Report to Congressional Requesters

United States General Accounting Office

GAO

July 2001 TAX

ADMINISTRATION

Millions of Dollars

Could Be Collected If

IRS Levied More

Federal Payments

GAO-01-711
Page i GAO-01-711 Increasing Use of Federal Tax Levies

Letter 1

Results in Brief 3

Background 5

IRS Could Recover at Least $270 Million Annually From Delinquent

Taxpayers Receiving USPS, DOD, and CMS Payments 6

Some Payments Could Be Included in the Continuous Levy

Program Sooner Than Others 10

IRS Could Use Its General Levy Authority for USPS, DOD, and CMS

Vendor Payments Until They Are Available to the Continuous

Levy Program 15

Conclusions 16

Recommendations for Executive Action 17

Agency Comments and Our Evaluation 18

Appendix I Objectives, Scope, and Methodology 21

Appendix II Comments From the Internal Revenue Service 23

Appendix III Comments From the Financial Management Service 27

Appendix IV Comments From the Department of Defense 30

Appendix V GAO Contacts and Staff Acknowledgments 31

Table

Table 1: Potential Taxpayers Affected and Potential Annual Tax

Recoveries 8

Contents
Page ii GAO-01-711 Increasing Use of Federal Tax Levies

Abbreviations

CMS Centers for Medicare & Medicaid Services

DFAS Defense Finance and Accounting Service

DOD Department of Defense

FMS Financial Management Service

IRS Internal Revenue Service

TIN taxpayer identification number

USPS United States Postal Service
Page 1 GAO-01-711 Increasing Use of Federal Tax Levies

July 20, 2001

The Honorable William M. Thomas

Chairman, Committee on Ways and Means

House of Representatives

The Honorable Amo Houghton

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Federal agencies pay billions of dollars each year to thousands of

taxpayers that owe delinquent federal taxes. The Department of the

Treasury’s Financial Management Service (FMS) makes payments on

behalf of most agencies. However, more than $900 billion in payments are

disbursed directly by other federal agencies each year.1

 These payments

are not currently subject to a tax levy2

 through the continuous federal tax

levy program, which the Internal Revenue Service (IRS) operates in

conjunction with FMS.3

Authorized under the Taxpayer Relief Act of 19974 the continuous levy

program enables IRS to continuously levy up to 15 percent of certain

federal payments made to delinquent taxpayers.5

 The program provides

IRS with an automated process for serving tax levies and collecting

delinquent taxes through FMS, which matches federal payment data

against IRS’ accounts receivable data in order to identify payments that

IRS could levy. For payments disbursed by FMS, the amount to be levied

 1

Non-FMS disbursements are estimated based on our analysis of FMS financial information

and represent unaudited data.

2

A levy under Internal Revenue Code section 6331 is the legal process by which IRS orders

a third party to turn over property in its possession that belongs to the delinquent taxpayer

named in a notice of levy. Generally, a levy applies only to property possessed and

obligations existing at the time of the levy. However, a continuous levy remains in effect

from the date the levy is first made until the tax debt is fully paid or IRS releases the levy.

3

In this report, we will refer to this program as the continuous levy program. IRS does levy

some of the payments made by other federal agencies using its general levy authority under

Internal Revenue Code section 6331.

4

P.L. 105-34.

5

See Internal Revenue Code section 6331(h).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-711 Increasing Use of Federal Tax Levies

and credited to IRS is deducted before FMS disburses the payment. For

payments disbursed directly by other federal agencies, FMS would have to

notify the respective payment agency to deduct the amount to be levied

and credited to IRS before the agency disbursed the payment.

Over half of all non-FMS disbursed federal payments are made by the

United States Postal Service (USPS); the Department of Defense (DOD);

and the Centers for Medicare & Medicaid Services (CMS),6 which

disburses Medicare fee-for-service payments.7

 These particular payments

constitute a large portion of non-FMS disbursed payments, and thus, you

requested that we (1) determine the number of delinquent taxpayers

receiving federal payments from USPS, DOD, and CMS that would be

affected and the amount of tax debt that might be recovered if they were

to be included in the continuous levy program; (2) determine whether

these types of payments could be included in the continuous levy program

and the timeframes for doing so; and (3) identify other actions that could

be taken to enhance IRS’ ability to levy federal payments to delinquent

individuals and businesses that are not currently included in the

continuous levy program.

To meet our objectives, we obtained and matched payments made by the

three agencies to IRS’ accounts receivable records; discussed whether and

when these types of payments could be included in IRS’ continuous levy

program with IRS and FMS officials, as well as with officials from the

three agencies and Medicare contractors; and discussed the general levy

procedures with IRS officials and reviewed the related tax law governing

these procedures. Our estimates of the tax debt that might be recovered

are understated because Medicare contractors did not provide us with

data on over 50 percent of the Medicare vendor payments made for the

time period we reviewed. In addition, we were unable to match about $3.4

billion in DOD vendor payments against IRS’ accounts receivable data

because the payment records did not contain a taxpayer identification

 6

In June 2001, the Health Care Financing Administration was renamed the Centers for

Medicare and Medicaid Services.

7

Fee-for-service payments are made to individuals and businesses, such as doctors,

hospitals, and nursing homes that provide health care services to Medicare beneficiaries. In

this report, we will refer to these payments as vendor payments.
Page 3 GAO-01-711 Increasing Use of Federal Tax Levies

number (TIN).8 Our work was done between June 2000 and May 2001 in

accordance with generally accepted government auditing standards. (App.

I describes our overall objectives, scope, and methodology.)

About 70,400 individuals and businesses that received about $1.9 billion in

federal payments collectively from USPS, DOD, and CMS owed over $1

billion in federal taxes as of June 30, 2000. We estimate that IRS could

recover at least $270 million annually in delinquent federal taxes if these

payments were included in the continuous levy program. However, the

amount of delinquent taxes recovered annually through this program

could be somewhat lower because some taxpayers might make other

arrangements with IRS to resolve their tax debts. We further estimate that

an additional $16 million could be recovered annually if IRS were to

provide FMS with the different names vendors have used for tax purposes,

such as prior business names, so that FMS could include them in the

continuous levy program.

