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entitled 'Debt Collection: Opportunities Exist for Improving FMS's 
Cross-Servicing Program' which was released on October 31, 2003.

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Report to the Secretary of the Treasury and the Director of the Office 
of Management and Budget:

October 2003:

DEBT COLLECTION:

Opportunities Exist for Improving FMS's Cross-Servicing Program:

GAO-04-47:

GAO Highlights:
Highlights of GAO-04-47, a report to the Secretary of the Treasury and 
the Director of the Office of Management and Budget

Why GAO Did This Study:

GAO has previously reviewed facets of Treasury’s Financial Management 
Service’s (FMS) cross-servicing efforts. These reviews did not include 
FMS’s handling of nontax debts that were returned to FMS uncollected 
by its private collection agency (PCA) contractors because FMS 
officials did not consider the cross-servicing program to be fully 
mature. During fiscal years 2000, 2001, and 2002, FMS’s PCA 
contractors returned about $3.9 billion of uncollected debts to FMS. 
This report focuses primarily on (1) actions taken by FMS on 
uncollected nontax debts returned from its PCA contractors and (2) 
actions taken, if any, by FMS and the Office of Management and Budget 
(OMB) to ensure that federal agencies are reporting their eligible 
uncollectible nontax debts to IRS as income to debtors.

What GAO Found:

Although FMS has made progress in implementing its cross-servicing 
program and considers it to be fully mature, opportunities exist to 
improve the program.

FMS had not reviewed most of the debts returned to it by its PCA 
contractors to determine whether any opportunities for collection or 
other recoveries remained, including those possible from reporting 
closed-out debts to IRS as income to debtors. For example, as shown in 
the figure below, about $3.7 billion of the $6.6 billion of debts that 
were at FMS for cross-servicing as of February 28, 2003, were being 
kept in the Treasury Offset Program (TOP) for passive collection after 
they had been returned uncollected to FMS by PCA contractors. Passive 
collection entailed no further collection action on the part of FMS 
other than minimal efforts through offset, and collections on debts in 
passive collection through offset totaled only about $9 million 
through February 28, 2003. Various problems hindered collections 
through offset, including the fact that many of the debts were beyond 
the 10-year statutory and regulatory limitations for offset.

GAO’s analysis also showed that relatively few debts in cross-
servicing were being referred to the Department of Justice for more 
aggressive enforced collection action. This analysis further showed 
that FMS continues to have problems with debt compromises and the 
reporting of a key cross-servicing performance measure.   

Finally, neither FMS nor OMB monitored or reported the extent to which 
federal agencies governmentwide were closing out all eligible 
uncollectible debts and reporting those amounts to IRS as income to 
debtors.

What GAO Recommends:

GAO recommends that Treasury (1) help ensure that all appropriate 
collection action is taken on debts returned from PCA contractors, 
(2) increase opportunities for collection, and (3) help maximize the 
soundness of FMS’s cross-servicing program. GAO also recommends that 
OMB take steps to improve agencies’ compliance with standards and 
policies for writing off and closing out debts. Treasury concurred 
with most of GAO’s findings but raised a number of points about 
certain of the recommendations. OMB agreed with the thrust of GAO’s 
recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-04-47.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Gary Engel (202) 512-
3406 or EngelG@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

Scope and Methodology: 

Collection Opportunities Were Lost on Uncollected Debts Returned from 
PCA Contractors: 

Inadequate Monitoring and Reporting of Closed-Out Debts to IRS: 

FMS Missed Certain Opportunities to Improve Overall Collections: 

Problems Identified with Debt Compromises and a Key Performance 
Measure:

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Sampling Method: 

Appendix II: Comments from the Department of the Treasury: 

GAO Comments: 

Appendix III: Staff Acknowledgments: 

Tables: 

Table 1:  Debt Referral Rate of Cross-Serviced Debts for Fiscal Year 
2002: 

Table 2: Details of Cases Selected: 

Figures: 

Figure 1: Percentage of Cross-Serviced Debts in Passive Collection as of 
February 28, 2003: 

Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by Fiscal 
Year Referred: 


Letter October 31, 2003:

The Honorable John W. Snow 
The Secretary of the Treasury:

The Honorable Joshua B. Bolten Director, 
Office of Management and Budget:

The Debt Collection Improvement Act of 1996 (DCIA) gave the Department 
of the Treasury (Treasury) significant governmentwide responsibilities 
for collecting federal nontax debts delinquent more than 180 days that 
are referred by federal agencies for collection action, known as cross-
servicing. Treasury's Financial Management Service (FMS) is responsible 
for carrying out Treasury's cross-servicing responsibility. Nontax 
debts that federal agencies reported as delinquent more than 180 days 
totaled over $60 billion at the end of each of the last 4 fiscal 
years.[Footnote 1] However, as of September 30, 2002, federal agencies 
reported to FMS that only about $8.5 billion, or approximately 13 
percent, of the approximately $64 billion of reported nontax debts 
delinquent over 180 days were eligible for cross-servicing. FMS has 
continued to express concern about the accuracy, completeness, and 
validity of debts reported by agencies as eligible for and excluded 
from the DCIA cross-servicing provisions, and over the years, we have 
identified and reported on problems regarding the accuracy and 
completeness of exclusions from cross-servicing as reported by certain 
federal agencies.[Footnote 2] Nonetheless, for the billions of dollars 
of nontax delinquent debts that agencies do refer for cross-servicing, 
it is critical that FMS manage its collection activities to fully 
utilize available debt collection tools and maximize collection 
opportunities.

In January 2003, we reported that FMS had made significant progress in 
implementing key provisions of DCIA, which directs and authorizes use 
of a wide range of collection tools.[Footnote 3] For example, we 
reported that FMS's successful merger of the Tax Refund Offset Program 
with the Treasury Offset Program (TOP), both of which are designed to 
offset federal payments up to the amount of the delinquent federal 
debt, and system enhancements have streamlined operations and 
contributed over $1 billion in nontax debt collections from tax refund 
offsets during each of fiscal years 2000, 2001, and 2002. In addition, 
FMS's incorporation of Social Security benefit payments into TOP in May 
2001 resulted in about $114 million in reported nontax debt collections 
from Social Security benefit offsets through early July 2003.

While we have previously reviewed various facets of FMS's cross-
servicing efforts, we did not review FMS's handling of nontax debts 
that remained uncollected after being returned to FMS from its private 
collection agency (PCA) contractors because FMS did not consider the 
cross-servicing program to be fully mature at that time.[Footnote 4] 
FMS officials now consider the cross-servicing program to be fully 
mature. Therefore, as follow-up to our prior work, this review focused 
primarily on nontax delinquent debts that remained uncollected after 
they had been at both FMS and its PCA contractors for cross-servicing. 
Specifically, our objectives were to evaluate (1) actions taken by FMS 
on uncollected nontax debts returned from its PCA contractors; (2) 
FMS's efforts to ensure that eligible uncollectible nontax debts, which 
federal agencies rely on FMS to report on their behalf to the Internal 
Revenue Service (IRS) as income to the debtors, are promptly identified 
and accurately reported; and (3) actions taken, if any, by FMS and the 
Office of Management and Budget (OMB) to ensure that federal agencies 
are reporting their eligible uncollectible nontax debts to IRS as 
income to the debtors. In addition to addressing these objectives, this 
report discusses opportunities for FMS to (1) improve collection of 
nontax debts through cross-servicing and (2) enhance the soundness of 
certain operational and reporting facets of its cross-servicing 
program.

Results in Brief:

Opportunities exist to improve FMS's cross-servicing program for 
federal nontax debts in the following areas: (1) the extent to which 
debts are kept in TOP for passive collection after they have been 
returned uncollected to FMS by PCA contractors; (2) FMS's adherence to 
its procedures for returning certain uncollected debts to referring 
agencies; (3) the extent to which FMS and OMB monitor federal agencies' 
reporting of closed-out debts to IRS as income to debtors; (4) the 
extent to which FMS refers debts to the Department of Justice (DOJ) for 
enforced collection and reports debts to TOP; (5) the adequacy of FMS's 
system for tracking debt amounts forgiven and PCA contractors' 
adherence to regulatory and contractual policies and procedures for 
forgiving debts through compromises with debtors; and (6) the 
reliability of FMS's reporting on the extent to which agencies are 
referring eligible debts for cross-servicing.

FMS did not review most debts returned uncollected from PCA contractors 
to determine the appropriate next step to maximize collection of the 
debts. As of February 28, 2003, FMS had approximately $6.6 billion of 
debts in cross-servicing. About $3.7 billion of these debts had been 
returned uncollected by FMS's PCA contractors and were being kept in 
TOP for passive collection through offset.[Footnote 5] While offset 
yielded some collections for debts in passive collection, the amounts 
were small, totaling only about $9 million on debts returned to FMS by 
its PCA contractors. In addition, many of the debts returned to FMS by 
its PCA contractors had no prospects for collection through offset 
because they were beyond the 10-year statutory and regulatory 
limitations applicable to offset.[Footnote 6]

FMS also did not review about $446 million of the approximately $1.1 
billion of uncollected debts that it returned to referring agencies 
during fiscal years 2000, 2001, and 2002 to determine whether it should 
close out and report the debts to IRS on behalf of agencies that had 
authorized FMS to do so. We determined that FMS summarily returned 
these debts to referring agencies without ensuring that the required 
collection activities had been performed. For example, FMS did not 
review debts totaling about $97 million to determine their eligibility 
for IRS reporting even though they met two key criteria for IRS 
reporting--they had Taxpayer Identification Numbers (TIN) and their 
referring agencies had granted FMS authority to report them to IRS.

Neither FMS nor OMB monitored or reported the extent to which federal 
agencies were closing out uncollectible debts and reporting eligible 
amounts to IRS. The Treasury Reports on Receivables (TROR) for the 24 
Chief Financial Officers (CFO) Act agencies[Footnote 7] showed that for 
calendar year 2002, of the approximately $3.2 billion of nontax debts 
that these agencies reported as closed out, about $1 billion, or 
approximately 31 percent, of this amount was reported to IRS as income 
to the debtors.[Footnote 8] FMS does not require federal agencies to 
disclose in their TRORs why closed-out debts are not reported to IRS, 
and neither FMS nor OMB officials could specifically explain why 
certain federal agencies had reported different amounts for closed-out 
debts and debts reported to IRS.

In looking for missed cross-servicing collection opportunities, we 
further found that FMS had referred only a small amount of debt to the 
Department of Justice (DOJ) for enforced collection because FMS did not 
establish effective processes or procedures for identifying debts to 
forward to DOJ. We also found that FMS had not reported about $356 
million of debts to TOP for offset payments as required by FMS 
procedures. As of February 28, 2003, most of these debts were at 
secondary PCA contractors and had been in cross-servicing for an 
average of about 11 months without having been sent to TOP. Further, 
although many nontax debts involved secondary debtors, such as 
cosignors, from which collection can be pursued, FMS had not reported 
such debtors to TOP.

In addition, we identified continuing problems in FMS's administration 
of compromises with debtors. FMS's cross-servicing database showed that 
in-house FMS collectors and FMS's PCA contractors had established 
repayment agreements forgiving a total of at least $51 million of 
delinquent debts during fiscal years 2000, 2001, and 2002. However, the 
cross-servicing database did not identify the forgiven amounts on 
debts. Specifically, it did not include amounts forgiven by in-house 
FMS collectors in accordance with established compromise agreements 
between FMS and debtors unless the agreed-upon reduced amount had been 
paid in full. In addition, PCA contractors that established compromise 
agreements with debtors often did not have documentation to justify 
their rationale for concluding that debtors could not pay the full debt 
amount or to support the amounts forgiven.

Finally, FMS overstated federal agencies' progress in referring 
eligible nontax debts for cross-servicing. Although FMS reported that 
agencies had referred about 96 percent of over $8 billion of reported 
eligible debts, we determined that the referral rate was about 79 
percent, thereby leaving room for improvement.

We are making a number of recommendations to Treasury and OMB to 
increase opportunities for collections and other recoveries of debts 
and to help maximize the operational soundness of the cross-servicing 
program.

