Tax Administration: Federal Payment Levy Program Measures, Performance, and Equity Can Be Improved
Published: 2003-03-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to the Internal Revenue Service (IRS), taxpayers currently owe about $249 billion in delinquent taxes. At the same time, the government pays billions of dollars in Social Security, retirement, and other federal payments to thousands of these individuals. To help IRS administer tax laws fairly and collect delinquent taxes effectively, Congress included a provision authorizing the Federal Payment Levy Program, which allows IRS to continuously levy up to 15 percent of certain federal payments made to delinquent taxpayers. Because of congressional interest about whether the Federal Payment Levy Program is being implemented as intended, GAO was asked to assess how well the program is operating.
section_title: What GAO Found
paragraphs: The Federal Payment Levy Program enables IRS to continuously levy (take a portion of) federal payments to individuals and businesses owing delinquent taxes. IRS measures only about 27 percent of the revenues that can be attributed to the continuous levy program. IRS does not measure revenues that are received through voluntary payments as taxpayers respond to the notice of intent to levy or certain other results. Understating the program's impact may hinder IRS in making well-founded decisions on program management and resource allocation. IRS plans to revise its measure of program results but has not yet decided how to do so. IRS blocks many eligible delinquent accounts from being included in the Federal Payment Levy Program, thereby missing an opportunity to gather information on which debtors are receiving federal payments, that could be used to collect these delinquent taxes more efficiently. IRS recently unblocked some accounts and plans to unblock more, but has not established a time frame to complete these changes. IRS uses an inaccurate income criterion of ability to pay when determining whether taxpayers receiving Social Security benefits can afford to have their benefits levied under the Federal Payment Levy Program. As a result, fair treatment of taxpayers is compromised because taxpayers with a similar ability to pay their delinquent taxes likely are treated differently. IRS recognizes that the criterion is flawed but continues to use it.

section_title: Letter
paragraphs: According to the Internal Revenue Service (IRS), taxpayers currently owe  about $249 billion in delinquent taxes to the federal government. At the  same time, the government pays billions of dollars in Social Security,  retirement, and other federal payments to thousands of these individuals  each year. IRS and federal payment records indicate that nearly one  million taxpayers owing about $26 billion in delinquent taxes as of  February 2002 were receiving federal payments for federal wages and  retirement, Social Security benefits, and goods and services provided to  federal agencies. To help IRS collect these delinquent taxes more  effectively, Congress included a provision in the Taxpayer Relief Act of  1997 authorizing the establishment of the Federal Payment Levy Program  (FPLP), which allows IRS to continuously levy up to 15 percent of certain  federal payments made to delinquent taxpayers. According to IRS, the  program, which began in July 2000, resulted in collecting over $60 million  in fiscal year 2002 by directly levying federal payments.
Under FPLP, IRS matches its accounts receivable records with federal  payment records maintained by the Department of the Treasury’s  Financial Management Service (FMS), such as certain Social Security  benefit and federal wage records. When the records match, the delinquent  taxpayer is sent a notice of intent to levy the payment, which generally  gives the taxpayer at least 30 days to either make arrangements to pay the  tax debt or provide a reason as to why the payments should not be levied,  such as financial hardship. If taxpayers do not respond after 30 days, IRS  can instruct FMS to levy their federal payments. Subsequent payments are  continuously levied until such time that the tax debt is paid or IRS releases  the levy.
To determine whether FPLP was being implemented as intended and that  the program helps IRS meet its strategic goal of treating all taxpayers  fairly, you asked us to assess how well the program is operating.  Specifically, our objectives were to determine (1) whether the data IRS  uses to manage the program adequately measures program results,  (2) how IRS’s decision to block some delinquent accounts from being  matched to federal payments under FPLP impacts the agency’s ability to  collect taxes efficiently, and (3) whether the criterion IRS uses to include  taxpayers receiving Social Security benefit payments into FPLP effectively  targets taxpayers who can afford to pay their tax debts.
To address our objectives, we  reviewed documents IRS uses to measure program results and select  cases that qualify for FPLP,   discussed program operations with program officials,    analyzed sample cases of delinquent taxpayers who were sent notices  of intent to levy during the period October through December 2001, and   analyzed IRS’s accounts receivable and FMS’s payment files on  delinquent taxpayer accounts that were not included in the program.
