United States General Accounting Office 

GAO Report to the Secretary of the Treasury 

and the Director of the Office of 

Management and Budget 

October 2003 DEBT COLLECTION 

Opportunities Exist 

for Improving FMS’s 

Cross-Servicing 

Program 

GAO-04-47


a
Highlights of GAO-04-47, a report to the 

Secretary of the Treasury and the Director 

of the Office of Management and Budget 

GAO has previously reviewed 

facets of Treasury’s Financial 

Management Service’s (FMS) 

cross-servicing efforts. These 

reviews did not include FMS’s 

handling of nontax debts that were 

returned to FMS uncollected by its 

private collection agency (PCA) 

contractors because FMS officials 

did not consider the cross-servicing 

program to be fully mature. During 

fiscal years 2000, 2001, and 2002, 

FMS’s PCA contractors returned 

about $3.9 billion of uncollected 

debts to FMS. This report focuses 

primarily on (1) actions taken by 

FMS on uncollected nontax debts 

returned from its PCA contractors 

and (2) actions taken, if any, by 

FMS and the Office of Management 

and Budget (OMB) to ensure that 

federal agencies are reporting their 

eligible uncollectible nontax debts 

to IRS as income to debtors. 

GAO recommends that Treasury 

(1) help ensure that all appropriate 

collection action is taken on debts 

returned from PCA contractors, 

(2) increase opportunities for 

collection, and (3) help maximize 

the soundness of FMS’s crossservicing program. GAO also 

recommends that OMB take steps 

to improve agencies’ compliance 

with standards and policies for 

writing off and closing out debts. 

Treasury concurred with most of 

GAO’s findings but raised a number 

of points about certain of the 

recommendations. OMB agreed 

with the thrust of GAO’s 

recommendation. 

www.gao.gov/cgi-bin/getrpt?GAO-04-47. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gary Engel 

(202) 512-3406 or EngelG@gao.gov. 

October 2003 

DEBT COLLECTION 

Opportunities Exist For Improving FMS’s 

Cross-Servicing Program 

Although FMS has made progress in implementing its cross-servicing 

program and considers it to be fully mature, opportunities exist to improve 

the program. 

FMS had not reviewed most of the debts returned to it by its PCA 

contractors to determine whether any opportunities for collection or other 

recoveries remained, including those possible from reporting closed-out 

debts to IRS as income to debtors. For example, as shown in the figure 

below, about $3.7 billion of the $6.6 billion of debts that were at FMS for 

cross-servicing as of February 28, 2003, were being kept in the Treasury 

Offset Program (TOP) for passive collection after they had been returned 

uncollected to FMS by PCA contractors. Passive collection entailed no 

further collection action on the part of FMS other than minimal efforts 

through offset, and collections on debts in passive collection through offset 

totaled only about $9 million through February 28, 2003. Various problems 

hindered collections through offset, including the fact that many of the debts 

were beyond the 10-year statutory and regulatory limitations for offset. 

GAO’s analysis also showed that relatively few debts in cross-servicing were 

being referred to the Department of Justice for more aggressive enforced 

collection action. This analysis further showed that FMS continues to have 

problems with debt compromises and the reporting of a key cross-servicing 

performance measure. 

Finally, neither FMS nor OMB monitored or reported the extent to which 

federal agencies governmentwide were closing out all eligible uncollectible 

debts and reporting those amounts to IRS as income to debtors. 

Percentage of Cross-Serviced Debts in Passive Collection as of February 28, 2003 
Contents


Letter 1 

Results in Brief 3 

Background 6 

Scope and Methodology 8 

Collection Opportunities Were Lost on Uncollected Debts Returned 

from PCA Contractors 9 

Inadequate Monitoring and Reporting of Closed-Out Debts to 

IRS 14 

FMS Missed Certain Opportunities to Improve Overall 

Collections 16 

Problems Identified with Debt Compromises and a Key Performance 

Measure 23 

Conclusions 31 

Recommendations for Executive Action 31 

Agency Comments and Our Evaluation 34 

Appendixes 

Appendix I: Sampling Method 41 

Appendix II:	 Comments from the Department of the Treasury 42 

GAO Comments 46 

Appendix III: Staff Acknowledgments 47 

Tables Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year 

2002 30 

Table 2: Details of Cases Selected 41 

Figures Figure 1: Percentage of Cross-Serviced Debts in Passive Collection 

as of February 28, 2003 10 

Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by 

Fiscal Year Referred 18 

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Page i GAO-04-47 FMS Cross-Servicing Opportunities 
Page 1 GAO-04-47 FMS Cross-Servicing Opportunities 

A

United States General Accounting Office 

Washington, D.C. 20548 

October 31, 2003


The Honorable John W. Snow


The Secretary of the Treasury


The Honorable Joshua B. Bolten


Director, Office of Management and Budget


The Debt Collection Improvement Act of 1996 (DCIA) gave the Department 


of the Treasury (Treasury) significant governmentwide responsibilities for 


collecting federal nontax debts delinquent more than 180 days that are


referred by federal agencies for collection action, known as cross-


servicing. Treasury’s Financial Management Service (FMS) is responsible 


for carrying out Treasury’s cross-servicing responsibility. Nontax debts 


that federal agencies reported as delinquent more than 180 days totaled 


over $60 billion at the end of each of the last 4 fiscal years.1 However, as of 


September 30, 2002, federal agencies reported to FMS that only about 


$8.5 billion, or approximately 13 percent, of the approximately $64 billion 


of reported nontax debts delinquent over 180 days were eligible for cross-


servicing. FMS has continued to express concern about the accuracy,


completeness, and validity of debts reported by agencies as eligible for and 


excluded from the DCIA cross-servicing provisions, and over the years, we 


have identified and reported on problems regarding the accuracy and


completeness of exclusions from cross-servicing as reported by certain 


federal agencies.2 Nonetheless, for the billions of dollars of nontax 


delinquent debts that agencies do refer for cross-servicing, it is critical that 


FMS manage its collection activities to fully utilize available debt collection 


tools and maximize collection opportunities.


1

These debts include those classified by federal agencies as “currently not collectible” 

(CNC). Generally, write-off is mandatory for delinquent debts older than 2 years. The agency 

must either classify the debts as CNC or discharge the debts. The collection process 

continues on debts classified as CNC until the agency determines it is no longer costeffective to pursue collection. At that point, the debt should be discharged or closed out. 

2

See, for example, U.S. General Accounting Office, Debt Collection Improvement Act of 

1996: Department of Agriculture’s Farm Service Agency Has Not Yet Fully Implemented 

Certain Key Provisions, GAO-02-463 (Washington, D.C.: Mar. 29, 2002). 

Page 1 GAO-04-47 FMS Cross-Servicing Opportunities 
In January 2003, we reported that FMS had made significant progress in 

implementing key provisions of DCIA, which directs and authorizes use of 

a wide range of collection tools.3 For example, we reported that FMS’s 

successful merger of the Tax Refund Offset Program with the Treasury 

Offset Program (TOP), both of which are designed to offset federal 

payments up to the amount of the delinquent federal debt, and system 

enhancements have streamlined operations and contributed over $1 billion 

in nontax debt collections from tax refund offsets during each of fiscal 

years 2000, 2001, and 2002. In addition, FMS’s incorporation of Social 

Security benefit payments into TOP in May 2001 resulted in about 

$114 million in reported nontax debt collections from Social Security 

benefit offsets through early July 2003. 

While we have previously reviewed various facets of FMS’s cross-servicing 

efforts, we did not review FMS’s handling of nontax debts that remained 

uncollected after being returned to FMS from its private collection agency 

(PCA) contractors because FMS did not consider the cross-servicing 

program to be fully mature at that time.4 FMS officials now consider the 

cross-servicing program to be fully mature. Therefore, as follow-up to our 

prior work, this review focused primarily on nontax delinquent debts that 

remained uncollected after they had been at both FMS and its PCA 

contractors for cross-servicing. Specifically, our objectives were to 

evaluate (1) actions taken by FMS on uncollected nontax debts returned 

from its PCA contractors; (2) FMS’s efforts to ensure that eligible 

uncollectible nontax debts, which federal agencies rely on FMS to report 

on their behalf to the Internal Revenue Service (IRS) as income to the 

debtors, are promptly identified and accurately reported; and (3) actions 

taken, if any, by FMS and the Office of Management and Budget (OMB) to 

ensure that federal agencies are reporting their eligible uncollectible 

nontax debts to IRS as income to the debtors. In addition to addressing 

these objectives, this report discusses opportunities for FMS to (1) improve 

collection of nontax debts through cross-servicing and (2) enhance the 

soundness of certain operational and reporting facets of its cross-servicing 

program. 

3

U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of the Treasury, GAO-03-109 (Washington, D.C.: January 2003). 

4

U.S. General Accounting Office, Debt Collection: Treasury Faces Challenges in 

Implementing Its Cross-Servicing Initiative, GAO/AIMD-00-234 (Washington, D.C.: Aug. 4, 

2000). 

Page 2 GAO-04-47 FMS Cross-Servicing Opportunities 
Results in Brief	 Opportunities exist to improve FMS’s cross-servicing program for federal 

nontax debts in the following areas: (1) the extent to which debts are kept 

in TOP for passive collection after they have been returned uncollected to 

FMS by PCA contractors; (2) FMS’s adherence to its procedures for 

returning certain uncollected debts to referring agencies; (3) the extent to 

which FMS and OMB monitor federal agencies’ reporting of closed-out 

debts to IRS as income to debtors; (4) the extent to which FMS refers debts 

to the Department of Justice (DOJ) for enforced collection and reports 

debts to TOP; (5) the adequacy of FMS’s system for tracking debt amounts 

forgiven and PCA contractors’ adherence to regulatory and contractual 

policies and procedures for forgiving debts through compromises with 

debtors; and (6) the reliability of FMS’s reporting on the extent to which 

agencies are referring eligible debts for cross-servicing. 

FMS did not review most debts returned uncollected from PCA contractors 

to determine the appropriate next step to maximize collection of the debts. 

As of February 28, 2003, FMS had approximately $6.6 billion of debts in 

cross-servicing. About $3.7 billion of these debts had been returned 

uncollected by FMS’s PCA contractors and were being kept in TOP for 

passive collection through offset.5 While offset yielded some collections 

for debts in passive collection, the amounts were small, totaling only about 

$9 million on debts returned to FMS by its PCA contractors. In addition, 

many of the debts returned to FMS by its PCA contractors had no prospects 

for collection through offset because they were beyond the 10-year 

statutory and regulatory limitations applicable to offset.

6 

FMS also did not review about $446 million of the approximately 

$1.1 billion of uncollected debts that it returned to referring agencies 

during fiscal years 2000, 2001, and 2002 to determine whether it should 

close out and report the debts to IRS on behalf of agencies that had 

authorized FMS to do so. We determined that FMS summarily returned 

these debts to referring agencies without ensuring that the required 

collection activities had been performed. For example, FMS did not review 

debts totaling about $97 million to determine their eligibility for IRS 

reporting even though they met two key criteria for IRS reporting—they 

5

For the purpose of this report, offset refers to administrative offset and tax refund offset. 

6

31 U.S.C. 3716(e)(1) is applicable to administrative offset and 31 C.F.R. 285.2(d)(1)(ii) is 

applicable to tax refund offset to collect nontax debts. 

Page 3 GAO-04-47 FMS Cross-Servicing Opportunities 
had Taxpayer Identification Numbers (TIN) and their referring agencies 

had granted FMS authority to report them to IRS. 