Treasury and OMB generally agreed with our findings. However, Treasury 
raised a number of points regarding our specific findings and 
recommendations that missed the central concerns conveyed in our report 
and tended to downplay their significance. How well these findings, 
along with others relating to cross-servicing that we have cited in 
previous reports, are addressed is central to success in collecting 
delinquent nontax debt and creating credibility among debtors that the 
federal government is serious about its collection efforts.

Background:

DCIA was enacted by the Congress, in part, to collect nontax debts 
delinquent more than 180 days by referring such debts to Treasury or a 
Treasury-approved debt collection center for cross-servicing.[Footnote 
9] FMS is the only Treasury-approved governmentwide debt collection 
center.

After receiving a debt from a referring federal agency, FMS generally 
keeps the debt for 30 days at its Debt Management Operations Center. 
During this time, FMS is to send a letter demanding payment to the 
debtor. An in-house FMS collector may attempt to contact the debtor to 
obtain payment in full or secure payment through other options, 
including compromise.[Footnote 10] If the debt has not been collected 
20 days after the date of the demand letter, FMS is to report the debt 
to TOP if the referring agency has not already done so.[Footnote 11]

If the referred debt remains uncollected after it has been at FMS for 
30 days, FMS typically sends the debt to one of its five PCA 
contractors.[Footnote 12] The PCA contractor that receives the debt 
initially--the primary PCA contractor--is generally given 270 days from 
the date it receives the debt from FMS to collect or resolve the 
debt.[Footnote 13] If the primary PCA contractor is unable to collect 
or resolve the debt, it sends the debt back to FMS. FMS then typically 
sends the debt to another PCA contractor, the secondary PCA contractor 
for the debt. The secondary PCA contractor is also given 270 days from 
the date it receives the debt from FMS to collect or resolve the debt. 
FMS requires its PCA contractors to attempt to locate debtors, send 
demand letters, and attempt to obtain full payment before compromising 
any debt. FMS may refer debts to DOJ for litigation and enforced 
collection at any time.

Debts that are returned uncollected to FMS from its secondary PCA 
contractors are to be either retained by FMS for additional collection 
action or returned to the referring agencies.[Footnote 14] According to 
the Federal Claims Collection Standards,[Footnote 15] federal agencies 
must terminate all collection action before closing out a delinquent 
nontax debt and must report certain closed-out debts to IRS.[Footnote 
16]

Federal agencies are required to report annually in their TRORs on the 
status of their nontax debts.[Footnote 17] TRORs are FMS's only 
comprehensive means of collecting information on the federal 
government's nontax debt portfolio, including debts written off, closed 
out, and reported to IRS. TRORs are also used to collect information on 
nontax debts delinquent more than 180 days to help FMS monitor federal 
agencies' implementation of DCIA. FMS summarizes the information in the 
federal agencies' TRORs annually in Report to the Congress on U.S. 
Government Receivables and Debt Collection Activities of Federal 
Agencies.

OMB assists the President by developing governmentwide policies for the 
effective and efficient operation of the executive branch. As such, OMB 
establishes credit management policy for the federal government, 
including setting standards for extending credit, managing lenders 
participating in guaranteed loan programs, servicing nontax 
receivables, and collecting delinquent nontax debts. In addition, OMB 
is responsible for reviewing federal agencies' policies and procedures 
related to credit programs and debt collection activities.

Scope and Methodology:

To address our objectives, we interviewed FMS officials and reviewed 
pertinent FMS documents and reports to obtain an understanding of FMS's 
policies and procedures for nontax debts that are returned uncollected 
to FMS by its PCA contractors and for closing out uncollectible nontax 
debts and reporting such debts to IRS as income to the debtor. We also 
reviewed applicable federal regulations and guidance for federal nontax 
debt collection, close-out, and IRS reporting, including the Federal 
Claims Collection Standards, OMB Circular A-129, and IRS instructions 
for reporting closed-out debts. In addition, we obtained and analyzed 
FMS's cross-servicing database for the period from inception of the 
cross-servicing program in fiscal year 1996 through February 28, 2003, 
to determine what collection actions in-house FMS collectors performed 
on debts that had been returned uncollected from its PCA contractors 
and whether the in-house FMS collectors properly identified all 
uncollected debts that could be reported to IRS, including amounts that 
had been forgiven through compromise.

A scope limitation prevented us from using statistical sampling 
techniques to determine whether compromises made by in-house FMS 
collectors were justified, supported, and reported to IRS. FMS's cross-
servicing database did not identify all forgiven amounts resulting from 
compromise agreements made by in-house FMS collectors; the database 
identified forgiven amounts only for in-house FMS agreements if the 
compromised amount had been paid in full and the debt settled.[Footnote 
18] The database did not include the forgiven amounts for in-house 
compromise agreements that were active but had not yet been settled. We 
did use statistical sampling techniques to select from FMS's PCA cross-
servicing database 54 debts that had been compromised by FMS's PCA 
contractors from October 1, 2002, through February 28, 2003.[Footnote 
19] Using electronic and hard-copy information provided by FMS for the 
selected compromised debts, we determined whether the compromises were 
justified, supported, and reported to IRS. We projected the results 
from our sample of compromises to the population from which the sampled 
items were drawn. (App. I contains additional information on the 
sampling method.):

In addition, we interviewed FMS and OMB officials about the extent to 
which their respective agencies monitor and report on federal agencies 
governmentwide regarding identification and reporting of closed-out 
debts to IRS. We also obtained and analyzed TRORs for all 24 CFO Act 
agencies to determine the nontax debt close-out and IRS reporting 
information for calendar year 2002.

To determine whether information in FMS's cross-servicing database was 
reliable, we reviewed documentation provided by FMS supporting 
reliability testing performed by FMS and its contractors on the 
database. In addition, we performed electronic testing of specific data 
elements in the database that we used to perform our work. Based on our 
review of FMS's documents and our own testing, we concluded that the 
data elements used for this report are sufficiently reliable for the 
purpose of the report.

We performed our work from October 2002 through August 2003 in 
accordance with U.S. generally accepted government auditing standards.

We requested comments on a draft of this report from the Secretary of 
the Treasury and the Director of OMB or their designees. The 
Commissioner of FMS provided Treasury's comments, which are reprinted 
in appendix II. On October 21, 2003, staff from OMB provided us with 
OMB's oral comments on the draft. Treasury's and OMB's comments are 
discussed in the Agency Comments and Our Evaluation section of this 
report and are incorporated in the report as applicable.

Collection Opportunities Were Lost on Uncollected Debts Returned from 
PCA Contractors:

As of February 28, 2003, FMS had approximately $6.6 billion of debts in 
cross-servicing. More than half of these debts had been returned 
uncollected by FMS's secondary PCA contractors and were being kept in 
TOP for passive collection. Passive collection entailed no further 
collection action other than minimal efforts through offsets, and 
certain debts in passive collection were not eligible for such offsets. 
In addition, FMS did not review certain uncollected debts that FMS 
returned to the referring agencies to determine whether all collection 
activity had been performed on the debts, including whether FMS should 
close out and report the debts to IRS on behalf of the agencies. 
Further, certain debts that were not in passive collection or returned 
to referring agencies were kept in inactive status where no collection 
activities, including referral to TOP, were performed. Consequently, 
opportunities for maximizing collections or other recoveries were lost.

FMS Did Not Review Uncollected Debts Left in TOP for Passive 
Collection:

When debts were returned from secondary PCA contractors, FMS simply 
kept most of them in TOP, where they largely lay dormant without any 
review to determine the next best course of action to improve 
collections. For fiscal years 2000, 2001, and 2002, FMS kept about $2.6 
billion of uncollected nontax debts returned from its secondary PCA 
contractors in TOP for passive collection. As of February 28, 2003, 
debts retained in TOP for passive collection totaled about $3.7 billion 
and, as shown in figure 1, represented 56 percent of the approximately 
$6.6 billion of debts that were at FMS for cross-servicing at that 
time.[Footnote 20] Through February 28, 2003, FMS had collected only 
about $9 million on debts in passive collection through offsets, which 
was the only collection tool being used to collect these returned 
debts.

Figure 1: Percentage of Cross-Serviced Debts in Passive Collection as 
of February 28, 2003:

[See PDF for image]

Note: Derived from analysis of FMS's cross-servicing database as of 
February 28, 2003.

[End of figure]

FMS did not have written procedures for reviewing debts kept in TOP for 
passive collection. It is important to note that FMS officials stated 
that because of system limitations, FMS did not identify specific debts 
that were in TOP for passive collection. However, we were able to 
identify debts in TOP for passive collection using off-the-shelf 
database analysis software.

Certain nontax debts kept in TOP for passive collection warrant 
additional review to determine the next best course of action to 
maximize collections or other recoveries, such as those possible 
through administrative wage garnishment (AWG) or reporting closed-out 
debts to IRS. For example, DCIA authorized federal agencies to use AWG 
to collect delinquent nontax debts.[Footnote 21] FMS can perform AWG on 
behalf of other federal agencies as part of cross-servicing, although 
only on behalf of agencies that have authorized FMS to do so. FMS began 
using AWG with the assistance of its PCA contractors during fiscal year 
2002. Because most of the debts in TOP for passive collection were 
returned to FMS from PCA contractors before any agencies had authorized 
FMS to use AWG on their behalf, most debts in TOP for passive 
collection have not yet been assessed for AWG collection opportunities. 
Further, as of our fieldwork completion date, only four federal 
agencies had authorized FMS to perform AWG on their behalf.[Footnote 
22] However, FMS expects additional agencies to provide such 
authorization in the future.

In addition, about $449 million of nontax debts in TOP for passive 
collection as of February 28, 2003, will not be collected through 
offset because the statutory and regulatory 10-year limitations for 
offsets has expired for those debts.[Footnote 23] According to FMS 
officials, FMS's cross-servicing system did not remove debts from TOP 
when the debts reached the 10-year limitation, so such debts were not 
evaluated for possible close-out and reporting to IRS.[Footnote 24]

Certain other debts in TOP for passive collection are also unlikely to 
yield any collections through offsets--those for which we determined 
the debtors' Taxpayer Identification Numbers (TIN) were invalid or 
belonged to deceased individuals or cases in which the debtors were 
bankrupt. Specifically, we identified about $24 million of delinquent 
nontax debts for which the debtors' TINs were invalid.[Footnote 25] In 
addition, using the Social Security Administration's (SSA) Death Master 
File, we identified over 2,500 nontax debts totaling about $18 million 
with TINs that belonged to reportedly deceased debtors, including one 
with a referred balance of approximately $4 million.[Footnote 26] This 
debt had been in TOP since November 2001 with no collections through 
offsets. We also identified 69 delinquent Medicare debts belonging to 
the Department of Health and Human Services (HHS) totaling about $12 
million that were being held in TOP after return from secondary PCA 
contractors for which FMS's cross-servicing database indicated that the 
debtors were in bankruptcy.[Footnote 27] According to FMS officials, 
when a bankruptcy is recorded in the cross-servicing database for a 
particular debt, the cross-servicing system marks the debtor as 
bankrupt for all debts associated with that debtor but does not remove 
them from TOP. In-house FMS collectors typically removed from TOP only 
the specific debt that they were working even though others had been 
flagged as belonging to the same bankrupt debtor.

As a result of our analyses and inquiries, FMS has initiated a review 
of debts in TOP to identify those beyond the statutory and regulatory 
10-year limitations for offsets. As of April 2003, FMS had identified 
over 7,300 such debts, totaling about $463 million (an increase of $14 
million over the $449 million of debts we identified as of February 28, 
2003). An FMS official stated that these debts would be removed from 
TOP and evaluated for possible close-out and reporting to IRS as income 
to the debtors. The official also stated that FMS would develop a 
process for routinely identifying such debts. In addition, FMS 
officials stated that FMS will revise its policies and procedures so 
that collectors will be instructed to review the debtor and all 
associated nontax debts whenever a bankruptcy is discovered for a debt 
and determine debts that should be removed from TOP. Finally, FMS 
officials stated that FMS is in the process of developing a new 
automated cross-servicing system, called FedDebt. According to FMS 
officials, once FedDebt is implemented in January 2005, FMS will be 
able to routinely identify individual debts that are in passive 
collection.

