Debt Collection: Opportunities Exist for Improving FMS's Cross-Servicing Program
Published: 2003-10-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO has previously reviewed facets of Treasury's Financial Management Service's (FMS) cross-servicing efforts. These reviews did not include FMS's handling of nontax debts that were returned to FMS uncollected by its private collection agency (PCA) contractors because FMS officials did not consider the cross-servicing program to be fully mature. During fiscal years 2000, 2001, and 2002, FMS's PCA contractors returned about $3.9 billion of uncollected debts to FMS. This report focuses primarily on (1) actions taken by FMS on uncollected nontax debts returned from its PCA contractors and (2) actions taken, if any, by FMS and the Office of Management and Budget (OMB) to ensure that federal agencies are reporting their eligible uncollectible nontax debts to IRS as income to debtors.
section_title: What GAO Found
paragraphs: Although FMS has made progress in implementing its cross-servicing program and considers it to be fully mature, opportunities exist to improve the program. FMS had not reviewed most of the debts returned to it by its PCA contractors to determine whether any opportunities for collection or other recoveries remained, including those possible from reporting closed-out debts to IRS as income to debtors. For example, about $3.7 billion of the $6.6 billion of debts that were at FMS for cross-servicing as of February 28, 2003, were being kept in the Treasury Offset Program (TOP) for passive collection after they had been returned uncollected to FMS by PCA contractors. Passive collection entailed no further collection action on the part of FMS other than minimal efforts through offset, and collections on debts in passive collection through offset totaled only about $9 million through February 28, 2003. Various problems hindered collections through offset, including the fact that many of the debts were beyond the 10-year statutory and regulatory limitations for offset. GAO's analysis also showed that relatively few debts in cross-servicing were being referred to the Department of Justice for more aggressive enforced collection action. This analysis further showed that FMS continues to have problems with debt compromises and the reporting of a key cross-servicing performance measure. Finally, neither FMS nor OMB monitored or reported the extent to which federal agencies governmentwide were closing out all eligible uncollectible debts and reporting those amounts to IRS as income to debtors.

section_title: Letter
paragraphs: The Debt Collection Improvement Act of 1996 (DCIA) gave the Department  of the Treasury (Treasury) significant governmentwide responsibilities for  collecting federal nontax debts delinquent more than 180 days that are referred by federal agencies for collection action, known as cross- servicing.  Treasury’s Financial Management Service (FMS) is responsible  for carrying out Treasury’s cross-servicing responsibility.  Nontax debts  that federal agencies reported as delinquent more than 180 days totaled  over $60 billion at the end of each of the last 4 fiscal years. However, as of  September 30, 2002, federal agencies reported to FMS that only about  $8.5 billion, or approximately 13 percent, of the approximately $64 billion  of reported nontax debts delinquent over 180 days were eligible for cross- servicing.  FMS has continued to express concern about the accuracy, completeness, and validity of debts reported by agencies as eligible for and  excluded from the DCIA cross-servicing provisions, and over the years, we  have identified and reported on problems regarding the accuracy and completeness of exclusions from cross-servicing as reported by certain  federal agencies.Nonetheless, for the billions of dollars of nontax  delinquent debts that agencies do refer for cross-servicing, it is critical that  FMS manage its collection activities to fully utilize available debt collection  tools and maximize collection opportunities.
In January 2003, we reported that FMS had made significant progress in  implementing key provisions of DCIA, which directs and authorizes use of  a wide range of collection tools.For example, we reported that FMS’s  successful merger of the Tax Refund Offset Program with the Treasury  Offset Program (TOP), both of which are designed to offset federal  payments up to the amount of the delinquent federal debt, and system  enhancements have streamlined operations and contributed over $1 billion  in nontax debt collections from tax refund offsets during each of fiscal  years 2000, 2001, and 2002.  In addition, FMS’s incorporation of Social  Security benefit payments into TOP in May 2001 resulted in about  $114 million in reported nontax debt collections from Social Security  benefit offsets through early July 2003.
While we have previously reviewed various facets of FMS’s cross-servicing  efforts, we did not review FMS’s handling of nontax debts that remained  uncollected after being returned to FMS from its private collection agency  (PCA) contractors because FMS did not consider the cross-servicing  program to be fully mature at that time. FMS officials now consider the  cross-servicing program to be fully mature.  Therefore, as follow-up to our  prior work, this review focused primarily on nontax delinquent debts that  remained uncollected after they had been at both FMS and its PCA  contractors for cross-servicing.  Specifically, our objectives were to  evaluate (1) actions taken by FMS on uncollected nontax debts returned  from its PCA contractors; (2) FMS’s efforts to ensure that eligible  uncollectible nontax debts, which federal agencies rely on FMS to report  on their behalf to the Internal Revenue Service (IRS) as income to the  debtors, are promptly identified and accurately reported; and (3) actions  taken, if any, by FMS and the Office of Management and Budget (OMB) to  ensure that federal agencies are reporting their eligible uncollectible  nontax debts to IRS as income to the debtors.  In addition to addressing  these objectives, this report discusses opportunities for FMS to (1) improve  collection of nontax debts through cross-servicing and (2) enhance the  soundness of certain operational and reporting facets of its cross-servicing  program.
subsections: section_title: Background
paragraphs: DCIA was enacted by the Congress, in part, to collect nontax debts  delinquent more than 180 days by referring such debts to Treasury or a  Treasury-approved debt collection center for cross-servicing. FMS is the  only Treasury-approved governmentwide debt collection center.
After receiving a debt from a referring federal agency, FMS generally keeps  the debt for 30 days at its Debt Management Operations Center.  During this  time, FMS is to send a letter demanding payment to the debtor.  An in-house  FMS collector may attempt to contact the debtor to obtain payment in full  or secure payment through other options, including compromise. If the  debt has not been collected 20 days after the date of the demand letter,  FMS is to report the debt to TOP if the referring agency has not already  done so.
If the referred debt remains uncollected after it has been at FMS for 30  days, FMS typically sends the debt to one of its five PCA contractors.The  PCA contractor that receives the debt initially—the primary PCA  contractor—is generally given 270 days from the date it receives the debt  from FMS to collect or resolve the debt. If the primary PCA contractor is  unable to collect or resolve the debt, it sends the debt back to FMS.  FMS  then typically sends the debt to another PCA contractor, the secondary  PCA contractor for the debt.  The secondary PCA contractor is also given  270 days from the date it receives the debt from FMS to collect or resolve  the debt.  FMS requires its PCA contractors to attempt to locate debtors,  send demand letters, and attempt to obtain full payment before  compromising any debt.  FMS may refer debts to DOJ for litigation and  enforced collection at any time.
Debts that are returned uncollected to FMS from its secondary PCA  contractors are to be either retained by FMS for additional collection  action or returned to the referring agencies.According to the Federal  Claims Collection Standards,federal agencies must terminate all  collection action before closing out a delinquent nontax debt and must  report certain closed-out debts to IRS.
Federal agencies are required to report annually in their TRORs on the  status of their nontax debts. TRORs are FMS’s only comprehensive  means of collecting information on the federal government’s nontax debt  portfolio, including debts written off, closed out, and reported to IRS.  TRORs are also used to collect information on nontax debts delinquent  more than 180 days to help FMS monitor federal agencies’ implementation  of DCIA.  FMS summarizes the information in the federal agencies’ TRORs  annually in Report to the Congress on U.S. Government Receivables and  Debt Collection Activities of Federal Agencies.
OMB assists the President by developing governmentwide policies for the  effective and efficient operation of the executive branch. As such, OMB  establishes credit management policy for the federal government, including  setting standards for extending credit, managing lenders participating in  guaranteed loan programs, servicing nontax receivables, and collecting  delinquent nontax debts. In addition, OMB is responsible for reviewing  federal agencies’ policies and procedures related to credit programs and  debt collection activities.
section_title: Scope and Methodology
paragraphs: To address our objectives, we interviewed FMS officials and reviewed  pertinent FMS documents and reports to obtain an understanding of FMS’s  policies and procedures for nontax debts that are returned uncollected to  FMS by its PCA contractors and for closing out uncollectible nontax debts  and reporting such debts to IRS as income to the debtor.  We also reviewed  applicable federal regulations and guidance for federal nontax debt  collection, close-out, and IRS reporting, including the Federal Claims  Collection Standards, OMB Circular A-129, and IRS instructions for  reporting closed-out debts.  In addition, we obtained and analyzed FMS’s  cross-servicing database for the period from inception of the cross- servicing program in fiscal year 1996 through February 28, 2003, to  determine what collection actions in-house FMS collectors performed on  debts that had been returned uncollected from its PCA contractors and  whether the in-house FMS collectors properly identified all uncollected  debts that could be reported to IRS, including amounts that had been  forgiven through compromise.