Neither FMS nor OMB monitored or reported the extent to which federal 

agencies were closing out uncollectible debts and reporting eligible 

amounts to IRS. The Treasury Reports on Receivables (TROR) for the 24 

Chief Financial Officers (CFO) Act agencies7

 showed that for calendar year 

2002, of the approximately $3.2 billion of nontax debts that these agencies 

reported as closed out, about $1 billion, or approximately 31 percent, of 

this amount was reported to IRS as income to the debtors.8 FMS does not 

require federal agencies to disclose in their TRORs why closed-out debts 

are not reported to IRS, and neither FMS nor OMB officials could 

specifically explain why certain federal agencies had reported different 

amounts for closed-out debts and debts reported to IRS. 

In looking for missed cross-servicing collection opportunities, we further 

found that FMS had referred only a small amount of debt to the Department 

of Justice (DOJ) for enforced collection because FMS did not establish 

effective processes or procedures for identifying debts to forward to DOJ. 

We also found that FMS had not reported about $356 million of debts to 

TOP for offset payments as required by FMS procedures. As of February 

28, 2003, most of these debts were at secondary PCA contractors and had 

been in cross-servicing for an average of about 11 months without having 

been sent to TOP. Further, although many nontax debts involved 

secondary debtors, such as cosignors, from which collection can be 

pursued, FMS had not reported such debtors to TOP. 

7

One of the 24 CFO Act agencies, the Federal Emergency Management Agency (FEMA), was 

transferred to the new Department of Homeland Security (DHS) effective March 1, 2003. 

With this transfer, FEMA will no longer be required to prepare and have audited stand-alone 

financial statements under the CFO Act, leaving 23 CFO Act agencies. DHS, along with most 

other executive branch agencies, will be required to prepare and have audited financial 

statements under the Accountability of Tax Dollars Act of 2002, Pub. L. No. 107-289, 116 

Stat. 2049 (Nov. 7, 2002). 

8

The format of the TROR is on a fiscal year basis (i.e., October 1, 2001 to September 30, 

2002). To determine the reported amounts for closed-out debts and debts reported to IRS for 

the 24 CFO Act agencies for calendar year 2002, we obtained and analyzed the 24 CFO Act 

agencies' quarterly TRORs for fiscal years 2001, 2002, and 2003. GAO has not assessed the 

completeness and accuracy of the information in the TRORs for the 24 CFO Act agencies; 

therefore, we have not determined whether the TROR figures reported by the agencies are 

understated, overstated, or accurate. 

Page 4 GAO-04-47 FMS Cross-Servicing Opportunities 
In addition, we identified continuing problems in FMS’s administration of 

compromises with debtors. FMS’s cross-servicing database showed that inhouse FMS collectors and FMS’s PCA contractors had established 

repayment agreements forgiving a total of at least $51 million of delinquent 

debts during fiscal years 2000, 2001, and 2002. However, the crossservicing database did not identify the forgiven amounts on debts. 

Specifically, it did not include amounts forgiven by in-house FMS collectors 

in accordance with established compromise agreements between FMS and 

debtors unless the agreed-upon reduced amount had been paid in full. In 

addition, PCA contractors that established compromise agreements with 

debtors often did not have documentation to justify their rationale for 

concluding that debtors could not pay the full debt amount or to support 

the amounts forgiven. 

Finally, FMS overstated federal agencies’ progress in referring eligible 

nontax debts for cross-servicing. Although FMS reported that agencies had 

referred about 96 percent of over $8 billion of reported eligible debts, we 

determined that the referral rate was about 79 percent, thereby leaving 

room for improvement. 

We are making a number of recommendations to Treasury and OMB to 

increase opportunities for collections and other recoveries of debts and to 

help maximize the operational soundness of the cross-servicing program. 

Treasury and OMB generally agreed with our findings. However, Treasury 

raised a number of points regarding our specific findings and 

recommendations that missed the central concerns conveyed in our report 

and tended to downplay their significance. How well these findings, along 

with others relating to cross-servicing that we have cited in previous 

reports, are addressed is central to success in collecting delinquent nontax 

debt and creating credibility among debtors that the federal government is 

serious about its collection efforts. 

Page 5 GAO-04-47 FMS Cross-Servicing Opportunities 
Background	 DCIA was enacted by the Congress, in part, to collect nontax debts 

delinquent more than 180 days by referring such debts to Treasury or a 

Treasury-approved debt collection center for cross-servicing.9 FMS is the 

only Treasury-approved governmentwide debt collection center. 

After receiving a debt from a referring federal agency, FMS generally keeps 

the debt for 30 days at its Debt Management Operations Center. During this 

time, FMS is to send a letter demanding payment to the debtor. An in-house 

FMS collector may attempt to contact the debtor to obtain payment in full 

or secure payment through other options, including compromise.10 If the 

debt has not been collected 20 days after the date of the demand letter, 

FMS is to report the debt to TOP if the referring agency has not already 

done so.11 

If the referred debt remains uncollected after it has been at FMS for 30 

days, FMS typically sends the debt to one of its five PCA contractors.12 The 

PCA contractor that receives the debt initially—the primary PCA 

contractor—is generally given 270 days from the date it receives the debt 

from FMS to collect or resolve the debt.

13 If the primary PCA contractor is 

unable to collect or resolve the debt, it sends the debt back to FMS. FMS 

then typically sends the debt to another PCA contractor, the secondary 

PCA contractor for the debt. The secondary PCA contractor is also given 

270 days from the date it receives the debt from FMS to collect or resolve 

the debt. FMS requires its PCA contractors to attempt to locate debtors, 

send demand letters, and attempt to obtain full payment before 

9

Federal agencies may, at their discretion, refer valid, legally enforceable debts for crossservicing that are less than 180 days delinquent; however, it may not be feasible for certain 

agencies to do so. 

10FMS’s policy is to attempt to obtain payment in full. However, other payment options 

include (1) repayment agreement for payment in full, (2) lump sum compromise settlement, 

and (3) compromise repayment agreement. 

11DCIA requires that eligible debts delinquent more than 180 days be reported to TOP. 

12FMS’s current PCA contract covers fiscal years 2001 through 2006. The five PCA 

contractors are located in California, Florida, Georgia, New York, and Texas. 

13FMS recently increased the number of days PCA contractors are given to collect or resolve 

referred nontax debts from 180 days to 270 days. Administrative debt resolution occurs 

when a PCA contractor determines that a delinquent debtor is either bankrupt, deceased, or 

disabled and financially unable to pay the debt. 

Page 6 GAO-04-47 FMS Cross-Servicing Opportunities 
compromising any debt. FMS may refer debts to DOJ for litigation and 

enforced collection at any time. 

Debts that are returned uncollected to FMS from its secondary PCA 

contractors are to be either retained by FMS for additional collection 

action or returned to the referring agencies.14 According to the Federal 

Claims Collection Standards,15 federal agencies must terminate all 

collection action before closing out a delinquent nontax debt and must 

report certain closed-out debts to IRS.16 

Federal agencies are required to report annually in their TRORs on the 

status of their nontax debts.17 TRORs are FMS’s only comprehensive 

means of collecting information on the federal government’s nontax debt 

portfolio, including debts written off, closed out, and reported to IRS. 

TRORs are also used to collect information on nontax debts delinquent 

more than 180 days to help FMS monitor federal agencies’ implementation 

of DCIA. FMS summarizes the information in the federal agencies’ TRORs 

annually in Report to the Congress on U.S. Government Receivables and 

Debt Collection Activities of Federal Agencies. 

OMB assists the President by developing governmentwide policies for the 

effective and efficient operation of the executive branch. As such, OMB 

establishes credit management policy for the federal government, including 

setting standards for extending credit, managing lenders participating in 

guaranteed loan programs, servicing nontax receivables, and collecting 

delinquent nontax debts. In addition, OMB is responsible for reviewing 

federal agencies’ policies and procedures related to credit programs and 

debt collection activities. 

14FMS collectors are required to review debts to determine whether further collection 

actions, such as reporting debts to TOP or IRS, are needed prior to returning the debts back 

to the referring agencies. If no further collection actions are needed, the debt is returned to 

the referring agency. 

1531 C.F.R. Parts 901-904. 

16According to the Federal Claims Collection Standards, upon close-out of a debt, the agency 

must report the close-out to IRS in accordance with the requirements of 26 U.S.C. 6050P and 

26 C.F.R. 1.6050P-1. IRS Form 1099C is used to report the uncollectible debt as income to 

the debtor, which may be taxable at the debtor’s current tax rate. 

17All CFO Act agencies and non-CFO Act agencies with nontax ending debt balances of $50 

million or greater are required to report quarterly. 

Page 7 GAO-04-47 FMS Cross-Servicing Opportunities 
Scope and 

Methodology 

To address our objectives, we interviewed FMS officials and reviewed 

pertinent FMS documents and reports to obtain an understanding of FMS’s 

policies and procedures for nontax debts that are returned uncollected to 

FMS by its PCA contractors and for closing out uncollectible nontax debts 

and reporting such debts to IRS as income to the debtor. We also reviewed 

applicable federal regulations and guidance for federal nontax debt 

collection, close-out, and IRS reporting, including the Federal Claims 

Collection Standards, OMB Circular A-129, and IRS instructions for 

reporting closed-out debts. In addition, we obtained and analyzed FMS’s 

cross-servicing database for the period from inception of the crossservicing program in fiscal year 1996 through February 28, 2003, to 

determine what collection actions in-house FMS collectors performed on 

debts that had been returned uncollected from its PCA contractors and 

whether the in-house FMS collectors properly identified all uncollected 

debts that could be reported to IRS, including amounts that had been 

forgiven through compromise. 

A scope limitation prevented us from using statistical sampling techniques 

to determine whether compromises made by in-house FMS collectors were 

justified, supported, and reported to IRS. FMS’s cross-servicing database 

did not identify all forgiven amounts resulting from compromise 

agreements made by in-house FMS collectors; the database identified 

forgiven amounts only for in-house FMS agreements if the compromised 

amount had been paid in full and the debt settled.

18 The database did not 

include the forgiven amounts for in-house compromise agreements that 

were active but had not yet been settled. We did use statistical sampling 

techniques to select from FMS’s PCA cross-servicing database 54 debts that 

had been compromised by FMS’s PCA contractors from October 1, 2002, 

through February 28, 2003.19 Using electronic and hard-copy information 

provided by FMS for the selected compromised debts, we determined 

whether the compromises were justified, supported, and reported to IRS. 

We projected the results from our sample of compromises to the 

population from which the sampled items were drawn. (App. I contains 

additional information on the sampling method.) 

18If the debtor defaults on the compromise agreement, the debtor owes the full balance of 

the debt prior to compromise, less any amounts paid. 

19We selected October 1, 2002, through February 28, 2003, as our testing period because FMS 

had performed reviews of compromises made by its PCA contractors for prior periods and 

found problems. 

Page 8 GAO-04-47 FMS Cross-Servicing Opportunities 
In addition, we interviewed FMS and OMB officials about the extent to 

which their respective agencies monitor and report on federal agencies 

governmentwide regarding identification and reporting of closed-out debts 

to IRS. We also obtained and analyzed TRORs for all 24 CFO Act agencies 

to determine the nontax debt close-out and IRS reporting information for 

calendar year 2002. 

To determine whether information in FMS’s cross-servicing database was 

reliable, we reviewed documentation provided by FMS supporting 

reliability testing performed by FMS and its contractors on the database. In 

addition, we performed electronic testing of specific data elements in the 

database that we used to perform our work. Based on our review of FMS’s 

documents and our own testing, we concluded that the data elements used 

for this report are sufficiently reliable for the purpose of the report. 

