Financial Management: State and Federal Governments Are Not
Taking Action to Collect Unpaid Debt through Reciprocal
Agreements (26-JUL-05, GAO-05-697R).
The Debt Collection Improvement Act of 1996 (DCIA) allows the
federal government to collect state debts from federal payments
to contractors. However, before a state can participate in this
program, DCIA requires that the state enter into a reciprocal
agreement with the Department of the Treasury that would require
the state to collect unpaid federal debt from state payments if
Treasury collects unpaid state debt from federal payments. In
February 2004, we reported that Department of Defense (DOD) and
Internal Revenue Service (IRS) records showed that over 27,000
DOD contractors had nearly $3 billion in unpaid federal taxes as
of September 30, 2002. In a hearing before the Senate Permanent
Subcommittee on Investigations on February 12, 2004, we noted
that many of those contractors also had unpaid state taxes. Based
on the issues raised in that hearing, Congress requested that we
determine (1) the extent to which Financial Management Service
(FMS) and the states have entered into reciprocal agreements to
collect unpaid state and federal debt from their payments to
contractors and (2) whether additional opportunities may exist
for the Department of the Treasury's FMS to collect unpaid state
taxes from federal contractors. This report responds to that
request by providing information on (1) the extent of states'
participation in FMS's debt collection levy and offset programs,
(2) the potential benefits to states of participation in those
programs, and (3) the level of state participation in, and the
benefits states derive from, the collection of state tax debt
from federal income tax refunds.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-697R
ACCNO: A31360
TITLE: Financial Management: State and Federal Governments Are
Not Taking Action to Collect Unpaid Debt through Reciprocal
Agreements
DATE: 07/26/2005
SUBJECT: Contractor payments
Debt collection
Federal/state relations
Offsetting collections
Federal taxes
State taxes
Tax nonpayment
Treasury Offset Program
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GAO-05-697R
United States Government Accountability Office Washington, DC 20548
July 26, 2005
Congressional Requesters
Subject: Financial Management: State and Federal Governments Are Not
Taking Action to Collect Unpaid Debt through Reciprocal Agreements
The Debt Collection Improvement Act of 1996 (DCIA) allows the federal
government to collect state debts from federal payments to contractors.
However, before a state can participate in this program, DCIA requires
that the state enter into a reciprocal agreement with the Department of
the Treasury that would require the state to collect unpaid federal debt
from state payments if Treasury collects unpaid state debt from federal
payments.
In February 2004, we reported that Department of Defense (DOD) and
Internal Revenue Service (IRS) records showed that over 27,000 DOD
contractors had nearly $3 billion in unpaid federal taxes as of September
30, 2002.1 In a hearing before the Senate Permanent Subcommittee on
Investigations on February 12, 2004, we noted that many of those
contractors also had unpaid state taxes.2
Based on the issues raised in that hearing, you requested that we
determine (1) the extent to which Financial Management Service (FMS) and
the states have entered into reciprocal agreements to collect unpaid state
and federal debt from their payments to contractors and (2) whether
additional opportunities may exist for the Department of the Treasury's
FMS to collect unpaid state taxes from federal contractors.3 This report
responds to your request by providing information on (1) the extent of
states' participation in FMS's debt collection levy and offset4 programs,
(2) the potential benefits to states of participation in those programs,
and (3) the level of state participation in, and the benefits states
derive from, the collection of state tax
1GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 12,
2004).
2GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence, GAO-04-414T (Washington, D.C.: Feb. 12,
2004).
3For this report, the term "state" means the 50 states of the United
States and the District of Columbia.
4"Levy" generically refers to seizure of property to collect a debt. For
federal tax debt, levy is the legal process by which IRS orders a third
party-FMS-to turn over property in its possession (e.g., the federal
payment) that belongs to the delinquent taxpayer named in a notice of
levy. FMS calls the reduction of federal payments to satisfy debt an
offset.
debt from federal income tax refunds.5 Our work was performed from
February 2005 through June 2005 in accordance with generally accepted
government auditing standards.