A scope limitation prevented us from using statistical sampling techniques  to determine whether compromises made by in-house FMS collectors were  justified, supported, and reported to IRS.  FMS’s cross-servicing database  did not identify all forgiven amounts resulting from compromise  agreements made by in-house FMS collectors; the database identified  forgiven amounts only for in-house FMS agreements if the compromised  amount had been paid in full and the debt settled. The database did not  include the forgiven amounts for in-house compromise agreements that  were active but had not yet been settled.  We did use statistical sampling  techniques to select from FMS’s PCA cross-servicing database 54 debts that  had been compromised by FMS’s PCA contractors from October 1, 2002,  through February 28, 2003.Using electronic and hard-copy information  provided by FMS for the selected compromised debts, we determined  whether the compromises were justified, supported, and reported to IRS.  We projected the results from our sample of compromises to the  population from which the sampled items were drawn.  (App. I contains  additional information on the sampling method.)
In addition, we interviewed FMS and OMB officials about the extent to  which their respective agencies monitor and report on federal agencies  governmentwide regarding identification and reporting of closed-out debts  to IRS.  We also obtained and analyzed TRORs for all 24 CFO Act agencies  to determine the nontax debt close-out and IRS reporting information for  calendar year 2002.
To determine whether information in FMS’s cross-servicing database was  reliable, we reviewed documentation provided by FMS supporting  reliability testing performed by FMS and its contractors on the database.  In  addition, we performed electronic testing of specific data elements in the  database that we used to perform our work.  Based on our review of FMS’s  documents and our own testing, we concluded that the data elements used  for this report are sufficiently reliable for the purpose of the report.
We performed our work from October 2002 through August 2003 in  accordance with U.S. generally accepted government auditing standards.
We requested comments on a draft of this report from the Secretary of the  Treasury and the Director of OMB or their designees.  The Commissioner of  FMS provided Treasury’s comments, which are reprinted in appendix II.  On October 21, 2003, staff from OMB provided us with OMB’s oral  comments on the draft.  Treasury’s and OMB’s comments are discussed in  the Agency Comments and Our Evaluation section of this report and are  incorporated in the report as applicable.
section_title: Collection Opportunities Were Lost on Uncollected Debts Returned from PCA Contractors
paragraphs: As of February 28, 2003, FMS had approximately $6.6 billion of debts in  cross-servicing.  More than half of these debts had been returned  uncollected by FMS’s secondary PCA contractors and were being kept in  TOP for passive collection.  Passive collection entailed no further  collection action other than minimal efforts through offsets, and certain  debts in passive collection were not eligible for such offsets.  In addition,  FMS did not review certain uncollected debts that FMS returned to the  referring agencies to determine whether all collection activity had been  performed on the debts, including whether FMS should close out and  report the debts to IRS on behalf of the agencies.  Further, certain debts  that were not in passive collection or returned to referring agencies were  kept in inactive status where no collection activities, including referral to  TOP, were performed. Consequently, opportunities for maximizing  collections or other recoveries were lost.
subsections: section_title: FMS Did Not Review Uncollected Debts Left in TOP for Passive Collection
paragraphs: When debts were returned from secondary PCA contractors, FMS simply  kept most of them in TOP, where they largely lay dormant without any  review to determine the next best course of action to improve collections.  For fiscal years 2000, 2001, and 2002, FMS kept about $2.6 billion of  uncollected nontax debts returned from its secondary PCA contractors in  TOP for passive collection.  As of February 28, 2003, debts retained in TOP  for passive collection totaled about $3.7 billion and, as shown in figure 1,  represented 56 percent of the approximately $6.6 billion of debts that were  at FMS for cross-servicing at that time. Through February 28, 2003, FMS  had collected only about $9 million on debts in passive collection through  offsets, which was the only collection tool being used to collect these  returned debts.
FMS did not have written procedures for reviewing debts kept in TOP for  passive collection.  It is important to note that FMS officials stated that  because of system limitations, FMS did not identify specific debts that were  in TOP for passive collection.  However, we were able to identify debts in  TOP for passive collection using off-the-shelf database analysis software.
Certain nontax debts kept in TOP for passive collection warrant additional  review to determine the next best course of action to maximize collections  or other recoveries, such as those possible through administrative wage  garnishment (AWG) or reporting closed-out debts to IRS.  For example,  DCIA authorized federal agencies to use AWG to collect delinquent nontax  debts. FMS can perform AWG on behalf of other federal agencies as part  of cross-servicing, although only on behalf of agencies that have authorized  FMS to do so.  FMS began using AWG with the assistance of its PCA  contractors during fiscal year 2002.  Because most of the debts in TOP for  passive collection were returned to FMS from PCA contractors before any  agencies had authorized FMS to use AWG on their behalf, most debts in  TOP for passive collection have not yet been assessed for AWG collection  opportunities.  Further, as of our fieldwork completion date, only four  federal agencies had authorized FMS to perform AWG on their behalf.However, FMS expects additional agencies to provide such authorization in  the future.
In addition, about $449 million of nontax debts in TOP for passive  collection as of February 28, 2003, will not be collected through offset  because the statutory and regulatory 10-year limitations for offsets has  expired for those debts. According to FMS officials, FMS’s cross- servicing system did not remove debts from TOP when the debts reached  the 10-year limitation, so such debts were not evaluated for possible close- out and reporting to IRS.
Certain other debts in TOP for passive collection are also unlikely to yield  any collections through offsets—those for which we determined the  debtors’ Taxpayer Identification Numbers (TIN) were invalid or belonged  to deceased individuals or cases in which the debtors were bankrupt.  Specifically, we identified about $24 million of delinquent nontax debts for  which the debtors’ TINs were invalid. In addition, using the Social  Security Administration’s (SSA) Death Master File, we identified over 2,500  nontax debts totaling about $18 million with TINs that belonged to  reportedly deceased debtors, including one with a referred balance of  approximately $4 million. This debt had been in TOP since November  2001 with no collections through offsets.  We also identified 69 delinquent  Medicare debts belonging to the Department of Health and Human Services  (HHS) totaling about $12 million that were being held in TOP after return  from secondary PCA contractors for which FMS’s cross-servicing database  indicated that the debtors were in bankruptcy. According to FMS  officials, when a bankruptcy is recorded in the cross-servicing database for  a particular debt, the cross-servicing system marks the debtor as bankrupt  for all debts associated with that debtor but does not remove them from  TOP.  In-house FMS collectors typically removed from TOP only the  specific debt that they were working even though others had been flagged  as belonging to the same bankrupt debtor.
As a result of our analyses and inquiries, FMS has initiated a review of  debts in TOP to identify those beyond the statutory and regulatory 10-year  limitations for offsets.  As of April 2003, FMS had identified over 7,300 such  debts, totaling about $463 million (an increase of $14 million over the  $449 million of debts we identified as of February 28, 2003).  An FMS  official stated that these debts would be removed from TOP and evaluated  for possible close-out and reporting to IRS as income to the debtors.  The  official also stated that FMS would develop a process for routinely  identifying such debts.  In addition, FMS officials stated that FMS will  revise its policies and procedures so that collectors will be instructed to  review the debtor and all associated nontax debts whenever a bankruptcy  is discovered for a debt and determine debts that should be removed from  TOP.  Finally, FMS officials stated that FMS is in the process of developing  a new automated cross-servicing system, called FedDebt. According to  FMS officials, once FedDebt is implemented in January 2005, FMS will be  able to routinely identify individual debts that are in passive collection.
section_title: FMS Did Not Perform Collection and Close-Out Reviews for All Debts Returned to Referring Agencies and Debts in Inactive Status
paragraphs: Through February 28, 2003, FMS returned to referring agencies about  $1.1 billion of delinquent nontax debts that had been returned uncollected  to FMS by secondary PCA contractors during fiscal years 2000, 2001, and  2002.  FMS’s cross-servicing procedures require that in-house FMS  collectors, prior to returning debts to referring agencies, review the  collection activity on the debts to determine whether they are eligible to be  returned to the referring federal agencies.  As part of this review, the cross- servicing procedures require collectors to determine whether the debts  should be closed out and reported to IRS by FMS.  We found, however, that  FMS had summarily returned about 40 percent of the $1.1 billion to  referring agencies without first ensuring that the required collection  activities had been performed.
