United States General Accounting Office

GAO Report to Congressional Requesters

June 1998 TAX

ADMINISTRATION

Increasing EFT Usage

for Installment

Agreements Could

Benefit IRS

GAO/GGD-98-112

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-275098 

June 10, 1998

The Honorable Bill Archer

Chairman, Committee on Ways and Means

House of Representatives

The Honorable Nancy L. Johnson

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

For years, the Internal Revenue Service (IRS) has allowed taxpayers to pay

delinquent taxes in installments, primarily through a paper-based system

in which IRS mails monthly statements to taxpayers, who, in turn, are to

mail monthly payments back to IRS. In fiscal year 1997, taxpayers defaulted

on $6.5 billion in installment agreements—almost as much as the

$6.7 billion IRS collected through installments.1

Because of your interest in improving IRS’ ability to collect delinquent

taxes, you asked us to identify the best practices currently used by

delinquent debt collectors and analyze them to determine if they offer IRS

any prospects for improving its collection efforts. This report discusses

one such practice, specifically, the use of electronic funds transfer (EFT)

for making installment tax payments. EFT is a means of conducting

financial transactions by using computers and electronic technology to

transfer money instead of using checks and other paper documents. IRS

currently accepts EFT payments from taxpayers with installment

agreements, but only a small percentage of taxpayers use this method.

In this report, we (1) describe some of the uses and benefits of EFT,

(2) discuss the experiences of two states that use EFT in their tax

installment agreement programs and the benefits they have obtained, and

(3) discuss the potential benefits IRS might realize by increasing EFT usage

in its installment agreement program.

In conducting our work, we reviewed literature on EFT and interviewed

officials in two states, Minnesota and California, that are recognized as

having innovative collection practices. We also contacted other EFT users,

including private sector organizations and the Department of the

Treasury’s Financial Management Service (FMS). Our analysis is based on a

review of information obtained from these sources and, in particular, on a

1

These amounts include taxes, interest, penalties, and fees.

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comparison of EFT use in the states’ installment agreement programs and

IRS’ program.

Results in Brief EFT is widely used by various types of organizations, such as banks, credit

unions, and mortgage companies, in receiving and transferring money. It is

used for various payment transactions, such as payroll, pension, and

dividends, and for collecting consumer payments. Relative to paper

transactions, EFT provides better accuracy, lower mailing and processing

costs, and fewer delinquencies and defaults. Because of these benefits,

some financial organizations routinely offer incentives, such as interest

rate reductions on loans and waivers on fees, to consumers who enter into

EFT arrangements.

Both Minnesota and California changed their installment agreement

programs to promote tax payments by EFT. Minnesota has required

taxpayers entering into new installment agreements since July 1995 to pay

by EFT, with some exceptions. In April 1997, California initiated

procedures to let taxpayers make installment agreements payments by

EFT. As of mid-November 1997, EFT usage was about 90 percent in

Minnesota and about 60 percent in California.

According to state officials, Minnesota and California both have seen a

sharp decrease in their installment agreement default rates, in part due to

EFT. In Minnesota, officials said that default rates were reduced from about

50 percent to between 3 and 5 percent; and in California, officials said that

they were reduced from about 40 percent to about 5 percent. Officials in

both states said that the lower default rates have resulted in collecting

revenues from installments faster.

In addition, officials in both Minnesota and California said they have

achieved administrative cost savings from greater use of EFT, which has

reduced the amount of paper processing and mailing costs related to their

installment agreement programs. Additional administrative cost savings

have occurred because fewer resources have been needed for follow-up

collection enforcement on defaulted agreements.

IRS’ installment agreement program has not taken advantage of the benefits

of EFT to the extent that Minnesota and California reported, as only about

1.5 percent of IRS’ delinquent taxpayers were using EFT for installment

agreements as of September 30, 1997. Because its current program is

similar to these states’ non-EFT programs, it seems likely that IRS could

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expect to achieve a reduction in its installment agreement default rates

and lower administrative costs if more taxpayers paid their installments by

EFT. In fiscal year 1997, IRS’ costs to process EFT installment payments were

about 37 percent lower than the cost to process non-EFT installment

payments.