Results in Brief
Neither the federal government nor the states have as yet pursued
potentially beneficial reciprocal agreements authorizing the collection of
debt from nontax payments, including payments to contractors. According to
FMS officials, no state has expressed interest in such agreements, and FMS
has not actively pursued avenues to encourage state participation. None of
the officials in the 17 states we contacted6 said they were aware of the
reciprocal agreement provision in DCIA, and all expressed interest in
pursuing this debt collection opportunity.
Our comparison of FMS disbursements with the database of state income tax
debt that FMS maintains found that thousands of federal contractors paid
through FMS have unpaid state tax debt. In fiscal year 2004, FMS disbursed
a total of about $1.8 billion to over 4,600 federal contractors that had
approximately $17 million in state tax debt owed primarily by individuals.
According to our analysis, if states had participated in FMS's program
that collects debt from nontax payments to contractors, they could have
collected over half of the outstanding state tax debt from these federal
contractors in fiscal year 2004.
On the other hand, the experiences of the federal government and the
states in working together to collect unpaid tax debt from state and
federal tax refunds demonstrate that reciprocal agreements to collect tax
debt from nontax payments, including contractor payments, have had a
significant impact. The federal government and most of the states with
income taxes collect tax debt on behalf of one another through the offset
of income tax refunds, which has resulted in millions of dollars in
collections. In fiscal year 2004, although most states submit only
personal income tax debt and not business income tax debt to FMS for
collection, FMS still collected over $217 million on behalf of various
states through offsets of federal income tax refunds to pay state income
tax debt. Conversely, IRS received over $77 million from states' levy of
state income tax refunds to pay delinquent federal taxes.
We are making three recommendations to the Commissioner of FMS to (1)
notify states of the opportunity to enter into reciprocal agreements with
FMS to offset state
5At your request, we have evaluated and reported separately on the federal
government's program designed to levy payments to civilian agency
contractors to collect federal tax debt. GAO, Financial Management:
Thousands of Civilian Agency Contractors Abuse the Tax System with Little
Consequence, GAO-05-637 (Washington, D.C.: June 16, 2005).
6Debt collection officials of the following 17 states were contacted:
California, Connecticut, Georgia, Hawaii, Illinois, Louisiana, Maine,
Maryland, Michigan, Minnesota, Missouri, New Jersey, New York, North
Carolina, Pennsylvania, South Carolina, and Virginia. Collectively, for
fiscal year 2004, the 17 states received over 75 percent of FMS's
collections from the federal tax refund offset program as well as over 75
percent of the federal collections from the state income tax levy program.
and federal payments, (2) assess the cost and potential benefits of such
agreements, and (3) encourage states to submit more of their business
income tax debts to FMS.
FMS generally did not concur with the conclusions and recommendations
presented in the report. FMS stated that the legislation authorizing
reciprocal agreements did not explicitly provide it the legal authority to
enter into reciprocal agreements with states to collect tax debt. FMS also
stated that it (1) did not believe reciprocal agreements would be
beneficial for either the states or the federal government and (2)
believed it had done an effective job encouraging states to send business
debts in to the offset program to assist the states in collecting those
debts. We disagree with FMS in each of those areas. IRS provided a
technical comment on the report and stated that it would discuss our
recommendations with the Federal Contractor Tax Compliance Task Force-a
multiagency task force established to address issues raised by our
February 12, 2004, report and testimony on DOD contractors with tax debt.
The Agency Comments and Our Evaluation section of this report provides a
more detailed discussion of the agency comments. We have reprinted FMS's
comments in enclosure II.
Background
Treasury is tasked with being the central debt collector for the federal
government and is responsible for collecting many types of debt. Within
Treasury, FMS is tasked with the responsibility for centralized collection
of nontax debt and assisting IRS and the states with collecting tax debt.7
DCIA is intended, among other things, to maximize the collection of unpaid
nontax debts owed to federal agencies. It requires FMS to withhold or
reduce certain federal payments to satisfy delinquent nontax debts owed by
payment recipients. This withholding or reduction of payments is referred
to as an offset. To the extent legally allowed, federal payments may be
offset in whole or in part to satisfy the federal debt. DCIA requires
federal agencies to refer their nontax debt that is more than 180 days
delinquent to Treasury for collection action.8
FMS established the Treasury Offset Program (TOP), a computer matching
program, to carry out its responsibilities under DCIA to collect federal
debt. TOP compares the names and taxpayer identification numbers (TIN) of
debtors with the names and TINs of recipients of federal payments. If
there is a match, the federal payment is reduced (levied) to satisfy the
overdue debt.
