Minimizing Inappropriate Levies in IRS's Federal Payment Levy
Program (03-JAN-03, GAO-03-318R).
Each year, thousands of taxpayers who owe delinquent federal
taxes receive billions of dollars in federal payments. To help
the Internal Revenue Service (IRS) collect these delinquent taxes
more effectively, the Congress passed the Taxpayer Relief Act of
1997, the provisions of which authorized the establishment of the
Federal Payment Levy Program (FPLP), which allows IRS to
continuously levy up to 15 percent of the payments made to
delinquent taxpayers. The Department of the Treasury's Financial
Management Service (FMS), which receives payment records from and
makes payments on behalf of most federal agencies, collects the
continuous levy from the federal payment after IRS has authorized
the levy. Subsequent payments are continuously levied until such
time that the tax debt is paid or IRS releases the levy. In a
prior report, we noted that inappropriate levies--which
subsequently must be refunded--could undermine support for the
continuous levy authority, by generating negative public reaction
to the program and frustrating taxpayers whose payments are
inappropriately levied. Since October of 2001, the inclusion of
Social Security recipients and others in the levy program has
extended levy use substantially. This expansion heightens the
importance of minimizing inappropriate levies. This report
identifies one cause for inappropriate levies for which
corrective measures can be taken before IRS completes the
installation of the replacement for its master file.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-318R
ACCNO: A05804
TITLE: Minimizing Inappropriate Levies in IRS's Federal Payment
Levy Program
DATE: 01/03/2003
SUBJECT: Debt collection
Federal records management
Federal taxes
Tax administration
Tax administration systems
Taxpayers
Federal Payment Levy Program
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GAO-03-318R
GAO- 03- 318R IRS*s Federal Payment Levy Program United States General
Accounting Office Washington, DC 20548 January 3, 2003
The Honorable Bob Wenzel Acting Commissioner of Internal Revenue Internal
Revenue Service
Subject: Minimizing Inappropriate Levies in IRS*s Federal Payment Levy
Program Dear Mr. Wenzel:
Each year, thousands of taxpayers who owe delinquent federal taxes receive
billions of dollars in federal payments. To help the Internal Revenue
Service (IRS) collect these delinquent taxes more effectively, the
Congress passed the Taxpayer Relief Act of 1997, the provisions of which
authorized the establishment of the Federal Payment Levy Program (FPLP),
which allows IRS to continuously levy up to 15 percent of the payments
made to delinquent taxpayers. The Department of the Treasury*s Financial
Management Service (FMS), which receives payment records from and makes
payments on behalf of most federal agencies, collects the continuous levy
from the federal payment after IRS has authorized the levy. Subsequent
payments are continuously levied until such time that the tax debt is paid
or IRS releases the levy.
In a prior report, we noted that inappropriate levies* which subsequently
must be refunded-- could undermine support for the continuous levy
authority, by generating negative public reaction to the program and
frustrating taxpayers whose payments are inappropriately levied. 1 Since
October of 2001, the inclusion of Social Security recipients and others in
the levy program has extended levy use substantially. This expansion
heightens the importance of minimizing inappropriate levies.
IRS built controls into FPLP to prevent levying taxpayers who are not
subject to levy and to protect against levying payments for more than
taxpayers owe. Under FPLP, FMS continuously levies a taxpayer*s account
based on the taxpayer*s account balance in FMS*s records. IRS updates
FMS*s records on the taxpayer*s account from its master file once every
week, 2 except during system maintenance and sends FMS
1 See U. S. General Accounting Office, Tax Administration: IRS* Levy of
Federal Payments Could Generate Millions of Dollars, GAO/ GGD- 00- 65
(Washington, D. C.: Apr. 7, 2000). 2 The master file maintains an account
for every taxpayer who files a return. The account maintained on the
master file includes records related to that taxpayer over the years
(returns filed, payments made, additional taxes assessed as a result of
audit, etc.).