Whether federal payments made by USPS, DOD, and CMS could be

included in the continuous levy program and, if so, when varied by agency

and type of payment. FMS plans to receive and include USPS and DOD

salary and wage payments, as well as military retirement payments, in the

Treasury Offset Program within the next 3 years, thus making them

available for continuous levy and enabling IRS to begin collecting about

half of the $270 million in potential annual tax recoveries mentioned

earlier. Vendor payments could also be included in the continuous levy

program, with the full range of USPS payments possibly included in less

than a year; DOD payments possibly included within about 3 years; and

CMS payments possibly included within about 5 years. However, with the

exception of some DOD vendor payments, officials from FMS, IRS, and the

three agencies have not discussed when and how all of these agencies’

vendor payments could be included in the continuous levy program and

whether practical options exist to include some portion of the vendor

payments in the program before all such payments are available.

Although billions of dollars in vendor payments disbursed by USPS, DOD,

and CMS are not scheduled to be included in the continuous levy program

 8

A TIN is a unique nine-digit identifier assigned to each individual and business that files

tax returns. For individuals, the social security number assigned by the Social Security

Administration serves as the TIN. For businesses, the employer identification number

assigned by IRS serves as the TIN.

Results in Brief
Page 4 GAO-01-711 Increasing Use of Federal Tax Levies

at this time, IRS does have general authority under the tax law to levy such

payments by issuing a levy notice directly to the agency responsible for the

payments. However, IRS does not have current information concerning

these agencies’ vendors, which IRS needs to identify levy sources, even

though the agencies could provide IRS with such information.

To aid FMS in identifying vendor payments currently included in the

continuous levy program made to vendors that owe federal taxes, as well

as any future vendor payments that may be included in this program, we

are recommending that IRS provide FMS with a file of the different names

used by these vendors for tax purposes. Since it is likely to be years before

the full range of USPS, DOD, and CMS vendor payments could practically

be included in the continuous levy program, we are also recommending

that IRS and FMS initiate discussions with the three payment agencies on

a timetable for including all such payments in the program and on options

for accelerating some portion of these agencies’ payments. Finally, as an

interim measure for enhancing IRS’ ability to levy vendor payments

directly through those agencies using its general levy authority, we are

recommending that IRS work individually with DOD and CMS on ways for

them to periodically provide IRS with current vendor information, thus

enabling IRS to identify potential levy sources.

We obtained written comments on a draft of this report from the

Commissioner of Internal Revenue (see app. II) and the Commissioner of

the Financial Management Service (see app. III), which are discussed at

the end of this report. The Commissioner of Internal Revenue generally

agreed with our recommendations. The Commissioner of the Financial

Management Service disagreed with our recommendation that FMS take

the lead in initiating discussions with other agencies in an effort to include

federal vendor payments in the continuous levy program, and we have

revised the recommendation to reflect that IRS and FMS should jointly

initiate such discussions.

We also received written comments from the Deputy Chief Financial

Officer, Office of the Under Secretary of Defense (see app. IV), and oral

comments from a representative of the United States Postal Service, in

which they generally agreed with our recommendations. In addition, we

received technical comments from the Acting Deputy Administrator of the

Centers for Medicare & Medicaid Services, in which he stressed that CMS

vendor payments could not be included in the continuous levy program

until a new CMS integrated accounting system is completed.
Page 5 GAO-01-711 Increasing Use of Federal Tax Levies

FMS receives payment records from and makes payments on behalf of

most federal agencies. However, a number of federal agencies have their

own disbursing authority. For example, USPS paid about $42 billion in

salary and benefits to almost 800,000 career employees in calendar year

1999, and entered into more than 47,000 contracts with vendors in

calendar year 1998, totaling almost $8 billion. DOD disbursed over $295

billion in fiscal year 2000, including about $150 billion in contractor and

vendor payments and about $100 billion in salary and retirement

payments. In addition, Medicare contractors processed over 900 million

fee-for-service claims during fiscal year 2000, totaling nearly $175 billion.

In addition to disbursing payments for various federal agencies, FMS

provides centralized debt collection services for most federal agencies. To

aid in federal debt collection, FMS has in place the Treasury Offset

Program, which uses a centralized database of delinquent debts that have

been referred for offset against federal payments. This database includes

federal nontax debts and federal tax debts, as well as state tax debts and

child support debts. FMS currently matches federal tax refunds, federal

retirement and vendor payments, and certain federal salary and social

security benefit payments against its database of delinquent debts, and

when a match of both TIN and name control9

 occurs, FMS offsets the

payment, thereby reducing or eliminating the debt. FMS plans to include

some non-FMS disbursed federal salary payments in the Treasury Offset

Program in the latter half of 2001.

A provision included in the Taxpayer Relief Act of 1997 enhanced IRS’

ability to collect delinquent federal tax debt by authorizing IRS to

continuously levy up to 15 percent of certain federal payments made to

delinquent taxpayers. FMS modified the Treasury Offset Program to

enable IRS to electronically serve a tax levy to FMS once IRS has notified

the delinquent taxpayer of the pending levy. In July 2000, IRS began adding

tax debts to FMS’ database of delinquent federal debts, thus initiating the

continuous levy program. For this program, FMS compares federal payee

information from agency payment records with IRS’ accounts receivable

records. When a match of both the TIN and name control occur, FMS

informs IRS of the match and IRS then notifies the taxpayer of the pending

 9

The name control is the first four characters of an individual’s last name or the first four

characters of a business name.

