Section 6159 of the Internal Revenue Code authorizes IRS to allow taxpayers to pay their taxes in installments, with interest, if this would facilitate collection of the liability. IRS procedures allow taxpayers to enter into an installment agreement any time during the collection process, which involves sending notices to taxpayers, contacting them by telephone and in person, and using enforcement tools such as liens against their property and levies against their financial assets. In 1992, IRS changed its installment agreement program by allowing (1) most IRS staff with taxpayer contact to approve agreements up to a certain dollar level, (2) taxpayers to obtain agreements up to a certain dollar level without providing financial information to demonstrate the need for an agreement, and (3) taxpayers to request agreements when they file their tax returns. As of September 30, 1997, IRS had about 2.9 million installment agreements outstanding, worth about $13.2 billion, thus averaging about $4,600 per agreement. To request an installment agreement, a taxpayer completes an optional Form 9465: Installment Agreement Request. In January 1996, IRS revised the form by providing space for taxpayers to add the information needed to set up an EFT agreement, based on a recommendation we made. Before the form was revised, taxpayers could make arrangements to pay their installment payments by EFT, but few did. For each month that an agreement is in effect, IRS prepares and mails a statement to the taxpayer. Taxpayers with non-EFT agreements are to mail the payment coupons back with their payments. These documents must be processed monthly in order to update the taxpayers’ accounts. According to the National Automated Clearing House Association (NACHA), a national electronic banking trade association, electronic payment transaction volumes are growing faster than check volumes. The clearinghouse association reported that EFT transactions in 1996 rose 15 percent, to nearly 4 billion transactions that represented over $12 trillion, which was 9 percent higher than the amount in 1995. By comparison, check volumes rose by about 1 percent during this period. Also, in 1995, more than 500,000 companies across the nation used the Automated Clearing House (ACH) Network for EFTs, involving payment transactions such as payroll, pensions, and dividends and to collect consumer payments. Large businesses and corporations are currently required to use EFT to make federal and state tax deposits. EFT use should increase further as provisions in the North American Free Trade Agreement (NAFTA) are implemented that will eventually require most employers to pay their federal tax deposits electronically. Further, the Debt Collection Improvement Act of 1996 requires that most federal benefit checks be disbursed electronically beginning in 1999. Our objectives were to (1) describe some of the uses and benefits of EFT, (2) discuss the experiences of two states that use EFT in their tax installment agreement programs and the benefits they have obtained, and (3) discuss the potential benefits IRS might realize by increasing EFT usage in its installment agreement program. To address the first objective, we judgmentally selected a limited number of financial institutions, including 8 banks, 1 credit union, and 14 mortgage companies, to obtain information on their use of EFT and its benefits to them and their customers. In addition, we spoke with officials from NACHA and the National Credit Union Association about the uses and benefits of EFT to financial institutions and their customers. We also contacted officials from FMS, which is ultimately responsible for collecting most of the nontax delinquent debts owed the federal government. FMS is also involved in the government’s overall efforts to maximize the use of EFT as required by the Debt Collection Improvement Act of 1996. We obtained from FMS, but did not independently verify, information on IRS’ cost to process installment agreement payments by paper processes and by EFT. To address our second objective, we identified two states—Minnesota and California—that have made changes to their installment agreement programs that resulted in most delinquent taxpayers using EFT to pay their installments. We visited these states because we had consulted with them in our previous work on ways to improve federal tax collection efforts. On that basis, we were aware of their efforts to undertake innovative practices to improve tax administration. Also, we contacted the Federation of Tax Administrators—an organization of state and municipal tax and revenue agencies—to identify state tax departments that are recognized as having successful collection programs, and both states were mentioned by the Federation. To assess the potential benefits IRS might realize by increasing EFT usage in its installment agreement program, we obtained data on its existing program and analyzed its installment agreement default rates. We did not independently verify the statistical data we obtained on IRS’ installment agreement program. The information we obtained on IRS’ current use of EFT helped us determine the feasibility of IRS’ making changes to its program similar to those that Minnesota and California have made. We interviewed IRS Collection officials at the National Office to obtain current information on the processes and procedures IRS uses in collecting delinquent