Minimizing Inappropriate Levies in IRS's Federal Payment Levy Program
Gao ID: GAO-03-318R January 3, 2003Each year, thousands of taxpayers who owe delinquent federal taxes receive billions of dollars in federal payments. To help the Internal Revenue Service (IRS) collect these delinquent taxes more effectively, the Congress passed the Taxpayer Relief Act of 1997, the provisions of which authorized the establishment of the Federal Payment Levy Program (FPLP), which allows IRS to continuously levy up to 15 percent of the payments made to delinquent taxpayers. The Department of the Treasury's Financial Management Service (FMS), which receives payment records from and makes payments on behalf of most federal agencies, collects the continuous levy from the federal payment after IRS has authorized the levy. Subsequent payments are continuously levied until such time that the tax debt is paid or IRS releases the levy. In a prior report, we noted that inappropriate levies--which subsequently must be refunded--could undermine support for the continuous levy authority, by generating negative public reaction to the program and frustrating taxpayers whose payments are inappropriately levied. Since October of 2001, the inclusion of Social Security recipients and others in the levy program has extended levy use substantially. This expansion heightens the importance of minimizing inappropriate levies. This report identifies one cause for inappropriate levies for which corrective measures can be taken before IRS completes the installation of the replacement for its master file.
An annual shutdown of master file operations for system maintenance causes inappropriate levies and subsequent refunds. According to IRS officials, the failures to post taxpayer payments to the master file during January 2002 were due to "dead cycle time"--a 3-to-4 week period at the beginning of each calendar year when IRS shuts down master file operations to upgrade software and perform other maintenance. During this period, the master file does not accept new postings, but FMS continues to levy federal payments based on its records for the balance owed by the taxpayers. IRS levy program official told us that they will make programming change in 2003 to help avoid inappropriate levies due to the down time for the master file.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Michael Brostek Team: Government Accountability Office: Strategic Issues Phone: (202) 512-9039GAO-03-318R, Minimizing Inappropriate Levies in IRS's Federal Payment Levy Program
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GAO-03-318R:
United States General Accounting Office:
Washington, DC 20548:
January 3, 2003:
The Honorable Bob Wenzel:
Acting Commissioner of Internal Revenue:
Internal Revenue Service:
Subject: Minimizing Inappropriate Levies in IRS‘s Federal Payment Levy
Program:
Dear Mr. Wenzel:
Each year, thousands of taxpayers who owe delinquent federal taxes
receive billions of dollars in federal payments. To help the Internal
Revenue Service (IRS) collect these delinquent taxes more effectively,
the Congress passed the Taxpayer Relief Act of 1997, the provisions of
which authorized the establishment of the Federal Payment Levy Program
(FPLP), which allows IRS to continuously levy up to 15 percent of the
payments made to delinquent taxpayers. The Department of the Treasury‘s
Financial Management Service (FMS), which receives payment records from
and makes payments on behalf of most federal agencies, collects the
continuous levy from the federal payment after IRS has authorized the
levy. Subsequent payments are continuously levied until such time that
the tax debt is paid or IRS releases the levy.
In a prior report, we noted that inappropriate levies”which
subsequently must be refunded--could undermine support for the
continuous levy authority, by generating negative public reaction to
the program and frustrating taxpayers whose payments are
inappropriately levied.[Footnote 1] Since October of 2001, the
inclusion of Social Security recipients and others in the levy program
has extended levy use substantially. This expansion heightens the
importance of minimizing inappropriate levies.
IRS built controls into FPLP to prevent levying taxpayers who are not
subject to levy and to protect against levying payments for more than
taxpayers owe. Under FPLP, FMS continuously levies a taxpayer‘s account
based on the taxpayer‘s account balance in FMS‘s records. IRS updates
FMS‘s records on the taxpayer‘s account from its master file once every
week,[Footnote 2] except during system maintenance and sends FMS
updated information on the balance owed by each delinquent taxpayer. In
part because IRS may receive other payments from taxpayers independent
of the levy process, FMS always substitutes IRS‘s account balance for
the one it maintains for each taxpayer‘s account as soon as it receives
IRS‘s weekly account updates. As discussed below, depending on the
specific timing of FMS‘s levies of taxpayer‘s accounts and IRS‘s weekly
updates of its master file, FMS‘s account balance can be in error and
taxpayer‘s accounts can be inappropriately levied. These time-related
situations, which give rise to inappropriate levies, should be
alleviated when IRS completes the installation of its replacement for
the master file. Because the new system will update taxpayers accounts
daily, there will be less opportunity for IRS‘s and FMS‘s records to
differ. However, the system will not be fully installed for several
years.