Background
Page 6 GAO-01-711 Increasing Use of Federal Tax Levies

tax levy.10 If the taxpayer fails to make an effort to satisfy the tax debt

within 30 days,11 such as by payment in full or entering into an installment

agreement, IRS will then instruct FMS to begin levying 15 percent of

subsequent payments made to the taxpayer or the exact amount of tax

owed if it is less than 15 percent of the next payment. For payments

disbursed on behalf of other agencies, FMS deducts the amount to be

levied before making the payment, and the levied amount is then credited

to IRS.12 In an April 2000 report, we estimated that IRS could potentially

collect as much as $478 million annually through this program.13

Based on matching federal payments made by the agencies to IRS’

accounts receivable data, we estimate that including payments disbursed

by USPS, DOD, and CMS in the continuous levy program could result in

recovering at least $270 million annually from about 70,000 delinquent

taxpayers. An additional $16 million in delinquent taxes could be

recovered annually from about 656 vendors if IRS were to provide FMS

with the different names these vendors have used for tax purposes when

FMS matches vendor payment data against IRS’ accounts receivable data.

Our analysis of IRS’ accounts receivable data as of June 30, 2000, showed

that about 70,400 taxpayers received about $1.9 billion in payments--about

$8.2 billion on a annualized basis--from either USPS, DOD, or CMS, and the

TIN and name on their payment records exactly matched the TIN and

name on IRS’ accounts receivable records. These taxpayers owed over $1

billion in delinquent taxes at the time they received these payments and

 10According to IRS, if a taxpayer had already received notification of a pending tax levy

before the FMS match process, IRS would then immediately serve the levy to FMS, and an

additional notice would not be sent.

11For social security payments, a second notification letter is sent to taxpayers, and they

will receive an additional 30 days before a levy is imposed.

12When levying payments disbursed directly by other federal agencies, such as USPS and

DOD, FMS plans to identify the amount to be levied and to then notify the respective

payment agency to deduct this amount from the payment before it is made to the payee.

13See Tax Administration: IRS’ Levy of Federal Payments Could Generate Millions of

Dollars (GAO/GGD-00-65, Apr. 7, 2000).

IRS Could Recover at

Least $270 Million

Annually From

Delinquent Taxpayers

Receiving USPS,

DOD, and CMS

Payments

The Number of Taxpayers

Affected and Delinquent

Taxes Recovered Annually

Could Be Substantial
Page 7 GAO-01-711 Increasing Use of Federal Tax Levies

met IRS’ criteria to be included in the continuous levy program.14 As shown

in table 1, we estimate that IRS could recover as much as $277.5 million

annually if these payments were included in the continuous levy program.

Almost half of the $277.5 million in delinquent taxes that could be

recovered would come from vendor payments. The rest would come from

wage and salary payments to employees and retirement payments.

The amount of delinquent taxes recovered annually could be somewhat

lower because some taxpayers might make other arrangements with IRS

to resolve their tax debts once they receive a notice of levy. For example,

in an effort to avoid a pending tax levy, some taxpayers might contact IRS

to arrange to pay their delinquent tax in full or through entering into an

installment agreement or submitting an offer-in-compromise.15 However,

such actions on the part of the taxpayer in response to the levy notice

would be an added benefit of the program.

 14To meet the program criteria, a tax delinquent account must include a valid TIN and must

not be in one of several exclusion categories, such as under criminal investigation,

bankruptcy, litigation, or a pending installment agreement, or classified as currently not

collectible due to hardship.

15An offer-in-compromise is a taxpayer proposal to settle a tax debt for less than the

amount owed.
Page 8 GAO-01-711 Increasing Use of Federal Tax Levies

Table 1: Potential Taxpayers Affected and Potential Annual Tax Recoveries

Dollars in Millions

Type of payment

Potential

taxpayers affected

Delinquent

tax liability

Potential annual

federal paymentsa

Potential annual

tax recoveriesb

USPS wages & salary 10,039 $100.1 $228.8 $33.8

USPS vendor pay 417 18.3 263.6 4.3

 USPS total 10,456 $118.4 $492.4 $38.1

DOD military active duty pay 7,951 $28.4 $192.0 $28.0

DOD civilian pay 6,758 75.0 166.4 24.6

DOD military retirement 28,209 405.2 374.4 55.7

DOD military reserve pay 12,114 81.5 27.6 4.1

DOD vendor pay 1,445 142.2 4,206.0 49.2

 DOD total 56,477 $732.3 $4,966.4 $161.6

CMS vendor pay 3,504 $172.6 $2,734.8 $77.8

 CMS total 3,504 $172.6 $2,734.8 $77.8

Overall total 70,437 $1,023.3 $8,193.6 $277.5

a

Vendor payments were for the third quarter of fiscal year 2000; USPS wage and salary payments

and DOD civilian payments were for one biweekly pay period in June 2000; and DOD military active

duty, retirement, and reserve payments were for the month of June 2000. These payments totaled

$1,865.8 million. To annualize the potential federal payments we multiplied vendor payments by 4;

USPS wage and salary payments and DOD civilian payments by 26; and DOD military active duty,

retirement, and reserve payments by 12.

b

To determine the amount that could be levied for each payment, we calculated either 15 percent of

the payment amount or the actual amount of tax owed if it was less than 15 percent of the payment.

To annualize the potential tax recoveries, we multiplied the amount of levied vendor payments by 4;

the amount of levied USPS wage and salary payments and DOD civilian payments by 26; and the

amount of levied DOD military active duty, retirement, and reserve payments by 12. The potential

annual tax recoveries could vary depending on the extent to which the number of tax delinquent

accounts that meet the program criteria either increase or decrease each year.

Source: GAO analysis of agency payment records and IRS’ accounts receivable records.

