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

 

November 2001

 

Reference Number:  2002-10-006

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

November 15, 2001

 

 

MEMORANDUM FOR COMMISSIONER, INTERNAL REVENUE SERVICE

                                         COMMISSIONER, FINANCIAL MANAGEMENT SERVICE

 

FROM:                            Pamela J. Gardiner /s/ Pamela J. Gardiner

       Deputy Inspector General for Audit

 

SUBJECT:                      Final Audit Report - Improvements Are Needed in Establishing Yearly Offset Fees for the Treasury Offset Program (Audit # 200110006)

 

This reports presents the results of our review of the establishment of yearly offset fees for the Treasury Offset Program (TOP).  The objective of the review was to determine the accuracy of offset fees associated with two segments of the TOP:  the Tax Refund Offset (TRO) service and the Tax Levy (TL) service.

In summary, a reasonable fee was established for the Internal Revenue Service’s (IRS) share of the TRO services.  While the Financial Management Service’s (FMS) total program budget was reasonable, fees established for TRO services did not 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.

IRS management concurred with our recommendation and requested a change in the Fiscal Year (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 also 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.

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, which resulted in a projected program shortfall, was incorrect.  The FMS stated that the program is not a fully reimbursable program, and it 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 the 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.

The 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.

Copies of this report are also being sent to the IRS and FMS managers who are affected by the report recommendations.  Please contact me at (202) 622-6510 if you have questions, or your staff may call Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

Table of Contents

Executive Summary

Objective and Scope

Background

Results

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

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

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

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Financial Management Service Management’s Response to the Draft Report

Appendix VI – Internal Revenue Service Management’s Response to the Draft Report

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.

Objective and Scope

The overall objective of this review was to determine the accuracy of offset fees associated with two segments of the Treasury Offset Program (TOP):  the Tax Refund Offset (TRO) service and the Tax Levy (TL) service.

The audit was performed at the request of the Internal Revenue Service (IRS) for assistance in reviewing the methodology used by both the IRS and the Financial Management Service (FMS) to establish the fees for the TRO and TL services.  Our audit work did not involve specific transaction testing of incurred program costs.  However, we did review cost and volume roll-up documents to assess the reasonableness and accuracy of numbers used in the establishment of per-offset fees for the debt collection services included in this audit.  We coordinated our audit work with the Department of the Treasury’s Office of Inspector General, who has audit responsibility for the FMS.  The audit work was conducted from December 2000 through May 2001 within the IRS’ Wage and Investment, and Small Business/Self-Employed Divisions, and the FMS’ Debt Management Services (DMS) office in Washington, DC.  The audit was performed in accordance with Government Auditing Standards.

Details of our objective, scope, and methodology are presented in Appendix I.  Major contributors to this report are listed in Appendix II.

Background

Since 1986, the IRS has collected delinquent debt owed to federal agencies by offsetting tax refunds.  The Debt Collection Improvement Act of 1996 provided that any non-tax debt or claim owed to the United States Government would be referred to the Department of the Treasury.  In January 1999, the IRS program was merged with the centralized administration offset program operated by the FMS, known as the TOP.

The 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 DMS of the FMS is responsible for the 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 IRS and the FMS work together to administer two of the TOP debt collection services.  The first of these is the TRO service.  The TRO involves the FMS offset of federal tax refunds for the collection of non-tax debts.  These debts include past-due child support, federal agency debt, and past-due state income tax obligations.

The TRO is user funded.  Both the IRS and FMS costs are recovered through per-offset fees deducted from proceeds prior to disbursement to state or federal creditor agencies.  These fees, which are established annually by the FMS, are authorized by the codification of the Debt Collection Improvement Act of 1996.  The IRS’ share of total per-offset fees is documented in an annual IRS/FMS Interagency Agreement.  For Calendar Year (CY) 2001, the IRS projected that it will have over 2.7 million offsets at a cost of over $13 million.

The second service in TOP debt collection is the TL service.  This involves a continuous IRS levy on FMS disbursements to individuals and businesses with delinquent tax liabilities, as authorized by the Taxpayer Relief Act of 1997.

The IRS, in accordance with the Economy Act, reimburses the FMS for its costs to administer the TL service.  The FMS annually projects its costs for the service and estimates a per-offset fee to cover those costs.  The IRS commits to reimburse the FMS for the costs of actual levy actions through the execution of an annual IRS/FMS Interagency Agreement.

The FMS and the IRS are to keep offset fees at the lowest possible level, consistent with the requirements of the law and regulations and the agencies’ costs for administering these programs.

