Debt Collection: Opportunities Exist for Improving FMS's
Cross-Servicing Program (31-OCT-03, GAO-04-47).
GAO has previously reviewed facets of Treasury's Financial
Management Service's (FMS) cross-servicing efforts. These reviews
did not include FMS's handling of nontax debts that were returned
to FMS uncollected by its private collection agency (PCA)
contractors because FMS officials did not consider the
cross-servicing program to be fully mature. During fiscal years
2000, 2001, and 2002, FMS's PCA contractors returned about $3.9
billion of uncollected debts to FMS. This report focuses
primarily on (1) actions taken by FMS on uncollected nontax debts
returned from its PCA contractors and (2) actions taken, if any,
by FMS and the Office of Management and Budget (OMB) to ensure
that federal agencies are reporting their eligible uncollectible
nontax debts to IRS as income to debtors.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-47
ACCNO: A08784
TITLE: Debt Collection: Opportunities Exist for Improving FMS's
Cross-Servicing Program
DATE: 10/31/2003
SUBJECT: Collection procedures
Debt
Debt collection
Performance measures
Program evaluation
Treasury Offset Program
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-04-47
United States General Accounting Office
GAO
Report to the Secretary of the Treasury
and the Director of the Office of Management and Budget
October 2003
DEBT COLLECTION
Opportunities Exist for Improving FMS's Cross-Servicing Program
a
GAO-04-47
Highlights of GAO-04-47, a report to the Secretary of the Treasury and the
Director of the Office of Management and Budget
GAO has previously reviewed facets of Treasury's Financial Management
Service's (FMS) cross-servicing efforts. These reviews did not include
FMS's handling of nontax debts that were returned to FMS uncollected by
its private collection agency (PCA) contractors because FMS officials did
not consider the cross-servicing program to be fully mature. During fiscal
years 2000, 2001, and 2002, FMS's PCA contractors returned about $3.9
billion of uncollected debts to FMS. This report focuses primarily on (1)
actions taken by FMS on uncollected nontax debts returned from its PCA
contractors and (2) actions taken, if any, by FMS and the Office of
Management and Budget (OMB) to ensure that federal agencies are reporting
their eligible uncollectible nontax debts to IRS as income to debtors.
GAO recommends that Treasury (1) help ensure that all appropriate
collection action is taken on debts returned from PCA contractors, (2)
increase opportunities for collection, and (3) help maximize the soundness
of FMS's cross-servicing program. GAO also recommends that OMB take steps
to improve agencies' compliance with standards and policies for writing
off and closing out debts. Treasury concurred with most of GAO's findings
but raised a number of points about certain of the recommendations. OMB
agreed with the thrust of GAO's recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-04-47.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gary Engel (202) 512-3406 or
[email protected].
October 2003
DEBT COLLECTION
Opportunities Exist For Improving FMS's Cross-Servicing Program
Although FMS has made progress in implementing its cross-servicing program
and considers it to be fully mature, opportunities exist to improve the
program.
FMS had not reviewed most of the debts returned to it by its PCA
contractors to determine whether any opportunities for collection or other
recoveries remained, including those possible from reporting closed-out
debts to IRS as income to debtors. For example, as shown in the figure
below, about $3.7 billion of the $6.6 billion of debts that were at FMS
for cross-servicing as of February 28, 2003, were being kept in the
Treasury Offset Program (TOP) for passive collection after they had been
returned uncollected to FMS by PCA contractors. Passive collection
entailed no further collection action on the part of FMS other than
minimal efforts through offset, and collections on debts in passive
collection through offset totaled only about $9 million through February
28, 2003. Various problems hindered collections through offset, including
the fact that many of the debts were beyond the 10-year statutory and
regulatory limitations for offset.
GAO's analysis also showed that relatively few debts in cross-servicing
were being referred to the Department of Justice for more aggressive
enforced collection action. This analysis further showed that FMS
continues to have problems with debt compromises and the reporting of a
key cross-servicing performance measure.
Finally, neither FMS nor OMB monitored or reported the extent to which
federal agencies governmentwide were closing out all eligible
uncollectible debts and reporting those amounts to IRS as income to
debtors.
Percentage of Cross-Serviced Debts in Passive Collection as of February
28, 2003
Contents
Letter 1
Results in Brief 3
Background 6
Scope and Methodology 8
Collection Opportunities Were Lost on Uncollected Debts Returned
from PCA Contractors 9 Inadequate Monitoring and Reporting of Closed-Out
Debts to IRS 14 FMS Missed Certain Opportunities to Improve Overall
Collections 16 Problems Identified with Debt Compromises and a Key
Performance
Measure 23 Conclusions 31 Recommendations for Executive Action 31 Agency
Comments and Our Evaluation 34
Appendixes
Appendix I: Sampling Method 41
Appendix II: Comments from the Department of the Treasury 42 GAO Comments
46
Appendix III: Staff Acknowledgments 47
Tables Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year
2002 30 Table 2: Details of Cases Selected 41
Figures Figure 1: Percentage of Cross-Serviced Debts in Passive Collection
as of February 28, 2003 10 Figure 2: FMS-Referred Debts at DOJ as of
February 28, 2003, by Fiscal Year Referred 18
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
A
United States General Accounting Office Washington, D.C. 20548
October 31, 2003
The Honorable John W. Snow
The Secretary of the Treasury
The Honorable Joshua B. Bolten
Director, Office of Management and Budget
The Debt Collection Improvement Act of 1996 (DCIA) gave the Department
of the Treasury (Treasury) significant governmentwide responsibilities for
collecting federal nontax debts delinquent more than 180 days that are
referred by federal agencies for collection action, known as cross-
servicing. Treasury's Financial Management Service (FMS) is responsible
for carrying out Treasury's cross-servicing responsibility. Nontax debts
that federal agencies reported as delinquent more than 180 days totaled
over $60 billion at the end of each of the last 4 fiscal years.1 However,
as of
September 30, 2002, federal agencies reported to FMS that only about
$8.5 billion, or approximately 13 percent, of the approximately $64
billion
of reported nontax debts delinquent over 180 days were eligible for cross-
servicing. FMS has continued to express concern about the accuracy,
completeness, and validity of debts reported by agencies as eligible for
and
excluded from the DCIA cross-servicing provisions, and over the years, we
have identified and reported on problems regarding the accuracy and
completeness of exclusions from cross-servicing as reported by certain
federal agencies.2 Nonetheless, for the billions of dollars of nontax
delinquent debts that agencies do refer for cross-servicing, it is
critical that
FMS manage its collection activities to fully utilize available debt
collection
tools and maximize collection opportunities.
1These debts include those classified by federal agencies as "currently
not collectible" (CNC). Generally, write-off is mandatory for delinquent
debts older than 2 years. The agency must either classify the debts as CNC
or discharge the debts. The collection process continues on debts
classified as CNC until the agency determines it is no longer
cost-effective to pursue collection. At that point, the debt should be
discharged or closed out.
2See, for example, U.S. General Accounting Office, Debt Collection
Improvement Act of 1996: Department of Agriculture's Farm Service Agency
Has Not Yet Fully Implemented Certain Key Provisions, GAO-02-463
(Washington, D.C.: Mar. 29, 2002).
In January 2003, we reported that FMS had made significant progress in
implementing key provisions of DCIA, which directs and authorizes use of a
wide range of collection tools.3 For example, we reported that FMS's
successful merger of the Tax Refund Offset Program with the Treasury
Offset Program (TOP), both of which are designed to offset federal
payments up to the amount of the delinquent federal debt, and system
enhancements have streamlined operations and contributed over $1 billion
in nontax debt collections from tax refund offsets during each of fiscal
years 2000, 2001, and 2002. In addition, FMS's incorporation of Social
Security benefit payments into TOP in May 2001 resulted in about $114
million in reported nontax debt collections from Social Security benefit
offsets through early July 2003.
While we have previously reviewed various facets of FMS's cross-servicing
efforts, we did not review FMS's handling of nontax debts that remained
uncollected after being returned to FMS from its private collection agency
(PCA) contractors because FMS did not consider the cross-servicing program
to be fully mature at that time.4 FMS officials now consider the
cross-servicing program to be fully mature. Therefore, as follow-up to our
prior work, this review focused primarily on nontax delinquent debts that
remained uncollected after they had been at both FMS and its PCA
contractors for cross-servicing. Specifically, our objectives were to
evaluate (1) actions taken by FMS on uncollected nontax debts returned
from its PCA contractors; (2) FMS's efforts to ensure that eligible
uncollectible nontax debts, which federal agencies rely on FMS to report
on their behalf to the Internal Revenue Service (IRS) as income to the
debtors, are promptly identified and accurately reported; and (3) actions
taken, if any, by FMS and the Office of Management and Budget (OMB) to
ensure that federal agencies are reporting their eligible uncollectible
nontax debts to IRS as income to the debtors. In addition to addressing
these objectives, this report discusses opportunities for FMS to (1)
improve collection of nontax debts through cross-servicing and (2) enhance
the soundness of certain operational and reporting facets of its
cross-servicing program.
3U.S. General Accounting Office, Major Management Challenges and Program
Risks: Department of the Treasury, GAO-03-109 (Washington, D.C.: January
2003).
4U.S. General Accounting Office, Debt Collection: Treasury Faces
Challenges in Implementing Its Cross-Servicing Initiative, GAO/AIMD-00-234
(Washington, D.C.: Aug. 4, 2000).
Results in Brief Opportunities exist to improve FMS's cross-servicing
program for federal nontax debts in the following areas: (1) the extent to
which debts are kept in TOP for passive collection after they have been
returned uncollected to FMS by PCA contractors; (2) FMS's adherence to its
procedures for returning certain uncollected debts to referring agencies;
(3) the extent to which FMS and OMB monitor federal agencies' reporting of
closed-out debts to IRS as income to debtors; (4) the extent to which FMS
refers debts to the Department of Justice (DOJ) for enforced collection
and reports debts to TOP; (5) the adequacy of FMS's system for tracking
debt amounts forgiven and PCA contractors' adherence to regulatory and
contractual policies and procedures for forgiving debts through
compromises with debtors; and (6) the reliability of FMS's reporting on
the extent to which agencies are referring eligible debts for
cross-servicing.
FMS did not review most debts returned uncollected from PCA contractors to
determine the appropriate next step to maximize collection of the debts.
As of February 28, 2003, FMS had approximately $6.6 billion of debts in
cross-servicing. About $3.7 billion of these debts had been returned
uncollected by FMS's PCA contractors and were being kept in TOP for
passive collection through offset.5 While offset yielded some collections
for debts in passive collection, the amounts were small, totaling only
about $9 million on debts returned to FMS by its PCA contractors. In
addition, many of the debts returned to FMS by its PCA contractors had no
prospects for collection through offset because they were beyond the
10-year statutory and regulatory limitations applicable to offset.6
FMS also did not review about $446 million of the approximately $1.1
billion of uncollected debts that it returned to referring agencies during
fiscal years 2000, 2001, and 2002 to determine whether it should close out
and report the debts to IRS on behalf of agencies that had authorized FMS
to do so. We determined that FMS summarily returned these debts to
referring agencies without ensuring that the required collection
activities had been performed. For example, FMS did not review debts
totaling about $97 million to determine their eligibility for IRS
reporting even though they met two key criteria for IRS reporting-they
5For the purpose of this report, offset refers to administrative offset
and tax refund offset.
