Order Code RL34164
Improper Payments Information Act of 2002:
Background, Implementation, and Assessment
September 10, 2007
Garrett L. Hatch
Analyst in Government Organization and Management
Government and Finance Division
Virginia A. McMurtry
Specialist in American National Government
Government and Finance Division

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Improper Payments Information Act of 2002:
Background, Implementation, and Assessment
Summary
On November 26, 2002, the Improper Payments Information Act (IPIA) was
signed into law as P.L. 107-300 (116 Stat. 2350). Augmenting previous financial
management reform laws, the IPIA seeks to increase financial accountability in the
federal government, and thus reduce wasteful spending. The law requires agencies
to identify each year programs and activities vulnerable to significant improper
payments, to estimate the amount of overpayments or underpayments, and to report
to Congress on steps being taken to reduce such payments.
In May 2003, the Office of Management and Budget (OMB) issued guidance
to agencies on the implementation of the IPIA, which was revised and incorporated
into OMB Circular A-123 as Appendix C in August 2006. OMB’s guidance, while
consistent with some provisions of the IPIA, has been criticized on several counts.
Whereas the statute requires agencies to report to Congress on all programs with
more than $10 million in estimated improper payments, OMB added an additional
threshold, such that agencies must only report on programs with improper payments
that exceed both $10 million and 2.5% of total program payments. Critics have
identified a number of examples of programs with improper payments over $10
million that are not reported to Congress because they do not also meet the 2.5%
threshold. In the 2006 update of its guidance, OMB stated that it may determine on
a case-by-case basis that some programs are to be subject to annual Performance and
Accountability Report requirements, even if they do not meet the 2.5% threshold.
OMB’s guidance has also been criticized for permitting agencies to exempt
some programs from the IPIA’s annual requirement for risk assessment. Under the
act, every program and activity is to be reviewed each year. OMB’s guidance,
however, now allows agencies to review a program once every three years if it has
been deemed low-risk. Critics say this runs counter to the language and intent of the
IPIA, and that it leaves open the possibility that improper payments might go
undetected during the exemption period.
Data from the first three years of IPIA reporting show that the government-wide
error rate has declined. However, nearly 20% of at-risk outlays — around $330
billion — lacked improper payment estimates and have not yet been included in the
error rate. A number of major programs are among those lacking estimates,
including Medicaid, the State Child Health Insurance Program (SCHIP), Medicare
Prescription Drug Benefit, and the Special Supplemental Nutrition Program for
Women, Infants, and Children (WIC). OMB has said it is working to produce valid
estimates for these and other risk susceptible programs in the next two years. Until
then, the full extent of the improper payments problem will remain unknown.
Both the House and Senate have held oversight hearings on the IPIA and its
implementation, most recently in March 2007. Congressional interest in identifying,
reducing, and recovering improper payments seems likely to continue. This report
will be updated as events may warrant.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legislative History and Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Major Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Previous Improper Payment Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Initial Guidance From OMB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Revision of OMB Circular A-123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Scorecard Standards and Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Trends in Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Error Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Amount of Improper Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Federal Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Continuing Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Reporting Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Annual Review Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Congressional Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Figures
Figure 1. Eliminating Improper Payments Initiative’s Quarterly
Scorecards for Current Status, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. Improper Payment Trends, FY2004-FY2006 . . . . . . . . . . . . . . . . . . . . . 9

