EXECUTIVE OFFICE OF THE PRESIDENT 


OFFICE OF MANAGEMENT AND BUDGET 


WASHINGTON , D. C. 20503 


THE DIRECTOR October 20, 2014 

M-15-02 

ADS OF EXECUTIVE DEPARTMENTS AND AGENCIES 

FROM: 

SUBJECT: 	 Appendix C to Circular No. A-123 , Requirements for Effective Estimation and 

Remediation ofImproper Payments 

The Administration has made reducing improper payments-payments made to the 

wrong entity, in the wrong amount, or for the wrong reason-a top priority. Since coming into 

office, the President has signed two laws and issued three directives- including an Executive 

Order- that created a robust infrastructure for agencies to reduce improper payments in their 

programs. Through this committed focus, the government-wide improper payment rate has 

declined for four consecutive years, from 5.42 percent in fiscal year (FY) 2009 to 3.53 percent in 

FY2013. 

The enactment of the Improper Payments Elimination and Recovery Improvement Act 

(IPERIA) of201 2 provided an opportunity for the Office of Management and Budget (OMB) to 

re-examine existing guidance to ensure agencies are able to more efficiently reduce their 

improper payment rates, while also complying with multiple legislative and administrative 

requirements. The goal of this overhauled version of Appendix C to Circular No. A-123 1 is to 

transform the improper payment compliance framework to create a more unified, 

comprehensive, and less burdensome set of requirements. Appendix C accomplishes the 

following: 

• 	 Consolidates and streamlines reporting requirements for agencies and Inspectors 

General, and eliminates duplicative and old one-time requirements so agencies can 

spend less time producing compliance reports and more time focusing on gamechanging solutions for achieving payment accuracy; 

• 	 Establishes new categories for reporting improper payments that will provide more 

granularity on improper payment estimates- thus leading to more effective corrective 

actions at the program level and more focused strategies for reducing improper 

payments at the government-wide level; 

1 Appendix C implements requirements from the following: (1) the Improper Payments Information Act of2002 

(!PIA), as amended; (2) the Improper Payments Elimination and Recovery Act of20 I 0 (IPERA); (3) the Improper 

Payments Elimination and Recovery Improvement Act of2012 (IPERIA); and (4) Executive Order 13520­

Reducing Improper Payments- issued November 20, 2009. 
• 	 Introduces a new internal control framework to ensure that payments are made in the 

right amount, to the right entity, and for the right purpose; and 

• 	 Provides guidance to agencies- as required by the most recent statute, IPERIA- to 

strengthen the statistical validity of estimates and include payments to Federal 

employees in the definition of improper payments, among other things. 

OMB Circular A-123 , Appendix C, Patis I and II (which were issued in April2011 as 

OMB Memorandum M-11-16) and Pati III (which was issued in March 2010 as OMB 

Memorandum M-10-13) are hereby modified. Unless otherwise noted in the guidance, the 

requirements found in Appendix Care effective starting in FY 2014. OMB will continue to 

work closely with agencies and Inspectors General to provide further implementation guidance 

as needed. 

Please contact Flavia Menasce (fmenasce@omb.eop.gov), Heather Pajak 

(hpajak@omb.eop.gov), or Mike Wetklow (mwetklow@omb.eop.gov) in OMB's Office of 

Federal Financial Management with any questions regarding this guidance. 

Attachment 

2 

APPENDIXC 

Requirements for Effective 


Estimation and Remediation of 


Improper Payments 

TABLE OF CONTENTS 


INTRODUCTION ............................................................................................................................... 5 


OVERVIEW ...................................................................................................................................... 5 


PART I-IMPROPER PAYMENTS ELIMINATION AND RECOVERY •••••••••••••••••••••••••••••••••••••••••••••••••• 7 


A. RISK-ASSESSING, ESTIMATING, AND REPORTING IMPROPER PAYMENTS..................................... 7 


1) Which agencies are required to comply with the requirements of IPIA, IPERA, and 


6) Must agencies include payments related to charge cards in improper payment risk 


11) What information should agencies provide to persons or entities producing improper 


12) Are agencies allowed to rely upon self-reporting by recipients of agency payments when 


13) Are agencies allowed to implement an estimation approach that excludes improper 


payments that have been subsequently corrected and recovered from the annual estimate? 


15) Should data used for estimating improper payments coincide with the fiscal year being 


16) What are Federally-funded, State-administered programs, and may agencies consider 


IPERIA? ............... ............. .................................................................................................. 7 


2) What is an improper payment? ...................... ............. ................. .......... ............................. 7 


3) What is a payment for an ineligible good or service? .................. ............. .......................... 7 


4) What is a program or activity? ................................................................................. ........... 8 


5) Must agencies include payments to employees in improper payment risk assessments? ... 8 


assessments? .................................................................... ................................................... 8 


7) Must agencies review intra-governmental transactions? .................................................... 9 


8) What constitutes an improper loan or loan guarantee payment? ................................. ....... 9 


9) What specific steps are agencies required to take? ........................................... .................. 9 


Step 1: Review all programs and activities and identify those that are susceptible to 


significant improper payments ......... .. .. ... .... ..................................................................... 9 


Step 2: Obtain a statistically valid estimate of the annual amount of improper payments 


in programs and activities for those programs that are identified in Step 1 as susceptible 


to significant improper payments .................................. ................................................. 11 


Step 3: Implement a plan to reduce improper payments ............................................... 15 


Step 4: Report annually in the AFR or PAR. ................................................................ 16 


10) When must agencies conduct risk assessments? ...........•................................................... 16 


payment estimates? ..................... ... ............ ........................................ ............................... 17 


estimating improper payments? ........................... ............................................................. 17 


······························ ·········· ·············································· ····· ················································ 18 


14) May agencies use alternative sampling and estimation approaches? ............................... 18 


reported in the AFR or PAR? ............................................................................................ 20 


other approaches for these types of programs? ............... .................................................. 21 


1 
17) Are programs that are identified as susceptible to significant improper payments, and that 


annually report improper payment estimates, permanently subject to improper payments 


reporting requirements? .................................................................... ................................ 21 


18) Are programs and activities that have been deemed susceptible to significant improper 


payments as a result of the Disaster Relief Appropriations Act, 2013, permanently subject 


to improper payments reporting requirements? ................................................................ 22 


B. IMPROVING THE DETERMINATION OF IMPROPER PAYMENTS ..................................................... 23 


1) How will OMB determine the "high-priority" programs as required under IPERIA? ..... 23 


2) 	 What are the requirements under IPERIA for establishing semi-annual or quarterly 


actions for reducing improper payments? ......................................................................... 23 


3) 	 Do high-priority programs have any specific requirements regarding corrective actions? 


........................................................................................................................................... 24 


4) 	 Are there any additional reporting requirements for agencies that have high-priority 


programs?.................................. ........................................................................................ 24 


C. CATEGORIES FOR REPORTING IMPROPER P AYMENTS ................................................................ 24 


1) What categories should agencies use when reporting improper payment estimates? ...... 24 


2) 	 How should agencies focus on fraudulent activities? ....................................................... 28 


D. pAYMENT RECAPTURE AUDITS ... ..... .............. ... .......... .................. ........ ...... ... ................... ........ 28 


2) What are the general agency requirements for implementing a payment recapture audit 


5) What criteria should an agency consider in determining whether a payment recapture 


6) What should an agency do if it determines that a payment recapture audit program would 


7) Should the agency follow any particular procedures when conducting payment recapture 


8) Can Federal agencies provide money to States and Local governments for Financial 


11) Are there any specific requirements when using a contracted payment recapture auditing 


13) Who performs recovery activities once the improper payments are discovered and 


1) What are the definitions used for payment recapture auditing in this guidance? ............. 28 


program? ........................................................................................................................... 29 


3) Should agencies establish targets for their payment recapture audit programs? .............. 30 


4) What is the scope for payment recapture audit programs? ............................................... 30 


audit is cost-effective? ...................................................................................................... 31 


not be cost-effective? ........................................................................................................ 32 


audits of grants payments? ................................................................................................ 32 


Management Improvement efforts? ............. .......................... ........................................... 33 


9) Who may perform payment recapture audits? .................................................................. 33 


10) May contractors perform payment recapture audit services? ........................................... 33 


firm? ................................................................................................................... ; ............ .. 33 


12) Are there any prohibitions when using a payment recapture audit contractor? ................ 34 


verified? .............. ........................... .......... ............................. ............................................ 34 


14) What is the proper disposition of recovered amounts? ..................................................... 3 5 


2 
15) Are agencies authorized to implement Financial Management Improvement Programs? 3 7 


16) What are the reporting requirements for payment recapture audits? ................... ............. 37 


17) How are improper payment estimates different from payment recapture audit efforts? .. 3 8 


PART II- COMPLIANCE WITH THE IMPROPER PAYMENT REQUIREMENTS ............................... 39 


A. RESPONSIBILITIES OF AGENCY INSPECTORS G ENERAL ........... ... ...... .... ... ....... .. ..... ..................... 39 


1) When should each agency Inspector General begin reviewing improper payment 


performance to determine whether the agency is in compliance under IPERA? ............. 3 9 


2) 	 When should the agency Inspector General complete its review of agency compliance 


under IPERA? ................. ................................................. ....... ................. .......... ............... 3 9 


3) 	 What should each agency Inspector General review to determine if an agency is in 


compliance under IPERA? .................................... ................................................ ............ 39 


4) 	 What else should the agency Inspector General include in its compliance review and 


report? .................................................................... ........................................................... 40 


5) 	 Who should the agency Inspector General notify when it has completed its determination 


of whether an agency is in compliance under IPERA? ..................................................... 40 


B. RESPONSIBILITIES FOR AGENCIES ........... ..... ........ .... .... ... ............... .... ............. ....................... ... . 40 


1) What are the requirements for agencies not compliant under IPERA? .............. .............. 40 


C. INTERNAL CONTROL OVER IMPROPER PAYMENTS .. .......... ... .......... .... ..... .... .... .... .... .................. . 42 


1) What are the criteria as to when an agency should initially be required to obtain an 


opinion on internal control over improper payments? .................................. .................... 42 


2) 	 How do internal control standards apply to improper payments? .................................... 43 


PART III- REQUIREMENTS FOR IMPLEMENTING EXECUTIVE ORDER 13520 ........................... 46 


A. GENERAL G UIDANCE .. .. ...... ..... ....... ... ...... .. .... .. ......... ...... ...... ......... ...... ... .......... ... ... ........... ....... . 46 


2) How will OMB determine the "high-priority" programs as required under Section 2(a)(i) 


3) What are agencies required to submit for the improper payments website as required 


1) Which agencies are subject to the requirements of Executive Order 13520? ...... ... .......... 46 


of the Executive Order? ......................... ....................... ......... .............................. ............. 46 


under Section 2(b) ofthe Executive Order? .................... .......... .................. ... ... ............... 46 


4) Why is program access important? ........ .. .................................................... ... ... ............... 46 


5) Does this guidance create any special rights? ................................................................... 4 7 


B. SUPPLEMENTAL MEASURES ... .......................... ...... ........ ................. ........... ...... ..... ......... .. ... ....... 47 


1) What are the requirements for establishing annual or semi-annual measurements in high3) Who is required to establish annual or semi-annual measurements under the Executive 


4) How should agencies establish annual or semi-annual targets for supplemental measures? 


priority programs, also known as supplemental measures? ............ .... ....... .... ................... 47 


2) Which tools should agencies use to identify supplemental measures? ...... ....................... 4 7 


Order? .................. ......... ... ............................................ .............................................. ....... 48 


······················································· ··········· ········································································· 49 


3 
5) 	 Are the reduction targets described in section I.A.9 of this guidance the same as the 


supplemental targets that agencies will set to comply with the Executive Order? ........... 49 


6) 	 How will agencies report annual or semi-annual supplemental measures and targets? ... 49 


C. ACCOUNTABLE OFFICIAL REQUIREMENTS .. .. ..... ... ... ............... ........................... ....................... 50 


1) Which agencies are responsible for establishing accountable officials under Section 3(a) 


of the Executive Order? ........................................................................................ ......... ... 50 


2) 	 Who may serve as an agency or component accountable official under Section 3(a) of the 


Executive Order? .. ................................................................................................... ......... 50 


3) 	 What are the accountable officials' roles and responsibilities? ........................................ 50 


4) 	 What are the agency requirements for providing a report to their IGs in response to 


Section 3(b) of the Executive Order? ..................................... ........................................... 50 


5) 	 What are the Inspector General' s responsibilities with respect to the report under Section 


3(b) ofthe Executive Order? ......................... .................................................................... 51 


D. AGENCY HEAD QUARTERLY HIGH-DOLLAR REPORT TO THE INSPECTOR GENERAL ........ ...... ... 51 


1) What is a "high-dollar" overpayment? ......... ..................... ............................................... 51 


2) 	 Which sources should agencies utilize to identify high-dollar overpayments? ................ 52 


3) 	 What information should be included in agency reporting on high-dollar overpayments? 


........................................................................................................................................... 52 


4) 	 Which agencies must report on high-dollar overpayments? Where shall agencies report 


high-dollar overpayments to the public? What if an agency has no high-dollar 


overpayments? ......... ............ .......................................... ............................. ...................... 52 


5) 	 Are there exceptions to the reporting requirements for the high-dollar report? ............... 52 


4 
INTRODUCTION 


Unless otherwise noted, the requirements found in this guidance are effective for fiscal year (FY) 

2014 and beyond. This guidance implements the requirements from the following: 

• 	 Improper Payments Information Act of2002 (IPIA; Pub. L. No. 107-300), as amended; 

• 	 Improper Payments Elimination and Recovery Act of2010 (IPERA; Pub. L. No. 111­

204); 

• 	 Improper Payments Elimination and Recovery Improvement Act of2012 (IPERIA; Pub. 

L. No. 112-248)1

; and 

• Executive Order 13520-Reducing Improper Payments-issued November 20,2009. 

Issuance of this guidance hereby modifies the Office of Management and Budget (OMB) 

Circular A-123, Appendix C, Parts I and II (which were issued in April2011 as OMB 

Memorandum M-11-16) and Part III (which was issued in March 2010 as OMB Memorandum 

M-10-13). 

OVERVIEW 

Before the passage ofiPIA, there was no overarching government-wide framework for 

measuring-let alone reducing-Federal improper payments. Between 2002 and 2009, as more 

agencies began measuring and reporting improper payment estimates for their programs, it 

became increasingly clear that Federal improper payments represented a significant loss to the 

government. As a result, between 2009 and present time, the Federal government has built a 

robust infrastructure of legislative and administrative requirements with which agencies must 

comply in order to achieve tangible results. These requirements-which apply to a wide array of 

stakeholders-are described in detail in Appendix C to OMB Circular A-123 . The six 

paragraphs below, as well as Figure 1, provide only a cursory overview of some key Appendix C 

requirements. However, for a more precise and comprehensive description, readers should 

consult the subsequent pages of the guidance. 

Payment Recapture Audits. One fundamental requirement that agencies must meet is to recover 

any Federal dollars that should not have gone out the door. IPERA requires any program that 

expends at least $1 million to implement payment recapture audits, if cost effective to the 

agency, in order to recover improper payments (see section I.D). 

Low-Risk Programs. Independent of any payment recapture activities, IPERA also requires that 

all programs assess their risk for improper payments. If an agency deems a program to be at a 

low risk for improper payments, the agency will re-assess that program's risk at least every three 

years (see section I.A.9, step 1). 