Background Section 6159 of the Internal Revenue Code authorizes IRS to allow

taxpayers to pay their taxes in installments, with interest, if this would

facilitate collection of the liability. IRS procedures allow taxpayers to enter

into an installment agreement any time during the collection process,

which involves sending notices to taxpayers, contacting them by

telephone and in person, and using enforcement tools such as liens against

their property and levies against their financial assets.

In 1992, IRS changed its installment agreement program by allowing

(1) most IRS staff with taxpayer contact to approve agreements up to a

certain dollar level, (2) taxpayers to obtain agreements up to a certain

dollar level without providing financial information to demonstrate the

need for an agreement, and (3) taxpayers to request agreements when they

file their tax returns. As of September 30, 1997, IRS had about 2.9 million

installment agreements outstanding, worth about $13.2 billion, thus

averaging about $4,600 per agreement.

To request an installment agreement, a taxpayer completes an optional

Form 9465: Installment Agreement Request. In January 1996, IRS revised

the form by providing space for taxpayers to add the information needed

to set up an EFT agreement, based on a recommendation we made.2

 Before

the form was revised, taxpayers could make arrangements to pay their

installment payments by EFT, but few did.

For each month that an agreement is in effect, IRS prepares and mails a

statement to the taxpayer. Taxpayers with non-EFT agreements are to mail

the payment coupons back with their payments. These documents must be

processed monthly in order to update the taxpayers’ accounts.

According to the National Automated Clearing House Association (NACHA),

a national electronic banking trade association, electronic payment

transaction volumes are growing faster than check volumes. The

clearinghouse association reported that EFT transactions in 1996 rose 15

2

See Tax Administration: Administrative Improvements Possible in IRS’ Installment Agreement

Program (GAO/GGD-95-137, May 2, 1995).

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percent, to nearly 4 billion transactions that represented over $12 trillion,

which was 9 percent higher than the amount in 1995. By comparison,

check volumes rose by about 1 percent during this period. Also, in 1995,

more than 500,000 companies across the nation used the Automated

Clearing House (ACH) Network for EFTs, involving payment transactions

such as payroll, pensions, and dividends and to collect consumer

payments.3

 Large businesses and corporations are currently required to

use EFT to make federal and state tax deposits. EFT use should increase

further as provisions in the North American Free Trade Agreement (NAFTA)

are implemented that will eventually require most employers to pay their

federal tax deposits electronically.4

 Further, the Debt Collection

Improvement Act of 1996 requires that most federal benefit checks be

disbursed electronically beginning in 1999.5

Objectives, Scope,

and Methodology

Our objectives were to (1) describe some of the uses and benefits of EFT,

(2) discuss the experiences of two states that use EFT in their tax

installment agreement programs and the benefits they have obtained, and

(3) discuss the potential benefits IRS might realize by increasing EFT usage

in its installment agreement program.

To address the first objective, we judgmentally selected a limited number

of financial institutions, including 8 banks, 1 credit union, and 14 mortgage

companies, to obtain information on their use of EFT and its benefits to

them and their customers. In addition, we spoke with officials from NACHA

and the National Credit Union Association about the uses and benefits of

EFT to financial institutions and their customers. We also contacted

officials from FMS, which is ultimately responsible for collecting most of

the nontax delinquent debts owed the federal government. FMS is also

involved in the government’s overall efforts to maximize the use of EFT as

required by the Debt Collection Improvement Act of 1996. We obtained

from FMS, but did not independently verify, information on IRS’ cost to

process installment agreement payments by paper processes and by EFT.

To address our second objective, we identified two states—Minnesota and

California—that have made changes to their installment agreement

3

The ACH Network is a nationwide electronic payment and collection system used to make EFT

financial transactions. The Network consists of the ACH operators, including the Federal Reserve

Bank System, and participating financial institutions—commercial banks, credit unions, etc.—which

provide services to businesses and consumers. The Network’s rules and operating guidelines are

established by NACHA.

