The objectives were to determine if the Internal Revenue Service (IRS) properly included taxpayers in the Federal Payment Levy Program (FPLP) and properly refunded erroneous levy payments to taxpayers when appropriate. To achieve our objectives, we selected all 73 taxpayers whose payments were reversed (115 reversals) from the 5,354 taxpayers with FPLP payments made between July 2000 and March 2001. We obtained and reviewed IRS and Financial Management Service (FMS) account information for these taxpayers and held discussions with IRS and FMS personnel to determine if these taxpayers should be included in the FPLP, why the payments were reversed, and whether the reversed payments were refunded to taxpayers when appropriate.

We conducted the review in the National Headquarters and the Atlanta Area Office between December 2000 and May 2001. This audit was performed in accordance with Government Auditing Standards.

Major contributors to this report are listed in Appendix I. Appendix II contains the Report Distribution List.

To help the IRS collect taxes owed, the Congress passed the Taxpayer Relief Act of 1997, authorizing the IRS to work directly with other government agencies to take up to 15 percent of certain federal payments owed to taxpayers. This taking of money is commonly referred to as a "levy." The IRS implemented the FPLP to collect part of these payments.

The FPLP is an automated process between the IRS and the FMS, in which the IRS will levy up to 15 percent of certain federal payments made by the FMS to delinquent taxpayers. The levy will continue until the liability is paid in full or the account is otherwise resolved, such as through the establishment of a monthly payment agreement.

The first phase of the FPLP, which began in July 2000, included levies on payments to retired federal employees and payments to vendors with federal contracts. During the first phase of the FPLP implementation, the IRS has been successful in collecting millions of dollars in taxes owed. See the chart below.

During the second phase, which was scheduled to begin in April 2001, the IRS and FMS plan to add payments made to federal employees for travel advances and reimbursements, salaries, and payments made to Social Security Administration (SSA) recipients to the FPLP. The General Accounting Office (GAO) estimated that there are approximately 232,000 SSA recipients who owe taxes.

While the first phase has been mostly successful in assisting taxpayers in paying their taxes owed, opportunities exist for the IRS to enhance the FPLP in the following areas:

• The IRS incorrectly included some taxpayers in the FPLP.
• The IRS did not have sufficient information to determine why FPLP payments were reversed.

We did not identify any erroneous payments that should have been refunded to taxpayers.

Some taxpayers are being incorrectly included in the FPLP. Our review of information for all 73 taxpayers’ accounts where the IRS reversed the payments received showed that 35 (48 percent) taxpayers were deceased. The IRS had incorrectly received FPLP payments totaling $7,945 for these taxpayers.

In the remaining 38 cases, we did not identify any information in the taxpayers’ accounts that indicated whether they should or should not be included in the FPLP.

IRS procedures require that prior to including any taxpayer in the FPLP, the IRS should verify whether the taxpayer is deceased. If deceased, the taxpayer should be excluded from the FPLP. If the taxpayer dies after being selected for the FPLP, the IRS should remove the account from the FPLP.

IRS management did not ensure that the FPLP computer program correctly identified deceased taxpayers. The program did not check all tax years for deceased taxpayer information. As a result, there were cases in which the deceased taxpayer information was in one tax year but not in all tax years for the taxpayer.

IRS management took positive actions when it recognized that some deceased taxpayers were being included in the FPLP and implemented a computer programming change in January 2001. This change allowed the IRS to use SSA death information to identify deceased taxpayers. However, the revision did not recognize the "00" in the year 2000 as a legitimate number. While the program identified taxpayers that died before or after the year 2000, it did not identify taxpayers that died in the year 2000. We determined that 27 of the 35 taxpayers died in the year 2000. IRS management was not aware of this year 2000 problem until we brought it to their attention.

In October 2001, the IRS plans to add payments made to approximately 232,000 SSA recipients to the FPLP. Many of these taxpayers are elderly and could be affected by this problem.

Burden on the surviving family members of the deceased taxpayers and negative publicity for the IRS could result by incorrectly including deceased taxpayers in the FPLP. Incorrectly including taxpayers in the FPLP could also distort management reports that are used to provide information to the Congress. While we determined that all payments had been correctly reversed in the cases we reviewed, our analysis showed there are still 22 deceased taxpayers included in the FPLP that should be removed to prevent their payments from being incorrectly sent to the IRS.

1. The Commissioner, Small Business/Self-Employed (SB/SE) Division, should ensure that the computer program designed to exclude deceased taxpayers from the FPLP works as intended.

Management’s Response: The IRS made programming corrections to properly recognize deceased taxpayers and remove them from the FPLP on April 13, 2001.

For the period July 2000 through March 2001, there were 115 FPLP payments totaling $46,099 that were reversed from 73 taxpayers’ accounts. Neither the IRS nor FMS personnel had sufficient information to determine why payments for 38 of the 73 taxpayers, totaling $38,153, were reversed. Our auditors were told that they would have to contact the agency that paid the taxpayer to determine why the payment was reversed.

