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entitled 'Minimizing Inappropriate Levies in IRS’s Federal Payment Levy
Program' which was released on January 3, 2003. 

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GAO-03-318R: 

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.[Footnote 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,[Footnote 2] except during system maintenance and sends FMS 
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-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 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 
[hyperlink, 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 contributed to 
this report include Thomas Bloom, Ellen Rominger, Samuel Scrutchins, 
Thom Venezia, and Elwood White. 

Sincerely yours, 

Signed by: 

Michael Brostek: 
Director, Tax Issues: 

[End of section] 

Footnotes: 

[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.). 

[End of section] 

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