oversight

Tax Administration: Federal Payment Levy Program Measures, Performance, and Equity Can Be Improved

Published by the Government Accountability Office on 2003-03-06.

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

             United States General Accounting Office

GAO          Report to Congressional Requesters




March 2003
             TAX
             ADMINISTRATION
             Federal Payment Levy
             Program Measures,
             Performance, and
             Equity Can Be
             Improved




GAO-03-356
                                               March 2003


                                               TAX ADMINISTRATION

                                               Federal Payment Levy Program
Highlights of GAO-03-356, a report to the      Measures, Performance, and Equity Can
Committee on Ways and Means and
Subcommittee on Oversight, House of            Be Improved
Representatives.




According to the Internal Revenue              The Federal Payment Levy Program enables IRS to continuously levy (take a
Service (IRS), taxpayers currently             portion of) federal payments to individuals and businesses owing delinquent
owe about $249 billion in                      taxes. GAO has found the following:
delinquent taxes. At the same time,
the government pays billions of                •       IRS measures only about 27 percent of the revenues that can be
dollars in Social Security,
retirement, and other federal
                                                       attributed to the continuous levy program. IRS does not measure
payments to thousands of these                         revenues that are received through voluntary payments as taxpayers
individuals. To help IRS administer                    respond to the notice of intent to levy or certain other results.
tax laws fairly and collect                            Understating the program’s impact may hinder IRS in making well-
delinquent taxes effectively,                          founded decisions on program management and resource allocation.
Congress included a provision                          IRS plans to revise its measure of program results but has not yet
authorizing the Federal Payment                        decided how to do so.
Levy Program, which allows IRS to              •       IRS blocks many eligible delinquent accounts from being included in the
continuously levy up to 15 percent                     Federal Payment Levy Program, thereby missing an opportunity to
of certain federal payments made                       gather information on which debtors are receiving federal payments, that
to delinquent taxpayers. Because                       could be used to collect these delinquent taxes more efficiently. IRS
of congressional interest about
whether the Federal Payment Levy
                                                       recently unblocked some accounts and plans to unblock more, but has
Program is being implemented as                        not established a time frame to complete these changes.
intended, GAO was asked to assess              •       IRS uses an inaccurate income criterion of ability to pay when
how well the program is operating.                     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
To help IRS improve the operation                      but continues to use it.
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                Collections Attributable to the Federal Payment Levy Program as of August 2002 for
                                               Taxpayers Receiving a Notice of Intent to Levy October-December 2001
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.                                     $28.5 Million                     $78.6 Million
                                                                Collections measured            Collections not measured
www.gao.gov/cgi-bin/getrpt?GAO-03-356.                                                 +
                                                                     27 percent                        73 percent
To view the full report, including the scope
                                                   Source: GAO analysis of IRS data.
and methodology, click on the link above.
For more information, contact Michael
Brostek at (202) 512-9110 or
brostekm@gao.gov.
Contents


Letter                                                                                    1
               Results in Brief                                                           3
               Background                                                                 4
               IRS’s FPLP Data Understates Program Results                                6
               Blocking Cases from Matching against Federal Payment Records
                 Prevents IRS from Collecting Taxes More Efficiently                      9
               IRS’s Criterion for Determining Which Social Security Beneficiaries
                 Can Afford to Have Their Payments Levied Is an Inaccurate
                 Indicator of Ability to Pay                                            11
               Conclusions                                                              16
               Recommendations for Executive Action                                     17
               Agency Comments and Our Evaluation                                       17

Appendix I     Objectives, Scope, and Methodology                                        20
               Scope and Methodology                                                    20

Appendix II    Additional Data on Revenue Collections Attributable
               to FPLP and Status of Taxpayer Accounts             23
               FPLP Payments by Collection Method                                       23
               Categorization of Taxpayers                                              25
               Most Recently Filed Income Tax Returns for Social Security
                 Beneficiaries                                                          26

Appendix III   Comments from the Internal Revenue Service                                27



Appendix IV    GAO Contacts and Staff Acknowledgments                                    30
               GAO Contacts                                                             30
               Acknowledgments                                                          30


Tables
               Table 1: Number of Delinquent Taxpayers Receiving Federal
                        Payments out of a Total 1.5 Million Blocked from FPLP            10
               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                                    24




               Page i                               GAO-03-356 Federal Payment Levy Program
         Table 3: Categorization of Taxpayers by Delinquent Account Status
                  as of August 2002                                                                25
         Table 4: Distribution of Social Security Payment Recipients by Year
                  of Most Recent Income Tax Return Filed                                           26


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                                                             8




         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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         Page ii                                       GAO-03-356 Federal Payment Levy Program
United States General Accounting Office
Washington, DC 20548




                                   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.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 levy2 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


                                   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.