According to information in FMS’s cross-servicing database, in April 2002  FMS had a substantial backlog of debts that had been returned to FMS by  secondary PCA contractors over the past several years that were primarily  in inactive status, meaning that no collection action was taking place.  To  eliminate this backlog, FMS used its automated system to summarily return  about 41,000 debts totaling approximately $446 million to the referring  agencies in April 2002.  According to agency procedures and as confirmed  by an FMS official, prior to the April 2002 return of the debts to the  referring agencies, FMS should have first evaluated these debts to  determine whether close-out was appropriate and whether the debts  should be reported to IRS.  Our analysis showed that about $97 million of  these returned debts met two criteria for being reported by FMS to IRS as  income to the debtor: (1) the debts had TINs and (2) the referring agencies  had granted FMS authority to report the debts to IRS.
Our review of the cross-servicing database showed that FMS continues to  face challenges in reviewing uncollected debts returned from secondary  PCA contractors.  Specifically, as of February 28, 2003, FMS had  approximately $80 million of debts in inactive status even though its PCA  contractors returned these uncollected debts to FMS during fiscal year  2002.  According to an FMS official, the backlog occurred because the  automated cross-servicing system did not always identify debts returned to  FMS by secondary PCA contractors that required further collection review  by in-house FMS collectors.  The FMS official stated that FedDebt, when  implemented in January 2005, would correct this problem.
section_title: Inadequate Monitoring and Reporting of Closed-Out Debts to IRS
paragraphs: DCIA gives OMB responsibility for annual reporting to the Congress on any  problems regarding federal agency progress in improving policies and  standards for closing out debts, and FMS is responsible for the form and  content of the TROR, which FMS uses to monitor federal agencies’  implementation of DCIA.  Neither OMB nor FMS monitored or reported on  the extent to which agencies governmentwide closed out debts and  reported them to IRS.  The TRORs for 24 CFO Act agencies showed that the  agencies reported that about $1 billion of the approximately $3.2 billion of  nontax debts that were reported closed out by those agencies were  reported to IRS as income to the debtors for calendar year 2002.Additionally, the TRORs that the agencies used to report did not disclose  why closed-out debts were not reported to IRS and did not include closed- out debts that had been previously classified as currently not collectible  (CNC).  These are significant reporting deficiencies because without such  information, the TRORs cannot be used to determine the extent to which  all eligible debts are closed out and reported to IRS. As a result of  inadequate monitoring and reporting of closed-out debts to IRS,  opportunities for recovery by reporting closed-out debts to IRS as income  to debtors may have been lost.
Neither OMB nor FMS officials could specifically explain why certain  agencies had reported different amounts for debts closed out and debts  reported to IRS.  According to an OMB official, OMB does not have a formal  process in place to review federal agencies’ standards and policies  regarding debt collection, including reporting closed-out debts to IRS, and  does not monitor the extent to which agencies close out debts and report  them to IRS.  The OMB official stated that OMB examiners, at their own  discretion, might look at how federal agencies are closing out debts as part  of the examiners’ overall evaluation of the agencies’ implementation of the  President’s Management Agenda.According to the official, OMB has not  submitted any reports to the Congress regarding problems with agencies’  standards and policies for closing out debts and reporting them to IRS.
FMS officials stated that the large difference on the agencies’ TRORs  between closed-out debts and debts reported to IRS may be attributable to  situations involving debts that are not required to be reported to IRS.However, FMS does not require federal agencies to disclose such  information in their TRORs.  Without such disclosures in the TRORs, it is  not possible for FMS, OMB, or any other interested party to determine  whether federal agencies are reporting their closed-out debts to IRS  accurately and completely.
Moreover, the agency TRORs understated the amount of debt closed out  during calendar year 2002.  Specifically, we determined and FMS officials  acknowledged that the $3.2 billion of debts that were reported closed out  by the 24 CFO Act agencies did not include debts previously classified as  CNC that were subsequently closed out.  This is a significant deficiency in  the TROR because CNC debts that are eventually closed out can be  substantial.  For example, the 24 CFO Act agencies reported about  $10.1 billion of CNC debts at the end of calendar year 2002.  Without  information on whether CNC debts are closed out, the TRORs cannot be  used to fully determine the extent to which all debts are closed out and  reported to IRS.  In spite of these reporting deficiencies, FMS officials  stated that FMS does not have any plans to revise the TROR.
section_title: FMS Missed Certain Opportunities to Improve Overall Collections
paragraphs: In addition to taking little action to improve collections for debts that were  returned uncollected by PCA contractors, FMS missed certain  opportunities to improve overall cross-servicing collections.  FMS did not  establish effective processes or procedures for identifying debts to forward  to DOJ.  As a result, FMS had relatively few debts (about $30 million as of  February 28, 2003) at DOJ for enforced collection action even though DOJ  has been successful in collecting debts through civil litigation in the past.  In addition, FMS did not report all eligible debts that had been referred for  cross-servicing to TOP, as required by its cross-servicing procedures, and  did not report secondary debtors, such as cosigners, to TOP.
subsections: section_title: FMS Missed Enforced Collection Opportunities
paragraphs: DOJ serves as the federal government’s “collector of last resort.”  When a  federal agency, including FMS, cannot collect certain debts  administratively, DOJ can litigate the claims and, with judicial oversight,  enforce collections by seizing bank, stock, and similar accounts from  debtors; seizing and selling debtor-owned real estate and other property;  and garnishing a higher percentage of debtors’ wages than AWG under  DCIA allows. The benefits of enforced collection are reflected in past  DOJ recoveries.  In its fiscal year 2002 report to the Congress, FMS noted  that DOJ collected about $10.9 billion in cash recoveries through civil  litigation from fiscal year 1998 through fiscal year 2002.
The Federal Claims Collection Standards require federal agencies to  promptly refer debts that have a principal balance of at least $2,500 to DOJ  when the debts cannot be collected through either compromise or  aggressive collection action and do not meet criteria for suspending or  terminating collection action. Accordingly, OMB Circular A-129 requires  federal agencies, including FMS as the federal government’s central debt  collection agency, to refer delinquent debts to DOJ as soon as there is  sufficient reason to conclude that full or partial recovery of the debts can  best be achieved through litigation.
FMS acknowledges that DOJ referrals are an important part of cross- servicing.  In its annual report to the Congress on federal agencies’ debt  collection activities, FMS reported that referrals to DOJ for civil litigation  governmentwide decreased significantly over the last 3 fiscal years, from  50,572 debts in fiscal year 2000 to 8,443 debts in fiscal year 2002.  As federal  agencies continue to implement DCIA and make progress in promptly  referring eligible debts that are over 180 days delinquent to FMS for  collection action in accordance with the act’s requirements, reported  decreases in federal agency referrals to DOJ for enforced collection can be  expected as would increases in FMS referrals due to the shift in collection  responsibilities from the agencies to FMS.  Generally, a determination that  a debt should be referred to DOJ cannot reasonably be made until  appropriate cross-servicing collection action has taken place.  In working  with federal agencies to facilitate implementation of DCIA, FMS  emphasizes that referral of a debt to DOJ for enforced collection is a key  cross-servicing tool.  FMS makes clear to agencies that it will (1) prepare  the forms necessary for referring debts to DOJ,(2) work with DOJ to  obtain necessary information from the agencies to litigate the claims,  (3) monitor the debts while they are at DOJ, and (4) apply DOJ collections  to the debts.
FMS, based on consultations with DOJ, established the following  conditions for its referral of agency debts to DOJ: (1) the federal creditor  agency has authorized FMS to refer its debts to DOJ, (2) the principal  amount of the debt is $25,000 or more, (3) there is at least 1 year before the  statute of limitations expires, (4) FMS has a debtor address (or other  debtor contact information for service-of-process purposes), and (5) FMS  has evidence that the debtor has assets or a source of income.  As  appropriate, FMS also expects to refer debts to DOJ when some, but not  all, of the criteria are met.  For example, FMS might refer debts less than  $25,000 when bank accounts have been identified.
