oversight

Debt Collection: Opportunities Exist for Improving FMS's Cross-Servicing Program

Published by the Government Accountability Office on 2003-10-31.

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

               United States General Accounting Office

GAO            Report to the Secretary of the Treasury
               and the Director of the Office of
               Management and Budget


October 2003
               DEBT COLLECTION
               Opportunities Exist
               for Improving FMS’s
               Cross-Servicing
               Program




GAO-04-47

               a

                                                October 2003


                                                DEBT COLLECTION

                                                Opportunities Exist For Improving FMS’s
Highlights of GAO-04-47, a report to the        Cross-Servicing Program
Secretary of the Treasury and the Director
of the Office of Management and Budget




GAO has previously reviewed                     Although FMS has made progress in implementing its cross-servicing
facets of Treasury’s Financial                  program and considers it to be fully mature, opportunities exist to improve
Management Service’s (FMS)                      the program.
cross-servicing efforts. These
reviews did not include FMS’s                   FMS had not reviewed most of the debts returned to it by its PCA
handling of nontax debts that were
returned to FMS uncollected by its
                                                contractors to determine whether any opportunities for collection or other
private collection agency (PCA)                 recoveries remained, including those possible from reporting closed-out
contractors because FMS officials               debts to IRS as income to debtors. For example, as shown in the figure
did not consider the cross-servicing            below, about $3.7 billion of the $6.6 billion of debts that were at FMS for
program to be fully mature. During              cross-servicing as of February 28, 2003, were being kept in the Treasury
fiscal years 2000, 2001, and 2002,              Offset Program (TOP) for passive collection after they had been returned
FMS’s PCA contractors returned                  uncollected to FMS by PCA contractors. Passive collection entailed no
about $3.9 billion of uncollected               further collection action on the part of FMS other than minimal efforts
debts to FMS. This report focuses               through offset, and collections on debts in passive collection through offset
primarily on (1) actions taken by               totaled only about $9 million through February 28, 2003. Various problems
FMS on uncollected nontax debts                 hindered collections through offset, including the fact that many of the debts
returned from its PCA contractors
and (2) actions taken, if any, by
                                                were beyond the 10-year statutory and regulatory limitations for offset.
FMS and the Office of Management
and Budget (OMB) to ensure that                 GAO’s analysis also showed that relatively few debts in cross-servicing were
federal agencies are reporting their            being referred to the Department of Justice for more aggressive enforced
eligible uncollectible nontax debts             collection action. This analysis further showed that FMS continues to have
to IRS as income to debtors.                    problems with debt compromises and the reporting of a key cross-servicing
                                                performance measure.

                                                Finally, neither FMS nor OMB monitored or reported the extent to which
GAO recommends that Treasury
(1) help ensure that all appropriate            federal agencies governmentwide were closing out all eligible uncollectible
collection action is taken on debts             debts and reporting those amounts to IRS as income to debtors.
returned from PCA contractors,
(2) increase opportunities for                  Percentage of Cross-Serviced Debts in Passive Collection as of February 28, 2003
collection, and (3) help maximize
the soundness of FMS’s cross-
servicing program. GAO also
recommends that OMB take steps
to improve agencies’ compliance
with standards and policies for
writing off and closing out debts.
Treasury concurred with most of
GAO’s findings but raised a number
of points about certain of the
recommendations. OMB agreed
with the thrust of GAO’s
recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-04-47.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gary Engel
(202) 512-3406 or EngelG@gao.gov.
Contents




Letter                                                                                                                  1
                             Results in Brief                                                                           3
                             Background                                                                                 6
                             Scope and Methodology                                                                      8
                             Collection Opportunities Were Lost on Uncollected Debts Returned
                               from PCA Contractors                                                                     9
                             Inadequate Monitoring and Reporting of Closed-Out Debts to
                               IRS                                                                                  14
                             FMS Missed Certain Opportunities to Improve Overall
                               Collections                                                                          16
                             Problems Identified with Debt Compromises and a Key Performance
                               Measure                                                                              23
                             Conclusions                                                                            31
                             Recommendations for Executive Action                                                   31
                             Agency Comments and Our Evaluation                                                     34


Appendixes
              Appendix I:    Sampling Method                                                                        41
             Appendix II:	 Comments from the Department of the Treasury                                             42
                           GAO Comments                                                                             46
             Appendix III:   Staff Acknowledgments                                                                  47


Tables                       Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year
                                      2002                                                                          30
                             Table 2: Details of Cases Selected                                                     41


Figures                      Figure 1: Percentage of Cross-Serviced Debts in Passive Collection
                                       as of February 28, 2003                                                      10
                             Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by
                                       Fiscal Year Referred                                                         18




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                             Page i                                      GAO-04-47 FMS Cross-Servicing Opportunities
A

United States General Accounting Office
Washington, D.C. 20548



                                    October 31, 2003


                                    The Honorable John W. Snow

                                    The Secretary of the Treasury


                                    The Honorable Joshua B. Bolten

                                    Director, Office of Management and Budget


                                    The Debt Collection Improvement Act of 1996 (DCIA) gave the Department 

                                    of the Treasury (Treasury) significant governmentwide responsibilities for 

                                    collecting federal nontax debts delinquent more than 180 days that are

                                    referred by federal agencies for collection action, known as cross-

                                    servicing. Treasury’s Financial Management Service (FMS) is responsible 

                                    for carrying out Treasury’s cross-servicing responsibility. Nontax debts 

                                    that federal agencies reported as delinquent more than 180 days totaled 

                                    over $60 billion at the end of each of the last 4 fiscal years.1 However, as of 

                                    September 30, 2002, federal agencies reported to FMS that only about 

                                    $8.5 billion, or approximately 13 percent, of the approximately $64 billion 

                                    of reported nontax debts delinquent over 180 days were eligible for cross-

                                    servicing. FMS has continued to express concern about the accuracy,

                                    completeness, and validity of debts reported by agencies as eligible for and 

                                    excluded from the DCIA cross-servicing provisions, and over the years, we 

                                    have identified and reported on problems regarding the accuracy and

                                    completeness of exclusions from cross-servicing as reported by certain 

                                    federal agencies.2 Nonetheless, for the billions of dollars of nontax 

                                    delinquent debts that agencies do refer for cross-servicing, it is critical that 

                                    FMS manage its collection activities to fully utilize available debt collection 

                                    tools and maximize collection opportunities.





                                    1
                                     These debts include those classified by federal agencies as “currently not collectible”
                                    (CNC). Generally, write-off is mandatory for delinquent debts older than 2 years. The agency
                                    must either classify the debts as CNC or discharge the debts. The collection process
                                    continues on debts classified as CNC until the agency determines it is no longer cost-
                                    effective to pursue collection. At that point, the debt should be discharged or closed out.
                                    2
                                     See, for example, U.S. General Accounting Office, Debt Collection Improvement Act of
                                    1996: Department of Agriculture’s Farm Service Agency Has Not Yet Fully Implemented
                                    Certain Key Provisions, GAO-02-463 (Washington, D.C.: Mar. 29, 2002).




                                    Page 1                                       GAO-04-47 FMS Cross-Servicing Opportunities
In January 2003, we reported that FMS had made significant progress in
implementing key provisions of DCIA, which directs and authorizes use of
a wide range of collection tools.3 For example, we reported that FMS’s
successful merger of the Tax Refund Offset Program with the Treasury
Offset Program (TOP), both of which are designed to offset federal
payments up to the amount of the delinquent federal debt, and system
enhancements have streamlined operations and contributed over $1 billion
in nontax debt collections from tax refund offsets during each of fiscal
years 2000, 2001, and 2002. In addition, FMS’s incorporation of Social
Security benefit payments into TOP in May 2001 resulted in about
$114 million in reported nontax debt collections from Social Security
benefit offsets through early July 2003.

While we have previously reviewed various facets of FMS’s cross-servicing
efforts, we did not review FMS’s handling of nontax debts that remained
uncollected after being returned to FMS from its private collection agency
(PCA) contractors because FMS did not consider the cross-servicing
program to be fully mature at that time.4 FMS officials now consider the
cross-servicing program to be fully mature. Therefore, as follow-up to our
prior work, this review focused primarily on nontax delinquent debts that
remained uncollected after they had been at both FMS and its PCA
contractors for cross-servicing. Specifically, our objectives were to
evaluate (1) actions taken by FMS on uncollected nontax debts returned
from its PCA contractors; (2) FMS’s efforts to ensure that eligible
uncollectible nontax debts, which federal agencies rely on FMS to report
on their behalf to the Internal Revenue Service (IRS) as income to the
debtors, are promptly identified and accurately reported; and (3) actions
taken, if any, by FMS and the Office of Management and Budget (OMB) to
ensure that federal agencies are reporting their eligible uncollectible
nontax debts to IRS as income to the debtors. In addition to addressing
these objectives, this report discusses opportunities for FMS to (1) improve
collection of nontax debts through cross-servicing and (2) enhance the
soundness of certain operational and reporting facets of its cross-servicing
program.



3
 U.S. General Accounting Office, Major Management Challenges and Program Risks:
Department of the Treasury, GAO-03-109 (Washington, D.C.: January 2003).
4
 U.S. General Accounting Office, Debt Collection: Treasury Faces Challenges in
Implementing Its Cross-Servicing Initiative, GAO/AIMD-00-234 (Washington, D.C.: Aug. 4,
2000).




Page 2                                     GAO-04-47 FMS Cross-Servicing Opportunities
Results in Brief	   Opportunities exist to improve FMS’s cross-servicing program for federal
                    nontax debts in the following areas: (1) the extent to which debts are kept
                    in TOP for passive collection after they have been returned uncollected to
                    FMS by PCA contractors; (2) FMS’s adherence to its procedures for
                    returning certain uncollected debts to referring agencies; (3) the extent to
                    which FMS and OMB monitor federal agencies’ reporting of closed-out
                    debts to IRS as income to debtors; (4) the extent to which FMS refers debts
                    to the Department of Justice (DOJ) for enforced collection and reports
                    debts to TOP; (5) the adequacy of FMS’s system for tracking debt amounts
                    forgiven and PCA contractors’ adherence to regulatory and contractual
                    policies and procedures for forgiving debts through compromises with
                    debtors; and (6) the reliability of FMS’s reporting on the extent to which
                    agencies are referring eligible debts for cross-servicing.

                    FMS did not review most debts returned uncollected from PCA contractors
                    to determine the appropriate next step to maximize collection of the debts.
                    As of February 28, 2003, FMS had approximately $6.6 billion of debts in
                    cross-servicing. About $3.7 billion of these debts had been returned
                    uncollected by FMS’s PCA contractors and were being kept in TOP for
                    passive collection through offset.5 While offset yielded some collections
                    for debts in passive collection, the amounts were small, totaling only about
                    $9 million on debts returned to FMS by its PCA contractors. In addition,
                    many of the debts returned to FMS by its PCA contractors had no prospects
                    for collection through offset because they were beyond the 10-year
                    statutory and regulatory limitations applicable to offset.6

                    FMS also did not review about $446 million of the approximately
                    $1.1 billion of uncollected debts that it returned to referring agencies
                    during fiscal years 2000, 2001, and 2002 to determine whether it should
                    close out and report the debts to IRS on behalf of agencies that had
                    authorized FMS to do so. We determined that FMS summarily returned
                    these debts to referring agencies without ensuring that the required
                    collection activities had been performed. For example, FMS did not review
                    debts totaling about $97 million to determine their eligibility for IRS
                    reporting even though they met two key criteria for IRS reporting—they



                    5
                    For the purpose of this report, offset refers to administrative offset and tax refund offset.
                    6
                     31 U.S.C. 3716(e)(1) is applicable to administrative offset and 31 C.F.R. 285.2(d)(1)(ii) is
                    applicable to tax refund offset to collect nontax debts.