7FMS's responsibilities include collecting nontax debt and assisting IRS
in collecting tax debt. Examples of nontax debts are (1) loans made,
insured, or guaranteed by the federal government, such as student direct
and guaranteed loans, Small Business Administration loans, and Department
of Housing and Urban Development loans; (2) overpayments, such as salary
or benefit overpayments, duplicate payments, or misused grant funds; (3)
the unpaid share of any nonfederal partner in a program involving a
federal payment and a matching or cost-sharing payment by the nonfederal
partner (e.g., the state share of a benefit matching program); (4) fines
or penalties assessed by an agency, such as civil monetary penalties or
Occupational Safety and Health Administration fines for mine safety
violations; (5) delinquent child support; and (6) other amounts of money
or property owed to the federal government, such as license fees.
831 U.S.C. S:S: 3711(g), 3716(c)(6).
Over the years, numerous types of payments have been added to TOP,
including federal payments to contractors for goods and services, federal
retirement payments, federal employee salary payments, Social Security
benefit payments, and federal income tax refunds. Also, since DCIA's
enactment, FMS has been given authority to collect various additional
categories of debt, including federal tax debt from federal payments. The
Taxpayer Relief Act of 1997 authorized IRS to continuously levy up to 15
percent of certain federal payments to both individuals and federal
contractors with unpaid federal tax debt.9 IRS coordinated with FMS to use
TOP as the means to implement this provision of the act, which is referred
to as the Federal Payment Levy Program (FPLP). The FPLP was implemented in
July 2000 and provides an automated process for collecting unpaid federal
taxes from federal payments.
As the various additions to the types of federal payments that can be
levied or offset, as well as the types of federal debt FMS is responsible
for collecting, were authorized by separate federal legislation, FMS has
gradually included them in TOP to facilitate centralized debt management.
According to FMS, the order of preference for the use of levy and offset
proceeds is as follows: unpaid federal taxes, certain types of child
support debt, federal nontax debt, other types of debt, and state income
tax debt in the order in which it was established.
By matching debt in TOP against federal payments, including IRS tax
refunds, Social Security payments, federal salary payments, and federal
contractor payments, FMS collected about $2.9 billion to pay federal and
other debts in fiscal year 2004. As of September 30, 2004, the TOP
database contained about $87 billion in federal tax debts.10 From initial
implementation of the FPLP in July 2000 through September 2004, FMS has
collected a total of $279.6 million from federal payments through the FPLP
to help satisfy federal tax debts.
DCIA also authorized FMS to collect unpaid state debt from federal
payments upon request by the appropriate state disbursing official.11 For
a state to participate, DCIA requires that the state enter into a
reciprocal agreement with Treasury (through FMS) in which the state agrees
to collect unpaid federal debt from state payments if FMS collects unpaid
state debt by offset of federal payments.
The Internal Revenue Service Restructuring and Reform Act of 199812
authorizes, among other things, Treasury to offset up to 100 percent of a
federal tax refund
926 U.S.C. S: 6331(h).
10FMS reported in its fiscal year 2004 report to the Congress that TOP had
$105 billion in federal income tax debt that was available for matching to
identify potential levies. According to an FMS official, the difference is
attributable to the inclusion of rescinded debts in its debt referral
calculation. Rescinded debt is debt that IRS has taken out of active
status in TOP. IRS rescinds debt for a variety of reasons, such as the
debtor having paid the debt in full or the debtor having filed for
bankruptcy protection, which makes the debt ineligible for collection
through the FPLP.
1131 U.S.C. S: 3716 (h).
1226 U.S.C. S: 6402 (e).
payment to collect state income tax debt.13 This provision was also
incorporated into TOP to provide for matching of state tax debt against
federal tax refunds.
