This is the accessible text file for GAO report number GAO-03-1030T 
entitled 'Federal Budget: Opportunities for Oversight and Improved Use 
of Taxpayer Funds' which was released on July 17, 2003.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

United States General Accounting Office:



Before the Committee on Ways and Means, House of Representatives:

For Release on Delivery :

Expected at 10 a.m. EDT Thursday, July 17, 2003:


Opportunities for Oversight and Improved Use of Taxpayer Funds:

Statement of David M. Walker:

Comptroller General of the United States:


GAO Highlights:

Highlights of GAO-03-1030T, testimony before the Committee on Ways and 
Means, House of Representatives 

Why GAO Did This Study:

The hearing today deals with the important congressional obligation to 
exercise oversight over the use of taxpayer funds, recognizing that 
waste, fraud, abuse, and mismanagement are not victimless activities. 
When resources are diverted for inappropriate, illegal, inefficient, 
or ineffective purposes, both taxpayers and legitimate program 
beneficiaries are cheated. Beyond preventing obvious abuse, government 
also has an obligation to modernize its practices and processes and 
fundamentally reexamine and reprioritize its activities to meet the 
demands and needs of today’s changing world. 

What GAO Found:

This testimony focuses on program reviews, oversight, and stewardship 
of taxpayer funds in three tiers: (1) areas vulnerable to fraud, 
waste, abuse, and mismanagement. For example, payments made to 
ineligible recipients drain resources that could otherwise go to the 
intended beneficiaries of a program. Everyone should be concerned 
about the diversion of resources and subsequent undermining of program 
integrity. (2) improving the economy, efficiency and effectiveness of 
federal programs and activities to enhance and maintain government 
performance. (3) fundamental reassessment and reprioritization of 
government programs, policies & activities to meet the challenges of 
the 21st century, especially in light of the demographic tidal wave 
looming on our fiscal horizon.
Each of these tiers is relevant to the areas on which the Committee is 
focusing attention as part of this hearing: Social security programs, 
Medicare, and tax compliance and preferences. 

* The Social Security Administration (SSA) must modernize its 
disability programs to bring them in line with the current status of 
science, medicine, technology, law, and labor market conditions. GAO 
placed federal disability programs on its high-risk list in 2003 to 
focus attention on this multi-agency challenge. SSA needs also to 
ensure the integrity of its programs, and in particular should give 
continuing management attention to problems in the SSI program. 

* Medicare is one of the largest and most complex programs in the 
federal government, making it highly vulnerable to waste, fraud, 
abuse, and mismanagement. GAO designated the Medicare program as a 
high-risk area in 1990, and the risk remains. Weaknesses in contractor 
performance and agency oversight increase the risks of improper 
payments, and—along with difficulties in payment setting—lead to 
wasteful spending. Structural reform is also necessary given the 
pressures of demographics and rising health care costs. 

* Ensuring that taxpayers meet their tax obligations under an 
increasingly complex tax code has long presented the Internal Revenue 
Service (IRS) with daunting challenges. The potential revenue losses 
and the threat to voluntary compliance make the collection of unpaid 
taxes a high-risk area. Congress and others have been concerned that 
declines in IRS’s enforcement programs are eroding taxpayers’ 
confidence in the fairness of our tax system. Further, any 
reassessment of government’s activities must include tax preferences. 
These often are not subject to the same review processes applied to 
spending programs but, given their growth and importance, they must be 
part of any comprehensive approach to the challenges ahead. 

What GAO Recommends:

Tackling areas at risk for fraud, waste, abuse, and mismanagement will 
require determination, persistence, and sustained attention by both 
agency managers and Congressional committees. In addition, there is a 
need to fundamentally review and reassess, the proper role of the 
federal government, how the government should do business in the 
future, and—sometimes--who should do the government’s business in the 
21st century. Periodic review of programs on the mandatory and 
discretionary sides of the budget, as well as tax preferences, can 
prompt a healthy reassessment of our priorities and of the changes 
needed in program design, resources and management to achieve results. 
Congressional support and oversight will be key.