4

NAFTA (P.L. 103-182) requires that the Secretary of the Treasury develop regulations to implement an

EFT system for the collection of federal tax deposits.

5

The act (P.L. 104-134) requires that almost all federal benefit payments, such as social security,

veterans benefits, and pensions (but not tax refunds) be made using EFT by January 1, 1999.

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programs that resulted in most delinquent taxpayers using EFT to pay their

installments. We visited these states because we had consulted with them

in our previous work on ways to improve federal tax collection efforts. On

that basis, we were aware of their efforts to undertake innovative

practices to improve tax administration. Also, we contacted the

Federation of Tax Administrators—an organization of state and municipal

tax and revenue agencies—to identify state tax departments that are

recognized as having successful collection programs, and both states were

mentioned by the Federation.

To assess the potential benefits IRS might realize by increasing EFT usage in

its installment agreement program, we obtained data on its existing

program and analyzed its installment agreement default rates. We did not

independently verify the statistical data we obtained on IRS’ installment

agreement program. The information we obtained on IRS’ current use of

EFT helped us determine the feasibility of IRS’ making changes to its

program similar to those that Minnesota and California have made. We

interviewed IRS Collection officials at the National Office to obtain current

information on the processes and procedures IRS uses in collecting

delinquent federal taxes to ensure that our comparisons between IRS and

others were based on the most recent IRS practices. We did not perform an

independent analysis to estimate the cost savings IRS might receive from

additional EFT use. Lastly, we discussed the changes Minnesota and

California have made to their program with IRS officials to obtain their

perspectives on how similar changes might affect IRS’ program.

We requested comments on a draft of this report from the Commissioner

of Internal Revenue. His comments are discussed at the end of this letter

and are reprinted in appendix I.

We did our work between October 1996 and December 1997, according to

generally accepted government auditing standards.

Uses and Benefits of

EFT

Private sector financial institutions and government agencies use EFT for a

variety of transactions. They do so because EFT has lower default rates and

is less expensive, faster, and more reliable than paper transactions.

Benefits, such as the convenience of EFT, also extend to the customers of

these organizations.

EFT transactions involve the paperless transfer of funds between accounts

in financial institutions, which allows for transactions such as the direct

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deposit of payroll checks, mortgage payments, and installment payments.

According to a NACHA official, most financial institutions can both make

and receive EFT transactions, although some smaller institutions

sometimes restrict the type of payment transactions they make.

Information from NACHA shows that, relative to paper transactions, EFT

provides lower loan defaults, better accuracy, and reduced mailing and

processing costs. A credit union loan official, for example, said defaults of

loans, usually defined as missed payments, are lower with automated

payments. In addition, EFTs are about one-third less expensive to handle

than paper transactions, according to one banking official with whom we

spoke. Exact savings, though, vary by individual financial institution,

depending on its internal processing systems and costs.

Representatives from financial institutions and FMS told us that the

benefits of EFT for customers as well as financial institutions are many.

The financial institution officials told us that the cost savings from EFT

were great enough for them to offer incentives to customers who use

direct deposit and other electronic transactions. A credit union, for

example, provides a 1-percentage-point discount on home equity lines of

credit that are repaid using EFT. Officials from two banks told us that they

waive monthly checking account fees for customers whose paychecks are

directly deposited into their accounts. Another bank offers a discount on

consumer loans that are repaid by EFT as a way of keeping existing

customers and attracting new ones.

Customers could also benefit from the reliability and accuracy of

electronic payments and deposits. FMS data, for example, showed that

direct deposit recipients are 20 times less likely to have a problem, such as

lost checks, with EFT than with deposits by check. Some of the other

benefits for customers were the convenience and savings by not having to

go to a bank to deposit checks or to write a check and use postage to mail

it.