We performed our work from October 2002 through August 2003 in 

accordance with U.S. generally accepted government auditing standards. 

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

Treasury and the Director of OMB or their designees. The Commissioner of 

FMS provided Treasury’s comments, which are reprinted in appendix II. 

On October 21, 2003, staff from OMB provided us with OMB’s oral 

comments on the draft. Treasury’s and OMB’s comments are discussed in 

the Agency Comments and Our Evaluation section of this report and are 

incorporated in the report as applicable. 

Collection 

Opportunities Were 

Lost on Uncollected 

Debts Returned from 

PCA Contractors 

As of February 28, 2003, FMS had approximately $6.6 billion of debts in 

cross-servicing. More than half of these debts had been returned 

uncollected by FMS’s secondary PCA contractors and were being kept in 

TOP for passive collection. Passive collection entailed no further 

collection action other than minimal efforts through offsets, and certain 

debts in passive collection were not eligible for such offsets. In addition, 

FMS did not review certain uncollected debts that FMS returned to the 

referring agencies to determine whether all collection activity had been 

performed on the debts, including whether FMS should close out and 

report the debts to IRS on behalf of the agencies. Further, certain debts 

that were not in passive collection or returned to referring agencies were 

kept in inactive status where no collection activities, including referral to 

TOP, were performed. Consequently, opportunities for maximizing 

collections or other recoveries were lost. 

Page 9 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS Did Not Review 

Uncollected Debts Left in 

TOP for Passive Collection 

When debts were returned from secondary PCA contractors, FMS simply 

kept most of them in TOP, where they largely lay dormant without any 

review to determine the next best course of action to improve collections. 

For fiscal years 2000, 2001, and 2002, FMS kept about $2.6 billion of 

uncollected nontax debts returned from its secondary PCA contractors in 

TOP for passive collection. As of February 28, 2003, debts retained in TOP 

for passive collection totaled about $3.7 billion and, as shown in figure 1, 

represented 56 percent of the approximately $6.6 billion of debts that were 

at FMS for cross-servicing at that time.

20 Through February 28, 2003, FMS 

had collected only about $9 million on debts in passive collection through 

offsets, which was the only collection tool being used to collect these 

returned debts. 

Figure 1: Percentage of Cross-Serviced Debts in Passive Collection as of February 

28, 2003 

56% 

44% Other collection statuses ($2.9 billion) 

Passive collection status ($3.7 billion) 

Source: GAO. 

Note: Derived from analysis of FMS’s cross-servicing database as of February 28, 2003. 

FMS did not have written procedures for reviewing debts kept in TOP for 

passive collection. It is important to note that FMS officials stated that 

20In addition to the approximately $2.6 billion of debts returned from secondary PCA 

contractors in fiscal years 2000 through 2002, about $1.1 billion were retained in TOP for 

passive collection on debts that were returned from secondary PCA contractors either prior 

to fiscal year 2000 or in fiscal year 2003. 

Page 10 GAO-04-47 FMS Cross-Servicing Opportunities 
because of system limitations, FMS did not identify specific debts that were 

in TOP for passive collection. However, we were able to identify debts in 

TOP for passive collection using off-the-shelf database analysis software. 

Certain nontax debts kept in TOP for passive collection warrant additional 

review to determine the next best course of action to maximize collections 

or other recoveries, such as those possible through administrative wage 

garnishment (AWG) or reporting closed-out debts to IRS. For example, 

DCIA authorized federal agencies to use AWG to collect delinquent nontax 

debts.21 FMS can perform AWG on behalf of other federal agencies as part 

of cross-servicing, although only on behalf of agencies that have authorized 

FMS to do so. FMS began using AWG with the assistance of its PCA 

contractors during fiscal year 2002. Because most of the debts in TOP for 

passive collection were returned to FMS from PCA contractors before any 

agencies had authorized FMS to use AWG on their behalf, most debts in 

TOP for passive collection have not yet been assessed for AWG collection 

opportunities. Further, as of our fieldwork completion date, only four 

federal agencies had authorized FMS to perform AWG on their behalf.

22 

However, FMS expects additional agencies to provide such authorization in 

the future. 

In addition, about $449 million of nontax debts in TOP for passive 

collection as of February 28, 2003, will not be collected through offset 

because the statutory and regulatory 10-year limitations for offsets has 

expired for those debts.23 According to FMS officials, FMS’s crossservicing system did not remove debts from TOP when the debts reached 

the 10-year limitation, so such debts were not evaluated for possible closeout and reporting to IRS.

24 

21AWG, as authorized by DCIA, is an administrative process that allows an agency to issue an 

order requiring the debtor’s employer to withhold up to 15 percent of the debtor’s disposable 

pay for payment of the debt. 

22The four agencies that have authorized FMS to perform AWG on their behalf are the 

Department of Housing and Urban Development, the Securities and Exchange Commission, 

the James Madison Foundation, and the Railroad Retirement Board. 

23Judgment debts and student loans are not subject to the statutory and regulatory 10-year 

limitations. None of the approximately $449 million of debts were judgment debts or 

student loans. 

24According to FMS officials, the debts are removed only if they are subsequently matched 

to payments in TOP. 

Page 11 GAO-04-47 FMS Cross-Servicing Opportunities 
Certain other debts in TOP for passive collection are also unlikely to yield 

any collections through offsets—those for which we determined the 

debtors’ Taxpayer Identification Numbers (TIN) were invalid or belonged 

to deceased individuals or cases in which the debtors were bankrupt. 

Specifically, we identified about $24 million of delinquent nontax debts for 

which the debtors’ TINs were invalid.

25 In addition, using the Social 

Security Administration’s (SSA) Death Master File, we identified over 2,500 

nontax debts totaling about $18 million with TINs that belonged to 

reportedly deceased debtors, including one with a referred balance of 

approximately $4 million.26 This debt had been in TOP since November 

2001 with no collections through offsets. We also identified 69 delinquent 

Medicare debts belonging to the Department of Health and Human Services 

(HHS) totaling about $12 million that were being held in TOP after return 

from secondary PCA contractors for which FMS’s cross-servicing database 

indicated that the debtors were in bankruptcy.

27 According to FMS 

officials, when a bankruptcy is recorded in the cross-servicing database for 

a particular debt, the cross-servicing system marks the debtor as bankrupt 

for all debts associated with that debtor but does not remove them from 

TOP. In-house FMS collectors typically removed from TOP only the 

specific debt that they were working even though others had been flagged 

as belonging to the same bankrupt debtor. 

As a result of our analyses and inquiries, FMS has initiated a review of 

debts in TOP to identify those beyond the statutory and regulatory 10-year 

limitations for offsets. As of April 2003, FMS had identified over 7,300 such 

debts, totaling about $463 million (an increase of $14 million over the 

25IRS periodically provides a list of prefix numbers for valid Employer Identification 

Numbers on its Web site. The Social Security Administration (SSA) provides a description 

of invalid Social Security numbers on its Web site. We used these Web sites to identify 

invalid TINs. There may be other debts with invalid TINs that we could not identify using 

the information from IRS and SSA Web sites. 

26SSA stores death information for each individual who has been issued a Social Security 

number and whose death has been reported to SSA. SSA periodically extracts the death 

information and makes this information, called the Death Master File, available for sale to 

the public by the Department of Commerce. 

27In total, FMS’s cross-servicing database showed that about $110 million of HHS’s Medicare 

debts, including the approximately $12 million in passive collection, were in TOP and 

available for liquidation by offsets even though the debtors were in bankruptcy. The 

automatic stay mandated by 11 U.S.C. 362 prevents the government from pursuing 

collection action against debtors in bankruptcy for certain debts that arise prior to the 

commencement of the bankruptcy litigation. 

Page 12 GAO-04-47 FMS Cross-Servicing Opportunities 
$449 million of debts we identified as of February 28, 2003). An FMS 

official stated that these debts would be removed from TOP and evaluated 

for possible close-out and reporting to IRS as income to the debtors. The 

official also stated that FMS would develop a process for routinely 

identifying such debts. In addition, FMS officials stated that FMS will 

revise its policies and procedures so that collectors will be instructed to 

review the debtor and all associated nontax debts whenever a bankruptcy 

is discovered for a debt and determine debts that should be removed from 

TOP. Finally, FMS officials stated that FMS is in the process of developing 

a new automated cross-servicing system, called FedDebt. According to 

FMS officials, once FedDebt is implemented in January 2005, FMS will be 

able to routinely identify individual debts that are in passive collection. 

FMS Did Not Perform 

Collection and Close-Out 

Reviews for All Debts 

Returned to Referring 

Agencies and Debts in 

Inactive Status 

Through February 28, 2003, FMS returned to referring agencies about 

$1.1 billion of delinquent nontax debts that had been returned uncollected 

to FMS by secondary PCA contractors during fiscal years 2000, 2001, and 

2002. FMS’s cross-servicing procedures require that in-house FMS 

collectors, prior to returning debts to referring agencies, review the 

collection activity on the debts to determine whether they are eligible to be 

returned to the referring federal agencies. As part of this review, the crossservicing procedures require collectors to determine whether the debts 

should be closed out and reported to IRS by FMS. We found, however, that 

FMS had summarily returned about 40 percent of the $1.1 billion to 

referring agencies without first ensuring that the required collection 

activities had been performed. 

According to information in FMS’s cross-servicing database, in April 2002 

FMS had a substantial backlog of debts that had been returned to FMS by 

secondary PCA contractors over the past several years that were primarily 

in inactive status, meaning that no collection action was taking place. To 

eliminate this backlog, FMS used its automated system to summarily return 

about 41,000 debts totaling approximately $446 million to the referring 

agencies in April 2002. According to agency procedures and as confirmed 

by an FMS official, prior to the April 2002 return of the debts to the 

referring agencies, FMS should have first evaluated these debts to 

determine whether close-out was appropriate and whether the debts 

should be reported to IRS. Our analysis showed that about $97 million of 

these returned debts met two criteria for being reported by FMS to IRS as 

income to the debtor: (1) the debts had TINs and (2) the referring agencies 

had granted FMS authority to report the debts to IRS. 

Page 13 GAO-04-47 FMS Cross-Servicing Opportunities 
Our review of the cross-servicing database showed that FMS continues to 

face challenges in reviewing uncollected debts returned from secondary 

PCA contractors. Specifically, as of February 28, 2003, FMS had 

approximately $80 million of debts in inactive status even though its PCA 

contractors returned these uncollected debts to FMS during fiscal year 

2002. According to an FMS official, the backlog occurred because the 

automated cross-servicing system did not always identify debts returned to 

FMS by secondary PCA contractors that required further collection review 

by in-house FMS collectors. The FMS official stated that FedDebt, when 

implemented in January 2005, would correct this problem. 

Inadequate Monitoring 

and Reporting of 

Closed-Out Debts to 

IRS 

DCIA gives OMB responsibility for annual reporting to the Congress on any 

problems regarding federal agency progress in improving policies and 

standards for closing out debts,28 and FMS is responsible for the form and 

content of the TROR, which FMS uses to monitor federal agencies’ 

implementation of DCIA. Neither OMB nor FMS monitored or reported on 

the extent to which agencies governmentwide closed out debts and 

reported them to IRS. The TRORs for 24 CFO Act agencies showed that the 

agencies reported that about $1 billion of the approximately $3.2 billion of 

nontax debts that were reported closed out by those agencies were 

reported to IRS as income to the debtors for calendar year 2002.29 

Additionally, the TRORs that the agencies used to report did not disclose 

why closed-out debts were not reported to IRS and did not include closed28Specifically, DCIA requires OMB to (1) review the standards and policies of each federal 

agency for compromising, writing down, forgiving, or discharging indebtedness arising from 

programs of the agency; (2) determine whether those standards and policies are consistent 

and protect the interests of the United States; (3) direct the head of the agency to make 

appropriate modifications to any federal agency’s standards or policies that the OMB 

Director determines are not consistent or do not protect the interests of the United States, 

and (4) report annually to the Congress on deficiencies in the standards and policies of 

federal agencies for compromising, writing down, forgiving, or discharging indebtedness, 

and progress made in improving those standards and policies. 