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Improper Payments Information Act of 2002:
Background, Implementation, and
Assessment
Background
Legislative History and Intent
On November 26, 2002, the Improper Payments Information Act (IPIA) was
signed into law as P.L. 107-300 (116 Stat. 2350). Augmenting previous financial
management reform laws, the IPIA is intended to increase financial accountability
in the federal government, and thereby reduce wasteful spending. The law requires
agencies to identify each year programs and activities vulnerable to significant
improper payments, to estimate the overpayments or underpayments exposure, and
to report on steps taken to reduce such payments. As explained more fully below,
improper payments generally include any payment that should not have been made
or was made for an incorrect amount.
Previously, there was no government-wide requirement for agencies to estimate
or report in any systematic way on improper payments, although it is generally
acknowledged that billions of dollars are involved. The Office of Management and
Budget (OMB) estimated, for example, that in FY2005, improper payments under 47
federal programs totaled approximately $37.3 billion.1
The IPIA was introduced in the 107th Congress as H.R. 4878 on June 6, 2002,
by Representative Stephen Horn, with a group of bipartisan cosponsors, and referred
to the House Committee on Government Reform. The Subcommittee on
Government Efficiency, Financial Management, and Intergovernmental Relations
held a markup on the measure on June 18, 2002, and approved the bill, as amended,
by unanimous voice vote. On July 9, 2002, H.R. 4878 was considered under a
suspension of the rules and passed the House, as amended, by voice vote. On October
9, 2002, the Senate Committee on Governmental Affairs ordered H.R. 4878 to be
reported favorably, with a substitute amendment. On October 17, 2002, the bill, as
amended, passed the Senate by unanimous consent, and on November 12, under a
suspension of the rules, the House agreed to the Senate amendment by voice vote.
The President signed H.R. 4868 into law on November 26, 2002 (P.L. 107-300).
1 Testimony of Clay Johnson III, Deputy Director for Management, Office of Management
and Budget, U.S. Congress, Statement before Senate Subcommittee on Federal Financial
Management, Government Information, and International Security, An Assessment of
Improper Payment Information Act of 2002, hearings, 109th Cong., 2nd sess., Dec. 5, 2006,
at [http://hsgac.senate.gov/_files/ClayJohsonTestimony05Dec2006ImproperPayments.pdf].

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CRS-2
The problem of improper payments had received attention in previous
Congresses. During House floor debate on H.R. 4878, Representative Horn noted
that hearings held in the past “clearly demonstrated the need” for such legislation.
Since the 104th Congress, the subcommittees I have chaired have held
approximately 100 hearings on wasteful spending within the Federal
Government. Time and again witnesses from the General Accounting Office and
agency inspectors general have told the subcommittee that poor accounting
systems and procedures have contributed to the government’s serious and long-
term problems involving improper payments.2
In the written report of the Senate Committee on Governmental Affairs to
accompany H.R. 4878, the provisions of the bill were explicitly linked to GAO
recommendations offered in a best practices guide for agencies in managing improper
payments, prepared at the request of the committee chairman, Senator Joseph
Lieberman. The guide suggested that determining the nature and extent of risks for
improper payments was a crucial step; H.R. 4878 would begin the process of
improving the management of improper payments, following GAO’s guidance, “by
requiring that agencies annually estimate the amount of improper payments, and
report on the steps they are taking to reduce the amounts of those payments in the
largest programs.”3
Major Provisions
The IPIA directs each executive branch agency, in accordance with OMB
guidance, to review all its programs and activities each year, identify those
susceptible to significant improper payments, and estimate the amount of improper
payment exposure. Agencies are then to report annually to Congress on improper
payments, using a standardized methodology determined by OMB.4
With respect to any program or activity with estimated annual improper
payments exceeding $10 million, each agency is also required to provide a report on
agency actions to reduce such improper payments, including (1) the causes of the
improper payments and the results of the actions taken to address them; (2) whether
the agency has information systems and other necessary infrastructure to reduce such
payments to “minimal cost-effective levels”; (3) if not, budgetary resources requested
2 Rep. Stephen Horn, “Debate on H.R. 4878,” remarks in the House, Congressional Record,
daily edition, vol. 148 (July 9, 2002), p. H4379.
3 See General Accounting Office, Strategies to Manage Improper Payments, GAO-02-69G,
October 2001. Cited in U.S. Congress, Senate Committee on Governmental Affairs,
Improper Payments Information Act of 2002, report to accompany H.R. 4878, 107th Cong.,
2nd sess., S.Rept. 107-333 (Washington: GPO, 2002), p. 2.
4 The IPIA originally set a deadline of March 31 for agencies to report to Congress on their
improper payments in the prior fiscal year. The improper payments reports are now included
in the performance and accountability reports or PARs, due to the President (via OMB) and
Congress 45 days after the close of an agency’s fiscal year, generally November 15. See
OMB Circular A-136, “Form and Content of the Performance and Accountability Report
(PAR),” at [http://www.whitehouse.gov/OMB/bulletins/b01-09.pdf].