FMS Did Not Perform Collection and Close-Out Reviews for All Debts 
Returned to Referring Agencies and Debts in Inactive Status:

Through February 28, 2003, FMS returned to referring agencies about 
$1.1 billion of delinquent nontax debts that had been returned 
uncollected to FMS by secondary PCA contractors during fiscal years 
2000, 2001, and 2002. FMS's cross-servicing procedures require that in-
house FMS collectors, prior to returning debts to referring agencies, 
review the collection activity on the debts to determine whether they 
are eligible to be returned to the referring federal agencies. As part 
of this review, the cross-servicing procedures require collectors to 
determine whether the debts should be closed out and reported to IRS by 
FMS. We found, however, that FMS had summarily returned about 40 
percent of the $1.1 billion to referring agencies without first 
ensuring that the required collection activities had been performed.

According to information in FMS's cross-servicing database, in April 
2002 FMS had a substantial backlog of debts that had been returned to 
FMS by secondary PCA contractors over the past several years that were 
primarily in inactive status, meaning that no collection action was 
taking place. To eliminate this backlog, FMS used its automated system 
to summarily return about 41,000 debts totaling approximately $446 
million to the referring agencies in April 2002. According to agency 
procedures and as confirmed by an FMS official, prior to the April 2002 
return of the debts to the referring agencies, FMS should have first 
evaluated these debts to determine whether close-out was appropriate 
and whether the debts should be reported to IRS. Our analysis showed 
that about $97 million of these returned debts met two criteria for 
being reported by FMS to IRS as income to the debtor: (1) the debts had 
TINs and (2) the referring agencies had granted FMS authority to report 
the debts to IRS.

Our review of the cross-servicing database showed that FMS continues to 
face challenges in reviewing uncollected debts returned from secondary 
PCA contractors. Specifically, as of February 28, 2003, FMS had 
approximately $80 million of debts in inactive status even though its 
PCA contractors returned these uncollected debts to FMS during fiscal 
year 2002. According to an FMS official, the backlog occurred because 
the automated cross-servicing system did not always identify debts 
returned to FMS by secondary PCA contractors that required further 
collection review by in-house FMS collectors. The FMS official stated 
that FedDebt, when implemented in January 2005, would correct this 
problem.

Inadequate Monitoring and Reporting of Closed-Out Debts to IRS:

DCIA gives OMB responsibility for annual reporting to the Congress on 
any problems regarding federal agency progress in improving policies 
and standards for closing out debts,[Footnote 28] and FMS is 
responsible for the form and content of the TROR, which FMS uses to 
monitor federal agencies' implementation of DCIA. Neither OMB nor FMS 
monitored or reported on the extent to which agencies governmentwide 
closed out debts and reported them to IRS. The TRORs for 24 CFO Act 
agencies showed that the agencies reported that about $1 billion of the 
approximately $3.2 billion of nontax debts that were reported closed 
out by those agencies were reported to IRS as income to the debtors for 
calendar year 2002.[Footnote 29] Additionally, the TRORs that the 
agencies used to report did not disclose why closed-out debts were not 
reported to IRS and did not include closed-out debts that had been 
previously classified as currently not collectible (CNC). These are 
significant reporting deficiencies because without such information, 
the TRORs cannot be used to determine the extent to which all eligible 
debts are closed out and reported to IRS. As a result of inadequate 
monitoring and reporting of closed-out debts to IRS, opportunities for 
recovery by reporting closed-out debts to IRS as income to debtors may 
have been lost.

Neither OMB nor FMS officials could specifically explain why certain 
agencies had reported different amounts for debts closed out and debts 
reported to IRS. According to an OMB official, OMB does not have a 
formal process in place to review federal agencies' standards and 
policies regarding debt collection, including reporting closed-out 
debts to IRS, and does not monitor the extent to which agencies close 
out debts and report them to IRS. The OMB official stated that OMB 
examiners, at their own discretion, might look at how federal agencies 
are closing out debts as part of the examiners' overall evaluation of 
the agencies' implementation of the President's Management 
Agenda.[Footnote 30] According to the official, OMB has not submitted 
any reports to the Congress regarding problems with agencies' standards 
and policies for closing out debts and reporting them to IRS.

FMS officials stated that the large difference on the agencies' TRORs 
between closed-out debts and debts reported to IRS may be attributable 
to situations involving debts that are not required to be reported to 
IRS.[Footnote 31] However, FMS does not require federal agencies to 
disclose such information in their TRORs. Without such disclosures in 
the TRORs, it is not possible for FMS, OMB, or any other interested 
party to determine whether federal agencies are reporting their closed-
out debts to IRS accurately and completely.

Moreover, the agency TRORs understated the amount of debt closed out 
during calendar year 2002. Specifically, we determined and FMS 
officials acknowledged that the $3.2 billion of debts that were 
reported closed out by the 24 CFO Act agencies did not include debts 
previously classified as CNC that were subsequently closed out. This is 
a significant deficiency in the TROR because CNC debts that are 
eventually closed out can be substantial. For example, the 24 CFO Act 
agencies reported about $10.1 billion of CNC debts at the end of 
calendar year 2002. Without information on whether CNC debts are closed 
out, the TRORs cannot be used to fully determine the extent to which 
all debts are closed out and reported to IRS. In spite of these 
reporting deficiencies, FMS officials stated that FMS does not have any 
plans to revise the TROR.

FMS Missed Certain Opportunities to Improve Overall Collections:

In addition to taking little action to improve collections for debts 
that were returned uncollected by PCA contractors, FMS missed certain 
opportunities to improve overall cross-servicing collections. FMS did 
not establish effective processes or procedures for identifying debts 
to forward to DOJ. As a result, FMS had relatively few debts (about $30 
million as of February 28, 2003) at DOJ for enforced collection action 
even though DOJ has been successful in collecting debts through civil 
litigation in the past. In addition, FMS did not report all eligible 
debts that had been referred for cross-servicing to TOP, as required by 
its cross-servicing procedures, and did not report secondary debtors, 
such as cosigners, to TOP.

FMS Missed Enforced Collection Opportunities:

DOJ serves as the federal government's "collector of last resort." When 
a federal agency, including FMS, cannot collect certain debts 
administratively, DOJ can litigate the claims and, with judicial 
oversight, enforce collections by seizing bank, stock, and similar 
accounts from debtors; seizing and selling debtor-owned real estate and 
other property; and garnishing a higher percentage of debtors' wages 
than AWG under DCIA allows.[Footnote 32] The benefits of enforced 
collection are reflected in past DOJ recoveries. In its fiscal year 
2002 report to the Congress, FMS noted that DOJ collected about $10.9 
billion in cash recoveries through civil litigation from fiscal year 
1998 through fiscal year 2002.

The Federal Claims Collection Standards require federal agencies to 
promptly refer debts that have a principal balance of at least $2,500 
to DOJ when the debts cannot be collected through either compromise or 
aggressive collection action and do not meet criteria for suspending or 
terminating collection action.[Footnote 33] Accordingly, OMB Circular 
A-129 requires federal agencies, including FMS as the federal 
government's central debt collection agency, to refer delinquent debts 
to DOJ as soon as there is sufficient reason to conclude that full or 
partial recovery of the debts can best be achieved through litigation.

FMS acknowledges that DOJ referrals are an important part of cross-
servicing. In its annual report to the Congress on federal agencies' 
debt collection activities, FMS reported that referrals to DOJ for 
civil litigation governmentwide decreased significantly over the last 3 
fiscal years, from 50,572 debts in fiscal year 2000 to 8,443 debts in 
fiscal year 2002. As federal agencies continue to implement DCIA and 
make progress in promptly referring eligible debts that are over 180 
days delinquent to FMS for collection action in accordance with the 
act's requirements, reported decreases in federal agency referrals to 
DOJ for enforced collection can be expected as would increases in FMS 
referrals due to the shift in collection responsibilities from the 
agencies to FMS. Generally, a determination that a debt should be 
referred to DOJ cannot reasonably be made until appropriate cross-
servicing collection action has taken place. In working with federal 
agencies to facilitate implementation of DCIA, FMS emphasizes that 
referral of a debt to DOJ for enforced collection is a key cross-
servicing tool. FMS makes clear to agencies that it will (1) prepare 
the forms necessary for referring debts to DOJ,[Footnote 34] (2) work 
with DOJ to obtain necessary information from the agencies to litigate 
the claims, (3) monitor the debts while they are at DOJ, and (4) apply 
DOJ collections to the debts.

FMS, based on consultations with DOJ, established the following 
conditions for its referral of agency debts to DOJ: (1) the federal 
creditor agency has authorized FMS to refer its debts to DOJ, (2) the 
principal amount of the debt is $25,000 or more, (3) there is at least 
1 year before the statute of limitations expires, (4) FMS has a debtor 
address (or other debtor contact information for service-of-process 
purposes), and (5) FMS has evidence that the debtor has assets or a 
source of income. As appropriate, FMS also expects to refer debts to 
DOJ when some, but not all, of the criteria are met. For example, FMS 
might refer debts less than $25,000 when bank accounts have been 
identified.

In spite of FMS's key role in determining whether debts referred for 
cross-servicing should be referred to DOJ for enforced collection, only 
a nominal amount of cross-serviced debt was at DOJ. Specifically, as of 
February 28, 2003, only about $30 million of the approximately $6.6 
billion of debts with FMS for cross-servicing were at DOJ. Moreover, as 
shown in figure 2, all but about $4 million of the debts FMS had 
referred to DOJ were referred prior to fiscal year 2000, suggesting 
that FMS had not emphasized adjudication as a collection tool.

Figure 2: FMS-Referred Debts at DOJ as of February 28, 2003, by Fiscal 
Year Referred:

[See PDF for image]

Note: Derived from analysis of FMS's cross-servicing database.

[End of figure]

According to an FMS official, prior to fiscal year 2002, FMS had no 
specific process to evaluate cross-serviced debts to determine whether 
recovery could best be achieved by DOJ. Rather, the FMS official 
stated, FMS relied on the referring agencies to identify delinquent 
debts to refer to DOJ. In addition, FMS's in-house collectors, using 
their own discretion during the normal course of their collection 
activities, could identify specific debts for referral to DOJ.

In fiscal year 2002, FMS, in an effort to increase referrals to DOJ, 
began performing quarterly queries of its cross-servicing database to 
identify uncollected debts for referral to DOJ. The queries, while 
conceptually good, did not cover most of FMS's cross-servicing 
portfolio. Rather, they were limited to debts with principal balances 
$25,000 or over that were classified as inactive or "special handling." 
As of February 28, 2003, FMS had identified nine debts totaling about 
$4 million for DOJ referral using this smaller segment of its cross-
servicing database.

Reviewing only debts classified as inactive or "special handling" with 
principal balances over $25,000 is unlikely to result in many 
candidates for FMS referral to DOJ because of the nature of these debts 
and the amounts covered. Specifically, for many of the debts in 
inactive status, FMS does not have TINs, which are required for DOJ 
referral, or the debtors are in bankruptcy.[Footnote 35] Debts 
classified as "special handling" are debts that collectors have 
identified as needing special processing because they want to keep the 
cases at the debt collection center. For example, a collector may place 
a debt in "special handling" if the collector is in negotiations with 
the debtor over a payment plan. We applied FMS's database query method 
to debts classified as inactive and "special handling." Our query 
identified about $198 million of uncollected debts, which represented 
about 3 percent of the amount in cross-servicing. We determined that 
the majority of these debts were not good candidates for DOJ referral. 
Specifically, about $106 million of such debts either (1) lacked agency 
authorization for referral to DOJ, (2) were involved in bankruptcy 
proceedings, (3) were beyond the general 6-year statute of limitations 
for litigation of nonjudgment debts, or (4) lacked TINs.