Programs Susceptible to Significant Improper Payments. If an agency deems a program to be 

susceptible to significant improper payments, the agency is required to estimate and report 

improper payments for that program annually, in addition to implementing corrective actions to 

reduce its improper payments (see section I.A.9, steps 2-4). In doing so, agencies should identify 

1 This guidance does not address the Do Not Pay initiative, which is found in Section 5 ofiPERIA. 

5 
the root causes of, and implement appropriate corrective actions to prevent and reduce the related 

improper payments. Agencies should continuously identify innovative corrective actions to 

prevent and reduce improper payments. For example, corrective actions could leverage new 

technologies and advanced techniques-such as forensic tools, pre-payment software, and data 

matches. In addition, for all programs that are susceptible to significant improper payments, 

Executive Order 13520-Reducing Improper Payments-requires agencies to produce a 

quarterly report of any "high-dollar" overpayments (see section III.D). 

High-Priority Programs. IPERIA reinforces the requirements from Executive Order 13520 by: 

fostering greater agency accountability; requiring OMB to designate the programs with the most 

egregious cases ofimproper payments as high-priority; and requiring those programs to develop 

indicators of improper payments (called supplemental measures) that are more frequent than the 

annual estimates, as a tool for tracking progress (see section III.B). Furthermore, Executive 

Order 13520 also requires those agencies with high-priority programs to name accountable 

officials to oversee efforts to reduce program improper payments (see section III. C). 

Annual Reporting. Once a year, agencies will report in the Agency Financial Report (AFR) or 

the Performance and Accountability Report (PAR) most of the required components listed in 

Appendix C.2 As agencies implement Appendix C, they should approach improper payments 

with an internal control framework in mind and provide a thoughtful analysis linking agency 

efforts in establishing internal controls and reducing improper payment rates (see section II. C). 

Annual Inspector General Compliance Review. IPERA adds an important component of 

accountability to the entire spectrum of improper payment efforts. Every year, each agency 

Inspector General reviews agency improper payment reporting in the agency's AFR or PAR to 

determine ifthe agency is in compliance with Appendix C requirements listed under section 

II.A.3. 

Figure 1 : Appendix C at a Glance 

• IP > $750 M 

• Accountable Officials 

• Supplemental Measures 

• Meets $10M & 1.5% (or $100M) 

Susceptible to ...lrlr... • Annual Estimates 

Significant IPs ~ • Corrective Actions 

• High-Dollar Reports 

Low Risk 

• If Program> $1 M 

• If Cost-Effective 

2 Per OMB Circular No. A-136, agencies may choose either to produce a consolidated PAR or to produce a separate 

AFR and Annual Performance Report (APR). 

6 
PART I-IMPROPER PAYMENTS ELIMINATION AND RECOVERY 


Part I discusses the requirements ofiPIA3, IPERA, and IPERIA. 

A. RISK-ASSESSING, ESTIMATING, AND REPORTING IMPROPER PAYMENTS 

1) 	 Which agencies are required to comply with the requirements of IPIA, IPERA, and 

IPERIA? 

The agencies required to comply with IPIA, IPERA, and IPERIA are defined broadly as "a[ny] 

department, agency, or instrumentality in the executive branch of the United States" as defined in 

Title 31, Section 102 of the United States Code. 

2) 	 What is an improper payment? 

An improper payment is any payment that should not have been made or that was made in an 

incorrect amount under statutory, contractual, administrative, or other legally applicable 

requirements. Incorrect amounts are overpayments or underpayments that are made to eligible 

recipients (including inappropriate denials of payment or service, any payment that does not 

account for credit for applicable discounts4

, payments that are for an incorrect amount, and 

duplicate payments). An improper payment also includes any payment that was made to an 

ineligible recipient or for an ineligible good or service, or payments for goods or services not 

received (except for such payments authorized by law). In addition, when an agency's review is 

unable to discern whether a payment was proper as a result of insufficient or lack of 

documentation, this payment must also be considered an improper payment. 

The term "payment" in this guidance means any disbursement or transfer of Federal funds 

(including a commitment for future payment, such as cash, securities, loans, loan guarantees, and 

insurance subsidies) to any non-Federal person, non-Federal entity, or Federal employee, that is 

made by a Federal agency, a Federal contractor, a Federal grantee, or a governmental or other 

organization administering a Federal program or activity. The term "payment" includes Federal 

awards subject to the Single Audit Act and the Uniform Guidance for Federal assistance (2 CFR 

200 Subpart F) (Single Audits) that are expended by both recipients and sub-recipients. 

3) 	 What is a payment for an ineligible good or service? 

A payment for an ineligible good or service includes a payment for any good or service that is 

not permitted under any provision of a contract, grant, lease, cooperative agreement, or other 

funding mechanism. 

3 Unless otherwise indicated, from this point forward in the guidance the term "IPIA" will imply "IPIA, as amended 


by IPERA and IPERIA." 
 4 Applicable discounts are only those discounts where it is both advantageous and within the agency's control to 


claim them. 


7 
4) 	 What is a program or activity? 

The law anticipates that agencies will examine the risk of, and feasibility of recapturing, 

improper payments in all programs and activities administered. The term "program" includes 

activities or sets of activities recognized as programs by the public, OMB, or Congress, as well 

as those that entail program management or policy direction. 5 This definition includes, but is not 

limited to, all grants including competitive grant programs and block/formula grant programs, 

non-competitive grants such as single-source awards, regulatory activities, research and 

development activities, direct Federal programs, all types of procurements (including capital 

assets and service acquisition), and credit programs. It also includes the activities engaged in by 

the agency in support of its programs. 

For Federal awards subject to the Single Audit Act or otherwise listed in the Catalog of Federal 

Domestic Assistance (CFDA), agencies should consider using the groupings in the Compliance 

Supplement for Single Audits (referred to as "clusters of programs") and the CFDA. However, 

unless otherwise specified in OMB Circular A-11, each Federal agency, after consultation with 

OMB, is authorized to determine the grouping of programs which most clearly identifies and 

reports improper payments for their agency. Agencies must1 not put programs or activities into 

groupings that may mask significant improper payment rates by the large size or scope of a 

groupmg. For transparency, the basis for these groupings must be reported in the agency's AFR 

or PAR. 

5) 	 Must agencies include payments to employees in improper payment risk assessments? 

Yes. IPERIA amended the definition of"payment" in IPIA to include payments made to Federal 

employees, in addition to payments made to non-Federal persons or entities. Therefore, agencies 

must include payments made to employees (including salary, locality pay, travel pay, and other 

payments to Federal employees) in the risk assessments (beginning in FY 2014) and, if 

applicable, in improper payment estimates (the following fiscal year). For improper payment 

reporting purposes, when a shared service provider is responsible for the actual disbursements of 

payments to employees (for example, payroll) on behalf of a customer agency, the customer 

agency and shared service provider6 should assess only the portions of the process that are within 

their respective control. 

6) 	 Must agencies include payments related to charge cards in improper payment risk 

assessments? 

Yes. Agencies should include such payments in risk assessments (beginning in FY 2014) and, if 

applicable, in improper payment estimates (the following year). Agencies should leverage 

guidance in OMB Circular A-123, Appendix B-Jmproving the Management ofGovernment 

Charge Card Programs-and OMB Memorandum M-13-21-Jmplementation ofthe 

5 The term "program" in this guidance implies "program and activity." 
 6 Shared service providers can leverage service organization internal control reports such as Reports on Controls at a 


Service Organization Relevant to User Entities' Internal Control over Financial Reporting (also known as SOC 1 


Reports) or other OMB A-123 assessments. 


8 
Government Charge Card Abuse Prevention Act of2012-when performing these risk 

assessments. 

7) 	 Must agencies review intra-governmental transactions? 

No. IPIA does not require agencies to include payments made by a Federal agency to another 

Federal agency. Therefore, agencies are not obligated to review intra-governmental transactions. 

However, any agency may review such payments, and must do so if directed by OMB. 

8) 	 What constitutes an improper loan or loan guarantee payment? 

Under a direct loan program, improper payments may include disbursements to borrowers or 

other payments by the Government to non-Federal entities that are based on incomplete, 

inaccurate, or fraudulent information. They may also include disbursements or other payments 

that are duplicate, in an incorrect amount, or for purposes other than those allowed by law, 

program regulations, or agency policy. 

Under a loan guarantee program, an improper payment may include payments by the 

Government to non-Federal entities for defaults, delinquencies, interest and other subsidies, or 

other payments that are based on incomplete, inaccurate, or fraudulent information. They may 

also include duplicate payments, payments in an incorrect amount, or any payments that are not 

in compliance with law, program regulations, or agency policy. 

9) 	 What specific steps are agencies required to take? 

Unless an agency has specific written approval from OMB to deviate from the steps explained 

below, agencies are required to follow these steps to determine whether the risk of improper 

payments is significant and to provide valid annual estimates of improper payments 7

• The 

agency is responsible for maintaining the documentation to demonstrate that the following steps 

(if applicable) were satisfied. 

Step 1: Review all programs and activities and identify those that are susceptible to 

significant improper payments. 

a. 	 Definition. For the purposes of this guidance, beginning with FY 2014 reporting and 

beyond, "significant improper payments" are defined as gross annual improper 

payments (i.e., the total amount of overpayments and underpayments) in the program 

exceeding (1) both 1.5 percent of program outlays and $10,000,000 of all program or 

activity payments made during the fiscal year reported or (2) $100,000,000 

(regardless of the improper payment percentage of total program outlays). 

7 Improper payment rates referenced here and throughout this guidance should be based on dollars rather than 

number of occurrences. In other words, the improper payment rate should be the amount in improper payments 

divided by the amount in program outlays for a given program in a given fiscal year (rather than the number of 

improper payments divided by the total number of payments). 

9 
b. 	 Systematic Method. All agencies shall institute a systematic method of reviewing all 

programs and identify programs susceptible to significant improper payments. This 

systematic method could be a quantitative evaluation based on a statistical sample or 

a qualitative method (e.g., a risk-assessment questionnaire). At a minimum, agencies 

shall take into account the following risk factors likely to contribute to improper 

payments, regardless of which method (quantitative or qualitative) is used: 

1. Whether the program or activity reviewed is new to the agency; 

11. The complexity of the program or activity reviewed, particularly with respect 

to determining correct payment amounts; 

111. The volume of payments made annually; 

1v. Whether payments or payment eligibility decisions are made outside of the 

agency, for example, by a State or local government, or a regional Federal 

office; 

v. Recent major changes in program funding, authorities, practices, or 

procedures; 

v1. The level, experience, and quality of training for personnel responsible for 

making program eligibility determinations or certifying that payments are 

accurate; 

Vll. Inherent risks of improper payments due to the nature of agency programs or 

operations; 

vm. Significant deficiencies in the audit reports of the agency including, but not 

limited to, the agency Inspector General or the Government Accountability 

Office (GAO) audit report findings, or other relevant management findings 

that might hinder accurate payment certification; and 

1x. Results from prior improper payment work. 

When appropriate, agencies may leverage other existing processes to help implement 

this systematic method. For example, if an agency chose to develop and implement 

an improper payment risk -assessment questionnaire, the agency might consider 

leveraging another existing similar tool, such as an internal control questionnaire. 

c. 	 Other Risk Susceptible Programs. OMB may determine on a case-by-case basis (e.g., 

if an audit report raises questions about an agency's risk assessment or improper 

payments results) that certain programs that do not meet the threshold requirements 

described above may still be subject to the annual AFR or PAR reporting 

requirement. 

d. 	 Examples. To further clarify use of the quantitative evaluation method for 

performing risk assessments in this step, we provide four examples: 

Example 1: Under the analysis in Step 1, a program has a potential improper 

payment rate of 1.2 percent or $14 million. Under this guidance an agency need 

not perform Step 2-obtaining a statistically valid estimate of improper payments 

in the program-because even though the potential amount of improper payments 

in the program exceeds $10 million, the potential improper payment rate does not 

exceed 1. 5 percent. 

10 
Example 2: Under the analysis in Step 1, a program has a potential improper 

payment rate of 1.8 percent or $9 million. Under this guidance, an agency need 

not perform Step 2-obtaining a statistically valid estimate of improper payments 

in the program-because even though the potential improper payment rate 

exceeds 1.5 percent, the potential amount ofimproper payments in the program 

does not exceed $1 0 million. 

Example 3: Under the analysis in Step 1, a program has a potential improper 

payment rate of 1.8 percent and $11 million. Under this guidance, an agency 

must perform Step 2-obtaining a statistically valid estimate of improper 

payments in the program-because the potential improper payment rate exceeds 

1.5 percent and the potential amount of improper payments exceeds $10 million. 

The agency must report a statistically valid improper payment rate for the 

program in its annual AFR or PAR. 

Example 4: Under the analysis in Step 1, a program has a potential improper 

payment rate of0.6 percent and $125 million. Under this guidance, regardless of 

the potential improper payment rate, the agency must perform Step 2-obtaining 

a statistically valid estimate of improper payments in the program-because the 

potential amount of improper payments in the program exceeds $100 million. 

Step 2: Obtain a statistically valid estimate of the annual amount of improper 

payments in programs and activities for those programs that are identified in Step 1 

as susceptible to significant improper payments. 8 

Programs reporting improper payments for the first time and programs revising their 

current methodology shall conform to the process and content described below in steps 

2.1 and 2.2. Programs that are currently using methodologies approved by OMB under 

the previous version ofOMB A-123 Appendix C do not need to resubmit a methodology 

plan-unless an update to the plan is warranted. Programs should consider updating their 

plan if the program undergoes any significant changes such as legislative, funding, 

structural, etc. 

Step 2.1: Process. All programs and activities susceptible to significant improper 

payments shall design and implement appropriate statistical sampling and estimation 

methods to produce statistically valid improper payment estimates. In doing so, agencies 

shall conform to the following process: 

a. 	 Annual Estimated Amount. For all programs and activities susceptible to significant 

improper payments, agencies shall determine an annual estimated amount of 

improper payments made in those programs and activities. When calculating a 

program's annual improper payment amount, agencies should only utilize the amount 

paid improperly. For example, if a $100 payment was due, but a $110 payment was 

8 Step 2 should occur in the fiscal year following the fiscal year in which the risk assessment was conducted under 

Step 1. 

11 
made erroneously, then the amount applied to the annual estimated improper payment 

amount should be $10, rather than the payment amount of $110. Similarly, if a $100 

payment was due, but a $90 payment was made erroneously, then the amount applied 

to the annual estimated improper payment amount should be $10, rather than the 

payment amount of $90. However, if a $100 payment was due and made, but there is 

insufficient documentation to support the appropriateness of the payment or if a 

duplicate payment was made, then the amount applied to the annual estimated 

improper payment amount should be $100. Agencies are required to determine an 

annual estimate that is a gross total of both over and underpayments (i.e., 

overpayments plus underpayments). However, in addition to the gross total, agencies 

are also allowed to calculate and disclose in their AFRs or PARs the net total (i.e., 

overpayments minus underpayments). 

b. 	 Statistical Sampling and Estimation Plans. Agencies are responsible for designing 

and documenting their sampling and estimation plan. Each plan shall be prepared by 

a statistician9 (either an agency employee or a contractor) and submitted to OMB no 

later than June 30 of the fiscal year for which the estimate is being produced (e.g., the 

sampling methodology to be used for the FY 2014 reporting cycle must be submitted 

by June 30, 2014). The agency shall also include a summary oftheir sampling 

methodology plan in its AFR or PAR. The sampling and estimation plan shall be 

accompanied by a document certifying that the methodology will yield a statistically 

valid improper payment estimate (see below). 

c. 	 Certification. IPERA requires agencies to produce statistically valid estimates of 

improper payments, and therefore each plan shall be accompanied by a certification 

stating that the methodology will produce a statistically valid estimate. The 

certification shall be signed by an agency official ofthe agency's choosing (e.g., this 

could be the Chief Financial Officer, his/her Deputy, a program official, etc.). Upon 

receipt, OMB will review the documents (i.e., the proposed statistical sampling plan 

and the accompanying signed certification) to verify that they are complete and 

include all the requisite components listed in Step 2.2 below. It is important to note 

that OMB will not be issuing a formal approval to the agency for the sampling planrather, it is the agency's responsibility to produce a statistically valid methodology. 