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to accomplish needed changes in information systems and infrastructure; and (4)
steps the agency has taken to ensure that managers are held accountable for reducing
improper payments.
Improper payment is defined as any payment that should not have been made
or that was made in an incorrect amount. This includes duplicate payments,
payments to ineligible recipients or for ineligible services, or for services not
received or that do not reflect applicable discounts. The act covers payments made
by a federal agency, a federal contractor, or a governmental or other organization
administering a federal program or activity.
Previous Improper Payment Efforts
The IPIA codified and expanded efforts already underway in the executive
branch to reduce improper payments. In 2001, the Bush Administration designated
improving financial performance as one of five government-wide initiatives in the
President’s Management Agenda (PMA). The establishment of a baseline on the
extent of erroneous (improper) payments for major federal benefit programs was a
key component of the financial management initiative.5 Agencies were to include
information on erroneous payment rates for benefit and assistance programs over $2
billion as part of their FY2003 budget submissions. In July 2001, revisions to OMB
Circular A-11 in Section 57 implemented this objective, requiring 15 federal agencies
to include improper payment information with their initial FY2003 budget materials
to OMB. Enactment of the IPIA extended improper payment reporting requirements
to all executive branch departments and agencies, lowered the threshold from $2
billion to $10 million, and designated Congress (as well as OMB) to receive the
annual agency reports.
Implementation
Initial Guidance From OMB
In May 2003, OMB distributed a guide to instruct agencies on the
implementation of the IPIA.6 The guide provided detailed definitions of “improper”
or “erroneous” payments and of “program” and “activity,” and then outlined four
steps to be taken by the agencies. First, agencies were required to review
systematically all their programs and activities and identify those which are
susceptible to significant erroneous payments, defined as “annual erroneous
5 See U.S. Office of Management and Budget (OMB), The President’s Management Agenda
— FY2002 (Washington: OMB, 2001), pp. 19-21. For an overview of the PMA, see CRS
Report RS21416, The President’s Management Agenda: A Brief Introduction, by Virginia
A. McMurtry.
6 OMB, “Improper Payments Information Act of 2002 (Public Law 107-300),”
Memorandum for Heads of Executive Departments and Agencies from Mitchell E. Daniels,
May 21, 2003, M-03-13. IPIA guidance was subsequently revised and incorporated into
Appendix C of OMB Circular A-123.

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payments in the program exceeding both 2.5% of the program payments and $10
million.” Second, agencies were to determine an annual estimated amount of
erroneous payments made in those programs and activities found susceptible to
significant errors; this calculation was to be based on a statistical random sample
sufficiently large “to yield an estimate with a 90 percent confidence interval” within
5% precision. The third step was to determine why the particular programs were at
risk, and then put in place a plan to reduce the erroneous payments. The last step was
agency reporting to the President (via OMB) and Congress on the estimates of the
annual amount of erroneous payments in its programs and activities and on progress
in reducing them.
Revision of OMB Circular A-123
In the summer of 2006, OMB issued a new appendix to OMB Circular A-123,7
updating the guidance in M-03-13. Appendix C, titled “Requirements for Effective
Measurement and Remediation of Improper Payments,”8 contained two parts; the first
addressed IPIA reporting and the second, recovery auditing.9 It began with new
language, expanding and clarifying the definition of an improper payment:
An improper payment is any payment that should not have been made or
that was made in an incorrect amount under statutory, contractual,
administrative, or other legally applicable requirements. Incorrect amounts are
overpayments and underpayments (including inappropriate denials of payment
or services). An improper payment includes any payment that was made to an
ineligible recipient or for an ineligible service, duplicate payments, payments for
services not received, and payments that are for the incorrect amount. In
addition, when an agency’s review is unable to discern whether a payment was
proper as a result of insufficient or lack of documentation, this payment must
also be considered in error.10
Other noteworthy features in the update included provisions for alternative
sampling methodologies, reporting requirements for certain low risk programs, and
guidance for federal agencies that fund state-administered programs. The revision
also contained a best practices listing for preventing, identifying, detecting, and
recovering improper payments. Finally, while the definition of “significant erroneous
payments” found in the previous OMB guidance was retained, A-123 Appendix C
provided elaboration: “OMB may determine on a case-by-case basis that certain
programs that do not meet the threshhold requirements...may still be subject to the
7 See OMB, Management’s Responsibility for Internal Controls, Circular No. A-123
revised, Dec. 21, 2004, at [http://www.whitehouse.gov/omb/circulars/a123/a123_rev.pdf].
8 See OMB, “Requirements for Effective Measurement and Remediation of Improper
Payments,” Appendix C to OMB Circular A-123, Aug. 10, 2006, available at
[http://www.whitehouse.gov/omb/circulars/a123/a123_appx-c.pdf]. Hereafter, Appendix C.
9 Recovery auditing is designed to identify and then recoup erroneous payments by
reviewing large volumes of purchase and contract records using ongoing, systematic
procedures for data analysis.
10 Appendix C, p. 2.