                    Page 3                                         GAO-04-47 FMS Cross-Servicing Opportunities
had Taxpayer Identification Numbers (TIN) and their referring agencies
had granted FMS authority to report them to IRS.

Neither FMS nor OMB monitored or reported the extent to which federal
agencies were closing out uncollectible debts and reporting eligible
amounts to IRS. The Treasury Reports on Receivables (TROR) for the 24
Chief Financial Officers (CFO) Act agencies7 showed that for calendar year
2002, of the approximately $3.2 billion of nontax debts that these agencies
reported as closed out, about $1 billion, or approximately 31 percent, of
this amount was reported to IRS as income to the debtors.8 FMS does not
require federal agencies to disclose in their TRORs why closed-out debts
are not reported to IRS, and neither FMS nor OMB officials could
specifically explain why certain federal agencies had reported different
amounts for closed-out debts and debts reported to IRS.

In looking for missed cross-servicing collection opportunities, we further
found that FMS had referred only a small amount of debt to the Department
of Justice (DOJ) for enforced collection because FMS did not establish
effective processes or procedures for identifying debts to forward to DOJ.
We also found that FMS had not reported about $356 million of debts to
TOP for offset payments as required by FMS procedures. As of February
28, 2003, most of these debts were at secondary PCA contractors and had
been in cross-servicing for an average of about 11 months without having
been sent to TOP. Further, although many nontax debts involved
secondary debtors, such as cosignors, from which collection can be
pursued, FMS had not reported such debtors to TOP.




7
 One of the 24 CFO Act agencies, the Federal Emergency Management Agency (FEMA), was
transferred to the new Department of Homeland Security (DHS) effective March 1, 2003.
With this transfer, FEMA will no longer be required to prepare and have audited stand-alone
financial statements under the CFO Act, leaving 23 CFO Act agencies. DHS, along with most
other executive branch agencies, will be required to prepare and have audited financial
statements under the Accountability of Tax Dollars Act of 2002, Pub. L. No. 107-289, 116
Stat. 2049 (Nov. 7, 2002).
8
 The format of the TROR is on a fiscal year basis (i.e., October 1, 2001 to September 30,
2002). To determine the reported amounts for closed-out debts and debts reported to IRS for
the 24 CFO Act agencies for calendar year 2002, we obtained and analyzed the 24 CFO Act
agencies' quarterly TRORs for fiscal years 2001, 2002, and 2003. GAO has not assessed the
completeness and accuracy of the information in the TRORs for the 24 CFO Act agencies;
therefore, we have not determined whether the TROR figures reported by the agencies are
understated, overstated, or accurate.




Page 4                                       GAO-04-47 FMS Cross-Servicing Opportunities
In addition, we identified continuing problems in FMS’s administration of
compromises with debtors. FMS’s cross-servicing database showed that in-
house FMS collectors and FMS’s PCA contractors had established
repayment agreements forgiving a total of at least $51 million of delinquent
debts during fiscal years 2000, 2001, and 2002. However, the cross-
servicing database did not identify the forgiven amounts on debts.
Specifically, it did not include amounts forgiven by in-house FMS collectors
in accordance with established compromise agreements between FMS and
debtors unless the agreed-upon reduced amount had been paid in full. In
addition, PCA contractors that established compromise agreements with
debtors often did not have documentation to justify their rationale for
concluding that debtors could not pay the full debt amount or to support
the amounts forgiven.

Finally, FMS overstated federal agencies’ progress in referring eligible
nontax debts for cross-servicing. Although FMS reported that agencies had
referred about 96 percent of over $8 billion of reported eligible debts, we
determined that the referral rate was about 79 percent, thereby leaving
room for improvement.

We are making a number of recommendations to Treasury and OMB to
increase opportunities for collections and other recoveries of debts and to
help maximize the operational soundness of the cross-servicing program.

Treasury and OMB generally agreed with our findings. However, Treasury
raised a number of points regarding our specific findings and
recommendations that missed the central concerns conveyed in our report
and tended to downplay their significance. How well these findings, along
with others relating to cross-servicing that we have cited in previous
reports, are addressed is central to success in collecting delinquent nontax
debt and creating credibility among debtors that the federal government is
serious about its collection efforts.




Page 5                               GAO-04-47 FMS Cross-Servicing Opportunities
Background	   DCIA was enacted by the Congress, in part, to collect nontax debts
              delinquent more than 180 days by referring such debts to Treasury or a
              Treasury-approved debt collection center for cross-servicing.9 FMS is the
              only Treasury-approved governmentwide debt collection center.

              After receiving a debt from a referring federal agency, FMS generally keeps
              the debt for 30 days at its Debt Management Operations Center. During this
              time, FMS is to send a letter demanding payment to the debtor. An in-house
              FMS collector may attempt to contact the debtor to obtain payment in full
              or secure payment through other options, including compromise.10 If the
              debt has not been collected 20 days after the date of the demand letter,
              FMS is to report the debt to TOP if the referring agency has not already
              done so.11

              If the referred debt remains uncollected after it has been at FMS for 30
              days, FMS typically sends the debt to one of its five PCA contractors.12 The
              PCA contractor that receives the debt initially—the primary PCA
              contractor—is generally given 270 days from the date it receives the debt
              from FMS to collect or resolve the debt.13 If the primary PCA contractor is
              unable to collect or resolve the debt, it sends the debt back to FMS. FMS
              then typically sends the debt to another PCA contractor, the secondary
              PCA contractor for the debt. The secondary PCA contractor is also given
              270 days from the date it receives the debt from FMS to collect or resolve
              the debt. FMS requires its PCA contractors to attempt to locate debtors,
              send demand letters, and attempt to obtain full payment before



              9
               Federal agencies may, at their discretion, refer valid, legally enforceable debts for cross-
              servicing that are less than 180 days delinquent; however, it may not be feasible for certain
              agencies to do so.
              10
                FMS’s policy is to attempt to obtain payment in full. However, other payment options
              include (1) repayment agreement for payment in full, (2) lump sum compromise settlement,
              and (3) compromise repayment agreement.
              11
                   DCIA requires that eligible debts delinquent more than 180 days be reported to TOP.
              12
               FMS’s current PCA contract covers fiscal years 2001 through 2006. The five PCA
              contractors are located in California, Florida, Georgia, New York, and Texas.
              13
               FMS recently increased the number of days PCA contractors are given to collect or resolve
              referred nontax debts from 180 days to 270 days. Administrative debt resolution occurs
              when a PCA contractor determines that a delinquent debtor is either bankrupt, deceased, or
              disabled and financially unable to pay the debt.




              Page 6                                          GAO-04-47 FMS Cross-Servicing Opportunities
compromising any debt. FMS may refer debts to DOJ for litigation and
enforced collection at any time.

Debts that are returned uncollected to FMS from its secondary PCA
contractors are to be either retained by FMS for additional collection
action or returned to the referring agencies.14 According to the Federal
Claims Collection Standards,15 federal agencies must terminate all
collection action before closing out a delinquent nontax debt and must
report certain closed-out debts to IRS.16

Federal agencies are required to report annually in their TRORs on the
status of their nontax debts.17 TRORs are FMS’s only comprehensive
means of collecting information on the federal government’s nontax debt
portfolio, including debts written off, closed out, and reported to IRS.
TRORs are also used to collect information on nontax debts delinquent
more than 180 days to help FMS monitor federal agencies’ implementation
of DCIA. FMS summarizes the information in the federal agencies’ TRORs
annually in Report to the Congress on U.S. Government Receivables and
Debt Collection Activities of Federal Agencies.

OMB assists the President by developing governmentwide policies for the
effective and efficient operation of the executive branch. As such, OMB
establishes credit management policy for the federal government, including
setting standards for extending credit, managing lenders participating in
guaranteed loan programs, servicing nontax receivables, and collecting
delinquent nontax debts. In addition, OMB is responsible for reviewing
federal agencies’ policies and procedures related to credit programs and
debt collection activities.



14
 FMS collectors are required to review debts to determine whether further collection
actions, such as reporting debts to TOP or IRS, are needed prior to returning the debts back
to the referring agencies. If no further collection actions are needed, the debt is returned to
the referring agency.
15
     31 C.F.R. Parts 901-904.
16
   According to the Federal Claims Collection Standards, upon close-out of a debt, the agency
must report the close-out to IRS in accordance with the requirements of 26 U.S.C. 6050P and
26 C.F.R. 1.6050P-1. IRS Form 1099C is used to report the uncollectible debt as income to
the debtor, which may be taxable at the debtor’s current tax rate.
17
 All CFO Act agencies and non-CFO Act agencies with nontax ending debt balances of $50
million or greater are required to report quarterly.




Page 7                                         GAO-04-47 FMS Cross-Servicing Opportunities
Scope and     To address our objectives, we interviewed FMS officials and reviewed
              pertinent FMS documents and reports to obtain an understanding of FMS’s
Methodology   policies and procedures for nontax debts that are returned uncollected to
              FMS by its PCA contractors and for closing out uncollectible nontax debts
              and reporting such debts to IRS as income to the debtor. We also reviewed
              applicable federal regulations and guidance for federal nontax debt
              collection, close-out, and IRS reporting, including the Federal Claims
              Collection Standards, OMB Circular A-129, and IRS instructions for
              reporting closed-out debts. In addition, we obtained and analyzed FMS’s
              cross-servicing database for the period from inception of the cross-
              servicing program in fiscal year 1996 through February 28, 2003, to
              determine what collection actions in-house FMS collectors performed on
              debts that had been returned uncollected from its PCA contractors and
              whether the in-house FMS collectors properly identified all uncollected
              debts that could be reported to IRS, including amounts that had been
              forgiven through compromise.

              A scope limitation prevented us from using statistical sampling techniques
              to determine whether compromises made by in-house FMS collectors were
              justified, supported, and reported to IRS. FMS’s cross-servicing database
              did not identify all forgiven amounts resulting from compromise
              agreements made by in-house FMS collectors; the database identified
              forgiven amounts only for in-house FMS agreements if the compromised
              amount had been paid in full and the debt settled.18 The database did not
              include the forgiven amounts for in-house compromise agreements that
              were active but had not yet been settled. We did use statistical sampling
              techniques to select from FMS’s PCA cross-servicing database 54 debts that
              had been compromised by FMS’s PCA contractors from October 1, 2002,
              through February 28, 2003.19 Using electronic and hard-copy information
              provided by FMS for the selected compromised debts, we determined
              whether the compromises were justified, supported, and reported to IRS.
              We projected the results from our sample of compromises to the
              population from which the sampled items were drawn. (App. I contains
              additional information on the sampling method.)


              18
                 If the debtor defaults on the compromise agreement, the debtor owes the full balance of
              the debt prior to compromise, less any amounts paid.
              19
                 We selected October 1, 2002, through February 28, 2003, as our testing period because FMS
              had performed reviews of compromises made by its PCA contractors for prior periods and
              found problems.




              Page 8                                       GAO-04-47 FMS Cross-Servicing Opportunities
                      In addition, we interviewed FMS and OMB officials about the extent to
                      which their respective agencies monitor and report on federal agencies
                      governmentwide regarding identification and reporting of closed-out debts
                      to IRS. We also obtained and analyzed TRORs for all 24 CFO Act agencies
                      to determine the nontax debt close-out and IRS reporting information for
                      calendar year 2002.

                      To determine whether information in FMS’s cross-servicing database was
                      reliable, we reviewed documentation provided by FMS supporting
                      reliability testing performed by FMS and its contractors on the database. In
                      addition, we performed electronic testing of specific data elements in the
                      database that we used to perform our work. Based on our review of FMS’s
                      documents and our own testing, we concluded that the data elements used
                      for this report are sufficiently reliable for the purpose of the report.