The signed certification will serve as evidence that the agency believes the 

methodology is statistically sound. OMB does reserve the right to raise questions 

about the particular methodology, should the need arise. 

d. 	 Working with other Entities. Agencies should consider working with entities-such 

as grant recipients-that are subject to Single Audits to leverage ongoing audits to 

assist in the process to estimate an improper payment rate and amount. 

e. 	 Incorporating Recommendations. Whenever possible, agencies should incorporate 

refinements to their improper payment methodologies based on recommendations 

9 This person should have training and experience designing statistical samples and using statistical methods to 

calculate population estimates and sampling errors from a probability sample. This person would generally have an 

advanced degree in statistics, biostatistics, mathematics, a quantitative social science, or a similar field. 

12 
from agency staff or auditors (such as their agency Inspector General, GAO, or 

private auditors). 

f. 	 Example Plans from Other Agencies. OMB will make available to agencies 

examples of statistical sampling and estimation plans submitted by agencies. 

Agencies are encouraged to review these examples and consult with other agencies 

when preparing their sampling plans. While each plan will likely be slightly different 

given the unique nature of each program, there are some characteristics that are 

common across many programs, and agencies should benefit from each other's work. 

However, each agency is responsible for designing and executing an appropriate 

sample to statistically estimate improperly paid dollars that meets the requirements in 

this guidance. 

Step 2.2: Content of Statistical Sampling and Estimation Plans. Agencies shall clearly 

and concisely describe the statistical methods that will be used to design and draw the 

sample and produce an improper payment estimate for the program in question. The 

plans shall explain and justify why the proposed methodology is appropriate for the 

program in question-this explanation must be supported by accurate statistical formulas, 

tables, and any additional materials to demonstrate how the sampling and estimation will 

be conducted and the appropriateness of those statistical methods for the program. 

Agency sampling and estimation plans must be complete and internally consistent. The 

following aspects must be clearly addressed: 

a. 	 Probability Sampling. Improper payment estimates shall generally be based on 

probability samples and shall provide estimates of the sampling error for the amount 

of the improper payments. Agencies may use simple random samples ifthose are 

appropriate, but many agencies have employed more complex stratified or multi-stage 

or clustered samples in order to obtain estimates of different components of the 

program that are more actionable than can be afforded by simpler sample designs. 

Depending on the nature and distribution of the payments made by a program, many 

agencies also use unequal probabilities of selection to capture larger payments with 

higher probability (i.e., probability proportionate to size). If the universe of payments 

for a program or a component/stratum of the program is small, agencies may review a 

complete census of payments in those cases and would not have any sampling error 

for that component or stratum-assuming a statistician is consulted on this approach. 

b. 	 Assumptions about the amount of Improper Payments. The agency may use their 

initial determination of the potential improper payment in Step 1, above, to aid in 

determining the sample size. Since most agencies have been conducting ongoing 

reviews of their improper payments for some time, they should utilize results from 

previous years and make appropriate adjustments to the sample size and even the 

sample design based on previous findings in order to obtain a more efficient sample 

or obtain more useful estimates of improper payments by program component. 

c. 	 Appropriate Sample Sizes. Because of the imprecision of the risk assessment 

performed in Step 1, agencies should ensure that they select a sample that will meet 

13 
the minimum precision requirements in Step 2.2.d below. For initial estimates of 

improper payments, agencies should take a conservative approach and use higher 

estimated improper payments in their sample size calculations to ensure that they will 

meet the precision targets. As noted above, since most agencies have been 

conducting ongoing reviews of their improper payments for some time, they should 

utilize results from previous years and make appropriate adjustments to the sample 

SIZe. 

d. 	 Precision. Agencies should design the sample and select a sample size sufficient to . 

yield an estimate of improper payments with a 90 percent confidence interval of plus 

or minus 2.5 percent of the total amount of all payments for a program around the 

estimate of the dollars of improper payments. 1

°For example, if the total amount of 

all payments for a program was $1 ,000,000,000 and the estimated total of improper 

payments based upon the statistical sample was $80,000,000, the 90 percent 

confidence interval around the estimate should be no more than plus or minus 

$25,000,000-i.e., $55,000,000 to $105,000,000. These guidelines for precision shall 

be taken as the minimum, and agencies are encouraged to increase samples above the 

minimum to achieve greater precision in their estimates in order for agencies to better 

understand underlying causes of improper payments and creating action plans. 

Agencies shall maintain documentation to support the calculation ofthese estimates. 

e. 	 Sample Design Documentation. Agency sampling and estimation plans shall . 

generally provide sufficient documentation of the sample design so that a qualified 

statistician would be able to replicate what was done or so that OMB, agency 

Inspector General, or GAO personnel can evaluate the design. Agencies shall clearly 

identify the frame or source for sampling payments and document its accuracy and 

completeness. All stages of selection, any stratification, and/or any clustering shall 

be clearly described. Explicit strata shall be clearly defined, as should any variables 

used for implicit stratification. Tables shall generally be provided showing the size of 

the universe and sample by strata (if applicable). Sampling plans shall also specify 

whether cases are selected with equal or unequal probabilities and how the 

probabilities of selection are determined when they are unequal. 

f. 	 Documentation of Estimation Formulas. Agency sampling and estimation plans shall 

include documentation of the statistical formulas that will be used to estimate the 

amount of improper payments (and the associated confidence intervals for the 

sample) and to project those results to the entire program. Documentation should 

include appropriate citations for these formulas. Agency sampling and estimation 

plans must be complete and internally consistent (for instance, estimation formulas 

must appropriately reflect the complexity of the sample design). 

g. 	 Updates and Changes to Agency Plans. Agencies should update their sampling and 

estimation plans, as needed, to reflect the current design and methods being used and 

incorporate refinements based on previous results, consultations with others, and/or 

10 Agencies may alternatively use a 95 percent confidence interval of plus or minus 3 percent around the estimate of 

the dollar amount of improper payments. 

14 
recommendations from Inspectors General, GAO, or OMB. Any updated plans will 

need to be submitted to OMB no later than June 30 of the fiscal year for which the 

estimate is being produced (e.g., the sampling methodology to be used for the FY 

2014 reporting cycle must be submitted by June 30, 2014). The plans shall include 

all the components described in steps 2.1 and 2.2 above. A plan that is being updated 

or changed should include some language explaining why the plan is changing and 

how the plan is different from the one previously submitted. 

Agencies shall submit an explanation and justification to OMB for any instances where a 

program is not able to fulfill the requirements described in Step 2. OMB will review 

requests for deviation from these requirements and must approve any alternative methods 

(see section I.A.14 below). 

Step 3: Implement a plan to reduce improper payments. 

a. 	 Root Causes and Corrective Actions. For all programs and activities as determined 

under Step 2 with improper payments exceeding the thresholds listed earlier in Step 1, 

agencies shall identify the reasons their programs and activities are at risk of 

improper payments and put in place a corrective action plan to reduce them. In many 

cases, agencies will implement long-term, on-going corrective actions that will be 

implemented and refined on a continuous basis (e.g., the corrective action is in place 

for many years, though it may be refined from year to year). Agencies should 

annually review their existing corrective actions to determine if any existing action 

can be intensified or expanded, resulting in a high-impact, high return-on-investment 

in terms of reduced or prevented improper payments. In addition, IPERIA requires 

agencies to tailor their corrective actions for programs that are deemed high-priority 

to better reflect the unique processes, procedures, and risks involved in each specific 

program. This information shall be reported in the agency's AFR or PAR annually. 

More detailed information about high-priority programs can be found below in 

section I.B. 

b. 	 Reduction Targets. When compiling plans to reduce improper payments, agencies 

shall set reduction targets for future improper payment levels and a timeline within 

which the targets will be reached. Reduction targets must be approved by the 

Director of OMB (this approval process will take place during the OMB review and 

approval process of draft AFRs and PARs). In cases in which a program needs a few 

years to fully establish an improper payment rate baseline (for example, stateadministered programs with a "rolling rate" in which only a fraction ofthe states 

report each year), OMB does not expect the program to publish a reduction target 

until a full baseline has been established and reported. 

c. 	 Accountability. Agencies must ensure that managers and accountable officers 

(including the agency head), programs and program officials, and where applicable 

States and local partners, are held accountable for reducing improper payments. In 

addition, for programs that are not implemented directly by Federal or State agencies 

or government, agencies may also consider establishing these accountability 

15 
mechanisms. For example, non-Federal entities could include colleges that disburse 

grants and loans to students, or banks that disburse loans to students. Agencies shall 

assess whether the organizations have the internal controls, human capital, 

information systems, and other infrastructure needed to reduce improper payments to 

minimal cost-effective levels, and identify any statutory or regulatory barriers which 

may limit the agencies' corrective actions in reducing improper payments. This 

information shall be reported in the agency's AFR or PAR annually. 

Step 4: Report annually in the AFR or PAR. 

a. 	 Reporting. Agencies shall report to the President and Congress (through AFRs or 

PARs in the format required by 0 MB Circular A -13 6 for improper payment 

reporting) an estimate of the annual amount and rate of improper payments for all 

programs and activities determined to be susceptible to significant improper payments 

under Step 1, regardless of the dollar amount of the estimate, as further explained 

below. OMB approval of some improper payment requirements (e.g., reduction 

targets) occurs through OMB' s review of the improper payment section of each 

agency's AFR or PAR. Improper payment information from AFRs and PARs is 

subsequently analyzed for inclusion in OMB's government-wide reporting on 

improper payments. This information (i.e., government-wide improper payment rates 

and improper payment amount estimates) is also posted on PaymentAccuracy.govthe improper payments website created under Executive Order 13520, Reducing 

Improper Payments. 

b. 	 Improper payment estimates that meet statutory thresholds. For programs and 

activities reporting improper payment estimates that meet the statutory thresholds 

described in Step 1(a) above, agencies shall follow all the improper payment 

reporting requirements delineated in OMB Circular A-136. The improper payments 

section in Circular A-136 outlines what information agencies are required to include 

in their annual AFRs or PARs regarding improper payment estimates, reduction 

targets, root causes, corrective actions, and other areas. 

c. 	 Improper payment estimates that DO NOT meet statutory thresholds. For programs 

and activities reporting improper payment estimates that DO NOT meet the statutory 

thresholds described in Step 1(a) above, agencies are still required to report an 

estimate of the annual amount and rate of improper payments, as well as reduction 

targets, in their annual AFRs or PARs, but they are not required to complete the 

additional steps referenced above in Step 4(b) and outlined in Circular A-136 (e.g., 

root causes, corrective actions, etc.). 

10) When must agencies conduct risk assessments? 

IPERA required agencies to conduct improper payment risk assessments for all programs starting 

in FY 2011 , unless they received a waiver from OMB. For programs that are deemed to be low 

risk of significant improper payments, agencies must perform risk assessments at least once 

every three years thereafter (programs that have been determined to be susceptible to significant 

16 
improper payments and that are already reporting an estimate-or in the process of establishing 

an estimate-do not have to perform additional risk assessments). However, if a low risk 

program experiences a significant change in legislation and/or a significant increase in its 

funding level, agencies are required to re-assess the program's risk susceptibility during the next 

annual cycle, even if it is less than three years from the last risk assessment. 

11) What information should agencies provide to persons or entities producing improper 

payment estimates? 

IPERIA requires OMB to instruct agencies to give persons or entities producing improper 

payment estimates access to all necessary payment data, including access to relevant 

documentation. In order to produce accurate improper payment estimates, agencies must provide 

full documentation to persons or entities producing their improper payment estimates. In 

addition, this documentation must be maintained for the length oftime required by the National 

Archives and Records Administration for the particular type of material being held in order for 

post-payment audits to be performed and to allow internal and external auditors to replicate 

reported results. For specific records retention requirements, agencies may contact their Senior 

Agency Official, a listing ofwhich can be found at http://www.archives.gov/recordsmgmt/ agency Isao-list.html. 

12) Are agencies allowed to rely upon self-reporting by recipients of agency payments when 

estimating improper payments? 

IPERIA requires OMB to explicitly bar agencies from relying on self-reporting by the recipients 

of agency payments as the sole source basis for improper payments estimates. Specifically, 

agencies shall not base their improper payment estimates solely on self-reporting of actual 

improper payments by the sub-agencies that made the payments or individuals or entities who 

received the payments. In other words, agencies may not use self-reporting by recipients of 

actual improper payments in lieu of a statistical estimate. 

However, agencies may continue to utilize sub-agencies and recipients of Federal funding to 

assist in the improper payment rate estimation process if the methodology is statistically valid 

(or, in the case of alternative methodologies, if approved by OMB) and ifthe appropriate checks 

and balances are in place, including Federal oversight to ensure the integrity of the process. For 

example, a Federal agency overseeing a Federally-funded, State-administered program may 

choose to ensure that a structured sampling methodology and procedures are prescribed for 

states' use for estimating and reporting improper payments using information from a variety of 

sources 11 , and not just from the beneficiaries of the program. 

Historically, some agencies used alternative methodologies for estimating and reporting 

improper payments that relied solely on self-reporting of actual improper payments. Current law 

no longer supports alternative methodologies that are comprised strictly of self-reporting or 

identification of actual improper payments by employees, vendors, or agency staff, instead of a 

11 These sources should be reliable and the information provided should be accurate and complete. Documentation 

of data reliability testing should be maintained by the sources. 

17 
statistical sample resulting in program estimates. Therefore, self-reported improper payments 

may be reported, but only in addition to the agency's statistical estimates. 

13) Are agencies allowed to implement an estimation approach that excludes improper 

payments that have been subsequently corrected and recovered from the annual 

estimate? 

IPERIA requires agencies to include all improper payments that were identified in the sample in 

the reported estimate, regardless of whether the improper payment has been or is being 

recovered. Prior to the passage of IPERIA, OMB guidance allowed agencies-in limited cases, 

and with prior approval from OMB-to implement an estimation approach that excluded 

improper payments that had been subsequently corrected and recovered from the annual estimate 

reported in the agency's AFR or PAR. Therefore, any program that currently excludes recovered 

amounts identified in the sample from its estimate shall update its methodology to reflect the 

new IPERIA requirement. In this case, OMB will work with the agency to help determine how 

and when the new methodology will go into effect, and how to report the change in the AFR or 

PAR (for example, possibly allowing the agency to use an additional figure to disclose the effect 

of recovered funds on the improper payment rate). 

14) May agencies use alternative sampling and estimation approaches? 

