Tax Administration
Federal Payment Levy Program Measures, Performance, and Equity Can Be Improved
Gao ID: GAO-03-356 March 6, 2003
According to the Internal Revenue Service (IRS), taxpayers currently owe about $249 billion in delinquent taxes. At the same time, the government pays billions of dollars in Social Security, retirement, and other federal payments to thousands of these individuals. To help IRS administer tax laws fairly and collect delinquent taxes effectively, Congress included a provision authorizing the Federal Payment Levy Program, which allows IRS to continuously levy up to 15 percent of certain federal payments made to delinquent taxpayers. Because of congressional interest about whether the Federal Payment Levy Program is being implemented as intended, GAO was asked to assess how well the program is operating.
The Federal Payment Levy Program enables IRS to continuously levy (take a portion of) federal payments to individuals and businesses owing delinquent taxes. IRS measures only about 27 percent of the revenues that can be attributed to the continuous levy program. IRS does not measure revenues that are received through voluntary payments as taxpayers respond to the notice of intent to levy or certain other results. Understating the program's impact may hinder IRS in making well-founded decisions on program management and resource allocation. IRS plans to revise its measure of program results but has not yet decided how to do so. IRS blocks many eligible delinquent accounts from being included in the Federal Payment Levy Program, thereby missing an opportunity to gather information on which debtors are receiving federal payments, that could be used to collect these delinquent taxes more efficiently. IRS recently unblocked some accounts and plans to unblock more, but has not established a time frame to complete these changes. IRS uses an inaccurate income criterion of ability to pay when determining whether taxpayers receiving Social Security benefits can afford to have their benefits levied under the Federal Payment Levy Program. As a result, fair treatment of taxpayers is compromised because taxpayers with a similar ability to pay their delinquent taxes likely are treated differently. IRS recognizes that the criterion is flawed but continues to use it.
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GAO-03-356, Tax Administration: Federal Payment Levy Program Measures, Performance, and Equity Can Be Improved
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
March 2003:
Tax Administration:
Federal Payment Levy Program Measures, Performance, and Equity Can Be
Improved:
GAO-03-356:
GAO Highlights:
Highlights of GAO-03-356, a report to the Committee on Ways and Means
and
Subcommittee on Oversight, House of Representatives.
March 2003:
Tax Administration:
Federal Payment Levy Program Measures, Performance, and Equity Can Be
Improved:
Why GAO Did This Study:
According to the Internal Revenue Service (IRS), taxpayers currently
owe
about $249 billion in delinquent taxes. At the same time, the
government pays
billions of dollars in Social Security, retirement, and other federal
payments
to thousands of these individuals. To help IRS administer tax laws
fairly and
collect delinquent taxes effectively, Congress included a provision
authorizing
the Federal Payment Levy Program, which allows IRS to continuously levy
up to 15
percent of certain federal payments made to delinquent taxpayers.
Because of
congressional interest about whether the Federal Payment Levy Program
is being
implemented as intended, GAO was asked to assess how well the program
is
operating.
What GAO Found:
The Federal Payment Levy Program enables IRS to continuously levy (take
a
portion of) federal payments to individuals and businesses owing
delinquent
taxes. GAO has found the following:
* IRS measures only about 27 percent of the revenues that can be
attributed to
the continuous levy program. IRS does not measure revenues that are
received
through voluntary payments as taxpayers respond to the notice of intent
to levy
or certain other results. Understating the program‘s impact may hinder
IRS in
making well-founded decisions on program management and resource
allocation.
IRS plans to revise its measure of program results but has not yet
decided how
to do so.
* IRS blocks many eligible delinquent accounts from being included in
the
Federal Payment Levy Program, thereby missing an opportunity to gather
information on which debtors are receiving federal payments, that could
be
used to collect these delinquent taxes more efficiently. IRS recently
unblocked
some accounts and plans to unblock more, but has not established a time
frame to
complete these changes.
* IRS uses an inaccurate income criterion of ability to pay when
determining
whether taxpayers receiving Social Security benefits can afford to have
their
benefits levied under the Federal Payment Levy Program. As a result,
fair
treatment of taxpayers is compromised because taxpayers with a similar
ability
to pay their delinquent taxes likely are treated differently. IRS
recognizes
that the criterion is flawed but continues to use it.
Figure:
[See PDF for image]
[End of figure]
What GAO Recommends:
To help IRS improve the operation of the levy program, GAO recommends
that IRS
(1) include more complete data on the range of taxpayers‘ actions and
tax
collections attributable to the program in its new measurement
approach, (2) study
the feasibility of submitting all delinquent accounts for matching
against federal
payments, and (3) discontinue use of the income criterion used to
determine which
Social Security beneficiaries can have their payments levied.
IRS agreed to implement the first two recommendations and explore
options in
regard to the third.
www.gao.gov/cgi-bin/getrpt?GAO-03-356.
To view the full report, including the scope and methodology, click on
the
link above.For more information, contact Michael Brostek at (202) 512-
9110 or
brostekm@gao.gov.
Contents:
Letter:
Results in Brief:
Background:
IRS‘s FPLP Data Understates Program Results:
Blocking Cases from Matching against Federal Payment Records Prevents
IRS from Collecting Taxes More Efficiently:
IRS‘s Criterion for Determining Which Social Security Beneficiaries Can
Afford to Have Their Payments Levied Is an Inaccurate Indicator of
Ability to Pay:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Scope and Methodology:
Appendix II: Additional Data on Revenue Collections Attributable
to FPLP and Status of Taxpayer Accounts:
FPLP Payments by Collection Method:
Categorization of Taxpayers:
Most Recently Filed Income Tax Returns for Social Security
Beneficiaries:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Number of Delinquent Taxpayers Receiving Federal Payments out
of a Total 1.5 Million Blocked from FPLP:
Table 2: FPLP Payments by Collection Method as of August 2002 for
Taxpayers Who Received a Notice of Intent to Levy during October-
December 2001:
Table 3: Categorization of Taxpayers by Delinquent Account Status as of
August 2002:
Table 4: Distribution of Social Security Payment Recipients by Year of
Most Recent Income Tax Return Filed:
Figure:
Figure 1: Tax Collections Attributable to FPLP as of August 2002 for
Taxpayers Receiving a Notice of Intent to Levy during October-December
2001:
Abbreviations:
ACS: Automated Collection System:
FMS: Financial Management Service:
FPLP: Federal Payment Levy Program:
IRS: Internal Revenue Service:
OPM: Office of Personnel Management:
TPI: Total Positive Income:
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Letter:
March 6, 2003:
The Honorable Bill Thomas
Chairman, Committee on Ways and Means
House of Representatives:
The Honorable Amo Houghton
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives:
According to the Internal Revenue Service (IRS), taxpayers currently
owe about $249 billion in delinquent taxes to the federal
government.[Footnote 1] At the same time, the government pays billions
of dollars in Social Security, retirement, and other federal payments
to thousands of these individuals each year. IRS and federal payment
records indicate that nearly one million taxpayers owing about $26
billion in delinquent taxes as of February 2002 were receiving federal
payments for federal wages and retirement, Social Security benefits,
and goods and services provided to federal agencies. To help IRS
collect these delinquent taxes more effectively, Congress included a
provision in the Taxpayer Relief Act of 1997 authorizing the
establishment of the Federal Payment Levy Program (FPLP), which allows
IRS to continuously levy[Footnote 2] up to 15 percent of certain
federal payments made to delinquent taxpayers. According to IRS, the
program, which began in July 2000, resulted in collecting over $60
million in fiscal year 2002 by directly levying federal payments.
Under FPLP, IRS matches its accounts receivable records with federal
payment records maintained by the Department of the Treasury‘s
Financial Management Service (FMS), such as certain Social Security
benefit and federal wage records. When the records match, the
delinquent taxpayer is sent a notice of intent to levy the payment,
which generally gives the taxpayer at least 30 days to either make
arrangements to pay the tax debt or provide a reason as to why the
payments should not be levied, such as financial hardship. If taxpayers
do not respond after 30 days, IRS can instruct FMS to levy their
federal payments. Subsequent payments are continuously levied until
such time that the tax debt is paid or IRS releases the levy.