29In previous work, we found that certain federal agencies may not be properly reporting 

closed-out debts to IRS. For example, in fiscal year 2002, we reported that the Centers for 

Medicare & Medicaid Services was not reporting certain closed-out Medicare debts to IRS as 

income to debtors. U.S. General Accounting Office, Debt Collection Improvement Act of 

1996: HHS’s Centers for Medicare & Medicaid Services Faces Challenges to Fully 

Implement Certain Key Provisions, GAO-02-307 (Washington, D.C.: Feb. 22, 2002). In 

addition, we found that Farm Services Agency officials were unaware of the requirement to 

report closed-out debts to IRS as income for secondary debtors. U.S. General Accounting 

Office, Debt Collection: Agriculture Making Progress in Addressing Key Challenges, GAO03-202T (Washington, D.C.: Nov. 13, 2002). 

Page 14 GAO-04-47 FMS Cross-Servicing Opportunities 
out debts that had been previously classified as currently not collectible 

(CNC). These are significant reporting deficiencies because without such 

information, the TRORs cannot be used to determine the extent to which 

all eligible debts are closed out and reported to IRS. As a result of 

inadequate monitoring and reporting of closed-out debts to IRS, 

opportunities for recovery by reporting closed-out debts to IRS as income 

to debtors may have been lost. 

Neither OMB nor FMS officials could specifically explain why certain 

agencies had reported different amounts for debts closed out and debts 

reported to IRS. According to an OMB official, OMB does not have a formal 

process in place to review federal agencies’ standards and policies 

regarding debt collection, including reporting closed-out debts to IRS, and 

does not monitor the extent to which agencies close out debts and report 

them to IRS. The OMB official stated that OMB examiners, at their own 

discretion, might look at how federal agencies are closing out debts as part 

of the examiners’ overall evaluation of the agencies’ implementation of the 

President’s Management Agenda.30 According to the official, OMB has not 

submitted any reports to the Congress regarding problems with agencies’ 

standards and policies for closing out debts and reporting them to IRS. 

FMS officials stated that the large difference on the agencies’ TRORs 

between closed-out debts and debts reported to IRS may be attributable to 

situations involving debts that are not required to be reported to IRS.31 

However, FMS does not require federal agencies to disclose such 

information in their TRORs. Without such disclosures in the TRORs, it is 

not possible for FMS, OMB, or any other interested party to determine 

whether federal agencies are reporting their closed-out debts to IRS 

accurately and completely. 

Moreover, the agency TRORs understated the amount of debt closed out 

during calendar year 2002. Specifically, we determined and FMS officials 

acknowledged that the $3.2 billion of debts that were reported closed out 

30The President's Management Agenda, announced in the summer of 2001, is a strategy for 

improving the management of the federal government. The President's Management Agenda 

includes an emphasis on strategic management of human capital, competitive sourcing, 

improved financial performance, expanded electronic government, and budget and 

performance integration. 

31For example, 26 U.S.C. 6050P and 26 C.F.R. 1.6050P-1 exclude certain debts that are 

discharged in bankruptcy and debts less than $600 from IRS reporting requirements. 

Page 15 GAO-04-47 FMS Cross-Servicing Opportunities 
by the 24 CFO Act agencies did not include debts previously classified as 

CNC that were subsequently closed out. This is a significant deficiency in 

the TROR because CNC debts that are eventually closed out can be 

substantial. For example, the 24 CFO Act agencies reported about 

$10.1 billion of CNC debts at the end of calendar year 2002. Without 

information on whether CNC debts are closed out, the TRORs cannot be 

used to fully determine the extent to which all debts are closed out and 

reported to IRS. In spite of these reporting deficiencies, FMS officials 

stated that FMS does not have any plans to revise the TROR. 

FMS Missed Certain 

Opportunities to 

Improve Overall 

Collections 

In addition to taking little action to improve collections for debts that were 

returned uncollected by PCA contractors, FMS missed certain 

opportunities to improve overall cross-servicing collections. FMS did not 

establish effective processes or procedures for identifying debts to forward 

to DOJ. As a result, FMS had relatively few debts (about $30 million as of 

February 28, 2003) at DOJ for enforced collection action even though DOJ 

has been successful in collecting debts through civil litigation in the past. 

In addition, FMS did not report all eligible debts that had been referred for 

cross-servicing to TOP, as required by its cross-servicing procedures, and 

did not report secondary debtors, such as cosigners, to TOP. 

FMS Missed Enforced 

Collection Opportunities 

DOJ serves as the federal government’s “collector of last resort.” When a 

federal agency, including FMS, cannot collect certain debts 

administratively, DOJ can litigate the claims and, with judicial oversight, 

enforce collections by seizing bank, stock, and similar accounts from 

debtors; seizing and selling debtor-owned real estate and other property; 

and garnishing a higher percentage of debtors’ wages than AWG under 

DCIA allows.32 The benefits of enforced collection are reflected in past 

DOJ recoveries. In its fiscal year 2002 report to the Congress, FMS noted 

that DOJ collected about $10.9 billion in cash recoveries through civil 

litigation from fiscal year 1998 through fiscal year 2002. 

32Federal agencies, in cases where there is no evidence of assets, can also refer delinquent 

debts to DOJ for judgment liens only rather than for enforced collection. 

Page 16 GAO-04-47 FMS Cross-Servicing Opportunities 
The Federal Claims Collection Standards require federal agencies to 

promptly refer debts that have a principal balance of at least $2,500 to DOJ 

when the debts cannot be collected through either compromise or 

aggressive collection action and do not meet criteria for suspending or 

terminating collection action.33 Accordingly, OMB Circular A-129 requires 

federal agencies, including FMS as the federal government’s central debt 

collection agency, to refer delinquent debts to DOJ as soon as there is 

sufficient reason to conclude that full or partial recovery of the debts can 

best be achieved through litigation. 

FMS acknowledges that DOJ referrals are an important part of crossservicing. In its annual report to the Congress on federal agencies’ debt 

collection activities, FMS reported that referrals to DOJ for civil litigation 

governmentwide decreased significantly over the last 3 fiscal years, from 

50,572 debts in fiscal year 2000 to 8,443 debts in fiscal year 2002. As federal 

agencies continue to implement DCIA and make progress in promptly 

referring eligible debts that are over 180 days delinquent to FMS for 

collection action in accordance with the act’s requirements, reported 

decreases in federal agency referrals to DOJ for enforced collection can be 

expected as would increases in FMS referrals due to the shift in collection 

responsibilities from the agencies to FMS. Generally, a determination that 

a debt should be referred to DOJ cannot reasonably be made until 

appropriate cross-servicing collection action has taken place. In working 

with federal agencies to facilitate implementation of DCIA, FMS 

emphasizes that referral of a debt to DOJ for enforced collection is a key 

cross-servicing tool. FMS makes clear to agencies that it will (1) prepare 

the forms necessary for referring debts to DOJ,34 (2) work with DOJ to 

obtain necessary information from the agencies to litigate the claims, 

(3) monitor the debts while they are at DOJ, and (4) apply DOJ collections 

to the debts. 

33According to the Federal Claims Collection Standards, federal agencies may refer debts to 

DOJ less than $2,500 in certain situations, such as debts for which litigation is important to 

ensure compliance with the federal agency’s policies or programs. The Federal Claims 

Collection Standards also state that federal agencies may terminate collection action on a 

claim when, among other things, the agency is unable to locate the debtor and/or the costs 

of collection are anticipated to exceed the amount recoverable. Federal agencies may 

suspend collection action on a claim when the agency cannot locate the debtor, the debtor’s 

financial condition is expected to improve, and/or the debtor has requested a waiver or 

review of the claim. 

34Unless excepted by DOJ, claims referred to DOJ should be accompanied by a Claims 

Collection Litigation Report, a Certificate of Indebtedness, and other information that may 

be required. 

Page 17 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS, based on consultations with DOJ, established the following 

conditions for its referral of agency debts to DOJ: (1) the federal creditor 

agency has authorized FMS to refer its debts to DOJ, (2) the principal 

amount of the debt is $25,000 or more, (3) there is at least 1 year before the 

statute of limitations expires, (4) FMS has a debtor address (or other 

debtor contact information for service-of-process purposes), and (5) FMS 

has evidence that the debtor has assets or a source of income. As 

appropriate, FMS also expects to refer debts to DOJ when some, but not 

all, of the criteria are met. For example, FMS might refer debts less than 

$25,000 when bank accounts have been identified. 

In spite of FMS’s key role in determining whether debts referred for crossservicing should be referred to DOJ for enforced collection, only a nominal 

amount of cross-serviced debt was at DOJ. Specifically, as of February 28, 

2003, only about $30 million of the approximately $6.6 billion of debts with 

FMS for cross-servicing were at DOJ. Moreover, as shown in figure 2, all 

but about $4 million of the debts FMS had referred to DOJ were referred 

prior to fiscal year 2000, suggesting that FMS had not emphasized 

adjudication as a collection tool. 

Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by Fiscal Year 

Referred 

16 Debt amount (in millions of dollars) 

14 

12 

10 

8 

6 

4 

2 

0 1996 1997 1998 1999 2000 2001 2002 2003 

Fiscal year 

Source: GAO. 

Note: Derived from analysis of FMS’s cross-servicing database. 

Page 18 GAO-04-47 FMS Cross-Servicing Opportunities 
According to an FMS official, prior to fiscal year 2002, FMS had no specific 

process to evaluate cross-serviced debts to determine whether recovery 

could best be achieved by DOJ. Rather, the FMS official stated, FMS relied 

on the referring agencies to identify delinquent debts to refer to DOJ. In 

addition, FMS’s in-house collectors, using their own discretion during the 

normal course of their collection activities, could identify specific debts for 

referral to DOJ. 

In fiscal year 2002, FMS, in an effort to increase referrals to DOJ, began 

performing quarterly queries of its cross-servicing database to identify 

uncollected debts for referral to DOJ. The queries, while conceptually 

good, did not cover most of FMS’s cross-servicing portfolio. Rather, they 

were limited to debts with principal balances $25,000 or over that were 

classified as inactive or “special handling.” As of February 28, 2003, FMS 

had identified nine debts totaling about $4 million for DOJ referral using 

this smaller segment of its cross-servicing database. 

Reviewing only debts classified as inactive or “special handling” with 

principal balances over $25,000 is unlikely to result in many candidates for 

FMS referral to DOJ because of the nature of these debts and the amounts 

covered. Specifically, for many of the debts in inactive status, FMS does 

not have TINs, which are required for DOJ referral, or the debtors are in 

bankruptcy.

35 Debts classified as “special handling” are debts that 

collectors have identified as needing special processing because they want 

to keep the cases at the debt collection center. For example, a collector 

may place a debt in “special handling” if the collector is in negotiations with 

the debtor over a payment plan. We applied FMS’s database query method 

to debts classified as inactive and “special handling.” Our query identified 

about $198 million of uncollected debts, which represented about 3 percent 

of the amount in cross-servicing. We determined that the majority of these 

debts were not good candidates for DOJ referral. Specifically, about 

$106 million of such debts either (1) lacked agency authorization for 

referral to DOJ, (2) were involved in bankruptcy proceedings, (3) were 

beyond the general 6-year statute of limitations for litigation of 

nonjudgment debts, or (4) lacked TINs. 