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annual PAR reporting requirement. This would most likely occur in programs with
relatively high annual outlays.”11
Scorecard Standards and Ratings
The Bush Administration designated Eliminating Improper Payments (EIP) as
a separate program initiative in the PMA in 2004.12 Under the EIP initiative, which
is ongoing, 15 federal agencies receive quarterly scorecard ratings from OMB for
their efforts to identify, eliminate, and recover improper payments.13 The scorecard
uses a stoplight rating system of green for success, yellow for mixed results, and red
for unsatisfactory. Agencies are rated against six EIP “standards for success,” or core
criteria (listed below). If an agency meets all six of the criteria, it receives a “green”
rating; if it meets the first four criteria, but not the fifth and sixth, it is rated “yellow”;
and if an agency fails to meet any one of the first four criteria it is rated “red.” The
criteria an agency must meet to “get to green” in the EIP initiative include the
following:
! Have a risk assessment in place that identifies all programs that are
at significant risk of improper payments;
! Have an OMB approved plan for measuring improper payments on
an annual basis and meets milestones established in the plan;
! Have an OMB-approved corrective action plan that includes
reduction targets;
! Be in compliance with improper payments reporting requirements;
! Demonstrate that improper payments are being reduced consistent
with reduction targets; and
! Have established improper payment recovery targets, and show it is
actively meeting these targets.14
As indicated in Figure 1, results in the initial round for the EIP scorecards,
released December 31, 2004, indicated that no agencies received “green,” five were
11 Ibid., p. 4. An example is given of a program with $10 billion in annual outlays and a 1%
error rate (below the 2.5% error rate threshhold ), yet resulting in $100 million in improper
payments. In such an instance, OMB may require that the program be designated as high
risk and included in the agency’s annual PAR (as a part of IPIA reporting).
12 See discussion in Fiscal Year 2006 Budget of the U.S. Government (Washington: GPO,
2005), p. 54. OMB, Improving the Accuracy and Integrity of Federal Payments, Jan. 25,
2005, p.i, at [http://www.whitehouse.gov/results/agenda/ipia_govt_wide_report.pdf].
13 The 15 agencies that receive scorecard ratings for Eliminating Improper Payments are: the
Departments of Agriculture, Defense, Education, Health and Human Services (HHS),
Homeland Security (DHS), Housing and Urban Development (HUD), Labor, Transportation
(DOT), Treasury, and Veterans Affairs (VA); and the Environmental Protection Agency
(EPA), the National Science Foundation (NSF), the Office of Personnel Management
(OPM), the Small Business Administration (SBA), and the Social Security Administration
(SSA). Acronyms cited are used in chart 1.
14 The White House, Scorecard Standards for Success, available at
[http://www.whitehouse.gov/results/agenda/standardsforsuccess08-2007.pdf].

