Overview of the Treasury Department’s Federal Payment Levy and Treasury Offset Programs

Overview of the Treasury Department’s Federal Payment Levy and Treasury Offset Programs

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Updated April 7, 2023
Overview of the Treasury Department’s Federal Payment Levy
and Treasury Offset Programs
Within the federal government, the U.S. Department of the
Both programs rely on the same BFS database of persons
Treasury, through its Bureau of Fiscal Service (BFS), is
and companies with delinquent state and federal tax and
primarily responsible for collecting delinquent debt owed to
nontax debt. Federal and state creditor agencies provide and
federal, and in some cases, state government agencies. The
update the information stored in the database.
BFS has two programs for collecting such debt. They differ
by the type of debt each program collects.
Origin and Operation of the FPLP
The Federal Payment Levy Program was established by the
The Federal Payment Levy Program (FPLP) collects
Taxpayer Relief Act of 1997 (TRA97, P.L. 105-34) as
delinquent federal tax debt only. Under the program, the
Section 6331(h) of the Internal Revenue Code (IRC).
BFS collaborates with the Internal Revenue Service (IRS)
Congress intended the FPLP to improve the collection of
to collect this debt by placing a continuous levy on eligible
delinquent federal taxes in two ways. First, the program
federal payments to delinquent taxpayers.
allowed the IRS to share with the BFS the taxpayer
information needed to set up a continuous levy for specific
The Treasury Offset Program (TOP) collects a variety of
taxpayer accounts. Second, IRC Section 6331 authorized
state tax and nontax debt and federal nontax debt. Under
the IRS to collect delinquent taxes through the offset of
the TOP, the BFS collaborates with federal and state
certain federal payments to debtors. Before TRA97, the IRS
government agencies to collect delinquent debt (including
was not permitted to establish such a process. The BFS and
past-due child support) by offsetting certain federal
IRS have managed the program since it began in July 2000.
payments to delinquent individuals. Federal nontax debt
consists of direct loans, defaulted guaranteed loans,
According to BFS’s FY2023 budget request, the 10-year
administrative debt (e.g., salary and benefit overpayments),
cost of developing and operating the FPLP is $220 million.
and unpaid fines and penalties.
The IRS reimburses the BFS for these services out of its
appropriated funds. The Biden Administration has proposed
As Table 1 shows, most of the delinquent debt BFS collects
allowing the BFS to cover its FPLP costs from FPLP
is federal nontax and state tax and nontax debt. From
collections; it argued that such a change would reduce
FY2017 to FY2021, FPLP tax collections accounted for
administrative and overhead costs for the IRS and the BFS.
7.5% of total delinquent federal and state debt collections
It is unclear if Congress approved this change.
through the TOP.
The FPLP facilitates the collection of delinquent federal
Table 1. Amount of Delinquent Federal and State Tax
taxes by levying designated federal payments disbursed by
and Nontax Debt Collected Through the Federal
BFS to businesses and individuals holding such debt. A
Payment Levy Program (FPLP) and the Treasury
levy remains in place until all delinquent taxes are paid in
Offset Program (TOP), FY2017 to FY2021
full, including penalties and accrued interest.
(Mil ions of Dollars)
Current law allows the following payments to be levied
TOP:
under the FPLP up to any specified limit:
State Tax
TOP:
and
Federal
 up to 15% of federal employee retirement annuities;
Fiscal
Nontax
Nontax
Year
FPLP
Debt
Debt
Total
 100% of federal payments to federal vendors;
FY2017
$683
$2,850
$3,724
$7,257
 100% of federal employee travel advances or
FY2018
$679
$2,712
$3,805
$7,196
reimbursements;
FY2019
$802
$2,592
$5,949
$9,343
 up to 15% of Social Security Old Age and Survivor
FY2020
$507
$5,861
$4,041
$10,409
benefits and Railroad Retirement benefits, excluding
disability and supplemental security income payments;
FY2021
$262
$3,837
$674
$4,773
and
Source: U.S. Department of the Treasury, U.S. Government