35FMS’s policy is to return all debts found to be in bankruptcy to referring agencies unless it 

has been stipulated by the referring agency that such cases will not be returned or that the 

bankruptcy proceedings have been completed and the debts were not discharged. 

Page 19 GAO-04-47 FMS Cross-Servicing Opportunities 
We would consider it reasonable for FMS to query a larger segment of its 

cross-servicing database. In particular, debts held in TOP for passive 

collection would seem to be better candidates for DOJ referral because 

they should have valid TINs and are not supposed to be in bankruptcy. This 

segment of the cross-servicing debt portfolio is rather large. We 

determined that FMS had approximately $2.2 billion of debts in TOP with 

principal balances of at least $2,500 that had been returned from its 

secondary PCA contractors and that were within the 6-year statute of 

limitations for litigating nonjudgment debt.36 Unless FMS starts expanding 

the scope of its reviews for potential referrals to DOJ, the statute of 

limitations for these debts will likely expire without any opportunity for 

enforced collection action. Our assessment of FMS’s database as of 

February 28, 2003, showed that about $449 million of debts with principal 

balances of at least $2,500 likely had their statute of limitations expire 

while they were held in TOP for passive collection. We determined that all 

of these debts would have been possible candidates for referral to DOJ, 

since they had been returned from FMS’s secondary PCA contractors with 

at least 1 year remaining before the statute of limitations expired. 

36Using a $25,000 principal balance as the threshold for DOJ referral, FMS’s database 

showed about $2.1 billion of debts in TOP that were within the 6-year statute of limitations. 

Page 20 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS also did not routinely consider or act on advice from its PCA 

contractors regarding referrals to DOJ. Because PCA contractors’ 

responsibilities include locating debtors and determining whether they 

have incomes or assets to repay delinquent debts, the PCA contractors 

would have a reasonable basis for identifying uncooperative debtors who 

could repay their debts but had refused. FMS’s PCA Operations and 

Procedures Manual requires FMS’s PCA contractors to provide 

recommendations to FMS on the next collection actions that should be 

taken on individual debts, such as referral to DOJ for litigation.37 

According to the manual, litigation should be recommended when the PCA 

contractor believes that the debtor has sufficient assets for debt repayment 

and that no less costly method of collection would be effective. Our 

analysis showed that FMS was holding debts totaling about $47 million in 

TOP for passive collection that had principal balances over $2,500 for 

which PCA contractors had recommended litigation.38 We noted that FMS’s 

cross-servicing database showed that these debts were within the general 

6-year statute of limitations for litigating nonjudgment debts and had no 

apparent barriers to litigation, such as debtor bankruptcy or a deceased 

debtor. 

FMS officials stated that FMS does not routinely review recommendations 

made by its PCA contractors because FMS does not believe such 

recommendations are reliable. In this regard, we noted that FMS’s PCA 

Operations and Procedures Manual does not set forth the specific FMS 

criteria for selecting debts for DOJ referral. In addition, FMS does not tell 

PCA contractors which creditor agencies have authorized FMS to refer 

debts to DOJ on the agency’s behalf. It is important to note that only about 

$3 million, or less than one-tenth of 1 percent, of the approximately $3.9 

billion of uncollected debts that were returned to FMS from its secondary 

PCA contractors during fiscal years 2000, 2001, and 2002 were at DOJ. 

Moreover, while FMS had referred only limited amounts of cross-serviced 

debt to DOJ for litigation, FMS lacked a history of its prior referral activity 

and knowledge of the results of such referrals. FMS officials stated that 

37In addition to litigation, PCA contractors can recommend that collection action be 

continued, the debt be returned to the referring agency, or the debt be written off and closed 

out. 

38Using a $25,000 principal balance as the threshold for DOJ referral, FMS’s database had 

about $45 million of debts in TOP for passive collection for which PCA contractors had 

recommended litigation. 

Page 21 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS does not use the cross-servicing database to track DOJ referrals; 

however, we found that the database has status and collection activity 

codes capable of being used for such tracking. FMS officials 

acknowledged the need to track all DOJ referrals and stated that FMS will 

ensure that FedDebt will be able to track all debts that FMS has referred to 

DOJ. 

FMS Did Not Fully Use TOP 	 FMS’s policies and procedures require in-house FMS collectors to report all 

eligible debts to TOP early in the cross-servicing process, before sending 

them to FMS’s PCA contractors. In fiscal year 2000, we reported that FMS 

did not promptly report eligible debts to TOP as its procedures required. 

Computer interface problems and errors by in-house FMS collectors were 

cited as reasons for not promptly reporting all eligible debts to TOP.

39 

Problems regarding TOP referrals continue as FMS’s cross-servicing 

database as of February 28, 2003, showed that about 1,800 debts that were 

eligible for TOP, with referred balances totaling about $356 million, were at 

PCA contractors but had never been put into TOP by FMS’s collectors. We 

did not identify any apparent factors that would have precluded FMS’s 

collectors from reporting these debts to TOP. The database showed that 

the debts were eligible for TOP in that the referring agencies had 

authorized FMS to report the debts to TOP, the debtors had TINs, the 

debtors were not in bankruptcy or deceased, and the debts were not over 

10 years delinquent. 

The delays in reporting these debts to TOP were extensive. As of February 

28, 2003, about $215 million of these debts with an average of 

approximately 320 days in cross-servicing were at the secondary PCA 

contractor without having been sent to TOP. One of the more egregious 

delays involved a debt referred by an agency in October 2001 for about 

$43 million that had been in cross-servicing for over 500 days without ever 

having been reported to TOP. 

FMS officials stated that they are aware that eligible debts are not always 

being reported to TOP. They told us that debts might not be reported to 

TOP because the cross-servicing automated system does not always 

identify debts that should be reported. For example, FMS officials stated 

that if the system failed during its nightly batch processing, the debts that 

39GAO/AIMD-00-234. 

Page 22 GAO-04-47 FMS Cross-Servicing Opportunities 
would otherwise have been flagged for reporting to TOP would be missed. 

FMS officials stated that the cross-servicing system could not go back and 

routinely identify debts that were missed. Thus, as acknowledged by FMS 

officials, FMS would have to perform a periodic sweep of the entire 

database to identify eligible debts that were missed for reporting to TOP. In 

response to our inquiries, FMS officials stated that FMS will take action to 

ensure that FedDebt includes features to correct this problem when it is 

implemented in January 2005. 

FMS is also not seizing the opportunity to report secondary debtors to TOP. 

Our analysis of FMS’s cross-servicing database as of February 28, 2003, 

showed that about $144 million of the approximately $5 billion of crossserviced debts in TOP had secondary debtors with TINs. According to FMS 

officials, both the TOP and cross-servicing automated systems are debtbased, rather than based on both debt and debtor. As such, TOP cannot be 

used to identify all debtors associated with a debt, a problem we noted to 

FMS about 5 years ago. Even if TOP would accept these data, the crossservicing system cannot provide them, since it is now capable of sending 

only one debtor per debt to TOP. FMS officials stated that FMS is in the 

process of enhancing TOP to accept multiple debtors for a single debt and 

that the TOP enhancement should be implemented in fiscal year 2004. The 

officials also stated that FMS will ensure that FedDebt will be capable of 

referring multiple debtors to TOP when it is implemented in January 2005. 

Problems Identified 

with Debt 

Compromises and a 

Key Performance 

Measure 

FMS did not sufficiently ensure that nontax debts that were forgiven 

through compromises with debtors by its in-house collectors or its PCA 

contractors were done so in an operationally sound manner. FMS’s crossservicing database as of February 28, 2003, showed that FMS and its PCA 

contractors forgave a total of at least $51 million of delinquent nontax 

debts through compromises with debtors during fiscal years 2000, 2001, 

and 2002. For FMS in-house compromises, this included only those 

compromise agreements that had been settled and paid in full. The crossservicing database did not identify forgiven amounts for agreements that 

were still active or defaulted. In addition, it is unclear whether certain 

forgiven amounts should have been forgiven or by how much, since FMS’s 

PCA contractors often did not document why they compromised debts and 

often did not obtain sufficient support and justification for the 

compromises. Further, FMS overstated federal agencies’ progress in 

referring eligible nontax debts for cross-servicing. Specifically, FMS 

incorrectly reported that agencies had referred 96 percent of their eligible 

debts for cross-servicing for fiscal year 2002, rather than the actual rate of 

Page 23 GAO-04-47 FMS Cross-Servicing Opportunities 
79 percent based on our analysis of information provided by FMS. This 

discrepancy occurred because FMS did not include any debts that were 

reported as having become eligible for referral for cross-servicing during 

fiscal year 2002 and did not deduct the amounts of certain debts that it 

returned to referring agencies during fiscal year 2002. 

Information Regarding Debt 

Compromises Was Not 

Sufficient 

The soundness of FMS’s cross-servicing program can be undermined if 

certain debtors receive more generous treatment as a result of compromise 

agreements than other similarly situated debtors. While the amount of debt 

forgiven as noted above was not substantial, the consistency with which 

delinquent debts are forgiven and the extent to which federal requirements 

are adhered to in arriving at such decisions are vital. Therefore, it is 

critically important for FMS to (1) accurately track debt amounts forgiven, 

(2) obtain documented support for the compromise agreements, and 

(3) obtain TINs for the debtors. In August 2000, as part of our overall 

report on FMS’s cross-servicing program, we reported that the majority of 

FMS compromise agreements we reviewed, including those made by PCA 

contractors, did not include support for the forgiven amounts.40 In 

following up on FMS’s compromise activity, we found that FMS’s crossservicing system did not track the forgiven amounts for all debts that had 

been compromised during fiscal years 2000, 2001, and 2002. In addition, 

FMS’s PCA contractors often did not document why they compromised 

debts and often did not obtain sufficient support for the compromise 

agreements, including debtors’ TINs, which are needed to report the 

forgiven amounts to IRS. 

The Federal Claims Collection Standards state that federal agencies may 

compromise debts if (1) the debtor is unable to pay the full amount in a 

reasonable time, as verified through credit reports or other financial 

information; (2) collection in full cannot be achieved within a reasonable 

time by enforced collection proceedings; (3) the cost of collection does not 

justify the enforced collection of the full amount; or (4) there is significant 

doubt concerning the government’s ability to prove its case in court. 

According to the standards, in determining the debtor’s inability to pay, 

agencies should consider a number of factors as verified by the debtor’s 

credit report and other financial information, including financial 

statements that show the debtor’s assets, liabilities, income, and expenses. 

40GAO/AIMD-00-234. 

Page 24 GAO-04-47 FMS Cross-Servicing Opportunities 
In addition, FMS’s PCA contract requires its PCA contractors to document 

their attempts to collect the full amount of delinquent debts and provide 

justification for compromises. In the absence of adequate documentation 

supporting the PCA contractor’s determination to compromise a debt for a 

specific amount, FMS cannot determine whether the compromise is 

reasonable under the Federal Claims Collection Standards. Thus, FMS has 

no basis to determine whether the government suffered a loss that should 

not have been incurred as a result of such a compromise. We also 

determined that the PCA contract does not establish liquidated damages or 

penalties for a PCA contractor’s failure to document a compromise. 