To determine whether FPLP was being implemented as intended and that
the program helps IRS meet its strategic goal of treating all taxpayers
fairly, you asked us to assess how well the program is operating.
Specifically, our objectives were to determine (1) whether the data IRS
uses to manage the program adequately measures program results,
(2) how IRS‘s decision to block some delinquent accounts from being
matched to federal payments under FPLP impacts the agency‘s ability to
collect taxes efficiently, and (3) whether the criterion IRS uses to
include taxpayers receiving Social Security benefit payments into FPLP
effectively targets taxpayers who can afford to pay their tax debts.
To address our objectives, we:
* reviewed documents IRS uses to measure program results and select
cases that qualify for FPLP,
* discussed program operations with program officials,
* analyzed sample cases of delinquent taxpayers who were sent notices
of intent to levy during the period October through December 2001, and
* analyzed IRS‘s accounts receivable and FMS‘s payment files on
delinquent taxpayer accounts that were not included in the program.
The estimates of the sample cases we took of taxpayers receiving
payments from the Social Security Administration have some sampling
errors associated with them. Further, estimates about the total group
of cases we analyzed (taxpayers receiving retirement payments from the
Office of Personnel Management (OPM); vendor payments; and taxpayers
receiving Social Security payments) have sampling errors as well. All
percentage estimates about the population of taxpayers receiving Social
Security payments or the overall population have sampling errors of
plus or minus 5 percentage points or less, unless otherwise noted. Our
work was done between November 2001 and December 2002 in accordance
with generally accepted government auditing standards. (App. I
describes our overall objectives, scope, and methodology.):
Results in Brief:
The data that IRS uses to manage FPLP does not adequately measure a
full range of results. The agency‘s sole measure of results consists of
the amount of revenues collected directly through the continuous levy
of federal payments. However, we estimate that direct levy collections
account for about 27 percent of the revenues that can be attributed to
FPLP, while the remaining 73 percent of FPLP delinquent tax revenue is
collected through nonlevy payments, as taxpayers respond to the levy
notice by making voluntary payments. IRS is also not measuring the
extent that FPLP helps IRS collections to function more efficiently. On
the basis of our analysis, we estimate that about 29 percent of the
taxpayers who received a notice of intent to levy from FPLP responded
by taking action that enabled IRS to remove them from active accounts
receivable, thus freeing up IRS resources to pursue other collections.
Without full performance management information on collections and
efficiency results, IRS can significantly understate the program‘s
impact and may be hindered in its ability to make well-founded
decisions on program management and resource allocation. Acknowledging
that FPLP generates indirect results in addition to tax collections
made through the continuous levy process, IRS has initiated its own
study on how to measure indirect outcomes. This study is expected to be
completed in calendar year 2003, at which point IRS will decide how to
revise its measurement approach.
When FPLP began in July 2000, IRS blocked certain delinquent taxpayers
from being identified as receiving federal payments, thereby missing an
opportunity to use this information to collect delinquent taxes more
efficiently. IRS officials imposed the blocks because of concerns that
the potential volume of levies--some 1.4 million taxpayer accounts--
would disrupt ongoing collection activities and likely could not be
handled with existing resources. We estimate that only a small fraction
of delinquent taxpayers, about 112,000, would actually qualify for
levy. However, these 112,000 delinquent taxpayers were collectively
receiving about $6.7 billion in federal payments and owed about $1.5
billion in delinquent taxes. If these taxpayer accounts had been
matched against federal payment records, IRS would have more
information available to determine whether FPLP, or other collection
activities, would be more efficient for collection of delinquent taxes
for these accounts. In January 2003, IRS unblocked and began matching
those delinquent taxpayer accounts identified as receiving either a
federal salary or annuity payment. IRS officials plan to unblock a
portion of the remaining delinquent accounts sometime in 2005, although
they have not yet established a firm time frame for doing so.
The FPLP income criterion IRS uses to decide whether taxpayers can
afford to have their Social Security benefit payments levied is an
inaccurate indicator of ability to pay. The criterion, implemented in
January 2002, was intended to identify and exclude from levy the
benefit payments of those Social Security beneficiaries who are least
able to pay their taxes. However, our analysis of taxpayer behavior for
two groups, Social Security benefit cases above and below the income
threshold criterion, showed that both responded similarly to a notice
of levy by arranging to make some kind of voluntary payment
arrangement. In addition, both groups were almost equally likely to
rely on Social Security as their sole source of income, suggesting both
may experience financial hardship at the same rate. Furthermore, we
also found that the income criterion is based on information that is
often outdated and incomplete. Because of the inaccuracy of the income
criterion, taxpayers with similar abilities to pay their delinquent
taxes are likely to be treated differently under FPLP, which conflicts
with IRS‘s goal of treating taxpayers fairly. Although IRS has also
determined that the income criterion is flawed, it continues to use it
to identify which Social Security benefit payments will and will not be
available for levy under FPLP.
We are making several recommendations to help improve FPLP measures of
program results, program performance, and to ensure equitable treatment
of taxpayers subject to levy. IRS generally agreed with two of our
recommendations and agreed to explore options in regard to the third.
Background:
In the Taxpayer Relief Act of 1997, Congress authorized IRS to collect
delinquent tax debt by continuously levying up to 15 percent of certain
federal payments made to delinquent taxpayers. In July 2000, IRS first
implemented the continuous levy program, now referred to as FPLP. We
estimated in prior reviews that once fully operational, the program
could potentially recover hundreds of millions of dollars in delinquent
tax debt[Footnote 3] annually. In fiscal year 2002 IRS collected more
than $60 million in delinquent taxes through continuous levy under
FPLP.
IRS operates the program with FMS, the agency that receives payment
records from and makes payments on behalf of most federal agencies,
including federal retirement payments and Social Security benefit and
vendor payments.[Footnote 4] With respect to FPLP, FMS compares each
taxpayer‘s identification number (TIN) and name on agency payment
records with the TIN and name control on accounts receivable records
provided by IRS. When FMS identifies a delinquent taxpayer scheduled to
receive a federal payment, it informs IRS, which then issues a notice
of intent to levy to the taxpayer, unless the notice was previously
sent. Once taxpayers receive the notice of impending levy, they have
several options for action.[Footnote 5] Taxpayers who receive a notice
from FPLP have a minimum of 30 days to respond to the notice,[Footnote
6] during which time they may consider several alternatives available
to them. Taxpayers may either:
* disagree with IRS‘s assessment and collection of tax liability, in
which case they can appeal the action by requesting a hearing with
IRS‘s Office of Appeals;
* elect to pay off the debt in full;
* negotiate with IRS to set up an alternative payment arrangement such
as an installment agreement or an offer in compromise;[Footnote 7] or
* apply to IRS for a hardship determination, whereby taxpayers
demonstrate to IRS that making any payments at all would result in a
significant financial hardship. In such cases, IRS may agree to
temporarily delay collection action until the taxpayer‘s financial
condition improves.
If taxpayers do not respond to IRS and avail themselves of options
within the notification period, IRS will instruct FMS to proceed with
the continuous levy by reducing each scheduled payment to the taxpayer
by 15 percent--or the exact amount of tax owed if it is less than 15
percent of the payment--until the tax debt is satisfied.
The FPLP began with levies of federal employees‘ retirement payments
and vendor payments issued by FMS. IRS later added additional types of
federal payments to the program, including selected Social Security
benefits and selected federal salaries. IRS plans to continue expanding
the program by adding additional federal employee salaries and other
types of federal payments.
Not all delinquent taxpayer accounts are eligible for FPLP. IRS has
excluded certain accounts from levy; for example, cases where the
taxpayer has entered bankruptcy, made alternative arrangements to pay,
or demonstrated to IRS that making payments on the outstanding tax debt
would result in a financial hardship. With some exceptions, delinquent
taxpayer accounts are eligible for FPLP if they are either assigned to
IRS‘s Automated Collection System (ACS) or to field collections or have
been waiting for assignment to one of these areas for at least 1
year.[Footnote 8] Cases in which collection activity has been deferred
for at least a year because of low tax liability, as well as cases in
which IRS has been unable to either locate or contact the taxpayer are
also eligible for FPLP.