Scope and Methodology
To determine the extent of states' participation in FMS's debt collection
programs, including the extent to which FMS and the states have
implemented the authority to enter into reciprocal agreements to collect
state tax debt from federal payments, we
o interviewed FMS officials regarding the extent to which state
disbursing officials have requested that FMS collect state tax debt from
federal payments and the extent to which FMS and the states have entered
into the reciprocal agreements to assist each other in the collection of
debts;
o examined FMS and IRS data on the amount of collections from their levy
and offset programs;
o analyzed the amount of state tax debt owed by federal contractors paid
through FMS that states have referred to FMS's TOP14 database to quantify
the extent of state participation in FMS's debt collection program by
obtaining and analyzing (1) the TOP database containing state tax debt as
of February 2005, (2) FMS's Payments, Claims, and Enhanced Reconciliation
(PACER)15 database containing contractor payments made during fiscal year
2004, and (3) various FMS reports showing the results of its programs to
collect state debt from federal payments; and
o contacted officials of the National Association of State Auditors,
Comptrollers, and Treasurers, the Federation of Tax Administrators, and
debt collection officials of the following 17 states: California,
Connecticut, Georgia, Hawaii, Illinois, Louisiana, Maine, Maryland,
Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, and Virginia. Collectively, for fiscal year
2004, these 17 states received over 75 percent of FMS's collections from
the federal tax refund offset program and generated over 75 percent of the
federal collections from the state income tax levy program.
To gain an understanding of federal government debt collection activities
that could be used to help states collect unpaid taxes, we
o researched federal statutes and consulted with FMS and IRS officials
regarding collaborative debt collection programs, associated regulations
in the U.S. Code of Federal Regulations related to such statutes, and
IRS's Internal Revenue Manual;
13The term "state income tax" is intended to cover all taxes determined
under state laws to be state income tax. The term includes any local
income tax that is administered by the chief tax-administering agency of
the state.
14TOP is a computer matching program established by FMS to help it fulfill
its debt collection responsibilities under DCIA.
15PACER maintains payment data and provides online access to these data to
federal agencies for which FMS makes disbursements.
o reviewed FMS's and IRS's technical specifications for the FPLP, under
which FMS collects unpaid tax debt from its disbursements to federal
contractors; and
o reviewed the applicable section of IRS's Internal Revenue Manual and
interviewed IRS officials responsible for implementing the state income
tax levy program, under which IRS enters into agreements with states for
the states to respond to an IRS levy of state income tax refunds to
collect federal tax debt.
To identify the potential financial benefits to states of participating in
FMS's debt collection programs, we
o compared the tax debt states had referred to TOP with the fiscal year
2004 contractor payments in the PACER database to identify the amount of
state tax debt that TOP had on record that could potentially be collected
by offsets against federal payments to contractors and
o performed additional analysis on the results of our comparison of
state tax debts in TOP with contractor payments in PACER to determine the
maximum potential value available to pay state tax debts if 100 percent of
the payments to contractors with state tax debt in TOP could have been
used to offset such debts.
To determine the level of state participation in and benefits actually
derived from the offset of federal income tax refunds to pay state tax
debts, we obtained and analyzed FMS reports and conducted interviews with
FMS officials.
We requested comments on a draft of this report from the Commissioner of
the Financial Management Service or his designee and the Commissioner of
Internal Revenue or his designee. We received written comments from the
Commissioner of the Financial Management Service, which are reprinted in
enclosure II of this report. IRS provided us a technical comment. We
conducted our work from February 2005 through June 2005 in accordance with
generally accepted government auditing standards.
States and the Federal Government Have Not Taken Full Advantage of Debt
Collection Programs
Federal and state governments have not taken full advantage of debt
collection programs authorized to help collect federal and state taxes.
DCIA authorizes FMS, on behalf of the states, to collect unpaid state debt
from federal payments. This provision allows FMS to collect not just from
federal contractor payments but also from other federal nontax payments,
including federal retirement payments and federal salary payments, to pay
state tax debts. Before a state can participate in this program, DCIA
requires that the state enter into a reciprocal agreement with FMS that
would require the state to collect unpaid federal debt from state payments
if FMS collects unpaid state debt by offset of federal payments.
To date, no state has entered into a reciprocal agreement with FMS to
participate in such a program to collect state debt, including state
income tax debt. According to FMS officials, states have not expressed
interest in executing such agreements.
