Financial Management
State and Federal Governments Are Not Taking Action to Collect Unpaid Debt through Reciprocal Agreements Gao ID: GAO-05-697R July 26, 2005The Debt Collection Improvement Act of 1996 (DCIA) allows the federal government to collect state debts from federal payments to contractors. However, before a state can participate in this program, DCIA requires that the state enter into a reciprocal agreement with the Department of the Treasury that would require the state to collect unpaid federal debt from state payments if Treasury collects unpaid state debt from federal payments. In February 2004, we reported that Department of Defense (DOD) and Internal Revenue Service (IRS) records showed that over 27,000 DOD contractors had nearly $3 billion in unpaid federal taxes as of September 30, 2002. In a hearing before the Senate Permanent Subcommittee on Investigations on February 12, 2004, we noted that many of those contractors also had unpaid state taxes. Based on the issues raised in that hearing, Congress requested that we determine (1) the extent to which Financial Management Service (FMS) and the states have entered into reciprocal agreements to collect unpaid state and federal debt from their payments to contractors and (2) whether additional opportunities may exist for the Department of the Treasury's FMS to collect unpaid state taxes from federal contractors. This report responds to that request by providing information on (1) the extent of states' participation in FMS's debt collection levy and offset programs, (2) the potential benefits to states of participation in those programs, and (3) the level of state participation in, and the benefits states derive from, the collection of state tax debt from federal income tax refunds.
Neither the federal government nor the states have as yet pursued potentially beneficial reciprocal agreements authorizing the collection of debt from nontax payments, including payments to contractors. According to FMS officials, no state has expressed interest in such agreements, and FMS has not actively pursued avenues to encourage state participation. None of the officials in the 17 states we contacted said they were aware of the reciprocal agreement provision in DCIA, and all expressed interest in pursuing this debt collection opportunity. Our comparison of FMS disbursements with the database of state income tax debt that FMS maintains found that thousands of federal contractors paid through FMS have unpaid state tax debt. In fiscal year 2004, FMS disbursed a total of about $1.8 billion to over 4,600 federal contractors that had approximately $17 million in state tax debt owed primarily by individuals. According to our analysis, if states had participated in FMS's program that collects debt from nontax payments to contractors, they could have collected over half of the outstanding state tax debt from these federal contractors in fiscal year 2004. On the other hand, the experiences of the federal government and the states in working together to collect unpaid tax debt from state and federal tax refunds demonstrate that reciprocal agreements to collect tax debt from nontax payments, including contractor payments, have had a significant impact. The federal government and most of the states with income taxes collect tax debt on behalf of one another through the offset of income tax refunds, which has resulted in millions of dollars in collections. In fiscal year 2004, although most states submit only personal income tax debt and not business income tax debt to FMS for collection, FMS still collected over $217 million on behalf of various states through offsets of federal income tax refunds to pay state income tax debt. Conversely, IRS received over $77 million from states' levy of state income tax refunds to pay delinquent federal taxes.
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Director: Team: Phone:GAO-05-697R, Financial Management: State and Federal Governments Are Not Taking Action to Collect Unpaid Debt through Reciprocal Agreements
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July 26, 2005:
Congressional Requesters:
Subject: Financial Management: State and Federal Governments Are Not
Taking Action to Collect Unpaid Debt through Reciprocal Agreements:
The Debt Collection Improvement Act of 1996 (DCIA) allows the federal
government to collect state debts from federal payments to contractors.
However, before a state can participate in this program, DCIA requires
that the state enter into a reciprocal agreement with the Department of
the Treasury that would require the state to collect unpaid federal
debt from state payments if Treasury collects unpaid state debt from
federal payments.
In February 2004, we reported that Department of Defense (DOD) and
Internal Revenue Service (IRS) records showed that over 27,000 DOD
contractors had nearly $3 billion in unpaid federal taxes as of
September 30, 2002.[Footnote 1] In a hearing before the Senate
Permanent Subcommittee on Investigations on February 12, 2004, we noted
that many of those contractors also had unpaid state taxes.[Footnote 2]
Based on the issues raised in that hearing, you requested that we
determine (1) the extent to which Financial Management Service (FMS)
and the states have entered into reciprocal agreements to collect
unpaid state and federal debt from their payments to contractors and
(2) whether additional opportunities may exist for the Department of
the Treasury's FMS to collect unpaid state taxes from federal
contractors.[Footnote 3] This report responds to your request by
providing information on (1) the extent of states' participation in
FMS's debt collection levy and offset[Footnote 4] programs, (2) the
potential benefits to states of participation in those programs, and
(3) the level of state participation in, and the benefits states derive
from, the collection of state tax debt from federal income tax
refunds.[Footnote 5] Our work was performed from February 2005 through
June 2005 in accordance with generally accepted government auditing
standards.
Results in Brief:
Neither the federal government nor the states have as yet pursued
potentially beneficial reciprocal agreements authorizing the collection
of debt from nontax payments, including payments to contractors.
According to FMS officials, no state has expressed interest in such
agreements, and FMS has not actively pursued avenues to encourage state
participation. None of the officials in the 17 states we
contacted[Footnote 6] said they were aware of the reciprocal agreement
provision in DCIA, and all expressed interest in pursuing this debt
collection opportunity.
