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Highlights

What GAO Found

The six agencies GAO reviewed reported taking various approaches related to key components of estimating improper payments—shown in the figure below—for 10 selected programs, which collectively reported outlays of over $2.5 trillion for fiscal year 2017.

Key Components in the Development of Improper Payment Estimates

Key Components in the Development of Improper Payment Estimates

Sample selection. Eight of the 10 programs GAO reviewed reported using statistically valid approaches, and the remaining 2 reported using alternative methodologies approved by the Office of Management and Budget (OMB). The sampled data elements varied, including payments, medical claims, and tax returns. The age of the data used to develop fiscal year 2017 improper payment estimates also varied, ranging from calendar year 2013 to fiscal year 2017.

Identification of improper payments. Some of the six agencies reported using processes designed specifically to estimate improper payments, whereas others reported leveraging existing reviews. These agencies' policies and procedures include a review of aspects of eligibility, except for those related to the Department of Defense's (DOD) Military Pay and the Office of Personnel Management's (OPM) Retirement overpayments. DOD and OPM have not fully assessed whether their estimation processes effectively consider key program risks. OMB guidance does not specifically address how agencies are to test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments are addressed.

The six agencies also varied in the treatment of insufficient documentation, both in identifying and in reporting the root causes of improper payments. For the agencies that contact entities outside the agency to estimate improper payments, the treatment of nonresponse differed, with one agency including nonresponses as improper payments and another generally excluding the nonresponse cases from review. Although OMB guidance states that agencies should treat cases of insufficient documentation as improper payments, it does not specifically address the treatment of nonresponse cases.

Calculation of the improper payment estimate. The six agencies generally reported using law and OMB guidance to calculate improper payment estimates for the selected programs, except for the Earned Income Tax Credit (EITC). The Internal Revenue Service (IRS) removed overpayments that were recovered when developing its estimate. OMB guidance requires agencies to include recovered amounts in their estimates. Removing these overpayments understates the EITC improper payment estimate and may limit IRS's ability to develop corrective actions to prevent improper payments.

Why GAO Did This Study

Improper payments—which include payments that should not have been made or were made in an incorrect amount—are a long-standing, significant problem in the federal government, estimated at almost $141 billion for fiscal year 2017. Executive branch agencies are required to annually estimate improper payments for certain programs. Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions. Relevant laws and guidance provide agencies flexibility in developing estimates.

This report describes agencies' processes to estimate improper payments in selected programs for fiscal year 2017 and the extent to which certain differences in these processes can affect the usefulness of the resulting estimates. GAO selected 10 programs across six agencies with the largest reported program outlays in fiscal years 2015 and 2016. For these programs, GAO reviewed relevant laws and guidance, analyzed agencies' policies and procedures, and interviewed officials at relevant agencies and OMB staff.

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Recommendations

GAO recommends that OMB develop guidance on treatment of nonresponse cases and testing to identify improper payments, that DOD and OPM assess their estimation processes, and that IRS revise its methodology to not exclude recovered payments from its estimate. All of the agencies either agreed or partially agreed with the specific recommendations to them. GAO believes that the actions are warranted, as discussed in the report.