In spite of FMS’s key role in determining whether debts referred for cross- servicing should be referred to DOJ for enforced collection, only a nominal  amount of cross-serviced debt was at DOJ.  Specifically, as of February 28,  2003, only about $30 million of the approximately $6.6 billion of debts with  FMS for cross-servicing were at DOJ.  Moreover, as shown in figure 2, all  but about $4 million of the debts FMS had referred to DOJ were referred  prior to fiscal year 2000, suggesting that FMS had not emphasized  adjudication as a collection tool.
According to an FMS official, prior to fiscal year 2002, FMS had no specific  process to evaluate cross-serviced debts to determine whether recovery  could best be achieved by DOJ.  Rather, the FMS official stated, FMS relied  on the referring agencies to identify delinquent debts to refer to DOJ.  In  addition, FMS’s in-house collectors, using their own discretion during the  normal course of their collection activities, could identify specific debts for  referral to DOJ.
In fiscal year 2002, FMS, in an effort to increase referrals to DOJ, began  performing quarterly queries of its cross-servicing database to identify  uncollected debts for referral to DOJ.  The queries, while conceptually  good, did not cover most of FMS’s cross-servicing portfolio.  Rather, they  were limited to debts with principal balances $25,000 or over that were  classified as inactive or “special handling.”  As of February 28, 2003, FMS  had identified nine debts totaling about $4 million for DOJ referral using  this smaller segment of its cross-servicing database.
Reviewing only debts classified as inactive or “special handling” with  principal balances over $25,000 is unlikely to result in many candidates for  FMS referral to DOJ because of the nature of these debts and the amounts  covered.  Specifically, for many of the debts in inactive status, FMS does  not have TINs, which are required for DOJ referral, or the debtors are in  bankruptcy.Debts classified as “special handling” are debts that  collectors have identified as needing special processing because they want  to keep the cases at the debt collection center. For example, a collector  may place a debt in “special handling” if the collector is in negotiations with  the debtor over a payment plan.  We applied FMS’s database query method  to debts classified as inactive and “special handling.”  Our query identified  about $198 million of uncollected debts, which represented about 3 percent  of the amount in cross-servicing.  We determined that the majority of these  debts were not good candidates for DOJ referral.  Specifically, about  $106 million of such debts either (1) lacked agency authorization for  referral to DOJ, (2) were involved in bankruptcy proceedings, (3) were  beyond the general 6-year statute of limitations for litigation of  nonjudgment debts, or (4) lacked TINs.
We would consider it reasonable for FMS to query a larger segment of its  cross-servicing database.  In particular, debts held in TOP for passive  collection would seem to be better candidates for DOJ referral because  they should have valid TINs and are not supposed to be in bankruptcy.  This  segment of the cross-servicing debt portfolio is rather large.  We  determined that FMS had approximately $2.2 billion of debts in TOP with  principal balances of at least $2,500 that had been returned from its  secondary PCA contractors and that were within the 6-year statute of  limitations for litigating nonjudgment debt. Unless FMS starts expanding  the scope of its reviews for potential referrals to DOJ, the statute of  limitations for these debts will likely expire without any opportunity for  enforced collection action.  Our assessment of FMS’s database as of  February 28, 2003, showed that about $449 million of debts with principal  balances of at least $2,500 likely had their statute of limitations expire  while they were held in TOP for passive collection.  We determined that all  of these debts would have been possible candidates for referral to DOJ,  since they had been returned from FMS’s secondary PCA contractors with  at least 1 year remaining before the statute of limitations expired.
FMS also did not routinely consider or act on advice from its PCA  contractors regarding referrals to DOJ.  Because PCA contractors’  responsibilities include locating debtors and determining whether they  have incomes or assets to repay delinquent debts, the PCA contractors  would have a reasonable basis for identifying uncooperative debtors who  could repay their debts but had refused.  FMS’s PCA Operations and  Procedures Manual requires FMS’s PCA contractors to provide  recommendations to FMS on the next collection actions that should be  taken on individual debts, such as referral to DOJ for litigation.According to the manual, litigation should be recommended when the PCA  contractor believes that the debtor has sufficient assets for debt repayment  and that no less costly method of collection would be effective.  Our  analysis showed that FMS was holding debts totaling about $47 million in  TOP for passive collection that had principal balances over $2,500 for  which PCA contractors had recommended litigation. We noted that FMS’s  cross-servicing database showed that these debts were within the general  6-year statute of limitations for litigating nonjudgment debts and had no  apparent barriers to litigation, such as debtor bankruptcy or a deceased  debtor.
FMS officials stated that FMS does not routinely review recommendations  made by its PCA contractors because FMS does not believe such  recommendations are reliable.  In this regard, we noted that FMS’s PCA  Operations and Procedures Manual does not set forth the specific FMS  criteria for selecting debts for DOJ referral.  In addition, FMS does not tell  PCA contractors which creditor agencies have authorized FMS to refer  debts to DOJ on the agency’s behalf.  It is important to note that only about  $3 million, or less than one-tenth of 1 percent, of the approximately $3.9  billion of uncollected debts that were returned to FMS from its secondary  PCA contractors during fiscal years 2000, 2001, and 2002 were at DOJ.
Moreover, while FMS had referred only limited amounts of cross-serviced  debt to DOJ for litigation, FMS lacked a history of its prior referral activity  and knowledge of the results of such referrals.  FMS officials stated that  FMS does not use the cross-servicing database to track DOJ referrals;  however, we found that the database has status and collection activity  codes capable of being used for such tracking.  FMS officials  acknowledged the need to track all DOJ referrals and stated that FMS will  ensure that FedDebt will be able to track all debts that FMS has referred to  DOJ.
FMS Did Not Fully Use TOP 	 FMS’s policies and procedures require in-house FMS collectors to report all  eligible debts to TOP early in the cross-servicing process, before sending  them to FMS’s PCA contractors.  In fiscal year 2000, we reported that FMS  did not promptly report eligible debts to TOP as its procedures required.  Computer interface problems and errors by in-house FMS collectors were  cited as reasons for not promptly reporting all eligible debts to TOP.Problems regarding TOP referrals continue as FMS’s cross-servicing  database as of February 28, 2003, showed that about 1,800 debts that were  eligible for TOP, with referred balances totaling about $356 million, were at  PCA contractors but had never been put into TOP by FMS’s collectors.  We  did not identify any apparent factors that would have precluded FMS’s  collectors from reporting these debts to TOP.  The database showed that  the debts were eligible for TOP in that the referring agencies had  authorized FMS to report the debts to TOP, the debtors had TINs, the  debtors were not in bankruptcy or deceased, and the debts were not over  10 years delinquent.
The delays in reporting these debts to TOP were extensive.  As of February  28, 2003, about $215 million of these debts with an average of  approximately 320 days in cross-servicing were at the secondary PCA  contractor without having been sent to TOP.  One of the more egregious  delays involved a debt referred by an agency in October 2001 for about  $43 million that had been in cross-servicing for over 500 days without ever  having been reported to TOP.
FMS officials stated that they are aware that eligible debts are not always  being reported to TOP.  They told us that debts might not be reported to  TOP because the cross-servicing automated system does not always  identify debts that should be reported.  For example, FMS officials stated  that if the system failed during its nightly batch processing, the debts that  would otherwise have been flagged for reporting to TOP would be missed.  FMS officials stated that the cross-servicing system could not go back and  routinely identify debts that were missed.  Thus, as acknowledged by FMS  officials, FMS would have to perform a periodic sweep of the entire  database to identify eligible debts that were missed for reporting to TOP.  In  response to our inquiries, FMS officials stated that FMS will take action to  ensure that FedDebt includes features to correct this problem when it is  implemented in January 2005.