Our comparison of FMS disbursements with the database of state income
tax debt that FMS maintains found that thousands of federal contractors
paid through FMS have unpaid state tax debt. In fiscal year 2004, FMS
disbursed a total of about $1.8 billion to over 4,600 federal
contractors that had approximately $17 million in state tax debt owed
primarily by individuals. According to our analysis, if states had
participated in FMS's program that collects debt from nontax payments
to contractors, they could have collected over half of the outstanding
state tax debt from these federal contractors in fiscal year 2004.
On the other hand, the experiences of the federal government and the
states in working together to collect unpaid tax debt from state and
federal tax refunds demonstrate that reciprocal agreements to collect
tax debt from nontax payments, including contractor payments, have had
a significant impact. The federal government and most of the states
with income taxes collect tax debt on behalf of one another through the
offset of income tax refunds, which has resulted in millions of dollars
in collections. In fiscal year 2004, although most states submit only
personal income tax debt and not business income tax debt to FMS for
collection, FMS still collected over $217 million on behalf of various
states through offsets of federal income tax refunds to pay state
income tax debt. Conversely, IRS received over $77 million from states'
levy of state income tax refunds to pay delinquent federal taxes.
We are making three recommendations to the Commissioner of FMS to (1)
notify states of the opportunity to enter into reciprocal agreements
with FMS to offset state and federal payments, (2) assess the cost and
potential benefits of such agreements, and (3) encourage states to
submit more of their business income tax debts to FMS.
FMS generally did not concur with the conclusions and recommendations
presented in the report. FMS stated that the legislation authorizing
reciprocal agreements did not explicitly provide it the legal authority
to enter into reciprocal agreements with states to collect tax debt.
FMS also stated that it (1) did not believe reciprocal agreements would
be beneficial for either the states or the federal government and (2)
believed it had done an effective job encouraging states to send
business debts in to the offset program to assist the states in
collecting those debts. We disagree with FMS in each of those areas.
IRS provided a technical comment on the report and stated that it would
discuss our recommendations with the Federal Contractor Tax Compliance
Task Force--a multiagency task force established to address issues
raised by our February 12, 2004, report and testimony on DOD
contractors with tax debt. The Agency Comments and Our Evaluation
section of this report provides a more detailed discussion of the
agency comments. We have reprinted FMS's comments in enclosure II.
Background:
Treasury is tasked with being the central debt collector for the
federal government and is responsible for collecting many types of
debt. Within Treasury, FMS is tasked with the responsibility for
centralized collection of nontax debt and assisting IRS and the states
with collecting tax debt.[Footnote 7] DCIA is intended, among other
things, to maximize the collection of unpaid nontax debts owed to
federal agencies. It requires FMS to withhold or reduce certain federal
payments to satisfy delinquent nontax debts owed by payment recipients.
This withholding or reduction of payments is referred to as an offset.
To the extent legally allowed, federal payments may be offset in whole
or in part to satisfy the federal debt. DCIA requires federal agencies
to refer their nontax debt that is more than 180 days delinquent to
Treasury for collection action.[Footnote 8]
FMS established the Treasury Offset Program (TOP), a computer matching
program, to carry out its responsibilities under DCIA to collect
federal debt. TOP compares the names and taxpayer identification
numbers (TIN) of debtors with the names and TINs of recipients of
federal payments. If there is a match, the federal payment is reduced
(levied) to satisfy the overdue debt.
Over the years, numerous types of payments have been added to TOP,
including federal payments to contractors for goods and services,
federal retirement payments, federal employee salary payments, Social
Security benefit payments, and federal income tax refunds. Also, since
DCIA's enactment, FMS has been given authority to collect various
additional categories of debt, including federal tax debt from federal
payments. The Taxpayer Relief Act of 1997 authorized IRS to
continuously levy up to 15 percent of certain federal payments to both
individuals and federal contractors with unpaid federal tax
debt.[Footnote 9] IRS coordinated with FMS to use TOP as the means to
implement this provision of the act, which is referred to as the
Federal Payment Levy Program (FPLP). The FPLP was implemented in July
2000 and provides an automated process for collecting unpaid federal
taxes from federal payments.
As the various additions to the types of federal payments that can be
levied or offset, as well as the types of federal debt FMS is
responsible for collecting, were authorized by separate federal
legislation, FMS has gradually included them in TOP to facilitate
centralized debt management. According to FMS, the order of preference
for the use of levy and offset proceeds is as follows: unpaid federal
taxes, certain types of child support debt, federal nontax debt, other
types of debt, and state income tax debt in the order in which it was
established.
By matching debt in TOP against federal payments, including IRS tax
refunds, Social Security payments, federal salary payments, and federal
contractor payments, FMS collected about $2.9 billion to pay federal
and other debts in fiscal year 2004. As of September 30, 2004, the TOP
database contained about $87 billion in federal tax debts.[Footnote 10]
From initial implementation of the FPLP in July 2000 through September
2004, FMS has collected a total of $279.6 million from federal payments
through the FPLP to help satisfy federal tax debts.
DCIA also authorized FMS to collect unpaid state debt from federal
payments upon request by the appropriate state disbursing
official.[Footnote 11] For a state to participate, DCIA requires that
the state enter into a reciprocal agreement with Treasury (through FMS)
in which the state agrees to collect unpaid federal debt from state
payments if FMS collects unpaid state debt by offset of federal
payments.