631 U.S.C. 3716(e)(1) is applicable to administrative offset and 31 C.F.R.
285.2(d)(1)(ii) is applicable to tax refund offset to collect nontax
debts.
had Taxpayer Identification Numbers (TIN) and their referring agencies had
granted FMS authority to report them to IRS.
Neither FMS nor OMB monitored or reported the extent to which federal
agencies were closing out uncollectible debts and reporting eligible
amounts to IRS. The Treasury Reports on Receivables (TROR) for the 24
Chief Financial Officers (CFO) Act agencies7 showed that for calendar year
2002, of the approximately $3.2 billion of nontax debts that these
agencies reported as closed out, about $1 billion, or approximately 31
percent, of this amount was reported to IRS as income to the debtors.8 FMS
does not require federal agencies to disclose in their TRORs why
closed-out debts are not reported to IRS, and neither FMS nor OMB
officials could specifically explain why certain federal agencies had
reported different amounts for closed-out debts and debts reported to IRS.
In looking for missed cross-servicing collection opportunities, we further
found that FMS had referred only a small amount of debt to the Department
of Justice (DOJ) for enforced collection because FMS did not establish
effective processes or procedures for identifying debts to forward to DOJ.
We also found that FMS had not reported about $356 million of debts to TOP
for offset payments as required by FMS procedures. As of February 28,
2003, most of these debts were at secondary PCA contractors and had been
in cross-servicing for an average of about 11 months without having been
sent to TOP. Further, although many nontax debts involved secondary
debtors, such as cosignors, from which collection can be pursued, FMS had
not reported such debtors to TOP.
7One of the 24 CFO Act agencies, the Federal Emergency Management Agency
(FEMA), was transferred to the new Department of Homeland Security (DHS)
effective March 1, 2003. With this transfer, FEMA will no longer be
required to prepare and have audited stand-alone financial statements
under the CFO Act, leaving 23 CFO Act agencies. DHS, along with most other
executive branch agencies, will be required to prepare and have audited
financial statements under the Accountability of Tax Dollars Act of 2002,
Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002).
8The format of the TROR is on a fiscal year basis (i.e., October 1, 2001
to September 30, 2002). To determine the reported amounts for closed-out
debts and debts reported to IRS for the 24 CFO Act agencies for calendar
year 2002, we obtained and analyzed the 24 CFO Act agencies' quarterly
TRORs for fiscal years 2001, 2002, and 2003. GAO has not assessed the
completeness and accuracy of the information in the TRORs for the 24 CFO
Act agencies; therefore, we have not determined whether the TROR figures
reported by the agencies are understated, overstated, or accurate.
In addition, we identified continuing problems in FMS's administration of
compromises with debtors. FMS's cross-servicing database showed that
in-house FMS collectors and FMS's PCA contractors had established
repayment agreements forgiving a total of at least $51 million of
delinquent debts during fiscal years 2000, 2001, and 2002. However, the
cross-servicing database did not identify the forgiven amounts on debts.
Specifically, it did not include amounts forgiven by in-house FMS
collectors in accordance with established compromise agreements between
FMS and debtors unless the agreed-upon reduced amount had been paid in
full. In addition, PCA contractors that established compromise agreements
with debtors often did not have documentation to justify their rationale
for concluding that debtors could not pay the full debt amount or to
support the amounts forgiven.
Finally, FMS overstated federal agencies' progress in referring eligible
nontax debts for cross-servicing. Although FMS reported that agencies had
referred about 96 percent of over $8 billion of reported eligible debts,
we determined that the referral rate was about 79 percent, thereby leaving
room for improvement.
We are making a number of recommendations to Treasury and OMB to increase
opportunities for collections and other recoveries of debts and to help
maximize the operational soundness of the cross-servicing program.
Treasury and OMB generally agreed with our findings. However, Treasury
raised a number of points regarding our specific findings and
recommendations that missed the central concerns conveyed in our report
and tended to downplay their significance. How well these findings, along
with others relating to cross-servicing that we have cited in previous
reports, are addressed is central to success in collecting delinquent
nontax debt and creating credibility among debtors that the federal
government is serious about its collection efforts.
Background DCIA was enacted by the Congress, in part, to collect nontax
debts delinquent more than 180 days by referring such debts to Treasury or
a Treasury-approved debt collection center for cross-servicing.9 FMS is
the only Treasury-approved governmentwide debt collection center.
After receiving a debt from a referring federal agency, FMS generally
keeps the debt for 30 days at its Debt Management Operations Center.
During this time, FMS is to send a letter demanding payment to the debtor.
An in-house FMS collector may attempt to contact the debtor to obtain
payment in full or secure payment through other options, including
compromise.10 If the debt has not been collected 20 days after the date of
the demand letter, FMS is to report the debt to TOP if the referring
agency has not already done so.11
If the referred debt remains uncollected after it has been at FMS for 30
days, FMS typically sends the debt to one of its five PCA contractors.12
The PCA contractor that receives the debt initially-the primary PCA
contractor-is generally given 270 days from the date it receives the debt
from FMS to collect or resolve the debt.13 If the primary PCA contractor
is unable to collect or resolve the debt, it sends the debt back to FMS.
FMS then typically sends the debt to another PCA contractor, the secondary
PCA contractor for the debt. The secondary PCA contractor is also given
270 days from the date it receives the debt from FMS to collect or resolve
the debt. FMS requires its PCA contractors to attempt to locate debtors,
send demand letters, and attempt to obtain full payment before
9Federal agencies may, at their discretion, refer valid, legally
enforceable debts for cross-servicing that are less than 180 days
delinquent; however, it may not be feasible for certain agencies to do so.
10FMS's policy is to attempt to obtain payment in full. However, other
payment options include (1) repayment agreement for payment in full, (2)
lump sum compromise settlement, and (3) compromise repayment agreement.
11DCIA requires that eligible debts delinquent more than 180 days be
reported to TOP.
12FMS's current PCA contract covers fiscal years 2001 through 2006. The
five PCA contractors are located in California, Florida, Georgia, New
York, and Texas.
13FMS recently increased the number of days PCA contractors are given to
collect or resolve referred nontax debts from 180 days to 270 days.
Administrative debt resolution occurs when a PCA contractor determines
that a delinquent debtor is either bankrupt, deceased, or disabled and
financially unable to pay the debt.
compromising any debt. FMS may refer debts to DOJ for litigation and
enforced collection at any time.
Debts that are returned uncollected to FMS from its secondary PCA
contractors are to be either retained by FMS for additional collection
action or returned to the referring agencies.14 According to the Federal
Claims Collection Standards,15 federal agencies must terminate all
collection action before closing out a delinquent nontax debt and must
report certain closed-out debts to IRS.16
Federal agencies are required to report annually in their TRORs on the
status of their nontax debts.17 TRORs are FMS's only comprehensive means
of collecting information on the federal government's nontax debt
portfolio, including debts written off, closed out, and reported to IRS.
TRORs are also used to collect information on nontax debts delinquent more
than 180 days to help FMS monitor federal agencies' implementation of
DCIA. FMS summarizes the information in the federal agencies' TRORs
annually in Report to the Congress on U.S. Government Receivables and Debt
Collection Activities of Federal Agencies.
OMB assists the President by developing governmentwide policies for the
effective and efficient operation of the executive branch. As such, OMB
establishes credit management policy for the federal government, including
setting standards for extending credit, managing lenders participating in
guaranteed loan programs, servicing nontax receivables, and collecting
delinquent nontax debts. In addition, OMB is responsible for reviewing
federal agencies' policies and procedures related to credit programs and
debt collection activities.
14FMS collectors are required to review debts to determine whether further
collection actions, such as reporting debts to TOP or IRS, are needed
prior to returning the debts back to the referring agencies. If no further
collection actions are needed, the debt is returned to the referring
agency.
1531 C.F.R. Parts 901-904.
16According to the Federal Claims Collection Standards, upon close-out of
a debt, the agency must report the close-out to IRS in accordance with the
requirements of 26 U.S.C. 6050P and 26 C.F.R. 1.6050P-1. IRS Form 1099C is
used to report the uncollectible debt as income to the debtor, which may
be taxable at the debtor's current tax rate.
17All CFO Act agencies and non-CFO Act agencies with nontax ending debt
balances of $50 million or greater are required to report quarterly.
Scope and Methodology
To address our objectives, we interviewed FMS officials and reviewed
pertinent FMS documents and reports to obtain an understanding of FMS's
policies and procedures for nontax debts that are returned uncollected to
FMS by its PCA contractors and for closing out uncollectible nontax debts
and reporting such debts to IRS as income to the debtor. We also reviewed
applicable federal regulations and guidance for federal nontax debt
collection, close-out, and IRS reporting, including the Federal Claims
Collection Standards, OMB Circular A-129, and IRS instructions for
reporting closed-out debts. In addition, we obtained and analyzed FMS's
cross-servicing database for the period from inception of the
cross-servicing program in fiscal year 1996 through February 28, 2003, to
determine what collection actions in-house FMS collectors performed on
debts that had been returned uncollected from its PCA contractors and
whether the in-house FMS collectors properly identified all uncollected
debts that could be reported to IRS, including amounts that had been
forgiven through compromise.
A scope limitation prevented us from using statistical sampling techniques
to determine whether compromises made by in-house FMS collectors were
justified, supported, and reported to IRS. FMS's cross-servicing database
did not identify all forgiven amounts resulting from compromise agreements
made by in-house FMS collectors; the database identified forgiven amounts
only for in-house FMS agreements if the compromised amount had been paid
in full and the debt settled.18 The database did not include the forgiven
amounts for in-house compromise agreements that were active but had not
yet been settled. We did use statistical sampling techniques to select
from FMS's PCA cross-servicing database 54 debts that had been compromised
by FMS's PCA contractors from October 1, 2002, through February 28,
2003.19 Using electronic and hard-copy information provided by FMS for the
selected compromised debts, we determined whether the compromises were
justified, supported, and reported to IRS. We projected the results from
our sample of compromises to the population from which the sampled items
were drawn. (App. I contains additional information on the sampling
method.)
18If the debtor defaults on the compromise agreement, the debtor owes the
full balance of the debt prior to compromise, less any amounts paid.
19We selected October 1, 2002, through February 28, 2003, as our testing
period because FMS had performed reviews of compromises made by its PCA
contractors for prior periods and found problems.