As part of our review, we attempted to obtain the forgiven amount for each 

compromise agreement established by in-house FMS collectors during 

fiscal years 2000, 2001, and 2002, to determine whether the bases for the 

forgiven amounts had been supported and documented by FMS’s in-house 

collectors. However, FMS could not provide us the forgiven amount for 

each compromise agreement because the cross-servicing system only 

identifies the forgiven amount for compromise agreements that have been 

settled in full. Thus, FMS could not provide us the forgiven amounts for 

compromise agreements that were active or in default. 

Absent information on forgiven amounts for all compromise agreements, 

FMS cannot track the extent to which its collectors are compromising 

agency-referred debts and the bases for the compromises. According to an 

FMS official, FMS acknowledges that such information is critical to sound 

cross-servicing operations and, as a result of our inquiries, plans to 

incorporate the ability to identify and track all forgiven amounts in the 

FedDebt system. 

According to FMS officials, in fiscal year 2002, FMS began to review 

repayment and compromise agreements made by its PCA contractors as 

part of its annual PCA contractor compliance reviews. During these 

reviews, FMS generally found that all PCA contractors failed to 

consistently document in their respective debt collection systems the 

justification for accepting installment payments and compromise 

agreements.

41 As a result of FMS’s findings, each PCA contractor agreed to 

conduct training sessions for its collectors or take other corrective actions 

41FMS found that the contractor error rates resulting from failure to provide justification for 

the acceptance of installment and compromise agreements ranged from 26 percent at one 

contractor to 88 percent at another contractor. 

Page 25 GAO-04-47 FMS Cross-Servicing Opportunities 
to help ensure that the collectors properly obtain and document support 

for forgiven amounts. 

In spite of FMS’s reviews of the compromise activity of its PCA contractors 

and related findings pertaining to the lack of documented support for the 

compromises, we found that PCA contractors were still not providing 

sufficient support for compromises during the first 5 months of fiscal year 

2003. Specifically, we found that 22 percent of the sampled compromised 

debts had no evidence that the PCA contractor had attempted to obtain a 

lump sum payment in full or a repayment agreement for the full amount 

prior to compromising the debt.42 For example, one debt involved a debtor 

who offered to pay the full debt balance of approximately $14,000 in 

installments. However, without explanation, the PCA contractor offered to 

compromise the debt by 20 percent if the debtor would pay right away. The 

debtor accepted the compromise offer. Moreover, this PCA contractor 

encouraged compromise activity prior to exhausting attempts to collect 

debts in full by sending out pro forma letters to debtors stating that the 

contractor may be authorized to compromise a portion of their debt should 

the debtor be in a position to pay the remaining balance. 

42We estimate that 22 percent of the debt compromises in the population were made without 

the PCA contractor attempting to obtain payment in full prior to compromise. We are 95 

percent confident that the percentage of debt compromises for which the PCA contractor 

did not attempt to obtain payment in full is from 12 percent to 34 percent. 

Page 26 GAO-04-47 FMS Cross-Servicing Opportunities 
In addition, 72 percent of the compromised debts in our sample did not 

have supporting documentation indicating why the PCA contractors 

compromised the debts or the bases used to determine how these debts 

met Federal Claims Collection Standards criteria for compromise.43 For 81 

percent of the compromised debts in our sample, PCA contractors did not 

have complete financial statements, and for 30 percent of the compromised 

debts, PCA contractors did not have credit bureau reports to support the 

compromises.44 

It should be noted that a PCA contractor is required to submit to FMS the 

debtor’s financial statement and credit bureau report for review only if the 

compromise percentage of the debt exceeds the compromise percentage 

that is authorized by FMS or the referring agency. We found that for 36 of 

the 54 compromised debts in our sample, the PCA contractors 

compromised up to the amount that was allowed by FMS or the referring 

agencies. For example, one PCA contractor allowed a debtor to pay 

approximately $46,000 to settle a debt that had an outstanding balance of 

about $58,000. The forgiven amount fell within the compromise parameter 

that had been established by the referring agency. However, the PCA 

contractor did not (1) attempt to collect payment in full, (2) provide any 

explanation to justify the compromise, or (3) obtain the debtor’s complete 

financial statement and credit report. Because the PCA contractor did not 

exceed the compromise parameter established by the referring agency, it 

was able to compromise the debt without submitting the debtor’s financial 

statements and credit report to FMS for review. 

FMS officials stated that PCA contractors are required to document their 

attempts to obtain payment in full and justification for offering or accepting 

a compromise even when the compromise is within agency parameters. 

According to FMS officials, FMS discussed this issue with its PCA 

43We estimate that 72 percent of the debt compromises in the population were made without 

the PCA contractor providing an explanation for the compromises. We are 95 percent 

confident that the percentage of debt compromises for which no explanation was provided 

by the PCA contractor is from 59 percent to 83 percent. 

44We estimate that 81 percent of the debt compromises in the population were made without 

the PCA contractor obtaining a complete financial statement for the debtor. We are 95 

percent confident that the percentage of debt compromises for which PCA contractors did 

not obtain complete financial statements is from 69 percent to 91 percent. We estimate that 

30 percent of the debt compromises in the population were made without the PCA 

contractor obtaining a credit bureau report. We are 95 percent confident that the 

percentage of debt compromises for which the PCA contractor did not obtain credit bureau 

reports is from 18 percent to 43 percent. 

Page 27 GAO-04-47 FMS Cross-Servicing Opportunities 
contractors in October 2002 and reiterated the importance of documenting 

the justification for compromising debts and obtaining financial statements 

and credit bureau reports to support the compromises. FMS officials 

stated that FMS would continue to look at compromise agreements in 

future PCA compliance reviews to help ensure that PCA contractors are 

providing justification and obtaining the financial statements and credit 

bureau reports necessary for entering into a compromise agreement. 

Moreover, FMS’s PCA contractors did not always attempt to obtain or 

report to FMS the TINs of debtors who were granted compromises. 

Specifically, we found that 17 percent of the compromised debts in our 

sample did not have TINs because the PCA contractors either did not 

request the TINs from the debtors or did not report the TINs to FMS.45 

Without TINs for debtors, neither FMS nor the referring agencies were able 

to report the forgiven amounts of the compromised debts to IRS as income 

to the debtors. In addition, without a TIN, if the debtor defaults on the 

compromise agreement, the debt cannot be reported to TOP. According to 

FMS officials, FMS is continuing to monitor the compromise agreements 

made by its PCA contractors to help ensure that the contractors obtain and 

report TINs to FMS. In addition, as a result of our inquiries, FMS plans to 

issue a technical bulletin to its PCA contractors to remind them of the need 

to obtain and report TINs. 

45We estimate that 17 percent of the debt compromises in the population were made without 

the PCA contractor obtaining a TIN from the debtor or reporting the TIN to FMS. We are 95 

percent confident that the percentage of debt compromises for which no TIN was obtained 

by the PCA contractor or reported to FMS is from 9 percent to 29 percent. 

Page 28 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS Overstated Progress in 

a Key Performance Measure 

DCIA requires Treasury to report to the Congress each year on the debt 

collection activities of federal agencies, including FMS as the government’s 

central debt collection agency. A key performance measure that FMS 

reports each year is the percentage of debt eligible for cross-servicing that 

has been referred by federal agencies. In fiscal year 2000, we reported that 

FMS did not properly calculate this key performance measure because the 

reported amount of debt referred for cross-servicing was not comparable 

to the reported amount of eligible debt. Specifically, FMS overstated the 

debt referral amount by accumulating the referred amount for about 3 and 

a half years. We recommended that FMS revise its reporting of debt 

amounts referred for cross-servicing to reflect the extent to which eligible 

debts reported by agencies as of a specific date have been referred to 

FMS.46 

In its fiscal year 2002 report to the Congress, FMS reported that $7.9 billion, 

or 96 percent, of the $8.2 billion of eligible debt had been referred for crossservicing as of fiscal year-end and cited the high referral rate as a notable 

accomplishment. However, FMS’s reports continue to overstate the 

progress made in this highly touted cross-servicing performance measure. 

Specifically, FMS understated debts that were eligible for cross-servicing 

and overstated debts that had been referred for cross-servicing, which 

significantly overstated the reported extent to which agencies had referred 

eligible debts for cross-servicing. As shown in table 1, the governmentwide 

cross-servicing referral rate at the end of fiscal year 2002 was about 79 

percent, rather than 96 percent as reported by FMS. This is a significant 

difference given that FMS officials consider the cross-servicing program to 

be fully mature and federal agencies should be referring eligible debts 

when they are over 180 days delinquent. 

46GAO/AIMD-00-234. 

Page 29 GAO-04-47 FMS Cross-Servicing Opportunities 
Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year 2002 

Dollars in billions 

FMS-reported amounts Adjusted amounts 

Eligible for referral for cross-servicing $8.2 $8.5 

Referred for cross-servicing $7.9 $6.7 

Referral rate for cross-servicing 96% 79% 

Source: FMS. 

According to the TRORs for the fourth quarter of fiscal year 2002, federal 

agencies governmentwide had about $8.5 billion, not $8.2 billion, of debt 

eligible for referral at the end of the fiscal year. In determining the amount 

of eligible debt for referral for cross-servicing, FMS inappropriately used 

the amount of debt eligible for cross-servicing referral at the end of fiscal 

year 2001. As such, FMS did not include any of the approximately $300 

million of debts that were reported as having become eligible for referral 

for cross-servicing during fiscal year 2002. Thus, FMS understated the 

amount of eligible debt for fiscal year 2002 by about $300 million. 

In addition, FMS noted in its fiscal year 2002 report to the Congress that the 

debts reported as referred for cross-servicing did not include those that 

were no longer being actively collected by FMS. However, FMS generally 

did not deduct from its reported referral amounts debts that were returned 

to the referring agencies during fiscal year 2002. According to FMS 

officials, FMS calculated the referral amount by adding debts that agencies 

referred to FMS during fiscal year 2002 to the amount of referred debt that 

FMS held for cross-servicing at the end of fiscal year 2001. FMS officials 

stated that they typically only reduced the referred debt amount when a 

debt was returned to the referring agency in the same month that the 

agency referred the debt to FMS. However, by not deducting the amount 

for all referred debts that were returned to agencies, the referred debt 

amount did not reflect the amount of debt that had been referred by 

agencies and was held by FMS for cross-servicing at fiscal year-end.47 

According to FMS’s cross-servicing database, at the end of fiscal year 2002, 

47For example, in February 2002, an agency erroneously referred to FMS about $263 million 

of debts that were exempted from cross-servicing. FMS returned these debts to the agency 

in March 2002. However, because these debts were returned 1 month after they had been 

referred, FMS inappropriately included them in the amounts reported as referred to FMS for 

cross-servicing as of the end of fiscal year 2002. 

Page 30 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS held about $6.7 billion of debts that had been referred by federal 

agencies for cross-servicing. In contrast, FMS reported $7.9 billion of debts 

referred for cross-servicing in its report to the Congress, an overstatement 

of about $1.2 billion. 

Conclusions 	 FMS continues to have opportunities for enhancing the effectiveness of its 

cross-servicing of delinquent nontax debt. Efficient and effective 

processes are needed for timely determining the next appropriate steps for 

debts that are not collected by FMS’s PCA contractors. As noted in our 

report, lack of adequate processes and systems weaknesses led to missed 

opportunities to refer cases to DOJ for enforced collection, failure to use 

payment offset tools for a large block of debt, and delays in decisions to 

stop collection efforts on old debt and report it to IRS as income for those 

who had not paid outstanding amounts. In addition, due to the lack of 

monitoring by FMS and OMB, there is no assurance that all eligible closedout nontax debt is reported to IRS. These lapses in oversight and 

systematic administration of unpaid debts, combined with continuing 

problems in FMS’s PCA contractors’ administration of offers to forgive a 

portion of outstanding amounts as inducements to pay the remainder, 

perpetuate our concerns about FMS’s efforts to pursue and collect unpaid 

nontax debts. 