Mr. Chairman, Mr. Rangel, members of the Committee:

It is a pleasure to be here today as you deal with one of your 
important obligations--to exercise oversight over the use of taxpayer 
funds. No government should waste its taxpayers' money, whether we are 
operating during a period of budget surpluses or deficits. And, as you 
all recognize, waste, fraud, abuse, and mismanagement are not 
victimless activities. Our resources are not unlimited, and when they 
are diverted for inappropriate, illegal, inefficient, or ineffective 
purposes, both taxpayers and legitimate program beneficiaries are 
cheated. Both the Administration and the Congress have an obligation to 
safeguard benefits for those that deserve them and avoid abuse of 
taxpayer funds by preventing such diversions. Beyond preventing obvious 
abuse, government also has an obligation to modernize its priorities, 
practices, and processes so that it can meet the demands and needs of 
today's changing world. More broadly, the federal government must 
reexamine the entire range of policies and programs--entitlements, 
discretionary spending, and tax preferences[Footnote 1]--in the context 
of the 21ST century. Both the Congress and the executive branch have a 
fiduciary and stewardship obligation to gain control over our fiscal 

Periodic reexamination and revaluation of government activities has 
never been more important than it is today. Our nation faces large and 
growing long-term fiscal challenges. Increased pressure also comes from 
world events: both from the recognition that we cannot consider 
ourselves "safe" between two oceans--which has increased demands for 
spending on homeland security--and from the U.S. role in an 
increasingly interdependent world. Government also faces increased 
demands from the American public for modern organizations and 
workforces that are results-oriented, capable, responsive, agile, and 

This committee has jurisdiction over some of the most important 
programs in the federal government: Social Security--including related 
programs such as SSI--Medicare, and TANF. As the committee with 
jurisdiction over our tax system--over raising the revenue to finance 
government's activities--you also oversee the growing number of 
"programs" conducted through the tax code in the form of tax 
preferences. By anyone's definitions, your oversight agenda is massive. 
It is important that you take it seriously. Today's hearing is a 
positive step in this regard.

And, of course, as everyone on this committee knows well, today 
discretionary spending makes up less than 40 percent of the budget. Net 
interest and other mandatory spending[Footnote 2]--including the 
programs under your control--represent over 60 percent of the federal 
budget. Figure 1 shows the composition of federal spending in 2003. 
Including the Iraq war supplemental mandatory spending makes up 54 
percent of the budget--up from 25 percent in 1963 before the creation 
of Medicare and 45 percent in 1983.[Footnote 3] If you look only at 
programmatic spending (i.e., excluding interest on the debt) the shares 
are 58 percent mandatory and 42 percent discretionary.

Figure 1: Composition of Federal Spending, 2003:

[See PDF for image]

Source: GAO analysis of data from the Congressional Budget Office.

Note: Includes $41 billion in discretionary spending and about $1 
billion in mandatory spending for the Iraq war supplemental. Includes 
$11 billion in mandatory spending for the 2003 tax cut package.

[End of figure]

Direct, or mandatory, spending programs and tax preferences are by 
definition assumed in the baseline and not automatically subject to 
annual congressional decisions as are appropriated discretionary 
programs. In our view, a periodic reassessment of these programs and 
tax preferences is critical to achieving fiscal discipline in the 
budget as a whole. Moreover, such a review can help ascertain whether 
these programs are protected from the risk of fraud, waste, and abuse, 
and are designed to be as economical, efficient, and effective as 

As you know, the Budget Resolution directs GAO to prepare a report 
identifying "instances in which the committees of jurisdiction may make 
legislative changes to improve the economy, efficiency, and 
effectiveness of programs within their jurisdiction." My testimony 
draws in part on some of the items that will be included in that 
report, which is due August 1, 2003. You asked me today to focus on 
several areas within this Committee's jurisdiction: Social Security and 
disability, unemployment insurance, Medicare, and tax preferences and 
compliance activities.