                      We performed our work from October 2002 through August 2003 in
                      accordance with U.S. generally accepted government auditing standards.

                      We requested comments on a draft of this report from the Secretary of the
                      Treasury and the Director of OMB or their designees. The Commissioner of
                      FMS provided Treasury’s comments, which are reprinted in appendix II.
                      On October 21, 2003, staff from OMB provided us with OMB’s oral
                      comments on the draft. Treasury’s and OMB’s comments are discussed in
                      the Agency Comments and Our Evaluation section of this report and are
                      incorporated in the report as applicable.



Collection            As of February 28, 2003, FMS had approximately $6.6 billion of debts in
                      cross-servicing. More than half of these debts had been returned
Opportunities Were    uncollected by FMS’s secondary PCA contractors and were being kept in
Lost on Uncollected   TOP for passive collection. Passive collection entailed no further
                      collection action other than minimal efforts through offsets, and certain
Debts Returned from   debts in passive collection were not eligible for such offsets. In addition,
PCA Contractors       FMS did not review certain uncollected debts that FMS returned to the
                      referring agencies to determine whether all collection activity had been
                      performed on the debts, including whether FMS should close out and
                      report the debts to IRS on behalf of the agencies. Further, certain debts
                      that were not in passive collection or returned to referring agencies were
                      kept in inactive status where no collection activities, including referral to
                      TOP, were performed. Consequently, opportunities for maximizing
                      collections or other recoveries were lost.




                      Page 9                                 GAO-04-47 FMS Cross-Servicing Opportunities
FMS Did Not Review           When debts were returned from secondary PCA contractors, FMS simply
Uncollected Debts Left in    kept most of them in TOP, where they largely lay dormant without any
                             review to determine the next best course of action to improve collections.
TOP for Passive Collection   For fiscal years 2000, 2001, and 2002, FMS kept about $2.6 billion of
                             uncollected nontax debts returned from its secondary PCA contractors in
                             TOP for passive collection. As of February 28, 2003, debts retained in TOP
                             for passive collection totaled about $3.7 billion and, as shown in figure 1,
                             represented 56 percent of the approximately $6.6 billion of debts that were
                             at FMS for cross-servicing at that time.20 Through February 28, 2003, FMS
                             had collected only about $9 million on debts in passive collection through
                             offsets, which was the only collection tool being used to collect these
                             returned debts.



                             Figure 1: Percentage of Cross-Serviced Debts in Passive Collection as of February
                             28, 2003




                                            44%                                       Other collection statuses ($2.9 billion)




                                                           56%                        Passive collection status ($3.7 billion)




                             Source: GAO.

                             Note: Derived from analysis of FMS’s cross-servicing database as of February 28, 2003.


                             FMS did not have written procedures for reviewing debts kept in TOP for
                             passive collection. It is important to note that FMS officials stated that


                             20
                              In addition to the approximately $2.6 billion of debts returned from secondary PCA
                             contractors in fiscal years 2000 through 2002, about $1.1 billion were retained in TOP for
                             passive collection on debts that were returned from secondary PCA contractors either prior
                             to fiscal year 2000 or in fiscal year 2003.




                             Page 10                                          GAO-04-47 FMS Cross-Servicing Opportunities
because of system limitations, FMS did not identify specific debts that were
in TOP for passive collection. However, we were able to identify debts in
TOP for passive collection using off-the-shelf database analysis software.

Certain nontax debts kept in TOP for passive collection warrant additional
review to determine the next best course of action to maximize collections
or other recoveries, such as those possible through administrative wage
garnishment (AWG) or reporting closed-out debts to IRS. For example,
DCIA authorized federal agencies to use AWG to collect delinquent nontax
debts.21 FMS can perform AWG on behalf of other federal agencies as part
of cross-servicing, although only on behalf of agencies that have authorized
FMS to do so. FMS began using AWG with the assistance of its PCA
contractors during fiscal year 2002. Because most of the debts in TOP for
passive collection were returned to FMS from PCA contractors before any
agencies had authorized FMS to use AWG on their behalf, most debts in
TOP for passive collection have not yet been assessed for AWG collection
opportunities. Further, as of our fieldwork completion date, only four
federal agencies had authorized FMS to perform AWG on their behalf.22
However, FMS expects additional agencies to provide such authorization in
the future.

In addition, about $449 million of nontax debts in TOP for passive
collection as of February 28, 2003, will not be collected through offset
because the statutory and regulatory 10-year limitations for offsets has
expired for those debts.23 According to FMS officials, FMS’s cross-
servicing system did not remove debts from TOP when the debts reached
the 10-year limitation, so such debts were not evaluated for possible close-
out and reporting to IRS.24



21
   AWG, as authorized by DCIA, is an administrative process that allows an agency to issue an
order requiring the debtor’s employer to withhold up to 15 percent of the debtor’s disposable
pay for payment of the debt.
22
 The four agencies that have authorized FMS to perform AWG on their behalf are the
Department of Housing and Urban Development, the Securities and Exchange Commission,
the James Madison Foundation, and the Railroad Retirement Board.
23
  Judgment debts and student loans are not subject to the statutory and regulatory 10-year
limitations. None of the approximately $449 million of debts were judgment debts or
student loans.
24
 According to FMS officials, the debts are removed only if they are subsequently matched
to payments in TOP.




Page 11                                       GAO-04-47 FMS Cross-Servicing Opportunities
Certain other debts in TOP for passive collection are also unlikely to yield
any collections through offsets—those for which we determined the
debtors’ Taxpayer Identification Numbers (TIN) were invalid or belonged
to deceased individuals or cases in which the debtors were bankrupt.
Specifically, we identified about $24 million of delinquent nontax debts for
which the debtors’ TINs were invalid.25 In addition, using the Social
Security Administration’s (SSA) Death Master File, we identified over 2,500
nontax debts totaling about $18 million with TINs that belonged to
reportedly deceased debtors, including one with a referred balance of
approximately $4 million.26 This debt had been in TOP since November
2001 with no collections through offsets. We also identified 69 delinquent
Medicare debts belonging to the Department of Health and Human Services
(HHS) totaling about $12 million that were being held in TOP after return
from secondary PCA contractors for which FMS’s cross-servicing database
indicated that the debtors were in bankruptcy.27 According to FMS
officials, when a bankruptcy is recorded in the cross-servicing database for
a particular debt, the cross-servicing system marks the debtor as bankrupt
for all debts associated with that debtor but does not remove them from
TOP. In-house FMS collectors typically removed from TOP only the
specific debt that they were working even though others had been flagged
as belonging to the same bankrupt debtor.

As a result of our analyses and inquiries, FMS has initiated a review of
debts in TOP to identify those beyond the statutory and regulatory 10-year
limitations for offsets. As of April 2003, FMS had identified over 7,300 such
debts, totaling about $463 million (an increase of $14 million over the


25
  IRS periodically provides a list of prefix numbers for valid Employer Identification
Numbers on its Web site. The Social Security Administration (SSA) provides a description
of invalid Social Security numbers on its Web site. We used these Web sites to identify
invalid TINs. There may be other debts with invalid TINs that we could not identify using
the information from IRS and SSA Web sites.
26
  SSA stores death information for each individual who has been issued a Social Security
number and whose death has been reported to SSA. SSA periodically extracts the death
information and makes this information, called the Death Master File, available for sale to
the public by the Department of Commerce.
27
   In total, FMS’s cross-servicing database showed that about $110 million of HHS’s Medicare
debts, including the approximately $12 million in passive collection, were in TOP and
available for liquidation by offsets even though the debtors were in bankruptcy. The
automatic stay mandated by 11 U.S.C. 362 prevents the government from pursuing
collection action against debtors in bankruptcy for certain debts that arise prior to the
commencement of the bankruptcy litigation.




Page 12                                       GAO-04-47 FMS Cross-Servicing Opportunities
                           $449 million of debts we identified as of February 28, 2003). An FMS
                           official stated that these debts would be removed from TOP and evaluated
                           for possible close-out and reporting to IRS as income to the debtors. The
                           official also stated that FMS would develop a process for routinely
                           identifying such debts. In addition, FMS officials stated that FMS will
                           revise its policies and procedures so that collectors will be instructed to
                           review the debtor and all associated nontax debts whenever a bankruptcy
                           is discovered for a debt and determine debts that should be removed from
                           TOP. Finally, FMS officials stated that FMS is in the process of developing
                           a new automated cross-servicing system, called FedDebt. According to
                           FMS officials, once FedDebt is implemented in January 2005, FMS will be
                           able to routinely identify individual debts that are in passive collection.



FMS Did Not Perform        Through February 28, 2003, FMS returned to referring agencies about
Collection and Close-Out   $1.1 billion of delinquent nontax debts that had been returned uncollected
                           to FMS by secondary PCA contractors during fiscal years 2000, 2001, and
Reviews for All Debts      2002. FMS’s cross-servicing procedures require that in-house FMS
Returned to Referring      collectors, prior to returning debts to referring agencies, review the
Agencies and Debts in      collection activity on the debts to determine whether they are eligible to be
Inactive Status            returned to the referring federal agencies. As part of this review, the cross-
                           servicing procedures require collectors to determine whether the debts
                           should be closed out and reported to IRS by FMS. We found, however, that
                           FMS had summarily returned about 40 percent of the $1.1 billion to
                           referring agencies without first ensuring that the required collection
                           activities had been performed.

                           According to information in FMS’s cross-servicing database, in April 2002
                           FMS had a substantial backlog of debts that had been returned to FMS by
                           secondary PCA contractors over the past several years that were primarily
                           in inactive status, meaning that no collection action was taking place. To
                           eliminate this backlog, FMS used its automated system to summarily return
                           about 41,000 debts totaling approximately $446 million to the referring
                           agencies in April 2002. According to agency procedures and as confirmed
                           by an FMS official, prior to the April 2002 return of the debts to the
                           referring agencies, FMS should have first evaluated these debts to
                           determine whether close-out was appropriate and whether the debts
                           should be reported to IRS. Our analysis showed that about $97 million of
                           these returned debts met two criteria for being reported by FMS to IRS as
                           income to the debtor: (1) the debts had TINs and (2) the referring agencies
                           had granted FMS authority to report the debts to IRS.




                           Page 13                               GAO-04-47 FMS Cross-Servicing Opportunities
                        Our review of the cross-servicing database showed that FMS continues to
                        face challenges in reviewing uncollected debts returned from secondary
                        PCA contractors. Specifically, as of February 28, 2003, FMS had
                        approximately $80 million of debts in inactive status even though its PCA
                        contractors returned these uncollected debts to FMS during fiscal year
                        2002. According to an FMS official, the backlog occurred because the
                        automated cross-servicing system did not always identify debts returned to
                        FMS by secondary PCA contractors that required further collection review
                        by in-house FMS collectors. The FMS official stated that FedDebt, when
                        implemented in January 2005, would correct this problem.