Results

Legal authorization for the IRS’ participation in the TOP has been established through legislation and Interagency Agreements.  Roles and responsibilities for the TRO and TL services have been defined for the IRS and the FMS.  These roles and responsibilities are the basis for determining costs associated with the services and were used to establish reimbursable fees authorized by legislation.

The IRS and FMS have processes in place to identify total costs associated with the TRO and TL services.  A reasonable fee was established for the IRS’ share of the TRO services; however, 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 tax levy conditions.

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

For 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).  In our opinion, based on available supporting documentation, the IRS’ CY 2001 TRO offset fee is reasonable in covering its estimated costs.

Though the IRS did not use a formal cost accounting system to record costs associated with the TRO, it has developed a set of various assumptions based on historical data to estimate total TRO participation costs.  For example, the IRS took all of the refund offsets from 1998 through 2000 and compared them to the number of injured spouse claims resulting from a refund offset for the same period.  By doing this, the IRS was able to establish an assumption that about 11.75 percent of all refund offsets will generate an injured spouse claim.  The IRS also determined that about half of all injured spouse claims received by the IRS resulted in the IRS issuing a manual refund.  These assumptions are critical since the IRS estimates 90 percent of the cost for participation in the TRO involves work directly associated with processing injured spouse claims.  This work is not automated and the processing is mostly manual, making it a costly component of processing the claims.  Further, the number of injured spouse claims has increased as the number of offsets has increased.

The above assumptions were accurately applied to detailed schedules of IRS direct, indirect, and administrative cost data in estimating the costs for participating in the TRO service.  Cost data included such items as salaries, benefits, equipment, utilities, and supplies.  The cost estimates were then used to establish the IRS’ TRO offset fee.

The IRS is continually working to update and fine tune its assumptions to achieve the highest level of accuracy.  The IRS also works with the FMS to arrive at the best possible figures for the number of expected offsets to be used in calculating 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 anticipated offsets to be 2,823,606.  The total costs were based on FY 2001 budget funding as of March 2000, allocation of program area employee costs, and related indirect costs.  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 and resulted in a projected program shortfall of $13,877,087.

The following table illustrates the FMS’ FY 2001 established offset fees and the estimated program shortfall.  Appendix IV also provides a description of the potential benefits to the FMS concerning the reliability of information.

Estimated FMS TOP Fees and Related Reimbursement for Fiscal Year 2001

Offset Type/Service

Volume

Fee

Revenue

Tax Refund Offsets (TRO) – General

1,195,400

$7.05

$8,427,570

TRO - Child Support

1,454,600

$5.50

$8,000,300

TRO - State Tax

60,000

$11.75

$705,000

Total TRO

2,710,000

 

$17,132,870

 

 

 

 

Tax Levy

71,694

$12.60

$903,344

 

 

 

 

Other TOP Services

41,912

$11.75

$492,466

 

 

 

 

Total

2,823,606

 

$18,528,680

 

 

 

 

TOP Budget

 

 

$32,405,767

 

 

 

 

Program Cost Shortfall

 

 

($13,877,087)

Source:  FMS cost allocation document.

Based on these figures, we calculated the FY 2001 average per-offset fee for all TOP offsets including the TRO to be $11.48, assuming full cost recovery through creditor agency reimbursements and without consideration of the offset fee difference for the TL service as described on page 9 of this report.

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.  The FMS further commented that when it took over the TRO from the IRS it continued the differential in the offset fees already established since it would have caused a dramatic increase in the offset fees charged to the individual creditor agencies.  The FMS plans to steadily increase per-offset fees until it does recover total cost.  However, until that happens, it will rely on direct appropriations to cover any associated shortfalls.

Based on these FMS practices, 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.

Further, even though FMS management decisions provided for the use of special and direct appropriations to cover program shortfalls, we believe that the TRO portion of TOP offset fees should have been established in accordance with the Code of Federal Regulations.  Section 285 of Title 31 Debt Collection Authorities Under The Debt Collection Improvement Act of 1996, provides for the collection of offset fees by the FMS from individual creditor agencies that reimburse the FMS for the full cost of administering the TRO services.  If offset fees were established that reflected total TRO services costs, additional direct appropriations to the FMS would not be needed.  Also, the use of total cost reimbursement offset fees would more accurately reflect the true cost of the services provided to the creditor agencies.

Recommendation

1.      The FMS’ DMS should ensure that TRO offset fees reflect the total costs of the corresponding debt collection services, thereby eliminating the need for additional appropriated funds to cover program shortfalls.  Decisions to not cover total costs should be documented to fully support how the individual fees are established.