Although the amount of delinquent taxes recovered could be somewhat

lower, as noted earlier, our estimates of the amount of delinquent taxes

that might be recovered are understated because we did not receive data

for over 50 percent of the Medicare vendor payments made for the time

period we reviewed. In addition, we were unable to match about $3.4

billion in DOD vendor payments against IRS’ accounts receivable data

because DOD’s payment records did not contain a TIN. According to DOD

officials, DOD has recently increased its emphasis on requiring vendors to

provide a TIN when registering to do business with DOD.
Page 9 GAO-01-711 Increasing Use of Federal Tax Levies

Under procedures for vendor payments that are paid by FMS and currently

subject to continuous levy, IRS’ file of accounts receivable data provided

to FMS includes only the most recent name a vendor has used for tax

purposes. As a result, FMS’ ability to exactly match the vendor name on

payment records against IRS’ tax debts is limited.

IRS already makes additional names for individual taxpayers included in

its databases available to FMS for use in the existing continuous levy

program. For example, if taxpayers change their name when they marry,

the name used as a single person would be sent to FMS along with their

married name. This is not the case for businesses. For vendor payments

currently paid by FMS and thus included in the continuous levy program, if

a business were to change its name on its federal tax return, IRS would

provide FMS with the most current name in its records, but not the prior

name.

When making our overall estimates of delinquent taxes that could be

recovered if USPS, DOD, and CMS Medicare vendor payments were

included in the continuous levy program, we determined the amount of

additional revenue that could be raised if IRS changed its policy and

provided FMS with all of the names it has for vendors. In addition to the

70,400 taxpayers whose TIN and name on the payment records exactly

matched the TIN and name on IRS’ accounts receivable records, we found

1,228 instances in which the TIN on the vendor payment records exactly

matched the TIN on IRS’ accounts receivable records, but the name on the

payment records did not exactly match the name on IRS’ records. For 656

of the 1,228 vendors, we found different names used by these vendors in

an IRS database that showed they were in fact the delinquent taxpayers.

There were no additional names in the IRS database for the remaining 572

vendors. The 656 taxpayers for which there were additional names owed

about $26 million in delinquent taxes. We estimate that IRS could recover

about $16 million annually if the different names it has for vendors were

provided to FMS for the continuous levy program.

If IRS were to provide FMS with the different names it has for business

taxpayers, this would benefit the current continuous levy program by

increasing the instances in which FMS could match the name in both

records, as required before a levy can be made.16 IRS officials agreed and

 16In our April 2000 report (GAO/GGD-00-65), we identified over 32,000 mismatches on

taxpayers’ names that we estimated could result in an additional $74 million annually if

such mismatches were corrected.

Additional Delinquent

Taxes Could Be Collected

If FMS Had the Different

Names Used by Vendors

for Tax Purposes
Page 10 GAO-01-711 Increasing Use of Federal Tax Levies

indicated that providing such a file of additional business names to FMS

could be done and would be well worth the effort. FMS officials indicated

they were in favor of receiving additional business names for use in the

continuous levy program.

Whether federal payments made by USPS, DOD, and CMS could be

included in the continuous levy program and, if so, when varied by agency

and type of payment. FMS plans to receive and include USPS and DOD

salary and wage payments, as well as military retirement payments, in the

Treasury Offset Program within the next 3 years, thus making them

available for continuous levy and enabling IRS to begin collecting about

half of the $277.5 million in potential annual tax recoveries mentioned

earlier. Vendor payments could also be included in the continuous levy

program, with the full range of USPS payments possibly included in less

than a year, DOD payments possibly included within 3 years, and CMS

payments possibly included within about 5 years. However, with the

exception of some DOD vendor payments, officials from FMS, IRS, and the

three agencies have not discussed when and how all of these agencies’

vendor payments could be included in the continuous levy program and

whether practical options exist to include some portion of the vendor

payments in the program before all such payments are available.

FMS officials stated that their discussions with USPS have focused on

including salary payments in the Treasury Offset Program rather than

vendor payments. USPS plans to provide employee salary payments to

FMS for inclusion in the Treasury Offset Program, and FMS is working

with USPS to develop a specific implementation date. According to FMS

officials, once USPS salary payments are available for the Treasury Offset

program, they could be included in the continuous levy program about a

month later.

USPS officials stated that, although they have not had any recent

discussions with FMS about including vendor payments in the Treasury

Offset Program, they do not believe any obstacles would prevent making

vendor payments available to FMS, since all USPS vendor payments are

disbursed from one payment center. Officials indicated that within about 4

months of FMS’ requesting them to do so, they could likely be ready to

provide vendor payments to FMS and to levy payments for which FMS

indicates a match with IRS’ accounts receivable data. USPS officials did

say that levying vendor payments could present some challenges. For

example, USPS vendor payments generally are not made on a particular

Some Payments

Could Be Included in

the Continuous Levy

Program Sooner Than

Others

USPS Payments Could Be

Included in the Continuous

Levy Program Relatively

Soon
Page 11 GAO-01-711 Increasing Use of Federal Tax Levies

schedule, but rather, are controlled by terms specified in individual

contracts. As a result, unlike biweekly salary payments, USPS disburses

vendor payments daily throughout the business week. Therefore, vendor

data exchanges between USPS and FMS would likely have to occur with

greater frequency than salary data exchanges. However, USPS officials

stated that the Prompt Payment Act requires that vendor payments be

deferred until the pay cycle immediately preceding the payment due date.

This should provide an adequate interval to offset such payments,

particularly if the vendor data exchanges with FMS were to occur either

weekly or biweekly.

USPS officials also stated that USPS does not currently offset vendor

payments to recover debts owed to USPS,17 and therefore, specific offset

procedures would have to be developed. However, these officials were

confident that they could modify the USPS system to enable them to flag

any vendor payments requiring offset identified through the Treasury

Offset Program. They further stated that such an offset would require

manual intervention to make the offset and reconcile the vendor’s

account.

Although USPS officials said that they could make vendor payments

available to FMS within about 4 months of FMS’ requesting such data,

USPS and FMS officials have not discussed specific arrangements for

doing so, such as when FMS could be ready to receive USPS vendor

payment data or how long it might take USPS to develop procedures for

performing such offsets.

