GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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 

 

1

GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little 

Consequence, GAO-04-95 (Washington, D.C.: Feb. 12, 2004). 

2

GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little 

Consequence, GAO-04-414T (Washington, D.C.: Feb. 12, 2004). 

3

For 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. 
Page 2 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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 

 

5

At 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). 

6

Debt 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. 
Page 3 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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. 

 

7

FMS’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. 

8

31 U.S.C. §§ 3711(g), 3716(c)(6). 
Page 4 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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 

 

9

26 U.S.C. § 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. § 3716 (h). 

1226 U.S.C. § 6402 (e). 
Page 5 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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 

• 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; 

• examined FMS and IRS data on the amount of collections from their levy and 

offset programs; 

• 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 

• 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 

• 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. 
Page 6 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

• 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 

• 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 

• 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 

• 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. 
Page 7 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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. 
Page 8 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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. § 6402(e). 

20These 44 states include the District of Columbia and 2 states that have income tax for dividends and 

interest income only. 
Page 9 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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. § 6331. 
Page 10 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

$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: 

• 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, 

• 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 

• 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 
Page 11 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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. § 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. § 3701(d)(1) renders inapplicable the offset authority of 31 

U.S.C. § 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. § 3107(d). 
Page 12 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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. 

- - - - - 
Page 13 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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 kutzg@gao.gov or Steven J. Sebastian at (202) 512-3406 or 

sebastians@gao.gov. 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
Page 14 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

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 
Page 15 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

Enclosure I 

Collections from Federal Tax Refund Offsets 

to Help Pay State Tax Debt 

States 

Fiscal year 2003 

net collections

Fiscal year 2004 

net collections 

Alabama $4,231,739 3,767,952 

Arizona 1,862,453 1,426,054 

Arkansas 117,731 156,674 

California 0 1,285,212 

Colorado 60,747 31,762 

District of Columbia 1,146,384 2,756,352 

Delaware 1,636,938 1,976,756 

Georgia 6,929,767 31,956,602 

Hawaii 6,914 228,736 

Idaho 0 864,944 

Illinois 8,259,464 8,137,602 

Indiana 6,436,163 4,973,739 

Iowa 1,522,628 1,433,055 

Kansas 2,570,906 2,470,630 

Kentucky 4,081,414 5,631,173 

Louisiana 22,388,849 32,473,126 

Maine 1,681,658 1,233,182 

Maryland 20,421,354 21,954,110 

Massachusetts 1,672,558 2,264,932 

Minnesota 3,636,347 4,231,983 

Missouri 12,983,801 11,766,741 

Nebraska 0 275,879 

New Jersey 4,011,862 3,827,253 

New Mexico 0 2,365,235 

New York 26,696,396 26,713,051 

North Carolina 5,344,976 5,657,035 

Ohio 9,215,298 3,465,182 

Oklahoma 3,544,721 5,329,897 

Oregon 2,432,217 3,166,835 

Pennsylvania 6,264,968 6,860,565 

Rhode Island 1,105,879 1,159,501 

South Carolina 2,211,802 1,262,470 

Utah 1,252,681 1,477,495 

Virginia 0 8,161,039 

Vermont 177,824 121,351 

Wisconsin 3,669,275 3,911,745 

West Virginia 1,703,362 2,584,159 

Total $169,279,076 $217,360,009 

Source: Department of the Treasury, Financial Management Service. 
Page 16 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

Enclosure II 

Comments from the Financial Management Service 
Page 17 GAO-05-697R Reciprocal Agreements for Collecting Unpaid Debt

Enclosure II 

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