Inadequate Monitoring   DCIA gives OMB responsibility for annual reporting to the Congress on any
                        problems regarding federal agency progress in improving policies and
and Reporting of        standards for closing out debts,28 and FMS is responsible for the form and
Closed-Out Debts to     content of the TROR, which FMS uses to monitor federal agencies’
                        implementation of DCIA. Neither OMB nor FMS monitored or reported on
IRS                     the extent to which agencies governmentwide closed out debts and
                        reported them to IRS. The TRORs for 24 CFO Act agencies showed that the
                        agencies reported that about $1 billion of the approximately $3.2 billion of
                        nontax debts that were reported closed out by those agencies were
                        reported to IRS as income to the debtors for calendar year 2002.29
                        Additionally, the TRORs that the agencies used to report did not disclose
                        why closed-out debts were not reported to IRS and did not include closed-

                        28
                           Specifically, DCIA requires OMB to (1) review the standards and policies of each federal
                        agency for compromising, writing down, forgiving, or discharging indebtedness arising from
                        programs of the agency; (2) determine whether those standards and policies are consistent
                        and protect the interests of the United States; (3) direct the head of the agency to make
                        appropriate modifications to any federal agency’s standards or policies that the OMB
                        Director determines are not consistent or do not protect the interests of the United States,
                        and (4) report annually to the Congress on deficiencies in the standards and policies of
                        federal agencies for compromising, writing down, forgiving, or discharging indebtedness,
                        and progress made in improving those standards and policies.
                        29
                          In previous work, we found that certain federal agencies may not be properly reporting
                        closed-out debts to IRS. For example, in fiscal year 2002, we reported that the Centers for
                        Medicare & Medicaid Services was not reporting certain closed-out Medicare debts to IRS as
                        income to debtors. U.S. General Accounting Office, Debt Collection Improvement Act of
                        1996: HHS’s Centers for Medicare & Medicaid Services Faces Challenges to Fully
                        Implement Certain Key Provisions, GAO-02-307 (Washington, D.C.: Feb. 22, 2002). In
                        addition, we found that Farm Services Agency officials were unaware of the requirement to
                        report closed-out debts to IRS as income for secondary debtors. U.S. General Accounting
                        Office, Debt Collection: Agriculture Making Progress in Addressing Key Challenges, GAO-
                        03-202T (Washington, D.C.: Nov. 13, 2002).




                        Page 14                                      GAO-04-47 FMS Cross-Servicing Opportunities
out debts that had been previously classified as currently not collectible
(CNC). These are significant reporting deficiencies because without such
information, the TRORs cannot be used to determine the extent to which
all eligible debts are closed out and reported to IRS. As a result of
inadequate monitoring and reporting of closed-out debts to IRS,
opportunities for recovery by reporting closed-out debts to IRS as income
to debtors may have been lost.

Neither OMB nor FMS officials could specifically explain why certain
agencies had reported different amounts for debts closed out and debts
reported to IRS. According to an OMB official, OMB does not have a formal
process in place to review federal agencies’ standards and policies
regarding debt collection, including reporting closed-out debts to IRS, and
does not monitor the extent to which agencies close out debts and report
them to IRS. The OMB official stated that OMB examiners, at their own
discretion, might look at how federal agencies are closing out debts as part
of the examiners’ overall evaluation of the agencies’ implementation of the
President’s Management Agenda.30 According to the official, OMB has not
submitted any reports to the Congress regarding problems with agencies’
standards and policies for closing out debts and reporting them to IRS.

FMS officials stated that the large difference on the agencies’ TRORs
between closed-out debts and debts reported to IRS may be attributable to
situations involving debts that are not required to be reported to IRS.31
However, FMS does not require federal agencies to disclose such
information in their TRORs. Without such disclosures in the TRORs, it is
not possible for FMS, OMB, or any other interested party to determine
whether federal agencies are reporting their closed-out debts to IRS
accurately and completely.

Moreover, the agency TRORs understated the amount of debt closed out
during calendar year 2002. Specifically, we determined and FMS officials
acknowledged that the $3.2 billion of debts that were reported closed out


30
   The President's Management Agenda, announced in the summer of 2001, is a strategy for
improving the management of the federal government. The President's Management Agenda
includes an emphasis on strategic management of human capital, competitive sourcing,
improved financial performance, expanded electronic government, and budget and
performance integration.
31
 For example, 26 U.S.C. 6050P and 26 C.F.R. 1.6050P-1 exclude certain debts that are
discharged in bankruptcy and debts less than $600 from IRS reporting requirements.




Page 15                                      GAO-04-47 FMS Cross-Servicing Opportunities
                           by the 24 CFO Act agencies did not include debts previously classified as
                           CNC that were subsequently closed out. This is a significant deficiency in
                           the TROR because CNC debts that are eventually closed out can be
                           substantial. For example, the 24 CFO Act agencies reported about
                           $10.1 billion of CNC debts at the end of calendar year 2002. Without
                           information on whether CNC debts are closed out, the TRORs cannot be
                           used to fully determine the extent to which all debts are closed out and
                           reported to IRS. In spite of these reporting deficiencies, FMS officials
                           stated that FMS does not have any plans to revise the TROR.



FMS Missed Certain         In addition to taking little action to improve collections for debts that were
                           returned uncollected by PCA contractors, FMS missed certain
Opportunities to           opportunities to improve overall cross-servicing collections. FMS did not
Improve Overall            establish effective processes or procedures for identifying debts to forward
                           to DOJ. As a result, FMS had relatively few debts (about $30 million as of
Collections                February 28, 2003) at DOJ for enforced collection action even though DOJ
                           has been successful in collecting debts through civil litigation in the past.
                           In addition, FMS did not report all eligible debts that had been referred for
                           cross-servicing to TOP, as required by its cross-servicing procedures, and
                           did not report secondary debtors, such as cosigners, to TOP.



FMS Missed Enforced        DOJ serves as the federal government’s “collector of last resort.” When a
Collection Opportunities   federal agency, including FMS, cannot collect certain debts
                           administratively, DOJ can litigate the claims and, with judicial oversight,
                           enforce collections by seizing bank, stock, and similar accounts from
                           debtors; seizing and selling debtor-owned real estate and other property;
                           and garnishing a higher percentage of debtors’ wages than AWG under
                           DCIA allows.32 The benefits of enforced collection are reflected in past
                           DOJ recoveries. In its fiscal year 2002 report to the Congress, FMS noted
                           that DOJ collected about $10.9 billion in cash recoveries through civil
                           litigation from fiscal year 1998 through fiscal year 2002.




                           32
                              Federal agencies, in cases where there is no evidence of assets, can also refer delinquent
                           debts to DOJ for judgment liens only rather than for enforced collection.




                           Page 16                                       GAO-04-47 FMS Cross-Servicing Opportunities
The Federal Claims Collection Standards require federal agencies to
promptly refer debts that have a principal balance of at least $2,500 to DOJ
when the debts cannot be collected through either compromise or
aggressive collection action and do not meet criteria for suspending or
terminating collection action.33 Accordingly, OMB Circular A-129 requires
federal agencies, including FMS as the federal government’s central debt
collection agency, to refer delinquent debts to DOJ as soon as there is
sufficient reason to conclude that full or partial recovery of the debts can
best be achieved through litigation.

FMS acknowledges that DOJ referrals are an important part of cross-
servicing. In its annual report to the Congress on federal agencies’ debt
collection activities, FMS reported that referrals to DOJ for civil litigation
governmentwide decreased significantly over the last 3 fiscal years, from
50,572 debts in fiscal year 2000 to 8,443 debts in fiscal year 2002. As federal
agencies continue to implement DCIA and make progress in promptly
referring eligible debts that are over 180 days delinquent to FMS for
collection action in accordance with the act’s requirements, reported
decreases in federal agency referrals to DOJ for enforced collection can be
expected as would increases in FMS referrals due to the shift in collection
responsibilities from the agencies to FMS. Generally, a determination that
a debt should be referred to DOJ cannot reasonably be made until
appropriate cross-servicing collection action has taken place. In working
with federal agencies to facilitate implementation of DCIA, FMS
emphasizes that referral of a debt to DOJ for enforced collection is a key
cross-servicing tool. FMS makes clear to agencies that it will (1) prepare
the forms necessary for referring debts to DOJ,34 (2) work with DOJ to
obtain necessary information from the agencies to litigate the claims,
(3) monitor the debts while they are at DOJ, and (4) apply DOJ collections
to the debts.

33
  According to the Federal Claims Collection Standards, federal agencies may refer debts to
DOJ less than $2,500 in certain situations, such as debts for which litigation is important to
ensure compliance with the federal agency’s policies or programs. The Federal Claims
Collection Standards also state that federal agencies may terminate collection action on a
claim when, among other things, the agency is unable to locate the debtor and/or the costs
of collection are anticipated to exceed the amount recoverable. Federal agencies may
suspend collection action on a claim when the agency cannot locate the debtor, the debtor’s
financial condition is expected to improve, and/or the debtor has requested a waiver or
review of the claim.
34
   Unless excepted by DOJ, claims referred to DOJ should be accompanied by a Claims
Collection Litigation Report, a Certificate of Indebtedness, and other information that may
be required.




Page 17                                       GAO-04-47 FMS Cross-Servicing Opportunities
FMS, based on consultations with DOJ, established the following
conditions for its referral of agency debts to DOJ: (1) the federal creditor
agency has authorized FMS to refer its debts to DOJ, (2) the principal
amount of the debt is $25,000 or more, (3) there is at least 1 year before the
statute of limitations expires, (4) FMS has a debtor address (or other
debtor contact information for service-of-process purposes), and (5) FMS
has evidence that the debtor has assets or a source of income. As
appropriate, FMS also expects to refer debts to DOJ when some, but not
all, of the criteria are met. For example, FMS might refer debts less than
$25,000 when bank accounts have been identified.

In spite of FMS’s key role in determining whether debts referred for cross-
servicing should be referred to DOJ for enforced collection, only a nominal
amount of cross-serviced debt was at DOJ. Specifically, as of February 28,
2003, only about $30 million of the approximately $6.6 billion of debts with
FMS for cross-servicing were at DOJ. Moreover, as shown in figure 2, all
but about $4 million of the debts FMS had referred to DOJ were referred
prior to fiscal year 2000, suggesting that FMS had not emphasized
adjudication as a collection tool.



Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by Fiscal Year
Referred
16 Debt amount (in millions of dollars)


14


12


10


 8


 6


 4


 2


 0
       1996        1997       1998        1999     2000          2001   2002      2003
     Fiscal year

Source: GAO.

Note: Derived from analysis of FMS’s cross-servicing database.




Page 18                                          GAO-04-47 FMS Cross-Servicing Opportunities
According to an FMS official, prior to fiscal year 2002, FMS had no specific
process to evaluate cross-serviced debts to determine whether recovery
could best be achieved by DOJ. Rather, the FMS official stated, FMS relied
on the referring agencies to identify delinquent debts to refer to DOJ. In
addition, FMS’s in-house collectors, using their own discretion during the
normal course of their collection activities, could identify specific debts for
referral to DOJ.

In fiscal year 2002, FMS, in an effort to increase referrals to DOJ, began
performing quarterly queries of its cross-servicing database to identify
uncollected debts for referral to DOJ. The queries, while conceptually
good, did not cover most of FMS’s cross-servicing portfolio. Rather, they
were limited to debts with principal balances $25,000 or over that were
classified as inactive or “special handling.” As of February 28, 2003, FMS
had identified nine debts totaling about $4 million for DOJ referral using
this smaller segment of its cross-servicing database.

Reviewing only debts classified as inactive or “special handling” with
principal balances over $25,000 is unlikely to result in many candidates for
FMS referral to DOJ because of the nature of these debts and the amounts
covered. Specifically, for many of the debts in inactive status, FMS does
not have TINs, which are required for DOJ referral, or the debtors are in
bankruptcy.35 Debts classified as “special handling” are debts that
collectors have identified as needing special processing because they want
to keep the cases at the debt collection center. For example, a collector
may place a debt in “special handling” if the collector is in negotiations with
the debtor over a payment plan. We applied FMS’s database query method
to debts classified as inactive and “special handling.” Our query identified
about $198 million of uncollected debts, which represented about 3 percent
of the amount in cross-servicing. We determined that the majority of these
debts were not good candidates for DOJ referral. Specifically, about
$106 million of such debts either (1) lacked agency authorization for
referral to DOJ, (2) were involved in bankruptcy proceedings, (3) were
beyond the general 6-year statute of limitations for litigation of
nonjudgment debts, or (4) lacked TINs.