FMS is working with DOD to include civilian, military retirement, and

military active duty payments in the Treasury Offset Program, thus

eventually making these types of payments available for the continuous

levy program. According to DOD officials, the approximate timeframes

that have been established for providing DOD payments to FMS are as

follows:

• DOD civilian salary payments in the latter part of 2001,

• DOD military retirement payments in 2002, and

• DOD military active duty payments in 2003.

 17USPS establishes an accounts receivable file and bills its vendors to recover debts, such

as overpayments.

DOD Salary, Retirement,

and Some Vendor

Payments Could Be

Included in the Continuous

Levy Program Within 3

Years
Page 12 GAO-01-711 Increasing Use of Federal Tax Levies

DOD has also initiated preliminary discussions with FMS about providing

some vendor payments to FMS. These payments are all made from one

payment system maintained at one DOD Defense Finance and Accounting

Service (DFAS) location and accounted for about 48 percent of all DOD

vendor payments made in fiscal year 2000. However, DOD officials have

not specifically discussed providing other vendor payments to FMS in the

near future, and they have concerns regarding the current capability to

make other vendor payments available for the continuous levy program

because of DOD’s decentralized vendor payment systems. For example,

vendors providing goods and services to three of the military branches–

Army, Air Force, and Navy18–are paid from separate vendor payment

systems maintained at various DFAS locations. In addition, there are

separate vendor payment systems for processing certain specialty items,

such as fuels and commissary resale products. DOD officials stated that

DFAS staff do not currently have the capability to track multiple payments

made from the various vendor payment systems to a particular vendor. As

a result, if they were to provide vendor payments to FMS from these

decentralized payment systems, DOD officials were concerned that there

would be a risk of offsetting more in payments than a vendor might owe in

delinquent taxes.

Although DOD officials expressed concerns about offsetting more in

payments than a vendor might owe in delinquent taxes, IRS officials

indicated there are controls in the continuous levy program to prevent

such overpayments. For example, IRS provides FMS with a weekly file

updating the balance due for each account subject to continuous levy. In

addition, FMS has the capability to update the balance due for each

account after each payment is levied, thus enabling FMS to identify when a

tax debt has been reduced to zero. In addition, selected staff in each IRS

office are authorized to directly access FMS’ levy database to rescind a

levy if necessary, such as for taxpayers subject to a continuous levy that

decide to either fully pay the tax debt or enter into an installment

agreement. FMS and IRS officials have not discussed these controls with

DOD to determine whether they would mitigate DOD’s overpayment

concerns and pave the way for other types of vendor payments to be

provided to FMS for the continuous levy program, in addition to those

vendor payments currently under consideration.

 18Marine Corps vendor payments are made from the same payment system from which

Army vendor payments are made.
Page 13 GAO-01-711 Increasing Use of Federal Tax Levies

DOD is currently developing a centralized vendor payment system that

could increase its capability to eventually provide all vendor payments to

FMS. According to DOD officials, the multiple vendor payment systems

currently in use are to be replaced by a single system known as the

Defense Procurement Payment System. The latest DOD estimate indicates

that the initial phase for implementing the new system will begin in the

latter part of fiscal year 2001. DOD officials estimate that the new system

may be fully operational by the latter part of fiscal year 2003 or the early

part of fiscal year 2004. However, they indicated that this is a “best-case”

scenario.19

FMS and CMS have not held any discussions related to including Medicare

vendor payments in the continuous levy program. CMS and Medicare

contractors we spoke with agreed that including all Medicare payments in

the continuous levy program would not be possible for several years

owing to the decentralized payment system in which the Medicare

program operates. CMS administers the Medicare program through about

50 health care contractors, which process and pay over 900 million fee-forservice claims totaling nearly $175 billion annually. These contractors are

responsible for verifying the accuracy of the name and TIN used by health

care providers that bill the Medicare program for reimbursement. Thus,

the ability to identify and subsequently levy the payments made to

Medicare providers who owe federal taxes would depend on establishing

effective coordination between IRS and FMS and each of the contractors

that pay the claims.

The possibility of including Medicare vendor payments in the continuous

levy program is further complicated because CMS contractors currently

use one of six different computerized systems to process and pay claims.

Although CMS eventually plans to have all of its contractors use one of

three standardized claims processing systems, this consolidation is not

expected to be completed before 2004. The contractors responsible for

maintaining the three standardized systems believe that integrating a

continuous levy process into Medicare claims processing systems is

possible, but the systems would likely have to be modified and tested

before implementation.

 19As recently as October 2000, DOD projected that the Defense Procurement Payment

System was to be fully operational by the beginning of 2003.

CMS Vendor Payments Will

Not Be Available to the

Continuous Levy Program

for Several Years
Page 14 GAO-01-711 Increasing Use of Federal Tax Levies

Planned enhancements to the CMS accounting and provider enrollment

systems may improve the likelihood that Medicare vendor payments could

be included in the continuous levy program in the future. For example, in

order to comply with federal financial management systems requirements,

the agency is developing the CMS Integrated General Ledger and

Accounting System. As currently envisioned by CMS, this system would

contain detailed information on each Medicare claim paid, and as such,

might offer FMS and IRS a central point of coordination for continuously

levying Medicare vendor payments. Also, CMS is developing a centralized

database of updated information on all health care providers that bill the

Medicare program. This system is intended to help ensure that only

qualified providers with a valid TIN enroll in and receive payments from

the Medicare program. Once fully operational, this system is expected to

interface with other CMS systems, thereby helping to ensure that the name

and TIN used by providers have been validated by IRS. Neither system is

scheduled to be fully operational before late 2006.

Although these new systems may improve the likelihood that CMS vendor

payments could be continuously levied in the future, FMS and CMS

officials have not held discussions to ensure this result. Medicare

contractors already offset payments to vendors for various reasons, such

as recovery of previously overpaid claim amounts, which could result from

either inadvertent billing errors or intentional misrepresentations.