Congress passed the Debt Collection Improvement Act of 1996 requiring

the use of EFT for most federal benefit payments (tax refunds are

excluded) by January 1, 1999, because it recognized the advantages of

electronic transactions. According to Treasury data, about 60 percent of

all federal benefits are now paid electronically, and Treasury estimates

that the government could save more than $500 million over the next 5

years by switching the remaining payments to EFT. However, EFT generally

requires individuals to have bank accounts to access the funds, and some

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recipients of government checks do not have bank accounts. Congress is

considering what it might do to mitigate the adverse effects of the 1996

legislation—for example, allowing recipients who do not have bank

accounts to access their payments by other electronic means, such as

automated teller machine cards from an account held by a disbursing

agency.

Two States’ Use of

EFT for Installment

Tax Payments and Its

Benefits

One use of EFT, as it relates to tax administration, is for installment tax

payments. The two states we visited, Minnesota and California, made

changes to their installment agreement programs that make EFT the

primary means taxpayers use to pay their taxes in installments. Both states

promoted the changes to make their installment agreement programs

more effective and efficient, and officials in both states attributed

reductions in their default rates and administrative costs to EFT use.

Overview of Minnesota’s

Program

The Minnesota Department of Revenue (MDOR) is that state’s primary tax

collection agency and, as such, administers the installment agreement

program covering delinquent taxes owed by individuals and businesses. In

1995, MDOR tested the use of EFT in its installment agreement program. EFT

was available in the installment agreement program before the test, but it

was not used extensively. The results of the test were compared with

MDOR’s non-EFT program. MDOR officials told us the test showed that by

requiring EFT payments, their installment agreement program could be

made more efficient and effective. This led MDOR to revise its policy on

installment agreements to require EFT for tax payments beginning in

July 1995, with a few exceptions.

One exception was for cases where the EFT requirement would create an

undue hardship on a taxpayer. For example, if a taxpayer did not have a

bank account, which is necessary for electronic transactions, the

requirement could be waived. Also, payment agreements of less than 4

months’ duration may be exempt from EFT.

The policy also allowed taxpayers with existing installment agreements to

continue with their non-EFT arrangements or convert to EFT. The state

required that taxpayers continue to comply with their current tax

obligations as a condition for gaining approval to pay delinquent taxes by

installment, regardless of whether EFT is used. According to information

obtained from MDOR, Minnesota taxpayers may be given about 1 year to

pay off their installment agreements.

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MDOR reported to us that, as of mid-November 1997, about 90 percent of

MDOR’s 4,200 installment agreements were EFT agreements, representing

about 90 percent of the delinquent taxes in the state’s installment

agreement program. Taxpayers with waivers and those continuing their

non-EFT arrangements accounted for the other 10 percent.

Overview of California’s

Program

The California Franchise Tax Board (FTB) is that state’s agency responsible

for collecting income taxes. Taxpayers owing delinquent personal income

taxes may be granted approval to pay their debts in installments.

Previously, EFT was not available in the installment agreement program,

but in April 1997, following MDOR’s success with EFT usage, FTB

implemented procedures for taxpayers to make installment agreement

payments by EFT. According to the procedures, taxpayers who have been

approved to pay their tax liabilities in installments must usually pay by EFT.

As in Minnesota, FTB allows taxpayers waivers to using EFT in certain

circumstances—for example, a taxpayer has no bank account, a low dollar

amount is owed, or EFT would create a hardship. Taxpayers must also

comply with their current tax obligations as a condition of paying

delinquent taxes in installments, regardless of whether EFT is used.

A state official told us that FTB revised its installment agreement

application form to include space for an EFT authorization. If the taxpayer

provided the necessary information for the state to process the EFT

authorization, the installment agreement request was usually approved. If

a taxpayer did not complete the EFT authorization, state officials said that

they would encourage EFT use by specifically discussing its benefits with

the taxpayer. FTB officials would inform applicants about the potential

benefits of using EFT—for example, they would not have to worry about

writing and mailing checks or money orders or be concerned that their

payments did not arrive on time. If a taxpayer still did not elect EFT, the

state would require a more strenuous review of the taxpayer’s application,

including a review of their financial status. At the time of our study,

approximately 8,000 of the 13,000 agreements made since

April 1997—about 60 percent—were set up to use EFT. These 8,000 EFT

agreements represented about 90 percent of the delinquent taxes owed in

the new agreements.