In addition, we interviewed FMS and OMB officials about the extent to
which their respective agencies monitor and report on federal agencies
governmentwide regarding identification and reporting of closed-out debts
to IRS. We also obtained and analyzed TRORs for all 24 CFO Act agencies to
determine the nontax debt close-out and IRS reporting information for
calendar year 2002.
To determine whether information in FMS's cross-servicing database was
reliable, we reviewed documentation provided by FMS supporting reliability
testing performed by FMS and its contractors on the database. In addition,
we performed electronic testing of specific data elements in the database
that we used to perform our work. Based on our review of FMS's documents
and our own testing, we concluded that the data elements used for this
report are sufficiently reliable for the purpose of the report.
We performed our work from October 2002 through August 2003 in accordance
with U.S. generally accepted government auditing standards.
We requested comments on a draft of this report from the Secretary of the
Treasury and the Director of OMB or their designees. The Commissioner of
FMS provided Treasury's comments, which are reprinted in appendix II. On
October 21, 2003, staff from OMB provided us with OMB's oral comments on
the draft. Treasury's and OMB's comments are discussed in the Agency
Comments and Our Evaluation section of this report and are incorporated in
the report as applicable.
Collection Opportunities Were Lost on Uncollected Debts Returned from PCA
Contractors
As of February 28, 2003, FMS had approximately $6.6 billion of debts in
cross-servicing. More than half of these debts had been returned
uncollected by FMS's secondary PCA contractors and were being kept in TOP
for passive collection. Passive collection entailed no further collection
action other than minimal efforts through offsets, and certain debts in
passive collection were not eligible for such offsets. In addition, FMS
did not review certain uncollected debts that FMS returned to the
referring agencies to determine whether all collection activity had been
performed on the debts, including whether FMS should close out and report
the debts to IRS on behalf of the agencies. Further, certain debts that
were not in passive collection or returned to referring agencies were kept
in inactive status where no collection activities, including referral to
TOP, were performed. Consequently, opportunities for maximizing
collections or other recoveries were lost.
FMS Did Not Review Uncollected Debts Left in TOP for Passive Collection
When debts were returned from secondary PCA contractors, FMS simply kept
most of them in TOP, where they largely lay dormant without any review to
determine the next best course of action to improve collections. For
fiscal years 2000, 2001, and 2002, FMS kept about $2.6 billion of
uncollected nontax debts returned from its secondary PCA contractors in
TOP for passive collection. As of February 28, 2003, debts retained in TOP
for passive collection totaled about $3.7 billion and, as shown in figure
1, represented 56 percent of the approximately $6.6 billion of debts that
were at FMS for cross-servicing at that time.20 Through February 28, 2003,
FMS had collected only about $9 million on debts in passive collection
through offsets, which was the only collection tool being used to collect
these returned debts.
Figure 1: Percentage of Cross-Serviced Debts in Passive Collection as of
February 28, 2003
Other collection statuses ($2.9 billion)
Passive collection status ($3.7 billion)
Source: GAO.
Note: Derived from analysis of FMS's cross-servicing database as of
February 28, 2003.
FMS did not have written procedures for reviewing debts kept in TOP for
passive collection. It is important to note that FMS officials stated that
20In addition to the approximately $2.6 billion of debts returned from
secondary PCA contractors in fiscal years 2000 through 2002, about $1.1
billion were retained in TOP for passive collection on debts that were
returned from secondary PCA contractors either prior to fiscal year 2000
or in fiscal year 2003.
because of system limitations, FMS did not identify specific debts that
were in TOP for passive collection. However, we were able to identify
debts in TOP for passive collection using off-the-shelf database analysis
software.
Certain nontax debts kept in TOP for passive collection warrant additional
review to determine the next best course of action to maximize collections
or other recoveries, such as those possible through administrative wage
garnishment (AWG) or reporting closed-out debts to IRS. For example, DCIA
authorized federal agencies to use AWG to collect delinquent nontax
debts.21 FMS can perform AWG on behalf of other federal agencies as part
of cross-servicing, although only on behalf of agencies that have
authorized FMS to do so. FMS began using AWG with the assistance of its
PCA contractors during fiscal year 2002. Because most of the debts in TOP
for passive collection were returned to FMS from PCA contractors before
any agencies had authorized FMS to use AWG on their behalf, most debts in
TOP for passive collection have not yet been assessed for AWG collection
opportunities. Further, as of our fieldwork completion date, only four
federal agencies had authorized FMS to perform AWG on their behalf.22
However, FMS expects additional agencies to provide such authorization in
the future.
In addition, about $449 million of nontax debts in TOP for passive
collection as of February 28, 2003, will not be collected through offset
because the statutory and regulatory 10-year limitations for offsets has
expired for those debts.23 According to FMS officials, FMS's
cross-servicing system did not remove debts from TOP when the debts
reached the 10-year limitation, so such debts were not evaluated for
possible close-out and reporting to IRS.24
21AWG, as authorized by DCIA, is an administrative process that allows an
agency to issue an order requiring the debtor's employer to withhold up to
15 percent of the debtor's disposable pay for payment of the debt.
22The four agencies that have authorized FMS to perform AWG on their
behalf are the Department of Housing and Urban Development, the Securities
and Exchange Commission, the James Madison Foundation, and the Railroad
Retirement Board.
23Judgment debts and student loans are not subject to the statutory and
regulatory 10-year limitations. None of the approximately $449 million of
debts were judgment debts or student loans.
24According to FMS officials, the debts are removed only if they are
subsequently matched to payments in TOP.
Certain other debts in TOP for passive collection are also unlikely to
yield any collections through offsets-those for which we determined the
debtors' Taxpayer Identification Numbers (TIN) were invalid or belonged to
deceased individuals or cases in which the debtors were bankrupt.
Specifically, we identified about $24 million of delinquent nontax debts
for which the debtors' TINs were invalid.25 In addition, using the Social
Security Administration's (SSA) Death Master File, we identified over
2,500 nontax debts totaling about $18 million with TINs that belonged to
reportedly deceased debtors, including one with a referred balance of
approximately $4 million.26 This debt had been in TOP since November 2001
with no collections through offsets. We also identified 69 delinquent
Medicare debts belonging to the Department of Health and Human Services
(HHS) totaling about $12 million that were being held in TOP after return
from secondary PCA contractors for which FMS's cross-servicing database
indicated that the debtors were in bankruptcy.27 According to FMS
officials, when a bankruptcy is recorded in the cross-servicing database
for a particular debt, the cross-servicing system marks the debtor as
bankrupt for all debts associated with that debtor but does not remove
them from TOP. In-house FMS collectors typically removed from TOP only the
specific debt that they were working even though others had been flagged
as belonging to the same bankrupt debtor.
As a result of our analyses and inquiries, FMS has initiated a review of
debts in TOP to identify those beyond the statutory and regulatory 10-year
limitations for offsets. As of April 2003, FMS had identified over 7,300
such debts, totaling about $463 million (an increase of $14 million over
the
25IRS periodically provides a list of prefix numbers for valid Employer
Identification Numbers on its Web site. The Social Security Administration
(SSA) provides a description of invalid Social Security numbers on its Web
site. We used these Web sites to identify invalid TINs. There may be other
debts with invalid TINs that we could not identify using the information
from IRS and SSA Web sites.
26SSA stores death information for each individual who has been issued a
Social Security number and whose death has been reported to SSA. SSA
periodically extracts the death information and makes this information,
called the Death Master File, available for sale to the public by the
Department of Commerce.
27In total, FMS's cross-servicing database showed that about $110 million
of HHS's Medicare debts, including the approximately $12 million in
passive collection, were in TOP and available for liquidation by offsets
even though the debtors were in bankruptcy. The automatic stay mandated by
11 U.S.C. 362 prevents the government from pursuing collection action
against debtors in bankruptcy for certain debts that arise prior to the
commencement of the bankruptcy litigation.
$449 million of debts we identified as of February 28, 2003). An FMS
official stated that these debts would be removed from TOP and evaluated
for possible close-out and reporting to IRS as income to the debtors. The
official also stated that FMS would develop a process for routinely
identifying such debts. In addition, FMS officials stated that FMS will
revise its policies and procedures so that collectors will be instructed
to review the debtor and all associated nontax debts whenever a bankruptcy
is discovered for a debt and determine debts that should be removed from
TOP. Finally, FMS officials stated that FMS is in the process of
developing a new automated cross-servicing system, called FedDebt.
According to FMS officials, once FedDebt is implemented in January 2005,
FMS will be able to routinely identify individual debts that are in
passive collection.
FMS Did Not Perform Collection and Close-Out Reviews for All Debts Returned
to Referring Agencies and Debts in Inactive Status
Through February 28, 2003, FMS returned to referring agencies about $1.1
billion of delinquent nontax debts that had been returned uncollected to
FMS by secondary PCA contractors during fiscal years 2000, 2001, and 2002.
FMS's cross-servicing procedures require that in-house FMS collectors,
prior to returning debts to referring agencies, review the collection
activity on the debts to determine whether they are eligible to be
returned to the referring federal agencies. As part of this review, the
cross-servicing procedures require collectors to determine whether the
debts should be closed out and reported to IRS by FMS. We found, however,
that FMS had summarily returned about 40 percent of the $1.1 billion to
referring agencies without first ensuring that the required collection
activities had been performed.
According to information in FMS's cross-servicing database, in April 2002
FMS had a substantial backlog of debts that had been returned to FMS by
secondary PCA contractors over the past several years that were primarily
in inactive status, meaning that no collection action was taking place. To
eliminate this backlog, FMS used its automated system to summarily return
about 41,000 debts totaling approximately $446 million to the referring
agencies in April 2002. According to agency procedures and as confirmed by
an FMS official, prior to the April 2002 return of the debts to the
referring agencies, FMS should have first evaluated these debts to
determine whether close-out was appropriate and whether the debts should
be reported to IRS. Our analysis showed that about $97 million of these
returned debts met two criteria for being reported by FMS to IRS as income
to the debtor: (1) the debts had TINs and (2) the referring agencies had
granted FMS authority to report the debts to IRS.
Our review of the cross-servicing database showed that FMS continues to
face challenges in reviewing uncollected debts returned from secondary PCA
contractors. Specifically, as of February 28, 2003, FMS had approximately
$80 million of debts in inactive status even though its PCA contractors
returned these uncollected debts to FMS during fiscal year 2002. According
to an FMS official, the backlog occurred because the automated
cross-servicing system did not always identify debts returned to FMS by
secondary PCA contractors that required further collection review by
in-house FMS collectors. The FMS official stated that FedDebt, when
implemented in January 2005, would correct this problem.