The estimates of the sample cases we took of taxpayers receiving  payments from the Social Security Administration have some sampling  errors associated with them. Further, estimates about the total group of  cases we analyzed (taxpayers receiving retirement payments from the  Office of Personnel Management (OPM); vendor payments; and taxpayers  receiving Social Security payments) have sampling errors as well. All  percentage estimates about the population of taxpayers receiving Social  Security payments or the overall population have sampling errors of plus  or minus 5 percentage points or less, unless otherwise noted. Our work  was done between November 2001 and December 2002 in accordance with  generally accepted government auditing standards. (App. I describes our  overall objectives, scope, and methodology.)
subsections: section_title: Background
paragraphs: In the Taxpayer Relief Act of 1997, Congress authorized IRS to collect  delinquent tax debt by continuously levying up to 15 percent of certain  federal payments made to delinquent taxpayers. In July 2000, IRS first  implemented the continuous levy program, now referred to as FPLP. We  estimated in prior reviews that once fully operational, the program could  potentially recover hundreds of millions of dollars in delinquent tax debt  annually. In fiscal year 2002 IRS collected more than $60 million in  delinquent taxes through continuous levy under FPLP.
IRS operates the program with FMS, the agency that receives payment  records from and makes payments on behalf of most federal agencies,  including federal retirement payments and Social Security benefit and  vendor payments. With respect to FPLP, FMS compares each taxpayer’s  identification number (TIN) and name on agency payment records with  the TIN and name control on accounts receivable records provided by IRS.  When FMS identifies a delinquent taxpayer scheduled to receive a federal  payment, it informs IRS, which then issues a notice of intent to levy to the  taxpayer, unless the notice was previously sent. Once taxpayers receive  the notice of impending levy, they have several options for action.  Taxpayers who receive a notice from FPLP have a minimum of 30 days to  respond to the notice, during which time they may consider several  alternatives available to them. Taxpayers may either    disagree with IRS’s assessment and collection of tax liability, in which  case they can appeal the action by requesting a hearing with IRS’s  Office of Appeals;   elect to pay off the debt in full;    negotiate with IRS to set up an alternative payment arrangement such  as an installment agreement or an offer in compromise; or   apply to IRS for a hardship determination, whereby taxpayers  demonstrate to IRS that making any payments at all would result in a  significant financial hardship. In such cases, IRS may agree to  temporarily delay collection action until the taxpayer’s financial  condition improves.
If taxpayers do not respond to IRS and avail themselves of options within  the notification period, IRS will instruct FMS to proceed with the  continuous levy by reducing each scheduled payment to the taxpayer by  15 percent—or the exact amount of tax owed if it is less than 15 percent of  the payment—until the tax debt is satisfied.
The FPLP began with levies of federal employees’ retirement payments  and vendor payments issued by FMS. IRS later added additional types of  federal payments to the program, including selected Social Security  benefits and selected federal salaries. IRS plans to continue expanding the  program by adding additional federal employee salaries and other types of  federal payments.
Not all delinquent taxpayer accounts are eligible for FPLP. IRS has  excluded certain accounts from levy; for example, cases where the  taxpayer has entered bankruptcy, made alternative arrangements to pay,  or demonstrated to IRS that making payments on the outstanding tax debt  would result in a financial hardship. With some exceptions, delinquent  taxpayer accounts are eligible for FPLP if they are either assigned to IRS’s  Automated Collection System (ACS) or to field collections or have been  waiting for assignment to one of these areas for at least 1 year. Cases in  which collection activity has been deferred for at least a year because of  low tax liability, as well as cases in which IRS has been unable to either  locate or contact the taxpayer are also eligible for FPLP.
section_title: IRS’s FPLP Data Understates Program Results
paragraphs: IRS tracks FPLP program results by measuring only tax revenue collected  through continuous levy, although most of the collections attributable to  FPLP result from taxpayers subsequently contacting IRS and either  submitting a payment voluntarily, or arranging to pay their delinquent  taxes through other means such as by entering into an installment  agreement. Our analysis of about 98,000 delinquent taxpayers who  received a notice of intent to levy during the October through December  2001 period showed that as of August 2002, IRS had collected an estimated  $107.1 million from these taxpayers. As shown in figure 1, levies  represented an estimated $28.5 million of this amount, or 27 percent of  the total collections, while other payment methods represented an  estimated $78.6 million, or 73 percent of the total FPLP-related  collections. By not measuring the nonlevy payments attributable to FPLP,  IRS significantly underestimates the program’s success.  (See app. II for more detailed information on the amount of delinquent  taxes collected as a result of FPLP by the type of federal payment  taxpayers received (i.e., Social Security benefits, federal retirement  payments, and vendor payments) and by the method of collection.)
