FMS and IRS officials
have not discussed these controls with DOD to determine whether they would
mitigate DOD?s overpayment concerns and pave the way for other types of
vendor payments to be provided to FMS for the continuous levy program, in
addition to those vendor payments currently under consideration.
18 Marine Corps vendor payments are made from the same payment system from
which Army vendor payments are made.
Page 13 GAO- 01- 711 Increasing Use of Federal Tax Levies
DOD is currently developing a centralized vendor payment system that could
increase its capability to eventually provide all vendor payments to FMS.
According to DOD officials, the multiple vendor payment systems currently in
use are to be replaced by a single system known as the Defense Procurement
Payment System. The latest DOD estimate indicates that the initial phase for
implementing the new system will begin in the latter part of fiscal year
2001. DOD officials estimate that the new system may be fully operational by
the latter part of fiscal year 2003 or the early part of fiscal year 2004.
However, they indicated that this is a ?best- case? scenario. 19
FMS and CMS have not held any discussions related to including Medicare
vendor payments in the continuous levy program. CMS and Medicare contractors
we spoke with agreed that including all Medicare payments in the continuous
levy program would not be possible for several years owing to the
decentralized payment system in which the Medicare program operates. CMS
administers the Medicare program through about 50 health care contractors,
which process and pay over 900 million fee- forservice claims totaling
nearly $175 billion annually. These contractors are responsible for
verifying the accuracy of the name and TIN used by health care providers
that bill the Medicare program for reimbursement. Thus, the ability to
identify and subsequently levy the payments made to Medicare providers who
owe federal taxes would depend on establishing effective coordination
between IRS and FMS and each of the contractors that pay the claims.
The possibility of including Medicare vendor payments in the continuous levy
program is further complicated because CMS contractors currently use one of
six different computerized systems to process and pay claims. Although CMS
eventually plans to have all of its contractors use one of three
standardized claims processing systems, this consolidation is not expected
to be completed before 2004. The contractors responsible for maintaining the
three standardized systems believe that integrating a continuous levy
process into Medicare claims processing systems is possible, but the systems
would likely have to be modified and tested before implementation.
19 As recently as October 2000, DOD projected that the Defense Procurement
Payment System was to be fully operational by the beginning of 2003. CMS
Vendor Payments Will
Not Be Available to the Continuous Levy Program for Several Years
Page 14 GAO- 01- 711 Increasing Use of Federal Tax Levies
Planned enhancements to the CMS accounting and provider enrollment systems
may improve the likelihood that Medicare vendor payments could be included
in the continuous levy program in the future. For example, in order to
comply with federal financial management systems requirements, the agency is
developing the CMS Integrated General Ledger and Accounting System. As
currently envisioned by CMS, this system would contain detailed information
on each Medicare claim paid, and as such, might offer FMS and IRS a central
point of coordination for continuously levying Medicare vendor payments.
Also, CMS is developing a centralized database of updated information on all
health care providers that bill the Medicare program. This system is
intended to help ensure that only qualified providers with a valid TIN
enroll in and receive payments from the Medicare program. Once fully
operational, this system is expected to interface with other CMS systems,
thereby helping to ensure that the name and TIN used by providers have been
validated by IRS. Neither system is scheduled to be fully operational before
late 2006.
Although these new systems may improve the likelihood that CMS vendor
payments could be continuously levied in the future, FMS and CMS officials
have not held discussions to ensure this result. Medicare contractors
already offset payments to vendors for various reasons, such as recovery of
previously overpaid claim amounts, which could result from either
inadvertent billing errors or intentional misrepresentations. However, FMS
and CMS officials have not explored whether these processes for offsetting
vendor payments could support including some CMS vendor payments in the
continuous levy program before late 2006.
Page 15 GAO- 01- 711 Increasing Use of Federal Tax Levies
In addition to the specific levy authority IRS has through the continuous
levy program under section 6331( h), IRS has general levy authority under
Internal Revenue Code section 6331 to collect federal tax debts by issuing a
levy notice directly to a federal agency. The continuous levy program
provides IRS with an automated process for serving tax levies and collecting
delinquent taxes through FMS. On the other hand, in order to levy payments
under its general levy authority IRS must identify that an agency is making
payments to a delinquent taxpayer. Unlike the 15- percent levy amount
limitation for the continuous levy program, under its general levy
authority, IRS can levy up to 100 percent of a taxpayer?s property and
rights to property in some cases.