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EFT Has Lowered the

Default Rates of

Installment Agreements in

Minnesota and California

According to state officials in Minnesota and California, one of the

benefits they have realized by promoting EFT use in their installment

agreement programs has been a substantial reduction in the programs’

default rates. These officials said that the benefits of lower default rates

included more timely payments and increased collection of taxes owed.

While the precise definition may vary, generally an installment agreement

is in default if payments are not made. Some of the amounts owed in

defaulted installment agreements are subsequently paid after further

collection actions by the states. Some are never paid.

EFT was available, but not used extensively, in MDOR’s installment

agreement program before the July 1995 requirement was implemented.

The program’s default rate was then about 50 percent. Since the

requirement was implemented, most of the state’s taxpayers with

installment agreements have used EFT, and according to MDOR officials, the

default rate for EFT installment agreements dropped to between 3 and

5 percent.

The California FTB’s overall installment agreement default rate also

decreased sharply after EFT use was promoted. Officials told us that before

EFT was available, the default rate for installment agreements was about

40 percent. As of October 1997, about 6 months after FTB implemented its

EFT procedures, the default rate for new EFT agreements was about

5 percent. FTB officials told us that although their EFT procedures had only

been in effect for a relatively short time, they expect their default rate to

continue to remain lower than before EFT use.

Recurring EFT payments are generally set up to be made on a specific day

of the month, which reduces some of the problems related to non-EFT

arrangements, such as taxpayers’ forgetting to send in their payments or

sending in the wrong amount. Officials in both states said that, because

these problems were reduced, some of the amounts owed were received

sooner and without the need for follow-up collection actions, such as

letters, telephone calls, liens, levies, or seizures.

Officials in both states also said that they experienced increased

collections from installment agreements after changing their programs to

promote EFT. Collections increased if payments made through EFT would

not have otherwise been made. However, the states had not measured the

dollar amounts that directly related to changing their programs. Also, they

found it difficult to determine if other effects, such as economic

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conditions, were a factor; and in California, the program was less than a

year old when we completed our field work. The officials from both states

told us, however, that they had not made any other changes to their

installment agreement programs that would account for the increased

collections.

EFT Has Reportedly

Reduced the

Administrative Costs of

Installment Agreements in

Minnesota and California

In discussing the benefits of EFT with officials in California and Minnesota,

we were told that EFT use reduced the administrative costs of their

installment agreement programs. Officials in both states said that the

greater use of EFT has reduced the amount of paper processing and mailing

costs related to their installment agreement programs. Additional

administrative cost savings have occurred because fewer resources were

needed to follow up on defaulted agreements.

Administrative cost savings from EFT stem from not having to process and

handle paper relating to the financial transactions. With EFT, much of the

personnel costs used to generate and process documents and the mailing

costs generally associated with paper financial transactions can be

reduced or eliminated. Officials in California and Minnesota said that they

reduced their installment agreement programs’ administrative costs by

eliminating most of the paper documents they previously sent taxpayers,

which also reduced taxpayers’ need to send paper documents back to the

states for processing.

Before changing their installment agreement programs to promote EFT,

Minnesota and California had procedures that required sending taxpayers

monthly statements. Taxpayers sent back their remittances, such as paper

coupons and checks and money orders, which had to be manually

processed. Under their current programs, the two states do not send

monthly statements to taxpayers using EFT. This is because state officials

said that the taxpayers’ bank statements show that the EFT payment was

made, and the statement provides the taxpayer with notification.

Although precise estimates were unavailable, officials in both states said

that administrative cost savings have resulted from EFT use, which has

streamlined the administrative operations of their installment agreement

programs. According to data collected during MDOR’s pilot test of EFT, for

example, several thousand work hours were saved by not having to

prepare and process the paperwork typically needed for manual

agreements. Further savings stemmed from reduced paper and postage

costs, which officials estimated to be about 50 cents per agreement per

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month. Another benefit from reducing the amount of paper used in the

programs was the reduced paperwork burden for taxpayers.