Inadequate Monitoring and Reporting of Closed-Out Debts to IRS
DCIA gives OMB responsibility for annual reporting to the Congress on any
problems regarding federal agency progress in improving policies and
standards for closing out debts,28 and FMS is responsible for the form and
content of the TROR, which FMS uses to monitor federal agencies'
implementation of DCIA. Neither OMB nor FMS monitored or reported on the
extent to which agencies governmentwide closed out debts and reported them
to IRS. The TRORs for 24 CFO Act agencies showed that the agencies
reported that about $1 billion of the approximately $3.2 billion of nontax
debts that were reported closed out by those agencies were reported to IRS
as income to the debtors for calendar year 2002.29 Additionally, the TRORs
that the agencies used to report did not disclose why closed-out debts
were not reported to IRS and did not include closed-
28Specifically, DCIA requires OMB to (1) review the standards and policies
of each federal agency for compromising, writing down, forgiving, or
discharging indebtedness arising from programs of the agency; (2)
determine whether those standards and policies are consistent and protect
the interests of the United States; (3) direct the head of the agency to
make appropriate modifications to any federal agency's standards or
policies that the OMB Director determines are not consistent or do not
protect the interests of the United States, and (4) report annually to the
Congress on deficiencies in the standards and policies of federal agencies
for compromising, writing down, forgiving, or discharging indebtedness,
and progress made in improving those standards and policies.
29In previous work, we found that certain federal agencies may not be
properly reporting closed-out debts to IRS. For example, in fiscal year
2002, we reported that the Centers for Medicare & Medicaid Services was
not reporting certain closed-out Medicare debts to IRS as income to
debtors. U.S. General Accounting Office, Debt Collection Improvement Act
of 1996: HHS's Centers for Medicare & Medicaid Services Faces Challenges
to Fully Implement Certain Key Provisions, GAO-02-307 (Washington, D.C.:
Feb. 22, 2002). In addition, we found that Farm Services Agency officials
were unaware of the requirement to report closed-out debts to IRS as
income for secondary debtors. U.S. General Accounting Office, Debt
Collection: Agriculture Making Progress in Addressing Key Challenges,
GAO-03-202T (Washington, D.C.: Nov. 13, 2002).
out debts that had been previously classified as currently not collectible
(CNC). These are significant reporting deficiencies because without such
information, the TRORs cannot be used to determine the extent to which all
eligible debts are closed out and reported to IRS. As a result of
inadequate monitoring and reporting of closed-out debts to IRS,
opportunities for recovery by reporting closed-out debts to IRS as income
to debtors may have been lost.
Neither OMB nor FMS officials could specifically explain why certain
agencies had reported different amounts for debts closed out and debts
reported to IRS. According to an OMB official, OMB does not have a formal
process in place to review federal agencies' standards and policies
regarding debt collection, including reporting closed-out debts to IRS,
and does not monitor the extent to which agencies close out debts and
report them to IRS. The OMB official stated that OMB examiners, at their
own discretion, might look at how federal agencies are closing out debts
as part of the examiners' overall evaluation of the agencies'
implementation of the President's Management Agenda.30 According to the
official, OMB has not submitted any reports to the Congress regarding
problems with agencies' standards and policies for closing out debts and
reporting them to IRS.
FMS officials stated that the large difference on the agencies' TRORs
between closed-out debts and debts reported to IRS may be attributable to
situations involving debts that are not required to be reported to IRS.31
However, FMS does not require federal agencies to disclose such
information in their TRORs. Without such disclosures in the TRORs, it is
not possible for FMS, OMB, or any other interested party to determine
whether federal agencies are reporting their closed-out debts to IRS
accurately and completely.
Moreover, the agency TRORs understated the amount of debt closed out
during calendar year 2002. Specifically, we determined and FMS officials
acknowledged that the $3.2 billion of debts that were reported closed out
30The President's Management Agenda, announced in the summer of 2001, is a
strategy for improving the management of the federal government. The
President's Management Agenda includes an emphasis on strategic management
of human capital, competitive sourcing, improved financial performance,
expanded electronic government, and budget and performance integration.
31For example, 26 U.S.C. 6050P and 26 C.F.R. 1.6050P-1 exclude certain
debts that are discharged in bankruptcy and debts less than $600 from IRS
reporting requirements.
by the 24 CFO Act agencies did not include debts previously classified as
CNC that were subsequently closed out. This is a significant deficiency in
the TROR because CNC debts that are eventually closed out can be
substantial. For example, the 24 CFO Act agencies reported about $10.1
billion of CNC debts at the end of calendar year 2002. Without information
on whether CNC debts are closed out, the TRORs cannot be used to fully
determine the extent to which all debts are closed out and reported to
IRS. In spite of these reporting deficiencies, FMS officials stated that
FMS does not have any plans to revise the TROR.
FMS Missed Certain Opportunities to Improve Overall Collections
In addition to taking little action to improve collections for debts that
were returned uncollected by PCA contractors, FMS missed certain
opportunities to improve overall cross-servicing collections. FMS did not
establish effective processes or procedures for identifying debts to
forward to DOJ. As a result, FMS had relatively few debts (about $30
million as of February 28, 2003) at DOJ for enforced collection action
even though DOJ has been successful in collecting debts through civil
litigation in the past. In addition, FMS did not report all eligible debts
that had been referred for cross-servicing to TOP, as required by its
cross-servicing procedures, and did not report secondary debtors, such as
cosigners, to TOP.
FMS Missed Enforced Collection Opportunities
DOJ serves as the federal government's "collector of last resort." When a
federal agency, including FMS, cannot collect certain debts
administratively, DOJ can litigate the claims and, with judicial
oversight, enforce collections by seizing bank, stock, and similar
accounts from debtors; seizing and selling debtor-owned real estate and
other property; and garnishing a higher percentage of debtors' wages than
AWG under DCIA allows.32 The benefits of enforced collection are reflected
in past DOJ recoveries. In its fiscal year 2002 report to the Congress,
FMS noted that DOJ collected about $10.9 billion in cash recoveries
through civil litigation from fiscal year 1998 through fiscal year 2002.
32Federal agencies, in cases where there is no evidence of assets, can
also refer delinquent debts to DOJ for judgment liens only rather than for
enforced collection.
The Federal Claims Collection Standards require federal agencies to
promptly refer debts that have a principal balance of at least $2,500 to
DOJ when the debts cannot be collected through either compromise or
aggressive collection action and do not meet criteria for suspending or
terminating collection action.33 Accordingly, OMB Circular A-129 requires
federal agencies, including FMS as the federal government's central debt
collection agency, to refer delinquent debts to DOJ as soon as there is
sufficient reason to conclude that full or partial recovery of the debts
can best be achieved through litigation.
FMS acknowledges that DOJ referrals are an important part of
cross-servicing. In its annual report to the Congress on federal agencies'
debt collection activities, FMS reported that referrals to DOJ for civil
litigation governmentwide decreased significantly over the last 3 fiscal
years, from 50,572 debts in fiscal year 2000 to 8,443 debts in fiscal year
2002. As federal agencies continue to implement DCIA and make progress in
promptly referring eligible debts that are over 180 days delinquent to FMS
for collection action in accordance with the act's requirements, reported
decreases in federal agency referrals to DOJ for enforced collection can
be expected as would increases in FMS referrals due to the shift in
collection responsibilities from the agencies to FMS. Generally, a
determination that a debt should be referred to DOJ cannot reasonably be
made until appropriate cross-servicing collection action has taken place.
In working with federal agencies to facilitate implementation of DCIA, FMS
emphasizes that referral of a debt to DOJ for enforced collection is a key
cross-servicing tool. FMS makes clear to agencies that it will (1) prepare
the forms necessary for referring debts to DOJ,34 (2) work with DOJ to
obtain necessary information from the agencies to litigate the claims, (3)
monitor the debts while they are at DOJ, and (4) apply DOJ collections to
the debts.
33According to the Federal Claims Collection Standards, federal agencies
may refer debts to DOJ less than $2,500 in certain situations, such as
debts for which litigation is important to ensure compliance with the
federal agency's policies or programs. The Federal Claims Collection
Standards also state that federal agencies may terminate collection action
on a claim when, among other things, the agency is unable to locate the
debtor and/or the costs of collection are anticipated to exceed the amount
recoverable. Federal agencies may suspend collection action on a claim
when the agency cannot locate the debtor, the debtor's financial condition
is expected to improve, and/or the debtor has requested a waiver or review
of the claim.
34Unless excepted by DOJ, claims referred to DOJ should be accompanied by
a Claims Collection Litigation Report, a Certificate of Indebtedness, and
other information that may be required.
FMS, based on consultations with DOJ, established the following conditions
for its referral of agency debts to DOJ: (1) the federal creditor agency
has authorized FMS to refer its debts to DOJ, (2) the principal amount of
the debt is $25,000 or more, (3) there is at least 1 year before the
statute of limitations expires, (4) FMS has a debtor address (or other
debtor contact information for service-of-process purposes), and (5) FMS
has evidence that the debtor has assets or a source of income. As
appropriate, FMS also expects to refer debts to DOJ when some, but not
all, of the criteria are met. For example, FMS might refer debts less than
$25,000 when bank accounts have been identified.
In spite of FMS's key role in determining whether debts referred for
cross-servicing should be referred to DOJ for enforced collection, only a
nominal amount of cross-serviced debt was at DOJ. Specifically, as of
February 28, 2003, only about $30 million of the approximately $6.6
billion of debts with FMS for cross-servicing were at DOJ. Moreover, as
shown in figure 2, all but about $4 million of the debts FMS had referred
to DOJ were referred prior to fiscal year 2000, suggesting that FMS had
not emphasized adjudication as a collection tool.
Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by Fiscal
Year Referred
16 Debt amount (in millions of dollars)
14
12
10
8
6
4
2
0 1996 1997 1998 1999 2000 2001 2002 2003 Fiscal year
Source: GAO.
Note: Derived from analysis of FMS's cross-servicing database.
According to an FMS official, prior to fiscal year 2002, FMS had no
specific process to evaluate cross-serviced debts to determine whether
recovery could best be achieved by DOJ. Rather, the FMS official stated,
FMS relied on the referring agencies to identify delinquent debts to refer
to DOJ. In addition, FMS's in-house collectors, using their own discretion
during the normal course of their collection activities, could identify
specific debts for referral to DOJ.
In fiscal year 2002, FMS, in an effort to increase referrals to DOJ, began
performing quarterly queries of its cross-servicing database to identify
uncollected debts for referral to DOJ. The queries, while conceptually
good, did not cover most of FMS's cross-servicing portfolio. Rather, they
were limited to debts with principal balances $25,000 or over that were
classified as inactive or "special handling." As of February 28, 2003, FMS
had identified nine debts totaling about $4 million for DOJ referral using
this smaller segment of its cross-servicing database.
Reviewing only debts classified as inactive or "special handling" with
principal balances over $25,000 is unlikely to result in many candidates
for FMS referral to DOJ because of the nature of these debts and the
amounts covered. Specifically, for many of the debts in inactive status,
FMS does not have TINs, which are required for DOJ referral, or the
debtors are in bankruptcy.35 Debts classified as "special handling" are
debts that collectors have identified as needing special processing
because they want to keep the cases at the debt collection center. For
example, a collector may place a debt in "special handling" if the
collector is in negotiations with the debtor over a payment plan. We
applied FMS's database query method to debts classified as inactive and
"special handling." Our query identified about $198 million of uncollected
debts, which represented about 3 percent of the amount in cross-servicing.