With me today are four GAO Directors with detailed knowledge in these 
areas: Barbara Bovbjerg of our Education, Workforce and Income Security 
Team [Social security, disability], Leslie Aronovitz and Laura Dummit 
of our Health Care Team [Medicare] and Michael Brostek who is a Tax 
Director in our Strategic Issues Team.

In this testimony, I will discuss program reviews, oversight, and 
stewardship of taxpayer funds on three levels:

First are those areas vulnerable to fraud, waste, abuse, and 
mismanagement. Payments to ineligibles drain resources that could 
otherwise go to the intended beneficiaries of a program. Everyone 
should be concerned about the diversion of resources and subsequent 
undermining of program integrity.

Second, and more broadly, policymakers and managers need to look at 
ways to improve the economy, efficiency, and effectiveness of federal 
functions, programs, and policies--including specific tax preferences. 
Even where we agree on the goals, numerous opportunities exist to 
streamline, target, and consolidate programs to improve their delivery. 
This means looking at program consolidation, at overlap, and at 
fragmentation. It means improved targeting in both spending programs 
and tax preferences.

Finally, a fundamental reassessment of government programs, policies, 
and activities can help weed out programs that are outdated, 
ineffective, unsustainable, or simply a lower priority than they used 
to be. In most federal mission areas national goals are achieved 
through the use of a variety of tools and, increasingly, through the 
participation of many organizations, such as state and local 
governments and international organizations, that are beyond the direct 
control of the federal government. Government cannot accept as "givens" 
all of its existing major programs, policies, and operations. A 
fundamental review, reassessment, and reprioritization of what the 
federal government does, how it does it, and in some cases, who does 
the government's business will be required, particularly given the 
demographic tidal wave that is starting to show on our fiscal horizon.

Before turning to the three program areas on which you asked us to 
focus today, let me briefly discuss each of the three levels of review.

Addressing Vulnerabilities to Fraud, Waste, Abuse, and Mismanagement:

Programs and functions central to national goals and objectives have 
been hampered by daunting financial and program management problems, 
exposing these activities to fraud, waste, abuse, and mismanagement. 
These weaknesses have real consequences with large stakes that are 
important and visible to many Americans. Some of the problems involve 
the waste of scarce federal resources. Other problems compromise the 
ability of the federal government to deliver critically needed 
services, such as ensuring airline safety and efficiently collecting 
taxes. Still others may undermine government's ability to safeguard 
critical assets from theft and misuse.

In recent years, GAO's work across the many areas of government program 
and operations has highlighted threats to the integrity of programs 
which prompt potential for fraud, waste, abuse, and mismanagement. As 
the sections in this testimony on social security programs and 
unemployment insurance, health care, and tax issues illustrate, much of 
our work for the Congress is n fact dedicated to helping redesign 
programs and improve management to address these long standing 
problems, in areas ranging from uncollected taxes--both corporate and 
individual--to critical entitlement programs that provide health and 
social services.

In 1990, GAO began a program to report on government operations we 
identified as "high risk." This label has helped draw attention to 
chronic, systemic performance and management shortfalls threatening 
taxpayer dollars and the integrity of government operations. Over the 
years GAO has made many recommendations to improve these high-risk 
operations. We discovered that the label often inspired corrective 
action--indeed 13 areas have come off the list since its inception. For 
each of these areas, we focus on (1) why the area is high-risk; (2) the 
actions that have been taken and that are under way to address the 
problem since our last update report and the issues that are yet to be 
resolved; and (3) what remains to be done to address the risk.

In January of this year we provided an update for the 108TH Congress, 
giving the status of high-risk areas included in our January 2001 
report and identifying new high-risk areas warranting attention by the 
Congress and the administration.[Footnote 4] GAO's 2003 high-risk list 
is shown in Attachment I. This Committee has jurisdiction over a number 
of these areas. Lasting solutions to high-risk problems offer the 
potential to save billions of dollars, dramatically improve service to 
the American public, strengthen public confidence and trust in the 
performance and accountability of our national government, and ensure 
the ability of government to deliver on its promises. We have noted 
that continued congressional interest and oversight, such as that 
exemplified by this hearing today are of crucial importance. In 
addition, perseverance by the administration in implementing needed 
solutions is needed. The administration has looked to our 
recommendations in shaping government-wide initiatives such as the 
President's Management Agenda, which has at its base many of the areas 
we have previously designated as high risk.