Yes, Section 2(b) of IPERA requires agencies to produce a statistically valid estimate, or "an 

estimate that is otherwise appropriate using a methodology approved" by the Director of 

OMB. This means that if, and only if, agencies are unable to develop a sampling methodology 

that follows the guidance described above in section I.A.9, step 2, they may utilize an alternative 

sampling and estimation approach after obtaining OMB approval. A request for approval and 

the proposed alternative sampling and estimation approach must be submitted in writing to OMB 

no later than June 30 in the fiscal year for which the alternative approach is being developed 

(e.g., an alternative approach to be used for the FY 2014 reporting cycle must be submitted by 

June 30, 2014). The request must describe the proposed alternative methodology in detail, and 

clearly explain why the agency is unable to produce a statistically valid estimate (as described in 

section I.A.9, step 2). OMB anticipates that a statistician12 (either an agency employee or a 

contractor) will be consulted when preparing an alternative sampling and estimation approach. 

If approved by OMB, agencies are responsible for maintaining documentation for the alternative 

sampling and estimation approach. The agency shall also include a summary ofthis alternative 

methodology in its AFR or PAR, including the justification for using an alternative 

methodology. 

The scenarios described below are examples ofthe types of approaches that may be approved by 

OMB as alternatives to section I.A.9, step 2 of this guidance. However, agencies are required to 

12 This person should have training and experience designing statistical samples and using statistical methods to 

calculate population estimates and sampling errors from a probability sample. This person would generally have an 

advanced degree in statistics, biostatistics, mathematics, a quantitative social science, or a similar field. 

18 
obtain OMB approval prior to implementation. The scenarios below are merely illustrations, and 

other alternatives may be presented to OMB. 

Scenario 1. An agency has a previous baseline improper payment rate, and has a plan in 

place to obtain another full program improper payment rate within five years from the 

baseline year. 

Step 1 : Aging the baseline rate. The agency should use statistical methods to update or 

"age" the baseline improper payment rate in the intervening years, until the next program 

rate is established. Specifically, the agency should use available data to extrapolate 

updates of the baseline rate. At a minimum, the analysis should provide a reasonable 

basis to conclude whether the baseline rate is trending upward, downward, or remaining 

static. 

Step 2: Program component annual estimate. The agency should develop an annual 

improper payment rate for a component of the program. The component can be defined 

based on population, program area, or known problem area. To the extent possible, the 

component chosen for analysis should be based on risk so that the agency is targeting an 

area ofthe program in which a significant amount of improper payments is expected to 

occur. This approach could mean choosing an area because of overall financial exposure, 

or in the case of State-administered programs, possibly selecting larger states to cover 

more ofthe risk. This program component should be statistically sampled annually to 

obtain an improper payment rate consistent with the statistical rigor requirements of this 

guidance. The goal for the component study is not to extrapolate an improper payment 

rate for the program as a whole. Rather, the goal is only to estimate an improper payment 

amount for the relevant program component being studied. Component-specific baseline 

and target rates, as well as corrective action plans, should be developed to assess agency 

progress in reducing improper payments in the program component. 

Please note, that both Steps 1 and 2 in Scenario 1 are required ifthis alternative is chosen by the 

agency and approved by OMB. 

Scenario 2. No baseline comprehensive improper payment rate is established and no 

statistically valid methodology is yet developed to obtain one. 

Step 1: Plan for comprehensive baseline improper payment rate. A methodology to 

obtain a comprehensive baseline improper payment rate must be developed with a 

time line that would allow for the first estimate to occur within three years of when the 

plan was approved by OMB. Statistical rigor must meet, at a minimum, the requirements 

previously stated in this guidance. 

Step 2: Program component annual improper payment rate. While the agency is working 

toward a comprehensive baseline rate, the agency should annually identify a component 

to assess, and begin to report an improper payment rate for that component within one 

year of the plan's approval by OMB (see Step 2 in Scenario 1 above). 

19 
Step 3: Determine rate. Once the baseline rate is established, and if the rate cannot be reestimated annually, the agency should perform both Steps 1 and 2 of Scenario 1 above to 

ensure that adequate information on improper payments is obtained on an annual basis. 

If an agency decides to utilize one of the scenarios listed above, it must complete all of 

the steps for the scenario selected. It is important to note that agencies are not restricted 

to using only these two approaches; different strategies may be necessary because of preexisting legislative requirements and/or prohibitions, or because a different method may 

be more appropriate in providing results for a particular program. Agencies may also 

consider non-probabilistic sampling approaches, such as purposive sampling or cut-off 

samples, when legislative requirements make probabilistic samples untenable. 

Scenario 3. The risk of improper payments in a program may be part of a larger 

inefficiency that the agency is attempting to address. For instance, the improper 

payments in the program may be a subset of a larger initiative, and the agency may only 

focus on one portion of the improper payments within the program that is under its 

control rather than the entire inefficiency. 

Step 1: Identify program component. The agency should identify the component of the 

program that it wants to estimate and report on. This selection should be a component of 

the program that is within its control, is a driver of improper payments within the 

program, and whose estimation would produce benefits that outweigh their costs. Once 

this selection is identified, the agency should implement an estimation plan that meets the 

statistical rigors stated in this guidance. 

Step 2: Continue broader program estimate. During and after the development of the 

program component improper payment rate, the agency should continue to report the 

overall program improper payment estimate. Eventually, OMB may notify the agency 

that it may stop conducting the overall program estimate and instead use the program 

component estimate in its place, but the agency should continue to report both the 

component and program improper payment rate until OMB notifies the agency that it 

may stop doing so. 

As detailed above, whether an agency decides to use one of these three scenarios, or proposes a 

different process, all deviations from section I.A.9, step 2, shall be submitted to OMB no later 

than June 30 in the fiscal year for which the estimate is being produced and documented in the 

AFR or PAR. In addition, programs should consider updating their alternative methodology if 

the program undergoes any significant changes such as legislative, funding, structural, etc. 

15) Should data used for estimating improper payments coincide with the fiscal year being 

reported in the AFR or PAR? 

To the extent possible, data used for estimating improper payments in a given program should 

coincide with the fiscal year being reported (for example, the estimate reported in the FY 2014 

AFR or PAR should be based on data from FY 20 14). However, agencies may utilize a different 

12-month reporting period with approval from OMB. This request for approval shall be 

submitted to OMB no later than June 30 in the fiscal year for which the estimate is being 

20 
reported and shall be documented in the AFR or PAR. For example, the estimate reported in the 

FY 2014 AFR or PAR could be based on data from FY 2013, if approved by OMB. As another 

example, the estimate reported in the FY 2014 AFR or PAR could be based on data from the last 

two quarters ofFY 2013 and the first two quarters ofFY 2014, if approved by OMB. For 

consistency purposes, the agency shall continue using the same time period for subsequent 

reporting years, unless a different time period is proposed by the agency and approved by OMB. 

Therefore, agencies do not need to re-submit a request for approval every year, only when they 

are planning to change their reporting time period. 

16) What are Federally-funded, State-administered programs, and may agencies consider 

other approaches for these types of programs? 

Federally-funded, State-administered programs (e.g., Medicaid, Unemployment Insurance, 

TANF, Title I Grants to States, Child and Adult Care Food Program) receive at least part of their 

funding from the Federal Government, but are administered, managed, and operated at the State 

or local level. Where programs are administered at the State level, statistically valid estimates of 

improper payments may be provided at the State level either for all States or for all sampled 

States annually. If the improper payment estimates are provided at the State level, these Statelevel estimates should then be used to generate a national improper payment dollar estimate and 

rate. However, agencies may submit a plan to OMB for approval to provide national level 

estimates for State-administered programs based on a systematic selection of such states each 

year. This request for approval must be submitted in writing to OMB no later than June 30 ofthe 

fiscal year for which the approach is being developed (in other words, an approach to be used for 

the FY 2014 reporting cycle would be submitted by June 30, 2014). 

One example of this type of approach can be seen in the Title JV.:.E Foster Care Program, 

wherein current regulations require that programs be reviewed every three years for compliance. 

With prior OMB approval, this program has taken the review cycle already in place and 

leveraged it for estimating improper payments, providing a rolling three-year average improper 

payment rate. 

Alternate methodologies, such as those described above, must be approved by OMB in advance 

of implementation. The justification to use this type of approach must include a description of 

the States to be selected each year, the methodology for generating annual national estimates, 

and a justification for using the proposed plan rather than an estimate based on a random 

statistical sample. 

17) Are programs that are identified as susceptible to significant improper payments, and 

that annually report improper payment estimates, permanently subject to improper 

payments reporting requirements? 

No. If an agency's program is currently estimating and reporting improper payments, but has 

documented a minimum of two consecutive years of improper payments that are below the 

statutory thresholds described in section I.A.9, the agency may request relief from the annual 

reporting requirements for this program or activity. This request must be submitted in writing to 

OMB, and must include an assertion from the agency' s Office oflnspector General that it 

21 
concurs with the agency's request for relief. The request for approval must be submitted to 

OMB no later than June 30 in the fiscal year for which the agency is requesting to halt reporting 

(e.g., a request to halt reporting for a program beginning with the FY 2014 reporting cycle must 

be submitted by June 30, 2014). 

OMB will not grant automatic approval. Rather, OMB will review the request and will also take 

into account the following criteria: 

a. 	 Burden-does measuring and reporting improper payments lead to a heavy burden (e.g., 

in terms of funding, program staffhours, etc.)? 

b. 	 Legislative considerations-are there any legislative requirements or recent changes that 

affect the program's ability or inability to estimate and report improper payments? 

c. 	 Audit findings-are there any audit findings (i.e., by the Inspector General or GAO) that 

point to reasons why the program might want to continue measuring and reporting 

improper payments? 

d. 	 Ongoing risk mitigation strategies-are there any appropriate controls, policies, or 

corrective actions that have been put in place to mitigate the risk of fraud and error in the 

program? 

e. 	 Other considerations-are there any other key factors that should be considered in 

deciding whether or not to grant relief from measuring and reporting improper payments? 

In order to expedite OMB's review, agencies should consider the five criteria above and discuss 

them, if appropriate, in the written request. If OMB approves the request, the agency shall 

incorporate that program or activity into its risk assessment cycle. However, if significant 

legislative changes occur, if program funding is significantly increased, or if any change results 

in substantial program impact, agencies must perform a risk assessment of this program as part 

of its next reporting cycle, even if it has been less than three years since the last risk assessment. 

If the risk assessment indicates that the program is again susceptible to significant improper 

payments, the agency will return to the full estimation and reporting process as required by IPIA. 

Agencies must continue to report improper payment rates, amounts, and remediation efforts as 

long as annual improper payments for a program exceed the reporting thresholds. 

18) Are programs and activities that have been deemed susceptible to significant improper 

payments as a result of the Disaster Relief Appropriations Act, 2013, permanently 

subject to improper payments reporting requirements? 

No. Improper payment measuring and reporting for funds received under the Disaster Relief 

Appropriations Act, 2013, for Hurricane Sandy-related activities must only be performed until 

those funds are expended. According to the Disaster Relief Appropriations Act, 20 13, all 

Federal programs or activities receiving funds under that Act are automatically considered 

susceptible to significant improper payments, regardless of any previous improper payment riskassessment results, and are required to calculate and report an improper payment estimate. For 

further guidance on Hurricane Sandy-related improper payment requirements, please refer to 

OMB Memorandum M-13-07, Accountability for Funds Provided by the Disaster Relief 

Appropriations Act, issued on March 12, 2013. 

22 
B. IMPROVING THE DETERMINATION OF IMPROPER PAYMENTS 

1) 	 How will OMB determine the "high-priority" programs as required under IPERIA? 

High-priority programs will be determined by OMB based on improper payment reporting in 

agencies' AFRs or PARs. 

OMB may classify a program as high-priority ifthe program meets the following conditions: 

a. 	 It is susceptible to significant improper payments as defined by statute and OMB 


implementing guidance and either: 


1. 	 Estimated and reported improper payments above the threshold determined by 

OMB or contributed to the majority of government-wide improper payments in the 

most recent reporting year; or 

ii. 	 Did not report an improper payment estimate in the most recent reporting year, but 

had reported improper payments before and did not receive relief from OMB from 

measuring and reporting; or 

111. 	 Has not yet reported an overall program improper payment estimate amount, but the 

aggregate of the program's component improper payments are above the threshold. 

b. 	 For those programs with improper payment amounts above the threshold, but with 

improper payment rates below 1.5 percent of program outlays, agencies may work with 

OMB to determine ifthe program can be exempted from fulfilling certain OMB 

requirements for high-priority programs. 

The threshold for high-priority program determinations for FY 2014 reporting, and for 

subsequent years, is $750 million in estimated improper payments as reported in the AFR or 

PAR (regardless ofthe improper payment rate estimate). OMB may revise this threshold in 

future years and, if so, will notify agencies ofthe new threshold and if any programs shall be 

added or removed (based on reporting errors above or below the new threshold) from the highpriority list. If a program is identified as high-priority (e.g., because it did not report an improper 

payment estimate, or reported an improper payment estimate above $750 million), but in 

subsequent years reports an improper payment estimate below $750 million, it will no longer be 

considered a high-priority program. 

2) 	 What are the requirements under IPERIA for establishing semi-annual or quarterly 

actions for reducing improper payments? 

IPERIA requires OMB, in coordination with agencies responsible for administering high-priority 

programs, to establish semi-annual or quarterly actions for reducing improper payments 

associated with each high-priority program. IPERIA codified parts of Executive Order 13520, 

including this particular requirement, which stems from the Executive Order supplemental 

measures and targets. For more details, please see section III.B ofthis guidance. 

23 
3) 	 Do high-priority programs have any specific requirements regarding corrective 

actions? 

High-priority programs are already required to develop corrective actions, as discussed in section 

LA. However, IPERIA requires agencies to tailor their corrective actions for high-priority 

programs. Therefore, any agency that has any programs identified as high-priority shall explain 

in its AFR or PAR how it has specifically tailored its corrective actions for high-priority 

programs to better reflect the unique processes, procedures, and risks involved in each specific 

program. 

4) 	 Are there any additional reporting requirements for agencies that have high-priority 

programs? 

Yes. IPERIA requires each agency that has any programs identified as high-priority to report to 

their Inspector General, and make available to the public (including availability through the 

internet): (1) any action the agency has taken-or plans to take-to recover improper payments; 

and (2) any action the agency intends to take to prevent future improper payments. In order to 

avoid duplication and reduce the number of agency reports related to improper payments, 

agencies shall fulfill this requirement by including this information in their AFRs or PARs 

starting with FY 2014 reporting. Please note that this reporting requirement will also fulfill the 

"accountable official" report required under Section 3(b) of Executive Order 13520. 

Inspectors General shall review this information (i.e., the information discussed in this question, 

in the paragraph above) when they conduct their annual compliance reviews (see Part II ofthis 

guidance). OMB will make the improper payments portions of AFRs and PARs publicly 

available on PaymentAccuracy.gov starting with the FY 2014 reporting cycle. As required by 

IPERIA, the agency shall not include any referrals the agency made or anticipates making to the 

Department of Justice, or any information provided in connection with such referrals. In 

addition, this requirement shall not prohibit any referral or information being made available to 

an Inspector General as otherwise provided by law. 

C. CATEGORIES FOR REPORTING IMPROPER PAYMENTS 

1) 	 What categories should agencies use when reporting improper payment estimates? 