IRS currently uses its general levy authority to levy federal salary and
retirement payments. 20 However, according to officials, IRS uses its
general levy authority less frequently to levy federal vendor payments,
partly because IRS has limited ability to identify and serve levies against
vendor payments. According to IRS officials, almost all information IRS has
on vendor payments comes from annual information returns that federal
agencies and contractors are required to file for such payments. It takes
IRS several months to process information returns and make them available to
collection staff so they can identify potential levy sources. According to
IRS officials, information return data are of little use because there is no
certainty that an individual or business that received payments in a past
year would receive payments in the current year. IRS officials acknowledged
that obtaining current information on taxpayers that may be receiving DOD
and CMS vendor payments might give IRS collection staff an opportunity to
levy such payments under its general levy authority until such time as these
payments could be included in the continuous levy program.
DOD and CMS have databases that could be used to provide IRS with current
information concerning individuals and businesses receiving vendor payments.
However, IRS has not requested such information from these agencies.
According to DOD officials, a DOD Central Contractor Register currently
includes information on over 160,000 vendors registered to do business with
DOD, including a vendor?s TIN and name, and an
20 Internal Revenue Code section 6334( d) requires that a certain amount of
salaries and wages be exempted from levy. IRS Could Use Its
General Levy Authority for USPS, DOD, and CMS Vendor Payments Until They Are
Available to the Continuous Levy Program
Page 16 GAO- 01- 711 Increasing Use of Federal Tax Levies
extract of this information could be provided periodically to IRS. 21
Medicare contractors we spoke with stated that it may be possible to provide
periodic extracts of payment data on recently paid provider claims, while
CMS officials indicated that extracts from centralized agency databases,
such as the National Claims History File, could also be made available to
IRS. Information from each of these databases could be useful to IRS for
identifying a current source against which to serve a levy under IRS?
general levy authority. For example, IRS could arrange to obtain information
from these agencies concerning vendors that currently receive periodic
payments and when such payments are made, and if such vendors have federal
tax delinquencies, work out a schedule for levying subsequent payments.
As with IRS? other collection efforts, resource constraints and other
collection priorities may limit the amount of delinquent taxes that IRS
could recover from DOD and CMS vendors using its general levy authority.
However, until all such vendor payments could be included in the continuous
levy program, obtaining periodic vendor information from these agencies
could enable IRS to begin collecting some portion of the delinquent taxes
owed by these vendors.
IRS? mission includes providing taxpayers with top quality service by
applying the tax law with integrity and fairness to all. Until more types of
federal payments are available, the current continuous levy program results
in unequal treatment of delinquent taxpayers depending on whether their
federal payments are made by FMS on behalf of other agencies or directly by
the agencies themselves. Delinquent taxpayers receiving payments from FMS
generally are subject to the continuous levy program; those receiving
payments directly from federal agencies are not and IRS is limited to using
its general levy authority in order to levy some of these non- FMS payments.
Although practical issues may impede achieving similar treatment of all
delinquent taxpayers receiving federal payments, progress could be made and
substantial additional revenues could be collected- in fairness to those who
properly pay their taxes. FMS has plans for including USPS
21 We obtained an extract of the Central Contractor Register and matched it
with IRS? accounts receivable file and found that it included about 4, 300
contractors and vendors that owed IRS about $250 million in delinquent taxes
as of June 30, 2000. Conclusions
Page 17 GAO- 01- 711 Increasing Use of Federal Tax Levies
salary and DOD salary and retirement payments in the continuous levy
program. Similar plans do not exist, however, for including all vendor
payments from USPS, DOD, and CMS in the continuous levy program. Discussions
among FMS, IRS, and the agencies have the potential to ensure that all of
these payments are included in the continuous levy program as soon as
practical, and for possibly accelerating the inclusion of certain types or
categories of vendor payments.
Further, the effectiveness of the current continuous levy program and its
expansion to other payments could be enhanced if IRS were to begin sharing
the different names that businesses use for tax purposes with FMS. This
would treat businesses more similarly to how IRS already handles individual
taxpayers in the continuous levy program.