We would consider it reasonable for FMS to query a larger segment of 
its cross-servicing database. In particular, debts held in TOP for 
passive collection would seem to be better candidates for DOJ referral 
because they should have valid TINs and are not supposed to be in 
bankruptcy. This segment of the cross-servicing debt portfolio is 
rather large. We determined that FMS had approximately $2.2 billion of 
debts in TOP with principal balances of at least $2,500 that had been 
returned from its secondary PCA contractors and that were within the 6-
year statute of limitations for litigating nonjudgment debt.[Footnote 
36] Unless FMS starts expanding the scope of its reviews for potential 
referrals to DOJ, the statute of limitations for these debts will 
likely expire without any opportunity for enforced collection action. 
Our assessment of FMS's database as of February 28, 2003, showed that 
about $449 million of debts with principal balances of at least $2,500 
likely had their statute of limitations expire while they were held in 
TOP for passive collection. We determined that all of these debts would 
have been possible candidates for referral to DOJ, since they had been 
returned from FMS's secondary PCA contractors with at least 1 year 
remaining before the statute of limitations expired.

FMS also did not routinely consider or act on advice from its PCA 
contractors regarding referrals to DOJ. Because PCA contractors' 
responsibilities include locating debtors and determining whether they 
have incomes or assets to repay delinquent debts, the PCA contractors 
would have a reasonable basis for identifying uncooperative debtors who 
could repay their debts but had refused. FMS's PCA Operations and 
Procedures Manual requires FMS's PCA contractors to provide 
recommendations to FMS on the next collection actions that should be 
taken on individual debts, such as referral to DOJ for 
litigation.[Footnote 37] According to the manual, litigation should be 
recommended when the PCA contractor believes that the debtor has 
sufficient assets for debt repayment and that no less costly method of 
collection would be effective. Our analysis showed that FMS was holding 
debts totaling about $47 million in TOP for passive collection that had 
principal balances over $2,500 for which PCA contractors had 
recommended litigation.[Footnote 38] We noted that FMS's cross-
servicing database showed that these debts were within the general 6-
year statute of limitations for litigating nonjudgment debts and had no 
apparent barriers to litigation, such as debtor bankruptcy or a 
deceased debtor.

FMS officials stated that FMS does not routinely review recommendations 
made by its PCA contractors because FMS does not believe such 
recommendations are reliable. In this regard, we noted that FMS's PCA 
Operations and Procedures Manual does not set forth the specific FMS 
criteria for selecting debts for DOJ referral. In addition, FMS does 
not tell PCA contractors which creditor agencies have authorized FMS to 
refer debts to DOJ on the agency's behalf. It is important to note that 
only about $3 million, or less than one-tenth of 1 percent, of the 
approximately $3.9 billion of uncollected debts that were returned to 
FMS from its secondary PCA contractors during fiscal years 2000, 2001, 
and 2002 were at DOJ.

Moreover, while FMS had referred only limited amounts of cross-serviced 
debt to DOJ for litigation, FMS lacked a history of its prior referral 
activity and knowledge of the results of such referrals. FMS officials 
stated that FMS does not use the cross-servicing database to track DOJ 
referrals; however, we found that the database has status and 
collection activity codes capable of being used for such tracking. FMS 
officials acknowledged the need to track all DOJ referrals and stated 
that FMS will ensure that FedDebt will be able to track all debts that 
FMS has referred to DOJ.

FMS Did Not Fully Use TOP:

FMS's policies and procedures require in-house FMS collectors to report 
all eligible debts to TOP early in the cross-servicing process, before 
sending them to FMS's PCA contractors. In fiscal year 2000, we reported 
that FMS did not promptly report eligible debts to TOP as its 
procedures required. Computer interface problems and errors by in-house 
FMS collectors were cited as reasons for not promptly reporting all 
eligible debts to TOP.[Footnote 39] Problems regarding TOP referrals 
continue as FMS's cross-servicing database as of February 28, 2003, 
showed that about 1,800 debts that were eligible for TOP, with referred 
balances totaling about $356 million, were at PCA contractors but had 
never been put into TOP by FMS's collectors. We did not identify any 
apparent factors that would have precluded FMS's collectors from 
reporting these debts to TOP. The database showed that the debts were 
eligible for TOP in that the referring agencies had authorized FMS to 
report the debts to TOP, the debtors had TINs, the debtors were not in 
bankruptcy or deceased, and the debts were not over 10 years 
delinquent.

The delays in reporting these debts to TOP were extensive. As of 
February 28, 2003, about $215 million of these debts with an average of 
approximately 320 days in cross-servicing were at the secondary PCA 
contractor without having been sent to TOP. One of the more egregious 
delays involved a debt referred by an agency in October 2001 for about 
$43 million that had been in cross-servicing for over 500 days without 
ever having been reported to TOP.

FMS officials stated that they are aware that eligible debts are not 
always being reported to TOP. They told us that debts might not be 
reported to TOP because the cross-servicing automated system does not 
always identify debts that should be reported. For example, FMS 
officials stated that if the system failed during its nightly batch 
processing, the debts that would otherwise have been flagged for 
reporting to TOP would be missed. FMS officials stated that the cross-
servicing system could not go back and routinely identify debts that 
were missed. Thus, as acknowledged by FMS officials, FMS would have to 
perform a periodic sweep of the entire database to identify eligible 
debts that were missed for reporting to TOP. In response to our 
inquiries, FMS officials stated that FMS will take action to ensure 
that FedDebt includes features to correct this problem when it is 
implemented in January 2005.

FMS is also not seizing the opportunity to report secondary debtors to 
TOP. Our analysis of FMS's cross-servicing database as of February 28, 
2003, showed that about $144 million of the approximately $5 billion of 
cross-serviced debts in TOP had secondary debtors with TINs. According 
to FMS officials, both the TOP and cross-servicing automated systems 
are debt-based, rather than based on both debt and debtor. As such, TOP 
cannot be used to identify all debtors associated with a debt, a 
problem we noted to FMS about 5 years ago. Even if TOP would accept 
these data, the cross-servicing system cannot provide them, since it is 
now capable of sending only one debtor per debt to TOP. FMS officials 
stated that FMS is in the process of enhancing TOP to accept multiple 
debtors for a single debt and that the TOP enhancement should be 
implemented in fiscal year 2004. The officials also stated that FMS 
will ensure that FedDebt will be capable of referring multiple debtors 
to TOP when it is implemented in January 2005.

Problems Identified with Debt Compromises and a Key Performance 
Measure:

FMS did not sufficiently ensure that nontax debts that were forgiven 
through compromises with debtors by its in-house collectors or its PCA 
contractors were done so in an operationally sound manner. FMS's cross-
servicing database as of February 28, 2003, showed that FMS and its PCA 
contractors forgave a total of at least $51 million of delinquent 
nontax debts through compromises with debtors during fiscal years 2000, 
2001, and 2002. For FMS in-house compromises, this included only those 
compromise agreements that had been settled and paid in full. The 
cross-servicing database did not identify forgiven amounts for 
agreements that were still active or defaulted. In addition, it is 
unclear whether certain forgiven amounts should have been forgiven or 
by how much, since FMS's PCA contractors often did not document why 
they compromised debts and often did not obtain sufficient support and 
justification for the compromises. Further, FMS overstated federal 
agencies' progress in referring eligible nontax debts for cross-
servicing. Specifically, FMS incorrectly reported that agencies had 
referred 96 percent of their eligible debts for cross-servicing for 
fiscal year 2002, rather than the actual rate of 79 percent based on 
our analysis of information provided by FMS. This discrepancy occurred 
because FMS did not include any debts that were reported as having 
become eligible for referral for cross-servicing during fiscal year 
2002 and did not deduct the amounts of certain debts that it returned 
to referring agencies during fiscal year 2002.

Information Regarding Debt Compromises Was Not Sufficient:

The soundness of FMS's cross-servicing program can be undermined if 
certain debtors receive more generous treatment as a result of 
compromise agreements than other similarly situated debtors. While the 
amount of debt forgiven as noted above was not substantial, the 
consistency with which delinquent debts are forgiven and the extent to 
which federal requirements are adhered to in arriving at such decisions 
are vital. Therefore, it is critically important for FMS to (1) 
accurately track debt amounts forgiven, (2) obtain documented support 
for the compromise agreements, and (3) obtain TINs for the debtors. In 
August 2000, as part of our overall report on FMS's cross-servicing 
program, we reported that the majority of FMS compromise agreements we 
reviewed, including those made by PCA contractors, did not include 
support for the forgiven amounts.[Footnote 40] In following up on FMS's 
compromise activity, we found that FMS's cross-servicing system did not 
track the forgiven amounts for all debts that had been compromised 
during fiscal years 2000, 2001, and 2002. In addition, FMS's PCA 
contractors often did not document why they compromised debts and often 
did not obtain sufficient support for the compromise agreements, 
including debtors' TINs, which are needed to report the forgiven 
amounts to IRS.

The Federal Claims Collection Standards state that federal agencies may 
compromise debts if (1) the debtor is unable to pay the full amount in 
a reasonable time, as verified through credit reports or other 
financial information; (2) collection in full cannot be achieved within 
a reasonable time by enforced collection proceedings; (3) the cost of 
collection does not justify the enforced collection of the full amount; 
or (4) there is significant doubt concerning the government's ability 
to prove its case in court. According to the standards, in determining 
the debtor's inability to pay, agencies should consider a number of 
factors as verified by the debtor's credit report and other financial 
information, including financial statements that show the debtor's 
assets, liabilities, income, and expenses.

In addition, FMS's PCA contract requires its PCA contractors to 
document their attempts to collect the full amount of delinquent debts 
and provide justification for compromises. In the absence of adequate 
documentation supporting the PCA contractor's determination to 
compromise a debt for a specific amount, FMS cannot determine whether 
the compromise is reasonable under the Federal Claims Collection 
Standards. Thus, FMS has no basis to determine whether the government 
suffered a loss that should not have been incurred as a result of such 
a compromise. We also determined that the PCA contract does not 
establish liquidated damages or penalties for a PCA contractor's 
failure to document a compromise.

As part of our review, we attempted to obtain the forgiven amount for 
each compromise agreement established by in-house FMS collectors during 
fiscal years 2000, 2001, and 2002, to determine whether the bases for 
the forgiven amounts had been supported and documented by FMS's in-
house collectors. However, FMS could not provide us the forgiven amount 
for each compromise agreement because the cross-servicing system only 
identifies the forgiven amount for compromise agreements that have been 
settled in full. Thus, FMS could not provide us the forgiven amounts 
for compromise agreements that were active or in default.

Absent information on forgiven amounts for all compromise agreements, 
FMS cannot track the extent to which its collectors are compromising 
agency-referred debts and the bases for the compromises. According to 
an FMS official, FMS acknowledges that such information is critical to 
sound cross-servicing operations and, as a result of our inquiries, 
plans to incorporate the ability to identify and track all forgiven 
amounts in the FedDebt system.

According to FMS officials, in fiscal year 2002, FMS began to review 
repayment and compromise agreements made by its PCA contractors as part 
of its annual PCA contractor compliance reviews. During these reviews, 
FMS generally found that all PCA contractors failed to consistently 
document in their respective debt collection systems the justification 
for accepting installment payments and compromise agreements.[Footnote 
41] As a result of FMS's findings, each PCA contractor agreed to 
conduct training sessions for its collectors or take other corrective 
actions to help ensure that the collectors properly obtain and document 
support for forgiven amounts.

In spite of FMS's reviews of the compromise activity of its PCA 
contractors and related findings pertaining to the lack of documented 
support for the compromises, we found that PCA contractors were still 
not providing sufficient support for compromises during the first 5 
months of fiscal year 2003. Specifically, we found that 22 percent of 
the sampled compromised debts had no evidence that the PCA contractor 
had attempted to obtain a lump sum payment in full or a repayment 
agreement for the full amount prior to compromising the debt.[Footnote 
42] For example, one debt involved a debtor who offered to pay the full 
debt balance of approximately $14,000 in installments. However, without 
explanation, the PCA contractor offered to compromise the debt by 20 
percent if the debtor would pay right away. The debtor accepted the 
compromise offer. Moreover, this PCA contractor encouraged compromise 
activity prior to exhausting attempts to collect debts in full by 
sending out pro forma letters to debtors stating that the contractor 
may be authorized to compromise a portion of their debt should the 
debtor be in a position to pay the remaining balance.