We determined that the majority of these debts were not good candidates
for DOJ referral. Specifically, about $106 million of such debts either
(1) lacked agency authorization for referral to DOJ, (2) were involved in
bankruptcy proceedings, (3) were beyond the general 6-year statute of
limitations for litigation of nonjudgment debts, or (4) lacked TINs.
35FMS's policy is to return all debts found to be in bankruptcy to
referring agencies unless it has been stipulated by the referring agency
that such cases will not be returned or that the bankruptcy proceedings
have been completed and the debts were not discharged.
We would consider it reasonable for FMS to query a larger segment of its
cross-servicing database. In particular, debts held in TOP for passive
collection would seem to be better candidates for DOJ referral because
they should have valid TINs and are not supposed to be in bankruptcy. This
segment of the cross-servicing debt portfolio is rather large. We
determined that FMS had approximately $2.2 billion of debts in TOP with
principal balances of at least $2,500 that had been returned from its
secondary PCA contractors and that were within the 6-year statute of
limitations for litigating nonjudgment debt.36 Unless FMS starts expanding
the scope of its reviews for potential referrals to DOJ, the statute of
limitations for these debts will likely expire without any opportunity for
enforced collection action. Our assessment of FMS's database as of
February 28, 2003, showed that about $449 million of debts with principal
balances of at least $2,500 likely had their statute of limitations expire
while they were held in TOP for passive collection. We determined that all
of these debts would have been possible candidates for referral to DOJ,
since they had been returned from FMS's secondary PCA contractors with at
least 1 year remaining before the statute of limitations expired.
36Using a $25,000 principal balance as the threshold for DOJ referral,
FMS's database showed about $2.1 billion of debts in TOP that were within
the 6-year statute of limitations.
FMS also did not routinely consider or act on advice from its PCA
contractors regarding referrals to DOJ. Because PCA contractors'
responsibilities include locating debtors and determining whether they
have incomes or assets to repay delinquent debts, the PCA contractors
would have a reasonable basis for identifying uncooperative debtors who
could repay their debts but had refused. FMS's PCA Operations and
Procedures Manual requires FMS's PCA contractors to provide
recommendations to FMS on the next collection actions that should be taken
on individual debts, such as referral to DOJ for litigation.37 According
to the manual, litigation should be recommended when the PCA contractor
believes that the debtor has sufficient assets for debt repayment and that
no less costly method of collection would be effective. Our analysis
showed that FMS was holding debts totaling about $47 million in TOP for
passive collection that had principal balances over $2,500 for which PCA
contractors had recommended litigation.38 We noted that FMS's
cross-servicing database showed that these debts were within the general
6-year statute of limitations for litigating nonjudgment debts and had no
apparent barriers to litigation, such as debtor bankruptcy or a deceased
debtor.
FMS officials stated that FMS does not routinely review recommendations
made by its PCA contractors because FMS does not believe such
recommendations are reliable. In this regard, we noted that FMS's PCA
Operations and Procedures Manual does not set forth the specific FMS
criteria for selecting debts for DOJ referral. In addition, FMS does not
tell PCA contractors which creditor agencies have authorized FMS to refer
debts to DOJ on the agency's behalf. It is important to note that only
about $3 million, or less than one-tenth of 1 percent, of the
approximately $3.9 billion of uncollected debts that were returned to FMS
from its secondary PCA contractors during fiscal years 2000, 2001, and
2002 were at DOJ.
Moreover, while FMS had referred only limited amounts of cross-serviced
debt to DOJ for litigation, FMS lacked a history of its prior referral
activity and knowledge of the results of such referrals. FMS officials
stated that
37In addition to litigation, PCA contractors can recommend that collection
action be continued, the debt be returned to the referring agency, or the
debt be written off and closed out.
38Using a $25,000 principal balance as the threshold for DOJ referral,
FMS's database had about $45 million of debts in TOP for passive
collection for which PCA contractors had recommended litigation.
FMS does not use the cross-servicing database to track DOJ referrals;
however, we found that the database has status and collection activity
codes capable of being used for such tracking. FMS officials acknowledged
the need to track all DOJ referrals and stated that FMS will ensure that
FedDebt will be able to track all debts that FMS has referred to DOJ.
FMS Did Not Fully Use TOP FMS's policies and procedures require in-house
FMS collectors to report all eligible debts to TOP early in the
cross-servicing process, before sending them to FMS's PCA contractors. In
fiscal year 2000, we reported that FMS did not promptly report eligible
debts to TOP as its procedures required. Computer interface problems and
errors by in-house FMS collectors were cited as reasons for not promptly
reporting all eligible debts to TOP.39 Problems regarding TOP referrals
continue as FMS's cross-servicing database as of February 28, 2003, showed
that about 1,800 debts that were eligible for TOP, with referred balances
totaling about $356 million, were at PCA contractors but had never been
put into TOP by FMS's collectors. We did not identify any apparent factors
that would have precluded FMS's collectors from reporting these debts to
TOP. The database showed that the debts were eligible for TOP in that the
referring agencies had authorized FMS to report the debts to TOP, the
debtors had TINs, the debtors were not in bankruptcy or deceased, and the
debts were not over 10 years delinquent.
The delays in reporting these debts to TOP were extensive. As of February
28, 2003, about $215 million of these debts with an average of
approximately 320 days in cross-servicing were at the secondary PCA
contractor without having been sent to TOP. One of the more egregious
delays involved a debt referred by an agency in October 2001 for about $43
million that had been in cross-servicing for over 500 days without ever
having been reported to TOP.
FMS officials stated that they are aware that eligible debts are not
always being reported to TOP. They told us that debts might not be
reported to TOP because the cross-servicing automated system does not
always identify debts that should be reported. For example, FMS officials
stated that if the system failed during its nightly batch processing, the
debts that
39GAO/AIMD-00-234.
would otherwise have been flagged for reporting to TOP would be missed.
FMS officials stated that the cross-servicing system could not go back and
routinely identify debts that were missed. Thus, as acknowledged by FMS
officials, FMS would have to perform a periodic sweep of the entire
database to identify eligible debts that were missed for reporting to TOP.
In response to our inquiries, FMS officials stated that FMS will take
action to ensure that FedDebt includes features to correct this problem
when it is implemented in January 2005.
FMS is also not seizing the opportunity to report secondary debtors to
TOP. Our analysis of FMS's cross-servicing database as of February 28,
2003, showed that about $144 million of the approximately $5 billion of
cross-serviced debts in TOP had secondary debtors with TINs. According to
FMS officials, both the TOP and cross-servicing automated systems are
debt-based, rather than based on both debt and debtor. As such, TOP cannot
be used to identify all debtors associated with a debt, a problem we noted
to FMS about 5 years ago. Even if TOP would accept these data, the
cross-servicing system cannot provide them, since it is now capable of
sending only one debtor per debt to TOP. FMS officials stated that FMS is
in the process of enhancing TOP to accept multiple debtors for a single
debt and that the TOP enhancement should be implemented in fiscal year
2004. The officials also stated that FMS will ensure that FedDebt will be
capable of referring multiple debtors to TOP when it is implemented in
January 2005.
Problems Identified with Debt Compromises and a Key Performance Measure
FMS did not sufficiently ensure that nontax debts that were forgiven
through compromises with debtors by its in-house collectors or its PCA
contractors were done so in an operationally sound manner. FMS's
cross-servicing database as of February 28, 2003, showed that FMS and its
PCA contractors forgave a total of at least $51 million of delinquent
nontax debts through compromises with debtors during fiscal years 2000,
2001, and 2002. For FMS in-house compromises, this included only those
compromise agreements that had been settled and paid in full. The
cross-servicing database did not identify forgiven amounts for agreements
that were still active or defaulted. In addition, it is unclear whether
certain forgiven amounts should have been forgiven or by how much, since
FMS's PCA contractors often did not document why they compromised debts
and often did not obtain sufficient support and justification for the
compromises. Further, FMS overstated federal agencies' progress in
referring eligible nontax debts for cross-servicing. Specifically, FMS
incorrectly reported that agencies had referred 96 percent of their
eligible debts for cross-servicing for fiscal year 2002, rather than the
actual rate of
79 percent based on our analysis of information provided by FMS. This
discrepancy occurred because FMS did not include any debts that were
reported as having become eligible for referral for cross-servicing during
fiscal year 2002 and did not deduct the amounts of certain debts that it
returned to referring agencies during fiscal year 2002.
Information Regarding Debt Compromises Was Not Sufficient
The soundness of FMS's cross-servicing program can be undermined if
certain debtors receive more generous treatment as a result of compromise
agreements than other similarly situated debtors. While the amount of debt
forgiven as noted above was not substantial, the consistency with which
delinquent debts are forgiven and the extent to which federal requirements
are adhered to in arriving at such decisions are vital. Therefore, it is
critically important for FMS to (1) accurately track debt amounts
forgiven, (2) obtain documented support for the compromise agreements, and
(3) obtain TINs for the debtors. In August 2000, as part of our overall
report on FMS's cross-servicing program, we reported that the majority of
FMS compromise agreements we reviewed, including those made by PCA
contractors, did not include support for the forgiven amounts.40 In
following up on FMS's compromise activity, we found that FMS's
cross-servicing system did not track the forgiven amounts for all debts
that had been compromised during fiscal years 2000, 2001, and 2002. In
addition, FMS's PCA contractors often did not document why they
compromised debts and often did not obtain sufficient support for the
compromise agreements, including debtors' TINs, which are needed to report
the forgiven amounts to IRS.
The Federal Claims Collection Standards state that federal agencies may
compromise debts if (1) the debtor is unable to pay the full amount in a
reasonable time, as verified through credit reports or other financial
information; (2) collection in full cannot be achieved within a reasonable
time by enforced collection proceedings; (3) the cost of collection does
not justify the enforced collection of the full amount; or (4) there is
significant doubt concerning the government's ability to prove its case in
court. According to the standards, in determining the debtor's inability
to pay, agencies should consider a number of factors as verified by the
debtor's credit report and other financial information, including
financial statements that show the debtor's assets, liabilities, income,
and expenses.
40GAO/AIMD-00-234.
In addition, FMS's PCA contract requires its PCA contractors to document
their attempts to collect the full amount of delinquent debts and provide
justification for compromises. In the absence of adequate documentation
supporting the PCA contractor's determination to compromise a debt for a
specific amount, FMS cannot determine whether the compromise is reasonable
under the Federal Claims Collection Standards. Thus, FMS has no basis to
determine whether the government suffered a loss that should not have been
incurred as a result of such a compromise. We also determined that the PCA
contract does not establish liquidated damages or penalties for a PCA
contractor's failure to document a compromise.