IRS realizes other benefits attributable to FPLP that it does not currently  measure. IRS does not measure the extent that FPLP helps IRS function  more efficiently by decreasing its accounts receivable inventory. Our  analysis of the 98,000 FPLP cases indicated that after receiving a notice of  intent to levy, about 29 percent of the taxpayers took action that enabled  IRS to remove them from the active accounts receivable inventory or to  move them to an inactive status. Specifically, we estimate that subsequent  to receiving a levy notice, about 19 percent of the taxpayers resolved their  liability while about 10 percent obtained a determination of financial  hardship. (For more information on the characterization of account status,  see app. II.) By reclassifying some active delinquent accounts to an  inactive status and removing others, FPLP helps IRS to more efficiently  prioritize its accounts receivable inventory and enables IRS to focus more  of its resources on delinquent accounts that have more collection  potential.
Knowing the full impact of FPLP’s effectiveness would be consistent with  IRS’s strategic planning and budgeting process, which emphasizes the  importance of assessing the impact of current program operations to  efficiently allocate resources. IRS acknowledges that FPLP generates  indirect results in addition to revenues collected through the continuous  levy process, and has initiated its own study on how to measure the  outcomes attributable to the program, which it expects to complete in  calendar year 2003. After completing this study, IRS will decide how to  revise its measurement approach.
section_title: Blocking Cases from Matching against Federal Payment Records Prevents IRS from Collecting Taxes More Efficiently
paragraphs: When IRS implemented FPLP in July 2000, it made a decision to  temporarily block most delinquent taxpayer accounts placed in ACS and  field collections from being matched against federal payment records. ACS  accounts were blocked primarily because IRS believed it lacked the  resources to issue levy notices and respond to the potential increase in  telephone calls from taxpayers responding to the notices and still  adequately perform other ACS activities. Specifically, agency officials were  concerned that if the 1.4 million delinquent taxpayers with accounts in  ACS were added to the program for matching too rapidly, it could disrupt  ACS workload processes and likely could not be handled with existing  resources. IRS also decided not to match over 55,000 delinquent accounts  in field collection because revenue officers believed that this action could  interfere with their successfully contacting taxpayers and negotiating a  settlement to resolve the delinquent account they had been assigned.
We found some of IRS officials’ concerns with respect to matching the  nearly 1.5 million ACS and field collection accounts may be unfounded.  We matched the nearly 1.5 million accounts to FMS payment records and  found that only about 112,000 taxpayers were receiving federal payments,  as shown in table 1.
Submitting delinquent taxpayer accounts to FMS for matching against  federal payment records does not necessarily mean IRS must levy these  accounts. Rather, the matching process performed by FMS would provide  IRS with useful additional information to assist in determining what the  best collection method may be. For example, of the 108,469 delinquent  taxpayers in ACS receiving federal payments at the time of our analysis,  IRS had not yet contacted or located more than half—about 55,900—of  these delinquent taxpayers, and could therefore have chosen to levy some  of these accounts without disrupting ongoing collections. These   55,900 taxpayers owed about $460 million in delinquent taxes and received   $4.1 billion in federal payments during 2002. If IRS had information on  matching federal payments for these delinquent accounts, it would have  had additional options available to determine how best to pursue  collection of the delinquent tax revenue—such as using FPLP.
While the ACS and field collection actions may result in the eventual  recovery of most of the delinquent taxes associated with these accounts,  using the automated FPLP matching process could help IRS collect this  revenue in a more timely and efficient manner. Even when ACS or field  revenue officers have already contacted the taxpayer, matching—but not  necessarily issuing a notice of intent to levy—the account could provide  useful information for IRS to consider in collections. For example,  revenue officers may not be aware that taxpayers in their case inventory  are currently receiving federal payments, and they could use this  information to develop a more complete assessment of the taxpayer’s  financial situation. In January 2003, IRS unblocked and made available for  matching and levy those delinquent accounts identified as receiving  federal salary or annuity payments—representing about 20,000 of the  112,000 blocked taxpayers we identified in our analysis. However, other  delinquent accounts remain blocked from being matched to FMS payment  records. Agency officials said that they plan to unblock a portion of the  remaining delinquent accounts sometime in 2005, although they have not  yet established a firm time frame for doing so.