Officials in both states said that fewer resources are being used to follow

up on defaulted agreements because there are fewer defaults with EFT.

Defaulted agreements generally require follow-up actions, such as

contacting the taxpayers and using enforcement actions, such as liens,

levies, and seizures. In general, contacting taxpayers and using

enforcement actions would increase administrative costs.

Increasing EFT Usage

Offers Potential

Benefits to IRS

IRS has the potential to achieve benefits by expanding the use of EFT in its

installment agreement program. At the time of our review, IRS had EFT

payment arrangements with only 1.5 percent of taxpayers who had

installment agreements. The reported experiences of Minnesota and

California, whose former programs were similar to IRS’ current program,

showed that encouraging greater EFT use has resulted in fewer defaulted

agreements and administrative cost savings. Many private and other public

organizations have reported that they, too, have benefited from electronic

financial transactions.

For fiscal 1997, IRS had about $6.5 billion in defaulted agreements, nearly

half its $13.2 billion inventory of 2.9 million outstanding agreements. Table

1 shows IRS’ installment agreement defaulted dollars and our estimated

default rates for fiscal years 1994 to 1997. Even a slight reduction in IRS’

default rate could lead to faster and increased collection of many tax

dollars because IRS’ defaulted agreements are in the billions of dollars

annually.

Of the total agreements in 1997, about 41,500—or 1.5 percent—were being

paid by EFT.

Table 1: IRS’ Installment Agreement

Defaults by Rates and Dollars Fiscal year 1994 1995 1996 1997

Default rate 35% 37% 39% 43%

Default dollars (in millions) $3,961 $4,714 $5,635 $6,479

Note: The default rates were estimated by dividing the number of defaults by the ending

inventories of installment agreements for each year. Although cohort data were not available, our

results should reasonably approximate such data because the average age of agreements in the

inventories was just under a year and our analysis covers a short period.

Source: GAO computations of IRS data.

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Another benefit IRS might achieve is administrative cost savings if more of

the payments it now receives by check (and other paper documents) were

made by EFT. Administrative cost savings could result from (1) lower costs

to process taxpayers’ remittances, (2) lower postage and handling costs,

and (3) lower collection enforcement costs. Administrative cost savings

would result even if the default rate remained the same, but based on the

reported experience of others who use EFT, lower default rates are also

likely to occur.

According to NACHA, the published literature, and the organizations we

contacted that used EFT, electronic payments are less expensive to process

than payments made by check, and default rates are lower. For example, a

1993 study for NACHA reported that the average processing cost for a

payment through the ACH system was about 46 percent less than the

average processing cost for a check.

Routinely, IRS uses lockboxes for installment agreement payments. Under

the lockbox concept, taxpayers are to mail payments to a lockbox, which

is a postal rental box serviced by a commercial bank. The bank is to

process the payments and transfer the funds to a federal government

account, record the payment and payer information on a computer tape,

and forward the tape to IRS for use in updating taxpayers’ accounts. FMS,

which pays the lockbox fees, reported to us that the average cost in fiscal

year 1997 to process an IRS installment agreement payment through

lockboxes was 76 cents per transaction versus 48 cents per transaction to

process a payment by EFT. Thus, FMS data show that IRS’ EFT costs are 28

cents lower or about 37 percent less than its lockbox costs. This shows

that IRS has the potential to reduce the costs it pays banks to process

installment agreement payments by increasing the number of EFT

payments and decreasing the number of lockbox payments.

By promoting EFT use, IRS could further reduce the administrative cost of

its installment agreement program. IRS could achieve additional cost

savings by not sending taxpayers who make EFT installment payments a

monthly statement, as it currently does for all taxpayers with installment

agreements. This would save IRS postage and handling costs and would be

similar to the practices for EFT installment agreements in Minnesota and

California. It is also similar to practices used by many private sector

organizations, especially for recurring EFT payments of the same dollar

amount. In addition, administrative cost savings pertaining to collection

enforcement would be lower as fewer resources would be needed to

pursue fewer taxpayers in default.

