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. 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. 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. 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.