Prior to FY 2015 reporting, agencies were required to categorize their improper payment 

estimates based on three categories of improper payments: documentation and administrative 

errors; authentication and medical necessity errors; and verification errors. However, those 

categories proved to be limited and not necessarily applicable to most programs. Therefore, 

OMB-in consultation with agencies-developed new improper payment categories. Reporting 

information based on these categories shall be required for FY 2015 reporting and beyond. To 

the extent possible, for FY 2014 reporting OMB encourages agencies with programs that are 

susceptible to significant improper payments to report information in their AFR or PAR based on 

the categories described below. 

24 
These new categories will: (1) prove more pertinent to the vast array of programs across the 

Federal landscape; (2) help agencies better present the different categories of improper payments 

in their programs and the percentage of the total improper payment estimate that each category 

represents; and (3) provide more granularity on improper payment estimates-thus leading to 

more effective corrective actions at the program level and more focused strategies for reducing 

improper payments at the government-wide level. 

The matrix below provides a cross-tabulation framework for the way in which each program 

shall categorize and report its improper payment estimate. 

Table 1: Matrix of Improper Payment Categories ($ in millions) 

Program 

Inability to 

Reason 

Design 

Authenticate 

or 

for 

Structural 

Improper 

Eligibility 

Payment 

Issue 

~ 

Death Data 

Financial Data 

Failure to Verify: Excluded Party Data 

Prisoner Data 

Other Eligibility Data (explain) 

Federal Agency 

Administrative State or Local Agency 

or Process Other Party (e.g., participating Error Made by: lender, health care provider, or 

any other organization 

administering Federal dollars) 

Medical Necessity 

Insufficient Documentation to Determine >< 

Other Reason (explain) 

A 8 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

In the matrix, columns A and B include two categories based on the type of improper payment, 

and rows 1 through 13 include thirteen categories based on the reason why the improper payment 

was made (each category is explained in more detail below). The matrix has a total of 25 cells 

(i.e., coordinates AI through B13, where B12 is not to be used, as indicated by the 'X' in cell 

25 
B12 in the matrix). Each program shall distribute its total improper payment estimate (which is 

based on dollars, as opposed to number of occurrences) across the 25 cells in the matrix-with 

the understanding, of course, that not every cell will apply to every program. 

For example, suppose a program reported $100 million in estimated improper payments. Here is 

an example of how the table might be filled out: 

• 	 If $70 million were overpayments caused by the inability to authenticate eligibility, then 

that amount would go in cell A2. 

• 	 If $10 million were underpayments caused by process errors at State agencies 


administering the program, then that amount would go in cell B9. 


• 	 If $20 million were cases where there was insufficient documentation to determine if 

payments were proper or improper, in which case it is assumed those are overpayments, 

then that amount would go in cell A12. 

Ultimately, the amounts placed across the different cells in the matrix need to add up to the total 

reported estimated improper payment amount for that given program. Please note that, taken by 

themselves, the amounts placed in each cell do not need to meet the statistical requirements 

described above in section I.A.9, step 2. Also note that, although there are 25 cells in the matrix 

below, agencies should only fill in relevant cells, and may leave cells blank ifthey are not 

relevant to the program's estimated improper payments. Finally, it is important to note that in 

cases where the agency believes more than one cell might be suitable to any given improper 

payment category, the agency should determine which cell it believes to be the most appropriate. 

All categories found in the matrix are described as follows: 

a. 	 Overpayments (column A) and Underpayments (column B): An overpayment is a 

payment that is evidently higher than it should have been (including a duplicate 

payment), and an underpayment is a payment that is evidently lower than it should have 

been. 

b. 	 Program Design or Structural Issue (row 1): A situation in which improper payments are 

the result ofthe design of the program or a structural issue. For example, a scenario in 

which a program has a statutory (or regulatory) requirement to pay benefits when due, 

regardless ofwhether or not all the information has been received to confirm payment 

accuracy. 

c. 	 Inability to Authenticate Eligibility (row 2): A situation in which an improper payment is 

made because the agency is unable to authenticate eligibility criteria. Though other 

scenarios are also possible, here we discuss three likely ways in which this can happen. 

First, the inability to authenticate eligibility can happen because no databases or other 

resources exist to help the agency make a determination of eligibility (for example, the 

inability to establish that a child lived with a family for a certain amount of time-for the 

purpose of determining that a family is eligible for a tax credit-because no database 

exists to do so). Second, a beneficiary has failed to report information to an agency that 

is needed for determining eligibility (for example, a beneficiary failing to provide an 

26 
agency with information on earnings, and the agency does not have access to databases 

containing the earnings information). Finally, statutory constraints prevent a program 

from being able to access information that would help prevent improper payments (for 

example, not confirming a recipient's earnings or work status through existing databases 

due to statutory constraints). 

d. 	 Failure to Verify Data (rows 3-7): A situation where the agency (Federal, State, or local), 

or another party administering Federal dollars, fails to verify appropriate data to 

determine whether or not a recipient should be receiving a payment, even though such 

data exist in government or third-party databases. For reporting purposes, the kind of 

data in question would include, but are not limited to, the following: 

1. Death Data (row 3)-failure to verify that an individual is deceased, and the 

agency pays that individual. 

ii. Financial Data (row 4)-failure to verify that an individual's or household's 

financial resources (for example, current income or assets) do not meet the 

threshold to qualify him or her for a benefit, and the agency makes a benefit 

payment to that individual or household. 

iii. Excluded Party Data (row 5)-failure to verify that an individual or entity has 

been excluded from receiving Federal payments, and the agency pays that 

individual or entity. 

iv. Prisoner Data (row 6)-failure to verify that an individual is incarcerated and 

ineligible for receiving a payment, and the agency pays that individual. 

v. Other Eligibility Data (row 7)-any other type of data not already listed above, 

causing the agency to make an improper payment as a result. 

e. 	 Administrative or Process Errors (Rows 8-10): Errors caused by incorrect data entry, 

classifying, or processing of applications or payments. For example, an eligible 

beneficiary receives a payment that is too high or too low due to a data entry mistake, or 

an agency enters an incorrect invoice amount into its financial system. These types of 

errors can be made by: 

i. Federal Agency (row 8) 

11. State or Local Agency (row 9) 

111. 	 Other Party (row 1 0)-for example, a participating lender, or any other type of 

organization administering Federal dollars that is not a Federal or State agency. 

f. 	 Medical Necessity (row 11): A situation in which a medical provider delivers a service or 

item that does not meet coverage requirements for medical necessity (for example, 

providing a power wheelchair to a patient whose medical record does not support 

meeting coverage requirements for a power wheelchair). 

g. 	 Insufficient Documentation to Determine (row 12): A situation where there is a lack of 

supporting documentation necessary to verify the accuracy of a payment identified in the 

improper payment testing sample. For example, a program does not have documentation 

to support a beneficiary's eligibility for a benefit (in this case, the beneficiary may have 

been eligible, but the documentation is not present to confirm it during the review 

period). 

27 
h. 	 Other Reason (row 13): If none of the above categories apply, include any other reasons 

for the improper payment under this category-and please explain the reasons in more 

detail either in footnotes or in the narrative below the table. In instances where agencies 

are able to identify improper payments resulting from fraud, they should report those 

dollar amounts in this row-unless they already report fraud through a mechanism 

outside of the annual improper payment process (e.g., an annual report to Congress). 

Additional considerations for fraudulent activities are discussed below. 

2) 	 How should agencies focus on fraudulent activities? 

When agencies are reviewing the root causes of improper payments, or analyzing areas for 

supplemental measures and targets, agencies should be mindful ofmaintaining a focus on 

fraudulent activity within the program. For instance, fraudulent actions (e.g., using fraudulent 

documents to receive a benefit or contract payment) may have an impact on agency outlays, and 

may also be something that agencies can reduce through improved pre-payment reviews and 

additional safeguards. Agencies should refer matters involving possible fraudulent activities to 

the appropriate parties as determined by specific agency policy. Such parties may include, but 

are not limited to, the Office of Inspector. General or the Department of Justice. 

D. PAYMENT RECAPTURE AUDITS 

This section of the guidance implements the requirements of IPERA Section 2(h), which requires 

agencies to' conduct payment recapture audits (also known as recovery audits) for each program 

and activity that expends $1 million or more annually if conducting such audits would be costeffective. Before IPERA, payment recapture audits were only required for agencies that entered 

into contracts with a total value in excess of $500 million in a fiscal year, and for certain other 

programs. 

A more recent law, IPERIA, requires OMB to determine current and historical rates and amounts 

of improper payment recoveries (or, in cases in which improper payments are identified solely 

on the basis of a sample, recovery rates and amounts estimated on the basis of the applicable 

sample), including a list of agency recovery audit contract programs and specific information of 

amounts and payments recovered by recovery audit contractors. 

1) 	 What are the definitions used for payment recapture auditing in this guidance? 

For purposes ofthis guidance the following terms and definitions are used: 

a. 	 Post-Award Audit refers to a post-award examination of the accounting and financial 

records of a payment recipient that is performed by an agency official, or an authorized 

representative of the agency official, pursuant to the audit and records clauses 

incorporated in the contract or award. A post-award audit is normally performed by an 

internal or external auditor that serves in an advisory capacity to the agency official. A 

post-award audit, as distinguished from a payment recapture audit, is normally performed 

28 
for the purpose of determining if amounts claimed by the recipient are in compliance with 

the terms of the award or contract, and with applicable laws and regulations. Such 

reviews involve the recipient's accounting records, including the internal control systems. 

A post-award audit may also include a review of other pertinent records (e.g., reviews to 

determine if a proposal was complete, accurate, and current); and reviews of recipients' 

systems established for identifying and returning any improper payments received under 

its Federal awards. 

b. 	 Payment Recapture Audit is a review and analysis of an agency's or program's 

accounting and financial records, supporting documentation, and other pertinent 

information supporting its payments, that is specifically designed to identify 

overpayments. It is not an audit in the traditional sense covered by Government Auditing 

Standards. Rather, it is a detective and corrective control activity designed to identify 

and recapture overpayments, and, as such, is a management function and responsibility. 

c. 	 Payment Recapture Audit Program is an agency's overall plan for risk analysis and the 

performance of payment recapture audits and recovery activities. The agency head will 

determine the manner and/or combination of payment recapture activities to use that are 

expected to yield the most cost-effective results (see definition below). 

d. 	 Cost-Effective Payment Recapture Audit Program is one in which the benefits (i.e., 

recaptured amounts) exceed the costs (e.g., stafftime and resources, or payments for the 

payment recapture audit contractor) associated with implementing and overseeing the 

program. 

e. 	 Payment Recapture Audit Contingency Contract is a contract for payment recapture audit 

services in which the contractor is paid for its services as a percentage of overpayments 

actually collected. The contractor must provide clear evidence of overpayments to the 

appropriate agency official. More information on contingency contracts can be found in 

the remaining questions of section I.D. 

f. 	 Recapture Activity is any activity by an agency to attempt to identify and recover 

overpayments identified by a payment recapture audit or a post-award audit. 

g. 	 Financial Management Improvement Program is an agency-wide program to address the 

deficiencies in an agency's internal controls over payments identified during the course of 

implementing a payment recapture audit program, or other agency activities and reviews. 

The first priority of such a program is to address problems that contribute directly to 

agency improper payments and other instances of waste, fraud, and abuse. 

2) 	 What are the general agency requirements for implementing a payment recapture audit 

program? 

Agencies shall have a cost-effective program of internal control to prevent, detect, and recover 

overpayments. A program of internal control may include policies .and activities such as 

prepayment reviews, a requirement that all relevant documents be made available before making 

29 
payment, and performance of post-award audits. Effective internal controls could include 

payment recapture auditing techniques such as data matching with Federal, State, and local 

databases; and data mining and predictive modeling to identify improper payments. However, 

for agencies that have programs and activities that expend more than $1 million in a fiscal year, a 

payment recapture audit program is a required element of their internal controls over payments if 

conducting such audits is cost-effective. These payment recapture audits should be implemented 

in a manner designed to ensure the greatest financial benefit to the Federal government. 

3) 	 Should agencies establish targets for their payment recapture audit programs? 

Yes, all agencies are required to establish annual targets for their payment recapture audit 

programs that will drive their annual performance. Agencies shall develop their own payment 

recapture targets for review and approval by OMB (this approval process will take place during 

the OMB review and approval process of draft AFRs and PARs). Agencies are expected to set 

targets that show an increase in recoveries over time, and OMB reserves the right to notify 

specific agencies that they need to establish stricter targets. An agency may set different 

payment recapture targets for the different types of payments it makes (for example, a given 

agency might set a target that encompasses all contract payments lumped together, and another 

target that encompasses all grant payments lumped together), or for each program. Lastly, 

agencies may also identify and implement additional metrics beyond these targets to evaluate 

their payment recapture audit programs, but these metrics shall not be used as a substitute for 

establishing annual recovery targets. 

4) 	 What is the scope for payment recapture audit programs? 

a. 	 All programs and activities that expend $1 million or more annually-including grant, 

benefit, loan and contract programs-shall be considered for payment recapture audits. 

b. 	 Agencies shall review their different types of programs and activities and prioritize 

conducting payment recapture audits on those categories that have a higher potential for 

overpayments and recoveries. Agencies should utilize known sources of improper 

payment information and give priority to recent payments and to payments made in 

programs identified as susceptible to significant improper payments. Possible sources of 

improper payment information include: statistical samples and risk assessments, agency 

post-payment reviews, prior payment recapture audits, agency Inspector General reviews, 

Government Accountability Office reports, self-reported errors, reports from the public, 

audit reports, and the results of the agency audit resolution and follow-up process. 

c. 	 Agencies shall conduct a payment recapture audit program in a manner that will ensure 

the greatest financial benefit for the government. 

d. 	 Agencies may exclude payments from certain programs and activities from payment 

recapture audit activities if the agency determines that payment recapture audits are not a 

cost-effective method for identifying and recapturing improper payments. 

30 
e. 	 The payment recapture audit contractor may, with the consent ofthe employing agency, 

notify entities (including individuals) of potential overpayments made to such entities, 

respond to questions concerning potential overpayments, and take other administrative 

actions with respect to overpayment claims made or to be made by the agency. However, 

the payment recapture audit contractor will not have the authority to make determinations 

relating to whether any overpayment occurred and whether to compromise, settle, or 

terminate overpayment claims. 

f. 	 To the extent possible, any underpayments identified through the payment recapture audit 

process should also be corrected by the agencies. Agencies may include provisions that 

authorize payments to payment recapture auditors for underpayments identified. 

g. 	 Payment recapture auditing activities should not duplicate other audits ofthe same 

(recipient or agency) records that specifically employ payment recapture audit techniques 

to identify and recapture overpayments. At a minimum, agencies should coordinate with 

their Inspectors General and other organizations with audit jurisdiction over agency 

programs and activities. 

h. 	 Instances of potential fraud discovered through payment recapture audit and recapture 

activities shall be reported immediately to the appropriate parties as determined by 

specific agency policy. Such parties may include, but are not limited to, the Office of 

Inspector General or the Department of Justice. 

5) 	 What criteria should an agency consider in determining whether a payment recapture 

audit is cost-effective? 

An agency may consider the following criteria in determining whether a payment recapture audit 

is cost-effective: 

a. 	 The likelihood that identified overpayments will be recaptured. For example: 

1. 	 Whether laws or regulations allow recovery; 

11. 	 Whether the recipient of the overpayment is likely to have resources to repay 

overpayments from non-Federal funds; 

111. 	 Whether the evidence of overpayment is clear and convincing (e.g., the same 

exact invoice was paid twice) as opposed to whether the recipient of an apparent 

overpayment has grounds to contest, and the agency's assessment ofthe strength 

of the recipient's counterargument; and 

IV. 	 Whether the overpayment is truly an improper payment that can be recovered 

rather than a failure to properly document compliance. 

b. 	 The likelihood that the expected recoveries will be greater than the costs incurred to 

identify and recover the overpayments. For example: 

1. 	 Can efficient techniques such as sophisticated software and matches be used to 

identify significant overpayments at a low cost per overpayment or will laborintensive manual reviews of paper documentation be required? 

