As of September 30, 1997, IRS had about 2.9 million installment agreements outstanding, worth about $13.2 billion, thus averaging about $4,600 per agreement. Objectives, Scope, and Methodology

Our objectives were to (1) describe some of the uses and benefits of EFT, (2) discuss the experiences of two states that use EFT in their tax installment agreement programs and the benefits they have obtained, and (3) discuss the potential benefits IRS might realize by increasing EFT usage in its installment agreement program. We obtained from FMS, but did not independently verify, information on IRS’ cost to process installment agreement payments by paper processes and by EFT. To address our second objective, we identified two states—Minnesota and California—that have made changes to their installment agreement programs that resulted in most delinquent taxpayers using EFT to pay their installments. Information from NACHA shows that, relative to paper transactions, EFT provides lower loan defaults, better accuracy, and reduced mailing and processing costs. These 8,000 EFT agreements represented about 90 percent of the delinquent taxes owed in the new agreements. EFT Has Lowered the Default Rates of Installment Agreements in Minnesota and California

According to state officials in Minnesota and California, one of the benefits they have realized by promoting EFT use in their installment agreement programs has been a substantial reduction in the programs’ default rates. Since the requirement was implemented, most of the state’s taxpayers with installment agreements have used EFT, and according to MDOR officials, the default rate for EFT installment agreements dropped to between 3 and 5 percent. As of October 1997, about 6 months after FTB implemented its EFT procedures, the default rate for new EFT agreements was about 5 percent. Officials in both states also said that they experienced increased collections from installment agreements after changing their programs to promote EFT. EFT Has Reportedly Reduced the Administrative Costs of Installment Agreements in Minnesota and California

In discussing the benefits of EFT with officials in California and Minnesota, we were told that EFT use reduced the administrative costs of their installment agreement programs. Officials in both states said that the greater use of EFT has reduced the amount of paper processing and mailing costs related to their installment agreement programs. Additional administrative cost savings have occurred because fewer resources were needed to follow up on defaulted agreements. Of the total agreements in 1997, about 41,500—or 1.5 percent—were being paid by EFT. IRS could achieve additional cost savings by not sending taxpayers who make EFT installment payments a monthly statement, as it currently does for all taxpayers with installment agreements. This would save IRS postage and handling costs and would be similar to the practices for EFT installment agreements in Minnesota and California. 13 and 14).
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the best practices being used by delinquent debt collectors, and if they offer the Internal Revenue Service (IRS) any prospects for improving collection efforts, focusing on the: (1) uses and benefits of electronic funds transfer (EFT); (2) experiences of two states that use EFT in their tax installment agreement programs and the benefits they have obtained; and (3) potential benefits IRS might realize by increasing EFT usage in its installment agreement program.

What GAO Found

GAO noted that: (1) EFT is widely used by various types of organizations in receiving and transferring money; (2) it is used for various payment transactions and for collecting consumer payments; (3) relative to paper transactions, EFT provides better accuracy, lower mailing and processing costs, and fewer delinquencies and defaults; (4) because of these benefits, some financial organizations routinely offer incentives to consumers who enter into EFT arrangements; (5) both Minnesota and California changed their installment agreement programs to promote tax payments by EFT; (6) Minnesota has required taxpayers entering into new installment agreements since July 1995 to pay by EFT, with some exceptions; (7) in April 1997, California initiated procedures to let taxpayers make installment agreement payments by EFT; (8) as of mid-November 1997, EFT usage was about 90 percent in Minnesota and about 60 percent in California; (9) according to state officials, Minnesota and California both have seen a sharp decrease in their installment agreement default rates, in part due to EFT; (10) in Minnesota, officials said that default rates were reduced from about 50 percent to between 3 and 5 percent; and in California, officials said that they were reduced from about 40 percent to about 5 percent; (11) officials in both states said that the lower default rates have resulted in collecting revenues from installments faster; (12) officials in both Minnesota and California said they have achieved administrative cost savings from greater use of EFT, which has reduced the amount of paper processing and mailing costs related to their installment agreement programs; (13) additional administrative cost savings have occurred because fewer resources have been needed for follow-up collection enforcement on defaulted agreements; (14) IRS' installment agreement program has not taken advantage of the benefits of EFT to the extent that Minnesota and California reported, as only about 1.5 percent of IRS' delinquent taxpayers were using EFT for installment agreements as of September 30, 1997; (15) because its current program is similar to these states' non-EFT programs, it seems likely that IRS could expect to achieve a reduction in its installment agreement default rates and lower administrative costs if more taxpayers paid their installments by EFT; and (16) in fiscal year 1997, IRS' costs to process EFT installment payments were 37 percent lower than the cost to process non-EFT installment payments.