TREASURY INSPECTOR GENERAL

FOR TAX ADMINISTRATION

 

Improvements Are Needed in Establishing Yearly Offset Fees for the Treasury Offset Program

 

November 2001

 

Reference No. 2002-10-006

 

Executive Summary

 

The Financial Management Service (FMS) is a bureau of the Department of the Treasury, and part of its mission is to provide centralized debt collection services to most federal agencies.  The Debt Management Services of the FMS is responsible for the Treasury Offset Program (TOP).  The TOP is a mandatory, governmentwide debt collection program that compares delinquent debtor data to federal payment data.  The TOP recovers delinquent debt by offsetting federal payments scheduled to be issued to debtors.

 

The Internal Revenue Service (IRS) and the FMS work together to administer two of the TOP debt collection services, the Tax Refund Offset (TRO) and the Tax Levy (TL).  These two services are funded by establishing a fee for each offset processed.  The overall objective of this review was to determine the accuracy of offset fees associated with these two services.

Results

The IRS and the FMS have processes in place to identify total costs associated with the TRO and the TL services.  A reasonable fee was established for the IRS’ share of TRO services.  While the FMS’ total TOP budget was reasonable, fees established for the FMS’ share of the TRO services did not directly reflect estimated FMS costs or allow for full recovery of costs incurred for the services.  Further, the fee established for the TL service was not sufficiently supported, nor was the IRS/FMS Interagency Agreement updated to reflect current levy conditions.

The Internal Revenue Service Fee Structure for the Tax Refund Offset Services Substantially Covered Its Estimated Program Costs

For Calendar Year (CY) 2001, the IRS established its TRO per-offset fee at $4.70.  The IRS derived this fee by estimating its total costs ($13,067,730) for participation in the TRO service and then dividing that amount by the number of estimated offsets (2,781,771).  Based on available supporting documentation, the IRS’ CY 2001 TRO offset fee is reasonable in covering its estimated costs.  Our opinion is based on the IRS’ accurate application of offset assumptions to detailed schedules of IRS direct, indirect, and administrative cost data, the result of which was then used to establish the IRS’ TRO offset fee.

 

While the Financial Management Service’s Total Offset Program Budget Was Reasonable, Tax Refund Offset Fees Did Not Directly Reflect Estimated Costs or Allow for Full Recovery of Costs Incurred

For Fiscal Year (FY) 2001, the FMS estimated the total costs of the TOP, of which the TRO is a service, to be $32,405,767 and the total TOP anticipated offsets to be 2,823,606.  We were able to trace the total estimated cost figures and anticipated TRO offsets to supporting documentation and, in our opinion, these figures are reasonable.

 

However, the FMS established TOP individual service offset fees, based on the type of offset, that were not directly reflective of estimated FMS TOP costs.  These offset fees, though higher than in previous years, were still substantially less than required to ensure reimbursement of total FY 2001 program costs, as we believe is required by the Code of Federal Regulations, and resulted in a projected program shortfall of $13,877,087.  The FMS explained that it receives special appropriated funds and makes use of other direct FMS appropriations to cover any shortfalls that result from the establishment of offset fees charged to creditor agencies that do not cover incurred costs.

 

Based on the above, we are unable to comment on the reasonableness of the individual TRO offset fees established by the FMS for FY 2001, other than to state that the offset fees established, combined with the FMS appropriations, covered the estimated cost of the TRO service.

The Tax Levy Service Fee Was Not Sufficiently Supported, Nor Was the Interagency Agreement Updated to Reflect Current Levy Conditions

Both the FMS and the IRS were aware that the TL service is more costly than other offset services.  As a result, the FMS established a per-offset fee of $12.60 for the TL service for FY 2001.  However, the FMS did not accumulate administrative costs by individual debt collection service, including the extra cost of the IRS’ request for additional actions associated with the TL service.  Therefore, no detailed cost documentation was available to support the establishment of the TL offset fee.  Without identifying the additional costs associated with the TL service, the FMS cannot be certain that the $12.60 fee charged to the IRS is appropriate or sufficient.

 

The FY 2001 IRS/FMS Interagency Agreement for the TL service was signed on January 31, 2001, and provided for reimbursement from the IRS to the FMS of $1,599,998 for 126,984 levies (at $12.60 each).

 

The FMS reported the recording of 24,061 levy actions as of May 23, 2001.  Using this amount, and giving consideration to an increase in levy actions from late February through May, we estimate the completion of approximately 43,200 levies through the end of FY 2001 at a projected cost of $544,320.  Though the actual reimbursement to the FMS will ultimately be based on the number of actual levy actions, the current IRS commitment amount of $1,599,998 represents a possible $1.1 million overcommitment of IRS appropriated funds that are unavailable for other IRS expenditures.

Summary of Recommendations

The FMS should ensure that TRO offset fees reflect the total costs of the corresponding debt collection services and that actual costs of TL offsets are recorded.  Further, the IRS and FMS should ensure that Interagency Agreements are updated to reflect the most current offset conditions and cost information.

 

Management’s Responses:  IRS management concurred with our recommendation and requested a change in the FY 2001 Interagency Agreement on August 9, 2001, and estimated the funding needed for the FY 2002 agreement based on more accurate historical data.

 

FMS management concurred with our recommendations.  The FMS captures costs associated with the debt program in an activity-based cost model.  In order to move the debt collection program towards full reimbursement, fees are increased each year, and shortfalls are covered by direct appropriation.  Fee increases are held as low as possible to avoid unduly burdening agencies.  The FMS will document the process used to isolate and track the additional costs associated with the TL service.  As the levy program continues, the IRS and the FMS should be able to gain experience with estimating the number of levies and associated costs with more precision.

 

Office of Audit Comment:  In its response, the FMS commented that the Treasury Inspector General for Tax Administration’s (TIGTA) statement concerning offset fees being substantially less than required to ensure reimbursement of total program costs, resulting in a projected program shortfall, was incorrect.  The FMS stated that the program is not a fully reimbursable program, and receives some direct appropriated money to support the program.  The FMS expressed concern that the statement implied that FMS management made an arbitrary adjustment that caused a shortfall.

 

The TIGTA continues to believe that the Code of Federal Regulations requires agencies to reimburse FMS for the full cost of the offset program, which would negate the need for direct appropriations to support the program.  The TIGTA is encouraged that the FMS is working towards full reimbursement, and again suggests that decisions to not cover total costs be documented to fully support how fees are established.

 

FMS and IRS management’s comments have been incorporated into the report where appropriate, and their complete responses are included as Appendices V and VI, respectively.