FMS is also not seizing the opportunity to report secondary debtors to TOP.  Our analysis of FMS’s cross-servicing database as of February 28, 2003,  showed that about $144 million of the approximately $5 billion of cross- serviced debts in TOP had secondary debtors with TINs.  According to FMS  officials, both the TOP and cross-servicing automated systems are debt- based, rather than based on both debt and debtor.  As such, TOP cannot be  used to identify all debtors associated with a debt, a problem we noted to  FMS about 5 years ago.  Even if TOP would accept these data, the cross- servicing system cannot provide them, since it is now capable of sending  only one debtor per debt to TOP.  FMS officials stated that FMS is in the  process of enhancing TOP to accept multiple debtors for a single debt and  that the TOP enhancement should be implemented in fiscal year 2004.  The  officials also stated that FMS will ensure that FedDebt will be capable of  referring multiple debtors to TOP when it is implemented in January 2005.
section_title: Problems Identified with Debt Compromises and a Key Performance Measure
paragraphs: FMS did not sufficiently ensure that nontax debts that were forgiven  through compromises with debtors by its in-house collectors or its PCA  contractors were done so in an operationally sound manner.  FMS’s cross- servicing database as of February 28, 2003, showed that FMS and its PCA  contractors forgave a total of at least $51 million of delinquent nontax  debts through compromises with debtors during fiscal years 2000, 2001,  and 2002.  For FMS in-house compromises, this included only those  compromise agreements that had been settled and paid in full. The cross- servicing database did not identify forgiven amounts for agreements that  were still active or defaulted.  In addition, it is unclear whether certain  forgiven amounts should have been forgiven or by how much, since FMS’s  PCA contractors often did not document why they compromised debts and  often did not obtain sufficient support and justification for the  compromises.  Further, FMS overstated federal agencies’ progress in  referring eligible nontax debts for cross-servicing.  Specifically, FMS  incorrectly reported that agencies had referred 96 percent of their eligible  debts for cross-servicing for fiscal year 2002, rather than the actual rate of  79 percent based on our analysis of information provided by FMS. This  discrepancy occurred because FMS did not include any debts that were  reported as having become eligible for referral for cross-servicing during  fiscal year 2002 and did not deduct the amounts of certain debts that it  returned to referring agencies during fiscal year 2002.
subsections: section_title: Information Regarding Debt Compromises Was Not Sufficient
paragraphs: The soundness of FMS’s cross-servicing program can be undermined if  certain debtors receive more generous treatment as a result of compromise  agreements than other similarly situated debtors.  While the amount of debt  forgiven as noted above was not substantial, the consistency with which  delinquent debts are forgiven and the extent to which federal requirements  are adhered to in arriving at such decisions are vital.  Therefore, it is  critically important for FMS to (1) accurately track debt amounts forgiven,  (2) obtain documented support for the compromise agreements, and  (3) obtain TINs for the debtors.  In August 2000, as part of our overall  report on FMS’s cross-servicing program, we reported that the majority of  FMS compromise agreements we reviewed, including those made by PCA  contractors, did not include support for the forgiven amounts. In  following up on FMS’s compromise activity, we found that FMS’s cross- servicing system did not track the forgiven amounts for all debts that had  been compromised during fiscal years 2000, 2001, and 2002.  In addition,  FMS’s PCA contractors often did not document why they compromised  debts and often did not obtain sufficient support for the compromise  agreements, including debtors’ TINs, which are needed to report the  forgiven amounts to IRS.
The Federal Claims Collection Standards state that federal agencies may  compromise debts if (1) the debtor is unable to pay the full amount in a  reasonable time, as verified through credit reports or other financial  information; (2) collection in full cannot be achieved within a reasonable  time by enforced collection proceedings; (3) the cost of collection does not  justify the enforced collection of the full amount; or (4) there is significant  doubt concerning the government’s ability to prove its case in court.  According to the standards, in determining the debtor’s inability to pay,  agencies should consider a number of factors as verified by the debtor’s  credit report and other financial information, including financial  statements that show the debtor’s assets, liabilities, income, and expenses.
In addition, FMS’s PCA contract requires its PCA contractors to document  their attempts to collect the full amount of delinquent debts and provide  justification for compromises.  In the absence of adequate documentation  supporting the PCA contractor’s determination to compromise a debt for a  specific amount, FMS cannot determine whether the compromise is  reasonable under the Federal Claims Collection Standards.  Thus, FMS has  no basis to determine whether the government suffered a loss that should  not have been incurred as a result of such a compromise.  We also  determined that the PCA contract does not establish liquidated damages or  penalties for a PCA contractor’s failure to document a compromise.
As part of our review, we attempted to obtain the forgiven amount for each  compromise agreement established by in-house FMS collectors during  fiscal years 2000, 2001, and 2002, to determine whether the bases for the  forgiven amounts had been supported and documented by FMS’s in-house  collectors.  However, FMS could not provide us the forgiven amount for  each compromise agreement because the cross-servicing system only  identifies the forgiven amount for compromise agreements that have been  settled in full.  Thus, FMS could not provide us the forgiven amounts for  compromise agreements that were active or in default.
Absent information on forgiven amounts for all compromise agreements,  FMS cannot track the extent to which its collectors are compromising  agency-referred debts and the bases for the compromises.  According to an  FMS official, FMS acknowledges that such information is critical to sound  cross-servicing operations and, as a result of our inquiries, plans to  incorporate the ability to identify and track all forgiven amounts in the  FedDebt system.
According to FMS officials, in fiscal year 2002, FMS began to review  repayment and compromise agreements made by its PCA contractors as  part of its annual PCA contractor compliance reviews.  During these  reviews, FMS generally found that all PCA contractors failed to  consistently document in their respective debt collection systems the  justification for accepting installment payments and compromise  agreements. As a result of FMS’s findings, each PCA contractor agreed to  conduct training sessions for its collectors or take other corrective actions  to help ensure that the collectors properly obtain and document support  for forgiven amounts.
In spite of FMS’s reviews of the compromise activity of its PCA contractors  and related findings pertaining to the lack of documented support for the  compromises, we found that PCA contractors were still not providing  sufficient support for compromises during the first 5 months of fiscal year  2003.  Specifically, we found that 22 percent of the sampled compromised  debts had no evidence that the PCA contractor had attempted to obtain a  lump sum payment in full or a repayment agreement for the full amount  prior to compromising the debt. For example, one debt involved a debtor  who offered to pay the full debt balance of approximately $14,000 in  installments.  However, without explanation, the PCA contractor offered to  compromise the debt by 20 percent if the debtor would pay right away.  The  debtor accepted the compromise offer.  Moreover, this PCA contractor  encouraged compromise activity prior to exhausting attempts to collect  debts in full by sending out pro forma letters to debtors stating that the  contractor may be authorized to compromise a portion of their debt should  the debtor be in a position to pay the remaining balance.
In addition, 72 percent of the compromised debts in our sample did not  have supporting documentation indicating why the PCA contractors  compromised the debts or the bases used to determine how these debts  met Federal Claims Collection Standards criteria for compromise. For 81  percent of the compromised debts in our sample, PCA contractors did not  have complete financial statements, and for 30 percent of the compromised  debts, PCA contractors did not have credit bureau reports to support the  compromises.
It should be noted that a PCA contractor is required to submit to FMS the  debtor’s financial statement and credit bureau report for review only if the  compromise percentage of the debt exceeds the compromise percentage  that is authorized by FMS or the referring agency.  We found that for 36 of  the 54 compromised debts in our sample, the PCA contractors  compromised up to the amount that was allowed by FMS or the referring  agencies.  For example, one PCA contractor allowed a debtor to pay  approximately $46,000 to settle a debt that had an outstanding balance of  about $58,000.  The forgiven amount fell within the compromise parameter  that had been established by the referring agency.  However, the PCA  contractor did not (1) attempt to collect payment in full, (2) provide any  explanation to justify the compromise, or (3) obtain the debtor’s complete  financial statement and credit report.  Because the PCA contractor did not  exceed the compromise parameter established by the referring agency, it  was able to compromise the debt without submitting the debtor’s financial  statements and credit report to FMS for review.
FMS officials stated that PCA contractors are required to document their  attempts to obtain payment in full and justification for offering or accepting  a compromise even when the compromise is within agency parameters.  According to FMS officials, FMS discussed this issue with its PCA  contractors in October 2002 and reiterated the importance of documenting  the justification for compromising debts and obtaining financial statements  and credit bureau reports to support the compromises.  FMS officials  stated that FMS would continue to look at compromise agreements in  future PCA compliance reviews to help ensure that PCA contractors are  providing justification and obtaining the financial statements and credit  bureau reports necessary for entering into a compromise agreement.