31 
n. Are tools available to efficiently perform the payment recapture audit and 

minimize payment recapture audit costs? Payment recapture audits are generally 

most efficient and effective where there is a central electronic database (e.g., a 

database that contains information on transactions and eligibility information) 

where sophisticated software can be used to perform matches and analysis to 

identify recoverable overpayments (e.g., duplicate payments). 

111. How expensive will attempts to recover some or all of the overpayments be, 

particularly in complex financial situations, and when recipients may contest the 

assertion of an overpayment, especially when litigation is anticipated (in which 

situations, the agency should consult with its counsel and, as appropriate, with the 

Department ofJustice)? 

Agencies are encouraged to use limited scope pilot payment recapture audits in areas deemed of 

highest risk (e.g., based on IPIA risk assessments or estimation process) to assess the likelihood 

of cost-effective payment recapture audits on a larger scale. 

6) 	 What should an agency do if it determines that a payment recapture audit program 

would not be cost-effective? 

If an agency determines that it would be unable to conduct a cost-effective payment recapture 

audit program for certain programs and activities that expend more than $1 million, then it must 

notify OMB and the agency's Inspector General ofthis decision and include any analysis used 

by the agency to reach this decision. OMB may review these materials and determine that the 

agency should conduct a payment recapture audit to review these programs and activities. In 

addition, the agency shall report in its annual AFR or PAR: 1) a list of programs and activities 

where it has determined conducting a payment recapture audit program would not be costeffective; and 2) a description of the justifications and analysis that it used to determine that 

conducting a payment recapture audit program for these programs and activities was not costeffective. 

7) 	 Should the agency follow any particular procedures when conducting payment 

recapture audits of grants payments? 

Agencies with grant programs shall consider payment recapture auditing contracts at the grant 

recipient level. Federal agencies should work with State and local governments to ensure that 

they have enough resources to conduct payment recapture audits (for example, through direct 

funding, allowable administrative expenses, or contingency contracts). Whenever applicable, 

agencies should leverage work already being carried out outside of payment recapture audits. 

For example, agencies are encouraged to rely on and use the audit work already being carried out 

under the Single Audit Act and the Uniform Guidance for federal assistance (2 CFR 200 Subpart 

F). Generally, Federal agencies should not look to pass-through entities for repayment of 

improper payments identified by payment recapture audits for funds they pass-through until 

repayment has been made by the sub-recipient or the final payee. Federal agencies should also 

coordinate among themselves to reach partnerships with grant recipients to ensure a coordinated, 

cost-effective approach to implement these payment recapture audit requirements. The 

32 
cognizant agency assignment model used in the Single Audit or cost allocation processes can 

help in streamlining the coordination between the Federal agencies and grant recipients. 

8) 	 Can Federal agencies provide money to States and Local governments for Financial 

Management Improvement efforts? 

Yes. Many programs are Federally-funded but State-administered, and Federal agencies should 

support State efforts to reduce improper payments in these programs. As authorized in IPERA 

and this guidance, agencies may use up to 25 percent of funds recovered under a payment 

recapture audit program to support Financial Management Improvement Programs (as described 

in more detail in section I.D.14 below), including making a portion of this funding available to 

State and local governments to support their Financial Management Improvement Programs. 

9) 	 Who may perform payment recapture audits? 

Payment recapture audits may be performed by employees of the agency, by any other 

department or agency of the Federal government acting on behalf ofthe agency, by non-Federal 

entities (as defined in the Uniform Guidance, 2 CFR Subpart A, section 200.69) expending 

Federal awards, by contractors performing payment recapture audit services under contracts 

awarded by the executive agency, or any combination of these options. 

10) May contractors perform payment recapture audit services? 

Yes. With respect to contracts with private sector contractors performing payment recapture 

audits, agencies may utilize a number of options, including a contingency contract with a private 

sector contractor, to conduct payment recapture audit services. With the passage ofiPERA, 

agencies are allowed and encouraged to utilize contingency contracts for private sector 

contractors to implement the ~uthorities under the new law to review all types of payments and 

activities. 

However, certain types of payments recovered may not be available to pay the payment 

recapture audit costs (for instance, amounts recovered due to interim improper payments made 

under ongoing contracts if these amounts are still needed to make subsequent payments under the 

contract, recoveries from an appropriation other than a discretionary appropriation, or recovered 

overpayments from an appropriation that has not expired-please refer to section I.D.14 below 

for more details). Therefore, agencies would need to establish other funding arrangements (such 

as through appropriations) when making payments to private sector payment recapture audit 

contractors in such cases where recoveries cannot be used to pay contingency fee contracts. 

11) Are there any specific requirements when using a contracted payment recapture 

auditing firm? 

Agencies should require contractors to become familiar with the agency's specific policies and 

procedures, and take steps to safeguard the confidentiality of sensitive financial information that 

has not been released for use by the general public and any information that could be used to 

identify a person. 

33 
At a minimum, each contract for payment recapture audit services shall require the contractor to: 

a. 	 Provide periodic reports to the agency on conditions giving rise to overpayments (e.g., 

root causes of overpayments) identified by the auditor and any recommendations on how 

to mitigate such conditions. If requested, the agency should provide the results of such 

analyses and related recommendations to its Office of Inspector General; 

b. 	 Notify the agency of any overpayment identified by the contractor pertaining to the 

agency or to any other agency or agencies that are beyond the scope of the contracts; and 

c. 	 Report to the agency and the agency's Office of Inspector General credible evidence of 

fraud or vulnerabilities to fraud, and conduct appropriate training of contractor personnel 

on identification of fraud. 

Agencies may allow payment recapture auditors to establish a presence on, or visit, the property, 

premises, or offices of any subject of payment recapture audits. Such physical presence is not 

prohibited, and may in fact allow the payment recapture auditor to do a more thorough review of 

the subject's payments, and related documentation and payment files. 

12) Are there any prohibitions when using a payment recapture audit contractor? 

In addition to provisions that describe the scope of payment recapture audits (and any other 

provisions required by law, regulation, or agency policy), any contract with a private sector firm 

for payment recapture audit services shall include provisions that prohibit the payment recapture 

audit contractor from: 

a. 	 Requiring production of any records or information by the agency's contractors. Only 

duly authorized employees of the agency can compel the production of information or 

records from the agency's contractors, in accordance with applicable contract terms and 

agency regulations; 

b. 	 Using or sharing sensitive financial information with any individual or organization, 

whether associated with the Federal government or not, that has not been officially 

released for use by the general public, except for an authorized purpose of fulfilling the 

payment recapture audit contract; and 

c. 	 Disclosing any information that identifies an individual, or reasonably can be used to 

identify an individual, for any purpose other than as authorized for fulfilling its 

responsibilities under the payment recapture audit contract. 

13) Who performs recovery activities once the improper payments are discovered and 

verified? 

The actual collection activity may be carried out by Federal agencies or non-Federal entities 

expending Federal awards, as appropriate. However, agencies or non-Federal entities may use 

34 
another private sector entity, such as a private collection agency, to perform this function, ifthis 

practice is permitted by statute. As noted above, the payment recapture audit contractor may not 

perform the collection activity, unless it meets the definition of a private collection agency, and 

the agency involved has statutory authority to utilize private collection agencies. Agencies shall 

ensure that applicable laws and regulations governing collection of amounts owed to the Federal 

government are followed. 

14) What is the proper disposition of recovered amounts? 

Funds collected under a payment recapture audit program can be used for the following 

purposes: 

a. 	Recaptured overpayments from expired discretionary fund accounts that were 

appropriated after enactment ofiPERA (i.e., July 22, 2010) shall be available to the 

agency to reimburse the actual expenses incurred by the agency for the following 

purposes: 

1. 	 To reimburse the actual expenses incurred by the agency for the administration of 

the program (including payments made to other agencies that carry out payment 

recapture audit services on behalf ofthe agency); and 

11. 	 To pay contractors for payment recapture audit services. 

b. 	 Recaptured overpayments from expired discretionary fund accounts that were 

appropriated after enactment ofiPERA (i.e., July 22, 2010) that are not used to 

reimburse expenses ofthe agency or pay payment recapture audit contractors-as 

described above in section I.D.l4.a-shall be used for: a financial management 

improvement program, the original purpose ofthe funds, Inspector General activities, or 

returned to the Treasury as miscellaneous receipts or returned to trust or special fund 

accounts. Each agency shall determine the actual percentage of recovered overpayments 

used for the purposes outlined here (up to the maximum amount allowed in the law and 

this guidance). Specifically: 

1. 	 Up to 25 percent ofthe recaptured funds may be used for the financial 

management improvement program described below in section I.D.l5. This 

funding shall be credited, if applicable, for that purpose identified by the agency 

head to any agency appropriations and funds that are available for obligation at 

the time of collection. These funds shall be used to supplement and not supplant 

any other amounts available for that purpose, and shall remain available until 

expended. As discussed in section I.D.8, such funds can go to non-Federal 

entities such as State and local governments if the agency determines that is the 

best disposition of the funds to support its financial management improvement 

program. 

11. 	 Up to 25 percent ofthe recaptured funds may be used for the original purpose. 

This funding shall be credited to the appropriation or fund, if any, available for 

obligation at the time of collection for the same general purposes as the 

appropriation or fund from which the overpayment was made, and shall remain 

available for the same period of availability and purposes as the appropriation or 

fund to which credited. Ifthe appropriation from which the overpayment was 

35 
made has expired, the funds shall be newly available for the same time period as 

the funds were originally available for obligation. However, any funds that are 

recovered more than five fiscal years after the last fiscal year in which the funds 

were available for obligation shall be deposited in the Treasury as miscellaneous 

receipts. 

iii. Up to 5 percent ofthe recaptured funds shall be available to the agency Inspector 

General. The agency Inspector General may use this funding to carry out the 

law's requirements, and perform other activities relating to investigating improper 

payments or auditing internal controls associated with payments. However, the 

funding shall remain available for the same period of availability and purposes as 

the appropriation or fund to which it is credited. 

iv. The remainder ofthe recaptured, expired discretionary funds that were 

appropriated after enactment ofiPERA (i.e., July 22, 2010)-including 

recaptured overpayment amounts from trust and special fund accounts-that 

are not applied in accordance with the preceding 14.a.i, 14.a.ii, 14.b.i, 14.b.ii, and 

14.b.iii shall be credited to the expired account from which the overpayment was 

made. 

c. 	 Recaptured overpayments from unexpired discretionary fund accounts that were 

appropriated after enactment ofiPERA (i.e., July 22, 2010) shall be credited to the 

account from which the overpayments were made without using it for any purposes 

outlined above in 14.a and 14.b. 

d. 	 Recaptured overpayments from mandatory fund accounts shall be credited to the 

account from which the overpayments were made without using it for any purposes 

outlined above in 14.a and 14.b. 

e. 	 In the case of recaptured overpayments from expired or unexpired discretionary fund 

accounts that were appropriated before enactment ofiPERA (i.e., July 22, 2010), 

agencies have the same authorities as before IPERA was enacted. Therefore, in this case 

recaptured overpayments may be applied in accordance with the preceding 14.a, but shall 

not be applied in accordance with the preceding 14.b. The remainder shall be credited to 

the expired account from which the overpayment was made. 

f. 	 In the case of closed accounts, the budgetary resources are cancelled, and all recaptured 

overpayments shall be deposited in the Treasury as miscellaneous receipts. 

g. 	 Contingency fee contracts shall preclude any payment to the payment recapture audit 

contractor until the recoveries are actually collected by the agency. 

h. 	 All funds collected and all direct expenses incurred as part ofthe payment recapture audit 

program shall be accounted for specifically. The identity of all funds recovered shall be 

maintained as necessary to facilitate the crediting of recovered funds to the correct . 

appropriations and to identify applicable time limitations associated with the appropriated 

funds recovered. 

36 
1. 	 Overpayments that are identified by the payment recapture auditor, but that are 


subsequently determined not to be collectable or not to be improper, shall not be 


considered "collected" for the disposition purposes outlined above. 


J. 	 Some programs and payments have separate statutory authority or requirements to 

conduct payment recapture audits, and thus are not required to follow the disposition of 

recovered funds outlined above for funds recovered from these programs and payments. 

For instance, under Section 302 of Division B of the Tax Relief and Health Care Act 

(Section 1893 ofthe Social Security Act; 42 U.S.C. 1395ddd) and Section 6411 ofthe 

Patient Protection and Affordable Care Act (Pub. L. No. 111-148), the Department of 

Health and Human Services is required to conduct reviews of certain Medicare program 

payments to identify and recover improper payments, and States are required to conduct 

similar reviews under Medicaid. In a similar example, under the authority of 31 U.S.C. 

3 726, the General Services Administration audits agency transportation payments for 

improper payments. Agencies with oversight of such programs and payments may 

choose to follow the disposition uses outlined in this guidance-provided that is 

consistent with any other applicable statutory requirements-but are not required to do 

so. Disposition of payments associated with loans and loan guarantees must conform to 

the requirements of the Federal Credit Reform Act of 1990, as amended (2 U.S.C. 661a 

et. seq.) 

15) Are agencies authorized to implement Financial Management Improvement Programs? 

Yes. IPERA authorizes agencies to implement "financial management improvement programs." 

Such programs shall take the information obtained from the payment recapture audit program (as 

well as other audits, reviews, or information that identify weaknesses in an agency's internal 

controls), and ensure that actions are taken to improve the agency's internal controls to address 

problems that directly contribute to agency improper payments. In conducting its fmancial 

management improvement programs, agency heads may also seek to reduce errors and waste in 

programs and activities other than where funds are recaptured. 

16) What are the reporting requirements for payment recapture audits? 

Agencies shall annually report information on their payment recapture audit program in their 

AFRs or PARs, as outlined in OMB Circular A-136. 

In addition, by November 1, agencies are required to complete a separate, annual report to OMB 

as well as the Senate Committee on Homeland Security and Governmental Affairs and the House 

Committee on Oversight and Government Reform. This report shall describe any 

recommendations identified by the payment recapture auditor on how to mitigate conditions 

giving rise to overpayments, and any corrective actions the agency took during the preceding 

fiscal year to address the auditor recommendations. This report shall describe agency efforts 

during the previous fiscal year (for example, for the November 1, 2014 report, the agency would 

describe recommendations and actions between October 1, 2013, and September 30, 2014; 

subsequent reports would describe efforts for subsequent fiscal years). This report is required 

only for Federal agencies utilizing external contractors to conduct their payment recapture audits 

37 
and only in instances where these contractors have provided any recommendations, as described 

above. This report is not required for state agencies utilizing contractors to conduct their 

payment recapture audits. 

17) How are improper payment estimates different from payment recapture audit efforts? 

Improper payment estimates evaluate a small number of payments in a program or activity to 

determine ifthe payments were improper or proper. The results of these reviews are then 

extrapolated to the universe of payments in a program or activity to determine the program or 

activity's annual improper payment amount and rate. Payment recapture audits are not statistical 

samples, and instead are targeted examinations of high-risk payments which most likely can be 

cost-effectively recaptured (e.g., cash collected from the final payee exceeding collection costs). 