FMS Management’s Response:  The FMS concurred with the recommendation.  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.

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, which resulted 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.

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.  This is due to an IRS request that the FMS prepare daily collection files and daily refund transfers that are not performed for the other debt collection services.  As a result, the FMS established a FY 2001 per-offset fee of $12.60 for the TL service, which represented an increase over the average offset fees charged for other debt collection services.  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 TL services.  Therefore, no detailed cost documentation was available to support the establishment of the TL offset fee.

The Economy Act provides for payment of goods or services provided by one agency to another agency based on the actual costs of the goods or services provided.

Notwithstanding the discussion on the FMS’ establishment of TRO offset fees, which affects all TOP offset fees including TL offset fees, and without identifying the additional costs associated with daily recordkeeping for 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), if all such levy actions actually occurred.  The budget amount was obtained from an IRS project approval document that describes the project life and multi-year estimated costs for the TL service.

As of May 23, 2001, the FMS reported the recording of 24,061 levy actions, with 14,323 of the actions occurring from late February through May 2001.  The decrease in offsets from the original estimate was due to delays in implementing additional payment sources and the IRS not activating anticipated levy debts under the TL service.  Though the decreases in levy actions were known by both the IRS and the FMS, no actions were taken to amend the original Interagency Agreement.

Using the actual figure of 24,061 levies recorded, and giving consideration to the increase from February through May, we estimate the completion of approximately 43,200 levies through the end of FY 2001 at an estimated cost of $544,320 (43,200 x $12.60), if levy patterns continue as experienced through May 23, 2001.  Although the reimbursement to the FMS will ultimately be based on the actual number of levy actions, the current IRS commitment of $1,599,998 as shown on the Interagency Agreement represents a possible $1.1 million overcommitment of IRS appropriated funds that are unavailable for other IRS expenditures.  While our calculations are not statistically valid projections, they are being presented to illustrate the potential magnitude of this issue.  Appendix IV provides further details for the potential $1.1 million in funds to be put to better use.

The TL service is a relatively new activity that began in July of 2000.  After the TL service has stabilized and more tax levy debts have been activated, both the IRS and the FMS should be able to gain experience with estimating the number of levies and associated costs with more precision.

The FMS has recognized the importance of recording accurate costs to individual services and, as a result, has teamed with an outside contractor to implement a cost-capturing model for its debt management processes.  The objectives of the effort are to determine the costs of FMS services and the costs associated with FMS activities to provide a dynamic cost-capturing model that enables periodic updating.  A draft report of the contractor’s efforts was issued on March 6, 2001.  One of the activities identified was to “Provide Tax Levy Accounting Operations.”  The specific identification of this activity should allow the FMS to segregate specific TL service costs and more accurately calculate the TL offset fee charged to the IRS.

The contractor also suggested updating the model on a quarterly or semi-annual basis to reflect the most current cost information.

Recommendations

2.      The FMS’ DMS should capture the actual costs for the TL service and adjust other service offset fees accordingly, including periodically updating cost information to reflect the most current offset conditions.

FMS Management’s Response:  The FMS concurred with the recommendation.  The FMS will document the process used to isolate and track the additional costs associated with the TL service.

3.      The IRS’ Wage and Investment, and Small Business/Self-Employed Divisions, and the FMS’ DMS should coordinate to timely amend Interagency Agreements, including the FY 2001 Agreement noted in this report, when current information shows that offset fee estimates are significantly misstated.

IRS Management’s Response:  On August 9, 2001, the IRS requested a change in the FY 2001 Interagency Agreement and based its FY 2002 Interagency Agreement estimate on historical information that is now available.  This data enabled the IRS to be more accurate in its estimates and it should limit the potential for overcommitment of funds.

FMS Management’s Response:  The FMS concurred with the recommendation.  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.

Conclusion

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 the TRO services; however, 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 services was not sufficiently supported, nor was the FY 2001 IRS/FMS Interagency Agreement updated to reflect current volumes of tax levy offsets.

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine the accuracy of offset fees associated with two segments of the Treasury Offset Program (TOP):  the Tax Refund Offset (TRO) service and the Tax Levy (TL) service.  To accomplish our objective, we:

 

I.          Gained an understanding of the process and related controls to establish, maintain, and participate in the TRO and TL services.

A.     Obtained legislation and interagency agreements authorizing the TRO and TL services.

B.     Interviewed Internal Revenue Service (IRS) management and personnel to document their roles and responsibilities for the TRO and the TL.

