IRS’ tax levy program could collect millions if expanded

The IRS could recover at least $270 million in delinquent federal taxes each year by taxing certain payments made by three major agencies, according to a new report from the General Accounting Office. A provision in the 1997 Taxpayer Relief Act, known as the continuous levy program, allows the IRS to tax up to 15 percent of certain federal payments made to delinquent taxpayers. But several major agencies with the authority to make federal payments without going through the Treasury Department's Financial Management Service (FMS), including the Postal Service, the Defense Department and the Centers for Medicare and Medicaid Services, do not participate in the program. The three agencies together made payments of about $1.9 billion to more than 70,000 delinquent individuals and businesses last year. Although the FMS makes payments on behalf of most federal agencies, more than $900 billion in payments is made directly by other agencies each year, according to GAO. "Until more types of federal payments are available, the current continuous levy program results in unequal treatment of delinquent taxpayers depending on whether their federal payments are made by FMS on behalf of other agencies or directly by the agencies themselves," said the report, "Millions of Dollars Could Be Collected If IRS Levied More Federal Payments" (GAO-01-711). The FMS and IRS work together to administer the continuous levy program: IRS collects delinquent taxes through an automated process connected with FMS, and FMS then matches federal payment data against IRS' accounts receivable data to identify which payments to tax. Delinquent taxpayers are notified and have 30 days to pay their debt before the IRS imposes a tax on subsequent federal payments sent to them. Currently, to impose the 15 percent tax on behalf of those agencies that make their own payments, FMS must tell those agencies to deduct the tax and credit it to the IRS before sending a payment to the delinquent taxpayer. GAO said that the FMS plans to include salary and wage payments for the Postal Service and the Defense Department in the IRS continuous levy program within the next three years. The timetable for including contractor payments for USPS is less than three years, while Defense payments could be ready in about three years. Payments disbursed by CMS could be included in the tax program within five years. GAO recommended that the IRS provide the FMS with a file containing information on delinquent taxpayers information so it can be included in the levy program. The IRS currently has the authority to levy a tax on such payments by notifying the agency responsible, but it needs up-to-date information on the delinquent taxpayers to do so, said GAO. The watchdog agency also encouraged IRS and FMS to work with the Postal Service, Defense and CMS on a timetable for including their payments in the program. The Postal Service, Defense, FMS and the IRS generally agreed with GAO's findings, but CMS said its payments to contractors could not be included in the continuous levy program until a new agency accounting system is up and running.