Clearly progress has been made in addressing most of the areas on our 
current high risk list, both through executive actions and 
congressional initiatives. However, many of these problems and risks 
are chronic and long standing in nature and their ultimate solution 
will require persistent and dedicated efforts on many fronts and by 
many actors over a period of time. Some will require changes in laws to 
simplify or change rules for eligibility, provide improved incentives 
or to give federal agencies additional tools, such as additional tools 
to track and correct improper payments. Continued progress in improving 
agencies' financial systems, information technology, and human capital 
management will be vital in attacking and mitigating risks to federal 
program integrity. Some areas may indeed require additional investments 
in people, process, and technology to provide effective information, 
oversight, and enforcement that protects programs from abuse. 
Ultimately, a transformation will be needed in the cultures and 
operations of many agencies to permit them to manage risks and foster 
the kind of sustained improvements in program operations that is called 
for. Continued persistence and perseverance in addressing the high-risk 
areas will ultimately yield significant benefits for the taxpayers over 
time. Finding lasting solutions offers the potential to achieve 
savings, improve services, and strengthen public trust in government.

Improving Economy, Efficiency, and Effectiveness:

Important as safeguarding funds from fraud, waste, abuse, and 
mismanagement is, I believe that for long-lasting improvements in 
government performance the federal government needs to move to the next 
step: to pursue widespread opportunities to improve the economy, 
efficiency, and effectiveness of existing federal goals and program 
commitments. The basic goals of many federal programs--both mandatory 
and discretionary--enjoy broad support. That support only makes it more 
important for us to pay attention to the substantial opportunities to 
improve cost effectiveness and the delivery of services and activities. 
No activity should be exempt from some key questions about its design 
and management.

Key Questions for Program Oversight: Is the program targeted 
appropriately?; Does the program duplicate or even work at cross 
purposes with related programs and tools?; Is the program financially 
sustainable and are there opportunities for instituting appropriate 
cost sharing and recovery from nonfederal parties including private 
entities that benefit from federal activities?; Can the program be made 
more efficient through reengineering or streamlining processes or 
restructuring organizational roles and responsibilities?; Are there 
clear goals, measures and data with which to track progress, results 
costs, and benefits?.

GAO's work illustrates numerous examples where programs can and should 
be changed to improve their impact and efficiency.

For example, our work has shown that scarce federal funds could have a 
greater impact on program goals by improving their targeting to places 
or people most in need of assistance. Poorly targeted funding can 
result in providing assistance to recipients who have the resources and 
interest to undertake the subsidized activity on their own without 
federal financing. Moreover, lax eligibility rules and controls can 
permit scarce funds to be diverted to clients with marginal needs for 
program funds. Federal grant programs with formula distributions to 
state and local governments could be better targeted to places with 
high needs but low fiscal capacity. Other programs should be re-
examined for perverse incentives (e.g. flood insurance, which provides 
an incentive to rebuild in areas vulnerable to flooding).

GAO's work over the years has also shown that numerous program areas 
are characterized by significant program overlap and duplication. In 
program area after program area, we have found that unfocused and 
uncoordinated programs cutting across federal agency boundaries waste 
scarce resources, confuse and frustrate taxpayers and beneficiaries and 
limit program effectiveness.

And finally, the allocation of costs that once made sense when programs 
were created needs to be periodically reexamined to keep up with the 
evolution of markets. In some cases, private markets and program 
beneficiaries can play greater roles in financing and delivery of 
program services.