35
 FMS’s policy is to return all debts found to be in bankruptcy to referring agencies unless it
has been stipulated by the referring agency that such cases will not be returned or that the
bankruptcy proceedings have been completed and the debts were not discharged.




Page 19                                       GAO-04-47 FMS Cross-Servicing Opportunities
We would consider it reasonable for FMS to query a larger segment of its
cross-servicing database. In particular, debts held in TOP for passive
collection would seem to be better candidates for DOJ referral because
they should have valid TINs and are not supposed to be in bankruptcy. This
segment of the cross-servicing debt portfolio is rather large. We
determined that FMS had approximately $2.2 billion of debts in TOP with
principal balances of at least $2,500 that had been returned from its
secondary PCA contractors and that were within the 6-year statute of
limitations for litigating nonjudgment debt.36 Unless FMS starts expanding
the scope of its reviews for potential referrals to DOJ, the statute of
limitations for these debts will likely expire without any opportunity for
enforced collection action. Our assessment of FMS’s database as of
February 28, 2003, showed that about $449 million of debts with principal
balances of at least $2,500 likely had their statute of limitations expire
while they were held in TOP for passive collection. We determined that all
of these debts would have been possible candidates for referral to DOJ,
since they had been returned from FMS’s secondary PCA contractors with
at least 1 year remaining before the statute of limitations expired.




36
 Using a $25,000 principal balance as the threshold for DOJ referral, FMS’s database
showed about $2.1 billion of debts in TOP that were within the 6-year statute of limitations.




Page 20                                       GAO-04-47 FMS Cross-Servicing Opportunities
FMS also did not routinely consider or act on advice from its PCA
contractors regarding referrals to DOJ. Because PCA contractors’
responsibilities include locating debtors and determining whether they
have incomes or assets to repay delinquent debts, the PCA contractors
would have a reasonable basis for identifying uncooperative debtors who
could repay their debts but had refused. FMS’s PCA Operations and
Procedures Manual requires FMS’s PCA contractors to provide
recommendations to FMS on the next collection actions that should be
taken on individual debts, such as referral to DOJ for litigation.37
According to the manual, litigation should be recommended when the PCA
contractor believes that the debtor has sufficient assets for debt repayment
and that no less costly method of collection would be effective. Our
analysis showed that FMS was holding debts totaling about $47 million in
TOP for passive collection that had principal balances over $2,500 for
which PCA contractors had recommended litigation.38 We noted that FMS’s
cross-servicing database showed that these debts were within the general
6-year statute of limitations for litigating nonjudgment debts and had no
apparent barriers to litigation, such as debtor bankruptcy or a deceased
debtor.

FMS officials stated that FMS does not routinely review recommendations
made by its PCA contractors because FMS does not believe such
recommendations are reliable. In this regard, we noted that FMS’s PCA
Operations and Procedures Manual does not set forth the specific FMS
criteria for selecting debts for DOJ referral. In addition, FMS does not tell
PCA contractors which creditor agencies have authorized FMS to refer
debts to DOJ on the agency’s behalf. It is important to note that only about
$3 million, or less than one-tenth of 1 percent, of the approximately $3.9
billion of uncollected debts that were returned to FMS from its secondary
PCA contractors during fiscal years 2000, 2001, and 2002 were at DOJ.

Moreover, while FMS had referred only limited amounts of cross-serviced
debt to DOJ for litigation, FMS lacked a history of its prior referral activity
and knowledge of the results of such referrals. FMS officials stated that


37
   In addition to litigation, PCA contractors can recommend that collection action be
continued, the debt be returned to the referring agency, or the debt be written off and closed
out.
38
 Using a $25,000 principal balance as the threshold for DOJ referral, FMS’s database had
about $45 million of debts in TOP for passive collection for which PCA contractors had
recommended litigation.




Page 21                                       GAO-04-47 FMS Cross-Servicing Opportunities
                              FMS does not use the cross-servicing database to track DOJ referrals;
                              however, we found that the database has status and collection activity
                              codes capable of being used for such tracking. FMS officials
                              acknowledged the need to track all DOJ referrals and stated that FMS will
                              ensure that FedDebt will be able to track all debts that FMS has referred to
                              DOJ.



FMS Did Not Fully Use TOP 	   FMS’s policies and procedures require in-house FMS collectors to report all
                              eligible debts to TOP early in the cross-servicing process, before sending
                              them to FMS’s PCA contractors. In fiscal year 2000, we reported that FMS
                              did not promptly report eligible debts to TOP as its procedures required.
                              Computer interface problems and errors by in-house FMS collectors were
                              cited as reasons for not promptly reporting all eligible debts to TOP.39
                              Problems regarding TOP referrals continue as FMS’s cross-servicing
                              database as of February 28, 2003, showed that about 1,800 debts that were
                              eligible for TOP, with referred balances totaling about $356 million, were at
                              PCA contractors but had never been put into TOP by FMS’s collectors. We
                              did not identify any apparent factors that would have precluded FMS’s
                              collectors from reporting these debts to TOP. The database showed that
                              the debts were eligible for TOP in that the referring agencies had
                              authorized FMS to report the debts to TOP, the debtors had TINs, the
                              debtors were not in bankruptcy or deceased, and the debts were not over
                              10 years delinquent.

                              The delays in reporting these debts to TOP were extensive. As of February
                              28, 2003, about $215 million of these debts with an average of
                              approximately 320 days in cross-servicing were at the secondary PCA
                              contractor without having been sent to TOP. One of the more egregious
                              delays involved a debt referred by an agency in October 2001 for about
                              $43 million that had been in cross-servicing for over 500 days without ever
                              having been reported to TOP.

                              FMS officials stated that they are aware that eligible debts are not always
                              being reported to TOP. They told us that debts might not be reported to
                              TOP because the cross-servicing automated system does not always
                              identify debts that should be reported. For example, FMS officials stated
                              that if the system failed during its nightly batch processing, the debts that


                              39
                                   GAO/AIMD-00-234.




                              Page 22                                GAO-04-47 FMS Cross-Servicing Opportunities
                      would otherwise have been flagged for reporting to TOP would be missed.
                      FMS officials stated that the cross-servicing system could not go back and
                      routinely identify debts that were missed. Thus, as acknowledged by FMS
                      officials, FMS would have to perform a periodic sweep of the entire
                      database to identify eligible debts that were missed for reporting to TOP. In
                      response to our inquiries, FMS officials stated that FMS will take action to
                      ensure that FedDebt includes features to correct this problem when it is
                      implemented in January 2005.

                      FMS is also not seizing the opportunity to report secondary debtors to TOP.
                      Our analysis of FMS’s cross-servicing database as of February 28, 2003,
                      showed that about $144 million of the approximately $5 billion of cross-
                      serviced debts in TOP had secondary debtors with TINs. According to FMS
                      officials, both the TOP and cross-servicing automated systems are debt-
                      based, rather than based on both debt and debtor. As such, TOP cannot be
                      used to identify all debtors associated with a debt, a problem we noted to
                      FMS about 5 years ago. Even if TOP would accept these data, the cross-
                      servicing system cannot provide them, since it is now capable of sending
                      only one debtor per debt to TOP. FMS officials stated that FMS is in the
                      process of enhancing TOP to accept multiple debtors for a single debt and
                      that the TOP enhancement should be implemented in fiscal year 2004. The
                      officials also stated that FMS will ensure that FedDebt will be capable of
                      referring multiple debtors to TOP when it is implemented in January 2005.



Problems Identified   FMS did not sufficiently ensure that nontax debts that were forgiven
                      through compromises with debtors by its in-house collectors or its PCA
with Debt             contractors were done so in an operationally sound manner. FMS’s cross-
Compromises and a     servicing database as of February 28, 2003, showed that FMS and its PCA
                      contractors forgave a total of at least $51 million of delinquent nontax
Key Performance       debts through compromises with debtors during fiscal years 2000, 2001,
Measure               and 2002. For FMS in-house compromises, this included only those
                      compromise agreements that had been settled and paid in full. The cross-
                      servicing database did not identify forgiven amounts for agreements that
                      were still active or defaulted. In addition, it is unclear whether certain
                      forgiven amounts should have been forgiven or by how much, since FMS’s
                      PCA contractors often did not document why they compromised debts and
                      often did not obtain sufficient support and justification for the
                      compromises. Further, FMS overstated federal agencies’ progress in
                      referring eligible nontax debts for cross-servicing. Specifically, FMS
                      incorrectly reported that agencies had referred 96 percent of their eligible
                      debts for cross-servicing for fiscal year 2002, rather than the actual rate of



                      Page 23                               GAO-04-47 FMS Cross-Servicing Opportunities
                             79 percent based on our analysis of information provided by FMS. This
                             discrepancy occurred because FMS did not include any debts that were
                             reported as having become eligible for referral for cross-servicing during
                             fiscal year 2002 and did not deduct the amounts of certain debts that it
                             returned to referring agencies during fiscal year 2002.



Information Regarding Debt   The soundness of FMS’s cross-servicing program can be undermined if
Compromises Was Not          certain debtors receive more generous treatment as a result of compromise
                             agreements than other similarly situated debtors. While the amount of debt
Sufficient                   forgiven as noted above was not substantial, the consistency with which
                             delinquent debts are forgiven and the extent to which federal requirements
                             are adhered to in arriving at such decisions are vital. Therefore, it is
                             critically important for FMS to (1) accurately track debt amounts forgiven,
                             (2) obtain documented support for the compromise agreements, and
                             (3) obtain TINs for the debtors. In August 2000, as part of our overall
                             report on FMS’s cross-servicing program, we reported that the majority of
                             FMS compromise agreements we reviewed, including those made by PCA
                             contractors, did not include support for the forgiven amounts.40 In
                             following up on FMS’s compromise activity, we found that FMS’s cross-
                             servicing system did not track the forgiven amounts for all debts that had
                             been compromised during fiscal years 2000, 2001, and 2002. In addition,
                             FMS’s PCA contractors often did not document why they compromised
                             debts and often did not obtain sufficient support for the compromise
                             agreements, including debtors’ TINs, which are needed to report the
                             forgiven amounts to IRS.

                             The Federal Claims Collection Standards state that federal agencies may
                             compromise debts if (1) the debtor is unable to pay the full amount in a
                             reasonable time, as verified through credit reports or other financial
                             information; (2) collection in full cannot be achieved within a reasonable
                             time by enforced collection proceedings; (3) the cost of collection does not
                             justify the enforced collection of the full amount; or (4) there is significant
                             doubt concerning the government’s ability to prove its case in court.
                             According to the standards, in determining the debtor’s inability to pay,
                             agencies should consider a number of factors as verified by the debtor’s
                             credit report and other financial information, including financial
                             statements that show the debtor’s assets, liabilities, income, and expenses.


                             40
                                  GAO/AIMD-00-234.




                             Page 24                                GAO-04-47 FMS Cross-Servicing Opportunities
In addition, FMS’s PCA contract requires its PCA contractors to document
their attempts to collect the full amount of delinquent debts and provide
justification for compromises. In the absence of adequate documentation
supporting the PCA contractor’s determination to compromise a debt for a
specific amount, FMS cannot determine whether the compromise is
reasonable under the Federal Claims Collection Standards. Thus, FMS has
no basis to determine whether the government suffered a loss that should
not have been incurred as a result of such a compromise. We also
determined that the PCA contract does not establish liquidated damages or
penalties for a PCA contractor’s failure to document a compromise.