section_title: IRS’s Criterion for Determining Which Social Security Beneficiaries Can Afford to Have Their Payments Levied Is an Inaccurate Indicator of Ability to Pay
paragraphs: IRS established an income threshold to exclude Social Security  beneficiaries who cannot afford to pay their taxes from FPLP. However,  our analysis of Social Security beneficiaries above and below this income  threshold shows that IRS’s income criterion is an inaccurate indicator of a  taxpayer’s ability to pay. We found little difference between the two  groups in terms of the frequency with which taxpayers either made  voluntary payments in response to a levy notice or relied on Social  Security as a sole source of income. We also found that the income  criterion relies on information that is often outdated and incomplete.
subsections: section_title: IRS Decided to Exclude Selected Social Security Payments from FPLP without Evaluating the Effectiveness of Its Income Level Criterion
paragraphs: In response to concerns raised by the National Taxpayer Advocate  regarding potential harm that may be experienced by Social Security  beneficiaries who are levied under FPLP, IRS implemented an income  criterion for Social Security benefit payments intended to identify and  screen from FPLP, those taxpayers who are least able to pay their tax  debt. The National Taxpayer Advocate believed that taxpayers who rely  solely on Social Security benefits as their income source are most  vulnerable to the financial hardship that a continuous levy may cause. In  January 2002, IRS implemented an income threshold that excluded Social  Security benefit payments from FPLP for 55 percent of the delinquent  taxpayers who receive these payments. This income level criterion, Total  Positive Income (TPI), is derived from income information reflected on  the most recent income tax return filed by the taxpayer. Under FPLP, the  TPI criterion only applies to Social Security benefit payments and not to  other forms of payments such as federal annuities or salary payments. We  estimate that taxpayers who were receiving Social Security payments and  whose TPI was below the income threshold owed approximately   $522 million in delinquent taxes.
Prior to introducing Social Security benefit payments into FPLP, IRS  implemented the TPI criterion without doing any tests to indicate whether  the TPI criterion was necessary or better than the special procedures IRS  had already planned–providing Social Security beneficiaries with a longer  notification period relative to recipients of other federal payments. Under  the normal notification process, IRS gives delinquent taxpayers 30 days  from receipt of a notice of impending levy before it begins to levy the  payment. Under FPLP, IRS planned to provide Social Security  beneficiaries with a second notice of intent to levy and an additional   30 days to respond. The extended notification period was adopted and is  intended to provide Social Security beneficiaries with sufficient  opportunity to contact IRS with any questions concerning the levy notice,  and, if necessary, demonstrate to IRS that the levy would result in financial  hardship. IRS officials said that due to time constraints IRS did not test the  extent to which the planned extended two-notice process would have  proved sufficient to ensure that Social Security beneficiaries were not  subjected to undue financial hardship under FPLP. In addition, IRS did not  do any studies to determine what TPI level would best protect financially  vulnerable Social Security beneficiaries, or whether the criterion should  apply to other federal payments as well.
section_title: The TPI Criterion Has Several Weaknesses
paragraphs: The TPI criterion has several weaknesses that can impact Social Security  beneficiaries both above and below the income threshold. Our analysis has  shown that TPI is an inaccurate indicator of those delinquent taxpayers  who are the most financially vulnerable. Under current program  procedures, IRS does not send either one of the two routine levy notices to  Social Security beneficiaries who are below the TPI threshold. However,  while phasing Social Security benefit payments into FPLP between  October and December of 2001, IRS issued the initial notice of intent to  levy to all delinquent Social Security beneficiaries who owed taxes,  including those whose TPI was below the threshold and whose benefit  payments would therefore be excluded from the program. As a result, we  were able to compare data on how taxpayers in both the “able to pay” and  “unable to pay” group responded to the levy notice. We found that of the  approximately 90,000 Social Security beneficiaries in the below TPI  threshold group, an estimated 18 percent made voluntary payments or  entered into an installment agreement of their own accord after receiving  the one-time notice of intent to levy at the end of 2001. Of the  approximately 97,000 Social Security beneficiaries whose TPI was above  the threshold, an estimated 12 percent had made voluntary payments or  entered into an installment agreement. The 6 percent difference between  the 12 and 18 percent figures is too small to be statistically significant;  thus, Social Security beneficiaries above and below the TPI threshold  made voluntary payments and entered into installment agreements at  comparable rates. While the TPI threshold’s use has categorized certain  taxpayers as those whose Social Security payments need to be excluded  from FPLP because they are unable to pay, their actions in response to  one levy notice demonstrates some ability to pay and, in fact, are similar to  the actions of taxpayers above the TPI threshold.