Reassessing What Government Does:

I have talked about the need to protect taxpayer dollars from fraud, 
waste, abuse, and mismanagement and about the need to take actions 
improving the economy, efficiency, and effectiveness of government 
programs, policies, and activities. However, to meet the challenges of 
today and the future, we must move beyond these levels to undertake a 
more fundamental reassessment of what government does and how it does 

In part, this requires looking at current federal programs--both 
spending and tax--in terms of their goals and results. Why does the 
program/activity exist? Is the activity achieving its intended 
objective? If not, can it be fixed? If so, how? If not, what other 
approaches might succeed in achieving the goal/objective? More 
fundamentally, even if a program or activity is achieving its stated 
mission--or can be "fixed" so that it does so--where does it fit in 
competition for federal resources? Are the taxpayers getting a good 
"return on investment" from the program? Is its priority higher or 
lower today given the nation's evolving challenges and fiscal 

A fundamental reassessment also requires asking whether an existing 
program, policy, or activity "fits" the world that we face today and 
will face in the future. It is important not to fall into the trap of 
accepting all existing activities as "givens" while subjecting new 
proposals to greater scrutiny than existing ones undergo. Think about 
how much the world has changed in the past few decades and how much it 
will change in future years. We need a fundamental reassessment and 
reconsideration of "the base." We need to ask: What is the purpose? 
What tools are used? What resources? What are the results? What are the 
costs and benefits? Who benefits? What other programs or activities 
exist in the same area or with the same goal? How do they compare?

I do not need to tell this Committee that any discussion about the role 
of the federal government, about the design and performance of federal 
activities, and about the near-term federal fiscal outlook takes place 
within the context of two dominating facts: a demographic tidal wave is 
on the horizon, and it, combined with rising health care costs, 
threatens to overwhelm the nation's fiscal future. The numbers do not 
add up. The fiscal gap is too great for any realistic expectation that 
the country can grow its way out of the problem. Figure 2 is just one 
illustration of this.

Figure 2: Composition of Spending as a Share of GDP:

[See PDF for image]

Source: GAO's March 2003 analysis.

Note: Assumes currently scheduled Social Security benefits are paid in 
full throughout the simulation period.

[End of figure]

Now, Mr. Chairman, Mr. Rangel, members of the Committee, let me turn to 
each of the areas that are the subject of this hearing: Social Security 
programs and unemployment insurance, Medicare, and tax compliance 
activities and preferences. In each of these areas the three levels of 
review I described are relevant: vulnerability to fraud, waste, abuse, 
and mismanagement; improvements in economy, efficiency, and 
effectiveness; and, finally, re-examining what government does, how it 
does business, and sometimes who does the government's business. 
Needless to say, I will not be discussing all the challenges faced in 
these program areas or by the departments and agencies that administer 


The Social Security Administration (SSA) faces a number of difficult 
management and policy challenges. This Committee has shown great 
leadership in pressing SSA to address such concerns, and indeed has 
achieved many management improvements that have saved millions of 
dollars, but much remains to be done. First, the agency needs to ensure 
the integrity of its three programs--Old Age and Survivors Insurance 
(OASI), Disability Insurance (DI), and Supplemental Security Income 
(SSI). In particular, it needs to provide continuing management 
attention to problems in the SSI program, including monitoring new 
initiatives to correct program weaknesses, and addressing the 
continuing problem of program complexity. Second, SSA must focus on 
improving the economy, efficiency, and effectiveness of these programs. 
SSA urgently needs to address the disappointing results of its efforts 
to improve the disability claims process it currently uses. Further, 
the Government Pension Offset (GPO) and the Windfall Elimination 
Provision (WEP) both need attention to assure they are administered 
effectively and equitably. Third and finally, SSA must focus on 
modernizing its disability programs. GAO has placed modernizing federal 
disability programs on its high-risk list in recognition of the 
transformation these programs must undergo to serve the needs of 21st 
century Americans.

SSA Needs to Continue to Strengthen the Integrity of the SSI Program of 
SSA's Programs:

SSI is the nation's largest cash assistance program for the poor. The 
SSI program poses a special challenge for SSA because, unlike its 
insurance programs (OASI and DI), SSI is a means-tested program. For 
this reason, SSA must collect and verify information on income, 
resources, and recipient living arrangements to determine initial and 
continuing eligibility for the program.