IRS‘s FPLP Data Understates Program Results:
IRS tracks FPLP program results by measuring only tax revenue collected
through continuous levy, although most of the collections attributable
to FPLP result from taxpayers subsequently contacting IRS and either
submitting a payment voluntarily,[Footnote 9] or arranging to pay their
delinquent taxes through other means such as by entering into an
installment agreement. Our analysis of about 98,000 delinquent
taxpayers who received a notice of intent to levy during the October
through December 2001 period showed that as of August 2002, IRS had
collected an estimated $107.1 million from these taxpayers. As shown in
figure 1, levies represented an estimated $28.5 million[Footnote 10] of
this amount, or 27 percent of the total collections, while other
payment methods represented an estimated $78.6 million,[Footnote 11] or
73 percent of the total FPLP-related collections.[Footnote 12] By not
measuring the nonlevy payments attributable to FPLP, IRS significantly
underestimates the program‘s success.
Figure 1: Tax Collections Attributable to FPLP as of August 2002 for
Taxpayers Receiving a Notice of Intent to Levy during October-December
2001:
[See PDF for image]
[End of figure]
(See app. II for more detailed information on the amount of delinquent
taxes collected as a result of FPLP by the type of federal payment
taxpayers received (i.e., Social Security benefits, federal retirement
payments, and vendor payments) and by the method of collection.):
IRS realizes other benefits attributable to FPLP that it does not
currently measure. IRS does not measure the extent that FPLP helps IRS
function more efficiently by decreasing its accounts receivable
inventory. Our analysis of the 98,000 FPLP cases indicated that after
receiving a notice of intent to levy, about 29 percent of the taxpayers
took action that enabled IRS to remove them from the active accounts
receivable inventory or to move them to an inactive status.
Specifically, we estimate that subsequent to receiving a levy notice,
about 19 percent of the taxpayers resolved their liability while about
10 percent obtained a determination of financial hardship. (For more
information on the characterization of account status, see app. II.) By
reclassifying some active delinquent accounts to an inactive status and
removing others, FPLP helps IRS to more efficiently prioritize its
accounts receivable inventory and enables IRS to focus more of its
resources on delinquent accounts that have more collection potential.
Knowing the full impact of FPLP‘s effectiveness would be consistent
with IRS‘s strategic planning and budgeting process, which emphasizes
the importance of assessing the impact of current program operations to
efficiently allocate resources. IRS acknowledges that FPLP generates
indirect results in addition to revenues collected through the
continuous levy process, and has initiated its own study on how to
measure the outcomes attributable to the program, which it expects to
complete in calendar year 2003. After completing this study, IRS will
decide how to revise its measurement approach.
Blocking Cases from Matching against Federal Payment Records Prevents
IRS from Collecting Taxes More Efficiently:
When IRS implemented FPLP in July 2000, it made a decision to
temporarily block most delinquent taxpayer accounts placed in ACS and
field collections from being matched against federal payment records.
ACS accounts were blocked primarily because IRS believed it lacked the
resources to issue levy notices and respond to the potential increase
in telephone calls from taxpayers responding to the notices and still
adequately perform other ACS activities. Specifically, agency officials
were concerned that if the 1.4 million delinquent taxpayers with
accounts in ACS were added to the program for matching too rapidly, it
could disrupt ACS workload processes and likely could not be handled
with existing resources. IRS also decided not to match over 55,000
delinquent accounts in field collection because revenue officers
believed that this action could interfere with their successfully
contacting taxpayers and negotiating a settlement to resolve the
delinquent account they had been assigned.
We found some of IRS officials‘ concerns with respect to matching the
nearly 1.5 million ACS and field collection accounts may be unfounded.
We matched the nearly 1.5 million accounts to FMS payment
records[Footnote 13] and found that only about 112,000 taxpayers were
receiving federal payments, as shown in table 1.
Table 1: Number of Delinquent Taxpayers Receiving Federal Payments out
of a Total 1.5 Million Blocked from FPLP:
[See PDF for image]
Source: GAO analysis of IRS and FMS data.
[End of table]
Submitting delinquent taxpayer accounts to FMS for matching against
federal payment records does not necessarily mean IRS must levy these
accounts. Rather, the matching process performed by FMS would provide
IRS with useful additional information to assist in determining what
the best collection method may be. For example, of the 108,469
delinquent taxpayers in ACS receiving federal payments at the time of
our analysis, IRS had not yet contacted or located more than half--
about 55,900--of these delinquent taxpayers, and could therefore have
chosen to levy some of these accounts without disrupting ongoing
collections. These 55,900 taxpayers owed about $460 million in
delinquent
taxes and received $4.1 billion in federal payments during 2002. If IRS
had information on matching federal payments for these delinquent
accounts, it would have had additional options available to determine
how best to pursue collection of the delinquent tax revenue--such as
using FPLP.
While the ACS and field collection actions may result in the eventual
recovery of most of the delinquent taxes associated with these
accounts, using the automated FPLP matching process could help IRS
collect this revenue in a more timely and efficient manner. Even when
ACS or field revenue officers have already contacted the taxpayer,
matching--but not necessarily issuing a notice of intent to levy--the
account could provide useful information for IRS to consider in
collections. For example, revenue officers may not be aware that
taxpayers in their case inventory are currently receiving federal
payments, and they could use this information to develop a more
complete assessment of the taxpayer‘s financial situation. In January
2003, IRS unblocked and made available for matching and levy those
delinquent accounts identified as receiving federal salary or annuity
payments--representing about 20,000 of the 112,000 blocked taxpayers we
identified in our analysis. However, other delinquent accounts remain
blocked from being matched to FMS payment records. Agency officials
said that they plan to unblock a portion of the remaining delinquent
accounts sometime in 2005, although they have not yet established a
firm time frame for doing so.
IRS‘s Criterion for Determining Which Social Security Beneficiaries Can
Afford to Have Their Payments Levied Is an Inaccurate Indicator of
Ability to Pay:
IRS established an income threshold to exclude Social Security
beneficiaries who cannot afford to pay their taxes from FPLP. However,
our analysis of Social Security beneficiaries above and below this
income threshold shows that IRS‘s income criterion is an inaccurate
indicator of a taxpayer‘s ability to pay. We found little difference
between the two groups in terms of the frequency with which taxpayers
either made voluntary payments in response to a levy notice or relied
on Social Security as a sole source of income. We also found that the
income criterion relies on information that is often outdated and
incomplete.
IRS Decided to Exclude Selected Social Security Payments from FPLP
without Evaluating the Effectiveness of Its Income Level Criterion:
In response to concerns raised by the National Taxpayer Advocate
regarding potential harm that may be experienced by Social Security
beneficiaries who are levied under FPLP, IRS implemented an income
criterion for Social Security benefit payments intended to identify and
screen from FPLP, those taxpayers who are least able to pay their tax
debt. The National Taxpayer Advocate believed that taxpayers who rely
solely on Social Security benefits as their income source are most
vulnerable to the financial hardship that a continuous levy may cause.
In January 2002, IRS implemented an income threshold that excluded
Social Security benefit payments from FPLP for 55 percent of the
delinquent taxpayers who receive these payments.[Footnote 14] This
income level criterion, Total Positive Income (TPI),[Footnote 15] is
derived from income information reflected on the most recent income tax
return filed by the taxpayer. Under FPLP, the TPI criterion only
applies to Social Security benefit payments and not to other forms of
payments such as federal annuities or salary payments. We estimate that
taxpayers who were receiving Social Security payments and whose TPI was
below the income threshold owed approximately
$522 million in delinquent taxes.[Footnote 16]
Prior to introducing Social Security benefit payments into FPLP, IRS
implemented the TPI criterion without doing any tests to indicate
whether the TPI criterion was necessary or better than the special
procedures IRS had already planned-providing Social Security
beneficiaries with a longer notification period relative to recipients
of other federal payments. Under the normal notification process, IRS
gives delinquent taxpayers 30 days from receipt of a notice of
impending levy before it begins to levy the payment. Under FPLP, IRS
planned to provide Social Security beneficiaries with a second notice
of intent to levy and an additional
30 days to respond. The extended notification period was adopted and is
intended to provide Social Security beneficiaries with sufficient
opportunity to contact IRS with any questions concerning the levy
notice, and, if necessary, demonstrate to IRS that the levy would
result in financial hardship. IRS officials said that due to time
constraints IRS did not test the extent to which the planned extended
two-notice process would have proved sufficient to ensure that Social
Security beneficiaries were not subjected to undue financial hardship
under FPLP. In addition, IRS did not do any studies to determine what
TPI level would best protect financially vulnerable Social Security
beneficiaries, or whether the criterion should apply to other federal
payments as well.