As part of our review, we attempted to obtain the forgiven amount for each
compromise agreement established by in-house FMS collectors during
fiscal years 2000, 2001, and 2002, to determine whether the bases for the
forgiven amounts had been supported and documented by FMS’s in-house
collectors. However, FMS could not provide us the forgiven amount for
each compromise agreement because the cross-servicing system only
identifies the forgiven amount for compromise agreements that have been
settled in full. Thus, FMS could not provide us the forgiven amounts for
compromise agreements that were active or in default.

Absent information on forgiven amounts for all compromise agreements,
FMS cannot track the extent to which its collectors are compromising
agency-referred debts and the bases for the compromises. According to an
FMS official, FMS acknowledges that such information is critical to sound
cross-servicing operations and, as a result of our inquiries, plans to
incorporate the ability to identify and track all forgiven amounts in the
FedDebt system.

According to FMS officials, in fiscal year 2002, FMS began to review
repayment and compromise agreements made by its PCA contractors as
part of its annual PCA contractor compliance reviews. During these
reviews, FMS generally found that all PCA contractors failed to
consistently document in their respective debt collection systems the
justification for accepting installment payments and compromise
agreements.41 As a result of FMS’s findings, each PCA contractor agreed to
conduct training sessions for its collectors or take other corrective actions


41
   FMS found that the contractor error rates resulting from failure to provide justification for
the acceptance of installment and compromise agreements ranged from 26 percent at one
contractor to 88 percent at another contractor.




Page 25                                        GAO-04-47 FMS Cross-Servicing Opportunities
to help ensure that the collectors properly obtain and document support
for forgiven amounts.

In spite of FMS’s reviews of the compromise activity of its PCA contractors
and related findings pertaining to the lack of documented support for the
compromises, we found that PCA contractors were still not providing
sufficient support for compromises during the first 5 months of fiscal year
2003. Specifically, we found that 22 percent of the sampled compromised
debts had no evidence that the PCA contractor had attempted to obtain a
lump sum payment in full or a repayment agreement for the full amount
prior to compromising the debt.42 For example, one debt involved a debtor
who offered to pay the full debt balance of approximately $14,000 in
installments. However, without explanation, the PCA contractor offered to
compromise the debt by 20 percent if the debtor would pay right away. The
debtor accepted the compromise offer. Moreover, this PCA contractor
encouraged compromise activity prior to exhausting attempts to collect
debts in full by sending out pro forma letters to debtors stating that the
contractor may be authorized to compromise a portion of their debt should
the debtor be in a position to pay the remaining balance.




42
 We estimate that 22 percent of the debt compromises in the population were made without
the PCA contractor attempting to obtain payment in full prior to compromise. We are 95
percent confident that the percentage of debt compromises for which the PCA contractor
did not attempt to obtain payment in full is from 12 percent to 34 percent.




Page 26                                    GAO-04-47 FMS Cross-Servicing Opportunities
In addition, 72 percent of the compromised debts in our sample did not
have supporting documentation indicating why the PCA contractors
compromised the debts or the bases used to determine how these debts
met Federal Claims Collection Standards criteria for compromise.43 For 81
percent of the compromised debts in our sample, PCA contractors did not
have complete financial statements, and for 30 percent of the compromised
debts, PCA contractors did not have credit bureau reports to support the
compromises.44

It should be noted that a PCA contractor is required to submit to FMS the
debtor’s financial statement and credit bureau report for review only if the
compromise percentage of the debt exceeds the compromise percentage
that is authorized by FMS or the referring agency. We found that for 36 of
the 54 compromised debts in our sample, the PCA contractors
compromised up to the amount that was allowed by FMS or the referring
agencies. For example, one PCA contractor allowed a debtor to pay
approximately $46,000 to settle a debt that had an outstanding balance of
about $58,000. The forgiven amount fell within the compromise parameter
that had been established by the referring agency. However, the PCA
contractor did not (1) attempt to collect payment in full, (2) provide any
explanation to justify the compromise, or (3) obtain the debtor’s complete
financial statement and credit report. Because the PCA contractor did not
exceed the compromise parameter established by the referring agency, it
was able to compromise the debt without submitting the debtor’s financial
statements and credit report to FMS for review.

FMS officials stated that PCA contractors are required to document their
attempts to obtain payment in full and justification for offering or accepting
a compromise even when the compromise is within agency parameters.
According to FMS officials, FMS discussed this issue with its PCA

43
 We estimate that 72 percent of the debt compromises in the population were made without
the PCA contractor providing an explanation for the compromises. We are 95 percent
confident that the percentage of debt compromises for which no explanation was provided
by the PCA contractor is from 59 percent to 83 percent.
44
 We estimate that 81 percent of the debt compromises in the population were made without
the PCA contractor obtaining a complete financial statement for the debtor. We are 95
percent confident that the percentage of debt compromises for which PCA contractors did
not obtain complete financial statements is from 69 percent to 91 percent. We estimate that
30 percent of the debt compromises in the population were made without the PCA
contractor obtaining a credit bureau report. We are 95 percent confident that the
percentage of debt compromises for which the PCA contractor did not obtain credit bureau
reports is from 18 percent to 43 percent.




Page 27                                      GAO-04-47 FMS Cross-Servicing Opportunities
contractors in October 2002 and reiterated the importance of documenting
the justification for compromising debts and obtaining financial statements
and credit bureau reports to support the compromises. FMS officials
stated that FMS would continue to look at compromise agreements in
future PCA compliance reviews to help ensure that PCA contractors are
providing justification and obtaining the financial statements and credit
bureau reports necessary for entering into a compromise agreement.

Moreover, FMS’s PCA contractors did not always attempt to obtain or
report to FMS the TINs of debtors who were granted compromises.
Specifically, we found that 17 percent of the compromised debts in our
sample did not have TINs because the PCA contractors either did not
request the TINs from the debtors or did not report the TINs to FMS.45
Without TINs for debtors, neither FMS nor the referring agencies were able
to report the forgiven amounts of the compromised debts to IRS as income
to the debtors. In addition, without a TIN, if the debtor defaults on the
compromise agreement, the debt cannot be reported to TOP. According to
FMS officials, FMS is continuing to monitor the compromise agreements
made by its PCA contractors to help ensure that the contractors obtain and
report TINs to FMS. In addition, as a result of our inquiries, FMS plans to
issue a technical bulletin to its PCA contractors to remind them of the need
to obtain and report TINs.




45
 We estimate that 17 percent of the debt compromises in the population were made without
the PCA contractor obtaining a TIN from the debtor or reporting the TIN to FMS. We are 95
percent confident that the percentage of debt compromises for which no TIN was obtained
by the PCA contractor or reported to FMS is from 9 percent to 29 percent.




Page 28                                     GAO-04-47 FMS Cross-Servicing Opportunities
FMS Overstated Progress in   DCIA requires Treasury to report to the Congress each year on the debt
a Key Performance Measure    collection activities of federal agencies, including FMS as the government’s
                             central debt collection agency. A key performance measure that FMS
                             reports each year is the percentage of debt eligible for cross-servicing that
                             has been referred by federal agencies. In fiscal year 2000, we reported that
                             FMS did not properly calculate this key performance measure because the
                             reported amount of debt referred for cross-servicing was not comparable
                             to the reported amount of eligible debt. Specifically, FMS overstated the
                             debt referral amount by accumulating the referred amount for about 3 and
                             a half years. We recommended that FMS revise its reporting of debt
                             amounts referred for cross-servicing to reflect the extent to which eligible
                             debts reported by agencies as of a specific date have been referred to
                             FMS.46

                             In its fiscal year 2002 report to the Congress, FMS reported that $7.9 billion,
                             or 96 percent, of the $8.2 billion of eligible debt had been referred for cross-
                             servicing as of fiscal year-end and cited the high referral rate as a notable
                             accomplishment. However, FMS’s reports continue to overstate the
                             progress made in this highly touted cross-servicing performance measure.
                             Specifically, FMS understated debts that were eligible for cross-servicing
                             and overstated debts that had been referred for cross-servicing, which
                             significantly overstated the reported extent to which agencies had referred
                             eligible debts for cross-servicing. As shown in table 1, the governmentwide
                             cross-servicing referral rate at the end of fiscal year 2002 was about 79
                             percent, rather than 96 percent as reported by FMS. This is a significant
                             difference given that FMS officials consider the cross-servicing program to
                             be fully mature and federal agencies should be referring eligible debts
                             when they are over 180 days delinquent.




                             46
                                  GAO/AIMD-00-234.




                             Page 29                                GAO-04-47 FMS Cross-Servicing Opportunities
Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year 2002

Dollars in billions
                                            FMS-reported amounts      Adjusted amounts
Eligible for referral for cross-servicing                      $8.2                   $8.5
Referred for cross-servicing                                   $7.9                   $6.7
Referral rate for cross-servicing                              96%                   79%

Source: FMS.


According to the TRORs for the fourth quarter of fiscal year 2002, federal
agencies governmentwide had about $8.5 billion, not $8.2 billion, of debt
eligible for referral at the end of the fiscal year. In determining the amount
of eligible debt for referral for cross-servicing, FMS inappropriately used
the amount of debt eligible for cross-servicing referral at the end of fiscal
year 2001. As such, FMS did not include any of the approximately $300
million of debts that were reported as having become eligible for referral
for cross-servicing during fiscal year 2002. Thus, FMS understated the
amount of eligible debt for fiscal year 2002 by about $300 million.

In addition, FMS noted in its fiscal year 2002 report to the Congress that the
debts reported as referred for cross-servicing did not include those that
were no longer being actively collected by FMS. However, FMS generally
did not deduct from its reported referral amounts debts that were returned
to the referring agencies during fiscal year 2002. According to FMS
officials, FMS calculated the referral amount by adding debts that agencies
referred to FMS during fiscal year 2002 to the amount of referred debt that
FMS held for cross-servicing at the end of fiscal year 2001. FMS officials
stated that they typically only reduced the referred debt amount when a
debt was returned to the referring agency in the same month that the
agency referred the debt to FMS. However, by not deducting the amount
for all referred debts that were returned to agencies, the referred debt
amount did not reflect the amount of debt that had been referred by
agencies and was held by FMS for cross-servicing at fiscal year-end.47
According to FMS’s cross-servicing database, at the end of fiscal year 2002,


47
   For example, in February 2002, an agency erroneously referred to FMS about $263 million
of debts that were exempted from cross-servicing. FMS returned these debts to the agency
in March 2002. However, because these debts were returned 1 month after they had been
referred, FMS inappropriately included them in the amounts reported as referred to FMS for
cross-servicing as of the end of fiscal year 2002.




Page 30                                      GAO-04-47 FMS Cross-Servicing Opportunities
                      FMS held about $6.7 billion of debts that had been referred by federal
                      agencies for cross-servicing. In contrast, FMS reported $7.9 billion of debts
                      referred for cross-servicing in its report to the Congress, an overstatement
                      of about $1.2 billion.



Conclusions 	         FMS continues to have opportunities for enhancing the effectiveness of its
                      cross-servicing of delinquent nontax debt. Efficient and effective
                      processes are needed for timely determining the next appropriate steps for
                      debts that are not collected by FMS’s PCA contractors. As noted in our
                      report, lack of adequate processes and systems weaknesses led to missed
                      opportunities to refer cases to DOJ for enforced collection, failure to use
                      payment offset tools for a large block of debt, and delays in decisions to
                      stop collection efforts on old debt and report it to IRS as income for those
                      who had not paid outstanding amounts. In addition, due to the lack of
                      monitoring by FMS and OMB, there is no assurance that all eligible closed-
                      out nontax debt is reported to IRS. These lapses in oversight and
                      systematic administration of unpaid debts, combined with continuing
                      problems in FMS’s PCA contractors’ administration of offers to forgive a
                      portion of outstanding amounts as inducements to pay the remainder,
                      perpetuate our concerns about FMS’s efforts to pursue and collect unpaid
                      nontax debts.