However, FMS and CMS officials have not explored whether these

processes for offsetting vendor payments could support including some

CMS vendor payments in the continuous levy program before late 2006.
Page 15 GAO-01-711 Increasing Use of Federal Tax Levies

In addition to the specific levy authority IRS has through the continuous

levy program under section 6331(h), IRS has general levy authority under

Internal Revenue Code section 6331 to collect federal tax debts by issuing

a levy notice directly to a federal agency. The continuous levy program

provides IRS with an automated process for serving tax levies and

collecting delinquent taxes through FMS. On the other hand, in order to

levy payments under its general levy authority IRS must identify that an

agency is making payments to a delinquent taxpayer. Unlike the 15-percent

levy amount limitation for the continuous levy program, under its general

levy authority, IRS can levy up to 100 percent of a taxpayer’s property and

rights to property in some cases.

IRS currently uses its general levy authority to levy federal salary and

retirement payments.20 However, according to officials, IRS uses its

general levy authority less frequently to levy federal vendor payments,

partly because IRS has limited ability to identify and serve levies against

vendor payments. According to IRS officials, almost all information IRS

has on vendor payments comes from annual information returns that

federal agencies and contractors are required to file for such payments. It

takes IRS several months to process information returns and make them

available to collection staff so they can identify potential levy sources.

According to IRS officials, information return data are of little use because

there is no certainty that an individual or business that received payments

in a past year would receive payments in the current year. IRS officials

acknowledged that obtaining current information on taxpayers that may

be receiving DOD and CMS vendor payments might give IRS collection

staff an opportunity to levy such payments under its general levy authority

until such time as these payments could be included in the continuous levy

program.

DOD and CMS have databases that could be used to provide IRS with

current information concerning individuals and businesses receiving

vendor payments. However, IRS has not requested such information from

these agencies. According to DOD officials, a DOD Central Contractor

Register currently includes information on over 160,000 vendors registered

to do business with DOD, including a vendor’s TIN and name, and an

 20Internal Revenue Code section 6334(d) requires that a certain amount of salaries and

wages be exempted from levy.

IRS Could Use Its

General Levy

Authority for USPS,

DOD, and CMS

Vendor Payments

Until They Are

Available to the

Continuous Levy

Program
Page 16 GAO-01-711 Increasing Use of Federal Tax Levies

extract of this information could be provided periodically to IRS.21

Medicare contractors we spoke with stated that it may be possible to

provide periodic extracts of payment data on recently paid provider

claims, while CMS officials indicated that extracts from centralized agency

databases, such as the National Claims History File, could also be made

available to IRS. Information from each of these databases could be useful

to IRS for identifying a current source against which to serve a levy under

IRS’ general levy authority. For example, IRS could arrange to obtain

information from these agencies concerning vendors that currently receive

periodic payments and when such payments are made, and if such vendors

have federal tax delinquencies, work out a schedule for levying subsequent

payments.

As with IRS’ other collection efforts, resource constraints and other

collection priorities may limit the amount of delinquent taxes that IRS

could recover from DOD and CMS vendors using its general levy authority.

However, until all such vendor payments could be included in the

continuous levy program, obtaining periodic vendor information from

these agencies could enable IRS to begin collecting some portion of the

delinquent taxes owed by these vendors.

IRS’ mission includes providing taxpayers with top quality service by

applying the tax law with integrity and fairness to all. Until more types of

federal payments are available, the current continuous levy program

results in unequal treatment of delinquent taxpayers depending on

whether their federal payments are made by FMS on behalf of other

agencies or directly by the agencies themselves. Delinquent taxpayers

receiving payments from FMS generally are subject to the continuous levy

program; those receiving payments directly from federal agencies are not

and IRS is limited to using its general levy authority in order to levy some

of these non-FMS payments.

Although practical issues may impede achieving similar treatment of all

delinquent taxpayers receiving federal payments, progress could be made

and substantial additional revenues could be collected—in fairness to

those who properly pay their taxes. FMS has plans for including USPS

 21We obtained an extract of the Central Contractor Register and matched it with IRS’

accounts receivable file and found that it included about 4,300 contractors and vendors

that owed IRS about $250 million in delinquent taxes as of June 30, 2000.

Conclusions
Page 17 GAO-01-711 Increasing Use of Federal Tax Levies

salary and DOD salary and retirement payments in the continuous levy

program. Similar plans do not exist, however, for including all vendor

payments from USPS, DOD, and CMS in the continuous levy program.

Discussions among FMS, IRS, and the agencies have the potential to

ensure that all of these payments are included in the continuous levy

program as soon as practical, and for possibly accelerating the inclusion of

certain types or categories of vendor payments.

Further, the effectiveness of the current continuous levy program and its

expansion to other payments could be enhanced if IRS were to begin

sharing the different names that businesses use for tax purposes with

FMS. This would treat businesses more similarly to how IRS already

handles individual taxpayers in the continuous levy program.

In the interim, until the continuous levy program can be extended to more

of the payments made directly by agencies, IRS’ use of its existing general

levy authority could be improved to better ensure that all delinquent

taxpayers receiving federal payments are subject to potential collection

action. DOD and CMS have available data that could be shared with IRS to

increase IRS’ ability to identify those taxpayers’ whose federal payments

could be practically and effectively levied under the general levy program.

To enhance the value of agency payment data that are available for the

continuous levy program, we recommend that the Commissioner of

Internal Revenue provide FMS with a file of all business names that IRS

has for each business taxpayer that owes federal taxes and meets the

program criteria.

To increase the potential for collecting delinquent federal taxes owed by

federal vendors, we recommend that the Commissioner of Internal

Revenue and the Commissioner of the Financial Management Service

jointly initiate specific discussions with USPS, DOD, and CMS to develop

plans for obtaining vendor payments from the respective agencies for the

continuous levy program. The discussions should cover plans for including

all of the agencies’ vendor payments in the continuous levy program, as

well as options for including some of their vendor payments in the

program on an accelerated basis.