In addition, 72 percent of the compromised debts in our sample did not 
have supporting documentation indicating why the PCA contractors 
compromised the debts or the bases used to determine how these debts 
met Federal Claims Collection Standards criteria for 
compromise.[Footnote 43] For 81 percent of the compromised debts in our 
sample, PCA contractors did not have complete financial statements, and 
for 30 percent of the compromised debts, PCA contractors did not have 
credit bureau reports to support the compromises.[Footnote 44]

It should be noted that a PCA contractor is required to submit to FMS 
the debtor's financial statement and credit bureau report for review 
only if the compromise percentage of the debt exceeds the compromise 
percentage that is authorized by FMS or the referring agency. We found 
that for 36 of the 54 compromised debts in our sample, the PCA 
contractors compromised up to the amount that was allowed by FMS or the 
referring agencies. For example, one PCA contractor allowed a debtor to 
pay approximately $46,000 to settle a debt that had an outstanding 
balance of about $58,000. The forgiven amount fell within the 
compromise parameter that had been established by the referring agency. 
However, the PCA contractor did not (1) attempt to collect payment in 
full, (2) provide any explanation to justify the compromise, or (3) 
obtain the debtor's complete financial statement and credit report. 
Because the PCA contractor did not exceed the compromise parameter 
established by the referring agency, it was able to compromise the debt 
without submitting the debtor's financial statements and credit report 
to FMS for review.

FMS officials stated that PCA contractors are required to document 
their attempts to obtain payment in full and justification for offering 
or accepting a compromise even when the compromise is within agency 
parameters. According to FMS officials, FMS discussed this issue with 
its PCA contractors in October 2002 and reiterated the importance of 
documenting the justification for compromising debts and obtaining 
financial statements and credit bureau reports to support the 
compromises. FMS officials stated that FMS would continue to look at 
compromise agreements in future PCA compliance reviews to help ensure 
that PCA contractors are providing justification and obtaining the 
financial statements and credit bureau reports necessary for entering 
into a compromise agreement.

Moreover, FMS's PCA contractors did not always attempt to obtain or 
report to FMS the TINs of debtors who were granted compromises. 
Specifically, we found that 17 percent of the compromised debts in our 
sample did not have TINs because the PCA contractors either did not 
request the TINs from the debtors or did not report the TINs to 
FMS.[Footnote 45] Without TINs for debtors, neither FMS nor the 
referring agencies were able to report the forgiven amounts of the 
compromised debts to IRS as income to the debtors. In addition, without 
a TIN, if the debtor defaults on the compromise agreement, the debt 
cannot be reported to TOP. According to FMS officials, FMS is 
continuing to monitor the compromise agreements made by its PCA 
contractors to help ensure that the contractors obtain and report TINs 
to FMS. In addition, as a result of our inquiries, FMS plans to issue a 
technical bulletin to its PCA contractors to remind them of the need to 
obtain and report TINs.

FMS Overstated Progress in a Key Performance Measure:

DCIA requires Treasury to report to the Congress each year on the debt 
collection activities of federal agencies, including FMS as the 
government's central debt collection agency. A key performance measure 
that FMS reports each year is the percentage of debt eligible for 
cross-servicing that has been referred by federal agencies. In fiscal 
year 2000, we reported that FMS did not properly calculate this key 
performance measure because the reported amount of debt referred for 
cross-servicing was not comparable to the reported amount of eligible 
debt. Specifically, FMS overstated the debt referral amount by 
accumulating the referred amount for about 3 and a half years. We 
recommended that FMS revise its reporting of debt amounts referred for 
cross-servicing to reflect the extent to which eligible debts reported 
by agencies as of a specific date have been referred to FMS.[Footnote 
46]

In its fiscal year 2002 report to the Congress, FMS reported that $7.9 
billion, or 96 percent, of the $8.2 billion of eligible debt had been 
referred for cross-servicing as of fiscal year-end and cited the high 
referral rate as a notable accomplishment. However, FMS's reports 
continue to overstate the progress made in this highly touted cross-
servicing performance measure. Specifically, FMS understated debts that 
were eligible for cross-servicing and overstated debts that had been 
referred for cross-servicing, which significantly overstated the 
reported extent to which agencies had referred eligible debts for 
cross-servicing. As shown in table 1, the governmentwide cross-
servicing referral rate at the end of fiscal year 2002 was about 79 
percent, rather than 96 percent as reported by FMS. This is a 
significant difference given that FMS officials consider the cross-
servicing program to be fully mature and federal agencies should be 
referring eligible debts when they are over 180 days delinquent.

Table 1: Debt Referral Rate of Cross-Serviced Debts for Fiscal Year 
2002:

Dollars in billions.

Eligible for referral for cross-servicing; FMS-reported amounts: $8.2; 
Adjusted amounts: $8.5.

Referred for cross-servicing; FMS-reported amounts: $7.9; Adjusted 
amounts: $6.7.

Referral rate for cross-servicing; FMS-reported amounts: 96%; Adjusted 
amounts: 79%.

Source: FMS.

[End of table]

According to the TRORs for the fourth quarter of fiscal year 2002, 
federal agencies governmentwide had about $8.5 billion, not $8.2 
billion, of debt eligible for referral at the end of the fiscal year. 
In determining the amount of eligible debt for referral for cross-
servicing, FMS inappropriately used the amount of debt eligible for 
cross-servicing referral at the end of fiscal year 2001. As such, FMS 
did not include any of the approximately $300 million of debts that 
were reported as having become eligible for referral for cross-
servicing during fiscal year 2002. Thus, FMS understated the amount of 
eligible debt for fiscal year 2002 by about $300 million.

In addition, FMS noted in its fiscal year 2002 report to the Congress 
that the debts reported as referred for cross-servicing did not include 
those that were no longer being actively collected by FMS. However, FMS 
generally did not deduct from its reported referral amounts debts that 
were returned to the referring agencies during fiscal year 2002. 
According to FMS officials, FMS calculated the referral amount by 
adding debts that agencies referred to FMS during fiscal year 2002 to 
the amount of referred debt that FMS held for cross-servicing at the 
end of fiscal year 2001. FMS officials stated that they typically only 
reduced the referred debt amount when a debt was returned to the 
referring agency in the same month that the agency referred the debt to 
FMS. However, by not deducting the amount for all referred debts that 
were returned to agencies, the referred debt amount did not reflect the 
amount of debt that had been referred by agencies and was held by FMS 
for cross-servicing at fiscal year-end.[Footnote 47] According to FMS's 
cross-servicing database, at the end of fiscal year 2002, FMS held 
about $6.7 billion of debts that had been referred by federal agencies 
for cross-servicing. In contrast, FMS reported $7.9 billion of debts 
referred for cross-servicing in its report to the Congress, an 
overstatement of about $1.2 billion.

Conclusions:

FMS continues to have opportunities for enhancing the effectiveness of 
its cross-servicing of delinquent nontax debt. Efficient and effective 
processes are needed for timely determining the next appropriate steps 
for debts that are not collected by FMS's PCA contractors. As noted in 
our report, lack of adequate processes and systems weaknesses led to 
missed opportunities to refer cases to DOJ for enforced collection, 
failure to use payment offset tools for a large block of debt, and 
delays in decisions to stop collection efforts on old debt and report 
it to IRS as income for those who had not paid outstanding amounts. In 
addition, due to the lack of monitoring by FMS and OMB, there is no 
assurance that all eligible closed-out nontax debt is reported to IRS. 
These lapses in oversight and systematic administration of unpaid 
debts, combined with continuing problems in FMS's PCA contractors' 
administration of offers to forgive a portion of outstanding amounts as 
inducements to pay the remainder, perpetuate our concerns about FMS's 
efforts to pursue and collect unpaid nontax debts.

Recommendations for Executive Action:

To help ensure that all appropriate collection action is taken on debts 
returned from FMS's PCA contractors, we recommend that the Secretary of 
the Treasury direct the Commissioner of FMS to take the following 
actions:

* Identify debts kept in TOP for passive collection through the 
implementation of FedDebt and, in the interim, utilize appropriate 
analytical database software to identify such debts.

* Establish and implement procedures to periodically review debts that 
are kept in TOP for passive collection to determine the next best 
course of action for the debts to maximize collections or other 
recoveries.

* After all collection activities have been exercised, determine 
whether debts should be closed out and reported to IRS by FMS, and, if 
not, promptly return them to the referring agencies.

* Establish and implement procedures to periodically review debts that 
are kept in TOP for passive collection to determine whether the statute 
of limitations has expired or any other conditions, such as bankruptcy, 
exist that would prevent offset of the debts in TOP.

* Remove debts from TOP that are not eligible for offset and determine 
whether the debts should be closed out and reported to IRS or returned 
to the referring agency.

* Establish and implement procedures to periodically monitor debts that 
are held in inactive status to avoid debt backlogs and to help ensure 
that all debts are promptly reviewed to determine whether additional 
collection action or close-out and reporting to IRS is warranted. 
Monthly may be a reasonable interval for performing such monitoring.

To help ensure that all federal agencies are appropriately reporting 
closed-out debts to IRS, we recommend that the Secretary of the 
Treasury direct the Commissioner of FMS to take the following actions:

* Require all federal agencies to disclose in their TRORs any 
significant differences between the amount of debt reported as closed 
out and the amount of debt reported to IRS and the reasons for those 
differences.

* Revise information requirements for the TROR to include the amount of 
CNC debts that are closed out.

We also recommend that the Director of OMB direct the Controller of 
OMB's Office of Federal Financial Management to:

* remind agencies of their obligation to comply with the standards and 
policies of individual agencies for writing off and closing out debts, 
as required by the DCIA and OMB Circular A-129;

* require agencies to initiate actions to review and correct any 
deficiencies they find during their review;

* require agencies to report to OMB on their policies, deficiencies, 
and corrective actions, if any; and:

* report annually to the Congress on the deficiencies, if any, found at 
the agencies and the progress in resolving any deficiencies found.

To increase opportunities for collecting debts, we recommend that the 
Secretary of the Treasury direct the Commissioner of FMS to take the 
following actions:

* Revise the database query methodology FMS uses to identify cross-
serviced debts for DOJ referral. The methodology should include debts 
kept in TOP for passive collection and should also incorporate 
information from FMS's PCA contractors.

* Incorporate FMS's criteria for selecting debts for DOJ referral in 
FMS's PCA Operations and Procedures Manual.

* Remind PCA contractors of the importance of enforced collection and 
that their recommendation for next collection action, including 
litigation, is a critical part of their responsibilities, and inform 
the PCA contractors of the agencies that have authorized FMS to refer 
debts to DOJ on the agencies' behalf.

* Establish and implement procedures to track all debts FMS has 
referred to DOJ and ensure that the FedDebt system is capable of 
tracking all debts that FMS refers to DOJ.

* Establish and implement procedures to monitor all debts in cross-
servicing to help ensure that debts are promptly reported to TOP, 
including periodically sweeping the portfolio to send debts to TOP.

* Implement enhancements to the TOP system so that it can accept 
multiple debtors for a single debt, and ensure that the FedDebt system 
will be capable of being used to report secondary debtors to TOP.

To help maximize the soundness of the cross-servicing program, we 
recommend that the Secretary of the Treasury direct the Commissioner of 
FMS to take the following actions:

* Establish procedures to monitor and track all debt amounts forgiven 
by in-house FMS collectors and ensure that the FedDebt system 
identifies the forgiven amounts for all compromise agreements 
established by in-house FMS collectors.

* Reinforce PCA contractors' adherence to the compromise requirements 
set forth in the PCA contract for documenting the attempt to collect 
the full amount of a debt prior to its compromise.

* Reinforce PCA contractors' adherence to the compromise requirements 
set forth in the Federal Claims Collection Standards for obtaining a 
debtor's financial information, such as credit reports and complete 
financial statements, to determine the debtor's inability to pay the 
full amount of the debt.

* Reinforce PCA contractors' adherence to the compromise requirements 
set forth in the PCA contract for documenting the justification for the 
compromise of a debt.

* Incorporate liquidated damages or a penalty provision in the next PCA 
contract for failure of PCA contractors to document a compromise in 
accordance with contract requirements.

* Remind PCA contractors, through a technical bulletin or other means, 
of the importance of obtaining debtors' TINs when compromising debts.