38 
PART II-COMPLIANCE WITH THE IMPROPER PAYMENT REQUIREMENTS 


Part II provides guidance to assist Inspectors General and agency management in implementing 

improper payment requirements. 

A. RESPONSIBILITIES OF AGENCY INSPECTORS GENERAL 

1) 	 When should each agency Inspector General begin reviewing improper payment 

performance to determine whether the agency is in compliance under IPERA? 

Each agency Inspector General should annually review agency improper payment reporting in 

the agency's annual AFR or PAR, and accompanying materials, to determine ifthe agency is in 

compliance under IPERA. 

2) 	 When should the agency Inspector General complete its review of agency compliance 

under IPERA? 

An agency Inspector General should review the agency's annual AFR or PAR, and 

accompanying materials, and complete its review and determination within 180 days of their 

publication. 

3) 	 What should each agency Inspector General review to determine if an agency is in 

compliance under IPERA? 

To determine compliance under IPERA, the agency Inspector General should review the 

agency's AFR or PAR (and any accompanying information) for the most recent fiscal year. 

Compliance under IPERA means that the agency has: 

a. 	 Published an AFR or PAR for the most recent fiscal year and posted that report and any 

accompanying materials required by OMB on the agency website; 

b. 	 Conducted a program specific risk assessment for each program or activity that conforms 

with Section 3321 note of Title 31 U.S.C. (if required); 

c. 	 Published improper payment estimates for all programs and activities identified as 

susceptible to significant improper payments under its risk assessment (if required); 

d. 	 Published programmatic corrective action plans in the AFR or PAR (if required); 

e. 	 Published, and is meeting13, annual reduction targets for each program assessed to be at 

risk and estimated for improper payments (if required and applicable); and 

f. 	 Reported a gross improper payment rate of less than 10 percent for each program and 

activity for which an improper payment estimate was obtained and published in the AFR 

or PAR. 

If an agency does not meet one or more of these requirements, then it is not compliant under 

IPERA. 

13 A program will have met a reduction target ifthe improper payment rate for that program in the current year falls 

within plus or minus 0.1 percentage points ofthe reduction target set in the previous year's AFR or PAR. 

39 
4) 	 What else should the agency Inspector General include in its compliance review and 

report? 

The report must contain a high-level summary toward the beginning of the report that (a) clearly 

states the agency's compliance status (i.e., compliant or non-compliant) and (b) indicates which 

of the six requirements the agency complied with and which requirements the agency did not 

comply with. 

As part of this review, the agency Inspector General may also evaluate the accuracy and 

completeness of agency reporting, and evaluate agency performance in reducing and recapturing 

improper payments. For example, when reviewing the program improper payment rates, 

corrective action plans, and improper payment reduction targets, the Inspector General should 

determine ifthe corrective action plans are robust and focused on the appropriate root causes of 

improper payments, effectively implemented, and prioritized within the agency, to allow it to 

meet its reduction targets. As part of its report, the agency Inspector General may include its 

evaluation of agency efforts to prevent and reduce improper payments, and any 

recommendations for actions to further improve: the agency' s or program's performance in 

reducing improper payments; corrective actions; or internal controls (see section II.C below). 

Finally, as part of the annual compliance review, for agencies that have high-priority programs, 

the agency Inspector General shall: evaluate the agency's assessment ofthe level of risk 

associated with the high-priority programs and the quality of the improper payment estimates 

and methodology; determine the extent of oversight warranted; and provide the agency head with 

recommendations, if any, for modifying the agency's methodology, promoting continued 

program access and participation, or maintaining adequate internal controls. 

5) 	 Who should the agency Inspector General notify when it has completed its 

determination of whether an agency is in compliance under IPERA? 

Each fiscal year, the agency Inspector General should determine whether the agency is in 

compliance under IPERA. Once it has completed its assessment, the agency Inspector General 

must submit its results to: 

a. The agency head; 

b. The Senate Committee on Homeland Security and Governmental Affairs; 

c. The House Committee on Oversight and Government Reform; 

d. The Comptroller General; and 

e. The OMB Controller. 

B. RESPONSIBILITIES FOR AGENCIES 

1) What are the requirements for agencies not compliant under IPERA? 

Agencies that are not compliant under IPERA must complete several actions, as described 

below: 

40 
a. 	 For agencies that are not compliant for one fiscal year, within 90 days of the 

determination of non-compliance, the agency shall submit a plan to the Senate 

Committee on Homeland Security and Governmental Mfairs, the House Committee on 

Oversight and Government Reform, and the OMB, describing the actions that the agency 

will take to become compliant. The plan shall include: 

1. 	 Measurable milestones to be accomplished in order to achieve compliance for 

each program or activity; 

11. 	 The designation of a senior agency official who shall be accountable for the 

progress of the agency in coming into compliance for each program or activity; 

and 

111. 	 The establishment of an accountability mechanism, such as a performance 

agreement, with appropriate incentives and consequences tied to the success of 

the senior agency official in leading agency efforts to achieve compliance for each 

program and activity. 

b. 	 For agencies that are not compliant for two consecutive fiscal years for the same 

program or activity, the Director of OMB will review the program and determine if 

additional funding would help the agency come into compliance. This process will 

unfold as part ofthe annual development of the President's Budget. If the Director of 

OMB determines that additional funding would help the agency become compliant, the 

agency shall obligate an amount of additional funding determined by the Director of 

OMB to intensify compliance efforts. When providing additional funding for compliance 

efforts, the agency shall: 

1. 	 Exercise reprogramming or transfer authority to provide additional funding to 

meet the level determined by the Director of OMB; and 

11. 	 Submit a request to Congress for additional reprogramming or transfer authority if 

additional funding is needed to meet the full level of funding determined by the 

Director of OMB. 

c. 	 For agencies that are not compliant for three consecutive fiscal years for the same 

program or activity, within 30 days of the determination of non-compliance, the agency 

will submit to Congress the following, in order to bring the program or activity in 

question into compliance: 

1. 	 Reauthorization proposals for each (discretionary) program or activity that has not 

been in compliance for three or more consecutive fiscal years; or 

11. 	 . Proposed statutory changes necessary to bring the program or activity into 

compliance. 

In addition, OMB may require agencies that are not compliant with the law (for one, two, or 

three years in a row) to complete additional requirements beyond those requirements listed 

above. For example, if a program is not compliant with the law, OMB may determine that the 

agency must re-evaluate or re-prioritize its corrective actions, intensify and expand existing 

corrective action plans, or implement or pilot new tools and methods to prevent improper 

payments. OMB will notify agencies of additional required actions as needed. Lastly, agencies 

should share.any plans or proposals required by this section with their respective Inspectors 

General. 

41 
C. INTERNAL CONTROL OVER IMPROPER PAYMENTS 

1) 	 What are the criteria as to when an agency should initially be required to obtain an 

opinion on internal control over improper payments? 

As agencies implement the requirements described in Parts I, II, and III of this guidance, they 

should approach improper payments with an internal control framework in mind. IPERA 

introduced the concept of internal control over improper payments. Agencies should first be 

given the opportunity to establish, maintain, and assess internal controls before a requirement to 

obtain an audit opinion on internal control over improper payments. Beginning in FY 2015, each 

agency reporting improper payments shall summarize the status of internal control over improper 

payments within the agency's AFR or PAR using: (1) a narrative explaining efforts undertaken 

to provide reasonable assurance that controls are in place and working; and (2) the table 

illustrated below. The primary purpose of the summary is to provide a thoughtful analysis 

linking agency efforts in establishing internal controls and reducing improper payment rates. 

Agencies should leverage existing internal control plans and at a minimum should address the 

internal control standards provided in question C.2 below. An illustrative example for the table 

is provided below (see Table 2). The programs listed at the top of each column would be the 

programs susceptible to significant improper payments currently reporting improper payments. 

Table 2: Example ofthe Status of Internal Controls 

Internal Control Standards Program A Program B Program C Program D Program E 

Control Environment 3 2 2 4 1 

Risk Assessment 4 1 4 4 1 

Control Activities 4 3 2 2 2 

Information and Communication 3 1 3 1 2 

Monitoring 2 1 4 3 1 

Legend: 


4 = Sufficient controls are in place to prevent improper payments 


3 = Controls are in place to prevent improper payments but there is room for improvement 


2 =Minimal controls are in place to prevent improper payments 


1 = Controls are not in place to prevent improper payments 


OMB will utilize the agency internal control summaries to monitor progress and ensure that 

planned actions result in the outcome ofreducing improper payment rates. In addition, OMB 

will review the status of an agency's internal control over improper payments against the 

following factors to determine when an agency should be required to obtain an internal control 

over improper payments audit: 

42 
a. 	 Current Condition of Internal Control over Improper Payments: The current 

condition of internal control over improper payments can be assessed by a number of 

factors, including recent audit findings (e.g., financial statement, performance, or 

compliance audit results) and the nature of material weaknesses or scope of 

management's control. In addition, management's overall assurance statement required 

by Section 2 of the Federal Managers Financial Integrity Act should inform agency 

internal control plans. However, no separate assurance statement for internal control 

over improper payments is required. 

b. 	 Agency Demonstration of Progress: Ifthe agency is not demonstrating measurable 

improvements in its internal control, OMB may encourage progress by requiring an audit 

of internal controls over improper payments, as it may assist agencies to identify and 

prioritize corrective actions to long-standing internal control weaknesses. In addition, 

innovative and cost-effective audit resolution approaches such as the Cooperative Audit 

Resolution and Oversight Initiative (CAROI) 14 will be encouraged to address internal 

control weaknesses related to improper payments. 

In deciding when to require an opinion on internal control over improper payments, the facts and 

circumstances of individual agencies will be considered on a case-by-case basis. It is expected 

that Inspectors General or firms contracted with to provide an audit opinion will work to 

leverage resources deployed as part of financial statement or performance audits and an efficient 

and cost-effective audit approach will be developed. 

2) 	 How do internal control standards apply to improper payments? 

Robust internal control processes should lead to fewer improper payments. Establishing and 

maintaining effective internal controls-including an internal control system that prevents 

improper payments from being made and promptly detects and recovers any improper payments 

that are made-should be a priority. It is important to note that the five standards and attributes 

below should be applied to the specific facts and circumstances ofthe various agency operations 

and programs. In addition, management has discretion in determining the breadth and depth of 

the scope of assessing internal control over improper payments. These standards and attributes 

can be implemented to fit the circumstances, conditions, and risks relevant to the situation of 

each agency. For example, one agency's program might lend itself to effective improper 

payment detection controls at the point of agency disbursement, while another program might be 

primarily administered by state or local entities where the appropriateness of a disbursement can 

only be determined at the state or local level. In these cases, agencies should describe efforts to 

provide oversight to state and local governments. 

a. 	 Control Environment. The agency has created a control environment that instills a 

cultural framework of accountability over improper payments by: 

1. 	 Fostering an atmosphere in which reducing improper payments are a top 

management priority. 

14 CAROl is described in detail at http://www.agacgfm.org/AGA/ToolsResources/documents/CAROI.pdf. 

43 
11. Providing a cultural framework for managing risk by engaging key stakeholders 

in the risk management process. 

m. Increasing accountability and providing leadership in setting and maintaining the 

agency's ethical code of conduct and laying out defined consequences for 

violations. 

1v. Clearly defining key areas of authority and responsibility and establishing 

appropriate lines of reporting within and external to the agency (e.g., program 

offices or state governments). 

v. Ensuring that personnel involved in developing, maintaining, and implementing 

control activities have the requisite skills and knowledge, recognizing that staff 

expertise needs to· be frequently updated in evolving areas such as information 

technology and fraud investigation. 

b. 	 Risk Assessment. The agency has determined the nature and extent of improper 

payments by: 

1. 	 Establishing well defined goals and objectives for eliminating improper payments 

and execution of corrective actions. 

11. 	 Determining where risks exist, what those risks are, and the potential or actual 

impact of those risks on program goals, objectives, and operations. 

111. 	 Using risk-assessment results to target high-risk areas and focus resources where 

the greatest exposure exists and return on investment can be maximized. 

1v. 	 Reassessing risks on a periodic basis to evaluate the impact of changing 

conditions, both external and internal, on program operations. 

v. 	 Establishing an inventory of root causes of improper payments and internal 

control deficiencies to develop corrective action plans for risk-susceptible 

programs. The inventory should include an explanation of how root causes were 

identified, prioritized, and analyzed to ensure corrective actions produce the 

highest return on investment for resolving improper payment control deficiencies. 

c. 	 Control Activities. The agency has developed control activities to help management 

achieve the objective of reducing improper payments by: 

1. 	 Establishing internal control activities that are responsive to management's 

directives to mitigate risks of improper payments (e.g., policies and procedures 

related to transaction authorization and approvals of program activities). 

11. 	 Implementing pre-award and pre-payment reviews where detailed criteria are 

evaluated before funds are expended. 

111. 	 Utilizing data analytics tools, such as Treasury's Do Not Pay Program, to 

compare information from different sources to help ensure that payments are 

appropriate. 

1v. 	 Performing cost-benefit analyses of potential control activities before 

implementation to help ensure that the cost ofthose activities to the organization 

is not greater than the potential benefit of the control. 

d. Information and Communications. The agency has effectively used and shared 

knowledge to manage improper payments by: 

44 
1. 	 Determining what information is needed by managers to meet and support 

initiatives aimed at preventing, reducing, and recapturing improper payments. 

11. 	 Ensuring that needed information is provided to managers in an accurate and 

timely manner. 

111. 	 Providing managers with timely feedback on applicable performance measures so 

they can use the information to effectively manage their programs. 

IV. 	 Developing educational programs to assist program participants in understanding 

program requirements. 

v. 	 Ensuring that there are adequate means of communicating with, and obtaining 

information from, external stakeholders that may have a significant impact on 

improper payment initiatives. 

v1. 	 Developing working relationships with other organizations to share information 

and pursue potential instances of waste, fraud and abuse. 

VII. 	 Making the results of performance reviews widely available to permit 

independent evaluations ofthe success of efforts to reduce improper payments. 

e. Monitoring. The agency has assessed the success of improper payment initiatives by: 

1. 	 Adhering to existing laws and OMB guidance to institute a statistical 

methodology to estimate the level of improper payments being made by the 

agency's programs. 

11. 	 Using an internal control assessment methodology that includes testing of control 

design and operating effectiveness and the evaluation of the significance of 

internal control deficiencies related to improper payments. 

iii. 	 Establishing program-specific targets for reducing improper payments in 

programs that measure and report annual improper payment estimates. 

IV. 	 , Assessing the progress of implementation of corrective actions over time and 

ensuring that the root causes of improper payment internal control deficiencies are 

resolved. 

v. 	 Considering the possibility of contracting activities out to firms that specialize in 

specific areas where in-house expertise is not available, such as payment 

recapture audits and fraud detection analytics. 

v1. 	 Ensuring timely resolution of problems identified by audits and other reviews. 

v11. 	 Adjusting control activities, as necessary, based on the results of monitoring 

activities. The agency should periodically test the controls to ensure they are 

effective in identifying, preventing, and recapturing improper payments. 

vm. 	 Understanding any statutory or regulatory barriers that may limit the agency's 

corrective actions in reducing improper payments and actions taken by the agency 

to mitigate the barriers' effects. 