In the interim, until the continuous levy program can be extended to more of
the payments made directly by agencies, IRS? use of its existing general
levy authority could be improved to better ensure that all delinquent
taxpayers receiving federal payments are subject to potential collection
action. DOD and CMS have available data that could be shared with IRS to
increase IRS? ability to identify those taxpayers? whose federal payments
could be practically and effectively levied under the general levy program.
To enhance the value of agency payment data that are available for the
continuous levy program, we recommend that the Commissioner of Internal
Revenue provide FMS with a file of all business names that IRS has for each
business taxpayer that owes federal taxes and meets the program criteria.
To increase the potential for collecting delinquent federal taxes owed by
federal vendors, we recommend that the Commissioner of Internal Revenue and
the Commissioner of the Financial Management Service jointly initiate
specific discussions with USPS, DOD, and CMS to develop plans for obtaining
vendor payments from the respective agencies for the continuous levy
program. The discussions should cover plans for including all of the
agencies? vendor payments in the continuous levy program, as well as options
for including some of their vendor payments in the program on an accelerated
basis.
To ensure that IRS has updated information on vendor payments to aid in
identifying possible levy sources for use under its general levy authority,
we recommend that the Commissioner of Internal Revenue work with DOD and CMS
officials to develop the means for these agencies to Recommendations for
Executive Action
Page 18 GAO- 01- 711 Increasing Use of Federal Tax Levies
periodically provide IRS with vendor information that is more current than
that which IRS receives now through annual information returns.
We received written comments on our draft report from the Commissioner of
Internal Revenue (see app. II) and the Commissioner of the Financial
Management Service (see app. III). Both the IRS and FMS Commissioners
offered factual updates, clarifications, or technical comments that we have
incorporated throughout this report where appropriate.
The Commissioner of Internal Revenue generally agreed with our
recommendations. Regarding our recommendation that the Commissioner of the
Financial Management Service initiate discussions with USPS, DOD, CMS, and
IRS officials to develop plans for obtaining vendor payments from the
respective agencies for the continuous levy program, the Commissioner of FMS
disagreed that initiating discussions with these agencies was FMS?
responsibility. Rather, the Commissioner stated that it was IRS?
responsibility to initiate and jointly schedule with FMS the implementation
of the continuous levy program for DOD, USPS, and CMS vendor payments. The
Commissioner further stated that once IRS is ready to develop this process,
FMS will work with the agencies and IRS to make the necessary system changes
to allow IRS to continuously levy these payments.
We agree with the FMS Commissioner?s view that IRS has the responsibility to
participate in leading discussions for implementing the continuous levy
program for vendor payments. However, because FMS is a principal component
in developing the necessary processes to effectively implement continuous
levies, we also believe that FMS must be equally involved in the discussions
on extending the continuous levy program to vendor payments paid by agencies
other than FMS. Accordingly, we modified our recommendation to state that
the IRS and FMS Commissioners should jointly initiate specific discussions
with USPS, DOD, and CMS for this purpose. Having been made aware of this
modification to our recommendation before providing comments, the IRS
Commissioner agreed in his written comments to participate with FMS in
discussions with the agencies and to assist FMS in developing plans for
obtaining vendor payments for inclusion in the continuous levy program.
To enhance the value of agency payment data available to the continuous levy
program, the Commissioner of Internal Revenue agreed to provide FMS with a
file of all business names that IRS has for each business taxpayer that owes
federal taxes and meets the program criteria. The Agency Comments
and Our Evaluation
Page 19 GAO- 01- 711 Increasing Use of Federal Tax Levies
Commissioner stated that a draft Request for Information Services has been
submitted to begin the formal process necessary to make this change, and the
change is expected to be completed by January 2003.
To ensure that IRS has updated information on vendor payments to aid in
identifying possible levy sources for use under its general levy authority,
the Commissioner agreed to pursue the costs and benefits of securing
possible levy sources from such agencies as DOD as well as pursuing more
frequent levy source updates from internal IRS sources.
We also received written comments from the Deputy Chief Financial Officer,
Office of the Under Secretary of Defense (see app. IV), and oral comments
from a representative of the United States Postal Service, in which they
generally agreed with our recommendations.
In addition, we received technical comments from the Acting Deputy
Administrator of the Centers for Medicare & Medicaid Services, in which he
stressed that CMS vendor payments could not be included in the continuous
levy program until a new CMS integrated accounting system is completed.