GAO standards require that all transactions and other significant events should be clearly documented (in paper or electronic form) and the documentation should be readily available for examination.

The interagency agreement signed by the IRS and the FMS for the FPLP does not require the FMS to provide or maintain documentation on why payments are reversed. The IRS believed it did not need to know why payments were reversed and, therefore, did not develop procedures.

As previously mentioned, the IRS periodically provides information for the FPLP to the Congress. Without adequate documentation, the IRS cannot explain to the Congress specifically why the FPLP payments for the 38 taxpayers were reversed. Also, the IRS cannot determine if the reversals were made in error, which could impact the taxpayers’ account balances. For example, in 2 of the 38 cases, the payments fully paid the balance owed but were later reversed.

2. The Commissioner, SB/SE Division, should coordinate with the FMS and the paying agencies to ensure that a sufficient explanation of why a payment is reversed is provided in the taxpayer’s account.

Management’s Response: The IRS disagreed with this recommendation and stated the information it receives from the FMS is sufficient to appropriately reverse the payment. The IRS agreed that some of its field employees may not be sufficiently familiar with the computer coding to provide a full explanation to taxpayers that have been levied through the FPLP. As a result, the IRS will emphasize, via a memorandum, what a payment reversal means when a payment has been returned to the FMS due to a non-entitlement claim by the federal payment agency source.

Office of Audit Comment: The General Accounting Office provides in its Standards for Internal Control in the Federal Government that "all transactions…need to be clearly documented, and the documentation should be readily available for examination. The documentation should appear in management directives…and may be in paper or electronic form. In addition, all documentation should be properly maintained." The IRS’ management directive (interagency agreement) with the FMS does not include a requirement to maintain documentation on why payments were reversed.

3. The Commissioner, SB/SE Division, should use these explanations to identify potential problems with the FPLP that could adversely affect taxpayers.

Management’s Response: The IRS disagreed with this recommendation and stated that it does not believe that reversal information will provide it with the problem solving information indicated. When a payment agency source informs the FPLP that the taxpayer was not entitled to the federal payment, it does not mean potential problems will exist in the FPLP that would adversely affect taxpayers.

Office of Audit Comment: The IRS accepts FMS’ actions to reverse payments from taxpayer accounts without knowing the reasons for those reversals. We believe the IRS can improve its administration of the Program by receiving the reasons for the reversal in order to analyze program trends. For example, if a check is returned to FMS undelivered because taxpayers change of address, FMS will reverse the levy payment until a better address is found. If the IRS knew that the levy payment was reversed due to an old address, it could research its records for an updated taxpayer address and share this information with both the FMS and the paying agency source.

While the first phase has been mostly successful in assisting taxpayers in paying their taxes owed, opportunities exist for the IRS to enhance the FPLP. In October 2001, another 232,000 taxpayers are expected to be included in the FPLP. The IRS needs to ensure that taxpayers are correctly included in the Program and that sufficient information is available to determine why tax payments are reversed to avoid potential negative publicity and questions from the Congress that it may not be able to answer.

Walter E. Arrison, Assistant Inspector General for Audit (Wage and Investment Income Programs)

Michael Phillips, Director

Deborah Glover, Audit Manager

Dan Adams, Senior Auditor

Anthony Anneski, Senior Auditor

Deborah Carter, Senior Auditor

Jackie Forbus, Auditor

Kathy Henderson, Auditor

Kevin O’Gallagher, Computer Specialist

Commissioner N:C

Chief Information Officer IS

Chief Counsel CC

National Taxpayer Advocate TA

Office of Management Controls N:CFO:F:M

Director, Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O

Audit Liaison - Senior Program Analyst S:C:CP:I

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

• Taxpayer Burden – Actual; 35 deceased taxpayer accounts with payments totaling $7,945 were incorrectly included in the Federal Payment Levy Program (FPLP) (see page 3).

Methodology Used to Measure the Reported Benefit:

The 35 deceased taxpayers are the actual number of taxpayers that were incorrectly included in the FPLP between July 2000 and March 2001. We identified the 35 deceased taxpayers during our review of all of the 115 payments that were reversed for 73 tax-payers during this period. Also, we used information from the Financial Management Service and Internal Revenue Service (IRS) computer system data, which included Social Security Administration date of death data, to determine why the payments were reversed.

Type and Value of Outcome Measure:

• Revenue Protection– Potential; FPLP payments totaling $38,153 for 38 taxpayers were reversed and the IRS did not have sufficient information to explain why (see page 5).

Methodology Used to Measure the Reported Benefit:

The FPLP payments totaling $38,153 for 38 taxpayers are the total amount of the payments that were reversed between July 2000 and March 2001 that did not have sufficient information to explain why the payments were reversed. We identified these payments during our review of all 115 FPLP payments that had been reversed during this period. Also, we used information from the Financial Management Service and IRS computer system data, which included Social Security Administration date of death data, to determine why the payments were reversed.

The response was removed due to its size. To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.