Our study also showed that IRS granted financial hardship status to Social  Security beneficiaries above and below the TPI threshold at similar rates.  As part of the regular collections process, any delinquent taxpayer has the  right to ask IRS for a hardship determination in which the taxpayer claims  that he or she is unable to pay their taxes without incurring undue  financial hardship. As part of the determination process, the taxpayer may  be required to provide IRS with financial information to substantiate his or  her financial condition, and if IRS agrees that paying taxes would  constitute a hardship, IRS will temporarily delay collection activity until  the taxpayer’s financial condition improves. An estimated 5 percent of  Social Security beneficiaries whose TPI is below the threshold and   8 percent of Social Security beneficiaries whose TPI is above the threshold  responded to the notice by contacting IRS and obtaining a determination  of financial hardship by using IRS’s standard hardship determination  process. The difference between the 5 and 8 percent figures is too small  to be statistically significant; thus, Social Security beneficiaries above and  below the TPI threshold entered in hardship status at comparable rates.
Furthermore, our analysis also determined that the TPI threshold poorly  identifies taxpayers who solely rely on Social Security benefits—the group  of taxpayers the National Taxpayer Advocate considered to be most  vulnerable to financial hardship from continuous levy. We analyzed  information returns data for tax year 2001 for a representative sample of  Social Security beneficiaries with a TPI below the threshold and reviewed  their current income sources. We found that an estimated 46 percent of  these Social Security beneficiaries received only Social Security benefits  and the remaining 54 percent received income in addition to Social  Security benefit payments. These numbers were very close to the numbers  we found for Social Security beneficiaries with a TPI above the threshold  and, thus, presumably able to afford paying their taxes. About 40 percent  of the above TPI group also relied on Social Security benefits as their sole  source of income. The difference between the 40 and 46 percent figures is  not statistically significant, indicating that a Social Security beneficiary  under the TPI threshold is almost equally likely to rely solely on Social  Security benefit payments as one deemed able to pay.
Our analysis also indicated that TPI is frequently outdated because it is  based on income information reflected on the most recent income tax  return filed by the taxpayer. However, if the taxpayer was not required to  file a tax return in recent years, his or her TPI information from that last  return filed may not be consistent with their current financial situation.
For example, a person who had a relatively high TPI according to his or  her last income tax return may now be receiving significantly less income,  in which case TPI is not an accurate indicator to determine whether they  should now be included or excluded from FPLP. We reviewed the  currency of the last tax return of Social Security beneficiaries who owed  delinquent taxes and estimate that only 17 percent had filed a return for  tax year 2001. We found that in total, 53 percent of the Social Security  beneficiaries had not filed since tax year 1996 or earlier. (See app. II for  more information on the results of this review.)
In addition to being frequently outdated, TPI is an incomplete indicator of  a person’s full resources. While the TPI calculation does include income  earned from assets such as interest and capital gains, it does not include  information on a taxpayer’s assets, such as savings account balances,  stocks, property ownership, or individual retirement account balances  when determining a taxpayer’s ability to pay. Using our review of data for  tax year 2001 information returns, we were able to estimate that over   14 percent of Social Security beneficiaries who had a TPI below the  threshold made mortgage interest payments, yet were excluded from  FPLP. During the regular collections process in which IRS works directly  with taxpayers to resolve their delinquent accounts, information on assets  is taken into account when assessing the taxpayers’ overall financial  condition.
Both the National Taxpayer Advocate and the FPLP officials we spoke  with acknowledged that the TPI criterion is flawed. FPLP officials, in their  own study on TPI implementation, agreed that the TPI criterion had  several problems. Similar to our findings, they reported that TPI is often  out of date because the majority of last tax returns filed were at least   1 year out of date. IRS also found that TPI does not include consideration  of filing status and dependent information, and is not adjusted when  changes on the return are made resulting from an audit or amendment.  However, IRS has continued to use TPI because it has not identified  suitable alternatives, and has not taken time to determine whether the  extended notification period effectively meets the needs of the Social  Security beneficiary population. Nor has it identified whether Social  Security beneficiaries are more vulnerable to financial hardship than other  federal payment recipient groups. IRS’s continued use of a criterion that is  inadequate in identifying those taxpayers who may be least able to pay,  and therefore treats taxpayers with similar abilities to pay differently, is at  odds with IRS’s strategic goal emphasizing the importance of treating all  taxpayers fairly.
section_title: Conclusions
paragraphs: IRS’s FPLP is still a relatively new program, and, as such, has not yet  realized its full potential. To ensure that it does, IRS needs sufficient  information to determine the results the program achieves so that well  informed decisions can be made in allocating resources to FPLP.  However, when measuring FPLP’s results, IRS only considers the  program’s most immediate effect, the tax revenue collected directly by  continuous levy, and thereby substantially understates the program’s  results. Although IRS recognizes that broader measures of FPLP results  are needed, its study to determine how to do so will not be completed until  calendar year 2003, at which time IRS will then decide how to revise its  measurement approach.