This report identifies one cause for inappropriate levies for which
corrective measures can be taken before IRS completes the installation
of the replacement for its master file. We identified this issue during
follow up work to our April 2000 report that we are conducting at the
request of the House Ways and Means Committee and its Subcommittee on
Oversight. To determine the causes of inappropriate levies and possible
corrective measures, we selected the 3,349 individual taxpayer accounts
that were levied during the first quarter of fiscal year 2002, the
period from October 1, 2001, through December 31, 2001. From these
3,349 accounts, we identified 160 individual taxpayer accounts that had
received a refund as a result of an inappropriate levy under FPLP. The
refunds were made between October 1, 2001, and April 1, 2002. We then
examined the activity that occurred on the 160 accounts through April
2002 to determine the basis for the inappropriate levies. We
interviewed IRS and FMS headquarters officials to obtain information on
the operation of the FPLP program, payment posting procedures and
refund procedures. Our review was conducted between October 2001 and
September 2002 in accordance with generally accepted government
auditing standards.
Results:
An annual shut down of master file operations for system maintenance
causes inappropriate levies and subsequent refunds. We found that 119
of the 160 refunds between October 1, 2001, and April 1, 2002, were
issued in February 2002, which was four times the number of refunds
issued in any other month during the 6-month period. The refunds ranged
from less than $5 to nearly $500, with the average refund being
$114.43. Of these 119 refunds in February 2002, 108 resulted because
IRS had received payments such as voluntary payments, transfers of tax
payments, and levies, sufficient to settle the tax indebtedness. Those
payments were not posted to IRS‘s master file during January 2002.
Without updated information, FMS relied on the information it
maintained to initiate the next round of levies on the taxpayers.
According to IRS officials, the failures to post taxpayer payments to
the master file during January were due to ’dead cycle time“--a 3-to-4
week period at the beginning of each calendar year when IRS shuts down
master file operations to upgrade software and perform other
maintenance. During this period, the master file does not accept new
postings, but FMS continues to levy federal payments based on its
records for the balance owed by the taxpayers. Taxpayers who had their
indebtedness resolved or reduced to less than what would be generated
by a 15-percent levy continued to have their federal payment levied at
the full 15-percent because updated IRS data could not be sent to FMS
indicating the correct balance. After the master file began accepting
new postings, IRS‘s automatic refund processes issued refunds for the
over collections.
The posting delay problem due to the January shut down of IRS‘s master
file can create inappropriate levies in at least two situations. In the
levy process, for example, FMS approves the payments to recipients of
monthly federal payments, such as those going to Social Security
recipients and federal retirees, 1-to-2 weeks prior to the actual
issuance of the payments, deducting the levy amount from the payment.
FMS records the lower debt balance for the levied taxpayer in files it
maintains. After the payment is issued to the taxpayer and IRS receives
the levy payment, IRS updates its master file record to show the lower
balance amount. IRS sends the lower balance amount to FMS on the next
weekly update.
Depending on the timing of IRS‘s master file update and FMS‘s next levy
of a payment to the taxpayer, FMS may make the next levy based on data
showing a higher balance due by the taxpayer than is in fact correct.
In one situation, FMS may levy an account and send the payment to IRS
shortly after IRS has completed its last update before shutting down
its master file. In this case, IRS will have sent FMS a new account
balance the week before shutdown that does not reflect the levy
payment. Because FMS always substitutes the last update from IRS for
its existing account balance, in this case it is substituting a balance
that does not reflect the previous levy. This balance becomes the basis
for the next levy. If FMS‘s account balance is zero or less than what
would be yielded by a 15-percent levy, substituting IRS‘s account
balance may result in FMS levying a settled account or over-levying an
account with a low balance. In another situation, IRS may receive a
separate payment from the taxpayer shortly after the last update that
could settle the account or reduce it below the amount that would be
generated by a 15-percent levy. Again, because FMS‘s records will not
reflect the actual balance due in the taxpayer‘s account and an
inappropriate levy can result.