The TPI Criterion Has Several Weaknesses:
The TPI criterion has several weaknesses that can impact Social
Security beneficiaries both above and below the income threshold. Our
analysis has shown that TPI is an inaccurate indicator of those
delinquent taxpayers who are the most financially vulnerable. Under
current program procedures, IRS does not send either one of the two
routine levy notices to Social Security beneficiaries who are below the
TPI threshold. However, while phasing Social Security benefit payments
into FPLP between October and December of 2001, IRS issued the initial
notice of intent to levy to all delinquent Social Security
beneficiaries who owed taxes, including those whose TPI was below the
threshold and whose benefit payments would therefore be excluded from
the program. As a result, we were able to compare data on how taxpayers
in both the ’able to pay“ and ’unable to pay“ group responded to the
levy notice. We found that of the approximately 90,000 Social Security
beneficiaries in the below TPI threshold group, an estimated 18 percent
made voluntary payments or entered into an installment agreement of
their own accord after receiving the one-time notice of intent to levy
at the end of 2001. Of the approximately 97,000 Social Security
beneficiaries whose TPI was above the threshold, an estimated 12
percent had made voluntary payments or entered into an installment
agreement.[Footnote 17] The 6 percent difference between the 12 and 18
percent figures[Footnote 18] is too small to be statistically
significant; thus, Social Security beneficiaries above and below the
TPI threshold made voluntary payments and entered into installment
agreements at comparable rates. While the TPI threshold‘s use has
categorized certain taxpayers as those whose Social Security payments
need to be excluded from FPLP because they are unable to pay, their
actions in response to one levy notice demonstrates some ability to pay
and, in fact, are similar to the actions of taxpayers above the TPI
threshold.[Footnote 19]
Our study also showed that IRS granted financial hardship status to
Social Security beneficiaries above and below the TPI threshold at
similar rates. As part of the regular collections process, any
delinquent taxpayer has the right to ask IRS for a hardship
determination in which the taxpayer claims that he or she is unable to
pay their taxes without incurring undue financial hardship. As part of
the determination process, the taxpayer may be required to provide IRS
with financial information to substantiate his or her financial
condition, and if IRS agrees that paying taxes would constitute a
hardship, IRS will temporarily delay collection activity until the
taxpayer‘s financial condition improves. An estimated 5 percent of
Social Security beneficiaries whose TPI is below the threshold and
8 percent of Social Security beneficiaries whose TPI is above the
threshold responded to the notice by contacting IRS and obtaining a
determination of financial hardship by using IRS‘s standard hardship
determination process. The difference between the 5 and 8 percent
figures[Footnote 20] is too small to be statistically significant;
thus, Social Security beneficiaries above and below the TPI threshold
entered in hardship status at comparable rates.
Furthermore, our analysis also determined that the TPI threshold poorly
identifies taxpayers who solely rely on Social Security benefits--the
group of taxpayers the National Taxpayer Advocate considered to be most
vulnerable to financial hardship from continuous levy. We analyzed
information returns data[Footnote 21] for tax year 2001 for a
representative sample of Social Security beneficiaries with a TPI below
the threshold and reviewed their current income sources. We found that
an estimated 46 percent of these Social Security beneficiaries received
only Social Security benefits and the remaining 54 percent received
income in addition to Social Security benefit payments. These numbers
were very close to the numbers we found for Social Security
beneficiaries with a TPI above the threshold and, thus, presumably able
to afford paying their taxes. About 40 percent of the above TPI group
also relied on Social Security benefits as their sole source of income.
The difference between the 40 and 46 percent figures[Footnote 22] is
not statistically significant, indicating that a Social Security
beneficiary under the TPI threshold is almost equally likely to rely
solely on Social Security benefit payments as one deemed able to pay.
Our analysis also indicated that TPI is frequently outdated because it
is based on income information reflected on the most recent income tax
return filed by the taxpayer. However, if the taxpayer was not required
to file a tax return in recent years,[Footnote 23] his or her TPI
information from that last return filed may not be consistent with
their current financial situation. For example, a person who had a
relatively high TPI according to his or her last income tax return may
now be receiving significantly less income, in which case TPI is not an
accurate indicator to determine whether they should now be included or
excluded from FPLP. We reviewed the currency of the last tax return of
Social Security beneficiaries who owed delinquent taxes and estimate
that only 17 percent had filed a return for tax year 2001. We found
that in total, 53 percent of the Social Security beneficiaries had not
filed since tax year 1996 or earlier. (See app. II for more information
on the results of this review.):
In addition to being frequently outdated, TPI is an incomplete
indicator of a person‘s full resources. While the TPI calculation does
include income earned from assets such as interest and capital gains,
it does not include information on a taxpayer‘s assets, such as savings
account balances, stocks, property ownership, or individual retirement
account balances when determining a taxpayer‘s ability to pay. Using
our review of data for tax year 2001 information returns, we were able
to estimate that over
14 percent of Social Security beneficiaries who had a TPI below the
threshold made mortgage interest payments, yet were excluded from FPLP.
During the regular collections process in which IRS works directly with
taxpayers to resolve their delinquent accounts, information on assets
is taken into account when assessing the taxpayers‘ overall financial
condition.
Both the National Taxpayer Advocate and the FPLP officials we spoke
with acknowledged that the TPI criterion is flawed. FPLP officials, in
their own study on TPI implementation, agreed that the TPI criterion
had several problems. Similar to our findings, they reported that TPI
is often out of date because the majority of last tax returns filed
were at least 1 year out of date. IRS also found that TPI does not
include consideration of filing status and dependent information, and
is not adjusted when changes on the return are made resulting from an
audit or amendment. However, IRS has continued to use TPI because it
has
not identified suitable alternatives, and has not taken time to
determine
whether the extended notification period effectively meets the needs of
the Social Security beneficiary population. Nor has it identified
whether Social Security beneficiaries are more vulnerable to financial
hardship than other federal payment recipient groups. IRS‘s continued
use of a criterion that is inadequate in identifying those taxpayers
who may be least able to pay, and therefore treats taxpayers with
similar abilities to pay differently, is at odds with IRS‘s strategic
goal emphasizing the importance of treating all taxpayers fairly.
Conclusions:
IRS‘s FPLP is still a relatively new program, and, as such, has not yet
realized its full potential. To ensure that it does, IRS needs
sufficient information to determine the results the program achieves so
that well informed decisions can be made in allocating resources to
FPLP. However, when measuring FPLP‘s results, IRS only considers the
program‘s most immediate effect, the tax revenue collected directly by
continuous levy, and thereby substantially understates the program‘s
results. Although IRS recognizes that broader measures of FPLP results
are needed, its study to determine how to do so will not be completed
until calendar year 2003, at which time IRS will then decide how to
revise its measurement approach.
FPLP‘s full potential also has not been tapped because IRS has not
taken full advantage of the information that could be used to determine
the most efficient means of collecting delinquent taxes. Rather than
analyzing the workload implications of matching additional accounts
under the program, IRS blocked certain delinquent accounts from the
program on the assumption that including them would create an
overwhelming increase in workload. In fact, only a small portion of the
blocked delinquent accounts--about 112,000 of the nearly 1.5 million--
matched against federal payments. In January 2003, IRS removed the
block on some delinquent accounts but it has not set a firm time frame
for unblocking the remaining accounts. Removing the block on the
remaining accounts does not mean IRS would necessarily have to levy the
accounts. Rather, it can use the information gained from matching the
accounts to federal payment records to help identify the most efficient
means of resolving the accounts, which may include levying some portion
of them.