FPLP’s full potential also has not been tapped because IRS has not taken  full advantage of the information that could be used to determine the most  efficient means of collecting delinquent taxes. Rather than analyzing the  workload implications of matching additional accounts under the  program, IRS blocked certain delinquent accounts from the program on  the assumption that including them would create an overwhelming  increase in workload. In fact, only a small portion of the blocked  delinquent accounts—about 112,000 of the nearly 1.5 million—matched  against federal payments. In January 2003, IRS removed the block on some  delinquent accounts but it has not set a firm time frame for unblocking the  remaining accounts. Removing the block on the remaining accounts does  not mean IRS would necessarily have to levy the accounts. Rather, it can  use the information gained from matching the accounts to federal payment  records to help identify the most efficient means of resolving the accounts,  which may include levying some portion of them.
Finally, use of an income based criterion to identify whether Social  Security benefit payments should be excluded from the program has likely  resulted in unequal treatment of similarly situated taxpayers, which  conflicts with IRS’s strategic goal of treating all taxpayers fairly. IRS  adopted this criterion (1) without testing its effectiveness and (2) without  determining if excluding any beneficiaries from FPLP was even a  necessary step, given measures that IRS had already taken to address  possible hardship cases. While FPLP officials concur that it has many  weaknesses, IRS continues using the criterion to exclude selected Social  Security benefit payments from FPLP.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that IRS is operating FPLP in a manner that achieves the  program’s full potential and ensures equitable treatment of taxpayers, we  recommend that the Acting Commissioner of Internal Revenue:  Include in IRS’s planned new approach to measuring FPLP results data  on the full range of taxpayers’ actions and tax collections attributable  to FPLP, including nonlevy collections and account resolutions.
Study the feasibility of submitting all eligible delinquent accounts to  FMS on an ongoing basis for matching against federal payment records  under FPLP, and use information from any matches to assist IRS in  determining the most efficient method of collecting delinquent taxes,  including whether to use FPLP.
Discontinue using the TPI criterion as an indicator of Social Security  beneficiaries’ ability to pay delinquent taxes and rely on the extended  two-notice process to identify beneficiaries for whom a levy would be a  hardship. Determine whether sending a second notice that explains the  financial hardship exception to all Social Security beneficiaries subject  to levy is sufficient to identify hardship situations. If not, develop and  test a criterion that reliably identifies those Social Security  beneficiaries for whom a levy would represent an undue hardship.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the Acting  Commissioner of Internal Revenue (see app. III).  The Acting  Commissioner generally agreed with our recommendations and provided  technical comments and clarifications that we have incorporated  throughout this report where appropriate.
To enhance IRS’s ability to measure the full range of direct and indirect  results of FPLP operation, the Acting Commissioner agreed to include in  the agency’s planned new approach to measuring program results, data on  nonlevy collections and account resolutions. The Acting Commissioner  said that, as IRS gets closer to implementing its new measurement  approach, it would like to share its methodology with us.
However, the Acting Commissioner raised concerns with the part of our  recommendation calling for IRS to consider account resolutions when  measuring FPLP results.  He said that contrary to our draft report’s  statement that FPLP frees up resources through account resolutions that  can be used to pursue accounts with more collection potential, FPLP has  generated an increased workload for IRS staff that diverts them from more  productive uses.  He concluded that it is difficult to assess the total costs  and/or indirect benefits of the program in terms of resources freed up to  pursue other collection activity.
We agree that doing such an assessment is challenging.  However, IRS  managers’ ability to accurately gauge FPLP effectiveness, as well as  validate resource allocation decisions among various IRS collection  activities should be based, to the extent practical, on data that accurately  and completely reflect program results.  While we recognize that IRS does  have workload that comes from FPLP cases, and that workload may be  lower priority in some cases than other alternative casework, FPLP also  leads to many case closures that require little IRS employee time.  In  addition, since all cases subject to the FPLP have already received notices  from IRS about their delinquent accounts, IRS had previously judged the  accounts as meriting collection action even if they might involve increased  collection staff workload.