* Fully implement our recommendation made in fiscal year 2000 to revise 
FMS's key performance measure on cross-servicing referrals so that the 
extent to which federal agencies have referred debts to cross-servicing 
directly corresponds to the eligible debts as of fiscal year-end. 
Specifically, the debt-eligible amount should reflect the amount 
reported by federal agencies as of fiscal year-end, and the debt-
referred amount should reflect the amount in cross-servicing as of 
fiscal year-end.

Agency Comments and Our Evaluation:

In written comments on a draft of this report, reprinted in appendix 
II, Treasury's FMS said that it concurred with most of the findings and 
that many of the findings and recommendations had already been 
addressed. FMS stated that enhancements to the systems that serve 
cross-servicing and PCA functions have resolved a number of issues and 
that the advent of FedDebt will further improve cross-servicing 
operations. However, FMS raised a number of points regarding certain of 
our findings and recommendations that missed the central concerns 
conveyed in our report and tended to downplay the significance of these 
concerns. The following discussion highlights and responds to the 
points FMS raised.

FMS stated that the findings in the report did not reflect critical 
operational issues and only affected a very small percentage of its 
cross-servicing portfolio. FMS expressed concern that we greatly 
expanded the scope of our work beyond the parameters that we originally 
set and focused on a range of opportunities to improve the cross-
servicing program that had little or no relation to the reporting of 
uncollectible debt.

We disagree. Specifically, referral of debts to DOJ for litigation and 
TOP for offset, monitoring of the compromise of debts by FMS and its 
PCA contractors, and identification and reporting of uncollectible debt 
amounts to IRS are all critical operational issues. Moreover, as 
discussed in the report, we found several problems related to FMS's 
identification and monitoring of debts held in TOP for passive 
collection, which represented over half the debts in FMS's $6.6 billion 
cross-servicing portfolio as of February 28, 2003. These issues, when 
considered in conjunction with issues we have cited in previous 
reports, such as limited implementation of administrative wage 
garnishment (AWG)[Footnote 48] and lack of independent verification of 
the accuracy, completeness, and validity of debts reported by agencies 
as eligible for or excluded from DCIA cross-servicing 
provisions,[Footnote 49] raise serious concerns about FMS's progress in 
addressing the challenges it faces in implementing the cross-servicing 
program.

We also disagree with FMS's assertion that we expanded the scope of our 
review beyond what we conveyed to Treasury at the beginning of the 
assignment. In our August 2002 letter to the Secretary of the Treasury 
and our subsequent entrance conference with FMS officials in October 
2002, we stated that our objectives were to evaluate (1) actions taken 
by FMS on uncollected nontax debts returned from its PCA contractors; 
(2) FMS's efforts to ensure that eligible uncollectible nontax debts, 
which federal agencies rely on FMS to report on their behalf to IRS as 
income to the debtors, are promptly identified and accurately reported; 
and (3) actions taken, if any, by FMS to ensure that federal agencies 
are reporting their eligible uncollectible nontax debts to IRS as 
income to the debtors. As stated in our report, our review addressed 
these objectives. In addition, in performing our work to address these 
objectives, we identified opportunities for FMS to improve collection 
of nontax debts through cross-servicing and enhance the soundness of 
certain operational and reporting facets of its cross-servicing 
program. In meeting our audit responsibilities, we must inform 
management of any significant issues identified during our work.

FMS suggests that our report unfairly characterizes FMS's efforts to 
collect debts through offset as "minimal" and that it criticizes FMS 
for collection activities that agencies have not delegated to it. FMS 
stated that TOP is its most effective collection tool, many agencies 
rely on TOP for the bulk of their collections, and significant 
collection opportunities could be lost if debts were removed from TOP 
prematurely. FMS stated that since the cost to collect through TOP is 
low, it is generally in the best interest of the government to attempt 
offset for as long as statutorily authorized before terminating 
collections and discharging the debt. FMS said that it is at creditor 
agencies' discretion to leave debts returned from PCA contractors in 
TOP for passive collection.

We agree that for certain debts, TOP can be an effective mechanism for 
collection, especially when used in conjunction with other debt 
collection activities. However, passive collection does not entail any 
collection action other than minimal efforts through TOP. As stated in 
the report, for debts held in passive collection, TOP is the only 
collection tool in use. Therefore, collection opportunities from the 
use of other collection tools, such as litigation and AWG, are lost for 
these debts. As we state in this report, FMS had collected only about 
$9 million, or about two-tenths of 1 percent, of the $3.7 billion of 
debts held in TOP for passive collection as of February 28, 2003. To 
increase the opportunities to collect these debts, we recommended that 
FMS periodically review debts kept in TOP for passive collection to 
determine the next best course of action for the debts, such as AWG or 
litigation, to maximize collections or other recoveries.

Moreover we did not recommend in our report that FMS remove debts from 
TOP prematurely. Rather, we stated that many of the debts kept in TOP 
for passive collection were unlikely to yield any collections through 
offsets because they were beyond the 10-year statutory and regulatory 
limitations applicable to offset or had other barriers, such as 
bankruptcy, that would prevent offset of the debts. Thus, we 
recommended that FMS establish and implement procedures to periodically 
review debts that are kept in TOP for passive collection to determine 
whether the statute of limitations has expired or any other conditions 
exist that would prevent offset of the debts and remove debts from TOP 
that are not eligible for offset and determine whether the debts should 
be closed out and reported to IRS or returned to the referring agency.

We also disagree with FMS's implication that we unfairly criticized FMS 
for not undertaking Form 1099C reporting activities that agencies have 
not delegated to it. Our review indicated that it would be highly 
unlikely for creditor agencies to be able to identify specific debts in 
cross-servicing that are kept in TOP for passive collection. FMS 
advised us that because of system limitations, it could not identify 
specific debts that are merely being held in passive collection after 
being returned from PCA contractors. However, we were able to readily 
identify debts in TOP for passive collection through use of off-the-
shelf database analysis software. Without the ability to identify 
specific debts for which passive collection is the only current ongoing 
effort, creditor agencies that have not delegated authority to FMS to 
report uncollectible debts to IRS on their behalf cannot fulfill their 
responsibility to determine whether a debt should be closed out and 
reported to IRS or whether other collection action should be taken on 
it. We consider this to also be the responsibility of FMS. This view is 
embodied in our recommendations that FMS establish and implement 
procedures to periodically review debts that are kept in TOP for 
passive collection to determine the next best course of action and 
after all collection activities have been exercised, determine whether 
debts should be closed out and reported to IRS by FMS, and, if not, 
promptly return them to the referring agencies.

In particular and as noted in our report, we would like to reemphasize 
that our analysis considered only those debts for which federal 
agencies had given FMS the authority to report uncollectible debt 
amounts to IRS on the agency's behalf. For such debts, FMS procedures 
require its collectors to evaluate them to determine whether close-out 
would be appropriate and whether the debt amounts should be reported to 
IRS.

FMS agreed with our finding that it had referred only a small amount of 
debt to DOJ. FMS stated that because of workload constraints, it has 
attempted to focus its DOJ referral efforts on cases most likely to be 
successfully collected through litigation. As stated in our report, in 
an effort to increase referrals to DOJ, FMS did begin to perform 
quarterly queries of its cross-servicing database to identify 
uncollected debts for referral to DOJ. However, we found that many of 
the debts identified through these queries would not be good candidates 
for referral to DOJ because, among other things, they lacked TINs and 
were involved in bankruptcy proceedings. In addition, these queries did 
not cover most debts in cross-servicing, including those held in TOP 
for passive collection that would seem to be better candidates for DOJ 
referral because they should have valid TINs and are not supposed to be 
in bankruptcy. In addition, FMS did not routinely consider or act on 
advice from its PCA contractors regarding referrals to DOJ. Because PCA 
contractors' responsibilities include locating debtors and determining 
whether they have incomes or assets to repay delinquent debts, the PCA 
contractors would have a reasonable basis for identifying uncooperative 
debtors who could repay their debts but had refused.

FMS did not agree with our recommendation to incorporate liquidated 
damages in the next PCA contract for failure of PCA contractors to 
document compromises in accordance with contract requirements. FMS 
stated that there is no incentive for a PCA contractor to accept a 
compromise agreement when the debtor has the capability to pay the full 
amount of the debt. We disagree with FMS's contention that a PCA 
contractor would not accept a compromise agreement when the debtor has 
the capability to pay the full amount of the debt. For example, as 
stated in our report, we noted that one debtor offered to pay the full 
debt balance of approximately $14,000 in installments. However, without 
explanation, the PCA contractor offered to compromise the debt by 20 
percent if the debtor would pay right away. Moreover, this PCA 
contractor encouraged compromise activity prior to exhausting attempts 
to collect debts in full by sending out pro forma letters to debtors 
stating that the contractor may be authorized to compromise a portion 
of their debt should the debtor be in a position to pay the remaining 
balance. Further, FMS stated that it is questionable whether liquidated 
damages or a penalty provision in the contract would be legally 
enforceable. For many of the debts that we reviewed, we found that the 
PCA contractors often did not have documentation to justify their 
rationale for concluding that debtors could not pay the full debt 
amount or to support the amounts forgiven. In the absence of adequate 
documentation supporting the PCA contractor's determination to 
compromise a debt for a specific amount, FMS cannot determine whether 
the compromise is reasonable under the Federal Claims Collection 
Standards. Thus, FMS has no basis to determine whether the government 
suffered a loss that should not have been incurred as a result of such 
a compromise. To encourage PCA contractors to obtain adequate 
documentation supporting their compromises, we continue to believe that 
FMS should incorporate liquidated damages or a penalty provision in the 
next PCA contract for failure of PCA contractors to document 
compromises in accordance with contract requirements. FMS did not offer 
any legal analysis to support its assertion that a liquidated damage or 
penalty provision, presumably properly drafted and applied, may not be 
legally enforceable. Of course, the enforceability of liquidated 
damages or a penalty provision (e.g., reduction in the number of cases 
or amount of debt referred to the PCA contractor) would depend on the 
nature of the provision and the facts of the individual cases.

FMS did not agree with our finding related to the cross-servicing 
referral performance measure. FMS stated that it considered many 
approaches for reporting agency performance and believed that the 
method it chose is fair and equitable. FMS said that using only the 
active balance on a given date (e.g., the end of the fiscal year) would 
not recognize debts that are paid off, administratively resolved, or 
determined to be uncollectible and closed out. FMS further stated that 
because CFO Act agencies were required to update their TRORs on a 
quarterly basis beginning in fiscal year 2003, eligible amounts of debt 
for calculating the percentages referred are now updated every quarter.

This performance indicator[Footnote 50] is a snapshot of the percentage 
of debt eligible for referral to cross-servicing that has been referred 
at a given point in time, such as at year-end. In calculating its debt 
referral measure for fiscal year 2002, FMS made an unreasonable 
determination in computing this key performance measure even though it 
had all the appropriate information to properly calculate this figure. 
A fundamental premise in calculating this performance indicator is that 
debts that are paid off, administratively resolved, or determined to be 
uncollectible and closed out are no longer eligible for referral for 
cross-servicing and are not subject to further federal collection 
efforts. As such, FMS should not include these debts in the amount 
referred for cross-servicing in its annual fiscal year report to the 
Congress. In addition, as stated in the report, in its fiscal year 2002 
report to the Congress, FMS inappropriately used the amount of debt 
eligible for cross-servicing referral at the end of fiscal year 2001 
instead of the end of fiscal year 2002. The net effect of these errors 
on the calculation was to overstate the amount referred (the numerator 
of the fraction) by $1.2 billion and to understate the amount available 
for referral (the denominator of the fraction) by approximately $300 
million. Both of these errors had the effect of overstating federal 
agencies' progress in referring eligible nontax debts for cross-
servicing.

In its oral comments, OMB agreed with the report's findings. In 
drafting the recommendation, we proposed that OMB review the standards 
and policies of individual agencies for writing off and closing out 
debts. In its oral response, OMB was concerned that it did not have the 
resources to review all federal agencies' policies and procedures. As 
such, OMB suggested that we modify our proposed recommendation to 
instead require OMB to have individual federal agencies review their 
own policies and procedures for writing off and closing out debts and 
report to OMB on their policies, deficiencies, and corrective actions, 
if any, based on such reviews. OMB stated that it will then use these 
reports from the individual agencies to report to the Congress on the 
deficiencies, if any, found at the agencies and the progress in 
resolving such deficiencies. OMB's suggested approach in resolving this 
finding is reasonable and fully meets the intent of our proposed 
recommendation. As such, we have modified our recommendation to OMB 
accordingly.