Finally, use of an income based criterion to identify whether Social
Security benefit payments should be excluded from the program has
likely resulted in unequal treatment of similarly situated taxpayers,
which conflicts with IRS‘s strategic goal of treating all taxpayers
fairly. IRS adopted this criterion (1) without testing its
effectiveness and (2) without determining if excluding any
beneficiaries from FPLP was even a necessary step, given measures that
IRS had already taken to address possible hardship cases. While FPLP
officials concur that it has many weaknesses, IRS continues using the
criterion to exclude selected Social Security benefit payments from
FPLP.
Recommendations for Executive Action:
To help ensure that IRS is operating FPLP in a manner that achieves the
program‘s full potential and ensures equitable treatment of taxpayers,
we recommend that the Acting Commissioner of Internal Revenue:
* Include in IRS‘s planned new approach to measuring FPLP results data
on the full range of taxpayers‘ actions and tax collections
attributable to FPLP, including nonlevy collections and account
resolutions.
* Study the feasibility of submitting all eligible delinquent accounts
to FMS on an ongoing basis for matching against federal payment records
under FPLP, and use information from any matches to assist IRS in
determining the most efficient method of collecting delinquent taxes,
including whether to use FPLP.
* Discontinue using the TPI criterion as an indicator of Social
Security beneficiaries‘ ability to pay delinquent taxes and rely on the
extended two-notice process to identify beneficiaries for whom a levy
would be a hardship. Determine whether sending a second notice that
explains the financial hardship exception to all Social Security
beneficiaries subject to levy is sufficient to identify hardship
situations. If not, develop and test a criterion that reliably
identifies those Social Security beneficiaries for whom a levy would
represent an undue hardship.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the Acting
Commissioner of Internal Revenue (see app. III). The Acting
Commissioner generally agreed with our recommendations and provided
technical comments and clarifications that we have incorporated
throughout this report where appropriate.
To enhance IRS‘s ability to measure the full range of direct and
indirect results of FPLP operation, the Acting Commissioner agreed to
include in the agency‘s planned new approach to measuring program
results, data on nonlevy collections and account resolutions. The
Acting Commissioner said that, as IRS gets closer to implementing its
new measurement approach, it would like to share its methodology with
us.
However, the Acting Commissioner raised concerns with the part of our
recommendation calling for IRS to consider account resolutions when
measuring FPLP results. He said that contrary to our draft report‘s
statement that FPLP frees up resources through account resolutions that
can be used to pursue accounts with more collection potential, FPLP has
generated an increased workload for IRS staff that diverts them from
more productive uses. He concluded that it is difficult to assess the
total costs and/or indirect benefits of the program in terms of
resources freed up to pursue other collection activity.
We agree that doing such an assessment is challenging. However, IRS
managers‘ ability to accurately gauge FPLP effectiveness, as well as
validate resource allocation decisions among various IRS collection
activities should be based, to the extent practical, on data that
accurately and completely reflect program results. While we recognize
that IRS does have workload that comes from FPLP cases, and that
workload may be lower priority in some cases than other alternative
casework, FPLP also leads to many case closures that require little IRS
employee time. In addition, since all cases subject to the FPLP have
already received notices from IRS about their delinquent accounts, IRS
had previously judged the accounts as meriting collection action even
if they might involve increased collection staff workload.
In our draft report, we had recommended that IRS submit all delinquent
accounts to FMS on an ongoing basis for matching against federal
payment records under FPLP and use information from any matches to
assist IRS in determining the most efficient method of collecting
delinquent taxes, including whether to use the FPLP to do so. While
reviewing the draft report, IRS officials raised concerns, which they
did not express in our previous discussions with them, that computer
programming costs associated with implementing this draft
recommendation might make the recommendation infeasible for certain
types of taxpayer accounts. In light of those concerns, we agreed to
modify our recommendation to instead recommend that IRS study the
feasibility of submitting all delinquent accounts for matching. In his
letter, the Acting Commissioner agrees with this revised recommendation
and indicates that efforts to do so are underway.
In reference to our recommendation that IRS discontinue use of the TPI
criterion, the Acting Commissioner stated IRS‘s commitment to ensuring
all taxpayers are treated fairly and that IRS is concerned with the
issues we raised regarding the TPI criterion. The Acting Commissioner
did not agree to discontinue the use of the TPI immediately, but said
that IRS would take the next 120 days to work with the National
Taxpayer Advocate and program administrators to assess deficiencies in
the current process and to develop a suitable solution. This action
generally is responsive to our recommendation. However, if developing
and implementing a suitable solution extends beyond the 120-day
milestone set by the Acting Commissioner, we believe IRS should, as we
recommended, discontinue use of the TPI criterion and rely on the two-
notice procedure already in place while IRS continues to work on a
solution it believes would be more suitable. As our report notes, IRS
has been aware of some limitations with TPI for some time and has yet
to identify a suitable solution.
We will send copies to the Ranking Minority Member, House Committee on
Ways and Means; Ranking Minority Member, Subcommittee on Oversight,
House Committee on Ways and Means; and the Chairman and Ranking
Minority Member, Senate Committee on Finance. We will also send copies
to the Acting Commissioner of Internal Revenue and other interested
parties. Copies of this report will also be made available to others
upon request. The report will also be available on GAO‘s Web site at
http://www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-9110 or Ralph Block at (415) 904-2150. Key contributors to
this work are listed in appendix IV.
Michael Brostek
Director, Tax Issues:
Signed by Michael Brostek:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to determine (1) whether the data the Internal
Revenue Service (IRS) uses to manage the Federal Payment Levy Program
(FPLP) adequately measures program results, (2) how IRS‘s decision to
block some delinquent accounts from being matched to federal payments
under FPLP impacts the agency‘s ability to collect taxes efficiently,
and (3) whether the criterion IRS uses to include taxpayers receiving
Social Security Administration benefit payments in FPLP effectively
targets taxpayers who can afford to pay their tax debts.
Scope and Methodology:
We obtained and reviewed the data used by IRS to track program results
in an effort to determine whether IRS‘s data on FPLP operations
adequately measures program results, including direct levy collections
and other nonlevy collections such as those made through voluntary
payments, installment agreements, and offers in compromise that occur
in response to FPLP collection notices. We also selected and analyzed
three groups of delinquent taxpayers that received a notice of intent
to levy between October and December 2001. These groups were (1) all
taxpayers receiving federal retirement payments from the Office of
Personnel Management (OPM), (2) all taxpayers receiving vendor payments
from federal agencies whose payments are processed by the Financial
Management Service (FMS), and (3) a random sample of taxpayers
receiving Social Security benefit payments.
We analyzed a total of 1,540 taxpayers that were comprised of
(1) 699 delinquent taxpayers receiving OPM payments, (2) 484 delinquent
vendors receiving federal payments, and (3) a random sample of
357 delinquent taxpayers who were receiving Social Security payments.
Since OPM and vendor payments have been eligible for FPLP matching
since program inception, we analyzed only the new matches that occurred
during the selected time period for these populations. However, because
IRS first started matching all Social Security payments during the
October-December 2001 time period, we randomly selected a sample of
357 taxpayers whose total positive income (TPI) was above the income
threshold and who were receiving Social Security benefit payments. We
weighted our observations on those 357 sampled cases in order to
project to the total population of 97,133 taxpayers in this
category.[Footnote 24] Using electronic taxpayer information files
provided by IRS, we analyzed subsequent transactional activity that
occurred on the taxpayer accounts reviewed between the initial match in
the fourth quarter of 2001 and as of August 26, 2002. We also analyzed
the level and type of account activity that occurred prior to inclusion
in FPLP, including the elapsed time since the last significant action
initiated by either IRS or the taxpayer, to determine whether the
account activity that occurred after IRS issued a notice of intent to
levy could be attributed to the continuous levy program. We attributed
voluntary tax payments to inclusion in FPLP in only those cases where
the delinquent account was not in any other collection status, that is,
field collection or in the Automated Collection System (ACS) inventory.
We discussed the range of impacts that may result after a taxpayer
receives a notice of intent to levy under FPLP with program officials,
which they agreed go beyond a continuous levy payment.