Recommendations for 

Executive Action 

To help ensure that all appropriate collection action is taken on debts 

returned from FMS’s PCA contractors, we recommend that the Secretary of 

the Treasury direct the Commissioner of FMS to take the following actions: 

•	 Identify debts kept in TOP for passive collection through the 

implementation of FedDebt and, in the interim, utilize appropriate 

analytical database software to identify such debts. 

•	 Establish and implement procedures to periodically review debts that 

are kept in TOP for passive collection to determine the next best course 

of action for the debts to maximize collections or other recoveries. 

•	 After all collection activities have been exercised, determine whether 

debts should be closed out and reported to IRS by FMS, and, if not, 

promptly return them to the referring agencies. 

Page 31 GAO-04-47 FMS Cross-Servicing Opportunities 
•	 Establish and implement procedures to periodically review debts that 

are kept in TOP for passive collection to determine whether the statute 

of limitations has expired or any other conditions, such as bankruptcy, 

exist that would prevent offset of the debts in TOP. 

•	 Remove debts from TOP that are not eligible for offset and determine 

whether the debts should be closed out and reported to IRS or returned 

to the referring agency. 

•	 Establish and implement procedures to periodically monitor debts that 

are held in inactive status to avoid debt backlogs and to help ensure that 

all debts are promptly reviewed to determine whether additional 

collection action or close-out and reporting to IRS is warranted. 

Monthly may be a reasonable interval for performing such monitoring. 

To help ensure that all federal agencies are appropriately reporting closedout debts to IRS, we recommend that the Secretary of the Treasury direct 

the Commissioner of FMS to take the following actions: 

•	 Require all federal agencies to disclose in their TRORs any significant 

differences between the amount of debt reported as closed out and the 

amount of debt reported to IRS and the reasons for those differences. 

•	 Revise information requirements for the TROR to include the amount of 

CNC debts that are closed out. 

We also recommend that the Director of OMB direct the Controller of 

OMB’s Office of Federal Financial Management to 

•	 remind agencies of their obligation to comply with the standards and 

policies of individual agencies for writing off and closing out debts, as 

required by the DCIA and OMB Circular A-129; 

•	 require agencies to initiate actions to review and correct any 

deficiencies they find during their review; 

•	 require agencies to report to OMB on their policies, deficiencies, and 

corrective actions, if any; and 

•	 report annually to the Congress on the deficiencies, if any, found at the 

agencies and the progress in resolving any deficiencies found. 

Page 32 GAO-04-47 FMS Cross-Servicing Opportunities 
To increase opportunities for collecting debts, we recommend that the 

Secretary of the Treasury direct the Commissioner of FMS to take the 

following actions: 

•	 Revise the database query methodology FMS uses to identify crossserviced debts for DOJ referral. The methodology should include debts 

kept in TOP for passive collection and should also incorporate 

information from FMS’s PCA contractors. 

•	 Incorporate FMS’s criteria for selecting debts for DOJ referral in FMS’s 

PCA Operations and Procedures Manual. 

•	 Remind PCA contractors of the importance of enforced collection and 

that their recommendation for next collection action, including 

litigation, is a critical part of their responsibilities, and inform the PCA 

contractors of the agencies that have authorized FMS to refer debts to 

DOJ on the agencies’ behalf. 

•	 Establish and implement procedures to track all debts FMS has referred 

to DOJ and ensure that the FedDebt system is capable of tracking all 

debts that FMS refers to DOJ. 

•	 Establish and implement procedures to monitor all debts in crossservicing to help ensure that debts are promptly reported to TOP, 

including periodically sweeping the portfolio to send debts to TOP. 

•	 Implement enhancements to the TOP system so that it can accept 

multiple debtors for a single debt, and ensure that the FedDebt system 

will be capable of being used to report secondary debtors to TOP. 

To help maximize the soundness of the cross-servicing program, we 

recommend that the Secretary of the Treasury direct the Commissioner of 

FMS to take the following actions: 

•	 Establish procedures to monitor and track all debt amounts forgiven by 

in-house FMS collectors and ensure that the FedDebt system identifies 

the forgiven amounts for all compromise agreements established by inhouse FMS collectors. 

•	 Reinforce PCA contractors’ adherence to the compromise requirements 

set forth in the PCA contract for documenting the attempt to collect the 

full amount of a debt prior to its compromise. 

Page 33 GAO-04-47 FMS Cross-Servicing Opportunities 
•	 Reinforce PCA contractors’ adherence to the compromise requirements 

set forth in the Federal Claims Collection Standards for obtaining a 

debtor’s financial information, such as credit reports and complete 

financial statements, to determine the debtor’s inability to pay the full 

amount of the debt. 

•	 Reinforce PCA contractors’ adherence to the compromise requirements 

set forth in the PCA contract for documenting the justification for the 

compromise of a debt. 

•	 Incorporate liquidated damages or a penalty provision in the next PCA 

contract for failure of PCA contractors to document a compromise in 

accordance with contract requirements. 

•	 Remind PCA contractors, through a technical bulletin or other means, of 

the importance of obtaining debtors’ TINs when compromising debts. 

•	 Fully implement our recommendation made in fiscal year 2000 to revise 

FMS’s key performance measure on cross-servicing referrals so that the 

extent to which federal agencies have referred debts to cross-servicing 

directly corresponds to the eligible debts as of fiscal year-end. 

Specifically, the debt-eligible amount should reflect the amount reported 

by federal agencies as of fiscal year-end, and the debt-referred amount 

should reflect the amount in cross-servicing as of fiscal year-end. 

Agency Comments and 

Our Evaluation 

In written comments on a draft of this report, reprinted in appendix II, 

Treasury’s FMS said that it concurred with most of the findings and that 

many of the findings and recommendations had already been addressed. 

FMS stated that enhancements to the systems that serve cross-servicing 

and PCA functions have resolved a number of issues and that the advent of 

FedDebt will further improve cross-servicing operations. However, FMS 

raised a number of points regarding certain of our findings and 

recommendations that missed the central concerns conveyed in our report 

and tended to downplay the significance of these concerns. The following 

discussion highlights and responds to the points FMS raised. 

FMS stated that the findings in the report did not reflect critical operational 

issues and only affected a very small percentage of its cross-servicing 

portfolio. FMS expressed concern that we greatly expanded the scope of 

our work beyond the parameters that we originally set and focused on a 

Page 34 GAO-04-47 FMS Cross-Servicing Opportunities 
range of opportunities to improve the cross-servicing program that had 

little or no relation to the reporting of uncollectible debt. 

We disagree. Specifically, referral of debts to DOJ for litigation and TOP 

for offset, monitoring of the compromise of debts by FMS and its PCA 

contractors, and identification and reporting of uncollectible debt amounts 

to IRS are all critical operational issues. Moreover, as discussed in the 

report, we found several problems related to FMS’s identification and 

monitoring of debts held in TOP for passive collection, which represented 

over half the debts in FMS’s $6.6 billion cross-servicing portfolio as of 

February 28, 2003. These issues, when considered in conjunction with 

issues we have cited in previous reports, such as limited implementation of 

administrative wage garnishment (AWG)48 and lack of independent 

verification of the accuracy, completeness, and validity of debts reported 

by agencies as eligible for or excluded from DCIA cross-servicing 

provisions,49 raise serious concerns about FMS’s progress in addressing the 

challenges it faces in implementing the cross-servicing program. 

We also disagree with FMS’s assertion that we expanded the scope of our 

review beyond what we conveyed to Treasury at the beginning of the 

assignment. In our August 2002 letter to the Secretary of the Treasury and 

our subsequent entrance conference with FMS officials in October 2002, 

we stated that our objectives were to evaluate (1) actions taken by FMS on 

uncollected nontax debts returned from its PCA contractors; (2) FMS’s 

efforts to ensure that eligible uncollectible nontax debts, which federal 

agencies rely on FMS to report on their behalf to IRS as income to the 

debtors, are promptly identified and accurately reported; and (3) actions 

taken, if any, by FMS to ensure that federal agencies are reporting their 

eligible uncollectible nontax debts to IRS as income to the debtors. As 

stated in our report, our review addressed these objectives. In addition, in 

performing our work to address these objectives, we identified 

opportunities for FMS to improve collection of nontax debts through crossservicing and enhance the soundness of certain operational and reporting 

facets of its cross-servicing program. In meeting our audit responsibilities, 

we must inform management of any significant issues identified during our 

work. 

48See, for example, U.S. General Accounting Office, Debt Collection Improvement Act of 

1996: Status of Selected Agencies’ Implementation of Administrative Wage Garnishment, 

GAO-02-313 (Washington, D.C.: Feb. 28, 2002). 

49GAO/AIMD-00-234. 

Page 35 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS suggests that our report unfairly characterizes FMS’s efforts to collect 

debts through offset as “minimal” and that it criticizes FMS for collection 

activities that agencies have not delegated to it. FMS stated that TOP is its 

most effective collection tool, many agencies rely on TOP for the bulk of 

their collections, and significant collection opportunities could be lost if 

debts were removed from TOP prematurely. FMS stated that since the cost 

to collect through TOP is low, it is generally in the best interest of the 

government to attempt offset for as long as statutorily authorized before 

terminating collections and discharging the debt. FMS said that it is at 

creditor agencies’ discretion to leave debts returned from PCA contractors 

in TOP for passive collection. 

We agree that for certain debts, TOP can be an effective mechanism for 

collection, especially when used in conjunction with other debt collection 

activities. However, passive collection does not entail any collection action 

other than minimal efforts through TOP. As stated in the report, for debts 

held in passive collection, TOP is the only collection tool in use. Therefore, 

collection opportunities from the use of other collection tools, such as 

litigation and AWG, are lost for these debts. As we state in this report, FMS 

had collected only about $9 million, or about two-tenths of 1 percent, of the 

$3.7 billion of debts held in TOP for passive collection as of February 28, 

2003. To increase the opportunities to collect these debts, we 

recommended that FMS periodically review debts kept in TOP for passive 

collection to determine the next best course of action for the debts, such as 

AWG or litigation, to maximize collections or other recoveries. 

Moreover we did not recommend in our report that FMS remove debts 

from TOP prematurely. Rather, we stated that many of the debts kept in 

TOP for passive collection were unlikely to yield any collections through 

offsets because they were beyond the 10-year statutory and regulatory 

limitations applicable to offset or had other barriers, such as bankruptcy, 

that would prevent offset of the debts. Thus, we recommended that FMS 

establish and implement procedures to periodically review debts that are 

kept in TOP for passive collection to determine whether the statute of 

limitations has expired or any other conditions exist that would prevent 

offset of the debts and remove debts from TOP that are not eligible for 

offset and determine whether the debts should be closed out and reported 

to IRS or returned to the referring agency. 

We also disagree with FMS’s implication that we unfairly criticized FMS for 

not undertaking Form 1099C reporting activities that agencies have not 

delegated to it. Our review indicated that it would be highly unlikely for 

Page 36 GAO-04-47 FMS Cross-Servicing Opportunities 
creditor agencies to be able to identify specific debts in cross-servicing that 

are kept in TOP for passive collection. FMS advised us that because of 

system limitations, it could not identify specific debts that are merely being 

held in passive collection after being returned from PCA contractors. 

However, we were able to readily identify debts in TOP for passive 

collection through use of off-the-shelf database analysis software. Without 

the ability to identify specific debts for which passive collection is the only 

current ongoing effort, creditor agencies that have not delegated authority 

to FMS to report uncollectible debts to IRS on their behalf cannot fulfill 

their responsibility to determine whether a debt should be closed out and 

reported to IRS or whether other collection action should be taken on it. 