:

This report contains recommendations to you. The head of a federal 
agency is required by 31 U.S.C. 720 to submit a written statement on 
actions taken on these recommendations to the Senate Committee on 
Governmental Affairs and the House Committee on Government Reform 
within 60 days of the date of this report. You must also send a written 
statement to the House and Senate Committees on Appropriations with the 
agency's first request for appropriations made over 60 days after the 
date of this report.

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Governmental Affairs; the 
Subcommittee on Financial Management, the Budget and International 
Security, Senate Committee on Governmental Affairs; the House Committee 
on Government Reform; the Subcommittee on Government Efficiency and 
Financial Management, House Committee on Government Reform; and the 
Commissioner of FMS. Copies will be made available to others upon 
request. The report is also available at no charge on GAO's Web site, 
at [Hyperlink, http://www.gao.gov] http://www.gao.gov.

If you have any questions regarding this report, please contact me on 
(202) 512-3406 or Kenneth Rupar, Assistant Director, on (214) 777-5714. 
Other key contributors to this report are listed in appendix III.

Signed by:

Gary T. Engel: 
Director: 
Financial Management and Assurance:

[End of section]

Appendixes: 

Appendix I: Sampling Method:

To test debts compromised by the Financial Management Service's (FMS) 
private collection agency (PCA) contractors from October 1, 2002, to 
February 28, 2003, we selected a stratified random sample of 54 debts 
that the PCA contractors compromised from a population of 358 debts in 
the cross-servicing database with forgiven dollar amounts of at least 
$2,000 but less than $100,000.[Footnote 51] We did not review debts 
with forgiven dollar amounts under $2,000 because they were deemed 
immaterial. In total, we selected 54 debts to review. (See table 2).

Table 2: Details of Cases Selected:

Forgiven amount for each debt: $2,000 or greater but less than 
$100,000; Number of debts per stratum: 358; Forgiven amount per 
stratum: $2,946,711.88; Items tested in each stratum: 54; 
Justification for number of items tested in each stratum: To provide 
coverage of the population of compromised debts.

Forgiven amount for each debt: Less than $2,000; Number of debts per 
stratum: 706; Forgiven amount per stratum: 479,309.38; Items tested in 
each stratum: None; Justification for number of items tested 
in each stratum: Average amount of strata (about $680) was deemed to be 
immaterial.

Forgiven amount for each debt: Total; Number of debts per stratum: 
1,064; Forgiven amount per stratum: $3,426,021.26; Items tested in each 
stratum: 54.

Source: GAO.

Note: Data derived from analysis of FMS's cross-servicing database.

[End of table]

[End of section]

Appendix II: Comments from the Department of the Treasury:

COMMISSIONER:

DEPARTMENT OF THE TREASURY
FINANCIAL MANAGEMENT SERVICE 
WASHINGTON, D.C. 20227:

October 20, 2003:

Mr. Gary T. Engle:

Director, Financial Management and Assurance General Accounting Office:

441 G Street, N.W. Washington, DC 20548:

Dear Mr. Engle:

The Financial Management Service (FMS) has received for comment a copy 
of the General Accounting Office's (GAO) recent draft audit report 
(GAO-04-47), entitled Debt Collection: Opportunities Exist for 
Improving FMS's Cross-Servicing Program. As the draft report has not 
been fully reviewed within GAO and is subject to change, we will 
address the report's specific findings and recommendations once it is 
finalized. I would like to address here several broad issues related to 
the conduct of the audit and its findings.

When it initiated its audit in August 2002, GAO notified the Secretary 
of the Treasury that it was reviewing the process for ensuring that 
appropriate uncollectible debts are reported to the Internal Revenue 
Service (IRS), and that the focus of the review would be on the 
Department of the Treasury's (Treasury) handling of debts returned by 
private collection contractors, Treasury's role in reporting 
uncollectible debts to the IRS, and Treasury's monitoring of agencies' 
reporting of uncollectible debts to the IRS. During the course of the 
audit, GAO greatly expanded the scope of the work beyond the parameters 
it originally set, and focused instead on a range of "opportunities ... 
for improving FMS's Cross-Servicing Program" many of which bear little 
or no relation to the reporting of uncollectible debt.

We appreciate GAO's efforts to identify opportunities for improvement 
in the Cross-Servicing Program. We are gratified, given the breadth and 
complexity of the program, that the findings reported do not reflect 
critical operational issues and only affect a very small percentage of 
our portfolio. Our Cross-Servicing Program, like the rest of our Debt 
Collection Program, has continued to grow significantly over the last 
several years --both in terms of referrals and collections. We 
recognize that the areas identified in this report require our 
attention, and we are already working to address these and other 
opportunities for improvement.

We concur with most of the findings in the draft report. FMS has come a 
long way in improving its Cross-Servicing Program, and many of the 
findings and recommendations in the Report have already been addressed. 
Enhancements to the systems that serve cross-servicing and private 
collection agency functions have resolved a number of issues; and the 
advent of FedDebt, a new comprehensive cross-servicing system, will 
further improve cross-servicing operations.

Return of Uncollectible Debt to Agencies - GAO's report found that by 
keeping returned uncollectible debts in the offset program rather than 
taking other collection action or recommending close-out, FMS lost 
collection opportunities. We have repeatedly stated to GAO auditors 
Treasury's role in handling uncollectible debts returned by PCAs: when 
we return debts to an agency as uncollectible, it is the agency's 
responsibility to close those debts out and report the debt amounts to 
IRS as income to the debtor. FMS will, if requested by an agency, and 
as a service to it, report to the IRS via Form 1099-C on the agency's 
behalf. Nonetheless, while debts are referred to Treasury for 
collection action, the receivables are never transferred --they remain 
on the agency's books, and the agency is responsible for discharging 
them.

Passive Collection in TOP - GAO found that "passive collection entailed 
no further collection action other than minimal efforts through 
offsets." The decision to leave returned debts in the Treasury Offset 
Program (TOP) for "passive collection" is at the creditor agency's 
discretion.

It is misleading to characterize efforts to collect debts through 
offsets as "minimal." TOP is our most effective collection tool; many 
agencies rely on it for the bulk of their collection, and significant 
collection opportunities could be lost if debts were removed from TOP 
prematurely. We believe that it is appropriate for those debts to 
remain in TOP.

The report also points out that offsets for debts left in TOP after 
return from private collection agencies totaled "only" about $9 
million. Since active attempts to recover the debts have been 
unsuccessful, it is important to note that these collections represent 
recoveries that probably would not have been realized without the 
offset program. One of the many benefits of TOP is that the cost to 
collect is low. Therefore, it is generally in the best interest of the 
government to attempt offset for as long as statutorily authorized 
before terminating collections and discharging the debt. As to the 
finding that some debts were left in TOP (less than 7 % of the cross-
servicing debts active in TOP) after the 10 year statute for offset has 
expired, FMS acknowledges that this is a system limitation; however, 
the TOP system has sufficient edits and safeguards in place to ensure 
that no offset is taken after the 10 year point.

Referrals to the Department of Justice - GAO's finding that FMS had 
referred only a small amount of debt to the DOJ is true. Cross-
Servicing management and representatives from the DOJ have been working 
closely to develop mutually agreed-upon procedures and criteria for DOJ 
referrals. Referral for litigation is an extremely labor-intensive 
process, as is the litigation process itself. Because of workload 
constraints both at DOJ and within the Cross-Servicing Program, we have 
attempted to focus on those cases most likely to be successfully 
collected through litigation, and we are diligently working to increase 
the number of cases referred to DOJ. Finally, we have initiated several 
actions to improve referrals to DOJ.

Compromise Requirements - GAO recommended that FMS reinforce the PCA 
contractors' adherence to various compromise requirements set forth in 
the PCA contract and Federal Claims Collection Standards. FMS will 
issue a technical bulletin to the PCA contractors reminding them of 
these requirements, as well as the fact that adherence to these 
requirements is included in the annual PCA compliance reviews conducted 
by FMS. Further, we recognize that our current cross-servicing system 
does not track the forgiven amount of a compromise agreement until the 
compromise is satisfied. This system limitation will be addressed by 
the FedDebt implementation. In the new system, the amount to be 
forgiven will be captured as soon as the compromise agreement is 
recorded. It is also important to note that our Treasury collectors 
have implemented compromise documentation procedures in accordance with 
recommendations from the previous GAO study on cross-servicing.

FMS does not agree with GAO's recommendation to incorporate liquidated 
damages in the next PCA contract for PCA failure to document a 
compromise in accordance with contract requirements. The PCA contract 
is a performance-based contract. The PCA contractors are paid based on 
collections and receive additional accounts and monetary bonuses based 
on their ability to collect and resolve debt. There is no incentive for 
a PCA contractor to accept a compromise agreement when the debtor has 
the capability to pay the full amount of the debt. Additionally, it is 
questionable whether or not liquidated damages or a penalty provision 
in the contract would be legally enforceable:

Agency Referral Performance - Concerning the finding that FMS 
overstated agencies' progress in referring eligible nontax debts for 
cross-servicing, we considered many approaches for reporting agency 
performance and believe that the method we chose is fair and equitable 
in a very dynamic debt environment. Reporting the amount that was 
referred during the year, regardless of the disposition of the debt, 
provides an appropriate measure of referral performance. Using only the 
active balance on a given date would not recognize those debts that are 
paid off, administratively resolved, or determined to be uncollectible 
and closed out. In the past, agencies were not required to report 
changes to the Treasury Report on Receivables (TROR) until forty-five 
days after the end of the present fiscal year. In FY 2003, all Chief 
Financial Officer Act agencies were required to update the TROR on a 
quarterly basis. The draft report does not note that, based on this 
requirement, eligible amounts for calculating the percentages referred 
are now updated every quarter.

Thank you for the opportunity to comment on this draft GAO report. If 
you have any questions or wish to discuss these comments further, I can 
be reached at (202) 874-7000, or you may contact Martin Mills, 
Assistant Commissioner, Debt Management Services, on (202) 874-3810.

Sincerely,

Richard L. Gregg:

Signed by Richard L. Gregg:

cc: Donald V. Hammond 
Fiscal Assistant Secretary 
U. S. Department of the Treasury:

The following are GAO's comments on the Department of the Treasury's 
letter dated October 20, 2003.

GAO Comments:

1. In conformity with generally accepted government auditing standards, 
we provide responsible agency officials and other directly affected 
parties with an opportunity to review and provide comments on a draft 
report before it is issued. The language referred to by FMS concerning 
the report's status as a draft has been the standard language included 
on the cover page of GAO reports when they are sent for agency comment. 
After receiving agency comments, we consider their substance, revise 
the draft report as appropriate, state in the report whether the agency 
agreed or disagreed with our findings, conclusions, and 
recommendations, and issue the report.

2. See our discussion in the Agency Comments and Our Evaluation 
section.

3. See comment 2.

4. See comment 2.

5. See comment 2.

6. See comment 2.

7. The scope of our work did not include determining whether FMS's TOP 
system has sufficient edits and safeguards in place to ensure that no 
offset is taken for debts over 10 years delinquent.

8. See comment 2.

9. As stated in our report, a scope limitation prevented us from using 
statistical sampling techniques to determine whether compromises made 
by in-house FMS collectors were justified, supported, and reported to 
IRS. As such, we cannot comment on whether FMS collectors have 
implemented compromise documentation procedures in accordance with 
previous GAO recommendations.

10. See comment 2.

11. See comment 2.

[End of section]

Appendix III: Staff Acknowledgments:

Other key contributors to this assignment were Richard Cambosos, 
Matthew Valenta, Ronald Haun, Michelle Philpott, Evan Gilman, and Cathy 
Hurley.

(191032):

FOOTNOTES

[1] These debts include those classified by federal agencies as 
"currently not collectible" (CNC). Generally, write-off is mandatory 
for delinquent debts older than 2 years. The agency must either 
classify the debts as CNC or discharge the debts. The collection 
process continues on debts classified as CNC until the agency 
determines it is no longer cost-effective to pursue collection. At that 
point, the debt should be discharged or closed out.