As part of our review, we attempted to obtain the forgiven amount for each
compromise agreement established by in-house FMS collectors during fiscal
years 2000, 2001, and 2002, to determine whether the bases for the
forgiven amounts had been supported and documented by FMS's in-house
collectors. However, FMS could not provide us the forgiven amount for each
compromise agreement because the cross-servicing system only identifies
the forgiven amount for compromise agreements that have been settled in
full. Thus, FMS could not provide us the forgiven amounts for compromise
agreements that were active or in default.
Absent information on forgiven amounts for all compromise agreements, FMS
cannot track the extent to which its collectors are compromising
agency-referred debts and the bases for the compromises. According to an
FMS official, FMS acknowledges that such information is critical to sound
cross-servicing operations and, as a result of our inquiries, plans to
incorporate the ability to identify and track all forgiven amounts in the
FedDebt system.
According to FMS officials, in fiscal year 2002, FMS began to review
repayment and compromise agreements made by its PCA contractors as part of
its annual PCA contractor compliance reviews. During these reviews, FMS
generally found that all PCA contractors failed to consistently document
in their respective debt collection systems the justification for
accepting installment payments and compromise agreements.41 As a result of
FMS's findings, each PCA contractor agreed to conduct training sessions
for its collectors or take other corrective actions
41FMS found that the contractor error rates resulting from failure to
provide justification for the acceptance of installment and compromise
agreements ranged from 26 percent at one contractor to 88 percent at
another contractor.
to help ensure that the collectors properly obtain and document support
for forgiven amounts.
In spite of FMS's reviews of the compromise activity of its PCA
contractors and related findings pertaining to the lack of documented
support for the compromises, we found that PCA contractors were still not
providing sufficient support for compromises during the first 5 months of
fiscal year 2003. Specifically, we found that 22 percent of the sampled
compromised debts had no evidence that the PCA contractor had attempted to
obtain a lump sum payment in full or a repayment agreement for the full
amount prior to compromising the debt.42 For example, one debt involved a
debtor who offered to pay the full debt balance of approximately $14,000
in installments. However, without explanation, the PCA contractor offered
to compromise the debt by 20 percent if the debtor would pay right away.
The debtor accepted the compromise offer. Moreover, this PCA contractor
encouraged compromise activity prior to exhausting attempts to collect
debts in full by sending out pro forma letters to debtors stating that the
contractor may be authorized to compromise a portion of their debt should
the debtor be in a position to pay the remaining balance.
42We estimate that 22 percent of the debt compromises in the population
were made without the PCA contractor attempting to obtain payment in full
prior to compromise. We are 95 percent confident that the percentage of
debt compromises for which the PCA contractor did not attempt to obtain
payment in full is from 12 percent to 34 percent.
In addition, 72 percent of the compromised debts in our sample did not
have supporting documentation indicating why the PCA contractors
compromised the debts or the bases used to determine how these debts met
Federal Claims Collection Standards criteria for compromise.43 For 81
percent of the compromised debts in our sample, PCA contractors did not
have complete financial statements, and for 30 percent of the compromised
debts, PCA contractors did not have credit bureau reports to support the
compromises.44
It should be noted that a PCA contractor is required to submit to FMS the
debtor's financial statement and credit bureau report for review only if
the compromise percentage of the debt exceeds the compromise percentage
that is authorized by FMS or the referring agency. We found that for 36 of
the 54 compromised debts in our sample, the PCA contractors compromised up
to the amount that was allowed by FMS or the referring agencies. For
example, one PCA contractor allowed a debtor to pay approximately $46,000
to settle a debt that had an outstanding balance of about $58,000. The
forgiven amount fell within the compromise parameter that had been
established by the referring agency. However, the PCA contractor did not
(1) attempt to collect payment in full, (2) provide any explanation to
justify the compromise, or (3) obtain the debtor's complete financial
statement and credit report. Because the PCA contractor did not exceed the
compromise parameter established by the referring agency, it was able to
compromise the debt without submitting the debtor's financial statements
and credit report to FMS for review.
FMS officials stated that PCA contractors are required to document their
attempts to obtain payment in full and justification for offering or
accepting a compromise even when the compromise is within agency
parameters. According to FMS officials, FMS discussed this issue with its
PCA
43We estimate that 72 percent of the debt compromises in the population
were made without the PCA contractor providing an explanation for the
compromises. We are 95 percent confident that the percentage of debt
compromises for which no explanation was provided by the PCA contractor is
from 59 percent to 83 percent.
44We estimate that 81 percent of the debt compromises in the population
were made without the PCA contractor obtaining a complete financial
statement for the debtor. We are 95 percent confident that the percentage
of debt compromises for which PCA contractors did not obtain complete
financial statements is from 69 percent to 91 percent. We estimate that 30
percent of the debt compromises in the population were made without the
PCA contractor obtaining a credit bureau report. We are 95 percent
confident that the percentage of debt compromises for which the PCA
contractor did not obtain credit bureau reports is from 18 percent to 43
percent.
contractors in October 2002 and reiterated the importance of documenting
the justification for compromising debts and obtaining financial
statements and credit bureau reports to support the compromises. FMS
officials stated that FMS would continue to look at compromise agreements
in future PCA compliance reviews to help ensure that PCA contractors are
providing justification and obtaining the financial statements and credit
bureau reports necessary for entering into a compromise agreement.
Moreover, FMS's PCA contractors did not always attempt to obtain or report
to FMS the TINs of debtors who were granted compromises. Specifically, we
found that 17 percent of the compromised debts in our sample did not have
TINs because the PCA contractors either did not request the TINs from the
debtors or did not report the TINs to FMS.45 Without TINs for debtors,
neither FMS nor the referring agencies were able to report the forgiven
amounts of the compromised debts to IRS as income to the debtors. In
addition, without a TIN, if the debtor defaults on the compromise
agreement, the debt cannot be reported to TOP. According to FMS officials,
FMS is continuing to monitor the compromise agreements made by its PCA
contractors to help ensure that the contractors obtain and report TINs to
FMS. In addition, as a result of our inquiries, FMS plans to issue a
technical bulletin to its PCA contractors to remind them of the need to
obtain and report TINs.
45We estimate that 17 percent of the debt compromises in the population
were made without the PCA contractor obtaining a TIN from the debtor or
reporting the TIN to FMS. We are 95 percent confident that the percentage
of debt compromises for which no TIN was obtained by the PCA contractor or
reported to FMS is from 9 percent to 29 percent.
FMS Overstated Progress in a Key Performance Measure
DCIA requires Treasury to report to the Congress each year on the debt
collection activities of federal agencies, including FMS as the
government's central debt collection agency. A key performance measure
that FMS reports each year is the percentage of debt eligible for
cross-servicing that has been referred by federal agencies. In fiscal year
2000, we reported that FMS did not properly calculate this key performance
measure because the reported amount of debt referred for cross-servicing
was not comparable to the reported amount of eligible debt. Specifically,
FMS overstated the debt referral amount by accumulating the referred
amount for about 3 and a half years. We recommended that FMS revise its
reporting of debt amounts referred for cross-servicing to reflect the
extent to which eligible debts reported by agencies as of a specific date
have been referred to FMS.46
In its fiscal year 2002 report to the Congress, FMS reported that $7.9
billion, or 96 percent, of the $8.2 billion of eligible debt had been
referred for cross-servicing as of fiscal year-end and cited the high
referral rate as a notable accomplishment. However, FMS's reports continue
to overstate the progress made in this highly touted cross-servicing
performance measure. Specifically, FMS understated debts that were
eligible for cross-servicing and overstated debts that had been referred
for cross-servicing, which significantly overstated the reported extent to
which agencies had referred eligible debts for cross-servicing. As shown
in table 1, the governmentwide cross-servicing referral rate at the end of
fiscal year 2002 was about 79 percent, rather than 96 percent as reported
by FMS. This is a significant difference given that FMS officials consider
the cross-servicing program to be fully mature and federal agencies should
be referring eligible debts when they are over 180 days delinquent.
46GAO/AIMD-00-234.
Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year 2002
Dollars in billions
FMS-reported amounts Adjusted amounts
Eligible for referral for cross-servicing $8.2 $8.5
Referred for cross-servicing $7.9 $6.7
Referral rate for cross-servicing 96% 79%
Source: FMS.
According to the TRORs for the fourth quarter of fiscal year 2002, federal
agencies governmentwide had about $8.5 billion, not $8.2 billion, of debt
eligible for referral at the end of the fiscal year. In determining the
amount of eligible debt for referral for cross-servicing, FMS
inappropriately used the amount of debt eligible for cross-servicing
referral at the end of fiscal year 2001. As such, FMS did not include any
of the approximately $300 million of debts that were reported as having
become eligible for referral for cross-servicing during fiscal year 2002.
Thus, FMS understated the amount of eligible debt for fiscal year 2002 by
about $300 million.
In addition, FMS noted in its fiscal year 2002 report to the Congress that
the debts reported as referred for cross-servicing did not include those
that were no longer being actively collected by FMS. However, FMS
generally did not deduct from its reported referral amounts debts that
were returned to the referring agencies during fiscal year 2002. According
to FMS officials, FMS calculated the referral amount by adding debts that
agencies referred to FMS during fiscal year 2002 to the amount of referred
debt that FMS held for cross-servicing at the end of fiscal year 2001. FMS
officials stated that they typically only reduced the referred debt amount
when a debt was returned to the referring agency in the same month that
the agency referred the debt to FMS. However, by not deducting the amount
for all referred debts that were returned to agencies, the referred debt
amount did not reflect the amount of debt that had been referred by
agencies and was held by FMS for cross-servicing at fiscal year-end.47
According to FMS's cross-servicing database, at the end of fiscal year
2002,
47For example, in February 2002, an agency erroneously referred to FMS
about $263 million of debts that were exempted from cross-servicing. FMS
returned these debts to the agency in March 2002. However, because these
debts were returned 1 month after they had been referred, FMS
inappropriately included them in the amounts reported as referred to FMS
for cross-servicing as of the end of fiscal year 2002.
FMS held about $6.7 billion of debts that had been referred by federal
agencies for cross-servicing. In contrast, FMS reported $7.9 billion of
debts referred for cross-servicing in its report to the Congress, an
overstatement of about $1.2 billion.
Conclusions FMS continues to have opportunities for enhancing the
effectiveness of its cross-servicing of delinquent nontax debt. Efficient
and effective processes are needed for timely determining the next
appropriate steps for debts that are not collected by FMS's PCA
contractors. As noted in our report, lack of adequate processes and
systems weaknesses led to missed opportunities to refer cases to DOJ for
enforced collection, failure to use payment offset tools for a large block
of debt, and delays in decisions to stop collection efforts on old debt
and report it to IRS as income for those who had not paid outstanding
amounts. In addition, due to the lack of monitoring by FMS and OMB, there
is no assurance that all eligible closed-out nontax debt is reported to
IRS. These lapses in oversight and systematic administration of unpaid
debts, combined with continuing problems in FMS's PCA contractors'
administration of offers to forgive a portion of outstanding amounts as
inducements to pay the remainder, perpetuate our concerns about FMS's
efforts to pursue and collect unpaid nontax debts.