The Internal Revenue Service Restructuring and Reform Act of
1998[Footnote 12] authorizes, among other things, Treasury to offset up
to 100 percent of a federal tax refund payment to collect state income
tax debt.[Footnote 13] This provision was also incorporated into TOP to
provide for matching of state tax debt against federal tax refunds.
Scope and Methodology:
To determine the extent of states' participation in FMS's debt
collection programs, including the extent to which FMS and the states
have implemented the authority to enter into reciprocal agreements to
collect state tax debt from federal payments, we:
* interviewed FMS officials regarding the extent to which state
disbursing officials have requested that FMS collect state tax debt
from federal payments and the extent to which FMS and the states have
entered into the reciprocal agreements to assist each other in the
collection of debts;
* examined FMS and IRS data on the amount of collections from their
levy and offset programs;
* analyzed the amount of state tax debt owed by federal contractors
paid through FMS that states have referred to FMS's TOP[Footnote 14]
database to quantify the extent of state participation in FMS's debt
collection program by obtaining and analyzing (1) the TOP database
containing state tax debt as of February 2005, (2) FMS's Payments,
Claims, and Enhanced Reconciliation (PACER)[Footnote 15] database
containing contractor payments made during fiscal year 2004, and (3)
various FMS reports showing the results of its programs to collect
state debt from federal payments; and:
* contacted officials of the National Association of State Auditors,
Comptrollers, and Treasurers, the Federation of Tax Administrators, and
debt collection officials of the following 17 states: California,
Connecticut, Georgia, Hawaii, Illinois, Louisiana, Maine, Maryland,
Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, and Virginia. Collectively, for fiscal
year 2004, these 17 states received over 75 percent of FMS's
collections from the federal tax refund offset program and generated
over 75 percent of the federal collections from the state income tax
levy program.
To gain an understanding of federal government debt collection
activities that could be used to help states collect unpaid taxes, we:
* researched federal statutes and consulted with FMS and IRS officials
regarding collaborative debt collection programs, associated
regulations in the U.S. Code of Federal Regulations related to such
statutes, and IRS's Internal Revenue Manual;
* reviewed FMS's and IRS's technical specifications for the FPLP, under
which FMS collects unpaid tax debt from its disbursements to federal
contractors; and:
* reviewed the applicable section of IRS's Internal Revenue Manual and
interviewed IRS officials responsible for implementing the state income
tax levy program, under which IRS enters into agreements with states
for the states to respond to an IRS levy of state income tax refunds to
collect federal tax debt.
To identify the potential financial benefits to states of participating
in FMS's debt collection programs, we:
* compared the tax debt states had referred to TOP with the fiscal year
2004 contractor payments in the PACER database to identify the amount
of state tax debt that TOP had on record that could potentially be
collected by offsets against federal payments to contractors and:
* performed additional analysis on the results of our comparison of
state tax debts in TOP with contractor payments in PACER to determine
the maximum potential value available to pay state tax debts if 100
percent of the payments to contractors with state tax debt in TOP could
have been used to offset such debts.
To determine the level of state participation in and benefits actually
derived from the offset of federal income tax refunds to pay state tax
debts, we obtained and analyzed FMS reports and conducted interviews
with FMS officials.
We requested comments on a draft of this report from the Commissioner
of the Financial Management Service or his designee and the
Commissioner of Internal Revenue or his designee. We received written
comments from the Commissioner of the Financial Management Service,
which are reprinted in enclosure II of this report. IRS provided us a
technical comment. We conducted our work from February 2005 through
June 2005 in accordance with generally accepted government auditing
standards.
States and the Federal Government Have Not Taken Full Advantage of Debt
Collection Programs:
Federal and state governments have not taken full advantage of debt
collection programs authorized to help collect federal and state taxes.
DCIA authorizes FMS, on behalf of the states, to collect unpaid state
debt from federal payments. This provision allows FMS to collect not
just from federal contractor payments but also from other federal
nontax payments, including federal retirement payments and federal
salary payments, to pay state tax debts. Before a state can participate
in this program, DCIA requires that the state enter into a reciprocal
agreement with FMS that would require the state to collect unpaid
federal debt from state payments if FMS collects unpaid state debt by
offset of federal payments.
To date, no state has entered into a reciprocal agreement with FMS to
participate in such a program to collect state debt, including state
income tax debt. According to FMS officials, states have not expressed
interest in executing such agreements. Similarly, FMS has not
researched or pursued reciprocal agreements with the states to help
collect federal debt, which we believe would include federal tax debt,
through offsets of state payments.[Footnote 16] According to FMS
officials, FMS has not developed a pro forma reciprocal agreement or
similar information for states that might want to participate, and FMS
has not taken steps to encourage states to participate in the program.
FMS officials told us that they had not performed analyses, conducted
studies, or consulted with states to identify the potential collections
from or costs to either the federal government or the states of
initiating reciprocal agreements to collect debt on behalf of each
other through offsets of payments to the related debtors. FMS officials
said that since no states had approached FMS concerning participation
in such debt collection activities, FMS had not conducted research to
identify the potential costs and benefits.