[2] See, for example, U.S. General Accounting Office, Debt Collection 
Improvement Act of 1996: Department of Agriculture's Farm Service 
Agency Has Not Yet Fully Implemented Certain Key Provisions, GAO-02-463 
(Washington, D.C.: Mar. 29, 2002).

[3] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of the Treasury, GAO-03-109 (Washington, 
D.C.: January 2003).

[4] U.S. General Accounting Office, Debt Collection: Treasury Faces 
Challenges in Implementing Its Cross-Servicing Initiative, GAO/AIMD-
00-234 (Washington, D.C.: Aug. 4, 2000).

[5] For the purpose of this report, offset refers to administrative 
offset and tax refund offset.

[6] 31 U.S.C. 3716(e)(1) is applicable to administrative offset and 31 
C.F.R. 285.2(d)(1)(ii) is applicable to tax refund offset to collect 
nontax debts.

[7] One of the 24 CFO Act agencies, the Federal Emergency Management 
Agency (FEMA), was transferred to the new Department of Homeland 
Security (DHS) effective March 1, 2003. With this transfer, FEMA will 
no longer be required to prepare and have audited stand-alone financial 
statements under the CFO Act, leaving 23 CFO Act agencies. DHS, along 
with most other executive branch agencies, will be required to prepare 
and have audited financial statements under the Accountability of Tax 
Dollars Act of 2002, Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 
2002).

[8] The format of the TROR is on a fiscal year basis (i.e., October 1, 
2001 to September 30, 2002). To determine the reported amounts for 
closed-out debts and debts reported to IRS for the 24 CFO Act agencies 
for calendar year 2002, we obtained and analyzed the 24 CFO Act 
agencies' quarterly TRORs for fiscal years 2001, 2002, and 2003. GAO 
has not assessed the completeness and accuracy of the information in 
the TRORs for the 24 CFO Act agencies; therefore, we have not 
determined whether the TROR figures reported by the agencies are 
understated, overstated, or accurate.

[9] Federal agencies may, at their discretion, refer valid, legally 
enforceable debts for cross-servicing that are less than 180 days 
delinquent; however, it may not be feasible for certain agencies to do 
so.

[10] FMS's policy is to attempt to obtain payment in full. However, 
other payment options include (1) repayment agreement for payment in 
full, (2) lump sum compromise settlement, and (3) compromise repayment 
agreement.

[11] DCIA requires that eligible debts delinquent more than 180 days be 
reported to TOP.

[12] FMS's current PCA contract covers fiscal years 2001 through 2006. 
The five PCA contractors are located in California, Florida, Georgia, 
New York, and Texas.

[13] FMS recently increased the number of days PCA contractors are 
given to collect or resolve referred nontax debts from 180 days to 270 
days. Administrative debt resolution occurs when a PCA contractor 
determines that a delinquent debtor is either bankrupt, deceased, or 
disabled and financially unable to pay the debt.

[14] FMS collectors are required to review debts to determine whether 
further collection actions, such as reporting debts to TOP or IRS, are 
needed prior to returning the debts back to the referring agencies. If 
no further collection actions are needed, the debt is returned to the 
referring agency.

[15] 31 C.F.R. Parts 901-904.

[16] According to the Federal Claims Collection Standards, upon close-
out of a debt, the agency must report the close-out to IRS in 
accordance with the requirements of 26 U.S.C. 6050P and 26 C.F.R. 
1.6050P-1. IRS Form 1099C is used to report the uncollectible debt as 
income to the debtor, which may be taxable at the debtor's current tax 
rate.

[17] All CFO Act agencies and non-CFO Act agencies with nontax ending 
debt balances of $50 million or greater are required to report 
quarterly.

[18] If the debtor defaults on the compromise agreement, the debtor 
owes the full balance of the debt prior to compromise, less any amounts 
paid.

[19] We selected October 1, 2002, through February 28, 2003, as our 
testing period because FMS had performed reviews of compromises made by 
its PCA contractors for prior periods and found problems.

[20] In addition to the approximately $2.6 billion of debts returned 
from secondary PCA contractors in fiscal years 2000 through 2002, about 
$1.1 billion were retained in TOP for passive collection on debts that 
were returned from secondary PCA contractors either prior to fiscal 
year 2000 or in fiscal year 2003.

[21] AWG, as authorized by DCIA, is an administrative process that 
allows an agency to issue an order requiring the debtor's employer to 
withhold up to 15 percent of the debtor's disposable pay for payment of 
the debt.

[22] The four agencies that have authorized FMS to perform AWG on their 
behalf are the Department of Housing and Urban Development, the 
Securities and Exchange Commission, the James Madison Foundation, and 
the Railroad Retirement Board.

[23] Judgment debts and student loans are not subject to the statutory 
and regulatory 10-year limitations. None of the approximately $449 
million of debts were judgment debts or student loans.

[24] According to FMS officials, the debts are removed only if they are 
subsequently matched to payments in TOP.

[25] IRS periodically provides a list of prefix numbers for valid 
Employer Identification Numbers on its Web site. The Social Security 
Administration (SSA) provides a description of invalid Social Security 
numbers on its Web site. We used these Web sites to identify invalid 
TINs. There may be other debts with invalid TINs that we could not 
identify using the information from IRS and SSA Web sites.

[26] SSA stores death information for each individual who has been 
issued a Social Security number and whose death has been reported to 
SSA. SSA periodically extracts the death information and makes this 
information, called the Death Master File, available for sale to the 
public by the Department of Commerce.

[27] In total, FMS's cross-servicing database showed that about $110 
million of HHS's Medicare debts, including the approximately $12 
million in passive collection, were in TOP and available for 
liquidation by offsets even though the debtors were in bankruptcy. The 
automatic stay mandated by 11 U.S.C. 362 prevents the government from 
pursuing collection action against debtors in bankruptcy for certain 
debts that arise prior to the commencement of the bankruptcy 
litigation.

[28] Specifically, DCIA requires OMB to (1) review the standards and 
policies of each federal agency for compromising, writing down, 
forgiving, or discharging indebtedness arising from programs of the 
agency; (2) determine whether those standards and policies are 
consistent and protect the interests of the United States; (3) direct 
the head of the agency to make appropriate modifications to any federal 
agency's standards or policies that the OMB Director determines are not 
consistent or do not protect the interests of the United States, and 
(4) report annually to the Congress on deficiencies in the standards 
and policies of federal agencies for compromising, writing down, 
forgiving, or discharging indebtedness, and progress made in improving 
those standards and policies.

[29] In previous work, we found that certain federal agencies may not 
be properly reporting closed-out debts to IRS. For example, in fiscal 
year 2002, we reported that the Centers for Medicare & Medicaid 
Services was not reporting certain closed-out Medicare debts to IRS as 
income to debtors. U.S. General Accounting Office, Debt Collection 
Improvement Act of 1996: HHS's Centers for Medicare & Medicaid Services 
Faces Challenges to Fully Implement Certain Key Provisions, GAO-02-307 
(Washington, D.C.: Feb. 22, 2002). In addition, we found that Farm 
Services Agency officials were unaware of the requirement to report 
closed-out debts to IRS as income for secondary debtors. U.S. General 
Accounting Office, Debt Collection: Agriculture Making Progress in 
Addressing Key Challenges, GAO-03-202T (Washington, D.C.: Nov. 13, 
2002).

[30] The President's Management Agenda, announced in the summer of 
2001, is a strategy for improving the management of the federal 
government. The President's Management Agenda includes an emphasis on 
strategic management of human capital, competitive sourcing, improved 
financial performance, expanded electronic government, and budget and 
performance integration.

[31] For example, 26 U.S.C. 6050P and 26 C.F.R. 1.6050P-1 exclude 
certain debts that are discharged in bankruptcy and debts less than 
$600 from IRS reporting requirements.

[32] Federal agencies, in cases where there is no evidence of assets, 
can also refer delinquent debts to DOJ for judgment liens only rather 
than for enforced collection.

[33] According to the Federal Claims Collection Standards, federal 
agencies may refer debts to DOJ less than $2,500 in certain situations, 
such as debts for which litigation is important to ensure compliance 
with the federal agency's policies or programs. The Federal Claims 
Collection Standards also state that federal agencies may terminate 
collection action on a claim when, among other things, the agency is 
unable to locate the debtor and/or the costs of collection are 
anticipated to exceed the amount recoverable. Federal agencies may 
suspend collection action on a claim when the agency cannot locate the 
debtor, the debtor's financial condition is expected to improve, and/or 
the debtor has requested a waiver or review of the claim.

[34] Unless excepted by DOJ, claims referred to DOJ should be 
accompanied by a Claims Collection Litigation Report, a Certificate of 
Indebtedness, and other information that may be required.

[35] FMS's policy is to return all debts found to be in bankruptcy to 
referring agencies unless it has been stipulated by the referring 
agency that such cases will not be returned or that the bankruptcy 
proceedings have been completed and the debts were not discharged.

[36] Using a $25,000 principal balance as the threshold for DOJ 
referral, FMS's database showed about $2.1 billion of debts in TOP that 
were within the 6-year statute of limitations.

[37] In addition to litigation, PCA contractors can recommend that 
collection action be continued, the debt be returned to the referring 
agency, or the debt be written off and closed out.

[38] Using a $25,000 principal balance as the threshold for DOJ 
referral, FMS's database had about $45 million of debts in TOP for 
passive collection for which PCA contractors had recommended 
litigation.

[39] GAO/AIMD-00-234.

[40] GAO/AIMD-00-234.

[41] FMS found that the contractor error rates resulting from failure 
to provide justification for the acceptance of installment and 
compromise agreements ranged from 26 percent at one contractor to 88 
percent at another contractor.

[42] We estimate that 22 percent of the debt compromises in the 
population were made without the PCA contractor attempting to obtain 
payment in full prior to compromise. We are 95 percent confident that 
the percentage of debt compromises for which the PCA contractor did not 
attempt to obtain payment in full is from 12 percent to 34 percent.

[43] We estimate that 72 percent of the debt compromises in the 
population were made without the PCA contractor providing an 
explanation for the compromises. We are 95 percent confident that the 
percentage of debt compromises for which no explanation was provided by 
the PCA contractor is from 59 percent to 83 percent.

[44] We estimate that 81 percent of the debt compromises in the 
population were made without the PCA contractor obtaining a complete 
financial statement for the debtor. We are 95 percent confident that 
the percentage of debt compromises for which PCA contractors did not 
obtain complete financial statements is from 69 percent to 91 percent. 
We estimate that 30 percent of the debt compromises in the population 
were made without the PCA contractor obtaining a credit bureau report. 
We are 95 percent confident that the percentage of debt compromises for 
which the PCA contractor did not obtain credit bureau reports is from 
18 percent to 43 percent.

[45] We estimate that 17 percent of the debt compromises in the 
population were made without the PCA contractor obtaining a TIN from 
the debtor or reporting the TIN to FMS. We are 95 percent confident 
that the percentage of debt compromises for which no TIN was obtained 
by the PCA contractor or reported to FMS is from 9 percent to 29 
percent.

[46] GAO/AIMD-00-234.

[47] For example, in February 2002, an agency erroneously referred to 
FMS about $263 million of debts that were exempted from cross-
servicing. FMS returned these debts to the agency in March 2002. 
However, because these debts were returned 1 month after they had been 
referred, FMS inappropriately included them in the amounts reported as 
referred to FMS for cross-servicing as of the end of fiscal year 2002.

[48] See, for example, U.S. General Accounting Office, Debt Collection 
Improvement Act of 1996: Status of Selected Agencies' Implementation of 
Administrative Wage Garnishment, GAO-02-313 (Washington, D.C.: Feb. 28, 
2002).

[49] GAO/AIMD-00-234.

[50] This performance indicator is represented as a fraction. The 
numerator is reported amounts referred, and the denominator is reported 
amounts eligible for referral.

[51] We identified one debt in the cross-servicing database for which 
the forgiven amount was at least $100,000. We found that the referring 
agency rather than FMS's PCA contractor had initiated the compromise 
for this debt. As such, this debt was not included in our review.

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