45 
PART III- REQUIREMENTS FOR IMPLEMENTING EXECUTIVE ORDER 13520 


Part III discusses the requirements of Executive Order 13520-Reducing Improper Paymentsissued November 20, 2009. IPERIA essentially codified a number of requirements from the 

Executive Order. Therefore, in order to reduce duplication in this document, Part III makes 

reference to Part I for all requirements that are found both in IPERIA and in the Executive Order. 

A. GENERAL GUIDANCE 

1) 	 Which agencies are subject to the requirements of Executive Order 13520? 

The agencies required to comply with Executive Order 13520 are defined broadly as "a[ny] 

department, agency, or instrumentality in the executive branch ofthe United States" as defined in 

Title 31, Section 102 ofthe United States Code . 

2) 	 How will OMB determine the "high-priority" programs as required under Section 

2(a)(i) of the Executive Order? 

This is also an IPERIA requirement. Please refer to section I.B ofthis guidance. 

3) 	 What are agencies required to submit for the improper payments website as required 

under Section 2(b) of the Executive Order? 

Agencies shall submit the following information, subject to Federal privacy policies and to the 

extent permitted by law: 

a. 	 The names ofthe accountable officials; 

b. 	 Current and historical rates and amounts of estimated improper payments, including, 

where known and appropriate, causes of the improper payments; 

c. 	 Current and historical rates and amounts of recovery ofimproper payments, where 

appropriate (or, where improper payments are identified solely on the basis of a sample, 

recovery rates and amounts estimated on the basis ofthe applicable sample); 

d. 	 Targets for reducing as well as recovering improper payments, where appropriate; and 

e. 	 The entities that have received the greatest amount of outstanding improper payments (or, 

where improper payments are identified solely on the basis of a sample, the entities that 

have received the greatest amount of outstanding improper payments in the applicable 

sample). 

4) 	 Why is program access important? 

The purpose of the Executive Order is to reduce improper payments while continuing to ensure 

that Federal programs serve and provide access to their intended beneficiaries. Because the 

Executive Order targets waste, fraud, and abuse, efforts to reduce improper payments must 

protect access to Federal programs by their intended beneficiaries. Therefore, efforts to reduce 

improper payments in high-priority programs should not deter eligible beneficiaries from seeking 

and receiving benefits. Furthermore, eligible beneficiaries who are receiving benefits should not 

46 
be improperly denied or removed from program benefits as a result of agency efforts to reduce 

improper payments. 

5) 	 Does this guidance create any special rights? 

This guidance is not intended to, and does not create, any right or benefit, substantive or 

procedural, enforceable at law or in equity by a party against ~he United States, its departments, 

agencies, or entities, its officers, employees, or agents, or any other person. Further, this 

guidance is not intended to impose, and does not impose, liability on the United States, its 

departments, agencies, or entities, its officers, employees, or agents, or any other person for 

action taken pursuant to the guidance. 

B. SUPPLEMENTAL MEASURES 

1) 	 What are the requirements for establishing annual or semi-annual measurements in 

high-priority programs, also known as supplemental measures? 

Agencies with high-priority programs shall establish annual or semi-annual (or more frequent, if 

possible) supplemental measures (or actions) for reducing improper payments. Supplemental 

measures should focus on higher risk areas within the high-priority programs and report on root 

causes of improper payments that agencies can resolve through corrective actions. In addition, 

the measures should use available and accessible information (e.g., claims, payments, files) for 

the current year rather than previous years to the extent possible. Lastly, the supplemental 

measures do not have to meet the statistical requirements of section I.A.9. 

Possible measurement examples include: 

a. 	 A measurement that focuses on the main cause ofimproper payments in the program. 

For example, if documentation is the leading cause ofimproper payments in a highpriority program, then the program could establish a measurement that focuses on that 

specific issue; 

b. 	 A measurement that focuses on one ofthe main causes ofimproper payments in the 

program. For example, if an agency is unable to identify the leading root cause of 

improper payments, it could establish a measure to examine another major root cause of 

improper payments; or 

c. 	 A measurement or set ofmeasurements ofcontributing factors or proxy indicators of 

improper payments in the program. For example, if an agency can identify a timely 

measured factor known to move in the same or inverse direction of improper payments, 

while not a main cause, it could establish a measure or set of factor measures. 

2) 	 Which tools should agencies use to identify supplemental measures? 

When identifying areas within the high-priority program that should be part of the supplemental 

measurement requirement, agencies should focus on areas that will provide the greatest rate of 

return on investment to the program. To identify such areas where agencies could achieve 

47 
optimal impact on improper payment prevention and reduction, the agencies should analyze their 

programs and root causes of improper payments through two perspectives: 

a. 	 The degree to which an agency has control over reducing improper payments within a 

program: 

1. 	 More Control- Improper payments that could be addressed through 

administrative or regulatory changes based on existing program requirements; 

11. 	 Less Control- Improper payments that require statutory changes at the Federal or 

State level 

b. 	 The impact on agency outlays: 

1. 	 High-Impact Improper Payments- High-dollar improper payments that may be 

intentional (e.g., fraud), or unintentional (but still high dollar) and have a large 

impact on Federal outlays; 

11. 	 Low-Impact Improper Payments- Small-dollar improper payments (e.g. 

infrequent data entry mistakes, errors due to lack of supporting documentation) 

that likely have a minimal impact on Federal outlays. 

Using these two identified areas, the matrix below shows four different quadrants that agencies 

can consider when developing supplemental measures for high-priority programs (i.e., highimpact improper payments within agency control, low-impact improper payments within agency 

control, high-impact improper payments not within agency control, and low-impact improper 

payments not within agency control). OMB recommends that agencies focus on root causes of 

improper payments within high-priority programs that would be within the program's ability (or 

control) to reduce, or which would impact program outlays. 

Table 3: Considerations for Developing Supplemental Measures 

High 

Impact 

Low 

Impact 

More Control 

• Fraud 

• System errors 

• Agency policies 

• Infrequent data entry errors by Federal 

agencies (with low-dollar impact) 

Less Control 

• Statutory definitions and requirements 

• Infrequent instances of State agencies 

lacking minor documentation (with 

low-dollar impact) 

3) 	 Who is required to establish annual or semi-annual measurements under the Executive 

Order? 

Under the Executive Order, agencies with high-priority programs are required to establish annual 

or semi-annual measurements or actions for reducing improper payment: 

a. 	 For high-priority programs that already report an annual estimate, agencies should 

develop annual or semi-annual supplemental measurements within 180 days of a program 

being deemed high-priority; or 

b. 	 For high-priority programs that are establishing or revising their estimation methodology, 

agencies should work with OMB to establish a plan for meeting the Executive Order 

48 
supplemental measure requirements within 180 days of a program being deemed highpriority. 

If a high-priority program is unable to conduct or report supplemental measurements (e.g., due to 

. data restrictions, or resource constraints), it may work with OMB to meet this requirement in 

another manner (e.g., to develop a supplemental measure using an alternative time frame or an 

alternative type of information). 

4) 	 How should agencies establish annual or semi-annual targets for supplemental 


measures? 


Agencies with high-priority programs will work with OMB to establish-and/or update-annual 

or semi-annual supplemental measures and targets required by the Executive Order. When 

establishing supplemental measures, agencies should set aggressive targets (e.g., targets for 

improved performance in the future) and develop supporting analytics (e.g., projected impact of 

corrective actions or regulatory changes that might lead to lower rates) on how the agency chose 

those targets. Targets for supplemental measures in high-priority programs will be set once an 

initial supplemental measurement is reported. If the program shows significant progress in 

reducing improper payments or meeting supplemental measure targets, the program may work 

with OMB to develop different supplemental measures and targets to focus on another highimpact area. 

5) 	 Are the reduction targets described in section I.A.9 of this guidance the same as the 


supplemental targets that agencies will set to comply with the Executive Order? 


No, agencies will need to establish two sets of targets for high-priority programs: 

a. 	 Reduction targets for all programs susceptible to significant improper payments under 

IPIA, as described in section I.A.9, step 3.b of this guidance and OMB Circular A-136; 

and 

b. 	 Annual or semi-annual supplemental measures and related targets. 

6) 	 How will agencies report annual or semi-annual supplemental measures and targets? 

Agencies shall post supplemental measures to PaymentAccuracy.gov annually or semiannually-depending on the frequency of the measure and to the extent possible. In addition, 

agencies shall ensure that their AFRs or PARs contain a basic summary discussing the 

supplemental measures, the frequency of each supplemental measurement (i.e., how often will 

the area be measured and reported on PaymentAccuracy.gov), the measurement baseline, a 

discussion of how information from this measurement will help the program reduce improper 

payments, and the actual (or planned) targets, including any reasons for meeting, exceeding, or 

failing to meet the supplemental targets. 

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C. ACCOUNTABLE OFFICIAL REQUIREMENTS 

1) 	 Which agencies are responsible for establishing accountable officials under Section 3(a) 

of the Executive Order? 

Agencies with high-priority programs, as determined under Section 2 of the Executive Order, are 

required to designate an agency accountable official to oversee agency efforts to reduce improper 

payments. Agencies with high-priority programs should also designate a component accountable 

official-responsible for efforts within a component or bureau-if a single component or bureau 

makes up a significant portion of the agency's improper payments. The component accountable 

official should work within the component or bureau to coordinate the bureau's program 

integrity efforts. 

OMB encourages all agencies to appoint improper payment accountable officials and to 

continually assess the effectiveness of its internal controls for preventing and detecting improper 

payments. However, if an agency without a high-priority program elects to appoint an 

accountable official, the agency is not expected to fulfill the specific requirements under the 

Order related to high-priority programs. 

2) 	 Who may serve as an agency or component accountable official under Section 3(a) of 

the Executive Order? 

An agency's accountable official must hold an existing position that requires Senate 

confirmation; in other words, agencies do not have to create a new position. The second 

component accountable official does not have to hold a Senate-confirmed position. Agencies 

must submit each accountable official's name and position to the Director of OMB (including 

any acting accountable officials) for review and approval by the Director within 30 calendar days 

of a vacancy (e.g., retirement or resignation). 

In subsequent years, if an agency did not previously have a high-priority program but has a 

newly designated high-priority program, the agency has 30 calendar days from the date of the 

announcement of a new high-priority program to submit the name and position of proposed 

agency and component accountable officials. 

3) 	What are the accountable officials' roles and responsibilities? 

Each accountable official is responsible for the agency's or component's efforts to implement the 

Executive Order and its requirements. For instance, accountable officials are responsible for 

meeting improper payment reduction targets in a manner that does not negatively impact 

program access. Implementing the Executive Order should represent a significant responsibility 

and be a major focus ofthe accountable official and the second component accountable official. 

4) 	 What are the agency requirements for providing a report to their IGs in response to 

Section 3(b) of the Executive Order? 

This is also an IPERIA requirement. Please refer to section I.B.4 ofthis guidance. 

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5) 	 What are the Inspector General's responsibilities with respect to the report under 

Section 3(b) of the Executive Order? 

This is also an IPERIA requirement. Please refer to section I.B.4 ofthis guidance. 

D. AGENCY HEAD QUARTERLY HIGH-DOLLAR REPORT TO THE INSPECTOR GENERAL 

1) 	 What is a "high-dollar" overpayment? 

A high-dollar overpayment can be made to an individual15 or an entity16 . A high-dollar 

overpayment is any overpayment that is in excess of 50 percent of the correct amount ofthe 

intended payment under the following circumstances: 

a. 	 Where the total payment to an individual exceeds $25,000 as a single payment or in 

cumulative payments for the quarter; or 

b. 	 Where the total payment to an entity exceeds $100,000 as a single payment or in 


cumulative payments for the quarter. 


The Executive Order requires some agencies to report on their high-dollar overpayments on a 

quarterly basis. The following are examples, for illustrative purposes only, of overpayments that 

would need to be included in an agency's quarterly report on high-dollar overpayments: 

Scenario 1: A single payment, or cumulative payments for the quarter, to the wrong 

individual or entity that exceeds the respective $25,000 or $100,000 limit. In this case, 

the full payment would be reported as a high-dollar overpayment. 

Scenario 2: A single payment, or cumulative payments for the quarter, to the correct 

individual of $26,000 (the payment exceeds $25,000) when the intended amount was 

$16,000. In this case, an overpayment was made in the amount of $10,000 (which is 

more than 50 percent higher than the intended amount). Therefore, this scenario meets 

the criteria to qualify as a high-dollar improper payment to an individual. The amount 

to be reported as a high-dollar overpayment is $10,000. 

Scenario 3: A single payment, or cumulative payments for the quarter, to the correct 

entity of$106,000 (the payment exceeds $100,000) when the intended amount was 

$70,000. In this case, an overpayment was made in the amount of $36,000 (which is 

more than 50 percent higher than the intended amount). Therefore, this scenario meets 

the criteria to qualify as a high-dollar improper payment to an entity. The amount to be 

reported as a high-dollar overpayment is $36,000. 

Please note that ifthe agency has corrected the overpayment within the quarter in which the 

payment was made, it does not need to be reported as a high-dollar overpayment. 

15 For purposes ofthis guidance, an individual is someone acting in either a personal or commercial capacity (that is, 


a sole proprietor). 
 16 For purposes of this guidance, an entity is a non-individual or a Federal, State, and local government agency. 


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2) 	 Which sources should agencies utilize to identify high-dollar overpayments? 

High-dollar overpayments can be identified by examining one or more relevant sources of 

information available to agencies. For instance, agencies could identify high-dollar 

overpayments, where applicable and cost-effective, through: 

a. 	 Annual improper payment testing samples; 

b. 	 Payment recapture audits; or 

c. 	 Other sources identified by the agency. 

3) 	 What information should be included in agency reporting on high-dollar 

overpayments? 

This information is subject to Federal privacy laws, regulations, and policies, and should not 

include information about improper payments or recipients that the agency has referred, or 

anticipates referring, to the Department of Justice for enforcement, collection, or other legal 

action. At a minimum, the report should describe: 

a. 	 The total amount of high-dollar overpayments made by the agency (the agency does not 

need to list each individual high-dollar overpayment in the report); 

b. 	 Any actions the agency has taken or plans to take to recover high-dollar overpayments 

(the report should address overall actions and strategies); and 

c. 	 Any actions the agency will make to prevent overpayments from occurring in the future 

(the report should address overall actions and strategies). 

4) 	 Which agencies must report on high-dollar overpayments? Where shall agencies report 

high-dollar overpayments to the public? What if an agency has no high-dollar 

overpayments? 

Agencies with programs susceptible to significant improper payments under the IPIA are 

required to report quarterly on high-dollar overpayments that occurred within those specific 

programs. Agencies may report this information to the public on their own website, or through 

other mechanisms designed to allow the public to access agency information. For any given 

quarter, if an agency with programs susceptible to significant improper payments has had no 

high-dollar overpayments, then the agency should inform OMB and the agency's Inspector 

General that the agency had no high-dollar overpayments in that quarter. Agencies without any 

programs susceptible to significant improper payments do not need to report or notify either 

OMB or the Inspector General. 

5) 	 Are there exceptions to the reporting requirements for the high-dollar report? 

If an agency believes that the high-dollar report is duplicative of other reports compiled by the 

agency, they may submit a written request to OMB for an alternative reporting structure. 

Included in the request should be a listing ofthe other report(s) and a detailed description of how 

those reports provide the same information as the high-dollar report. After reviewing any such 

request, OMB may permit agencies to leverage existing reporting mechanisms in lieu of separate 

quarterly high-dollar overpayment reports. 

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