                                   Page 1                                         GAO-03-356 Federal Payment Levy Program
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



Page 2                                 GAO-03-356 Federal Payment Levy Program
                   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.)


                   The data that IRS uses to manage FPLP does not adequately measure a full
Results in Brief   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


                   Page 3                                GAO-03-356 Federal Payment Levy Program
             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.


             In the Taxpayer Relief Act of 1997, Congress authorized IRS to collect
Background   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 debt3
             annually. In fiscal year 2002 IRS collected more than $60 million in
             delinquent taxes through continuous levy under FPLP.


             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).




             Page 4                                      GAO-03-356 Federal Payment Levy Program
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.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.5
Taxpayers who receive a notice from FPLP have a minimum of 30 days to
respond to the notice,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;7 or

•   apply to IRS for a hardship determination, whereby taxpayers
    demonstrate to IRS that making any payments at all would result in a



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.




Page 5                                         GAO-03-356 Federal Payment Levy Program
                          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.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 tracks FPLP program results by measuring only tax revenue collected
IRS’s FPLP Data       through continuous levy, although most of the collections attributable to
Understates Program   FPLP result from taxpayers subsequently contacting IRS and either
                      submitting a payment voluntarily,9 or arranging to pay their delinquent
Results               taxes through other means such as by entering into an installment


                      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.




                      Page 6                                        GAO-03-356 Federal Payment Levy Program
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 million10 of this amount, or 27 percent of
the total collections, while other payment methods represented an
estimated $78.6 million,11 or 73 percent of the total FPLP-related
collections.12 By not measuring the nonlevy payments attributable to FPLP,
IRS significantly underestimates the program’s success.




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.




Page 7                                        GAO-03-356 Federal Payment Levy Program
Figure 1: Tax Collections Attributable to FPLP as of August 2002 for Taxpayers
Receiving a Notice of Intent to Levy during October-December 2001

                                                           2%
                                                           Litigations, claims and offers
                                                           in compromise
            $28.5
            million                                        3%
                                                           Installment agreements




                        $78.6                              68%
                        million                            Voluntary payments




         Other payment methods (not measured by FPLP), 73 percent

         Levy collections (measured by FPLP), 27 percent


Source: GAO analysis of IRS data.



(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




Page 8                                                     GAO-03-356 Federal Payment Levy Program
                        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.


                        When IRS implemented FPLP in July 2000, it made a decision to
Blocking Cases from     temporarily block most delinquent taxpayer accounts placed in ACS and
Matching against        field collections from being matched against federal payment records. ACS
                        accounts were blocked primarily because IRS believed it lacked the
Federal Payment         resources to issue levy notices and respond to the potential increase in
Records Prevents IRS    telephone calls from taxpayers responding to the notices and still
                        adequately perform other ACS activities. Specifically, agency officials were
from Collecting Taxes   concerned that if the 1.4 million delinquent taxpayers with accounts in
More Efficiently        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 records13 and
                        found that only about 112,000 taxpayers were receiving federal payments,
                        as shown in table 1.




                        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.




                        Page 9                                         GAO-03-356 Federal Payment Levy Program
Table 1: Number of Delinquent Taxpayers Receiving Federal Payments out of a
Total 1.5 Million Blocked from FPLP

 Dollars in millions
                                                                                 Potential
                                                      Taxpayers debt    annualized federal
 Collection status            Taxpayers affected         owed to IRS            payments
 ACS                                    108,469               $1,016                $5,151
 Field                                     3,717                 543                 1,618
 Total                                  112,186               $1,559                $6,769
Source: GAO analysis of IRS and FMS data.


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




Page 10                                            GAO-03-356 Federal Payment Levy Program
                              remaining delinquent accounts sometime in 2005, although they have not
                              yet established a firm time frame for doing so.