Moreover, FMS’s PCA contractors did not always attempt to obtain or  report to FMS the TINs of debtors who were granted compromises.  Specifically, we found that 17 percent of the compromised debts in our  sample did not have TINs because the PCA contractors either did not  request the TINs from the debtors or did not report the TINs to FMS.Without TINs for debtors, neither FMS nor the referring agencies were able  to report the forgiven amounts of the compromised debts to IRS as income  to the debtors.  In addition, without a TIN, if the debtor defaults on the  compromise agreement, the debt cannot be reported to TOP.  According to  FMS officials, FMS is continuing to monitor the compromise agreements  made by its PCA contractors to help ensure that the contractors obtain and  report TINs to FMS.  In addition, as a result of our inquiries, FMS plans to  issue a technical bulletin to its PCA contractors to remind them of the need  to obtain and report TINs.
section_title: FMS Overstated Progress in a Key Performance Measure
paragraphs: DCIA requires Treasury to report to the Congress each year on the debt  collection activities of federal agencies, including FMS as the government’s  central debt collection agency.  A key performance measure that FMS  reports each year is the percentage of debt eligible for cross-servicing that  has been referred by federal agencies.  In fiscal year 2000, we reported that  FMS did not properly calculate this key performance measure because the  reported amount of debt referred for cross-servicing was not comparable  to the reported amount of eligible debt.  Specifically, FMS overstated the  debt referral amount by accumulating the referred amount for about 3 and  a half years. We recommended that FMS revise its reporting of debt  amounts referred for cross-servicing to reflect the extent to which eligible  debts reported by agencies as of a specific date have been referred to  FMS.
In its fiscal year 2002 report to the Congress, FMS reported that $7.9 billion,  or 96 percent, of the $8.2 billion of eligible debt had been referred for cross- servicing as of fiscal year-end and cited the high referral rate as a notable  accomplishment.  However, FMS’s reports continue to overstate the  progress made in this highly touted cross-servicing performance measure.  Specifically, FMS understated debts that were eligible for cross-servicing  and overstated debts that had been referred for cross-servicing, which  significantly overstated the reported extent to which agencies had referred  eligible debts for cross-servicing.  As shown in table 1, the governmentwide  cross-servicing referral rate at the end of fiscal year 2002 was about 79  percent, rather than 96 percent as reported by FMS.  This is a significant  difference given that FMS officials consider the cross-servicing program to  be fully mature and federal agencies should be referring eligible debts  when they are over 180 days delinquent.
According to the TRORs for the fourth quarter of fiscal year 2002, federal  agencies governmentwide had about $8.5 billion, not $8.2 billion, of debt  eligible for referral at the end of the fiscal year.  In determining the amount  of eligible debt for referral for cross-servicing, FMS inappropriately used  the amount of debt eligible for cross-servicing referral at the end of fiscal  year 2001.  As such, FMS did not include any of the approximately $300  million of debts that were reported as having become eligible for referral  for cross-servicing during fiscal year 2002.  Thus, FMS understated the  amount of eligible debt for fiscal year 2002 by about $300 million.
In addition, FMS noted in its fiscal year 2002 report to the Congress that the  debts reported as referred for cross-servicing did not include those that  were no longer being actively collected by FMS.  However, FMS generally  did not deduct from its reported referral amounts debts that were returned  to the referring agencies during fiscal year 2002.  According to FMS  officials, FMS calculated the referral amount by adding debts that agencies  referred to FMS during fiscal year 2002 to the amount of referred debt that  FMS held for cross-servicing at the end of fiscal year 2001.  FMS officials  stated that they typically only reduced the referred debt amount when a  debt was returned to the referring agency in the same month that the  agency referred the debt to FMS.  However, by not deducting the amount  for all referred debts that were returned to agencies, the referred debt  amount did not reflect the amount of debt that had been referred by  agencies and was held by FMS for cross-servicing at fiscal year-end.According to FMS’s cross-servicing database, at the end of fiscal year 2002,  FMS held about $6.7 billion of debts that had been referred by federal  agencies for cross-servicing.  In contrast, FMS reported $7.9 billion of debts  referred for cross-servicing in its report to the Congress, an overstatement  of about $1.2 billion.
section_title: Conclusions
paragraphs: FMS continues to have opportunities for enhancing the effectiveness of its  cross-servicing of delinquent nontax debt.  Efficient and effective  processes are needed for timely determining the next appropriate steps for  debts that are not collected by FMS’s PCA contractors.  As noted in our  report, lack of adequate processes and systems weaknesses led to missed  opportunities to refer cases to DOJ for enforced collection, failure to use  payment offset tools for a large block of debt, and delays in decisions to  stop collection efforts on old debt and report it to IRS as income for those  who had not paid outstanding amounts.  In addition, due to the lack of  monitoring by FMS and OMB, there is no assurance that all eligible closed- out nontax debt is reported to IRS.  These lapses in oversight and  systematic administration of unpaid debts, combined with continuing  problems in FMS’s PCA contractors’ administration of offers to forgive a  portion of outstanding amounts as inducements to pay the remainder,  perpetuate our concerns about FMS’s efforts to pursue and collect unpaid  nontax debts.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that all appropriate collection action is taken on debts  returned from FMS’s PCA contractors, we recommend that the Secretary of  the Treasury direct the Commissioner of FMS to take the following actions:
Identify debts kept in TOP for passive collection through the  implementation of FedDebt and, in the interim, utilize appropriate  analytical database software to identify such debts.
Establish and implement procedures to periodically review debts that  are kept in TOP for passive collection to determine the next best course  of action for the debts to maximize collections or other recoveries.
After all collection activities have been exercised, determine whether  debts should be closed out and reported to IRS by FMS, and, if not,  promptly return them to the referring agencies.
Establish and implement procedures to periodically review debts that  are kept in TOP for passive collection to determine whether the statute  of limitations has expired or any other conditions, such as bankruptcy,  exist that would prevent offset of the debts in TOP.
Remove debts from TOP that are not eligible for offset and determine  whether the debts should be closed out and reported to IRS or returned  to the referring agency.
Establish and implement procedures to periodically monitor debts that  are held in inactive status to avoid debt backlogs and to help ensure that  all debts are promptly reviewed to determine whether additional  collection action or close-out and reporting to IRS is warranted.  Monthly may be a reasonable interval for performing such monitoring.
To help ensure that all federal agencies are appropriately reporting closed- out debts to IRS, we recommend that the Secretary of the Treasury direct  the Commissioner of FMS to take the following actions:
Require all federal agencies to disclose in their TRORs any significant  differences between the amount of debt reported as closed out and the  amount of debt reported to IRS and the reasons for those differences.
Revise information requirements for the TROR to include the amount of  CNC debts that are closed out.
We also recommend that the Director of OMB direct the Controller of  OMB’s Office of Federal Financial Management to remind agencies of their obligation to comply with the standards and  policies of individual agencies for writing off and closing out debts, as  required by the DCIA and OMB Circular A-129; require agencies to initiate actions to review and correct any  deficiencies they find during their review; require agencies to report to OMB on their policies, deficiencies, and  corrective actions, if any; and report annually to the Congress on the deficiencies, if any, found at the  agencies and the progress in resolving any deficiencies found.
To increase opportunities for collecting debts, we recommend that the  Secretary of the Treasury direct the Commissioner of FMS to take the  following actions:
Revise the database query methodology FMS uses to identify cross- serviced debts for DOJ referral.  The methodology should include debts  kept in TOP for passive collection and should also incorporate  information from FMS’s PCA contractors.
Incorporate FMS’s criteria for selecting debts for DOJ referral in FMS’s  PCA Operations and Procedures Manual.
Remind PCA contractors of the importance of enforced collection and  that their recommendation for next collection action, including  litigation, is a critical part of their responsibilities, and inform the PCA  contractors of the agencies that have authorized FMS to refer debts to  DOJ on the agencies’ behalf.
Establish and implement procedures to track all debts FMS has referred  to DOJ and ensure that the FedDebt system is capable of tracking all  debts that FMS refers to DOJ.
Establish and implement procedures to monitor all debts in cross- servicing to help ensure that debts are promptly reported to TOP,  including periodically sweeping the portfolio to send debts to TOP.