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CRS-6
“yellow,” and 10 were “red.”15 By June 30, 2007, the scorecard showed that four
agencies were “green” in status, nine agencies were “yellow,” and two were “red.”
In less than three years, the number of agencies receiving green increased from zero
to four, and the number of agencies receiving red declined from 10 to two. The first
agency to attain green was the Department of Housing and Urban Development
(HUD) on the June 2005 scorecard, joined the next quarter by the Department of
Labor. The only agency to receive red grades throughout the period depicted was the
Department of the Treasury.
Further examination of the data in Figure 1, however, discloses a more
complicated picture. For example, the three most recent quarters have the same
totals for the red (two), yellow (nine), and green (four) grades. Yet, there were
noteworthy changes from the March to June 2007 ratings: HHS advanced from red
to yellow, while DHS slipped from yellow back to red.
The up and down arrows in Figure 1 indicate a change in grade from the
previous quarter. During the 11 quarters covered, there were 16 instances where an
agency’s grade changed from one quarter to the next. Most of the changes (14) reflect
an improvement in rating, with the National Science Foundation (NSF) jumping from
red to green in the final quarter of 2005 (hence the double arrows). On the other
hand, there were three instances when an agency’s grade was lowered from one
quarter to the next. The Department of Veterans Affairs (VA) received four yellows
followed by four greens and then slipped back to yellow for the last three quarters.
The Small Business Administration (SBA) started with red, advanced to yellow for
four quarters and then to green for three quarters, but like VA, slipped back to yellow
for the final three quarters. The DHS went from four reds to six yellows, and then in
the final quarter entered in the chart, unfortunately, regressed back to red.
In addition to the “current status” grades (provided in Figure 1), OMB, since
2005, also has given the agencies a grade for “progress in implementation.”16 These
ratings have been predominantly green from the outset (for the quarter ending March
31, 2005, 11 green and four yellow). For the quarters ending December 31, 2005, and
March 31, 2006, all agencies included in the scorecard received green, except for the
Department of the Treasury.17 For the next six quarters, either two, three, or four
agencies received a yellow grade, but the group of agencies not receiving green
varied somewhat from quarter to quarter. For the quarter ending June 30, 2007, there
was a single yellow (Treasury), but for the first time, an agency (DHS) received a red
grade for progress in implementation.
15 Ibid., Scorecard - December 31, 2004, at [http://www.whitehouse.gov/results/agenda/
200412scorecard.pdf].
16 Since the quarter ending Dec. 31, 2004, was the first quarter for which agency efforts in
the eliminating improper payments initiative were rated, there were no progress scores
given. Electronic version of scorecards for progress in implementation grades are available
at [http://www.whitehouse.gov/results/agenda/scorecard.html].
17 The Department of the Treasury did receive a grade of green for progress in
implementation for the quarter ending Mar. 31, 2005, but subsequently has consistently been
rated as yellow.

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It is not clear how useful scorecard ratings are as indicators of agency results in
eliminating improper payments. While OMB’s standards for success overlap with
IPIA objectives, the scorecard ratings themselves do not appear to be tightly linked
to improper payments rates or amounts. The Department of Labor (DOL), for
example, improved from a “yellow” rating at the start of FY2005 to a “green” by the
end of that fiscal year, even though its error rate increased during that time.18
Similarly, the Department of Housing and Urban Development (HUD), received a
“green” rating in each quarter of FY2006, despite reporting nearly $1.5 billion in
improper payments that year.19 Under the present scorecard grading system, then, an
agency may receive the highest rating even when its error rate increases, or when the
dollar value of its improper payments reaches into the billions.
18 OMB, Improving the Accuracy and Integrity of Federal Payments, Jan. 31, 2007 at
[http://www.whitehouse.gov/omb/financial/reports/2007_ipia_report.pdf].
19 Ibid.

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Figure 1. Eliminating Improper Payments Initiative’s Quarterly Scorecards for Current Status, 2004-2007
Source: Office of Management and Budget. Electronic version of scorecards available at [http://whitehouse.gov/results/agenda/scorecard.html].