However, when we contacted state debt collection officials in 17
states, they told us that they were not aware of the DCIA reciprocal
agreement provision or the potential for collecting additional state
debt through the offset of federal payments. Each of them also
expressed interest in obtaining more information on potential
agreements. The state officials we spoke with told us that they had not
been contacted by FMS regarding this provision of DCIA. In addition, 16
of the 17 states we contacted are already offsetting their own state
payments to collect state income tax debt, which indicates that they
could also have the capacity to offset their payments to collect
federal debt, including federal tax debt. Officials of the National
Association of State Auditors, Comptrollers, and Treasurers, as well as
the Federation of Tax Administrators, both of which represent states in
monetary matters, told us that they were also not aware of this
provision of DCIA. They said that they thought their members would be
very interested in pursuing such agreements.
Participation with FMS Could Yield Substantial Benefits Both to States
and the Federal Government:
Our analysis of state tax debt reported to TOP indicates that states
could have collected a substantial portion of their outstanding state
tax debt owed by federal contractors if they had participated with FMS
in debt collection activities. Our review of contractors paid through
FMS identified over 4,600 federal contractors with unpaid state tax
debt recorded in the TOP database as of February 2005. We found that
Treasury disbursed about $1.8 billion to these contractors in fiscal
year 2004 and that these contractors owed approximately $17 million in
state tax debt recorded in the TOP database. If FMS had offset payments
made during fiscal year 2004 to these contractors to pay state tax
debt, states could have collected over half of this outstanding amount
owed. However, because states do not participate, none of the payments
were used to help pay the contractors' state tax debt.
Reciprocal agreements permitting the collection of unpaid state tax
debt from federal payments could result in even higher collections if
states were to send business income tax debt to TOP. According to FMS
officials, FMS began accepting state business income tax debt in April
2004 only after a state official inquired whether such debt could be
referred to TOP. Our analysis of the TOP database showed that as of
February 2005, only two states had referred business income tax debt to
TOP. Of the approximately $4.9 billion of state income tax debt
recorded in TOP as of February 2005, less than 1 percent--3.4 million-
-was business income tax debt.
To a limited extent, the federal government already takes advantage of
its ability to collect unpaid federal tax debt from certain nontax
payments. FMS collected about $114 million through TOP to pay federal
tax debt during fiscal year 2004. About $21 million of the $114 million
in federal tax collections was levied from federal payments to
contractors. However, our previous work on the levy of payments to
contractors showed that collections from such levies could be much
greater. We estimated that as much as $350 million could have been
levied in a single year if all FMS payments to contractors included in
our review could have been levied.[Footnote 17]
The potential benefit to the federal government of collecting unpaid
federal debt from state nontax payments is also significant. IRS's
experience with collecting federal tax debt from state income tax
refunds, which is discussed below, indicates that reciprocal agreements
between FMS and the states related to states' nontax payments could be
mutually beneficial.
States and the Federal Government Already Benefit from Tax Refund
Offset and Levy Programs:
Both the states and the federal government have benefited from their
participation in the programs to collect taxes from federal and state
tax refunds. The program to use federal income tax refunds to collect
state income tax debt is known as the federal tax refund offset
program,[Footnote 18] and the program to use state income tax refunds
to collect federal tax debt is known as the state income tax levy
program. According to IRS officials, reciprocal agreements are not
required for the tax refund offset and levy programs.
FMS is authorized to collect unpaid state income tax debt through
offsets of federal income tax refunds.[Footnote 19] As figure 1 shows,
37 of the 44 states[Footnote 20] with some form of individual income
tax participated in the federal tax refund offset program. As of
February 2005, the 37 participating states had referred about $4.9
billion in state income tax debt to TOP for collection, most of which
was tax debt owed by individuals. In fiscal years 2003 and 2004, FMS
collected over $169 million and over $217 million, respectively, on
behalf of various states through offsets of federal tax refunds to pay
state income tax debt. (See enclosure I for detail.)
Figure 1: State Participation in the Federal Tax Refund Offset Program:
[See PDF for image]
[End of figure]
Collection of state income tax debt through offsets of federal income
tax refunds is somewhat limited, however, because FMS is permitted to
offset a federal income tax refund to collect a state income tax debt
only if the address of the taxpayer is in the same state where the tax
debt recorded in TOP is owed. That is, for example, FMS could not
offset a federal income tax refund payment to a taxpayer living in
Virginia to pay a state income tax debt owed to the taxpayer's former
home state of Maryland. Our analysis of the TOP database indicated that
almost half a billion dollars of state income tax debt was not eligible
for offset in fiscal year 2004 because the address of the debtor in TOP
was not in the state for which there was a recorded state income tax
debt.
To help the federal government collect unpaid federal income tax debt,
IRS has entered into agreements with states to levy state income tax
refunds to collect unpaid federal tax debt.[Footnote 21] As of May
2005, IRS had agreements with 27 states to levy individual state income
tax refunds to pay federal tax debt. IRS collected over $77 million for
payment of federal tax debt through the levy of state tax refunds in
fiscal year 2004, and it has collected a total of about $270 million
since July 2000.
Conclusion:
In a time of fiscal constraints for both the federal government and
state governments, every avenue to identify cost-effective ways of
collecting debt should be pursued. Our analysis indicates that a well-
administered program to collect unpaid debt from payments that the
federal and state governments make to their contractors can be a very
effective tool for collecting substantial amounts of both federal and
state unpaid debt, which we believe would include tax debt.