                              IRS established an income threshold to exclude Social Security
IRS’s Criterion for           beneficiaries who cannot afford to pay their taxes from FPLP. However,
Determining Which             our analysis of Social Security beneficiaries above and below this income
                              threshold shows that IRS’s income criterion is an inaccurate indicator of a
Social Security               taxpayer’s ability to pay. We found little difference between the two
Beneficiaries Can             groups in terms of the frequency with which taxpayers either made
                              voluntary payments in response to a levy notice or relied on Social
Afford to Have Their          Security as a sole source of income. We also found that the income
Payments Levied Is an         criterion relies on information that is often outdated and incomplete.
Inaccurate Indicator
of Ability to Pay


IRS Decided to Exclude        In response to concerns raised by the National Taxpayer Advocate
Selected Social Security      regarding potential harm that may be experienced by Social Security
Payments from FPLP            beneficiaries who are levied under FPLP, IRS implemented an income
                              criterion for Social Security benefit payments intended to identify and
without Evaluating the        screen from FPLP, those taxpayers who are least able to pay their tax
Effectiveness of Its Income   debt. The National Taxpayer Advocate believed that taxpayers who rely
Level Criterion               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.14 This income level criterion, Total
                              Positive Income (TPI),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


                              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.




                              Page 11                                        GAO-03-356 Federal Payment Levy Program
                        whose TPI was below the income threshold owed approximately
                        $522 million in delinquent taxes.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   The TPI criterion has several weaknesses that can impact Social Security
Several Weaknesses      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



                        16
                         Data as of August 2002. The 95 percent confidence interval ranges from $383 million to
                        $660 million.




                        Page 12                                       GAO-03-356 Federal Payment Levy Program
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.17 The 6 percent difference between
the 12 and 18 percent figures18 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.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



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.




Page 13                                         GAO-03-356 Federal Payment Levy Program
process. The difference between the 5 and 8 percent figures20 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 data21 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 figures22 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,23 his or her TPI information from that last
return filed may not be consistent with their current financial 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.




Page 14                                         GAO-03-356 Federal Payment Levy Program
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.



Page 15                                 GAO-03-356 Federal Payment Levy Program
              IRS’s FPLP is still a relatively new program, and, as such, has not yet
Conclusions   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.




              Page 16                               GAO-03-356 Federal Payment Levy Program
                      To help ensure that IRS is operating FPLP in a manner that achieves the
Recommendations for   program’s full potential and ensures equitable treatment of taxpayers, we
Executive Action      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.

                      We received written comments on a draft of this report from the Acting
Agency Comments       Commissioner of Internal Revenue (see app. III). The Acting
and Our Evaluation    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



                      Page 17                                 GAO-03-356 Federal Payment Levy Program
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


Page 18                                GAO-03-356 Federal Payment Levy Program
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




Page 19                               GAO-03-356 Federal Payment Levy Program
              Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
              Methodology



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.


              We obtained and reviewed the data used by IRS to track program results in
Scope and     an effort to determine whether IRS’s data on FPLP operations adequately
Methodology   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




              Page 20                               GAO-03-356 Federal Payment Levy Program
Appendix I: Objectives, Scope, and
Methodology




to the total population of 97,133 taxpayers in this category.1 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.2

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



1
 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.
2
 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.




Page 21                                         GAO-03-356 Federal Payment Levy Program
Appendix I: Objectives, Scope, and
Methodology




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.




Page 22                                GAO-03-356 Federal Payment Levy Program
                    Appendix II: Additional Data on Revenue
Appendix II: Additional Data on Revenue
                    Collections Attributable to FPLP and Status
                    of Taxpayer Accounts


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.


                    Our analysis included a group of taxpayers in FPLP receiving Social
FPLP Payments by    Security benefit payments, federal government retirement payments from
Collection Method   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.




                    Page 23                                       GAO-03-356 Federal Payment Levy Program
                                        Appendix II: Additional Data on Revenue
                                        Collections Attributable to FPLP and Status
                                        of Taxpayer Accounts




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
                                                                               95 percent confidence
                                                                                   interval of dollars            Percentage of dollars
                                                   Dollars collected                        collecteda                      collected
                                                                                                                                      b