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Trends in Improper Payments
Since IPIA reporting began in FY2004, OMB has published aggregate improper
payments data in an annual report titled “Improving the Accuracy and Integrity of
Federal Payments.”20 Table 1 shows government-wide improper payments rates and
totals for the first three years of IPIA reporting.
Table 1. Improper Payment Trends, FY2004-FY2006
(in millions)
Federal Outlaysa
Improper Payments
Error Rate
FY2004
$1,142,520
$45,043
3.9%
FY2005
$1,222,844
$38,484
3.2%
FY2006
$1,412,078
$40,515
2.9%
Source: Office of Management and Budget, Improving the Accuracy and Integrity of Federal
Payments, January 31, 2007.
a. Column does not represent total federal outlays, but only includes outlays that (1) have been
determined to be at risk and (2) have improper payments estimates. See the Federal Outlays
section for more information.
Error Rate
The data in Table 1 show that the error rate declined in each of the two fiscal
years since the government-wide baseline for improper payments was established in
FY2004. OMB has stated that the declining error rate was largely due to two factors:
a reduction in improper payments reported under the Medicare fee-for-service
program, and low improper payment rates among the programs that reported for the
first time in either FY2005 or FY2006.21 GAO has argued that, while improper
payments have declined significantly under the fee-for-service component of
Medicare, that was not necessarily a consequence of improved accountability of
program dollars, but rather was due largely to “refinements” in the way HHS
calculated the program’s improper payments estimate.22
20 OMB’s annual improper payments report is issued in the winter following the end of the
fiscal year that it covers. It is made available to the public through OMB’s website, at
[http://www.whitehouse.gov/omb/financial/fia_improper.html].
21 Medicare is comprised of a fee-for-service component (Parts A and B), a managed care
component (Part C), and a prescription drug benefit component (Part D).
22 Testimony of McCoy Williams, GAO Director of Financial Management and Assurance,
Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing
Requirements Continue, U.S. Congress, Senate Subcommittee on Federal Financial
Management, Government Information, Federal Services, and International Security,
hearings, 110th Cong., 1st sess, Mar. 29, 2007, GAO-07-635T.

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Amount of Improper Payments
The data also show that the dollar amount of the government’s improper
payments declined by $6.56 billion between FY2004 and FY2005, and then increased
by $2.03 billion between FY2005 and FY2006. The initial decrease was primarily
driven by reductions in improper payments under Medicare, and the subsequent
increase was largely due to the $1.57 billion jump in estimated improper payments
under USDA’s Marketing Loan Assistance Program.23 That the fluctuation of
improper payments can be driven by changes in individual programs is indicative of
the concentrated nature of the problem. In FY2006, for example, eight programs
accounted for 89% of reported improper payments, and just two programs —
Medicare and the Earned Income Tax Credit — accounted for 53% of all reported
improper payments that year.24
Federal Outlays
The federal outlays data in Table 1 represent the amount of risk-susceptible
dollars for which federal agencies have developed improper payments estimates. In
FY2006, agencies had estimates in place for $1.4 trillion out of $1.7 trillion (81%)
in total at-risk outlays. Compared to FY2004, this represents a $270 billion increase
in risk-susceptible expenditures with estimates in place. It also indicates, however,
that nearly 20% of at-risk outlays — around $330 billion — lacked improper
payment estimates. A number of major programs are among those lacking estimates,
including Medicaid, the National School Lunch and School Breakfast Programs,
Temporary Assistance to Needy Families (TANF), the State Child Health Insurance
Program (SCHIP), Medicare Prescription Drug Benefit and Medicare Advantage, and
the Special Supplemental Nutrition Program for Women, Infants, and Children
(WIC). OMB Controller Linda Combs has said that the difficulty in developing error
rates in many of these cases lay in the “size and complexity” of the programs, many
of which are administered by state governments.25 Combs also said that OMB is
working with states to collect the information necessary to produce valid estimates
in the next two years. Until these programs have estimates, the full extent of the
improper payments problem will remain unknown.
23 OMB, Improving the Accuracy and Integrity of Federal Payments, January 31, 2007.
24 Ibid. The eight programs that accounted for 89% of FY2006 reported improper payments
were Medicare, Earned Income Tax Credit, Unemployment Insurance, Supplemental
Security Income, Food Stamps, Public Housing/Rental Assistance, Marketing Assistance
Loan Program, and Old-Age, Survivors, and Disability Insurance.
25 Testimony of OMB Controller Linda Combs, U.S. Congress, House Subcommittee on
Government Management, Finance, and Accountability, The Improper Payments
Information Act — Are Agencies Meeting the Requirements of the Law?, hearings, 109th
Cong., 2nd sess., Apr. 5, 2006.