Investigating ways to promote reciprocal agreements between the federal
government and states for the collection of unpaid debts, including tax
debts, is consistent with the intent of DCIA. Additionally, encouraging
states to expand their reporting of business tax debts for collection
under the federal tax refund offset program would further assist states
in collecting unpaid taxes from federal contractors.
Recommendations for Executive Action:
We recommend that the Commissioner of the Financial Management Service
take the following actions:
* notify states of the opportunity to enter into reciprocal agreements
with the federal government to collect delinquent debts through offsets
of federal and state payments,
* assess the cost and potential benefits of developing reciprocal
agreements with the states to collect delinquent debts through offsets
of federal and state payments, and:
* encourage states to increase their participation in the federal tax
refund offset program by submitting more of their business income tax
debt to TOP.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the
Commissioner of the Financial Management Service (See enclosure II). We
received informal comments from IRS.
In written comments, FMS agreed to take certain steps, but generally
did not concur with our conclusions and recommendations. FMS stated
that the legislation authorizing reciprocal agreements did not provide
it the legal authority to enter into reciprocal agreements with states
to collect federal tax debt. FMS also stated that it (1) did not
believe reciprocal agreements would be beneficial for either the states
or the federal government and (2) believed it had done an effective job
of encouraging states to send business debts to the offset program to
assist the states in collecting those debts. We disagree with FMS in
each of those areas.
First, while FMS did not dispute the availability of reciprocal
agreements allowing it to collect both tax and nontax state debt and
for states to collect federal nontax debt, it stated that we were
mistaken to suggest that DCIA authorizes FMS to enter into reciprocal
agreements with states to collect federal tax debt. As support, FMS
cited statutory provisions that prohibit it from using its offset
authority to collect federal tax debt. Consequently, FMS said it would
not be authorized to enter into agreements with states under which the
states would collect federal tax debts from their own payments and send
the collected amounts to the Treasury.[Footnote 22]
While we understand FMS's interpretation of the statutes, it is not the
only reading; and we believe it does not accurately reflect what the
Congress intended. Both DCIA and its legislative history recognize that
Treasury would have broad authority to specify the scope and terms of
reciprocal agreements. The DCIA legislation providing for reciprocal
agreements, 31 U.S.C. § 3716(h), was enacted after, and with
recognition of, the general prohibition on using FMS's general offset
authority to collect federal tax debts as well as certain Social
Security debts and debts arising from tariff laws.[Footnote 23]
However, the legislative history states that "Congress anticipates that
States will offset Federal debts in which there is no State financial
interest or Federal/State cost-sharing (such as debts owed to the
Customs Service.)" Id. (emphasis added). Debts owed to the Customs
Service include debts arising from federal tariff laws. This statement
in the legislative history regarding the use of reciprocal agreements
to collect debts owed to Customs Service was made in light of and in
contrast to the preexisting provision restricting FMS from using its
general offset authority to collect debts arising from tariff
laws.[Footnote 24] In contrast to FMS's interpretation, one can
reasonably conclude that if Congress intended Treasury to use
reciprocal agreements to collect federal tariff law debts, which are
explicitly excluded from offset by the preexisting provision cited by
FMS, then Congress also intended that other debts excluded by that
provision, such as federal tax debts, would also be authorized to be
collected through reciprocal agreements. Second, FMS's interpretation
that its authority to offset federal payments is not applicable to
federal taxes does not consider that the receipt of a tax debt
collected by a state and sent to Treasury would not constitute an
offset made by FMS.
To address FMS's concerns regarding its authority to collect tax debts,
we have augmented our report to indicate that the reciprocal agreements
would cover the collection of federal debt, which we continue to
believe would include federal tax debt. However, if FMS believes it
lacks statutory authority to enter into reciprocal agreements to
collect federal tax debt, it should seek legislative clarification or
correction. Further, nothing in FMS's interpretation would preclude the
use of reciprocal agreements that call for states to assist Treasury in
collecting on federal tax debt short of making actual collections, such
as states identifying to FMS any state payees' assets, such as payments
the state is going to make, that could be levied, which FMS could then
pass along to IRS to use in its own collection activities.
Second, although FMS agreed with our recommendation to inform states of
the opportunity to enter into reciprocal agreements, FMS indicated it
did not believe reciprocal agreements would be beneficial to the
states, and stated that our report did not take into account
operational and legal complexities associated with collecting debt on
behalf of the federal government. At this juncture, it would seem that
no real basis exists for questioning the merits of entering into
reciprocal agreements since neither FMS nor the states have analyzed
the potential costs or benefits of these reciprocal agreements to
determine whether they would be mutually beneficial despite the fact
that such agreements have been a potentially viable collection tool
since 1996. This is the whole point behind our recommendation that FMS
assess the cost and potential benefits of such reciprocal agreements.
We agree with FMS that states need to carefully consider the net
benefits of entering into such agreements, but FMS's response downplays
the significant collections that states could receive if FMS were to
take action to negotiate reciprocal agreements. As our report
indicates, thousands of federal contractors could have payments offset
to help collect state tax debt, and over half of all debt states had
submitted to FMS for collection in fiscal year 2004 potentially could
be paid in a single year through such offsets. Sixteen of the 17 states
we contacted during our audit were already offsetting state nontax
payments, including contractor payments, to collect their own state
taxes and expressed interest in doing so for the federal government.