Given the substantial delinquent taxes that could potentially be recovered
from CMS vendors and that CMS contractors already offset vendor payments for
various other reasons, we believe that discussions between IRS, FMS, and CMS
should explore whether some portion of the vendor payments could be included
on an accelerated basis.
As agreed with your offices, unless you announce the contents of this report
earlier, we plan no further distribution until 30 days from the date of this
letter. At that time, we will send copies to the Ranking Minority Member,
House Committee on Ways and Means; Ranking Minority Member, Subcommittee on
Oversight; and the Chairman and Ranking Minority Member, Senate Committee on
Finance. We will also send copies to the Commissioner of Internal Revenue,
Commissioner of the Financial Management Service, Secretary of Defense,
Administrator of the Centers for Medicare & Medicaid Services, Postmaster
General, and other interested parties. Copies of this report will also be
made available to others upon request.
Page 20 GAO- 01- 711 Increasing Use of Federal Tax Levies
If you have any questions concerning this report, please contact Ralph Block
at (415) 904- 2000 or me at (202) 512- 9110. Key contributors to this work
are listed in appendix V.
Michael Brostek Director, Tax Issues
Appendix I: Objectives, Scope, and Methodology
Page 21 GAO- 01- 711 Increasing Use of Federal Tax Levies
Our objectives in this report were to (1) determine the number of delinquent
taxpayers receiving federal payments from the United States Postal Service
(USPS), Department of Defense (DOD), and Centers for Medicare & Medicaid
Services (CMS) that would be affected and the tax debt that might be
recovered if they were to be included in the continuous levy program; (2)
determine whether these types of payments could be included in the
continuous levy program and the timeframes for doing so; and (3) identify
other actions that could be taken to enhance IRS? ability to manually levy
federal payments to delinquent individuals and businesses that are not
currently included in the continuous levy program.
To determine the number of delinquent taxpayers receiving federal payments
from USPS, DOD, and CMS that would be affected and the tax debt that might
be recovered if they were included in the continuous levy program, we
obtained and matched IRS? accounts receivable records as of June 30, 2000,
that met IRS? continuous levy program criteria with agency and contractor
payment records as follows:
For wage and salary payments, USPS provided payments for a biweekly pay
period made on June 23, 2000; for vendor payments, USPS provided payments
made during the April through June 2000 quarter.
For DOD military salary, retirement, and reserve payments, the DOD Defense
Manpower Data Center provided payments made for the month of June 2000; for
DOD civilian salary, the DOD Defense Management Data Center provided
payments made for the biweekly pay period ending July 1, 2000; for DOD
vendor and contractor payments, the Defense Finance and Accounting Service
provided payments made during the April through June 2000 quarter.
For CMS Medicare vendor payments, Medicare contractors provided payments
made during the April through June 2000 quarter.
For payments that matched on both taxpayer identification number (TIN) and
name, we calculated either 15 percent of the payment or the actual amount of
tax owed if it was less than 15 percent of the payment to determine the
amount that could be levied. All estimates of the delinquent taxes that
might be recovered throughout this report have been annualized. Although
some taxpayers might take actions to avoid a continuous levy, we believe our
estimates of the tax debt that might be recovered are understated because we
did not receive data for over 50 percent of Medicare payments made during
the April through June 2000 quarter. In addition, we were unable to match
about $3.4 billion in DOD Appendix I: Objectives, Scope, and
Methodology Scope and Methodology
Appendix I: Objectives, Scope, and Methodology
Page 22 GAO- 01- 711 Increasing Use of Federal Tax Levies
vendor payments against IRS? accounts receivable data because the payment
records did not contain a TIN.
Based on our prior work involving the continuous levy program, we were aware
that problems with information contained in vendor payment records could
make such records unsuitable for matching against IRS? accounts receivable
file, thus reducing the amount of tax debt that might be recovered. To
identify additional debt that could be collected if problems with vendor
payment records were corrected, we analyzed agency payment records to
identify instances of a missing or inconsistent payee TIN or name. We
selected all instances in which the TIN in the payment records matched the
TIN in IRS? accounts receivable records, but the name in the payment records
did not match the name in IRS? records. For these instances, we then
reviewed IRS? records to determine whether it had additional information to
indicate that the payee was in fact the delinquent taxpayer in question.