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Continuing Concerns
Reporting Threshold
There has been criticism of OMB’s definition of “significant [emphasis added]
improper payments.” In addition to the $10 million threshold in estimated improper
spending established by the statute, OMB required that the improper payments
represent at least 2.5% of total program payments. The Chairman and Ranking
Minority Member of the House Subcommittee on Government Efficiency and
Financial Management, Representative Todd Platts and Representative Marsha
Blackburn, sent a letter to OMB in August 2003 questioning the 2.5% minimum
threshold. Likewise, according to a news article, Senators Charles Grassley and Max
Baucus, the Chairman and Ranking Minority Member of the Senate Finance
Committee, stated in a January 9, 2004, letter to OMB Director Joshua Bolten that
OMB should not have established the 2.5% threshold and should have simply
required that agencies report all programs generating estimated improper payments
of more than $10 million. The Senators reportedly observed that, by adding the 2.5%
threshold, “The improper payments figures that will eventually be reported to the
public will look better and feel better than they really are....”26
According to GAO, the 2.5% threshold could mask the extent of the improper
payments problem. In a 2006 report reviewing agency PARs from FY2005, GAO
identified many examples of agency programs with estimated improper payments
over $10 million that were not included in the agency’s improper payments estimate
because they did not meet the 2.5% threshold.27 For example, GAO said that the
Department of Education did not report on three programs that each had estimated
improper payments exceeding $10 million — $155 million in total — because in
each case those payments represented less than 2.5% of program outlays.28 If the
2.5% criterion were applied to large programs, GAO concluded, billions of dollars
in improper payments could go unreported.29 OMB has defended the 2.5% threshold,
stating it was established “to ensure that agencies were focusing their resources on
programs with the highest levels of risk for improper payments.”30
As noted above, revised IPIA guidance, issued by OMB in 2006 as Appendix
C to Circular A-123, addressed this issue to some extent. Language in the updated
version stated explicitly that OMB could require a large program with relatively high
annual outlays, but that failed to meet the 2.5% criteria, to be considered as high risk
and included in the agency’s annual IPIA reporting. Such a determination, however,
26 Cited by Amelia Gruber, “OMB Defends Actions on Improper Payments,” GovExec.com,
Jan. 14, 2004.
27 GAO, Improper Payments: Agencies’ Fiscal Year 2005 Reporting Under the Improper
Payments Information Act Remains Incomplete, GAO-07-92, Dec. 2006, pp. 41-45.
28 Ibid., p. 44.
29 Ibid., p. 54.
30 Letter from Linda Combs, OMB Controller, to McCoy Williams, GAO Director of
Financial Management and Assurance, Oct. 26, 2006.

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would be done by OMB on a case-by-case, nonmandatory basis. The clarification in
Appendix C, arguably, thus may be viewed as not going far enough by some in
Congress who in the past have taken issue with OMB’s addition of the 2.5%
prerequisite.
Annual Review Exemption
As previously described, the IPIA requires agencies to review all their programs
and activities each year to determine whether they are at risk for significant improper
payments. OMB’s 2006 revised guidance, however, permits agencies to exempt
programs from the annual review requirement (which OMB refers to as a risk
assessment) for two years if a program is determined to be not risk susceptible.
Thus, if a program were reviewed in 2007 and deemed not at risk, then the program
would not have to be reviewed again until 2010.31 At a hearing on improper
payments held in March 2007, McCoy Williams, Director of Financial Management
and Assurance at GAO, testified that OMB had discussed the proposed changes with
GAO prior to issuing the revised guidance. According to the witness, “We [at GAO]
advised OMB that the provision to perform risk assessments every 3 years for those
programs not deemed risk-susceptible was inconsistent with the IPIA requirement for
agencies to review all programs and activities annually.”32
OMB’s exemption from the IPIA’s annual review requirement might exacerbate
the consequences of inaccurate risk assessments. Agencies are still refining their
procedures for identifying risk-susceptible programs. In some cases, improvements
in risk assessment methods have resulted in programs being designated as risk
susceptible that previously had been considered low-risk. The Department of
Agriculture (USDA), for example, enhanced its risk assessment methodology in
FY2006, and, as a consequence, it determined that four programs were susceptible
to significant improper payments that year which had been considered low-risk the
previous year.33 USDA reported that those four programs had total outlays of $12.8
billion and had issued a combined $804 million in improper payments.34 While
OMB praised the agency for identifying “previously undetected” improper payments,
USDA could have claimed OMB’s annual review exemption for the four programs
after determining they were low-risk in FY2005.35 Had it done so, USDA would not
have been required to re-assess those programs until FY2008, and hundreds of
31 OMB’s guidance would require a program to be re-assessed if it experienced a significant
legislative change or a major increase in funding, even if that assessment would occur less
than three years from the last risk assessment.
32 Testimony of McCoy Williams, Mar. 29, 2007, GAO-07-635T, p. 6.
33 The four programs were Direct and Counter-Cyclical Payments, Conservation Reserve
Program, Farm Service Agency (FSA) Disaster Programs, and the Non-insured Assistance
Program. U.S. Department of Agriculture, “Improper Payment and Recovery Auditing
Details,” FY2006 Performance and Accountability Report, Nov. 15, 2006, at
[http://www.ocfo.usda.gov/usdarpt/pdf/par09.pdf].
34 Ibid.
35 OMB, Improving the Accuracy and Integrity of Federal Payments, Jan. 31, 2007, p. 4.