Recommendations for Executive Action
To help ensure that all appropriate collection action is taken on debts
returned from FMS's PCA contractors, we recommend that the Secretary of
the Treasury direct the Commissioner of FMS to take the following actions:
o Identify debts kept in TOP for passive collection through the
implementation of FedDebt and, in the interim, utilize appropriate
analytical database software to identify such debts.
o Establish and implement procedures to periodically review debts that
are kept in TOP for passive collection to determine the next best course
of action for the debts to maximize collections or other recoveries.
o After all collection activities have been exercised, determine whether
debts should be closed out and reported to IRS by FMS, and, if not,
promptly return them to the referring agencies.
o Establish and implement procedures to periodically review debts that
are kept in TOP for passive collection to determine whether the statute of
limitations has expired or any other conditions, such as bankruptcy, exist
that would prevent offset of the debts in TOP.
o Remove debts from TOP that are not eligible for offset and determine
whether the debts should be closed out and reported to IRS or returned to
the referring agency.
o Establish and implement procedures to periodically monitor debts that
are held in inactive status to avoid debt backlogs and to help ensure that
all debts are promptly reviewed to determine whether additional collection
action or close-out and reporting to IRS is warranted. Monthly may be a
reasonable interval for performing such monitoring.
To help ensure that all federal agencies are appropriately reporting
closed-out debts to IRS, we recommend that the Secretary of the Treasury
direct the Commissioner of FMS to take the following actions:
o Require all federal agencies to disclose in their TRORs any significant
differences between the amount of debt reported as closed out and the
amount of debt reported to IRS and the reasons for those differences.
o Revise information requirements for the TROR to include the amount of
CNC debts that are closed out.
We also recommend that the Director of OMB direct the Controller of OMB's
Office of Federal Financial Management to
o remind agencies of their obligation to comply with the standards and
policies of individual agencies for writing off and closing out debts, as
required by the DCIA and OMB Circular A-129;
o require agencies to initiate actions to review and correct any
deficiencies they find during their review;
o require agencies to report to OMB on their policies, deficiencies, and
corrective actions, if any; and
o report annually to the Congress on the deficiencies, if any, found at
the agencies and the progress in resolving any deficiencies found.
To increase opportunities for collecting debts, we recommend that the
Secretary of the Treasury direct the Commissioner of FMS to take the
following actions:
o Revise the database query methodology FMS uses to identify
cross-serviced debts for DOJ referral. The methodology should include
debts kept in TOP for passive collection and should also incorporate
information from FMS's PCA contractors.
o Incorporate FMS's criteria for selecting debts for DOJ referral in
FMS's PCA Operations and Procedures Manual.
o Remind PCA contractors of the importance of enforced collection and
that their recommendation for next collection action, including
litigation, is a critical part of their responsibilities, and inform the
PCA contractors of the agencies that have authorized FMS to refer debts to
DOJ on the agencies' behalf.
o Establish and implement procedures to track all debts FMS has referred
to DOJ and ensure that the FedDebt system is capable of tracking all debts
that FMS refers to DOJ.
o Establish and implement procedures to monitor all debts in
cross-servicing to help ensure that debts are promptly reported to TOP,
including periodically sweeping the portfolio to send debts to TOP.
o Implement enhancements to the TOP system so that it can accept multiple
debtors for a single debt, and ensure that the FedDebt system will be
capable of being used to report secondary debtors to TOP.
To help maximize the soundness of the cross-servicing program, we
recommend that the Secretary of the Treasury direct the Commissioner of
FMS to take the following actions:
o Establish procedures to monitor and track all debt amounts forgiven by
in-house FMS collectors and ensure that the FedDebt system identifies the
forgiven amounts for all compromise agreements established by in-house FMS
collectors.
o Reinforce PCA contractors' adherence to the compromise requirements set
forth in the PCA contract for documenting the attempt to collect the full
amount of a debt prior to its compromise.
o Reinforce PCA contractors' adherence to the compromise requirements set
forth in the Federal Claims Collection Standards for obtaining a debtor's
financial information, such as credit reports and complete financial
statements, to determine the debtor's inability to pay the full amount of
the debt.
o Reinforce PCA contractors' adherence to the compromise requirements set
forth in the PCA contract for documenting the justification for the
compromise of a debt.
o Incorporate liquidated damages or a penalty provision in the next PCA
contract for failure of PCA contractors to document a compromise in
accordance with contract requirements.
o Remind PCA contractors, through a technical bulletin or other means, of
the importance of obtaining debtors' TINs when compromising debts.
o Fully implement our recommendation made in fiscal year 2000 to revise
FMS's key performance measure on cross-servicing referrals so that the
extent to which federal agencies have referred debts to cross-servicing
directly corresponds to the eligible debts as of fiscal year-end.
Specifically, the debt-eligible amount should reflect the amount reported
by federal agencies as of fiscal year-end, and the debt-referred amount
should reflect the amount in cross-servicing as of fiscal year-end.
Agency Comments and Our Evaluation
In written comments on a draft of this report, reprinted in appendix II,
Treasury's FMS said that it concurred with most of the findings and that
many of the findings and recommendations had already been addressed. FMS
stated that enhancements to the systems that serve cross-servicing and PCA
functions have resolved a number of issues and that the advent of FedDebt
will further improve cross-servicing operations. However, FMS raised a
number of points regarding certain of our findings and recommendations
that missed the central concerns conveyed in our report and tended to
downplay the significance of these concerns. The following discussion
highlights and responds to the points FMS raised.
FMS stated that the findings in the report did not reflect critical
operational issues and only affected a very small percentage of its
cross-servicing portfolio. FMS expressed concern that we greatly expanded
the scope of our work beyond the parameters that we originally set and
focused on a
range of opportunities to improve the cross-servicing program that had
little or no relation to the reporting of uncollectible debt.
We disagree. Specifically, referral of debts to DOJ for litigation and TOP
for offset, monitoring of the compromise of debts by FMS and its PCA
contractors, and identification and reporting of uncollectible debt
amounts to IRS are all critical operational issues. Moreover, as discussed
in the report, we found several problems related to FMS's identification
and monitoring of debts held in TOP for passive collection, which
represented over half the debts in FMS's $6.6 billion cross-servicing
portfolio as of February 28, 2003. These issues, when considered in
conjunction with issues we have cited in previous reports, such as limited
implementation of administrative wage garnishment (AWG)48 and lack of
independent verification of the accuracy, completeness, and validity of
debts reported by agencies as eligible for or excluded from DCIA
cross-servicing provisions,49 raise serious concerns about FMS's progress
in addressing the challenges it faces in implementing the cross-servicing
program.
We also disagree with FMS's assertion that we expanded the scope of our
review beyond what we conveyed to Treasury at the beginning of the
assignment. In our August 2002 letter to the Secretary of the Treasury and
our subsequent entrance conference with FMS officials in October 2002, we
stated that our objectives were to evaluate (1) actions taken by FMS on
uncollected nontax debts returned from its PCA contractors; (2) FMS's
efforts to ensure that eligible uncollectible nontax debts, which federal
agencies rely on FMS to report on their behalf to IRS as income to the
debtors, are promptly identified and accurately reported; and (3) actions
taken, if any, by FMS to ensure that federal agencies are reporting their
eligible uncollectible nontax debts to IRS as income to the debtors. As
stated in our report, our review addressed these objectives. In addition,
in performing our work to address these objectives, we identified
opportunities for FMS to improve collection of nontax debts through
cross-servicing and enhance the soundness of certain operational and
reporting facets of its cross-servicing program. In meeting our audit
responsibilities, we must inform management of any significant issues
identified during our work.
48See, for example, U.S. General Accounting Office, Debt Collection
Improvement Act of 1996: Status of Selected Agencies' Implementation of
Administrative Wage Garnishment,
GAO-02-313 (Washington, D.C.: Feb. 28, 2002).
49GAO/AIMD-00-234.
FMS suggests that our report unfairly characterizes FMS's efforts to
collect debts through offset as "minimal" and that it criticizes FMS for
collection activities that agencies have not delegated to it. FMS stated
that TOP is its most effective collection tool, many agencies rely on TOP
for the bulk of their collections, and significant collection
opportunities could be lost if debts were removed from TOP prematurely.
FMS stated that since the cost to collect through TOP is low, it is
generally in the best interest of the government to attempt offset for as
long as statutorily authorized before terminating collections and
discharging the debt. FMS said that it is at creditor agencies' discretion
to leave debts returned from PCA contractors in TOP for passive
collection.
We agree that for certain debts, TOP can be an effective mechanism for
collection, especially when used in conjunction with other debt collection
activities. However, passive collection does not entail any collection
action other than minimal efforts through TOP. As stated in the report,
for debts held in passive collection, TOP is the only collection tool in
use. Therefore, collection opportunities from the use of other collection
tools, such as litigation and AWG, are lost for these debts. As we state
in this report, FMS had collected only about $9 million, or about
two-tenths of 1 percent, of the $3.7 billion of debts held in TOP for
passive collection as of February 28, 2003. To increase the opportunities
to collect these debts, we recommended that FMS periodically review debts
kept in TOP for passive collection to determine the next best course of
action for the debts, such as AWG or litigation, to maximize collections
or other recoveries.
Moreover we did not recommend in our report that FMS remove debts from TOP
prematurely. Rather, we stated that many of the debts kept in TOP for
passive collection were unlikely to yield any collections through offsets
because they were beyond the 10-year statutory and regulatory limitations
applicable to offset or had other barriers, such as bankruptcy, that would
prevent offset of the debts. Thus, we recommended that FMS establish and
implement procedures to periodically review debts that are kept in TOP for
passive collection to determine whether the statute of limitations has
expired or any other conditions exist that would prevent offset of the
debts and remove debts from TOP that are not eligible for offset and
determine whether the debts should be closed out and reported to IRS or
returned to the referring agency.
We also disagree with FMS's implication that we unfairly criticized FMS
for not undertaking Form 1099C reporting activities that agencies have not
delegated to it. Our review indicated that it would be highly unlikely for
creditor agencies to be able to identify specific debts in cross-servicing
that are kept in TOP for passive collection. FMS advised us that because
of system limitations, it could not identify specific debts that are
merely being held in passive collection after being returned from PCA
contractors. However, we were able to readily identify debts in TOP for
passive collection through use of off-the-shelf database analysis
software. Without the ability to identify specific debts for which passive
collection is the only current ongoing effort, creditor agencies that have
not delegated authority to FMS to report uncollectible debts to IRS on
their behalf cannot fulfill their responsibility to determine whether a
debt should be closed out and reported to IRS or whether other collection
action should be taken on it. We consider this to also be the
responsibility of FMS. This view is embodied in our recommendations that
FMS establish and implement procedures to periodically review debts that
are kept in TOP for passive collection to determine the next best course
of action and after all collection activities have been exercised,
determine whether debts should be closed out and reported to IRS by FMS,
and, if not, promptly return them to the referring agencies.