Similarly, FMS has not researched or pursued reciprocal agreements with
the states to help collect federal debt, which we believe would include
federal tax debt, through offsets of state payments.16 According to FMS
officials, FMS has not developed a pro forma reciprocal agreement or
similar information for states that might want to participate, and FMS has
not taken steps to encourage states to participate in the program.
FMS officials told us that they had not performed analyses, conducted
studies, or consulted with states to identify the potential collections
from or costs to either the federal government or the states of initiating
reciprocal agreements to collect debt on behalf of each other through
offsets of payments to the related debtors. FMS officials said that since
no states had approached FMS concerning participation in such debt
collection activities, FMS had not conducted research to identify the
potential costs and benefits.
However, when we contacted state debt collection officials in 17 states,
they told us that they were not aware of the DCIA reciprocal agreement
provision or the potential for collecting additional state debt through
the offset of federal payments. Each of them also expressed interest in
obtaining more information on potential agreements. The state officials we
spoke with told us that they had not been contacted by FMS regarding this
provision of DCIA. In addition, 16 of the 17 states we contacted are
already offsetting their own state payments to collect state income tax
debt, which indicates that they could also have the capacity to offset
their payments to collect federal debt, including federal tax debt.
Officials of the National Association of State Auditors, Comptrollers, and
Treasurers, as well as the Federation of Tax Administrators, both of which
represent states in monetary matters, told us that they were also not
aware of this provision of DCIA. They said that they thought their members
would be very interested in pursuing such agreements.
Participation with FMS Could Yield Substantial Benefits Both to States and
the Federal Government
Our analysis of state tax debt reported to TOP indicates that states could
have collected a substantial portion of their outstanding state tax debt
owed by federal contractors if they had participated with FMS in debt
collection activities. Our review of contractors paid through FMS
identified over 4,600 federal contractors with unpaid state tax debt
recorded in the TOP database as of February 2005. We found that Treasury
disbursed about $1.8 billion to these contractors in fiscal year 2004 and
that these contractors owed approximately $17 million in state tax debt
recorded in the TOP database. If FMS had offset payments made during
fiscal year 2004 to these contractors to pay state tax debt, states could
have collected over half of this outstanding amount owed. However, because
states do not participate, none of the payments were used to help pay the
contractors' state tax debt.
16Our views concerning FMS's authorization for the reciprocal agreements
to include federal tax debt are included in our response to FMS's comments
on our report.
Reciprocal agreements permitting the collection of unpaid state tax debt
from federal payments could result in even higher collections if states
were to send business income tax debt to TOP. According to FMS officials,
FMS began accepting state business income tax debt in April 2004 only
after a state official inquired whether such debt could be referred to
TOP. Our analysis of the TOP database showed that as of February 2005,
only two states had referred business income tax debt to TOP. Of the
approximately $4.9 billion of state income tax debt recorded in TOP as of
February 2005, less than 1 percent------3.4 million------was business
income tax debt.
To a limited extent, the federal government already takes advantage of its
ability to collect unpaid federal tax debt from certain nontax payments.
FMS collected about $114 million through TOP to pay federal tax debt
during fiscal year 2004. About $21 million of the $114 million in federal
tax collections was levied from federal payments to contractors. However,
our previous work on the levy of payments to contractors showed that
collections from such levies could be much greater. We estimated that as
much as $350 million could have been levied in a single year if all FMS
payments to contractors included in our review could have been levied.17
The potential benefit to the federal government of collecting unpaid
federal debt from state nontax payments is also significant. IRS's
experience with collecting federal tax debt from state income tax refunds,
which is discussed below, indicates that reciprocal agreements between FMS
and the states related to states' nontax payments could be mutually
beneficial.
States and the Federal Government Already Benefit from Tax Refund Offset
and Levy Programs
Both the states and the federal government have benefited from their
participation in the programs to collect taxes from federal and state tax
refunds. The program to use federal income tax refunds to collect state
income tax debt is known as the federal tax refund offset program,18 and
the program to use state income tax refunds to collect federal tax debt is
known as the state income tax levy program. According to IRS officials,
reciprocal agreements are not required for the tax refund offset and levy
programs.
FMS is authorized to collect unpaid state income tax debt through offsets
of federal income tax refunds.19 As figure 1 shows, 37 of the 44 states20
with some form of individual income tax participated in the federal tax
refund offset program. As of February 2005, the 37 participating states
had referred about $4.9 billion in state income tax debt to TOP for
collection, most of which was tax debt owed by
17GAO-05-637.