We designated SSI a high-risk program in 1997, after several years of 
reporting on specific instances of abuse and mismanagement, increasing 
overpayments, and poor recovery of outstanding SSI overpayments. In 
response to our high-risk designation, SSA made sufficient progress in 
improving SSI's financial integrity and management to warrant removing 
its high-risk designation earlier this year. SSA's actions included 
developing a major legislative proposal with numerous overpayment 
deterrence and recovery provisions. Many of these provisions were 
incorporated into the Foster Care Independence Act, which passed in 
1999 thanks to the leadership of this Committee. The act directly 
addresses a number of our prior recommendations and provides SSA with 
additional tools to prevent and recover overpayments. SSA also took a 
number of internal administrative actions to strengthen SSI program 
integrity, many in response to GAO recommendations.[Footnote 5] These 
include using tax refund offsets for collecting SSI overpayments and 
more frequent automated matches to identify ineligible SSI recipients 
living in nursing homes and other institutions.

Although SSA's current initiatives demonstrate a stronger management 
commitment to SSI integrity and have the potential to significantly 
improve program management, challenges remain. In prior work, we have 
reported that SSI living arrangement and in-kind support and 
maintenance policies used by SSA to calculate eligibility and benefit 
amounts were complex, prone to error, and a major source of 
overpayments.[Footnote 6] We also recommended that SSA develop options 
for simplifying the program. Although SSA is considering various 
options, it has not moved forward in recommending specific proposals 
for change.

Our current work, to be issued by the end of this month for the Human 
Resources Subcommittee, suggests that some of these complex policies--
such as living arrangements--remain a problem. In recent years, SSA has 
identified a general increase in the amount of annual overpayments made 
to (1) individuals who are found to have violated program residency 
requirements, or (2) recipients who leave the United States and live 
outside the country for more than 30 consecutive days without informing 
SSA. The Social Security Act requires that an individual be a resident 
of the United States to be eligible for SSI benefits.[Footnote 7] SSA 
guidelines define a resident as a person who has established a dwelling 
in the United States with the intent to live in the country. The Act 
also stipulates that no individual is eligible for SSI benefits for any 
full month that the individual is outside the United States.[Footnote 
8] Further, an individual who is outside the United States for 30 
consecutive days cannot be eligible for SSI benefits until he or she 
has been back in the country for 30 days. SSA detected overpayments of 
$118 million for residency violations between 1997 and 2001, but 
interviews with OIG and agency officials suggest that the agency 
detects only a portion of the violations that occur each year, at least 
in some parts of the country.

We identified three kinds of weaknesses which impede SSA's ability to 
detect and deter residency violations: First, in asking SSI recipients 
about their current residence, field staff often rely on recipients' 
own assertions and may accept only minimal documentation from them, 
such as rent receipts and statements from neighbors or clergy. 
Recipients who wish to misreport their residency can manipulate such 
documents. Second, the agency makes limited use of tools at its 
disposal to detect possible violators. For example, while SSA routinely 
employs a risk analysis system to identify SSI recipients who are more 
likely to incur overpayments, it does not use this tool to specifically 
consider and target potential residency violators. Finally, SSA has not 
adequately pursued the use of independent, third party data, such as 
recipient bank account information, to help detect residency 
violations. Although SSA is currently working with an independent 
contractor to obtain access to SSI recipients' financial data, the 
agency plans to use the information only to verify their financial 
resources. It does not plan to use the information to detect those who 
may be living and making financial transactions outside the United 
States for extended periods of time.