While FMS stated that it will "assist states in assessing the costs and
potential benefits of such agreements," in our view, FMS's response
falls short of taking an active role in identifying and analyzing
available new sources of federal debt collection. We believe FMS needs
to take a proactive approach to its debt collection responsibilities.
Finally, with respect to encouraging states to increase their
participation in the federal tax refund offset program, FMS indicated
that it had done a sufficient job of informing states. We disagree.
Although FMS's response pointed out actions it took in early 2004 to
inform states that it was accepting business tax debts, only two states
had referred business income tax debts to the offset program as of the
time of our audit. At least 6 of the 17 states we contacted said they
were unaware that states were allowed to send business tax debt to the
levy program. As a result, we reiterate our recommendation for FMS to
inform states that the program will accept business tax debts.
In its response to our draft report, IRS said that agency officials
would discuss our recommendations with the Federal Contractor Tax
Compliance Task Force--a multiagency task force established to address
issues raised by our February 12, 2004, report and testimony on DOD
contractors with tax debt. IRS also suggested one technical correction
in the report, which we have made.
As agreed with your office, unless you publicly release its contents
earlier we plan no further distribution of this report until 30 days
from the date of this letter. At that time, we will send copies of this
report to the Chairman of the Subcommittee on Government Efficiency and
Financial Management, House Committee on Government Reform, as well as
to other congressional committees. We are also sending copies to the
Secretary of the Treasury, the Commissioner of the Financial Management
Service, the Commissioner of Internal Revenue, state governors, and the
Mayor of the District of Columbia. The report is also available at no
charge on the GAO Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact either
Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov or Steven J.
Sebastian at (202) 512-3406 or sebastians@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Major contributors to this report were
Ray Bush, Bill Cordrey, Paul Foderaro, Jason Kelly, John Kelly, Rich
Larsen, John Ryan, Richard Riskie, Esther Tepper, Quan Thai, and
Matthew Valenta.
Signed by:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Enclosures - 2:
List of Requesters:
The Honorable Susan M. Collins:
Chairman:
The Honorable Joseph I. Lieberman:
Ranking Minority Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Norm Coleman:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Daniel K. Akaka:
Ranking Minority Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
Enclosure I: Collections from Federal Tax Refund Offsets to Help Pay
State Tax Debt:
State: Alabama;
Fiscal year 2003 net collections: $4,231,739;
Fiscal year 2004 net collections: $3,767,952.
State: Arizona;
Fiscal year 2003 net collections: $1,862,453;
Fiscal year 2004 net collections: $1,426,054.
State: Arkansas;
Fiscal year 2003 net collections: $117,731;
Fiscal year 2004 net collections: $156,674.
State: California;
Fiscal year 2003 net collections: $0;
Fiscal year 2004 net collections: $1,285,212.
State: Colorado;
Fiscal year 2003 net collections: $60,747;
Fiscal year 2004 net collections: $31,762.
State: District of Columbia;
Fiscal year 2003 net collections: $1,146,384;
Fiscal year 2004 net collections: $2,756,352.
State: Delaware;
Fiscal year 2003 net collections: $1,636,938;
Fiscal year 2004 net collections: $1,976,756.
State: Georgia;
Fiscal year 2003 net collections: $6,929,767;
Fiscal year 2004 net collections: $31,956,602.
State: Hawaii;
Fiscal year 2003 net collections: $6,914;
Fiscal year 2004 net collections: $228,736.
State: Idaho;
Fiscal year 2003 net collections: $0;
Fiscal year 2004 net collections: $864,944.
State: Illinois;
Fiscal year 2003 net collections: $8,259,464;
Fiscal year 2004 net collections: $8,137,602.
State: Indiana;
Fiscal year 2003 net collections: $6,436,163;
Fiscal year 2004 net collections: $4,973,739.
State: Iowa;
Fiscal year 2003 net collections: $1,522,628;
Fiscal year 2004 net collections: $1,433,055.
State: Kansas;
Fiscal year 2003 net collections: $2,570,906;
Fiscal year 2004 net collections: $2,470,630.
State: Kentucky;
Fiscal year 2003 net collections: $4,081,414;
Fiscal year 2004 net collections: $5,631,173.
State: Louisiana;
Fiscal year 2003 net collections: $22,388,849;
Fiscal year 2004 net collections: $32,473,126.
State: Maine;
Fiscal year 2003 net collections: $1,681,658;
Fiscal year 2004 net collections: $1,233,182.
State: Maryland;
Fiscal year 2003 net collections: $20,421,354;
Fiscal year 2004 net collections: $21,954,110.
State: Massachusetts;
Fiscal year 2003 net collections: $1,672,558;
Fiscal year 2004 net collections: $2,264,932.
State: Minnesota;
Fiscal year 2003 net collections: $3,636,347;
Fiscal year 2004 net collections: $4,231,983.
State: Missouri;
Fiscal year 2003 net collections: $12,983,801;
Fiscal year 2004 net collections: $11,766,741.
State: Nebraska;
Fiscal year 2003 net collections: $0;
Fiscal year 2004 net collections: $275,879.
