Minimizing Inappropriate Levies in IRS's Federal Payment Levy Program

Published by the Government Accountability Office on 2003-01-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office
Washington, DC 20548

          January 3, 2003

          The Honorable Bob Wenzel
          Acting Commissioner of Internal Revenue
          Internal Revenue Service

          Subject: Minimizing Inappropriate Levies in IRS’s Federal Payment Levy

          Dear Mr. Wenzel:

          Each year, thousands of taxpayers who owe delinquent federal taxes receive billions
          of dollars in federal payments. To help the Internal Revenue Service (IRS) collect
          these delinquent taxes more effectively, the Congress passed the Taxpayer Relief Act
          of 1997, the provisions of which authorized the establishment of the Federal Payment
          Levy Program (FPLP), which allows IRS to continuously levy up to 15 percent of the
          payments made to delinquent taxpayers. The Department of the Treasury’s Financial
          Management Service (FMS), which receives payment records from and makes
          payments on behalf of most federal agencies, collects the continuous levy from the
          federal payment after IRS has authorized the levy. Subsequent payments are
          continuously levied until such time that the tax debt is paid or IRS releases the levy.

          In a prior report, we noted that inappropriate levies—which subsequently must be
          refunded--could undermine support for the continuous levy authority, by generating
          negative public reaction to the program and frustrating taxpayers whose payments
          are inappropriately levied.1 Since October of 2001, the inclusion of Social Security
          recipients and others in the levy program has extended levy use substantially. This
          expansion heightens the importance of minimizing inappropriate levies.

          IRS built controls into FPLP to prevent levying taxpayers who are not subject to levy
          and to protect against levying payments for more than taxpayers owe. Under FPLP,
          FMS continuously levies a taxpayer’s account based on the taxpayer’s account
          balance in FMS’s records. IRS updates FMS’s records on the taxpayer’s account from
          its master file once every week, except during system maintenance and sends FMS

          See U.S. General Accounting Office, Tax Administration: IRS’ Levy of Federal Payments Could
          Generate Millions of Dollars, GAO/GGD-00-65 (Washington, D.C.: Apr. 7, 2000).

          The master file maintains an account for every taxpayer who files a return. The account maintained
          on the master file includes records related to that taxpayer over the years (returns filed, payments
          made, additional taxes assessed as a result of audit, etc.).

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updated information on the balance owed by each delinquent taxpayer. In part
because IRS may receive other payments from taxpayers independent of the levy
process, FMS always substitutes IRS’s account balance for the one it maintains for
each taxpayer’s account as soon as it receives IRS’s weekly account updates. As
discussed below, depending on the specific timing of FMS’s levies of taxpayer’s
accounts and IRS’s weekly updates of its master file, FMS’s account balance can be in
error and taxpayer’s accounts can be inappropriately levied. These time-related
situations, which give rise to inappropriate levies, should be alleviated when IRS
completes the installation of its replacement for the master file. Because the new
system will update taxpayers accounts daily, there will be less opportunity for IRS’s
and FMS’s records to differ. However, the system will not be fully installed for
several years.

This report identifies one cause for inappropriate levies for which corrective
measures can be taken before IRS completes the installation of the replacement for
its master file. We identified this issue during follow up work to our April 2000 report
that we are conducting at the request of the House Ways and Means Committee and
its Subcommittee on Oversight. To determine the causes of inappropriate levies and
possible corrective measures, we selected the 3,349 individual taxpayer accounts that
were levied during the first quarter of fiscal year 2002, the period from October 1,
2001, through December 31, 2001. From these 3,349 accounts, we identified 160
individual taxpayer accounts that had received a refund as a result of an
inappropriate levy under FPLP. The refunds were made between October 1, 2001,
and April 1, 2002. We then examined the activity that occurred on the 160 accounts
through April 2002 to determine the basis for the inappropriate levies. We
interviewed IRS and FMS headquarters officials to obtain information on the
operation of the FPLP program, payment posting procedures and refund procedures.
Our review was conducted between October 2001 and September 2002 in accordance
with generally accepted government auditing standards.


An annual shut down of master file operations for system maintenance causes
inappropriate levies and subsequent refunds. We found that 119 of the 160 refunds
between October 1, 2001, and April 1, 2002, were issued in February 2002, which was
four times the number of refunds issued in any other month during the 6-month
period. The refunds ranged from less than $5 to nearly $500, with the average refund
being $114.43. Of these 119 refunds in February 2002, 108 resulted because IRS had
received payments such as voluntary payments, transfers of tax payments, and levies,
sufficient to settle the tax indebtedness. Those payments were not posted to IRS’s
master file during January 2002. Without updated information, FMS relied on the
information it maintained to initiate the next round of levies on the taxpayers.

According to IRS officials, the failures to post taxpayer payments to the master file
during January were due to “dead cycle time”--a 3-to-4 week period at the beginning
of each calendar year when IRS shuts down master file operations to upgrade
software and perform other maintenance. During this period, the master file does not
accept new postings, but FMS continues to levy federal payments based on its
records for the balance owed by the taxpayers. Taxpayers who had their
indebtedness resolved or reduced to less than what would be generated by a 15-

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percent levy continued to have their federal payment levied at the full 15-percent
because updated IRS data could not be sent to FMS indicating the correct balance.
After the master file began accepting new postings, IRS’s automatic refund processes
issued refunds for the over collections.