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IRS Has Concerns

About Requiring EFT

Use in Installment

Agreements

In 1995, we reported on ways IRS could make administrative improvements

to its installment agreement program.6 IRS officials then agreed that EFT

had advantages over the standard installment agreement. According to

officials at that time, EFT agreements (1) are cheaper to service than the

standard agreement, (2) eliminate the chance that a taxpayer will forget to

make a payment or send less than the agreed-upon amount, (3) result in

quicker deposit of funds to Treasury accounts, and (4) may reduce default

rates.

During this review, we met with IRS Collection officials, including the

Assistant Commissioner (Collection), to obtain their views about

expanding EFT use in the installment agreement program and to determine

if there were any barriers or concerns in doing so. The officials generally

agreed with the comments IRS officials made in our 1995 report, but they

expressed concerns about requiring EFT use, which is one option for

expanding its use. The Assistant Commissioner told us that IRS had

considered expanding EFT use for installment agreements in the past but

did not develop definite plans to do so. With regard to making EFT a

requirement, he said that this raises many issues for IRS, including policy,

legal, and operational concerns.

From a policy perspective, the Assistant Commissioner said that IRS

attempts to treat all taxpayers the same, and he was uncertain whether

requiring or suggesting to taxpayers that they use a certain payment

procedure would be fair unless all taxpayers had to abide by it. In this

regard, we note that IRS now routinely requires taxpayers to use a specified

method to pay taxes. For example, compliant taxpayers whose federal tax

deposits are over $50,000 are required to use EFT.

7

 Thus, requiring

delinquent taxpayers, such as those with installment agreements, to use

EFT would not appear to be contrary to existing IRS procedures on

specifying payment methods for certain taxpayers. In addition, there are

circumstances in which IRS can impose even stricter payment procedures

on delinquent taxpayers. For example, IRS can require a delinquent

employer to file returns and pay the applicable tax monthly rather than

quarterly.

The IRS officials were not certain what legal issues would have to be dealt

with, and they did not provide specifics at our meeting with them. Also,

because IRS is attempting to be more customer-service oriented, the

Assistant Commissioner felt that imposing a requirement that delinquent

6

GAO/GGD-95-137.

7

Section 6302(h) Internal Revenue Code.

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taxpayers use EFT to make installment payments might contradict the

current customer service emphasis. In this regard, we noted that many

organizations, as in California, promote EFT use by specifically informing

their customers of the benefits it offers them, which includes enhanced

customer service and convenience.

The IRS Collection officials articulated operational concerns about

expanding EFT use. Regarding making EFT a requirement, they said that IRS

would probably have difficulty handling the potentially large number of

taxpayer inquiries that might occur from changing its program. In

particular, the Assistant Commissioner felt that the service centers would

be unable to manage the expected large number of waivers for potential

hardships that could result if EFT payments were required. We realize that

provisions would be necessary to handle hardship waivers if EFT is to be

required, and one way would be to provide taxpayers with waivers without

their having to verify the hardships. This would be similar to the way IRS

currently approves taxpayers’ applications for streamlined installment

agreements without verification of their ability to pay in full.

Another concern expressed by the Assistant Commissioner was that many

taxpayers pay installments in cash and that to require EFT would probably

make this group of taxpayers, who essentially manage their finances on a

cash basis, even less compliant in paying their taxes. We could not verify

the extent of this potential concern because IRS had no specific data on

how many taxpayers currently pay installments in cash. We note, however,

that such taxpayers could be granted automatic waivers.

Conclusions The reported successful practices of two states in using EFT for installment

agreement payments appear to offer IRS the potential to make its

installment agreement program more effective and efficient. In Minnesota

and California, EFT is now the method used by most taxpayers to make

their installment payments. With EFT, the two states reported they have

reduced the percentage of taxpayer defaults and decreased the

administrative costs of their installment agreement programs while

achieving higher and faster collections. The benefits reported by these

states were achieved with programs that included waivers in certain

circumstances. Other users, such as banks, have also acknowledged the

benefits of EFT, and the federal government has taken steps to promote

greater usage for other nontax payments.