 SSA
 FPLP nonlevy payments                                           $73.4                     54.6 to 123.4                                  73
 Installment agreement payments                                    2.8                         2.4 to 3.5                                  3
 Litigation, claim, and offer in
  compromise payments                                              1.9                         1.1 to 1.9                                  2
 Voluntary payments                                               68.7                     52.7 to 119.0                                  69
 FPLP levy payments                                               26.9                      23.8 to 30.1                                  27
 Total                                                          $100.3                                                                   100
 OPM
 FPLP nonlevy payments                                             0.3                                                                    49
 Installment agreement payments                                   0.02                                                                     4
 Litigation, claim, and offer in
  compromise payments                                           0.0007                                                                     0
 Voluntary payments                                                 0.3                                                                   45
 FPLP levy payments                                                 0.3                                                                   51
 Total                                                            $0.6                                                                   100
 Vendor
 FPLP nonlevy payments                                              4.9                                                                   79
 Installment agreement payments                                     0.9                                                                   14
 Litigation, claim, and offer in
  compromise payments                                              0.2                                                                     4
 Voluntary payments                                                3.8                                                                    62
 FPLP levy payments                                                1.3                                                                    21
 Total                                                            $6.2                                                                   100
 Overall
 FPLP nonlevy payments                                            78.6                     59.8 to 128.6                                  73
 Installment agreement payments                                    3.7                         3.3 to 4.4                                  3
 Litigation, claim, and offer in
  compromise payments                                              2.1                         1.3 to 2.1                                  2
 Voluntary payments                                               72.8                     56.8 to 123.1                                  68
 FPLP levy payments                                               28.5                      25.4 to 31.7                                  27
 Total                                                          $107.1                                                                   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.
                                        Percentages may not add due to rounding.
                                        b




                                        Page 24                                            GAO-03-356 Federal Payment Levy Program
                                              Appendix II: Additional Data on Revenue
                                              Collections Attributable to FPLP and Status
                                              of Taxpayer Accounts




                                              To assess the full range of FPLP results, we reviewed the status of
Categorization of                             accounts for a group of taxpayers after they had been in the program for
Taxpayers                                     an extended period of time.1 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

                                                                     Taxpayers                              Percentage of taxpayers
                                                          SSA        OPM Vendor          Overall          SSA     OPM Vendor Overall
 Resolved account                                       17,685        257      295       18,237             18      37        61     19
 Account currently in FPLP                              42,445        212       91       42,748             44      30        19     43
 Voluntary payment made                                  2,993         49       15        3,057              3       7         3      3
 Installment agreement                                   5,442         59       20        5,521              6       8         4      6
 Litigation, claim, and offer in compromise              2,993         30       16        3,039              3       4         3      3
 Transferred to manual collection process                6,802         29       29        6,860              7       4         6      7
 Out of FPLP                                             9,251         38       18        9,307             10       5         4      9
 Determined unable to pay                                9,523         25        0        9,548             10       4         0     10
 Total                                                  97,133        699      484       98,316            100     100       100    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.




                                              1
                                              Roughly 8 to 11 months.




                                              Page 25                                            GAO-03-356 Federal Payment Levy Program
                      Appendix II: Additional Data on Revenue
                      Collections Attributable to FPLP and Status
                      of Taxpayer Accounts




                      We analyzed the yearly distribution of the most recent income tax return
Most Recently Filed   filed for Social Security payment recipients who owed delinquent taxes.
Income Tax Returns    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.
for Social Security
Beneficiaries
                      Table 4: Distribution of Social Security Payment Recipients by Year of Most Recent
                      Income Tax Return Filed

                                                                                  Percentage of            Cumulative
                       Tax year of last return                 Number of              taxpayers          percentage of
                       filed                                   taxpayers               who filed             taxpayers
                       2001                                       31,865                      17                   100
                       2000                                       11,246                       6                    83
                       1999                                       13,121                       7                    77
                       1998                                       14,995                       8                    70
                       1997                                       16,870                       9                    62
                       1996 and earlier                           99,343                      53                    53
                       Total                                     187,440                    100
                      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.




                      Page 26                                           GAO-03-356 Federal Payment Levy Program
              Appendix III: Comments from the Internal Revenue Service
Appendix III: Comments from the Internal
Revenue Service




              Page 27                                     GAO-03-356 Federal Payment Levy Program
Appendix III: Comments from the Internal Revenue Service




Page 28                                     GAO-03-356 Federal Payment Levy Program
Appendix III: Comments from the Internal Revenue Service




Page 29                                     GAO-03-356 Federal Payment Levy Program
                  Appendix IV: GAO Contacts and Staff
Appendix IV: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Michael Brostek (202) 512-9110
GAO Contacts      Ralph T. Block (415) 904-2150


                  In addition to those named above, Tom N. Bloom, Allen T. Chan, Jeanine
Acknowledgments   Lavender, Ellen Rominger, Amy Rosewarne, Samuel Scrutchins, Wendy
                  Turenne, James J. Ungvarsky, Elwood D. White, and Thomas Venezia
                  made key contributions to this report.




(440073)
                  Page 30                               GAO-03-356 Federal Payment Levy Program
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