The posting delay problem due to the January shut down of IRS’s master file can
create inappropriate levies in at least two situations. In the levy process, for
example, FMS approves the payments to recipients of monthly federal payments,
such as those going to Social Security recipients and federal retirees, 1-to-2 weeks
prior to the actual issuance of the payments, deducting the levy amount from the
payment. FMS records the lower debt balance for the levied taxpayer in files it
maintains. After the payment is issued to the taxpayer and IRS receives the levy
payment, IRS updates its master file record to show the lower balance amount. IRS
sends the lower balance amount to FMS on the next weekly update.

Depending on the timing of IRS’s master file update and FMS’s next levy of a payment
to the taxpayer, FMS may make the next levy based on data showing a higher balance
due by the taxpayer than is in fact correct. In one situation, FMS may levy an account
and send the payment to IRS shortly after IRS has completed its last update before
shutting down its master file. In this case, IRS will have sent FMS a new account
balance the week before shutdown that does not reflect the levy payment. Because
FMS always substitutes the last update from IRS for its existing account balance, in
this case it is substituting a balance that does not reflect the previous levy. This
balance becomes the basis for the next levy. If FMS’s account balance is zero or less
than what would be yielded by a 15-percent levy, substituting IRS’s account balance
may result in FMS levying a settled account or over-levying an account with a low
balance. In another situation, IRS may receive a separate payment from the taxpayer
shortly after the last update that could settle the account or reduce it below the
amount that would be generated by a 15-percent levy. Again, because FMS’s records
will not reflect the actual balance due in the taxpayer’s account and an inappropriate
levy can result.

We found 101 instances resulting from the first situation described above in which an
inappropriate levy resulted because the full 15-percent levy was taken from the
taxpayer’s federal payment, even though the taxpayer’s remaining debt balance was
less than what would be generated by a 15-percent levy. This number will likely
grow now that Social Security recipients are being levied under FPLP. IRS data show
that in the first quarter of fiscal year 2002, the period of our sample, FPLP took 8,584
levies from individual taxpayers whereas in the last quarter of fiscal year 2002 FPLP
took 177,872 levies from individual taxpayers.

IRS levy program officials told us that they will make programming changes in 2003
to help avoid inappropriate levies due to the down time for the master file. Officials
said an approach IRS is considering would address those inappropriate levies that are
due to the first situation described above. That is, it would deal with those cases
where the balance IRS reports to FMS fails to reflect the last levy made by FMS.
Officials are considering suspending IRS’s update several weeks prior the dead cycle
period and instead having FMS rely only on its own record of the taxpayer’s balance
to determine the levy amount to be deducted. This would result in correct levies
being made in all cases where the only amount being credited to the taxpayer’s

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account is from the levy. It would not alleviate inappropriate levies that result from
taxpayers making other payments on their delinquent account during the period.
Officials did not believe these changes would be costly to implement.


Inappropriately levying taxpayers could undermine support for the levy authority that
has been granted to IRS and FMS. Although the inappropriate levies we found that
are due to the January “down time” for updating IRS’s master file were relatively few
in number, the potential number of such inappropriate levies could rise substantially
now that the levies have been extended to additional types of federal payments,
principally Social Security benefits. According to IRS officials, programming
changes would not be costly and could help avoid a portion of these inappropriate
levies. Because of the inherent data processing time delays, it is inevitable that some
over collections will occur and thus refunds will be issued. However, it is imperative
that IRS does whatever it can to avoid over collections and prevent unnecessary
refunds to ensure that the taxpayer receives his full federal payment once the tax
debt has been settled.


We recommend that the Acting Commissioner of Internal Revenue direct FPLP staff
to avoid over collections during scheduled dead cycle time for IRS’s master file.
Planned actions, such as suspending IRS’s update several weeks prior to the dead
cycle period so as to not supersede FMS record of balance due and allow FMS to rely
on its own record of the taxpayer’s balance to determine the levy amount to be
deducted, would achieve this objective.

Agency Comments

We requested comments on a draft of this report from the Acting Commissioner of
Internal Revenue or his designee. We obtained oral comments on December 18, 2002,
from the Acting Director, Filing and Payment Compliance, Wage and Investment. She
told us they agree with our recommendation and anticipate this change will be in
place by December 2003. She also emphasized that the only the last levy of the
taxpayer was inappropriate because the delay updating FMS’s records caused an
incorrect amount to be taken.


We are sending copies of this report to the Secretary of the Treasury and the
Commissioner of Financial Management Service. We are also sending copies of the
report to the Chairman and Ranking Minority Member, House Committee on Ways
and Means; Chairman and Ranking Minority Member, Subcommittee on Oversight,
House Committee on Ways and Means; Chairman and Ranking Minority Member,
Senate Committee on Finance. We will also make copies of this report available to
others upon request. This report is also available at GAO’s Web site
http://www.gao.gov. If you or your staff have any questions, please contact me at
(202) 512-9110 or Ralph Block, Assistant Director at (415) 904-2150. Other staff who

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contributed to this report include Thomas Bloom, Ellen Rominger, Samuel
Scrutchins, Thom Venezia, and Elwood White.

Sincerely yours,

Michael Brostek
Director, Tax Issues

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