State: New Jersey;
Fiscal year 2003 net collections: $4,011,862;
Fiscal year 2004 net collections: $3,827,253.
State: New Mexico;
Fiscal year 2003 net collections: $0;
Fiscal year 2004 net collections: $2,365,235.
State: New York;
Fiscal year 2003 net collections: $26,696,396;
Fiscal year 2004 net collections: $26,713,051.
State: North Carolina;
Fiscal year 2003 net collections: $5,344,976;
Fiscal year 2004 net collections: $5,657,035.
State: Ohio;
Fiscal year 2003 net collections: $9,215,298;
Fiscal year 2004 net collections: $3,465,182.
State: Oklahoma;
Fiscal year 2003 net collections: $3,544,721;
Fiscal year 2004 net collections: $5,329,897.
State: Oregon;
Fiscal year 2003 net collections: $2,432,217;
Fiscal year 2004 net collections: $3,166,835.
State: Pennsylvania;
Fiscal year 2003 net collections: $6,264,968;
Fiscal year 2004 net collections: $6,860,565.
State: Rhode Island;
Fiscal year 2003 net collections: $1,105,879;
Fiscal year 2004 net collections: $1,159,501.
State: South Carolina;
Fiscal year 2003 net collections: $2,211,802;
Fiscal year 2004 net collections: $1,262,470.
State: Utah;
Fiscal year 2003 net collections: $1,252,681;
Fiscal year 2004 net collections: $1,477,495.
State: Virginia;
Fiscal year 2003 net collections: $0;
Fiscal year 2004 net collections: $8,161,039.
State: Vermont;
Fiscal year 2003 net collections: $177,824;
Fiscal year 2004 net collections: $121,351.
State: Wisconsin;
Fiscal year 2003 net collections: $3,669,275;
Fiscal year 2004 net collections: $3,911,745.
State: West Virginia;
Fiscal year 2003 net collections: $1,703,362;
Fiscal year 2004 net collections: $2,584,159.
State: Total;
Fiscal year 2003 net collections: $169,279,076;
Fiscal year 2004 net collections: $217,360,009.
Source: Department of the Treasury, Financial Management Service.
[End of table]
[End of section]
Enclosure II: Comments from the Financial Management Service:
DEPARTMENT OF THE TREASURY:
FINANCIAL MANAGEMENT SERVICE:
COMMISSIONER:
WASHINGTON, D.C. 20227:
June 15, 2005:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Sebastian:
Thank you for the opportunity to comment on the Government
Accountability Office's proposed report entitled Debt Collection: State
and Federal Governments Are Not Taking Action to Collect Unpaid Tax
Debt through Reciprocal Agreements (GAO-05-697R). The Financial
Management Service (FMS) is always interested in improving its
performance in Federal financial management, and also in expanding its
already successful debt collection services to states. Nevertheless, I
have concerns regarding some aspects of this report's recommendations.
First, and most significant, the report mistakenly suggests that the
Debt Collection Improvement Act (DCIA) authorizes FMS to collect
federal tax debt by entering into reciprocal agreements with states to
offset state payments. The DCIA authorizes Treasury, upon the request
of a state, to offset Federal nontax payments to collect state debt,
provided the state enters into a reciprocal agreement with Treasury.
See 31 U.S.C. §3716(h). However, the DCIA clearly states that that this
authority does not extend to the collection of Federal tax debt. See 31
U.S.C. §3701(d):
"Sections 3711 (e) and 3716-3719 of this title do not apply to a claim
or debt under, or to an amount payable under - (1) the Internal Revenue
Code of 1986..."
Therefore, the recommendation that FMS assess the potential benefits of
developing reciprocal agreements with states to collect delinquent
Federal tax debt through the offset of state payments, is not
appropriate.
With respect to entering into reciprocal agreements, FMS is willing to
work with states to: (1) inform them of opportunities to enter into
reciprocal agreements with Treasury and (2) assist states in assessing
the costs and potential benefits of such agreements. However, states
must remain primarily responsible for determining whether such
agreements are to their benefit, taking into account operational and
legal complexities associated with collecting debt on behalf of the
Federal government. The report does not address such complexities,
calling into question the broad conclusion that estimated annual
collections of approximately $250,000 per state would represent a net
benefit above the amount of related costs associated with program
participation. (Note that the report estimates that if contractor
payments were offset to collect the state tax debts in the Treasury
Offset Program (TOP), over half of the $17 million in outstanding state
tax debt could have been collected. Dividing those collections -
approximately $9 million - equally among the participating states
results in collections of approximately $250,000 per state.)
We also disagree with the report's conclusion that the success of the
tax refund offset program logically demonstrates the potential success
of a program involving the offset of nontax payments. Our experience
with the collection of past-due child support on behalf of states is
illustrative. While FMS collected almost $1.5 billion in delinquent
child support during FY 2004, only $2.6 million of that came from
nontax payments.
Finally, the report recommends that FMS encourage states to increase
their participation in the Federal Tax Refund Offset Program by
submitting more of their business income tax debts to TOP. In April
2004, FMS determined, on its own initiative, that income tax debt owed
by businesses could be included in TOP. FMS took a proactive stance by
issuing a Technical Bulletin (04-05-04) that explained this change. In
addition, we held a conference call with states and the Federation of
State Tax Administrators (FTA) to further discuss the change. As a
result of the conference call, FTA included news of the change in their
weekly email newsletter to states on April 12, 2004.