To ensure that IRS has updated information on vendor payments to aid in

identifying possible levy sources for use under its general levy authority,

we recommend that the Commissioner of Internal Revenue work with

DOD and CMS officials to develop the means for these agencies to

Recommendations for

Executive Action
Page 18 GAO-01-711 Increasing Use of Federal Tax Levies

periodically provide IRS with vendor information that is more current than

that which IRS receives now through annual information returns.

We received written comments on our draft report from the Commissioner

of Internal Revenue (see app. II) and the Commissioner of the Financial

Management Service (see app. III). Both the IRS and FMS Commissioners

offered factual updates, clarifications, or technical comments that we have

incorporated throughout this report where appropriate.

The Commissioner of Internal Revenue generally agreed with our

recommendations. Regarding our recommendation that the Commissioner

of the Financial Management Service initiate discussions with USPS, DOD,

CMS, and IRS officials to develop plans for obtaining vendor payments

from the respective agencies for the continuous levy program, the

Commissioner of FMS disagreed that initiating discussions with these

agencies was FMS’ responsibility. Rather, the Commissioner stated that it

was IRS’ responsibility to initiate and jointly schedule with FMS the

implementation of the continuous levy program for DOD, USPS, and CMS

vendor payments. The Commissioner further stated that once IRS is ready

to develop this process, FMS will work with the agencies and IRS to make

the necessary system changes to allow IRS to continuously levy these

payments.

We agree with the FMS Commissioner’s view that IRS has the

responsibility to participate in leading discussions for implementing the

continuous levy program for vendor payments. However, because FMS is a

principal component in developing the necessary processes to effectively

implement continuous levies, we also believe that FMS must be equally

involved in the discussions on extending the continuous levy program to

vendor payments paid by agencies other than FMS. Accordingly, we

modified our recommendation to state that the IRS and FMS

Commissioners should jointly initiate specific discussions with USPS,

DOD, and CMS for this purpose. Having been made aware of this

modification to our recommendation before providing comments, the IRS

Commissioner agreed in his written comments to participate with FMS in

discussions with the agencies and to assist FMS in developing plans for

obtaining vendor payments for inclusion in the continuous levy program.

To enhance the value of agency payment data available to the continuous

levy program, the Commissioner of Internal Revenue agreed to provide

FMS with a file of all business names that IRS has for each business

taxpayer that owes federal taxes and meets the program criteria. The

Agency Comments

and Our Evaluation
Page 19 GAO-01-711 Increasing Use of Federal Tax Levies

Commissioner stated that a draft Request for Information Services has

been submitted to begin the formal process necessary to make this

change, and the change is expected to be completed by January 2003.

To ensure that IRS has updated information on vendor payments to aid in

identifying possible levy sources for use under its general levy authority,

the Commissioner agreed to pursue the costs and benefits of securing

possible levy sources from such agencies as DOD as well as pursuing more

frequent levy source updates from internal IRS sources.

We also received written comments from the Deputy Chief Financial

Officer, Office of the Under Secretary of Defense (see app. IV), and oral

comments from a representative of the United States Postal Service, in

which they generally agreed with our recommendations.

In addition, we received technical comments from the Acting Deputy

Administrator of the Centers for Medicare & Medicaid Services, in which

he stressed that CMS vendor payments could not be included in the

continuous levy program until a new CMS integrated accounting system is

completed. Given the substantial delinquent taxes that could potentially

be recovered from CMS vendors and that CMS contractors already offset

vendor payments for various other reasons, we believe that discussions

between IRS, FMS, and CMS should explore whether some portion of the

vendor payments could be included on an accelerated basis.

As agreed with your offices, unless you announce the contents of this

report earlier, we plan no further distribution until 30 days from the date

of this letter. At that time, we will send copies to the Ranking Minority

Member, House Committee on Ways and Means; Ranking Minority

Member, Subcommittee on Oversight; and the Chairman and Ranking

Minority Member, Senate Committee on Finance. We will also send copies

to the Commissioner of Internal Revenue, Commissioner of the Financial

Management Service, Secretary of Defense, Administrator of the Centers

for Medicare & Medicaid Services, Postmaster General, and other

interested parties. Copies of this report will also be made available to

others upon request.
Page 20 GAO-01-711 Increasing Use of Federal Tax Levies

If you have any questions concerning this report, please contact Ralph

Block at (415) 904-2000 or me at (202) 512-9110. Key contributors to this

work are listed in appendix V.

Michael Brostek

Director, Tax Issues
Appendix I: Objectives, Scope, and

Methodology

Page 21 GAO-01-711 Increasing Use of Federal Tax Levies

Our objectives in this report were to (1) determine the number of

delinquent taxpayers receiving federal payments from the United States

Postal Service (USPS), Department of Defense (DOD), and Centers for

Medicare & Medicaid Services (CMS) that would be affected and the tax

debt that might be recovered if they were to be included in the continuous

levy program; (2) determine whether these types of payments could be

included in the continuous levy program and the timeframes for doing so;

and (3) identify other actions that could be taken to enhance IRS’ ability to

manually levy federal payments to delinquent individuals and businesses

that are not currently included in the continuous levy program.

To determine the number of delinquent taxpayers receiving federal

payments from USPS, DOD, and CMS that would be affected and the tax

debt that might be recovered if they were included in the continuous levy

program, we obtained and matched IRS’ accounts receivable records as of

June 30, 2000, that met IRS’ continuous levy program criteria with agency

and contractor payment records as follows:

• For wage and salary payments, USPS provided payments for a biweekly

pay period made on June 23, 2000; for vendor payments, USPS provided

payments made during the April through June 2000 quarter.

• For DOD military salary, retirement, and reserve payments, the DOD

Defense Manpower Data Center provided payments made for the month of

June 2000; for DOD civilian salary, the DOD Defense Management Data

Center provided payments made for the biweekly pay period ending July 1,

2000; for DOD vendor and contractor payments, the Defense Finance and

Accounting Service provided payments made during the April through

June 2000 quarter.