We interviewed IRS officials in FPLP, ACS, and field collection areas
to determine whether some of the taxpayer accounts that are currently
blocked could be subject to FPLP, including determining the reason for
blocking these accounts as well as the likelihood of unblocking them in
the future. To estimate the number of blocked delinquent accounts that
would match federal payment records if IRS were to introduce accounts
that are blocked from being included in the program, we obtained and
matched IRS‘s accounts receivable records as of February 2002 with
agency payment records obtained from FMS.[Footnote 25]
To determine whether the TPI criterion IRS uses to levy Social Security
payments is effectively targeting taxpayers who can afford to pay their
tax debts, we performed additional analysis on the random sample of
357 delinquent taxpayers receiving Social Security payments included in
the first of our study objectives. In addition, we analyzed a random
sample of 405 delinquent taxpayers who received Social Security
payments and who were under the TPI threshold. We weighted our
observations on the 405 cases to project to the population of 90,307
taxpayers in this category. We reviewed income data from IRS‘s taxpayer
information files and information returns database to determine (1)
each taxpayer‘s reliance on Social Security benefits as a sole source
of income, (2) whether taxpayers below and above the TPI threshold
differed in their reaction to receiving a notice of intent to levy
under FPLP, and (3) whether the TPI criterion accurately reflected each
taxpayer‘s current income level. We also met with the National Taxpayer
Advocate as well as IRS program officials to discuss why the TPI
criterion is used to screen Social Security payments that are to be
included in FPLP. We also met with officials from the Social Security
Administration to get their views on phasing benefit payments into
FPLP.
We did our work at IRS and FMS headquarters in Washington, D.C.; the
Social Security Administration headquarters in Baltimore, Maryland; the
IRS area offices in Oakland, California and Sacramento, California; and
the IRS Return Processing Center in Fresno, California.
[End of section]
Appendix II: Additional Data on Revenue Collections Attributable to
FPLP
and Status of Taxpayer Accounts:
This appendix provides additional details on the results of our
analysis, specifically (1) the estimated $107.1 million in delinquent
tax collections that can be attributed to the FPLP, (2) the
categorization of taxpayer action after entering the FPLP, and (3) the
distribution of Social Security payment recipients by year of the most
recent income tax return filed.
FPLP Payments by Collection Method:
Our analysis included a group of taxpayers in FPLP receiving Social
Security benefit payments, federal government retirement payments from
OPM, and vendor payments. For detailed information on the distribution
of delinquent tax dollars collected by various methods, including
continuous levy under FPLP, see table 2.
Table 2: FPLP Payments by Collection Method as of August 2002 for
Taxpayers Who Received a Notice of Intent to Levy during October-
December 2001:
Dollars in millions:
SSA:
FPLP nonlevy payments; Dollars collected: $73.4;
95 percent confidence: interval of dollars: collected[A]: 54.6 to
123.4; Percentage of dollars: collected[B]: 73.
Installment agreement payments; Dollars collected:
2.8; 95 percent confidence: interval of dollars: collected[A]: 2.4 to
3.5; Percentage of dollars: collected[B]: 3.
Litigation, claim, and offer in
compromise payments; Dollars collected: 1.9; 95 percent confidence:
interval of dollars: collected[A]: 1.1 to 1.9; Percentage of dollars:
collected[B]: 2.
Voluntary payments; Dollars collected: 68.7; 95
percent confidence: interval of dollars: collected[A]: 52.7 to 119.0;
Percentage of dollars: collected[B]: 69.
FPLP levy payments; Dollars collected: 26.9; 95
percent confidence: interval of dollars: collected[A]: 23.8 to 30.1;
Percentage of dollars: collected[B]: 27.
Total; Dollars collected: $100.3; 95 percent
confidence: interval of dollars: collected[A]: [Empty]; Percentage of
dollars: collected[B]: 100.
OPM;
FPLP nonlevy payments; Dollars collected: 0.3; 95
percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 49.
Installment agreement payments; Dollars collected:
0.02; 95 percent confidence: interval of dollars: collected[A]:
[Empty]; Percentage of dollars: collected[B]: 4.
Litigation, claim, and offer in
compromise payments; Dollars collected: 0.0007; 95 percent confidence:
interval of dollars: collected[A]: [Empty]; Percentage of dollars:
collected[B]: 0.
Voluntary payments; Dollars collected: 0.3; 95
percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 45.
FPLP levy payments; Dollars collected: 0.3; 95
percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 51.
Total; Dollars collected: $0.6; 95 percent
confidence: interval of dollars: collected[A]: [Empty]; Percentage of
dollars: collected[B]: 100.
Vendor;
FPLP nonlevy payments; Dollars collected: 4.9; 95
percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 79.
Installment agreement payments; Dollars collected:
0.9; 95 percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 14.
Litigation, claim, and offer in
compromise payments; Dollars collected: 0.2; 95 percent confidence:
interval of dollars: collected[A]: [Empty]; Percentage of dollars:
collected[B]: 4.
Voluntary payments; Dollars collected: 3.8; 95
percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 62.
FPLP levy payments; Dollars collected: 1.3; 95
percent confidence: interval of dollars: collected[A]: [Empty];
Percentage of dollars: collected[B]: 21.
Total; Dollars collected: $6.2; 95 percent
confidence: interval of dollars: collected[A]: [Empty]; Percentage of
dollars: collected[B]: 100.
Overall;
FPLP nonlevy payments; Dollars collected: 78.6; 95
percent confidence: interval of dollars: collected[A]: 59.8 to 128.6;
Percentage of dollars: collected[B]: 73.
Installment agreement payments; Dollars collected:
3.7; 95 percent confidence: interval of dollars: collected[A]: 3.3 to
4.4; Percentage of dollars: collected[B]: 3.
Litigation, claim, and offer in
compromise payments; Dollars collected: 2.1; 95 percent confidence:
interval of dollars: collected[A]: 1.3 to 2.1; Percentage of dollars:
collected[B]: 2.
Voluntary payments; Dollars collected: 72.8; 95
percent confidence: interval of dollars: collected[A]: 56.8 to 123.1;
Percentage of dollars: collected[B]: 68.
FPLP levy payments; Dollars collected: 28.5; 95
percent confidence: interval of dollars: collected[A]: 25.4 to 31.7;
Percentage of dollars: collected[B]: 27.
Total; Dollars collected: $107.1; 95 percent
confidence: interval of dollars: collected[A]: [Empty]; Percentage of
dollars: collected[B]: 100.
Source: GAO analysis of IRS data.
[A] Data on Social Security cases sampled has been projected to
represent the total population of 97,133 taxpayers receiving Social
Security payments and whose TPI was above the criterion threshold.
[B] Percentages may not add due to rounding.
[End of table]
Categorization of Taxpayers:
To assess the full range of FPLP results, we reviewed the status of
accounts for a group of taxpayers after they had been in the program
for an extended period of time.[Footnote 26] Based on our examination
of the available IRS transactions data for each delinquent account, we
assigned these sampled taxpayers to categories representative of the
most recent activity that had occurred on their account as of August
2002. In general, we found that the taxpayer status fell into one of
eight categories: (1) the account had been resolved through payment
and/or abatement of the tax liability; (2) the account was still being
actively matched and/or levied under FPLP; (3) the taxpayer had made at
least one voluntary payment on the delinquent debt; (4) the taxpayer
had made installment agreement payments on the debt or had initiated
the installment agreement process; (5) the taxpayer had either
initiated litigation, a claim for a refund, or the offer in compromise
process; (6) the delinquent account had been transferred to either the
ACS or the field for manual collection; (7) the delinquent account was
removed from FPLP for various reasons, for example, the taxpayer was
deceased or for other unknown reasons; and (8) IRS made a determination
that the taxpayer had a financial hardship and was currently unable to
make any payments on the debt. Table 3 provides more detailed
information on the categorization of taxpayer activity we observed for
the accounts reviewed.
Table 3: Categorization of Taxpayers by Delinquent Account Status as of
August 2002:
Resolved account; Taxpayers: SSA: 17,685; Taxpayers: OPM: 257;
Taxpayers: Vendor: 295; Taxpayers: Overall: 18,237; [Empty]; Percentage
of taxpayers: SSA: 18; Percentage of taxpayers: OPM: 37; Percentage of
taxpayers: Vendor: 61; Percentage of taxpayers: Overall: 19.