It is also important to note that FMS has supported legislation that
would allow states to submit debts owed by out-of-state residents to
TOP. The passage of this legislation would yield immediate benefits to
states, as it could significantly increase the number of business debts
submitted to TOP. States would first have to determine whether or not
particular business taxes are considered income taxes (under applicable
regulations and individual state laws) and therefore eligible for TOP.
(FMS does not make such determinations.) This issue of debtors owing to
one state but residing in another is a substantial impediment to
states' fully maximizing the collection potential of TOP.
Once again, thank you for the opportunity to comment on this draft GAO
report. If you have any questions or wish to discuss these comments in
more detail, I can be reached on (202) 874-7000, or you may contact J.
Martin Mills on (202) 874-3810.
Sincerely,
Signed by:
Richard L. Gregg:
cc: Donald V. Hammond:
[End of section]
(192157):
FOOTNOTES
[1] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb.
12, 2004).
[2] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, GAO-04-414T (Washington, D.C.: Feb.
12, 2004).
[3] For this report, the term "state" means the 50 states of the United
States and the District of Columbia.
[4] "Levy" generically refers to seizure of property to collect a debt.
For federal tax debt, levy is the legal process by which IRS orders a
third party--FMS--to turn over property in its possession (e.g., the
federal payment) that belongs to the delinquent taxpayer named in a
notice of levy. FMS calls the reduction of federal payments to satisfy
debt an offset.
[5] At your request, we have evaluated and reported separately on the
federal government's program designed to levy payments to civilian
agency contractors to collect federal tax debt. GAO, Financial
Management: Thousands of Civilian Agency Contractors Abuse the Tax
System with Little Consequence, GAO-05-637 (Washington, D.C.: June 16,
2005).
[6] Debt collection officials of the following 17 states were
contacted: California, Connecticut, Georgia, Hawaii, Illinois,
Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, New Jersey,
New York, North Carolina, Pennsylvania, South Carolina, and Virginia.
Collectively, for fiscal year 2004, the 17 states received over 75
percent of FMS's collections from the federal tax refund offset program
as well as over 75 percent of the federal collections from the state
income tax levy program.
[7] FMS's responsibilities include collecting nontax debt and assisting
IRS in collecting tax debt. Examples of nontax debts are (1) loans
made, insured, or guaranteed by the federal government, such as student
direct and guaranteed loans, Small Business Administration loans, and
Department of Housing and Urban Development loans; (2) overpayments,
such as salary or benefit overpayments, duplicate payments, or misused
grant funds; (3) the unpaid share of any nonfederal partner in a
program involving a federal payment and a matching or cost-sharing
payment by the nonfederal partner (e.g., the state share of a benefit
matching program); (4) fines or penalties assessed by an agency, such
as civil monetary penalties or Occupational Safety and Health
Administration fines for mine safety violations; (5) delinquent child
support; and (6) other amounts of money or property owed to the federal
government, such as license fees.
[8] 31 U.S.C. §§ 3711(g), 3716(c)(6).
[9] 26 U.S.C. § 6331(h).
[10] FMS reported in its fiscal year 2004 report to the Congress that
TOP had $105 billion in federal income tax debt that was available for
matching to identify potential levies. According to an FMS official,
the difference is attributable to the inclusion of rescinded debts in
its debt referral calculation. Rescinded debt is debt that IRS has
taken out of active status in TOP. IRS rescinds debt for a variety of
reasons, such as the debtor having paid the debt in full or the debtor
having filed for bankruptcy protection, which makes the debt ineligible
for collection through the FPLP.
[11] 31 U.S.C. § 3716 (h).
[12] 26 U.S.C. § 6402 (e).
[13] The term "state income tax" is intended to cover all taxes
determined under state laws to be state income tax. The term includes
any local income tax that is administered by the chief tax-
administering agency of the state.
[14] TOP is a computer matching program established by FMS to help it
fulfill its debt collection responsibilities under DCIA.
[15] PACER maintains payment data and provides online access to these
data to federal agencies for which FMS makes disbursements.
[16] Our views concerning FMS's authorization for the reciprocal
agreements to include federal tax debt are included in our response to
FMS's comments on our report.
[17] GAO-05-637.
[18] In addition to state tax debt, the federal tax refund offset
program is also used to collect other debt such as nontax debt owed to
federal agencies.
[19] 26 U.S.C. § 6402(e).
[20] These 44 states include the District of Columbia and 2 states that
have income tax for dividends and interest income only.
[21] IRS relies on its levy and distraint authority to conduct the
state income tax levy program. 26 U.S.C. § 6331.
[22] Specifically, FMS stated that 31 U.S.C. § 3701(d)(1) renders
inapplicable the offset authority of 31 U.S.C. § 3716 for collection of
federal tax debts. Therefore, in its view, FMS could not enter into
reciprocal agreements under section 3716(h) that would call for states
to withhold amounts from their payees on the behalf of the federal
government to collect federal tax debts.
[23] See 142 Cong. Rec. 9127 (Apr. 25, 1996). Such authority would be
implemented within Treasury by FMS.
[24] 31 U.S.C. § 3107(d).