In particular and as noted in our report, we would like to reemphasize
that our analysis considered only those debts for which federal agencies
had given FMS the authority to report uncollectible debt amounts to IRS on
the agency's behalf. For such debts, FMS procedures require its collectors
to evaluate them to determine whether close-out would be appropriate and
whether the debt amounts should be reported to IRS.
FMS agreed with our finding that it had referred only a small amount of
debt to DOJ. FMS stated that because of workload constraints, it has
attempted to focus its DOJ referral efforts on cases most likely to be
successfully collected through litigation. As stated in our report, in an
effort to increase referrals to DOJ, FMS did begin to perform quarterly
queries of its cross-servicing database to identify uncollected debts for
referral to DOJ. However, we found that many of the debts identified
through these queries would not be good candidates for referral to DOJ
because, among other things, they lacked TINs and were involved in
bankruptcy proceedings. In addition, these queries did not cover most
debts in cross-servicing, including those held in TOP for passive
collection that would seem to be better candidates for DOJ referral
because they should have valid TINs and are not supposed to be in
bankruptcy. In addition, FMS did not routinely consider or act on advice
from its PCA contractors regarding referrals to DOJ. Because PCA
contractors' responsibilities include locating debtors and determining
whether they
have incomes or assets to repay delinquent debts, the PCA contractors
would have a reasonable basis for identifying uncooperative debtors who
could repay their debts but had refused.
FMS did not agree with our recommendation to incorporate liquidated
damages in the next PCA contract for failure of PCA contractors to
document compromises in accordance with contract requirements. FMS stated
that there is no incentive for a PCA contractor to accept a compromise
agreement when the debtor has the capability to pay the full amount of the
debt. We disagree with FMS's contention that a PCA contractor would not
accept a compromise agreement when the debtor has the capability to pay
the full amount of the debt. For example, as stated in our report, we
noted that one debtor offered to pay the full debt balance of
approximately $14,000 in installments. However, without explanation, the
PCA contractor offered to compromise the debt by 20 percent if the debtor
would pay right away. Moreover, this PCA contractor encouraged compromise
activity prior to exhausting attempts to collect debts in full by sending
out pro forma letters to debtors stating that the contractor may be
authorized to compromise a portion of their debt should the debtor be in a
position to pay the remaining balance. Further, FMS stated that it is
questionable whether liquidated damages or a penalty provision in the
contract would be legally enforceable. For many of the debts that we
reviewed, we found that the PCA contractors often did not have
documentation to justify their rationale for concluding that debtors could
not pay the full debt amount or to support the amounts forgiven. In the
absence of adequate documentation supporting the PCA contractor's
determination to compromise a debt for a specific amount, FMS cannot
determine whether the compromise is reasonable under the Federal Claims
Collection Standards. Thus, FMS has no basis to determine whether the
government suffered a loss that should not have been incurred as a result
of such a compromise. To encourage PCA contractors to obtain adequate
documentation supporting their compromises, we continue to believe that
FMS should incorporate liquidated damages or a penalty provision in the
next PCA contract for failure of PCA contractors to document compromises
in accordance with contract requirements. FMS did not offer any legal
analysis to support its assertion that a liquidated damage or penalty
provision, presumably properly drafted and applied, may not be legally
enforceable. Of course, the enforceability of liquidated damages or a
penalty provision (e.g., reduction in the number of cases or amount of
debt referred to the PCA contractor) would depend on the nature of the
provision and the facts of the individual cases.
FMS did not agree with our finding related to the cross-servicing referral
performance measure. FMS stated that it considered many approaches for
reporting agency performance and believed that the method it chose is fair
and equitable. FMS said that using only the active balance on a given date
(e.g., the end of the fiscal year) would not recognize debts that are paid
off, administratively resolved, or determined to be uncollectible and
closed out. FMS further stated that because CFO Act agencies were required
to update their TRORs on a quarterly basis beginning in fiscal year 2003,
eligible amounts of debt for calculating the percentages referred are now
updated every quarter.
This performance indicator50 is a snapshot of the percentage of debt
eligible for referral to cross-servicing that has been referred at a given
point in time, such as at year-end. In calculating its debt referral
measure for fiscal year 2002, FMS made an unreasonable determination in
computing this key performance measure even though it had all the
appropriate information to properly calculate this figure. A fundamental
premise in calculating this performance indicator is that debts that are
paid off, administratively resolved, or determined to be uncollectible and
closed out are no longer eligible for referral for cross-servicing and are
not subject to further federal collection efforts. As such, FMS should not
include these debts in the amount referred for cross-servicing in its
annual fiscal year report to the Congress. In addition, as stated in the
report, in its fiscal year 2002 report to the Congress, FMS
inappropriately used the amount of debt eligible for cross-servicing
referral at the end of fiscal year 2001 instead of the end of fiscal year
2002. The net effect of these errors on the calculation was to overstate
the amount referred (the numerator of the fraction) by $1.2 billion and to
understate the amount available for referral (the denominator of the
fraction) by approximately $300 million. Both of these errors had the
effect of overstating federal agencies' progress in referring eligible
nontax debts for cross-servicing.
In its oral comments, OMB agreed with the report's findings. In drafting
the recommendation, we proposed that OMB review the standards and policies
of individual agencies for writing off and closing out debts. In its oral
response, OMB was concerned that it did not have the resources to review
all federal agencies' policies and procedures. As such, OMB suggested that
we modify our proposed recommendation to instead require OMB to have
50This performance indicator is represented as a fraction. The numerator
is reported amounts referred, and the denominator is reported amounts
eligible for referral.
individual federal agencies review their own policies and procedures for
writing off and closing out debts and report to OMB on their policies,
deficiencies, and corrective actions, if any, based on such reviews. OMB
stated that it will then use these reports from the individual agencies to
report to the Congress on the deficiencies, if any, found at the agencies
and the progress in resolving such deficiencies. OMB's suggested approach
in resolving this finding is reasonable and fully meets the intent of our
proposed recommendation. As such, we have modified our recommendation to
OMB accordingly.
This report contains recommendations to you. The head of a federal agency
is required by 31 U.S.C. 720 to submit a written statement on actions
taken
on these recommendations to the Senate Committee on Governmental
Affairs and the House Committee on Government Reform within 60 days of
the date of this report. You must also send a written statement to the
House
and Senate Committees on Appropriations with the agency's first request
for appropriations made over 60 days after the date of this report.
We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Governmental Affairs; the
Subcommittee on Financial Management, the Budget and International
Security, Senate Committee on Governmental Affairs; the House
Committee on Government Reform; the Subcommittee on Government
Efficiency and Financial Management, House Committee on Government
Reform; and the Commissioner of FMS. Copies will be made available to
others upon request. The report is also available at no charge on GAO's
Web site, at http://www.gao.gov.
If you have any questions regarding this report, please contact me on
(202)
512-3406 or Kenneth Rupar, Assistant Director, on (214) 777-5714. Other
key contributors to this report are listed in appendix III.
Gary T. Engel
Director
Financial Management and Assurance
Appendix I
Sampling Method
To test debts compromised by the Financial Management Service's (FMS)
private collection agency (PCA) contractors from October 1, 2002, to
February 28, 2003, we selected a stratified random sample of 54 debts that
the PCA contractors compromised from a population of 358 debts in the
cross-servicing database with forgiven dollar amounts of at least $2,000
but less than $100,000.1 We did not review debts with forgiven dollar
amounts under $2,000 because they were deemed immaterial. In total, we
selected 54 debts to review. (See table 2).
Table 2: Details of Cases Selected Forgiven amount for Number of debts
Forgiven amount Items tested in Justification for number of items tested
each debt
per stratum per stratum each stratum in each stratum
$2,000 or greater To provide coverage of the
but population of
less than $100,000 358 $2,946,711.88 54 compromised debts.
Average amount of strata
Less than $2,000 (about $680) was
706 479,309.38 None deemed to be immaterial.
Total 1,064 $3,426,021.26 54
Source: GAO.
Note: Data derived from analysis of FMS's cross-servicing database.
1We identified one debt in the cross-servicing database for which the
forgiven amount was at least $100,000. We found that the referring agency
rather than FMS's PCA contractor had initiated the compromise for this
debt. As such, this debt was not included in our review.
Appendix II
Comments from the Department of the Treasury
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
See comment 1.
See comment 2.
See comment 3.
See comment 4.
Appendix II
Comments from the Department of the
Treasury
See comment 5.
See comment 6.
See comment 7.
See comment 8.
Appendix II
Comments from the Department of the
Treasury
See comment 9.
See comment 10.
See comment 11.
Appendix II
Comments from the Department of the
Treasury
Appendix II
Comments from the Department of the
Treasury
The following are GAO's comments on the Department of the Treasury's
letter dated October 20, 2003.
GAO Comments 1.
2.
3.
4.
5.
6.
7.
8.
9.
In conformity with generally accepted government auditing standards, we
provide responsible agency officials and other directly affected parties
with an opportunity to review and provide comments on a draft report
before it is issued. The language referred to by FMS concerning the
report's status as a draft has been the standard language included on the
cover page of GAO reports when they are sent for agency comment. After
receiving agency comments, we consider their substance, revise the draft
report as appropriate, state in the report whether the agency agreed or
disagreed with our findings, conclusions, and recommendations, and issue
the report.
See our discussion in the Agency Comments and Our Evaluation section.
See comment 2.
See comment 2.
See comment 2.
See comment 2.
The scope of our work did not include determining whether FMS's TOP system
has sufficient edits and safeguards in place to ensure that no offset is
taken for debts over 10 years delinquent.
See comment 2.
As stated in our report, a scope limitation prevented us from using
statistical sampling techniques to determine whether compromises made by
in-house FMS collectors were justified, supported, and reported to IRS. As
such, we cannot comment on whether FMS collectors have implemented
compromise documentation procedures in accordance with previous GAO
recommendations.
10. See comment 2.
11. See comment 2.
Appendix III
Staff Acknowledgments
Other key contributors to this assignment were Richard Cambosos, Matthew
Valenta, Ronald Haun, Michelle Philpott, Evan Gilman, and Cathy Hurley.
(191032) Page 47
GAO's Mission The General Accounting Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO's Web site (www.gao.gov) contains abstracts
and full-text files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document files.
To have GAO e-mail this list to you every afternoon, go to www.gao.gov and
select "Subscribe to e-mail alerts" under the "Order GAO Products"
heading.
Order by Mail or Phone The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:
U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C.
20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061
To Report Fraud, Contact: Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in E-mail: [email protected]
Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470
Public Affairs Jeff Nelligan, Managing Director, [email protected] (202)
512-4800 U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
Presorted Standard
Postage & Fees Paid
GAO
Permit No. GI00
United States
General Accounting Office
Washington, D.C. 20548-0001
Official Business
Penalty for Private Use $300
Address Service Requested
*** End of document. ***