In our draft report, we had recommended that IRS submit all delinquent  accounts to FMS on an ongoing basis for matching against federal  payment records under FPLP and use information from any matches to  assist IRS in determining the most efficient method of collecting  delinquent taxes, including whether to use the FPLP to do so.  While  reviewing the draft report, IRS officials raised concerns, which they did  not express in our previous discussions with them, that computer  programming costs associated with implementing this draft  recommendation might make the recommendation infeasible for certain  types of taxpayer accounts.  In light of those concerns, we agreed to  modify our recommendation to instead recommend that IRS study the  feasibility of submitting all delinquent accounts for matching.  In his letter,  the Acting Commissioner agrees with this revised recommendation and  indicates that efforts to do so are underway.
In reference to our recommendation that IRS discontinue use of the TPI  criterion, the Acting Commissioner stated IRS’s commitment to ensuring  all taxpayers are treated fairly and that IRS is concerned with the issues  we raised regarding the TPI criterion.  The Acting Commissioner did not  agree to discontinue the use of the TPI immediately, but said that IRS  would take the next 120 days to work with the National Taxpayer  Advocate and program administrators to assess deficiencies in the current  process and to develop a suitable solution.  This action generally is  responsive to our recommendation.  However, if developing and  implementing a suitable solution extends beyond the 120-day milestone set  by the Acting Commissioner, we believe IRS should, as we recommended,  discontinue use of the TPI criterion and rely on the two-notice procedure  already in place while IRS continues to work on a solution it believes  would be more suitable.  As our report notes, IRS has been aware of some  limitations with TPI for some time and has yet to identify a suitable  solution.
We will send copies to the Ranking Minority Member, House Committee  on Ways and Means; Ranking Minority Member, Subcommittee on  Oversight, House Committee on Ways and Means; and the Chairman and  Ranking Minority Member, Senate Committee on Finance.  We will also  send copies to the Acting Commissioner of Internal Revenue and other  interested parties.  Copies of this report will also be made available to  others upon request.  The report will also be available on GAO’s Web site  at http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-9110 or Ralph Block at (415) 904-2150. Key contributors to this  work are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine (1) whether the data the Internal  Revenue Service (IRS) uses to manage the Federal Payment Levy Program  (FPLP) adequately measures program results, (2) how IRS’s decision to  block some delinquent accounts from being matched to federal payments  under FPLP impacts the agency’s ability to collect taxes efficiently, and   (3) whether the criterion IRS uses to include taxpayers receiving Social  Security Administration benefit payments in FPLP effectively targets  taxpayers who can afford to pay their tax debts.
subsections: section_title: Scope and Methodology
paragraphs: We obtained and reviewed the data used by IRS to track program results in  an effort to determine whether IRS’s data on FPLP operations adequately  measures program results, including direct levy collections and other  nonlevy collections such as those made through voluntary payments,  installment agreements, and offers in compromise that occur in response  to FPLP collection notices. We also selected and analyzed three groups of  delinquent taxpayers that received a notice of intent to levy between  October and December 2001. These groups were (1) all taxpayers  receiving federal retirement payments from the Office of Personnel  Management (OPM), (2) all taxpayers receiving vendor payments from  federal agencies whose payments are processed by the Financial  Management Service (FMS), and (3) a random sample of taxpayers  receiving Social Security benefit payments.
We analyzed a total of 1,540 taxpayers that were comprised of   (1) 699 delinquent taxpayers receiving OPM payments, (2) 484 delinquent  vendors receiving federal payments, and (3) a random sample of   357 delinquent taxpayers who were receiving Social Security payments.  Since OPM and vendor payments have been eligible for FPLP matching  since program inception, we analyzed only the new matches that occurred  during the selected time period for these populations. However, because  IRS first started matching all Social Security payments during the October- December 2001 time period, we randomly selected a sample of   357 taxpayers whose total positive income (TPI) was above the income  threshold and who were receiving Social Security benefit payments. We  weighted our observations on those 357 sampled cases in order to project  to the total population of 97,133 taxpayers in this category. Using  electronic taxpayer information files provided by IRS, we analyzed  subsequent transactional activity that occurred on the taxpayer accounts  reviewed between the initial match in the fourth quarter of 2001 and as of  August 26, 2002. We also analyzed the level and type of account activity  that occurred prior to inclusion in FPLP, including the elapsed time since  the last significant action initiated by either IRS or the taxpayer, to  determine whether the account activity that occurred after IRS issued a  notice of intent to levy could be attributed to the continuous levy program.  We attributed voluntary tax payments to inclusion in FPLP in only those  cases where the delinquent account was not in any other collection status,  that is, field collection or in the Automated Collection System (ACS)  inventory. We discussed the range of impacts that may result after a  taxpayer receives a notice of intent to levy under FPLP with program  officials, which they agreed go beyond a continuous levy payment.