Implement enhancements to the TOP system so that it can accept  multiple debtors for a single debt, and ensure that the FedDebt system  will be capable of being used to report secondary debtors to TOP.
To help maximize the soundness of the cross-servicing program, we  recommend that the Secretary of the Treasury direct the Commissioner of  FMS to take the following actions:
Establish procedures to monitor and track all debt amounts forgiven by  in-house FMS collectors and ensure that the FedDebt system identifies  the forgiven amounts for all compromise agreements established by in- house FMS collectors.
Reinforce PCA contractors’ adherence to the compromise requirements  set forth in the PCA contract for documenting the attempt to collect the  full amount of a debt prior to its compromise.
Reinforce PCA contractors’ adherence to the compromise requirements  set forth in the Federal Claims Collection Standards for obtaining a  debtor’s financial information, such as credit reports and complete  financial statements, to determine the debtor’s inability to pay the full  amount of the debt.
Reinforce PCA contractors’ adherence to the compromise requirements  set forth in the PCA contract for documenting the justification for the  compromise of a debt.
Incorporate liquidated damages or a penalty provision in the next PCA  contract for failure of PCA contractors to document a compromise in  accordance with contract requirements.
Remind PCA contractors, through a technical bulletin or other means, of  the importance of obtaining debtors’ TINs when compromising debts.
Fully implement our recommendation made in fiscal year 2000 to revise  FMS’s key performance measure on cross-servicing referrals so that the  extent to which federal agencies have referred debts to cross-servicing  directly corresponds to the eligible debts as of fiscal year-end.  Specifically, the debt-eligible amount should reflect the amount reported  by federal agencies as of fiscal year-end, and the debt-referred amount  should reflect the amount in cross-servicing as of fiscal year-end.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, reprinted in appendix II,  Treasury’s FMS said that it concurred with most of the findings and that  many of the findings and recommendations had already been addressed.  FMS stated that enhancements to the systems that serve cross-servicing  and PCA functions have resolved a number of issues and that the advent of  FedDebt will further improve cross-servicing operations.  However, FMS  raised a number of points regarding certain of our findings and  recommendations that missed the central concerns conveyed in our report  and tended to downplay the significance of these concerns.  The following  discussion highlights and responds to the points FMS raised.
FMS stated that the findings in the report did not reflect critical operational  issues and only affected a very small percentage of its cross-servicing  portfolio.  FMS expressed concern that we greatly expanded the scope of  our work beyond the parameters that we originally set and focused on a  range of opportunities to improve the cross-servicing program that had  little or no relation to the reporting of uncollectible debt.
We disagree.  Specifically, referral of debts to DOJ for litigation and TOP  for offset, monitoring of the compromise of debts by FMS and its PCA  contractors, and identification and reporting of uncollectible debt amounts  to IRS are all critical operational issues.  Moreover, as discussed in the  report, we found several problems related to FMS’s identification and  monitoring of debts held in TOP for passive collection, which represented  over half the debts in FMS’s $6.6 billion cross-servicing portfolio as of  February 28, 2003.  These issues, when considered in conjunction with  issues we have cited in previous reports, such as limited implementation of  administrative wage garnishment (AWG) and lack of independent  verification of the accuracy, completeness, and validity of debts reported  by agencies as eligible for or excluded from DCIA cross-servicing  provisions, raise serious concerns about FMS’s progress in addressing the  challenges it faces in implementing the cross-servicing program.
We also disagree with FMS’s assertion that we expanded the scope of our  review beyond what we conveyed to Treasury at the beginning of the  assignment.  In our August 2002 letter to the Secretary of the Treasury and  our subsequent entrance conference with FMS officials in October 2002,  we stated that our objectives were to evaluate (1) actions taken by FMS on  uncollected nontax debts returned from its PCA contractors; (2) FMS’s  efforts to ensure that eligible uncollectible nontax debts, which federal  agencies rely on FMS to report on their behalf to IRS as income to the  debtors, are promptly identified and accurately reported; and (3) actions  taken, if any, by FMS to ensure that federal agencies are reporting their  eligible uncollectible nontax debts to IRS as income to the debtors.  As  stated in our report, our review addressed these objectives.  In addition, in  performing our work to address these objectives, we identified  opportunities for FMS to improve collection of nontax debts through cross- servicing and enhance the soundness of certain operational and reporting  facets of its cross-servicing program.  In meeting our audit responsibilities,  we must inform management of any significant issues identified during our  work.
FMS suggests that our report unfairly characterizes FMS’s efforts to collect  debts through offset as “minimal” and that it criticizes FMS for collection  activities that agencies have not delegated to it.  FMS stated that TOP is its  most effective collection tool, many agencies rely on TOP for the bulk of  their collections, and significant collection opportunities could be lost if  debts were removed from TOP prematurely.  FMS stated that since the cost  to collect through TOP is low, it is generally in the best interest of the  government to attempt offset for as long as statutorily authorized before  terminating collections and discharging the debt.  FMS said that it is at  creditor agencies’ discretion to leave debts returned from PCA contractors  in TOP for passive collection.
We agree that for certain debts, TOP can be an effective mechanism for  collection, especially when used in conjunction with other debt collection  activities. However, passive collection does not entail any collection action  other than minimal efforts through TOP.  As stated in the report, for debts  held in passive collection, TOP is the only collection tool in use.  Therefore,  collection opportunities from the use of other collection tools, such as  litigation and AWG, are lost for these debts.  As we state in this report, FMS  had collected only about $9 million, or about two-tenths of 1 percent, of the  $3.7 billion of debts held in TOP for passive collection as of February 28,  2003.  To increase the opportunities to collect these debts, we  recommended that FMS periodically review debts kept in TOP for passive  collection to determine the next best course of action for the debts, such as  AWG or litigation, to maximize collections or other recoveries.
Moreover we did not recommend in our report that FMS remove debts  from TOP prematurely. Rather, we stated that many of the debts kept in  TOP for passive collection were unlikely to yield any collections through  offsets because they were beyond the 10-year statutory and regulatory  limitations applicable to offset or had other barriers, such as bankruptcy,  that would prevent offset of the debts.  Thus, we recommended that FMS  establish and implement procedures to periodically review debts that are  kept in TOP for passive collection to determine whether the statute of  limitations has expired or any other conditions exist that would prevent  offset of the debts and remove debts from TOP that are not eligible for  offset and determine whether the debts should be closed out and reported  to IRS or returned to the referring agency.
We also disagree with FMS’s implication that we unfairly criticized FMS for  not undertaking Form 1099C reporting activities that agencies have not  delegated to it.  Our review indicated that it would be highly unlikely for  creditor agencies to be able to identify specific debts in cross-servicing that  are kept in TOP for passive collection.  FMS advised us that because of  system limitations, it could not identify specific debts that are merely being  held in passive collection after being returned from PCA contractors.  However, we were able to readily identify debts in TOP for passive  collection through use of off-the-shelf database analysis software.  Without  the ability to identify specific debts for which passive collection is the only  current ongoing effort, creditor agencies that have not delegated authority  to FMS to report uncollectible debts to IRS on their behalf cannot fulfill  their responsibility to determine whether a debt should be closed out and  reported to IRS or whether other collection action should be taken on it.  We consider this to also be the responsibility of FMS.  This view is  embodied in our recommendations that FMS establish and implement  procedures to periodically review debts that are kept in TOP for passive  collection to determine the next best course of action and after all  collection activities have been exercised, determine whether debts should  be closed out and reported to IRS by FMS, and, if not, promptly return them  to the referring agencies.
In particular and as noted in our report, we would like to reemphasize that  our analysis considered only those debts for which federal agencies had  given FMS the authority to report uncollectible debt amounts to IRS on the  agency’s behalf.  For such debts, FMS procedures require its collectors to  evaluate them to determine whether close-out would be appropriate and  whether the debt amounts should be reported to IRS.