Recommendations for   To help ensure that all appropriate collection action is taken on debts
                      returned from FMS’s PCA contractors, we recommend that the Secretary of
Executive Action      the Treasury direct the Commissioner of FMS to take the following actions:

                      •	 Identify debts kept in TOP for passive collection through the
                         implementation of FedDebt and, in the interim, utilize appropriate
                         analytical database software to identify such debts.

                      •	 Establish and implement procedures to periodically review debts that
                         are kept in TOP for passive collection to determine the next best course
                         of action for the debts to maximize collections or other recoveries.

                      •	 After all collection activities have been exercised, determine whether
                         debts should be closed out and reported to IRS by FMS, and, if not,
                         promptly return them to the referring agencies.




                      Page 31                               GAO-04-47 FMS Cross-Servicing Opportunities
•	 Establish and implement procedures to periodically review debts that
   are kept in TOP for passive collection to determine whether the statute
   of limitations has expired or any other conditions, such as bankruptcy,
   exist that would prevent offset of the debts in TOP.

•	 Remove debts from TOP that are not eligible for offset and determine
   whether the debts should be closed out and reported to IRS or returned
   to the referring agency.

•	 Establish and implement procedures to periodically monitor debts that
   are held in inactive status to avoid debt backlogs and to help ensure that
   all debts are promptly reviewed to determine whether additional
   collection action or close-out and reporting to IRS is warranted.
   Monthly may be a reasonable interval for performing such monitoring.

To help ensure that all federal agencies are appropriately reporting closed-
out debts to IRS, we recommend that the Secretary of the Treasury direct
the Commissioner of FMS to take the following actions:

•	 Require all federal agencies to disclose in their TRORs any significant
   differences between the amount of debt reported as closed out and the
   amount of debt reported to IRS and the reasons for those differences.

•	 Revise information requirements for the TROR to include the amount of
   CNC debts that are closed out.

We also recommend that the Director of OMB direct the Controller of
OMB’s Office of Federal Financial Management to

•	 remind agencies of their obligation to comply with the standards and
   policies of individual agencies for writing off and closing out debts, as
   required by the DCIA and OMB Circular A-129;

•	 require agencies to initiate actions to review and correct any
   deficiencies they find during their review;

•	 require agencies to report to OMB on their policies, deficiencies, and
   corrective actions, if any; and

•	 report annually to the Congress on the deficiencies, if any, found at the
   agencies and the progress in resolving any deficiencies found.




Page 32                               GAO-04-47 FMS Cross-Servicing Opportunities
To increase opportunities for collecting debts, we recommend that the
Secretary of the Treasury direct the Commissioner of FMS to take the
following actions:

•	 Revise the database query methodology FMS uses to identify cross-
   serviced debts for DOJ referral. The methodology should include debts
   kept in TOP for passive collection and should also incorporate
   information from FMS’s PCA contractors.

•	 Incorporate FMS’s criteria for selecting debts for DOJ referral in FMS’s
   PCA Operations and Procedures Manual.

•	 Remind PCA contractors of the importance of enforced collection and
   that their recommendation for next collection action, including
   litigation, is a critical part of their responsibilities, and inform the PCA
   contractors of the agencies that have authorized FMS to refer debts to
   DOJ on the agencies’ behalf.

•	 Establish and implement procedures to track all debts FMS has referred
   to DOJ and ensure that the FedDebt system is capable of tracking all
   debts that FMS refers to DOJ.

•	 Establish and implement procedures to monitor all debts in cross-
   servicing to help ensure that debts are promptly reported to TOP,
   including periodically sweeping the portfolio to send debts to TOP.

•	 Implement enhancements to the TOP system so that it can accept
   multiple debtors for a single debt, and ensure that the FedDebt system
   will be capable of being used to report secondary debtors to TOP.

To help maximize the soundness of the cross-servicing program, we
recommend that the Secretary of the Treasury direct the Commissioner of
FMS to take the following actions:

•	 Establish procedures to monitor and track all debt amounts forgiven by
   in-house FMS collectors and ensure that the FedDebt system identifies
   the forgiven amounts for all compromise agreements established by in-
   house FMS collectors.

•	 Reinforce PCA contractors’ adherence to the compromise requirements
   set forth in the PCA contract for documenting the attempt to collect the
   full amount of a debt prior to its compromise.



Page 33                                 GAO-04-47 FMS Cross-Servicing Opportunities
                      •	 Reinforce PCA contractors’ adherence to the compromise requirements
                         set forth in the Federal Claims Collection Standards for obtaining a
                         debtor’s financial information, such as credit reports and complete
                         financial statements, to determine the debtor’s inability to pay the full
                         amount of the debt.

                      •	 Reinforce PCA contractors’ adherence to the compromise requirements
                         set forth in the PCA contract for documenting the justification for the
                         compromise of a debt.

                      •	 Incorporate liquidated damages or a penalty provision in the next PCA
                         contract for failure of PCA contractors to document a compromise in
                         accordance with contract requirements.

                      •	 Remind PCA contractors, through a technical bulletin or other means, of
                         the importance of obtaining debtors’ TINs when compromising debts.

                      •	 Fully implement our recommendation made in fiscal year 2000 to revise
                         FMS’s key performance measure on cross-servicing referrals so that the
                         extent to which federal agencies have referred debts to cross-servicing
                         directly corresponds to the eligible debts as of fiscal year-end.
                         Specifically, the debt-eligible amount should reflect the amount reported
                         by federal agencies as of fiscal year-end, and the debt-referred amount
                         should reflect the amount in cross-servicing as of fiscal year-end.



Agency Comments and   In written comments on a draft of this report, reprinted in appendix II,
                      Treasury’s FMS said that it concurred with most of the findings and that
Our Evaluation        many of the findings and recommendations had already been addressed.
                      FMS stated that enhancements to the systems that serve cross-servicing
                      and PCA functions have resolved a number of issues and that the advent of
                      FedDebt will further improve cross-servicing operations. However, FMS
                      raised a number of points regarding certain of our findings and
                      recommendations that missed the central concerns conveyed in our report
                      and tended to downplay the significance of these concerns. The following
                      discussion highlights and responds to the points FMS raised.

                      FMS stated that the findings in the report did not reflect critical operational
                      issues and only affected a very small percentage of its cross-servicing
                      portfolio. FMS expressed concern that we greatly expanded the scope of
                      our work beyond the parameters that we originally set and focused on a




                      Page 34                                GAO-04-47 FMS Cross-Servicing Opportunities
range of opportunities to improve the cross-servicing program that had
little or no relation to the reporting of uncollectible debt.

We disagree. Specifically, referral of debts to DOJ for litigation and TOP
for offset, monitoring of the compromise of debts by FMS and its PCA
contractors, and identification and reporting of uncollectible debt amounts
to IRS are all critical operational issues. Moreover, as discussed in the
report, we found several problems related to FMS’s identification and
monitoring of debts held in TOP for passive collection, which represented
over half the debts in FMS’s $6.6 billion cross-servicing portfolio as of
February 28, 2003. These issues, when considered in conjunction with
issues we have cited in previous reports, such as limited implementation of
administrative wage garnishment (AWG)48 and lack of independent
verification of the accuracy, completeness, and validity of debts reported
by agencies as eligible for or excluded from DCIA cross-servicing
provisions,49 raise serious concerns about FMS’s progress in addressing the
challenges it faces in implementing the cross-servicing program.

We also disagree with FMS’s assertion that we expanded the scope of our
review beyond what we conveyed to Treasury at the beginning of the
assignment. In our August 2002 letter to the Secretary of the Treasury and
our subsequent entrance conference with FMS officials in October 2002,
we stated that our objectives were to evaluate (1) actions taken by FMS on
uncollected nontax debts returned from its PCA contractors; (2) FMS’s
efforts to ensure that eligible uncollectible nontax debts, which federal
agencies rely on FMS to report on their behalf to IRS as income to the
debtors, are promptly identified and accurately reported; and (3) actions
taken, if any, by FMS to ensure that federal agencies are reporting their
eligible uncollectible nontax debts to IRS as income to the debtors. As
stated in our report, our review addressed these objectives. In addition, in
performing our work to address these objectives, we identified
opportunities for FMS to improve collection of nontax debts through cross-
servicing and enhance the soundness of certain operational and reporting
facets of its cross-servicing program. In meeting our audit responsibilities,
we must inform management of any significant issues identified during our
work.

48
   See, for example, U.S. General Accounting Office, Debt Collection Improvement Act of
1996: Status of Selected Agencies’ Implementation of Administrative Wage Garnishment,
GAO-02-313 (Washington, D.C.: Feb. 28, 2002).
49
     GAO/AIMD-00-234.




Page 35                                    GAO-04-47 FMS Cross-Servicing Opportunities
FMS suggests that our report unfairly characterizes FMS’s efforts to collect
debts through offset as “minimal” and that it criticizes FMS for collection
activities that agencies have not delegated to it. FMS stated that TOP is its
most effective collection tool, many agencies rely on TOP for the bulk of
their collections, and significant collection opportunities could be lost if
debts were removed from TOP prematurely. FMS stated that since the cost
to collect through TOP is low, it is generally in the best interest of the
government to attempt offset for as long as statutorily authorized before
terminating collections and discharging the debt. FMS said that it is at
creditor agencies’ discretion to leave debts returned from PCA contractors
in TOP for passive collection.

We agree that for certain debts, TOP can be an effective mechanism for
collection, especially when used in conjunction with other debt collection
activities. However, passive collection does not entail any collection action
other than minimal efforts through TOP. As stated in the report, for debts
held in passive collection, TOP is the only collection tool in use. Therefore,
collection opportunities from the use of other collection tools, such as
litigation and AWG, are lost for these debts. As we state in this report, FMS
had collected only about $9 million, or about two-tenths of 1 percent, of the
$3.7 billion of debts held in TOP for passive collection as of February 28,
2003. To increase the opportunities to collect these debts, we
recommended that FMS periodically review debts kept in TOP for passive
collection to determine the next best course of action for the debts, such as
AWG or litigation, to maximize collections or other recoveries.

Moreover we did not recommend in our report that FMS remove debts
from TOP prematurely. Rather, we stated that many of the debts kept in
TOP for passive collection were unlikely to yield any collections through
offsets because they were beyond the 10-year statutory and regulatory
limitations applicable to offset or had other barriers, such as bankruptcy,
that would prevent offset of the debts. Thus, we recommended that FMS
establish and implement procedures to periodically review debts that are
kept in TOP for passive collection to determine whether the statute of
limitations has expired or any other conditions exist that would prevent
offset of the debts and remove debts from TOP that are not eligible for
offset and determine whether the debts should be closed out and reported
to IRS or returned to the referring agency.

We also disagree with FMS’s implication that we unfairly criticized FMS for
not undertaking Form 1099C reporting activities that agencies have not
delegated to it. Our review indicated that it would be highly unlikely for



Page 36                               GAO-04-47 FMS Cross-Servicing Opportunities
creditor agencies to be able to identify specific debts in cross-servicing that
are kept in TOP for passive collection. FMS advised us that because of
system limitations, it could not identify specific debts that are merely being
held in passive collection after being returned from PCA contractors.
However, we were able to readily identify debts in TOP for passive
collection through use of off-the-shelf database analysis software. Without
the ability to identify specific debts for which passive collection is the only
current ongoing effort, creditor agencies that have not delegated authority
to FMS to report uncollectible debts to IRS on their behalf cannot fulfill
their responsibility to determine whether a debt should be closed out and
reported to IRS or whether other collection action should be taken on it.
We consider this to also be the responsibility of FMS. This view is
embodied in our recommendations that FMS establish and implement
procedures to periodically review debts that are kept in TOP for passive
collection to determine the next best course of action and after all
collection activities have been exercised, determine whether debts should
be closed out and reported to IRS by FMS, and, if not, promptly return them
to the referring agencies.