18In addition to state tax debt, the federal tax refund offset program is
also used to collect other debt such as nontax debt owed to federal
agencies.
1926 U.S.C. S: 6402(e).
20These 44 states include the District of Columbia and 2 states that have
income tax for dividends and interest income only.
individuals. In fiscal years 2003 and 2004, FMS collected over $169
million and over $217 million, respectively, on behalf of various states
through offsets of federal tax refunds to pay state income tax debt. (See
enclosure I for detail.)
Figure 1: State Participation in the Federal Tax Refund Offset Program
Collection of state income tax debt through offsets of federal income tax
refunds is somewhat limited, however, because FMS is permitted to offset a
federal income tax refund to collect a state income tax debt only if the
address of the taxpayer is in the same state where the tax debt recorded
in TOP is owed. That is, for example, FMS could not offset a federal
income tax refund payment to a taxpayer living in Virginia to pay a state
income tax debt owed to the taxpayer's former home state of Maryland. Our
analysis of the TOP database indicated that almost half a billion dollars
of state income tax debt was not eligible for offset in fiscal year 2004
because the address of the debtor in TOP was not in the state for which
there was a recorded state income tax debt.
To help the federal government collect unpaid federal income tax debt, IRS
has entered into agreements with states to levy state income tax refunds
to collect unpaid federal tax debt.21 As of May 2005, IRS had agreements
with 27 states to levy individual state income tax refunds to pay federal
tax debt. IRS collected over
21IRS relies on its levy and distraint authority to conduct the state
income tax levy program. 26 U.S.C. S: 6331.
$77 million for payment of federal tax debt through the levy of state tax
refunds in fiscal year 2004, and it has collected a total of about $270
million since July 2000.
Conclusion
In a time of fiscal constraints for both the federal government and state
governments, every avenue to identify cost-effective ways of collecting
debt should be pursued. Our analysis indicates that a well-administered
program to collect unpaid debt from payments that the federal and state
governments make to their contractors can be a very effective tool for
collecting substantial amounts of both federal and state unpaid debt,
which we believe would include tax debt. Investigating ways to promote
reciprocal agreements between the federal government and states for the
collection of unpaid debts, including tax debts, is consistent with the
intent of DCIA. Additionally, encouraging states to expand their reporting
of business tax debts for collection under the federal tax refund offset
program would further assist states in collecting unpaid taxes from
federal contractors.
Recommendations for Executive Action
We recommend that the Commissioner of the Financial Management Service
take the following actions:
o notify states of the opportunity to enter into reciprocal agreements
with the federal government to collect delinquent debts through offsets of
federal and state payments,
o assess the cost and potential benefits of developing reciprocal
agreements with the states to collect delinquent debts through offsets of
federal and state payments, and
o encourage states to increase their participation in the federal tax
refund offset program by submitting more of their business income tax debt
to TOP.
Agency Comments and Our Evaluation
We received written comments on a draft of this report from the
Commissioner of the Financial Management Service (See enclosure II). We
received informal comments from IRS.
In written comments, FMS agreed to take certain steps, but generally did
not concur with our conclusions and recommendations. FMS stated that the
legislation authorizing reciprocal agreements did not provide it the legal
authority to enter into reciprocal agreements with states to collect
federal tax debt. FMS also stated that it (1) did not believe reciprocal
agreements would be beneficial for either the states or the federal
government and (2) believed it had done an effective job of encouraging
states to send business debts to the offset program to assist the states
in collecting those debts. We disagree with FMS in each of those areas.