We consider this to also be the responsibility of FMS. This view is 

embodied in our recommendations that FMS establish and implement 

procedures to periodically review debts that are kept in TOP for passive 

collection to determine the next best course of action and after all 

collection activities have been exercised, determine whether debts should 

be closed out and reported to IRS by FMS, and, if not, promptly return them 

to the referring agencies. 

In particular and as noted in our report, we would like to reemphasize that 

our analysis considered only those debts for which federal agencies had 

given FMS the authority to report uncollectible debt amounts to IRS on the 

agency’s behalf. For such debts, FMS procedures require its collectors to 

evaluate them to determine whether close-out would be appropriate and 

whether the debt amounts should be reported to IRS. 

FMS agreed with our finding that it had referred only a small amount of 

debt to DOJ. FMS stated that because of workload constraints, it has 

attempted to focus its DOJ referral efforts on cases most likely to be 

successfully collected through litigation. As stated in our report, in an 

effort to increase referrals to DOJ, FMS did begin to perform quarterly 

queries of its cross-servicing database to identify uncollected debts for 

referral to DOJ. However, we found that many of the debts identified 

through these queries would not be good candidates for referral to DOJ 

because, among other things, they lacked TINs and were involved in 

bankruptcy proceedings. In addition, these queries did not cover most 

debts in cross-servicing, including those held in TOP for passive collection 

that would seem to be better candidates for DOJ referral because they 

should have valid TINs and are not supposed to be in bankruptcy. In 

addition, FMS did not routinely consider or act on advice from its PCA 

contractors regarding referrals to DOJ. Because PCA contractors’ 

responsibilities include locating debtors and determining whether they 

Page 37 GAO-04-47 FMS Cross-Servicing Opportunities 
have incomes or assets to repay delinquent debts, the PCA contractors 

would have a reasonable basis for identifying uncooperative debtors who 

could repay their debts but had refused. 

FMS did not agree with our recommendation to incorporate liquidated 

damages in the next PCA contract for failure of PCA contractors to 

document compromises in accordance with contract requirements. FMS 

stated that there is no incentive for a PCA contractor to accept a 

compromise agreement when the debtor has the capability to pay the full 

amount of the debt. We disagree with FMS’s contention that a PCA 

contractor would not accept a compromise agreement when the debtor has 

the capability to pay the full amount of the debt. For example, as stated in 

our report, we noted that one debtor offered to pay the full debt balance of 

approximately $14,000 in installments. However, without explanation, the 

PCA contractor offered to compromise the debt by 20 percent if the debtor 

would pay right away. Moreover, this PCA contractor encouraged 

compromise activity prior to exhausting attempts to collect debts in full by 

sending out pro forma letters to debtors stating that the contractor may be 

authorized to compromise a portion of their debt should the debtor be in a 

position to pay the remaining balance. Further, FMS stated that it is 

questionable whether liquidated damages or a penalty provision in the 

contract would be legally enforceable. For many of the debts that we 

reviewed, we found that the PCA contractors often did not have 

documentation to justify their rationale for concluding that debtors could 

not pay the full debt amount or to support the amounts forgiven. In the 

absence of adequate documentation supporting the PCA contractor’s 

determination to compromise a debt for a specific amount, FMS cannot 

determine whether the compromise is reasonable under the Federal Claims 

Collection Standards. Thus, FMS has no basis to determine whether the 

government suffered a loss that should not have been incurred as a result 

of such a compromise. To encourage PCA contractors to obtain adequate 

documentation supporting their compromises, we continue to believe that 

FMS should incorporate liquidated damages or a penalty provision in the 

next PCA contract for failure of PCA contractors to document 

compromises in accordance with contract requirements. FMS did not offer 

any legal analysis to support its assertion that a liquidated damage or 

penalty provision, presumably properly drafted and applied, may not be 

legally enforceable. Of course, the enforceability of liquidated damages or 

a penalty provision (e.g., reduction in the number of cases or amount of 

debt referred to the PCA contractor) would depend on the nature of the 

provision and the facts of the individual cases. 

Page 38 GAO-04-47 FMS Cross-Servicing Opportunities 
FMS did not agree with our finding related to the cross-servicing referral 

performance measure. FMS stated that it considered many approaches for 

reporting agency performance and believed that the method it chose is fair 

and equitable. FMS said that using only the active balance on a given date 

(e.g., the end of the fiscal year) would not recognize debts that are paid off, 

administratively resolved, or determined to be uncollectible and closed out. 

FMS further stated that because CFO Act agencies were required to update 

their TRORs on a quarterly basis beginning in fiscal year 2003, eligible 

amounts of debt for calculating the percentages referred are now updated 

every quarter. 

This performance indicator

50 is a snapshot of the percentage of debt 

eligible for referral to cross-servicing that has been referred at a given point 

in time, such as at year-end. In calculating its debt referral measure for 

fiscal year 2002, FMS made an unreasonable determination in computing 

this key performance measure even though it had all the appropriate 

information to properly calculate this figure. A fundamental premise in 

calculating this performance indicator is that debts that are paid off, 

administratively resolved, or determined to be uncollectible and closed out 

are no longer eligible for referral for cross-servicing and are not subject to 

further federal collection efforts. As such, FMS should not include these 

debts in the amount referred for cross-servicing in its annual fiscal year 

report to the Congress. In addition, as stated in the report, in its fiscal year 

2002 report to the Congress, FMS inappropriately used the amount of debt 

eligible for cross-servicing referral at the end of fiscal year 2001 instead of 

the end of fiscal year 2002. The net effect of these errors on the calculation 

was to overstate the amount referred (the numerator of the fraction) by 

$1.2 billion and to understate the amount available for referral (the 

denominator of the fraction) by approximately $300 million. Both of these 

errors had the effect of overstating federal agencies’ progress in referring 

eligible nontax debts for cross-servicing. 

In its oral comments, OMB agreed with the report’s findings. In drafting the 

recommendation, we proposed that OMB review the standards and policies 

of individual agencies for writing off and closing out debts. In its oral 

response, OMB was concerned that it did not have the resources to review 

all federal agencies’ policies and procedures. As such, OMB suggested that 

we modify our proposed recommendation to instead require OMB to have 

50This performance indicator is represented as a fraction. The numerator is reported 

amounts referred, and the denominator is reported amounts eligible for referral. 

Page 39 GAO-04-47 FMS Cross-Servicing Opportunities 
individual federal agencies review their own policies and procedures for 

writing off and closing out debts and report to OMB on their policies, 

deficiencies, and corrective actions, if any, based on such reviews. OMB 

stated that it will then use these reports from the individual agencies to 

report to the Congress on the deficiencies, if any, found at the agencies and 

the progress in resolving such deficiencies. OMB’s suggested approach in 

resolving this finding is reasonable and fully meets the intent of our 

proposed recommendation. As such, we have modified our 

recommendation to OMB accordingly. 

This report contains recommendations to you. The head of a federal agency 


is required by 31 U.S.C. 720 to submit a written statement on actions taken 


on these recommendations to the Senate Committee on Governmental 


Affairs and the House Committee on Government Reform within 60 days of 


the date of this report. You must also send a written statement to the House 


and Senate Committees on Appropriations with the agency’s first request 


for appropriations made over 60 days after the date of this report.


We are sending copies of this report to the Chairmen and Ranking Minority 


Members of the Senate Committee on Governmental Affairs; the 


Subcommittee on Financial Management, the Budget and International 


Security, Senate Committee on Governmental Affairs; the House 


Committee on Government Reform; the Subcommittee on Government 


Efficiency and Financial Management, House Committee on Government 


Reform; and the Commissioner of FMS. Copies will be made available to 


others upon request. The report is also available at no charge on GAO’s 


Web site, at http://www.gao.gov.


If you have any questions regarding this report, please contact me on (202) 


512-3406 or Kenneth Rupar, Assistant Director, on (214) 777-5714. Other 


key contributors to this report are listed in appendix III.


Gary T. Engel


Director


Financial Management and Assurance


Page 40 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix I 

Sampling Method


To test debts compromised by the Financial Management Service’s (FMS) 

private collection agency (PCA) contractors from October 1, 2002, to 

February 28, 2003, we selected a stratified random sample of 54 debts that 

the PCA contractors compromised from a population of 358 debts in the 

cross-servicing database with forgiven dollar amounts of at least $2,000 but 

less than $100,000.

1 We did not review debts with forgiven dollar amounts 

under $2,000 because they were deemed immaterial. In total, we selected 

54 debts to review. (See table 2). 

Table 2: Details of Cases Selected 

Forgiven amount for Number of debts Forgiven amount Items tested in Justification for number of items tested 

each debt per stratum per stratum each stratum in each stratum 

$2,000 or greater but To provide coverage of the population of 

less than $100,000 358 $2,946,711.88 54 compromised debts. 

Less than $2,000 Average amount of strata (about $680) was 

706 479,309.38 None deemed to be immaterial. 

Total 1,064 $3,426,021.26 54 

Source: GAO. 

Note: Data derived from analysis of FMS’s cross-servicing database. 

1

We identified one debt in the cross-servicing database for which the forgiven amount was at 

least $100,000. We found that the referring agency rather than FMS’s PCA contractor had 

initiated the compromise for this debt. As such, this debt was not included in our review. 

Page 41 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix II 

Comments from the Department of the 

Treasury 

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix. 

See comment 1. 

See comment 2. 

See comment 3. 

See comment 4. 

Page 42 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix II


Comments from the Department of the 


Treasury


See comment 5. 

See comment 6. 

See comment 7. 

See comment 8. 

Page 43 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix II


Comments from the Department of the 


Treasury


See comment 9. 

See comment 10. 

See comment 11. 

Page 44 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix II


Comments from the Department of the 


Treasury


Page 45 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix II


Comments from the Department of the 


Treasury


The following are GAO’s comments on the Department of the Treasury’s 

letter dated October 20, 2003. 

GAO Comments 1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

In conformity with generally accepted government auditing standards, 

we provide responsible agency officials and other directly affected 

parties with an opportunity to review and provide comments on a draft 

report before it is issued. The language referred to by FMS concerning 

the report’s status as a draft has been the standard language included 

on the cover page of GAO reports when they are sent for agency 

comment. After receiving agency comments, we consider their 

substance, revise the draft report as appropriate, state in the report 

whether the agency agreed or disagreed with our findings, conclusions, 

and recommendations, and issue the report. 

See our discussion in the Agency Comments and Our Evaluation 

section. 

See comment 2. 

See comment 2. 

See comment 2. 

See comment 2. 

The scope of our work did not include determining whether FMS’s TOP 

system has sufficient edits and safeguards in place to ensure that no 

offset is taken for debts over 10 years delinquent. 

See comment 2. 

As stated in our report, a scope limitation prevented us from using 

statistical sampling techniques to determine whether compromises 

made by in-house FMS collectors were justified, supported, and 

reported to IRS. As such, we cannot comment on whether FMS 

collectors have implemented compromise documentation procedures 

in accordance with previous GAO recommendations. 

10. See comment 2. 

11. See comment 2. 

Page 46 GAO-04-47 FMS Cross-Servicing Opportunities 
Appendix III 

Staff Acknowledgments


Other key contributors to this assignment were Richard Cambosos, 

Matthew Valenta, Ronald Haun, Michelle Philpott, Evan Gilman, and Cathy 

Hurley. 

(191032) Page 47 GAO-04-47 FMS Cross-Servicing Opportunities 
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