GAO- 03- 318R IRS*s Federal Payment Levy Program 2 updated information on
the balance owed by each delinquent taxpayer. In part
because IRS may receive other payments from taxpayers independent of the
levy process, FMS always substitutes IRS*s account balance for the one it
maintains for each taxpayer*s account as soon as it receives IRS*s weekly
account updates. As discussed below, depending on the specific timing of
FMS*s levies of taxpayer*s accounts and IRS*s weekly updates of its master
file, FMS*s account balance can be in error and taxpayer*s accounts can be
inappropriately levied. These time- related situations, which give rise to
inappropriate levies, should be alleviated when IRS completes the
installation of its replacement for the master file. Because the new
system will update taxpayers accounts daily, there will be less
opportunity for IRS*s and FMS*s records to differ. However, the system
will not be fully installed for several years.
This report identifies one cause for inappropriate levies for which
corrective measures can be taken before IRS completes the installation of
the replacement for its master file. We identified this issue during
follow up work to our April 2000 report that we are conducting at the
request of the House Ways and Means Committee and its Subcommittee on
Oversight. To determine the causes of inappropriate levies and possible
corrective measures, we selected the 3,349 individual taxpayer accounts
that were levied during the first quarter of fiscal year 2002, the period
from October 1, 2001, through December 31, 2001. From these 3,349
accounts, we identified 160 individual taxpayer accounts that had received
a refund as a result of an inappropriate levy under FPLP. The refunds were
made between October 1, 2001, and April 1, 2002. We then examined the
activity that occurred on the 160 accounts through April 2002 to determine
the basis for the inappropriate levies. We interviewed IRS and FMS
headquarters officials to obtain information on the operation of the FPLP
program, payment posting procedures and refund procedures. Our review was
conducted between October 2001 and September 2002 in accordance with
generally accepted government auditing standards.
Results
An annual shut down of master file operations for system maintenance
causes inappropriate levies and subsequent refunds. We found that 119 of
the 160 refunds between October 1, 2001, and April 1, 2002, were issued in
February 2002, which was four times the number of refunds issued in any
other month during the 6- month period. The refunds ranged from less than
$5 to nearly $500, with the average refund being $114.43. Of these 119
refunds in February 2002, 108 resulted because IRS had received payments
such as voluntary payments, transfers of tax payments, and levies,
sufficient to settle the tax indebtedness. Those payments were not posted
to IRS*s master file during January 2002. Without updated information, FMS
relied on the information it maintained to initiate the next round of
levies on the taxpayers.
According to IRS officials, the failures to post taxpayer payments to the
master file during January were due to *dead cycle time*-- a 3- to- 4 week
period at the beginning of each calendar year when IRS shuts down master
file operations to upgrade software and perform other maintenance. During
this period, the master file does not accept new postings, but FMS
continues to levy federal payments based on its records for the balance
owed by the taxpayers. Taxpayers who had their indebtedness resolved or
reduced to less than what would be generated by a 15-
GAO- 03- 318R IRS*s Federal Payment Levy Program 3 percent levy continued
to have their federal payment levied at the full 15- percent
because updated IRS data could not be sent to FMS indicating the correct
balance. After the master file began accepting new postings, IRS*s
automatic refund processes issued refunds for the over collections.
The posting delay problem due to the January shut down of IRS*s master
file can create inappropriate levies in at least two situations. In the
levy process, for example, FMS approves the payments to recipients of
monthly federal payments, such as those going to Social Security
recipients and federal retirees, 1- to- 2 weeks prior to the actual
issuance of the payments, deducting the levy amount from the payment. FMS
records the lower debt balance for the levied taxpayer in files it
maintains. After the payment is issued to the taxpayer and IRS receives
the levy payment, IRS updates its master file record to show the lower
balance amount. IRS sends the lower balance amount to FMS on the next
weekly update.
Depending on the timing of IRS*s master file update and FMS*s next levy of
a payment to the taxpayer, FMS may make the next levy based on data
showing a higher balance due by the taxpayer than is in fact correct. In
one situation, FMS may levy an account and send the payment to IRS shortly
after IRS has completed its last update before shutting down its master
file. In this case, IRS will have sent FMS a new account balance the week
before shutdown that does not reflect the levy payment. Because FMS always
substitutes the last update from IRS for its existing account balance, in
this case it is substituting a balance that does not reflect the previous
levy. This balance becomes the basis for the next levy. If FMS*s account
balance is zero or less than what would be yielded by a 15- percent levy,
substituting IRS*s account balance may result in FMS levying a settled
account or over- levying an account with a low balance. In another
situation, IRS may receive a separate payment from the taxpayer shortly
after the last update that could settle the account or reduce it below the
amount that would be generated by a 15- percent levy. Again, because FMS*s
records will not reflect the actual balance due in the taxpayer*s account
and an inappropriate levy can result.