We interviewed IRS officials in FPLP, ACS, and field collection areas to  determine whether some of the taxpayer accounts that are currently  blocked could be subject to FPLP, including determining the reason for  blocking these accounts as well as the likelihood of unblocking them in  the future. To estimate the number of blocked delinquent accounts that  would match federal payment records if IRS were to introduce accounts  that are blocked from being included in the program, we obtained and  matched IRS’s accounts receivable records as of February 2002 with  agency payment records obtained from FMS.
To determine whether the TPI criterion IRS uses to levy Social Security  payments is effectively targeting taxpayers who can afford to pay their tax  debts, we performed additional analysis on the random sample of   357 delinquent taxpayers receiving Social Security payments included in  the first of our study objectives. In addition, we analyzed a random sample  of 405 delinquent taxpayers who received Social Security payments and  who were under the TPI threshold. We weighted our observations on the  405 cases to project to the population of 90,307 taxpayers in this category.  We reviewed income data from IRS’s taxpayer information files and  information returns database to determine (1) each taxpayer’s reliance on  Social Security benefits as a sole source of income, (2) whether taxpayers  below and above the TPI threshold differed in their reaction to receiving a  notice of intent to levy under FPLP, and (3) whether the TPI criterion  accurately reflected each taxpayer’s current income level. We also met  with the National Taxpayer Advocate as well as IRS program officials to  discuss why the TPI criterion is used to screen Social Security payments  that are to be included in FPLP. We also met with officials from the Social  Security Administration to get their views on phasing benefit payments  into FPLP.
We did our work at IRS and FMS headquarters in Washington, D.C.; the  Social Security Administration headquarters in Baltimore, Maryland; the  IRS area offices in Oakland, California and Sacramento, California; and the  IRS Return Processing Center in Fresno, California.
section_title: Appendix II: Additional Data on Revenue Collections Attributable to FPLP and Status of Taxpayer Accounts
paragraphs: This appendix provides additional details on the results of our analysis,  specifically (1) the estimated $107.1 million in delinquent tax collections  that can be attributed to the FPLP, (2) the categorization of taxpayer  action after entering the FPLP, and (3) the distribution of Social Security  payment recipients by year of the most recent income tax return filed.
subsections: section_title: FPLP Payments by Collection Method
paragraphs: Our analysis included a group of taxpayers in FPLP receiving Social  Security benefit payments, federal government retirement payments from  OPM, and vendor payments. For detailed information on the distribution  of delinquent tax dollars collected by various methods, including  continuous levy under FPLP, see table 2.
section_title: Categorization of Taxpayers
paragraphs: To assess the full range of FPLP results, we reviewed the status of  accounts for a group of taxpayers after they had been in the program for  an extended period of time. Based on our examination of the available  IRS transactions data for each delinquent account, we assigned these  sampled taxpayers to categories representative of the most recent activity  that had occurred on their account as of August 2002. In general, we found  that the taxpayer status fell into one of eight categories: (1) the account  had been resolved through payment and/or abatement of the tax liability;  (2) the account was still being actively matched and/or levied under FPLP;  (3) the taxpayer had made at least one voluntary payment on the  delinquent debt; (4) the taxpayer had made installment agreement  payments on the debt or had initiated the installment agreement process;  (5) the taxpayer had either initiated litigation, a claim for a refund, or the  offer in compromise process; (6) the delinquent account had been  transferred to either the ACS or the field for manual collection; (7) the  delinquent account was removed from FPLP for various reasons, for  example, the taxpayer was deceased or for other unknown reasons; and  (8) IRS made a determination that the taxpayer had a financial hardship  and was currently unable to make any payments on the debt. Table 3  provides more detailed information on the categorization of taxpayer  activity we observed for the accounts reviewed.
section_title: Most Recently Filed Income Tax Returns for Social Security Beneficiaries
paragraphs: We analyzed the yearly distribution of the most recent income tax return  filed for Social Security payment recipients who owed delinquent taxes.  Table 4 shows that only 17 percent of these taxpayers had filed for tax  year 2001, and that 53 percent had not filed since 1996 or earlier.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Tom N. Bloom, Allen T. Chan, Jeanine  Lavender, Ellen Rominger, Amy Rosewarne, Samuel Scrutchins, Wendy  Turenne, James J. Ungvarsky, Elwood D. White, and Thomas Venezia  made key contributions to this report.