We found 101 instances resulting from the first situation described
above in which an inappropriate levy resulted because the full 15-
percent levy was taken from the taxpayer‘s federal payment, even though
the taxpayer‘s remaining debt balance was less than what would be
generated by a 15-percent levy. This number will likely grow now that
Social Security recipients are being levied under FPLP. IRS data show
that in the first quarter of fiscal year 2002, the period of our
sample, FPLP took 8,584 levies from individual taxpayers whereas in the
last quarter of fiscal year 2002 FPLP took 177,872 levies from
individual taxpayers.
IRS levy program officials told us that they will make programming
changes in 2003 to help avoid inappropriate levies due to the down time
for the master file. Officials said an approach IRS is considering
would address those inappropriate levies that are due to the first
situation described above. That is, it would deal with those cases
where the balance IRS reports to FMS fails to reflect the last levy
made by FMS. Officials are considering suspending IRS‘s update several
weeks prior the dead cycle period and instead having FMS rely only on
its own record of the taxpayer‘s balance to determine the levy amount
to be deducted. This would result in correct levies being made in all
cases where the only amount being credited to the taxpayer‘s account is
from the levy. It would not alleviate inappropriate levies that result
from taxpayers making other payments on their delinquent account during
the period. Officials did not believe these changes would be costly to
implement.
Conclusions:
Inappropriately levying taxpayers could undermine support for the levy
authority that has been granted to IRS and FMS. Although the
inappropriate levies we found that are due to the January ’down time“
for updating IRS‘s master file were relatively few in number, the
potential number of such inappropriate levies could rise substantially
now that the levies have been extended to additional types of federal
payments, principally Social Security benefits. According to IRS
officials, programming changes would not be costly and could help avoid
a portion of these inappropriate levies. Because of the inherent data
processing time delays, it is inevitable that some over collections
will occur and thus refunds will be issued. However, it is imperative
that IRS does whatever it can to avoid over collections and prevent
unnecessary refunds to ensure that the taxpayer receives his full
federal payment once the tax debt has been settled.
Recommendations:
We recommend that the Acting Commissioner of Internal Revenue direct
FPLP staff to avoid over collections during scheduled dead cycle time
for IRS‘s master file. Planned actions, such as suspending IRS‘s update
several weeks prior to the dead cycle period so as to not supersede FMS
record of balance due and allow FMS to rely on its own record of the
taxpayer‘s balance to determine the levy amount to be deducted, would
achieve this objective.
Agency Comments:
We requested comments on a draft of this report from the Acting
Commissioner of Internal Revenue or his designee. We obtained oral
comments on December 18, 2002, from the Acting Director, Filing and
Payment Compliance, Wage and Investment. She told us they agree with
our recommendation and anticipate this change will be in place by
December 2003. She also emphasized that the only the last levy of the
taxpayer was inappropriate because the delay updating FMS‘s records
caused an incorrect amount to be taken.
We are sending copies of this report to the Secretary of the Treasury
and the Commissioner of Financial Management Service. We are also
sending copies of the report to the Chairman and Ranking Minority
Member, House Committee on Ways and Means; Chairman and Ranking
Minority Member, Subcommittee on Oversight, House Committee on Ways and
Means; Chairman and Ranking Minority Member, Senate Committee on
Finance. We will also make copies of this report available to others
upon request. This report is also available at GAO‘s Web site
[hyperlink, http://www.gao.gov]. If you or your staff have any
questions, please contact me at (202) 512-9110 or Ralph Block,
Assistant Director at (415) 904-2150. Other staff who contributed to
this report include Thomas Bloom, Ellen Rominger, Samuel Scrutchins,
Thom Venezia, and Elwood White.
Sincerely yours,
Signed by:
Michael Brostek:
Director, Tax Issues:
[End of section]
Footnotes:
[1] See U.S. General Accounting Office, Tax Administration: IRS‘ Levy
of Federal Payments Could Generate Millions of Dollars, GAO/GGD-00-65
(Washington, D.C.: Apr. 7, 2000).
[2] The master file maintains an account for every taxpayer who files a
return. The account maintained on the master file includes records
related to that taxpayer over the years (returns filed, payments made,
additional taxes assessed as a result of audit, etc.).
[End of section]
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