In particular and as noted in our report, we would like to reemphasize that
our analysis considered only those debts for which federal agencies had
given FMS the authority to report uncollectible debt amounts to IRS on the
agency’s behalf. For such debts, FMS procedures require its collectors to
evaluate them to determine whether close-out would be appropriate and
whether the debt amounts should be reported to IRS.

FMS agreed with our finding that it had referred only a small amount of
debt to DOJ. FMS stated that because of workload constraints, it has
attempted to focus its DOJ referral efforts on cases most likely to be
successfully collected through litigation. As stated in our report, in an
effort to increase referrals to DOJ, FMS did begin to perform quarterly
queries of its cross-servicing database to identify uncollected debts for
referral to DOJ. However, we found that many of the debts identified
through these queries would not be good candidates for referral to DOJ
because, among other things, they lacked TINs and were involved in
bankruptcy proceedings. In addition, these queries did not cover most
debts in cross-servicing, including those held in TOP for passive collection
that would seem to be better candidates for DOJ referral because they
should have valid TINs and are not supposed to be in bankruptcy. In
addition, FMS did not routinely consider or act on advice from its PCA
contractors regarding referrals to DOJ. Because PCA contractors’
responsibilities include locating debtors and determining whether they



Page 37                                GAO-04-47 FMS Cross-Servicing Opportunities
have incomes or assets to repay delinquent debts, the PCA contractors
would have a reasonable basis for identifying uncooperative debtors who
could repay their debts but had refused.

FMS did not agree with our recommendation to incorporate liquidated
damages in the next PCA contract for failure of PCA contractors to
document compromises in accordance with contract requirements. FMS
stated that there is no incentive for a PCA contractor to accept a
compromise agreement when the debtor has the capability to pay the full
amount of the debt. We disagree with FMS’s contention that a PCA
contractor would not accept a compromise agreement when the debtor has
the capability to pay the full amount of the debt. For example, as stated in
our report, we noted that one debtor offered to pay the full debt balance of
approximately $14,000 in installments. However, without explanation, the
PCA contractor offered to compromise the debt by 20 percent if the debtor
would pay right away. Moreover, this PCA contractor encouraged
compromise activity prior to exhausting attempts to collect debts in full by
sending out pro forma letters to debtors stating that the contractor may be
authorized to compromise a portion of their debt should the debtor be in a
position to pay the remaining balance. Further, FMS stated that it is
questionable whether liquidated damages or a penalty provision in the
contract would be legally enforceable. For many of the debts that we
reviewed, we found that the PCA contractors often did not have
documentation to justify their rationale for concluding that debtors could
not pay the full debt amount or to support the amounts forgiven. In the
absence of adequate documentation supporting the PCA contractor’s
determination to compromise a debt for a specific amount, FMS cannot
determine whether the compromise is reasonable under the Federal Claims
Collection Standards. Thus, FMS has no basis to determine whether the
government suffered a loss that should not have been incurred as a result
of such a compromise. To encourage PCA contractors to obtain adequate
documentation supporting their compromises, we continue to believe that
FMS should incorporate liquidated damages or a penalty provision in the
next PCA contract for failure of PCA contractors to document
compromises in accordance with contract requirements. FMS did not offer
any legal analysis to support its assertion that a liquidated damage or
penalty provision, presumably properly drafted and applied, may not be
legally enforceable. Of course, the enforceability of liquidated damages or
a penalty provision (e.g., reduction in the number of cases or amount of
debt referred to the PCA contractor) would depend on the nature of the
provision and the facts of the individual cases.




Page 38                              GAO-04-47 FMS Cross-Servicing Opportunities
FMS did not agree with our finding related to the cross-servicing referral
performance measure. FMS stated that it considered many approaches for
reporting agency performance and believed that the method it chose is fair
and equitable. FMS said that using only the active balance on a given date
(e.g., the end of the fiscal year) would not recognize debts that are paid off,
administratively resolved, or determined to be uncollectible and closed out.
FMS further stated that because CFO Act agencies were required to update
their TRORs on a quarterly basis beginning in fiscal year 2003, eligible
amounts of debt for calculating the percentages referred are now updated
every quarter.

This performance indicator50 is a snapshot of the percentage of debt
eligible for referral to cross-servicing that has been referred at a given point
in time, such as at year-end. In calculating its debt referral measure for
fiscal year 2002, FMS made an unreasonable determination in computing
this key performance measure even though it had all the appropriate
information to properly calculate this figure. A fundamental premise in
calculating this performance indicator is that debts that are paid off,
administratively resolved, or determined to be uncollectible and closed out
are no longer eligible for referral for cross-servicing and are not subject to
further federal collection efforts. As such, FMS should not include these
debts in the amount referred for cross-servicing in its annual fiscal year
report to the Congress. In addition, as stated in the report, in its fiscal year
2002 report to the Congress, FMS inappropriately used the amount of debt
eligible for cross-servicing referral at the end of fiscal year 2001 instead of
the end of fiscal year 2002. The net effect of these errors on the calculation
was to overstate the amount referred (the numerator of the fraction) by
$1.2 billion and to understate the amount available for referral (the
denominator of the fraction) by approximately $300 million. Both of these
errors had the effect of overstating federal agencies’ progress in referring
eligible nontax debts for cross-servicing.

In its oral comments, OMB agreed with the report’s findings. In drafting the
recommendation, we proposed that OMB review the standards and policies
of individual agencies for writing off and closing out debts. In its oral
response, OMB was concerned that it did not have the resources to review
all federal agencies’ policies and procedures. As such, OMB suggested that
we modify our proposed recommendation to instead require OMB to have


50
   This performance indicator is represented as a fraction. The numerator is reported
amounts referred, and the denominator is reported amounts eligible for referral.




Page 39                                      GAO-04-47 FMS Cross-Servicing Opportunities
individual federal agencies review their own policies and procedures for
writing off and closing out debts and report to OMB on their policies,
deficiencies, and corrective actions, if any, based on such reviews. OMB
stated that it will then use these reports from the individual agencies to
report to the Congress on the deficiencies, if any, found at the agencies and
the progress in resolving such deficiencies. OMB’s suggested approach in
resolving this finding is reasonable and fully meets the intent of our
proposed recommendation. As such, we have modified our
recommendation to OMB accordingly.


This report contains recommendations to you. The head of a federal agency 

is required by 31 U.S.C. 720 to submit a written statement on actions taken 

on these recommendations to the Senate Committee on Governmental 

Affairs and the House Committee on Government Reform within 60 days of 

the date of this report. You must also send a written statement to the House 

and Senate Committees on Appropriations with the agency’s first request 

for appropriations made over 60 days after the date of this report.


We are sending copies of this report to the Chairmen and Ranking Minority 

Members of the Senate Committee on Governmental Affairs; the 

Subcommittee on Financial Management, the Budget and International 

Security, Senate Committee on Governmental Affairs; the House 

Committee on Government Reform; the Subcommittee on Government 

Efficiency and Financial Management, House Committee on Government 

Reform; and the Commissioner of FMS. Copies will be made available to 

others upon request. The report is also available at no charge on GAO’s 

Web site, at http://www.gao.gov.


If you have any questions regarding this report, please contact me on (202) 

512-3406 or Kenneth Rupar, Assistant Director, on (214) 777-5714. Other 

key contributors to this report are listed in appendix III.





Gary T. Engel

Director

Financial Management and Assurance





Page 40                               GAO-04-47 FMS Cross-Servicing Opportunities
Appendix I

Sampling Method



                                         To test debts compromised by the Financial Management Service’s (FMS)
                                         private collection agency (PCA) contractors from October 1, 2002, to
                                         February 28, 2003, we selected a stratified random sample of 54 debts that
                                         the PCA contractors compromised from a population of 358 debts in the
                                         cross-servicing database with forgiven dollar amounts of at least $2,000 but
                                         less than $100,000.1 We did not review debts with forgiven dollar amounts
                                         under $2,000 because they were deemed immaterial. In total, we selected
                                         54 debts to review. (See table 2).



Table 2: Details of Cases Selected

Forgiven amount for        Number of debts     Forgiven amount        Items tested in      Justification for number of items tested
each debt                     per stratum           per stratum         each stratum       in each stratum
$2,000 or greater but                                                                      To provide coverage of the population of
less than $100,000                    358          $2,946,711.88                     54    compromised debts.
Less than $2,000                                                                           Average amount of strata (about $680) was
                                      706              479,309.38                None      deemed to be immaterial.
Total                                1,064         $3,426,021.26                     54
Source: GAO.

                                         Note: Data derived from analysis of FMS’s cross-servicing database.




                                         1
                                          We identified one debt in the cross-servicing database for which the forgiven amount was at
                                         least $100,000. We found that the referring agency rather than FMS’s PCA contractor had
                                         initiated the compromise for this debt. As such, this debt was not included in our review.




                                         Page 41                                          GAO-04-47 FMS Cross-Servicing Opportunities
Appendix II

Comments from the Department of the
Treasury

Note: GAO comments
supplementing those in
the report text appear
at the end of this
appendix.




See comment 1.




See comment 2.




See comment 3.




See comment 4.




                         Page 42   GAO-04-47 FMS Cross-Servicing Opportunities
                 Appendix II

                 Comments from the Department of the 

                 Treasury





See comment 5.




See comment 6.




See comment 7.




See comment 8.




                 Page 43                                 GAO-04-47 FMS Cross-Servicing Opportunities
                  Appendix II

                  Comments from the Department of the 

                  Treasury





See comment 9.




See comment 10.




See comment 11.




                  Page 44                                 GAO-04-47 FMS Cross-Servicing Opportunities
Appendix II

Comments from the Department of the 

Treasury





Page 45                                 GAO-04-47 FMS Cross-Servicing Opportunities
               Appendix II

               Comments from the Department of the 

               Treasury





               The following are GAO’s comments on the Department of the Treasury’s
               letter dated October 20, 2003.



GAO Comments   1. In conformity with generally accepted government auditing standards,
                  we provide responsible agency officials and other directly affected
                  parties with an opportunity to review and provide comments on a draft
                  report before it is issued. The language referred to by FMS concerning
                  the report’s status as a draft has been the standard language included
                  on the cover page of GAO reports when they are sent for agency
                  comment. After receiving agency comments, we consider their
                  substance, revise the draft report as appropriate, state in the report
                  whether the agency agreed or disagreed with our findings, conclusions,
                  and recommendations, and issue the report.

               2. See our discussion in the Agency Comments and Our Evaluation
                  section.

               3. See comment 2.

               4. See comment 2.

               5. See comment 2.

               6. See comment 2.

               7. The scope of our work did not include determining whether FMS’s TOP
                  system has sufficient edits and safeguards in place to ensure that no
                  offset is taken for debts over 10 years delinquent.

               8. See comment 2.

               9. As stated in our report, a scope limitation prevented us from using
                  statistical sampling techniques to determine whether compromises
                  made by in-house FMS collectors were justified, supported, and
                  reported to IRS. As such, we cannot comment on whether FMS
                  collectors have implemented compromise documentation procedures
                  in accordance with previous GAO recommendations.

               10. See comment 2.

               11. See comment 2.



               Page 46                                 GAO-04-47 FMS Cross-Servicing Opportunities
Appendix III

Staff Acknowledgments



               Other key contributors to this assignment were Richard Cambosos,
               Matthew Valenta, Ronald Haun, Michelle Philpott, Evan Gilman, and Cathy
               Hurley.




(191032)       Page 47                            GAO-04-47 FMS Cross-Servicing Opportunities
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