We found 101 instances resulting from the first situation described above
in which an inappropriate levy resulted because the full 15- percent levy
was taken from the taxpayer*s federal payment, even though the taxpayer*s
remaining debt balance was less than what would be generated by a 15-
percent levy. This number will likely grow now that Social Security
recipients are being levied under FPLP. IRS data show that in the first
quarter of fiscal year 2002, the period of our sample, FPLP took 8,584
levies from individual taxpayers whereas in the last quarter of fiscal
year 2002 FPLP took 177,872 levies from individual taxpayers.
IRS levy program officials told us that they will make programming changes
in 2003 to help avoid inappropriate levies due to the down time for the
master file. Officials said an approach IRS is considering would address
those inappropriate levies that are due to the first situation described
above. That is, it would deal with those cases where the balance IRS
reports to FMS fails to reflect the last levy made by FMS. Officials are
considering suspending IRS*s update several weeks prior the dead cycle
period and instead having FMS rely only on its own record of the
taxpayer*s balance to determine the levy amount to be deducted. This would
result in correct levies being made in all cases where the only amount
being credited to the taxpayer*s
GAO- 03- 318R IRS*s Federal Payment Levy Program 4 account is from the
levy. It would not alleviate inappropriate levies that result from
taxpayers making other payments on their delinquent account during the
period. Officials did not believe these changes would be costly to
implement.
Conclusions
Inappropriately levying taxpayers could undermine support for the levy
authority that has been granted to IRS and FMS. Although the inappropriate
levies we found that are due to the January *down time* for updating IRS*s
master file were relatively few in number, the potential number of such
inappropriate levies could rise substantially now that the levies have
been extended to additional types of federal payments, principally Social
Security benefits. According to IRS officials, programming changes would
not be costly and could help avoid a portion of these inappropriate
levies. Because of the inherent data processing time delays, it is
inevitable that some over collections will occur and thus refunds will be
issued. However, it is imperative that IRS does whatever it can to avoid
over collections and prevent unnecessary refunds to ensure that the
taxpayer receives his full federal payment once the tax debt has been
settled.
Recommendations
We recommend that the Acting Commissioner of Internal Revenue direct FPLP
staff to avoid over collections during scheduled dead cycle time for IRS*s
master file. Planned actions, such as suspending IRS*s update several
weeks prior to the dead cycle period so as to not supersede FMS record of
balance due and allow FMS to rely on its own record of the taxpayer*s
balance to determine the levy amount to be deducted, would achieve this
objective.
Agency Comments
We requested comments on a draft of this report from the Acting
Commissioner of Internal Revenue or his designee. We obtained oral
comments on December 18, 2002, from the Acting Director, Filing and
Payment Compliance, Wage and Investment. She told us they agree with our
recommendation and anticipate this change will be in place by December
2003. She also emphasized that the only the last levy of the taxpayer was
inappropriate because the delay updating FMS*s records caused an incorrect
amount to be taken.
- - - - - We are sending copies of this report to the Secretary of the
Treasury and the Commissioner of Financial Management Service. We are also
sending copies of the report to the Chairman and Ranking Minority Member,
House Committee on Ways and Means; Chairman and Ranking Minority Member,
Subcommittee on Oversight, House Committee on Ways and Means; Chairman and
Ranking Minority Member, Senate Committee on Finance. We will also make
copies of this report available to others upon request. This report is
also available at GAO*s Web site http:// www. gao. gov. If you or your
staff have any questions, please contact me at (202) 512- 9110 or Ralph
Block, Assistant Director at (415) 904- 2150. Other staff who
GAO- 03- 318R IRS*s Federal Payment Levy Program 5 contributed to this
report include Thomas Bloom, Ellen Rominger, Samuel
Scrutchins, Thom Venezia, and Elwood White. Sincerely yours,
Michael Brostek Director, Tax Issues
GAO- 03- 318R IRS*s Federal Payment Levy Program 6 (440173)
*** End of document. ***