Account currently in FPLP; Taxpayers: SSA: 42,445; Taxpayers: OPM: 212;
Taxpayers: Vendor: 91; Taxpayers: Overall: 42,748; [Empty]; Percentage
of taxpayers: SSA: 44; Percentage of taxpayers: OPM: 30; Percentage of
taxpayers: Vendor: 19; Percentage of taxpayers: Overall: 43.
Voluntary payment made; Taxpayers: SSA: 2,993; Taxpayers: OPM: 49;
Taxpayers: Vendor: 15; Taxpayers: Overall: 3,057; [Empty]; Percentage
of taxpayers: SSA: 3; Percentage of taxpayers: OPM: 7; Percentage of
taxpayers: Vendor: 3; Percentage of taxpayers: Overall: 3.
Installment agreement; Taxpayers: SSA: 5,442; Taxpayers: OPM: 59;
Taxpayers: Vendor: 20; Taxpayers: Overall: 5,521; [Empty]; Percentage
of taxpayers: SSA: 6; Percentage of taxpayers: OPM: 8; Percentage of
taxpayers: Vendor: 4; Percentage of taxpayers: Overall: 6.
Litigation, claim, and offer in compromise; Taxpayers: SSA: 2,993;
Taxpayers: OPM: 30; Taxpayers: Vendor: 16; Taxpayers: Overall: 3,039;
[Empty]; Percentage of taxpayers: SSA: 3; Percentage of taxpayers: OPM:
4; Percentage of taxpayers: Vendor: 3; Percentage of taxpayers:
Overall: 3.
Transferred to manual collection process; Taxpayers: SSA: 6,802;
Taxpayers: OPM: 29; Taxpayers: Vendor: 29; Taxpayers: Overall: 6,860;
[Empty]; Percentage of taxpayers: SSA: 7; Percentage of taxpayers: OPM:
4; Percentage of taxpayers: Vendor: 6; Percentage of taxpayers:
Overall: 7.
Out of FPLP; Taxpayers: SSA: 9,251; Taxpayers: OPM: 38; Taxpayers:
Vendor: 18; Taxpayers: Overall: 9,307; [Empty]; Percentage of
taxpayers: SSA: 10; Percentage of taxpayers: OPM: 5; Percentage of
taxpayers: Vendor: 4; Percentage of taxpayers: Overall: 9.
Determined unable to pay; Taxpayers: SSA: 9,523; Taxpayers: OPM: 25;
Taxpayers: Vendor: 0; Taxpayers: Overall: 9,548; [Empty]; Percentage of
taxpayers: SSA: 10; Percentage of taxpayers: OPM: 4; Percentage of
taxpayers: Vendor: 0; Percentage of taxpayers: Overall: 10.
Total; Taxpayers: SSA: 97,133; Taxpayers: OPM: 699; Taxpayers: Vendor:
484; Taxpayers: Overall: 98,316; [Empty]; Percentage of taxpayers: SSA:
100; Percentage of taxpayers: OPM: 100; Percentage of taxpayers:
Vendor: 100; Percentage of taxpayers: Overall: 100.
Source: GAO analysis of IRS data.
Note: Data on the sampled Social Security cases has been projected to
represent the total population of 97,133 taxpayers receiving Social
Security payments and whose TPI was above the criterion threshold.
Totals may not add due to rounding. The 95 percent confidence interval
on the overall percentage estimates ranges from plus or minus 1.5 to 5
percentage points.
[End of table]
Most Recently Filed Income Tax Returns for Social Security
Beneficiaries:
We analyzed the yearly distribution of the most recent income tax
return filed for Social Security payment recipients who owed delinquent
taxes. Table 4 shows that only 17 percent of these taxpayers had filed
for tax year 2001, and that 53 percent had not filed since 1996 or
earlier.
Table 4: Distribution of Social Security Payment Recipients by Year of
Most Recent Income Tax Return Filed:
Tax year of last return filed: 2001; Number of taxpayers: 31,865;
Percentage of taxpayers
who filed: 17; Cumulative percentage of taxpayers: 100.
Tax year of last return filed: 2000; Number of taxpayers: 11,246;
Percentage of taxpayers
who filed: 6; Cumulative percentage of taxpayers: 83.
Tax year of last return filed: 1999; Number of taxpayers: 13,121;
Percentage of taxpayers
who filed: 7; Cumulative percentage of taxpayers: 77.
Tax year of last return filed: 1998; Number of taxpayers: 14,995;
Percentage of taxpayers
who filed: 8; Cumulative percentage of taxpayers: 70.
Tax year of last return filed: 1997; Number of taxpayers: 16,870;
Percentage of taxpayers
who filed: 9; Cumulative percentage of taxpayers: 62.
Tax year of last return filed: 1996 and earlier; Number of taxpayers:
99,343; Percentage of taxpayers
who filed: 53; Cumulative percentage of taxpayers: 53.
Tax year of last return filed: Total; Number of taxpayers: 187,440;
Percentage of taxpayers
who filed: 100; Cumulative percentage of taxpayers: [Empty].
Source: GAO analysis of IRS data.
Note: Data on the combined Social Security samples of taxpayers above
and below the TPI criterion have been projected to represent the total
population of 187,440 taxpayers receiving Social Security payments. The
95 percent confidence interval on the percentage estimates ranges from
plus or minus 1.6 to 3.4 percentage points.
[End of table]
[End of section]
Appendix III: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C.
20224:
COMMISSIONER:
February 27, 2003:
Mr. Michael Brostek Director, Tax Issues U.S. General Accounting Office
441 G Street, N.W. Washington, D.C. 20548:
Dear Mr. Brostek:
This is in response to your letter and draft report entitled ’Federal
Payment Levy Program Measures, Performance, and Equity Can Be
Improved.“ The Federal Payment Levy Program (FPLP) has proven to be a
valuable, cost-effective method of securing tax revenues from federal
payment sources. As we expand FPLP to additional federal employee
salaries and other types of federal payments, we will continue our
efforts to fully capture the program‘s business results, and improve
performance in a manner that ensures fair and equitable treatment for
all taxpayers.
Your report suggests that FPLP frees up resources, enabling us to
pursue accounts with more collection potential. We agree that FPLP
automated processes enable us to close accounts. However, we have
experienced a workload increase due to taxpayer inquiries made as a
result of FPLP and the actions necessary to close these cases. Many of
these taxpayer contacts are on cases resulting in less productive use
of our resources. With the plans for continued expansion of FPLP, it is
difficult to assess the total costs and/or indirect benefits of the
program in terms of resources freed up to pursue other collection
activity.
Our response to the Recommendations for Executive Action follows:
Recommendation:
Include in IRS‘s planned new approach to measuring FPLP results data on
the full range of taxpayers‘ actions and tax collections attributable
to FPLP, including non-levy collections and account resolutions.
Response:
We agree with the report‘s finding that FPLP measures only the direct
revenue collected as a result of the levy and that we should also
measure indirect revenue through non-levy payments. The program staff
will work with our Information Technology Services (ITS) to determine
programming requirements needed to include:
indirect revenue as a measurement of FPLP. We anticipate developing
these requirements and including them in a Request for Information
Services in early May. Based on the requirements, ITS will provide an
estimated implementation date. We would like to share our proposed
methodology with you as we develop it. We will also explore the
feasibility of tracking other account resolutions, such as ’Determined
Unable to Pay,“ as a result of FPLP.
Recommendation:
Study the feasibility of submitting all eligible delinquent accounts to
FMS on an ongoing basis for matching against federal payment records
under FPLP, and use information from any matches to assist IRS in
determining the most efficient method of collecting delinquent taxes,
including whether to use FPLP.
Response:
We are currently conducting a one-time test match with FMS on Automated
Collection System (ACS) cases that are eligible for FPLP. We will study
the results of that test to determine the cost-effectiveness of
implementing matching as an ongoing process. In addition, we have
expanded our universe of accounts subject to FPLP. As you noted in your
report, we will include delinquent accounts of taxpayers who received
either a federal salary or annuity payment in Fiscal Year (FY) 2003,
and we have also requested programming changes for FY 2005 to include
additional cases currently in ACS.