• For CMS Medicare vendor payments, Medicare contractors provided

payments made during the April through June 2000 quarter.

For payments that matched on both taxpayer identification number (TIN)

and name, we calculated either 15 percent of the payment or the actual

amount of tax owed if it was less than 15 percent of the payment to

determine the amount that could be levied. All estimates of the delinquent

taxes that might be recovered throughout this report have been

annualized. Although some taxpayers might take actions to avoid a

continuous levy, we believe our estimates of the tax debt that might be

recovered are understated because we did not receive data for over 50

percent of Medicare payments made during the April through June 2000

quarter. In addition, we were unable to match about $3.4 billion in DOD

Appendix I: Objectives, Scope, and

Methodology

Scope and

Methodology
Appendix I: Objectives, Scope, and

Methodology

Page 22 GAO-01-711 Increasing Use of Federal Tax Levies

vendor payments against IRS’ accounts receivable data because the

payment records did not contain a TIN.

Based on our prior work involving the continuous levy program, we were

aware that problems with information contained in vendor payment

records could make such records unsuitable for matching against IRS’

accounts receivable file, thus reducing the amount of tax debt that might

be recovered. To identify additional debt that could be collected if

problems with vendor payment records were corrected, we analyzed

agency payment records to identify instances of a missing or inconsistent

payee TIN or name. We selected all instances in which the TIN in the

payment records matched the TIN in IRS’ accounts receivable records, but

the name in the payment records did not match the name in IRS’ records.

For these instances, we then reviewed IRS’ records to determine whether

it had additional information to indicate that the payee was in fact the

delinquent taxpayer in question.

To determine whether USPS, DOD, and CMS payments could be included

in the continuous levy program and the timeframes for doing so, we

interviewed IRS officials responsible for the continuous levy program. We

also interviewed Financial Management Service (FMS) officials involved in

recent discussions with various agencies in an attempt to include nonTreasury disbursed payments in the Treasury Offset Program. In addition,

we interviewed officials from USPS, DOD, and CMS as well as selected

Medicare contractors responsible for processing the various types of

payments.

To identify actions that could be taken to enhance IRS’ ability to manually

levy federal payments from delinquent individuals and businesses that are

not included in the continuous levy program, we discussed this issue with

IRS officials and officials from USPS, DOD, and CMS. We identified

various agency databases that could be used to provide IRS with updated

vendor payment sources. We also discussed IRS’ current levy procedures

with IRS officials, and reviewed the related tax law governing these

procedures.

We did our work at IRS, FMS, and USPS headquarters in Washington, D.C.;

DOD headquarters in Arlington, VA; CMS headquarters in Baltimore, MD;

Defense Finance and Accounting Service Centers in Columbus and

Cleveland, OH, and Denver, CO; Defense Manpower Data Center in

Seaside, CA; and the CMS Regional Office in San Francisco, CA. We also

interviewed Medicare contractors located in Alabama, California, Florida,

Maryland, New York, North Dakota, Pennsylvania, Texas, and Wisconsin.
Appendix II: Comments From the Internal

Revenue Service

Page 23 GAO-01-711 Increasing Use of Federal Tax Levies

Appendix II: Comments From the Internal

Revenue Service

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

See comment 4.

See comment 3.

See comment 2.

See comment 1.
Appendix II: Comments From the Internal

Revenue Service

Page 24 GAO-01-711 Increasing Use of Federal Tax Levies

See comment 6.

See comment 5.
Appendix II: Comments From the Internal

Revenue Service

Page 25 GAO-01-711 Increasing Use of Federal Tax Levies
Appendix II: Comments From the Internal

Revenue Service

Page 26 GAO-01-711 Increasing Use of Federal Tax Levies

The following are GAO’s comments on the Internal Revenue Service’s

letter dated July 16, 2001.

1. In response to IRS’ concern that our text may have given the

impression that IRS does not levy any federal payments that are not

subject to the continuous levy program, we modified footnote 3 to

recognize that IRS does levy such payments under its general levy

authority.

2. IRS’ suggested change has been incorporated into the text.

3. IRS’ suggested change is included in footnote 10.

4. We deleted “indirect” from our text. While it is debatable whether the

benefit would be direct or indirect, levy notices do sometimes result in

taxpayers making other arrangements to resolve their tax liability.

5. IRS’ suggested change has been incorporated into the text.

6. In response to IRS’ concern with our use of the term “disparate

treatment” of taxpayers in our conclusions, we have revised our text to

state that whether or not taxpayers are included in the continuous levy

program is predicated in part on whether their federal payments are

made by FMS or directly by other agencies. We believe that this

results in unequal treatment of delinquent taxpayers who receive

federal payments and that this will only be corrected when more types

of federal payments are available to the program.

GAO Comments
Appendix III: Comments From the Financial

Management Service

Page 27 GAO-01-711 Increasing Use of Federal Tax Levies

Appendix III: Comments From the Financial

Management Service
Appendix III: Comments From the Financial

Management Service

Page 28 GAO-01-711 Increasing Use of Federal Tax Levies
Appendix III: Comments From the Financial

Management Service

Page 29 GAO-01-711 Increasing Use of Federal Tax Levies
Appendix IV: Comments From the Department of Defense

Page 30 GAO-01-711 Increasing Use of Federal Tax Levies

Appendix IV: Comments From the

Department of Defense
Appendix V: GAO Contacts and

Staff Acknowledgments

Page 31 GAO-01-711 Increasing Use of Federal Tax Levies

Michael Brostek (202) 512-9110

Ralph T. Block (415) 904-2000

In addition to those named above, Wendy Ahmed, Tom N. Bloom, Robert

C. McKay, Ellen Rominger, James J. Ungvarsky, and Elwood D. White

made key contributions to this report.

Appendix V: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Acknowledgments

(268917)

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