First, while FMS did not dispute the availability of reciprocal agreements
allowing it to collect both tax and nontax state debt and for states to
collect federal nontax debt, it stated that we were mistaken to suggest
that DCIA authorizes FMS to enter into
reciprocal agreements with states to collect federal tax debt. As support,
FMS cited statutory provisions that prohibit it from using its offset
authority to collect federal tax debt. Consequently, FMS said it would not
be authorized to enter into agreements with states under which the states
would collect federal tax debts from their own payments and send the
collected amounts to the Treasury.22
While we understand FMS's interpretation of the statutes, it is not the
only reading; and we believe it does not accurately reflect what the
Congress intended. Both DCIA and its legislative history recognize that
Treasury would have broad authority to specify the scope and terms of
reciprocal agreements. The DCIA legislation providing for reciprocal
agreements, 31 U.S.C. S: 3716(h), was enacted after, and with recognition
of, the general prohibition on using FMS's general offset authority to
collect federal tax debts as well as certain Social Security debts and
debts arising from tariff laws.23 However, the legislative history states
that "Congress anticipates that States will offset Federal debts in which
there is no State financial interest or Federal/State cost-sharing (such
as debts owed to the Customs Service.)" Id. (emphasis added). Debts owed
to the Customs Service include debts arising from federal tariff laws.
This statement in the legislative history regarding the use of reciprocal
agreements to collect debts owed to Customs Service was made in light of
and in contrast to the preexisting provision restricting FMS from using
its general offset authority to collect debts arising from tariff laws.24
In contrast to FMS's interpretation, one can reasonably conclude that if
Congress intended Treasury to use reciprocal agreements to collect federal
tariff law debts, which are explicitly excluded from offset by the
preexisting provision cited by FMS, then Congress also intended that other
debts excluded by that provision, such as federal tax debts, would also be
authorized to be collected through reciprocal agreements. Second, FMS's
interpretation that its authority to offset federal payments is not
applicable to federal taxes does not consider that the receipt of a tax
debt collected by a state and sent to Treasury would not constitute an
offset made by FMS.
To address FMS's concerns regarding its authority to collect tax debts, we
have augmented our report to indicate that the reciprocal agreements would
cover the collection of federal debt, which we continue to believe would
include federal tax debt. However, if FMS believes it lacks statutory
authority to enter into reciprocal agreements to collect federal tax debt,
it should seek legislative clarification or correction. Further, nothing
in FMS's interpretation would preclude the use of reciprocal agreements
that call for states to assist Treasury in collecting on federal tax debt
short of making actual collections, such as states identifying to FMS any
22Specifically, FMS stated that 31 U.S.C. S: 3701(d)(1) renders
inapplicable the offset authority of 31 U.S.C. S: 3716 for collection of
federal tax debts. Therefore, in its view, FMS could not enter into
reciprocal agreements under section 3716(h) that would call for states to
withhold amounts from their payees on the behalf of the federal government
to collect federal tax debts.
23See 142 Cong. Rec. 9127 (Apr. 25, 1996). Such authority would be
implemented within Treasury by FMS.
2431 U.S.C. S: 3107(d).
state payees' assets, such as payments the state is going to make, that
could be levied, which FMS could then pass along to IRS to use in its own
collection activities.
Second, although FMS agreed with our recommendation to inform states of
the opportunity to enter into reciprocal agreements, FMS indicated it did
not believe reciprocal agreements would be beneficial to the states, and
stated that our report did not take into account operational and legal
complexities associated with collecting debt on behalf of the federal
government. At this juncture, it would seem that no real basis exists for
questioning the merits of entering into reciprocal agreements since
neither FMS nor the states have analyzed the potential costs or benefits
of these reciprocal agreements to determine whether they would be mutually
beneficial despite the fact that such agreements have been a potentially
viable collection tool since 1996. This is the whole point behind our
recommendation that FMS assess the cost and potential benefits of such
reciprocal agreements.
We agree with FMS that states need to carefully consider the net benefits
of entering into such agreements, but FMS's response downplays the
significant collections that states could receive if FMS were to take
action to negotiate reciprocal agreements. As our report indicates,
thousands of federal contractors could have payments offset to help
collect state tax debt, and over half of all debt states had submitted to
FMS for collection in fiscal year 2004 potentially could be paid in a
single year through such offsets. Sixteen of the 17 states we contacted
during our audit were already offsetting state nontax payments, including
contractor payments, to collect their own state taxes and expressed
interest in doing so for the federal government. While FMS stated that it
will "assist states in assessing the costs and potential benefits of such
agreements," in our view, FMS's response falls short of taking an active
role in identifying and analyzing available new sources of federal debt
collection. We believe FMS needs to take a proactive approach to its debt
collection responsibilities.
