Tax Administration

For years, the Internal Revenue Service (IRS) has allowed taxpayers to pay delinquent taxes in installments, primarily through a paper-based system in which IRS mails monthly statements to taxpayers who, in turn, mail monthly payments back to IRS. In fiscal year 1997, taxpayers defaulted on $6.5 billion in installment agreements--almost as much as the $6.7 billion that IRS collected through installments. This report examines a "best practice" used by delinquent debt collectors--electronic funds transfer (EFT)--to see whether it offers IRS any prospects for improving its collection efforts. GAO (1) describes some of the uses and benefits of EFT, (2) discusses the experiences of two states that use EFT in their tax installment agreement programs and the benefits that they have obtained, and (3) discusses the potential benefits that IRS might realize by increasing EFT use in its installment agreement program.

GAO noted that: (1) EFT is widely used by various types of organizations in receiving and transferring money; (2) it is used for various payment transactions and for collecting consumer payments; (3) relative to paper transactions, EFT provides better accuracy, lower mailing and processing costs, and fewer delinquencies and defaults; (4) because of these benefits, some financial organizations routinely offer incentives to consumers who enter into EFT arrangements; (5) both Minnesota and California changed their installment agreement programs to promote tax payments by EFT; (6) Minnesota has required taxpayers entering into new installment agreements since July 1995 to pay by EFT, with some exceptions; (7) in April 1997, California initiated procedures to let taxpayers make installment agreement payments by EFT; (8) as of mid-November 1997, EFT usage was about 90 percent in Minnesota and about 60 percent in California; (9) according to state officials, Minnesota and California both have seen a sharp decrease in their installment agreement default rates, in part due to EFT; (10) in Minnesota, officials said that default rates were reduced from about 50 percent to between 3 and 5 percent; and in California, officials said that they were reduced from about 40 percent to about 5 percent; (11) officials in both states said that the lower default rates have resulted in collecting revenues from installments faster; (12) officials in both Minnesota and California said they have achieved administrative cost savings from greater use of EFT, which has reduced the amount of paper processing and mailing costs related to their installment agreement programs; (13) additional administrative cost savings have occurred because fewer resources have been needed for follow-up collection enforcement on defaulted agreements; (14) IRS' installment agreement program has not taken advantage of the benefits of EFT to the extent that Minnesota and California reported, as only about 1.5 percent of IRS' delinquent taxpayers were using EFT for installment agreements as of September 30, 1997; (15) because its current program is similar to these states' non-EFT programs, it seems likely that IRS could expect to achieve a reduction in its installment agreement default rates and lower administrative costs if more taxpayers paid their installments by EFT; and (16) in fiscal year 1997, IRS' costs to process EFT installment payments were 37 percent lower than the cost to process non-EFT installment payments.