Recommendation:
Discontinue using the Total Positive Income (TPI) criterion as an
indicator of Social Security beneficiaries‘ ability to pay delinquent
taxes and rely on the extended two-notice process to identify
beneficiaries for whom a levy would be a hardship. Determine whether
sending a second notice that explains the financial hardship exception
to all Social Security beneficiaries subject to levy is sufficient to
identify hardship situations. If not, develop and test a criterion that
reliably identifies those Social Security beneficiaries for whom a levy
would represent an undue hardship.
Response:
We are committed to ensuring all taxpayers are treated fairly. We are
concerned with the issues you outlined in your report regarding the TPI
criterion we use for Social Security beneficiaries. We implemented this
process in response to concerns the National Taxpayer Advocate (NTA)
raised about the potential adverse effect of levies on this particular
group of taxpayers. We believe it is critical that we take the next 120
days to work with the NTA and program administrators to assess the
deficiencies in the current process and to develop a suitable solution.
If you have any questions, please contact me or have a member of your
staff contact Pamela G. Watson, Director, Filing and Payment Compliance
at (404) 338-8686.
Sincerely,
Bob Wenzel
Acting Commissioner:
Signed by Bob Wenzel
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Michael Brostek (202) 512-9110
Ralph T. Block (415) 904-2150:
Acknowledgments:
In addition to those named above, Tom N. Bloom, Allen T. Chan, Jeanine
Lavender, Ellen Rominger, Amy Rosewarne, Samuel Scrutchins, Wendy
Turenne, James J. Ungvarsky, Elwood D. White, and Thomas Venezia made
key contributions to this report.
FOOTNOTES
[1] This represents total unpaid assessments as of September 30, 2002.
Federal accounting standards identify unpaid assessments as (1) taxes
due from taxpayers for which IRS can support the existence of a
receivable through taxpayer agreement or a favorable court ruling
(federal taxes receivable); (2) assessments IRS has made of additional
taxes owed in which neither the taxpayer nor the court has affirmed
that the amounts are owed; and
(3) write-offs, for which IRS expects no collection due to factors such
as the taxpayer‘s death, bankruptcy, or insolvency.
[2] Levy is the legal process by which IRS orders a third party to turn
over property in its possession that belongs to the delinquent taxpayer
named in a notice of levy. A continuous levy remains in effect from the
date it is first made until the tax debt is fully paid or IRS releases
the levy.
[3] U.S. General Accounting Office, Tax Administration: IRS‘ Levy of
Federal Payments Could Generate Millions of Dollars, GAO/GGD-00-65
(Washington, D.C.: April 2000) and Tax Administration: Millions of
Dollars Could Be Collected If IRS Levied More Federal Payments,
GAO-01-711 (Washington, D.C.: July 2001).
[4] The Office of Personnel Management issues federal retirement
payments. Social Security benefit payments outlined in Title II,
Federal Old-Age, Survivors, and Disability Insurance Benefits, of the
Social Security Act, are subject to continuous levy under FPLP. Social
Security benefit payments such as lump-sum death benefits, benefits
paid to children, and special benefits for persons aged 72 and over by
1971 are not included in FPLP. In addition, Supplemental Security
Income payments under Title XVI and payments with partial withholding
to repay a debt owed to Social Security will not be levied through
FPLP. Vendor payments are issued to businesses or individuals that
provide goods or services to the federal government.
[5] Taxpayers notified of an impending FPLP levy have typically already
received several previous balance due notices as part of IRS‘s standard
notification process.
[6] Taxpayers who have been matched on a scheduled benefit payment from
the Social Security Administration receive a second notice, with an
additional 30 days to respond, if they take no action after receiving
the first notice of intent to levy.
[7] Installment agreements allow the full payment of the debt in
smaller, more manageable amounts. An offer in compromise approved by
IRS allows taxpayers to settle their unpaid debt for less than the full
amount of the balance due.
[8] The ACS is a telephone collection system that uses a computerized
inventory system containing information on balance due accounts and
investigations of delinquent tax returns. Delinquent accounts assigned
to the field collection inventory system are assigned to a revenue
officer in the field who pursues the account.
[9] We refer to payments made by taxpayers after receiving a levy
notice as voluntary payments because the taxpayers subsequently
remitted payments to IRS without further action on IRS‘s part.
[10] The 95 percent confidence interval ranges from $25.4 million to
$31.7 million.
[11] The 95 percent confidence interval ranges from $59.8 million to $
128.6 million.
[12] We attributed payments made on delinquent accounts to FPLP if
taxpayers had taken no significant actions to resolve their delinquency
prior to entering the program and receiving a notice of intent to levy.
Our analysis showed that prior to their inclusion into FPLP, an average
of 16 months had elapsed since the vendors had initiated any action on
their delinquent accounts; an average of 21 months had elapsed since
taxpayers receiving federal retirement payments had initiated any
action on their accounts; and an average of
57 months had elapsed since Social Security payment recipients had
initiated any significant action on their delinquent accounts. The 95
percent confidence interval on the Social Security estimate ranges from
54.1 to 60.7 months.
[13] We analyzed IRS‘s accounts receivable files data as of February
2002, which showed that IRS blocked the delinquent accounts of nearly
1.5 million individuals and businesses owing about $14.2 billion in tax
debt from FPLP. We matched the blocked delinquent taxpayers against
federal payments for Social Security benefits, federal retirement, and
federal salary that were made in February 2002, and for vendor payments
that were made during the second quarter of fiscal year 2002.
[14] IRS data as of July 2002.
[15] TPI is calculated by summing the positive values from the
following income fields from a taxpayer‘s most recently filed
individual income tax return: wages; interest; dividends; distributions
from partnerships, small business corporations, estates, or trusts;
Schedule C net profits; Schedule F net profits; and other income such
as Schedule D profits and capital gains distributions. Losses reported
for any of these values are treated as a zero. The TPI threshold is
sensitive information, and therefore, available for official use only.
[16] Data as of August 2002. The 95 percent confidence interval ranges
from $383 million to $660 million.
[17] As of August 2002.
[18] The 95 percent confidence intervals for the 18 percent and 12
percent overlap. The interval for the 18 percent figure ranges from 14
percent to 22 percent, while the interval for the 12 percent figure
ranges from 9 percent to 16 percent.
[19] Although the taxpayers‘ actions demonstrate some ability to pay,
we recognize that some portion of those who voluntarily settled their
delinquent accounts after receiving a levy notice may have done so
despite being in a financial hardship position. A case-by-case review
of the taxpayers‘ circumstances would be needed to determine to what
extent, if at all, taxpayers above and below the TPI who made voluntary
payments were nevertheless in a hardship situation.
[20] The 95 percent confidence intervals for the 5 percent and 8
percent overlap. The interval for the 5 percent figure ranges from 3
percent to 8 percent, while the interval for the
8 percent figure ranges from 5 percent to 11 percent.
[21] An information return is a tax document businesses are required to
file to report certain business transactions to IRS. For example, these
transactions include (but are not limited to) wages paid to employees;
interest and dividend payments; pension distributions; and mortgage
interest paid.
[22] The 95 percent confidence intervals for the 40 percent and 46
percent overlap. The interval for the 40 percent figure ranges from 35
percent to 45 percent while the interval for the 46 percent figure
ranges from 41 percent to 51 percent.
[23] The determination of whether an individual is required to file an
income tax return is based on their filing status, age, and the amount
of annual gross income. For example, in 2002, couples that filed
jointly and were over 65 years of age with a gross income of less than
$15,650 would not be required to file an income tax return.
[24] Because we followed a probability procedure based on random
selection for the samples we selected, each of these samples is only
one of a large number of samples that we might have drawn. Since each
sample could have provided different estimates, we express our
confidence in the precision of our particular sample‘s results as a 95
percent confidence interval. This is the interval that would contain
the actual population value for 95 percent of the samples we could have
drawn. As a result, we are 95 percent confident that each of the
confidence intervals in this report will include the true values in the
study population.
[25] The payment records obtained cover various periods of time. Vendor
payments are for the second quarter of fiscal year 2002, salary
payments represent one biweekly pay period in February 2002, and all
other payments are for the month of February 2002.
[26] Roughly 8 to 11 months.
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