To determine whether USPS, DOD, and CMS payments could be included in the
continuous levy program and the timeframes for doing so, we interviewed IRS
officials responsible for the continuous levy program. We also interviewed
Financial Management Service (FMS) officials involved in recent discussions
with various agencies in an attempt to include nonTreasury disbursed
payments in the Treasury Offset Program. In addition, we interviewed
officials from USPS, DOD, and CMS as well as selected Medicare contractors
responsible for processing the various types of payments.
To identify actions that could be taken to enhance IRS? ability to manually
levy federal payments from delinquent individuals and businesses that are
not included in the continuous levy program, we discussed this issue with
IRS officials and officials from USPS, DOD, and CMS. We identified various
agency databases that could be used to provide IRS with updated vendor
payment sources. We also discussed IRS? current levy procedures with IRS
officials, and reviewed the related tax law governing these procedures.
We did our work at IRS, FMS, and USPS headquarters in Washington, D. C.; DOD
headquarters in Arlington, VA; CMS headquarters in Baltimore, MD; Defense
Finance and Accounting Service Centers in Columbus and Cleveland, OH, and
Denver, CO; Defense Manpower Data Center in Seaside, CA; and the CMS
Regional Office in San Francisco, CA. We also interviewed Medicare
contractors located in Alabama, California, Florida, Maryland, New York,
North Dakota, Pennsylvania, Texas, and Wisconsin.
Appendix II: Comments From the Internal Revenue Service
Page 23 GAO- 01- 711 Increasing Use of Federal Tax Levies
Appendix II: Comments From the Internal Revenue Service
Note: GAO comments supplementing those in the report text appear at the end
of this appendix.
See comment 4. See comment 3.
See comment 2. See comment 1.
Appendix II: Comments From the Internal Revenue Service
Page 24 GAO- 01- 711 Increasing Use of Federal Tax Levies
See comment 6. See comment 5.
Appendix II: Comments From the Internal Revenue Service
Page 25 GAO- 01- 711 Increasing Use of Federal Tax Levies
Appendix II: Comments From the Internal Revenue Service
Page 26 GAO- 01- 711 Increasing Use of Federal Tax Levies
The following are GAO?s comments on the Internal Revenue Service?s letter
dated July 16, 2001.
1. In response to IRS? concern that our text may have given the impression
that IRS does not levy any federal payments that are not subject to the
continuous levy program, we modified footnote 3 to recognize that IRS does
levy such payments under its general levy authority.
2. IRS? suggested change has been incorporated into the text. 3. IRS?
suggested change is included in footnote 10. 4. We deleted ?indirect? from
our text. While it is debatable whether the
benefit would be direct or indirect, levy notices do sometimes result in
taxpayers making other arrangements to resolve their tax liability.
5. IRS? suggested change has been incorporated into the text. 6. In response
to IRS? concern with our use of the term ?disparate
treatment? of taxpayers in our conclusions, we have revised our text to
state that whether or not taxpayers are included in the continuous levy
program is predicated in part on whether their federal payments are made by
FMS or directly by other agencies. We believe that this results in unequal
treatment of delinquent taxpayers who receive federal payments and that this
will only be corrected when more types of federal payments are available to
the program. GAO Comments
Appendix III: Comments From the Financial Management Service
Page 27 GAO- 01- 711 Increasing Use of Federal Tax Levies
Appendix III: Comments From the Financial Management Service
Appendix III: Comments From the Financial Management Service
Page 28 GAO- 01- 711 Increasing Use of Federal Tax Levies
Appendix III: Comments From the Financial Management Service
Page 29 GAO- 01- 711 Increasing Use of Federal Tax Levies
Appendix IV: Comments From the Department of Defense Page 30 GAO- 01- 711
Increasing Use of Federal Tax Levies
Appendix IV: Comments From the Department of Defense
Appendix V: GAO Contacts and Staff Acknowledgments
Page 31 GAO- 01- 711 Increasing Use of Federal Tax Levies
Michael Brostek (202) 512- 9110 Ralph T. Block (415) 904- 2000
In addition to those named above, Wendy Ahmed, Tom N. Bloom, Robert C.
McKay, Ellen Rominger, James J. Ungvarsky, and Elwood D. White made key
contributions to this report. Appendix V: GAO Contacts and Staff
Acknowledgments GAO Contacts Acknowledgments
(268917)
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