Page 14 GAO/GGD-98-112 EFT Usage for Installment Agreements
B-275098 

Agency Comments

and Our Evaluation

In his letter dated April 15, 1998, the Commissioner of Internal Revenue

concurred with our report findings that greater use of EFT might increase

the efficiency and effectiveness of IRS’ installment agreement program. Our

draft report included a recommendation that IRS develop a strategy to

increase EFT usage for installment payments, and the Commissioner stated

that IRS is amenable to pursuing a voluntary program that promotes EFT

installment payments. IRS agreed to revisit its procedures and training

materials “to ensure there is sufficient emphasis on educating taxpayers

on the benefits of EFT and encouraging taxpayers to sign up for EFT

agreements.” IRS also reiterated the concerns it has about requiring EFT

usage for installment agreements, as discussed in this report (see pp. 13

and 14).

As we were finalizing our report, the IRS Commissioner announced major

structural and organizational changes for the agency, and congressional

leaders were considering legislation calling for one of the most

far-reaching overhauls of IRS in decades. The proposed changes most likely

will affect IRS’ administrative operations and processes and future

interactions with taxpayers. The proposals include, among other things,

ways to improve the service IRS provides to taxpayers and expand

taxpayers’ rights in their dealings with IRS.

Given the complexities of the proposed IRS restructuring and the need to

prioritize the necessary changes to IRS’ administrative processes, we are

not making a recommendation regarding EFT to IRS at this time. However,

as it continues to develop strategies to improve tax administration and the

services it provides to taxpayers, IRS may want to review the potential

benefits that greater use of EFT for installment payments can offer it and

taxpayers.

We are sending copies of this report to the Ranking Minority Members of

the House Ways and Means Committee and the Subcommittee on

Oversight, the Chairman and Ranking Minority Member of the Senate

Committee on Finance, various other congressional committees, the

Secretary of the Treasury, the Commissioner of Internal Revenue, and

other interested parties. We also will make copies available to others upon

request.

Page 15 GAO/GGD-98-112 EFT Usage for Installment Agreements
B-275098 

Please contact me at (202) 512-9110 if you or your staff have any questions.

The major contributors to this report are listed in appendix II.

James R. White

Associate Director, Tax Policy

 and Administration Issues

Page 16 GAO/GGD-98-112 EFT Usage for Installment Agreements
Page 17 GAO/GGD-98-112 EFT Usage for Installment Agreements
Contents

Letter 1

Appendix I 

Comments From the

Internal Revenue

Service

20

Appendix II 

Major Contributors to

This Report

22

Table Table 1: IRS’ Installment Agreement Defaults by Rates and

Dollars

11

Abbreviations

ACH Automated Clearing House

EFT electronic funds transfer

FMS Financial Management Service

FTB Franchise Tax Board

IRS Internal Revenue Service

MDOR Minnesota Department of Revenue

NACHA National Automated Clearing House Association

NAFTA North American Free Trade Agreement

Page 18 GAO/GGD-98-112 EFT Usage for Installment Agreements
Page 19 GAO/GGD-98-112 EFT Usage for Installment Agreements
Appendix I 

Comments From the Internal Revenue

Service

Page 20 GAO/GGD-98-112 EFT Usage for Installment Agreements
Appendix I 

Comments From the Internal Revenue

Service

Page 21 GAO/GGD-98-112 EFT Usage for Installment Agreements
Appendix II 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Charlie W. Daniel, Assistant Director

Keith E. Steck, Evaluator

Joseph E. Jozefczyk, Adviser

Elizabeth W. Scullin, Communications Analyst

Chicago Field Office Thomas D. Venezia, Core Group Manager

David R. Lehrer, Evaluator-in-Charge

(268752) Page 22 GAO/GGD-98-112 EFT Usage for Installment Agreements
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