Recommendations for Executive Action

Agency Affected Recommendation Status
Office of Management and Budget
Priority Rec.
This is a priority recommendation.
The Director of OMB should develop guidance on how agencies test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments, such as eligibility, are addressed through testing processes. (Recommendation 1)
Open
OMB partially concurred with this recommendation. In March 2021, OMB issued new guidance on improper payments that implements the requirements from the Payment Integrity Information Act of 2019. This guidance defines a "reliable improper payment (IP) and unknown payment (UP) estimate" as being produced from accurate sampling populations, testing procedures, and estimation calculations. The OMB guidance discusses a two-phased approach pertaining to assessing programs for susceptibility to significant improper payments and then, if determined susceptible, for measuring and reporting improper payments. In Phase I agencies assess the risk of improper payments and OMB has added new guidance for how agencies can assess payment integrity risks to identify areas where improper payments may arise. When these risks exceed established thresholds, programs move into Phase II where agencies design and submit to OMB a sampling and estimation methodology plan (S&EMP). OMB's guidance states that this S&EMP should have a mechanism for identifying, accounting for, and estimating the annual IPs and UPs, separately. However, OMB's guidance does not specifically direct agencies to ensure that all identified payment integrity risks are included as part of this plan and tested. In order to address this recommendation, OMB should direct agencies to include in their S&EMP details of how each identified payment integrity risk is being tested to provide assurance that agencies IP and UP estimates are reliable and can be used to assist in the process of identifying the root causes of improper payment and formulating targeted corrective action plans to address them. We will continue to monitor the agency's actions to address this recommendation.
Office of Management and Budget
Priority Rec.
This is a priority recommendation.
The Director of OMB should develop guidance clarifying the appropriate treatment of nonresponse cases during improper payment testing. (Recommendation 2)
Closed - Implemented
OMB concurred with this recommendation. On March 5, 2021, OMB revised its Appendix C to OMB Circular A-123, which includes guidance that clarifies the appropriate treatment for nonresponse cases during improper payment testing. Specifically, OMB guidance now specifies that a payment should be categorized and reported as an Unknown Payment when the agency is unable to determine whether the payment was proper or improper as a result of insufficient or lack of documentation (e.g., nonresponse cases). Agencies total reported improper payments now consist of overpayments, underpayments, and Unknown Payments. We believe OMB's revised guidance is sufficient and clear enough for agencies to follow and consistently categorize nonresponse cases as Unknown Payments during improper payment testing. Therefore, we believe OMB has met the intent of our recommendation and we consider the recommendation closed-implemented.
Department of Defense The Under Secretary of Defense (Comptroller) should assess the processes for estimating Military Pay improper payments to determine whether they effectively address key risks of improper payments--including eligibility for different types of pay and allowances--and take steps to update the processes to incorporate key risks that are not currently addressed. (Recommendation 3)
Closed - Implemented
The Department of Defense (DOD) concurred with this recommendation. In fiscal year 2019, DOD updated its Standard Operating Procedures (SOP) for post payment reviews of Military Pay accounts. We confirmed that the SOPs require reviewers to verify that Service members are eligible for special pay and allowances by validating the information included in pay accounts with supporting documentation. Further, we confirmed that DOD updated its processes to review documentation that supports the Service members' eligibility for special pay and allowances and to include as an improper payment instances where no evidence of documentation exists. Finally, we have reviewed DOD's fiscal year 2019 agency financial report and confirmed that DOD reflected therein that, beginning in fiscal year 2019, its post-payment review procedures related to Military Pay included verification of Military Service members pay and allowances with sufficient supporting documentation. We believe DOD's corrective actions address the recommendation.
Office of Personnel Management The Director of OPM should assess the processes to estimate Retirement improper payments to determine whether they effectively address key risks of improper payments--including eligibility and whether older claims face different risks of improper payments than new claims--and take steps to update the processes to incorporate key risks that are not currently addressed. (Recommendation 4)
Open
The Office of Personnel Management (OPM) partially concurred with this recommendation. Prior to 2006, OPM's improper payment estimate sampling methodology included both new and old adjudicated claims. After analyzing several years of data using this methodology, OPM found that including older claims in the sample could result in claimant's records being sampled multiple times and that the variance in the number of errors detected in new claims versus old claims was very low. OPM also looked at the resources used in performing the audit of old and new claims and based on these factors, management determined that it was not an efficient use of resources to include both old and new claims in the review. The methodology was updated to make the process more efficient. By using new claims only, OPM was able to provide feedback to program managers more timely. As a result, management can address issues negatively impacting the improper payment rate and prevent improper payments promptly. OPM agrees with the intent of our recommendation; however, OPM does not agree with our recommendation regarding a risk assessment on eligibility. Eligibility is determined before annuity/survivor benefits are fully adjudicated. As part of its correction plan, OPM stated that it will conduct an audit of older claims to determine if there are different risks to new claims. In April 2021, OPM provided us documentation to show that OPM completed its audit of older claims and concluded that the improper payment risks related to older claims versus new claims were indifferent. We are in the process of reviewing this documentation to determine whether the agency's actions address this recommendation.
Internal Revenue Service The Commissioner of IRS should update IRS's improper payment estimation methodology to not exclude recovered overpayments from its EITC improper payment estimate. (Recommendation 5)
Closed - Implemented
The Internal Revenue Service (IRS) concurred with this recommendation. To address the recommendation, IRS updated its estimation methodology to add back overclaims recovered through the IRS post-refund activities to the total overclaims amount in deriving its Earned Income Tax Credit (EITC) improper payment rate for fiscal year 2018. IRS's updated estimation methodology now conforms to the section of the Office of Management and Budget (OMB) guidance, which requires agencies to include all improper payments in their improper payment estimates, regardless of whether they have been or are being recovered. We have reviewed the fiscal year 2018 Treasury Agency Financial Report (AFR) and verified that it discloses that IRS's improper payment estimate and no longer subtracts projected recovered improper payments prior to calculating the improper payment rate. We believe that IRS's actions meet the intent of our recommendation and therefore, we consider this recommendation closed.

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