federal taxes to ensure that our comparisons between IRS and others were based on the most recent IRS practices. We did not perform an independent analysis to estimate the cost savings IRS might receive from additional EFT use. Lastly, we discussed the changes Minnesota and California have made to their program with IRS officials to obtain their perspectives on how similar changes might affect IRS’ program. We requested comments on a draft of this report from the Commissioner of Internal Revenue. His comments are discussed at the end of this letter and are reprinted in appendix I. We did our work between October 1996 and December 1997, according to generally accepted government auditing standards. Private sector financial institutions and government agencies use EFT for a variety of transactions. They do so because EFT has lower default rates and is less expensive, faster, and more reliable than paper transactions. Benefits, such as the convenience of EFT, also extend to the customers of these organizations. EFT transactions involve the paperless transfer of funds between accounts in financial institutions, which allows for transactions such as the direct deposit of payroll checks, mortgage payments, and installment payments. According to a NACHA official, most financial institutions can both make and receive EFT transactions, although some smaller institutions sometimes restrict the type of payment transactions they make. Information from NACHA shows that, relative to paper transactions, EFT provides lower loan defaults, better accuracy, and reduced mailing and processing costs. A credit union loan official, for example, said defaults of loans, usually defined as missed payments, are lower with automated payments. In addition, EFTs are about one-third less expensive to handle than paper transactions, according to one banking official with whom we spoke. Exact savings, though, vary by individual financial institution, depending on its internal processing systems and costs. Representatives from financial institutions and FMS told us that the benefits of EFT for customers as well as financial institutions are many. The financial institution officials told us that the cost savings from EFT were great enough for them to offer incentives to customers who use direct deposit and other electronic transactions. A credit union, for example, provides a 1-percentage-point discount on home equity lines of credit that are repaid using EFT. Officials from two banks told us that they waive monthly checking account fees for customers whose paychecks are directly deposited into their accounts. Another bank offers a discount on consumer loans that are repaid by EFT as a way of keeping existing customers and attracting new ones. Customers could also benefit from the reliability and accuracy of electronic payments and deposits. FMS data, for example, showed that direct deposit recipients are 20 times less likely to have a problem, such as lost checks, with EFT than with deposits by check. Some of the other benefits for customers were the convenience and savings by not having to go to a bank to deposit checks or to write a check and use postage to mail it. Congress passed the Debt Collection Improvement Act of 1996 requiring the use of EFT for most federal benefit payments (tax refunds are excluded) by January 1, 1999, because it recognized the advantages of electronic transactions. According to Treasury data, about 60 percent of all federal benefits are now paid electronically, and Treasury estimates that the government could save more than $500 million over the next 5 years by switching the remaining payments to EFT. However, EFT generally requires individuals to have bank accounts to access the funds, and some recipients of government checks do not have bank accounts. Congress is considering what it might do to mitigate the adverse effects of the 1996 legislation—for example, allowing recipients who do not have bank accounts to access their payments by other electronic means, such as automated teller machine cards from an account held by a disbursing agency. One use of EFT, as it relates to tax administration, is for installment tax payments. The two states we visited, Minnesota and California, made changes to their installment agreement programs that make EFT the primary means taxpayers use to pay their taxes in installments. Both states promoted the changes to make their installment agreement programs more effective and efficient, and officials in both states attributed reductions in their default rates and administrative costs to EFT use. The Minnesota Department of Revenue (MDOR) is that state’s primary tax collection agency and, as such, administers the installment agreement program covering delinquent taxes owed by individuals and businesses. In 1995, MDOR tested the use of EFT in its installment agreement program. EFT was available in the installment agreement program before the test, but it was not used extensively. The results of the test were compared with MDOR’s non-EFT program. MDOR officials told us the test showed that by requiring EFT payments, their installment agreement program could be made more efficient and effective. This led MDOR to revise its policy on installment agreements to require EFT for tax payments beginning in July 1995, with a few exceptions. One exception was for cases where the EFT requirement would create an undue hardship on a taxpayer.