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millions of dollars in improper payments might have gone undetected for another two
years.
In addition, the exemption has been applied not just to individual programs, but,
in at least one instance, to an entire agency. The General Services Administration
(GSA) stated in its FY2006 PAR that its review had identified no programs that were
susceptible to significant improper payments, and, therefore, the agency would not
review its programs again until FY2008.36 In this way, agencies might use OMB
guidance to declare themselves exempt from IPIA requirements.
Congressional Oversight
The House Subcommittee on Government Efficiency and Financial
Management held oversight hearings on improper payments in May and July 2003,
as did the House Subcommittee on Government Management, Finance, and
Accountability in July 2005 and April 2006.37 In the Senate, the Subcommittee on
Federal Financial Management, Government Information, and International Security
held improper payments hearings in July 2005, and in March and December 2006.38
In the 110th Congress, on March 29, 2007, the Senate Subcommittee on Federal
Financial Management, Government Information, Federal Services, and International
Security, reformulated after the 2006 elections, held a hearing titled “Eliminating and
Recovering Improper Payments.”39 In addition to testimony from McCoy Williams
36 U.S. General Services Administration (GSA), FY2006 Performance and Accountability
Report, Nov. 10, 2006, at [http://www.gsa.gov/gsa/cm_attachments/GSA_DOCUMENT/
GSAFY2006PAR_R2F-aAB_0Z5RDZ-i34K-pR.pdf].
37 U.S. Congress, House Committee on Government Reform, Subcommittee on Government
Efficiency and Financial Management, Show Me the Tax Dollars — How Much Is Lost to
Improper Payments Each Year? hearing, 108th Cong., 1st sess., May 13, 2003, (Washington:
GPO, 2003); and ibid., Show Me the Tax Dollars Part II — Improper Payments and the
Tenncare Program, July 14, 2003, (Washington: GPO, 2003); and ibid., Subcommittee on
Government Management, Finance, and Accountability, Implementing the Improper
Payment Information Act - Are We Making Progress? 109th Cong., 1st sess., July 20, 2005,
at [http://reform.house.gov/GMFA/Hearings/EventSingle.aspx?EventID=30182]; and ibid.,
The Improper Payments Information Act — Are Agencies Meeting the Requirements of the
Law? Apr. 5, 2006.
38 U.S. Congress, Senate Subcommittee on Federal Financial Management, Government
Information, and International Security, Improper Payments: Where Are Truth and
Transparency in Federal Financial Reporting?, hearing, 109th Cong., 1st sess., July 12, 2005
(Washington: GPO, 2005); and Reporting Improper Payments: A Report Card on Agencies’
Progress, hearing, Mar. 9, 2006, at [http://hsgac.senate.gov/index.cfm?Fuseaction=
Hearings.Detail&HearingID=329]; and An Assessment of the Improper Payments
Information Act of 2002, hearing, Dec. 5, 2006.
39 U.S. Congress, Senate Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, Eliminating and Recovering
Improper Payments, hearing, 110th Cong., 1st sess., Mar. 29, 2007, at
[http://hsgac.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=431].

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of GAO, referred to above, three other witnesses appeared at the hearing.40
Congressional interest in identifying, reducing, and recovering improper payments
likely will continue.
40 The other witnesses were: David Norquist, Chief Financial Officer, Department of
Homeland Security; Timothy B. Hill, Chief Financial Officer, Centers for Medicare and
Medicaid Services; and Lee White, Executive Vice President, PRG-Schultz, Inc.

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