Receivables and Debt Collection Activities of Federal Agencies, Fiscal Year
up to 15% of some federal salaries.
2021, Report to the Congress, November 2022.
These limits mean, for example, that for someone who
receives a monthly Social Security retirement benefit of
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Overview of the Treasury Department’s Federal Payment Levy and Treasury Offset Programs
$1,000, no more than $150 could be levied through the
For debts referred to the CSP, the BFS attempts to collect
FPLP to pay a delinquent federal tax debt.
them through a variety of actions. These include sending
demand letters and trying to establish phone contact with a
To initiate a levy, the IRS sends an electronic file with tax
debtor; reporting delinquent debt to consumer or
debt information to the BFS, which then adds it to its
commercial credit bureaus; and garnishing the wages of a
database for delinquent debt. The BFS then searches a
debtor. The BFS also has the option of collecting delinquent
separate database for pending federal payments, looking for
debt through the TOP or authorized private debt collectors.
a match between the name and taxpayer identification
number (TIN) of the delinquent taxpayer and the name and
In general, the federal payments eligible for levy under the
TIN of persons scheduled to receive federal payments.
FPLP are also eligible for offset through the TOP. The
same percentage limits apply in both cases. Up to 100% of
If a match is found, the BFS notifies the IRS, which in turn
federal income tax refunds may be offset, including refunds
notifies that person of its intent to levy qualified federal
from refundable tax credits like the earned income tax
payments until his or her tax debt is paid in full. If the
credit (EITC). Like the FPLP, certain federal payments
person does not reply within 30 days, the IRS may
cannot be offset through the TOP. If someone has both
authorize the BFS to initiate a continuous levy of those
delinquent federal tax and nontax debt, paying off the tax
payments. The levy remains in effect until the delinquent
debt is a higher priority. Only after the tax debt has been
taxes are fully paid, or the person makes an arrangement
paid in full can a federal payment be offset to collect
with the IRS to settle her or his tax debt.
someone’s nontax debt.
When a payment is levied, the BFS sends a letter to the
The process of offsetting a federal payment through the
taxpayer explaining which payment was reduced and by
TOP is similar to levying a federal payment under the
how much, and advising the individual to contact the IRS to
FPLP. Creditor agencies (federal and state) submit
come to an agreement on paying off the debt.
information about delinquent debts to the BFS. Before it
disburses an eligible payment, the BFS compares its
Some federal tax debt cannot be collected through the
payment information with the information in its delinquent
FPLP. More specifically, the IRS cannot levy the assets of
debtor database. If there is a match, the BFS offsets the
persons who are in bankruptcy proceedings, who applied
payment, to the allowable extent, to collect the debt.
for tax relief as an innocent or injured spouse, who entered
into an alternative payment agreement with the IRS (e.g.,
In the case of federal nontax debt, the BFS notifies the
offer-in-compromise), or who suffered specified hardships
debtor, the creditor agency, and the paying agency when an
(e.g., residing in a federally declared disaster area). Largely
offset is performed. The BFS sends the amounts collected
because of these limitations, 56% of delinquent individual
through offset to the creditor agencies, after subtracting its
federal tax debt was exempt from the FPLP in April 2020;
fee for conducting the offset. Federal nontax debt cannot be
the remaining 44% totaled $134.2 billion.
referred to TOP if a debtor has filed for bankruptcy or has
applied for tax relief as an innocent or injured spouse.
The amount collected through continuous levy each year is
a small fraction of the total amount of delinquent tax debt in
Policy Issues Raised by the FPLP and TOP
taxpayer accounts subject to payment levy. Social Security
A recurring issue with the FPLP has been whether to levy
payments typically account for over 70% of the federal
federal payments to low-income persons at risk of
payments levied under the program. The amount of
experiencing financial hardship. Responding to a study by
delinquent tax debt subject to FPLP levy in FY2019 totaled
the National Taxpayer Advocate (NTA), the IRS placed a
$107.3 billion, but only 0.7% of that amount was paid
low-income filter (LIF) on the FPLP in January 2011 to
through the program.
prevent low-income persons from having their federal
payments levied. However, if a low-income taxpayer has an
Origin and Operation of the TOP
unfiled return indicator in his/her tax record, that individual
The Treasury Offset Program was enacted as part of the
is excluded from the filter and subject to the FPLP. The
Debt Collection Improvement Act of 1996 (DCIA, P.L.
NTA has urged the IRS to eliminate this exclusion, but the
104-134). The act authorized the Treasury Department to
IRS so far has indicated that it will not do so.
create a centralized mechanism for offsetting federal
payments to pay off delinquent federal nontax debt and a
A recurring issue with the TOP has been offsetting the
variety of state tax and nontax debts, under IRC Sections
EITC to pay off delinquent federal student loan debt. The
6402(d), 6402(e), and 3716.
credit is refundable. Refunds received by EITC recipients
who have defaulted on federal student loan payments are
Under the TOP, the BFS is allowed to offset a variety of
subject to offset under the TOP. Some argue that the EITC
federal payments to recover delinquent federal nontax debt,
should be exempt from offset for low-income persons with
unpaid child support, or certain delinquent state tax and
federal student loan debt.
nontax debt. To be eligible for collection through the TOP,
federal nontax debt generally must be delinquent for more

than 120 days, legally enforceable, and referred to the TOP
by a creditor agency or through the BFS’s Cross-Servicing
Gary Guenther, Analyst in Public Finance
Program (CSP), Treasury-designated debt collection
centers, or the Department of Justice.
IF11671
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Overview of the Treasury Department’s Federal Payment Levy and Treasury Offset Programs

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