Finally, with respect to encouraging states to increase their
participation in the federal tax refund offset program, FMS indicated that
it had done a sufficient job of informing states. We disagree. Although
FMS's response pointed out actions it took in early 2004 to inform states
that it was accepting business tax debts, only two states had referred
business income tax debts to the offset program as of the time of our
audit. At least 6 of the 17 states we contacted said they were unaware
that states were allowed to send business tax debt to the levy program. As
a result, we reiterate our recommendation for FMS to inform states that
the program will accept business tax debts.
In its response to our draft report, IRS said that agency officials would
discuss our recommendations with the Federal Contractor Tax Compliance
Task Force-a multiagency task force established to address issues raised
by our February 12, 2004, report and testimony on DOD contractors with tax
debt. IRS also suggested one technical correction in the report, which we
have made.
As agreed with your office, unless you publicly release its contents
earlier we plan no further distribution of this report until 30 days from
the date of this letter. At that time, we will send copies of this report
to the Chairman of the Subcommittee on Government Efficiency and Financial
Management, House Committee on Government Reform, as well as to other
congressional committees. We are also sending copies to the Secretary of
the Treasury, the Commissioner of the Financial Management Service, the
Commissioner of Internal Revenue, state governors, and the Mayor of the
District of Columbia. The report is also available at no charge on the GAO
Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact either
Gregory D. Kutz at (202) 512-9095 or [email protected] or Steven J. Sebastian
at (202) 512-3406 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Major contributors to this report were Ray Bush, Bill
Cordrey, Paul Foderaro, Jason Kelly, John Kelly, Rich Larsen, John Ryan,
Richard Riskie, Esther Tepper, Quan Thai, and Matthew Valenta.
Gregory D. Kutz
Managing Director
Forensic Audits and Special Investigations
Steven J. Sebastian
Director
Financial Management and Assurance
Enclosures - 2
List of Requesters
The Honorable Susan M. Collins
Chairman
The Honorable Joseph I. Lieberman
Ranking Minority Member
Committee on Homeland Security
and Governmental Affairs
United States Senate
The Honorable Norm Coleman
Chairman
The Honorable Carl Levin
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Homeland Security
and Governmental Affairs
United States Senate
The Honorable Daniel K. Akaka
Ranking Minority Member
Subcommittee on Oversight of Government Management,
the Federal Workforce, and the District of Columbia Committee on Homeland
Security and Governmental Affairs United States Senate
Enclosure I
Collections from Federal Tax Refund Offsets to Help Pay State Tax Debt
Page 15
GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt
States
Fiscal year
2003 net District New New North Rhode South
collections Alabama Arizona Arkansas California 0 Colorado of Delaware Hawaii Idaho 0 Illinois Indiana Iowa Kansas Louisiana Maine Massachusetts Minnesota Missouri Nebraska 0 Mexico 0 York Carolina Ohio Oklahoma Island Carolina Utah 0 Vermont Wisconsin Total
Fiscal year Columbia
2004 net New West
collections $4,231,739 3,767,952 1,862,453 1,426,054 117,731 156,674 1,285,212 60,747 31,762 1,146,384 2,756,352 1,636,938 1,976,756 Georgia 6,929,767 31,956,602 6,914 228,736 864,944 8,259,464 8,137,602 6,436,163 4,973,739 1,522,628 1,433,055 2,570,906 2,470,630 Kentucky 4,081,414 5,631,173 22,388,849 32,473,126 1,681,658 1,233,182 Maryland 20,421,354 21,954,110 1,672,558 2,264,932 3,636,347 4,231,983 12,983,801 11,766,741 275,879 Jersey 4,011,862 3,827,253 2,365,235 26,696,396 26,713,051 5,344,976 5,657,035 9,215,298 3,465,182 3,544,721 5,329,897 Oregon 2,432,217 3,166,835 Pennsylvania 6,264,968 6,860,565 1,105,879 1,159,501 2,211,802 1,262,470 1,252,681 1,477,495 Virginia 8,161,039 177,824 121,351 3,669,275 3,911,745 Virginia 1,703,362 2,584,159 $169,279,076 $217,360,009
Source: Department of the Treasury, Financial Management Service.
Enclosure II Comments from the Financial Management Service
Enclosure II
(192157)
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