FMS agreed with our finding that it had referred only a small amount of  debt to DOJ.  FMS stated that because of workload constraints, it has  attempted to focus its DOJ referral efforts on cases most likely to be  successfully collected through litigation.  As stated in our report, in an  effort to increase referrals to DOJ, FMS did begin to perform quarterly  queries of its cross-servicing database to identify uncollected debts for  referral to DOJ.  However, we found that many of the debts identified  through these queries would not be good candidates for referral to DOJ  because, among other things, they lacked TINs and were involved in  bankruptcy proceedings.  In addition, these queries did not cover most  debts in cross-servicing, including those held in TOP for passive collection  that would seem to be better candidates for DOJ referral because they  should have valid TINs and are not supposed to be in bankruptcy.  In  addition, FMS did not routinely consider or act on advice from its PCA  contractors regarding referrals to DOJ.  Because PCA contractors’  responsibilities include locating debtors and determining whether they  have incomes or assets to repay delinquent debts, the PCA contractors  would have a reasonable basis for identifying uncooperative debtors who  could repay their debts but had refused.
FMS did not agree with our recommendation to incorporate liquidated  damages in the next PCA contract for failure of PCA contractors to  document compromises in accordance with contract requirements.  FMS  stated that there is no incentive for a PCA contractor to accept a  compromise agreement when the debtor has the capability to pay the full  amount of the debt.  We disagree with FMS’s contention that a PCA  contractor would not accept a compromise agreement when the debtor has  the capability to pay the full amount of the debt.  For example, as stated in  our report, we noted that one debtor offered to pay the full debt balance of  approximately $14,000 in installments.  However, without explanation, the  PCA contractor offered to compromise the debt by 20 percent if the debtor  would pay right away.  Moreover, this PCA contractor encouraged  compromise activity prior to exhausting attempts to collect debts in full by  sending out pro forma letters to debtors stating that the contractor may be  authorized to compromise a portion of their debt should the debtor be in a  position to pay the remaining balance. Further, FMS stated that it is  questionable whether liquidated damages or a penalty provision in the  contract would be legally enforceable.  For many of the debts that we  reviewed, we found that the PCA contractors often did not have  documentation to justify their rationale for concluding that debtors could  not pay the full debt amount or to support the amounts forgiven.  In the  absence of adequate documentation supporting the PCA contractor’s  determination to compromise a debt for a specific amount, FMS cannot  determine whether the compromise is reasonable under the Federal Claims  Collection Standards.  Thus, FMS has no basis to determine whether the  government suffered a loss that should not have been incurred as a result  of such a compromise.  To encourage PCA contractors to obtain adequate  documentation supporting their compromises, we continue to believe that  FMS should incorporate liquidated damages or a penalty provision in the  next PCA contract for failure of PCA contractors to document  compromises in accordance with contract requirements.  FMS did not offer  any legal analysis to support its assertion that a liquidated damage or  penalty provision, presumably properly drafted and applied, may not be  legally enforceable.  Of course, the enforceability of liquidated damages or  a penalty provision (e.g., reduction in the number of cases or amount of  debt referred to the PCA contractor) would depend on the nature of the  provision and the facts of the individual cases.
FMS did not agree with our finding related to the cross-servicing referral  performance measure.  FMS stated that it considered many approaches for  reporting agency performance and believed that the method it chose is fair  and equitable.  FMS said that using only the active balance on a given date  (e.g., the end of the fiscal year) would not recognize debts that are paid off,  administratively resolved, or determined to be uncollectible and closed out.  FMS further stated that because CFO Act agencies were required to update  their TRORs on a quarterly basis beginning in fiscal year 2003, eligible  amounts of debt for calculating the percentages referred are now updated  every quarter.
This performance indicator is a snapshot of the percentage of debt  eligible for referral to cross-servicing that has been referred at a given point  in time, such as at year-end.  In calculating its debt referral measure for  fiscal year 2002, FMS made an unreasonable determination in computing  this key performance measure even though it had all the appropriate  information to properly calculate this figure.  A fundamental premise in  calculating this performance indicator is that debts that are paid off,  administratively resolved, or determined to be uncollectible and closed out  are no longer eligible for referral for cross-servicing and are not subject to  further federal collection efforts.  As such, FMS should not include these  debts in the amount referred for cross-servicing in its annual fiscal year  report to the Congress.  In addition, as stated in the report, in its fiscal year  2002 report to the Congress, FMS inappropriately used the amount of debt  eligible for cross-servicing referral at the end of fiscal year 2001 instead of  the end of fiscal year 2002.  The net effect of these errors on the calculation  was to overstate the amount referred (the numerator of the fraction) by  $1.2 billion and to understate the amount available for referral (the  denominator of the fraction) by approximately $300 million.  Both of these  errors had the effect of overstating federal agencies’ progress in referring  eligible nontax debts for cross-servicing.
In its oral comments, OMB agreed with the report’s findings.  In drafting the  recommendation, we proposed that OMB review the standards and policies  of individual agencies for writing off and closing out debts.  In its oral  response, OMB was concerned that it did not have the resources to review  all federal agencies’ policies and procedures.  As such, OMB suggested that  we modify our proposed recommendation to instead require OMB to have  individual federal agencies review their own policies and procedures for  writing off and closing out debts and report to OMB on their policies,  deficiencies, and corrective actions, if any, based on such reviews.  OMB  stated that it will then use these reports from the individual agencies to  report to the Congress on the deficiencies, if any, found at the agencies and  the progress in resolving such deficiencies.  OMB’s suggested approach in  resolving this finding is reasonable and fully meets the intent of our  proposed recommendation.  As such, we have modified our  recommendation to OMB accordingly.
This report contains recommendations to you. The head of a federal agency  is required by 31 U.S.C. 720 to submit a written statement on actions taken  on these recommendations to the Senate Committee on Governmental  Affairs and the House Committee on Government Reform within 60 days of  the date of this report. You must also send a written statement to the House  and Senate Committees on Appropriations with the agency’s first request  for appropriations made over 60 days after the date of this report.
We are sending copies of this report to the Chairmen and Ranking Minority  Members of the Senate Committee on Governmental Affairs; the  Subcommittee on Financial Management, the Budget and International  Security, Senate Committee on Governmental Affairs; the House  Committee on Government Reform; the Subcommittee on Government  Efficiency and Financial Management, House Committee on Government  Reform; and the Commissioner of FMS.  Copies will be made available to  others upon request.  The report is also available at no charge on GAO’s  Web site, at http://www.gao.gov.
If you have any questions regarding this report, please contact me on (202)  512-3406 or Kenneth Rupar, Assistant Director, on (214) 777-5714.  Other  key contributors to this report are listed in appendix III.
section_title: Sampling Method
paragraphs: To test debts compromised by the Financial Management Service’s (FMS)  private collection agency (PCA) contractors from October 1, 2002, to  February 28, 2003, we selected a stratified random sample of 54 debts that  the PCA contractors compromised from a population of 358 debts in the  cross-servicing database with forgiven dollar amounts of at least $2,000 but  less than $100,000. We did not review debts with forgiven dollar amounts  under $2,000 because they were deemed immaterial.  In total, we selected  54 debts to review.  (See table 2).
section_title: Comments from the Department of the Treasury
paragraphs: The following are GAO’s comments on the Department of the Treasury’s  letter dated October 20, 2003.
subsections: section_title: GAO Comments
paragraphs: 1.
In conformity with generally accepted government auditing standards,  we provide responsible agency officials and other directly affected  parties with an opportunity to review and provide comments on a draft  report before it is issued.  The language referred to by FMS concerning  the report’s status as a draft has been the standard language included  on the cover page of GAO reports when they are sent for agency  comment. After receiving agency comments, we consider their  substance, revise the draft report as appropriate, state in the report  whether the agency agreed or disagreed with our findings, conclusions,  and recommendations, and issue the report.
2.
See our discussion in the Agency Comments and Our Evaluation  section.
3.
See comment 2.
4.
See comment 2.
5.
See comment 2.
6.
See comment 2.
7.
The scope of our work did not include determining whether FMS’s TOP  system has sufficient edits and safeguards in place to ensure that no  offset is taken for debts over 10 years delinquent.
8.
See comment 2.
9.
As stated in our report, a scope limitation prevented us from using  statistical sampling techniques to determine whether compromises  made by in-house FMS collectors were justified, supported, and  reported to IRS.  As such, we cannot comment on whether FMS  collectors have implemented compromise documentation procedures  in accordance with previous GAO recommendations.  10.  See comment 2.  11.  See comment 2.
section_title: Staff Acknowledgments
paragraphs: Other key contributors to this assignment were Richard Cambosos,  Matthew Valenta, Ronald Haun, Michelle Philpott, Evan Gilman, and Cathy  Hurley.
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