C.     Interviewed Financial Management Service (FMS) management and personnel to document their roles and responsibilities for the TRO and TL services.  Coordinated these interviews with the Treasury Office of Inspector General.

D.     Compared the results of step A with those of steps B and C to identify any inconsistencies.

II.                 Determined whether all costs associated with the TRO and TL services are accurately and timely recorded and reported in determining offset fees.  Subject costs include direct costs (salaries, benefits, space, travel, etc.) as well as indirect costs (shared information technology, field support, legal, etc., in addition to FMS-provided support).

A.     Identified all costs associated with performing all roles and responsibilities for the TRO services.

B.     Identified all costs associated with performing all roles and responsibilities for the TL service.

C.     Identified all costs that are included in the formulas for the currently established annual offset fees and recalculated fees based on those costs.

D.     Compared the results of steps A and B with those of step C to determine whether only those costs associated with program roles and responsibilities are included in the formula for establishing offset fees.

III.       Determined whether TRO and TL services costs and benefits are monitored and validated by the IRS and the FMS to provide complete and accurate information to evaluate participation in the programs.

A.     Reviewed policies and guidelines for capturing data and reporting results of program costs and benefits.

B.      Interviewed IRS and FMS personnel involved in the TRO and TL services to determine what processes are used to monitor and validate program costs and benefits.

Appendix II

 

Major Contributors to This Report

 

Maurice S. Moody, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

John R. Wright, Director

Thomas J. Brunetto, Audit Manager

Theresa A. Haley, Senior Auditor

S. Kent Johnson, Senior Auditor

Bobbie M. Draudt, Auditor

Peter L. Stoughton, Auditor

 

Appendix III

 

Report Distribution List

 

Internal Revenue Service

 

Commissioner, Small Business/Self-Employed Division  S

Commissioner, Wage and Investment Division  W

Chief Financial Officer  N:CFO

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Legislative Affairs  CL:LA

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

Office of Management Controls  N:CFO:F:M

Audit Liaisons:  Commissioner, Small Business/Self-Employed Division  S

                           Commissioner, Wage and Investment Division  W

                           Chief Financial Officer  N:CFO

 

Financial Management Service

 

Assistant Commissioner, Debt Management Services

Audit Liaison:  Director, Agency Liaison Division, Debt Management Services

 

Appendix IV

 

Outcome Measures

 

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:

 

·        Reliability of Information – Potential; management of a $32.4 million program that affects 2.8 million debt collection offset actions, with a projected reimbursement shortfall to the Financial Management Service (FMS) of approximately $13.9 million (see page 5).

Methodology Used to Measure the Reported Benefit:

For Fiscal Year (FY) 2001, the estimated cost of the Treasury Offset Program (TOP) was $32,405,767.  The established fees for the estimated 2,823,606 offsets would generate estimated revenue of $18,528,680, creating a projected $13,877,087 shortfall in reimbursement to the FMS for TOP costs.  The total cost figure, estimated offsets, and projected shortfall were obtained from a FMS cost allocation document.

 

Type and Value of Outcome Measure:

 

·        Funds to Be Put to Better Use – Potential; approximately $1.1 million in Internal Revenue Service (IRS) committed funds (see page 9).

Methodology Used to Measure the Reported Benefit:

As of May 23, 2001, the FMS reported the recording of 24,061 levy actions, with 14,323 of the actions occurring from late February through May 2001.

Using the actual figure of 24,061 levies recorded, and giving consideration to the increase from February through May, we estimate the completion of approximately 43,200 levies through the end of FY 2001, if levy patterns continue as experienced through May 23, 2001.  Accordingly, the IRS could expect to reimburse FMS $544,320 (43,200 * $12.60).  Comparing this amount to the $1,599,998 shown on the FY 2001 IRS/FMS Interagency Agreement results in a potential overcommitment of IRS appropriated funds of approximately $1.1 million.  Our calculations are not statistically valid projections but are presented to illustrate the potential magnitude of this issue.

Our estimate of 43,200 (rounded) expected levies was calculated as follows:

Levies recorded from February 22, 2001, to May 23, 2001                  14,323

Divided by 3 elapsed months                                                                         3

Levies per month                                                                                    4,774

Times 4 months remaining in FY 2001                                                4

Levies for the remaining 4 months of FY 2001                           19,096

Plus levies recorded through May 23, 2001                                           24,061

Projected FY 2001 levies                                                                     43,157

 

Appendix V

Financial Management Service Management’s Response to the Draft Report

 

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

 

Appendix VI

Internal Revenue Service Management’s Response to the Draft Report

 

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