As a consequence of the SSI program's problems, we believe that 
sustained management attention continues to be necessary to improve SSI 
program integrity. Following our most recent review of SSA's 
progress,[Footnote 9] the agency agreed with our recommendations to (1) 
sustain and expand its program integrity activities underway and 
continue to develop additional tools to improve program operations and 
management, (2) identify and move forward with implementing cost-
effective options for simplifying complex policies, (3) evaluate 
current policies for applying penalties for individuals who fail to 
report essential eligibility information and remove barriers to their 
use and effectiveness, and (4) reexamine its policies for waiving 
recovery of SSI overpayments:

Improving the Economy, Efficiency, and Effectiveness of SSA's Programs:

As important as ensuring the integrity of SSA's programs is, the agency 
also faces difficult challenges in improving the economy, efficiency, 
and effectiveness of its programs, including administering certain 
provisions of the Social Security Act such as the Government Pension 
Offset (GPO) and the Windfall Elimination Provision (WEP). Most 
importantly, the agency must place greater emphasis on improving its 
flawed disability claim process.

Administration of the Government Pension Offset and Windfall 
Elimination Provision Remains a Concern:

The GPO and the WEP reduce Social Security benefits for those who 
receive noncovered pension benefits.[Footnote 10] The GPO affects 
spouse and survivor benefits and the WEP affects retired worker 
benefits. Both provisions depend on having complete and accurate 
information on receipt of noncovered pension benefits. However, such 
information is not always available for the state and local pension 
plans that do not participate in Social Security. In particular, our 
prior work found that SSA is often unable to determine whether 
applicants should be subject to the GPO and WEP because it does not 
have access to any independent source of noncovered pension 
information. Thus, both the GPO and WEP have proven difficult for SSA 
to administer. To help correct this situation, we previously 
recommended that SSA work with the Internal Revenue Service (IRS) to 
revise the reporting of pension information on IRS Form 1099R, so that 
SSA would be able to identify people receiving a pension from 
noncovered employment, especially in state and local 
governments.[Footnote 11] However, IRS does not believe it can make the 
recommended change without new legislative authority. Thus, in a recent 
testimony before the Ways and Means Social Security Subcommittee, we 
recommended that the Congress consider giving the Service the authority 
to collect this information.[Footnote 12] We estimate that millions of 
dollars in reduced overpayments could be achieved by implementing such 
payment controls.

In addition to this administrative problem, we continue to be concerned 
about the GPO "last day" exemption. As you know, the GPO prevents 
workers from receiving a full Social Security spousal benefit on top of 
a pension earned from government employment not covered by Social 
Security. However, the law provides an exemption from the GPO if an 
individual's last day of state/local employment is in a position that 
is covered by both Social Security and the state/local government's 
pension system. In a recent study, we found instances where individuals 
performed work in Social Security covered positions for short periods 
to qualify for the GPO last-day exemption. The practices we identified 
in Texas and Georgia alone could increase long-term benefit payments 
from the Social Security Trust Fund by $450 million. In response to a 
recommendation we made, this committee--and subsequently the full 
House--passed the Social Security Protection Act of 2003 (H.R. 743), 
which includes a provision to lengthen the time period to qualify for 
the GPO exemption from 1 day to 5 years. The bill is still pending in 
the Senate, and if passed, will narrow this loophole significantly.

Efforts to Improve the Disability Claims Process Have Been 

SSA's disability determination process is time-consuming, complex, and 
expensive. Although the agency has been working for years to improve 
this process, ensuring the quality and timeliness of its disability 
decisions remains one of SSA's greatest unmet challenges. Individuals 
initially denied benefits by SSA who appeal their claims may wait a 
year or more for a final decision on their eligibility. These long 
waits result, in part, from complex and fragmented decision-making 
processes that are laden with many layers of reviews and multiple 
handoffs from one person to another. The demanding nature of the 
process can be seen in the cost of administering the DI and SSI 
programs. Although SSI and DI program benefits account for less than 20 
percent of SSA's total benefit payments, they consume nearly 55 percent 
of the annual administrative resources.

SSA has also had difficulty ensuring accurate and consistent decisions 
regarding a claimant's eligibility for disability benefits across all 
levels of the decision-making process. Our work shows that in fiscal 
year 2000, about 40 percent of the applicants whose cases were denied 
at the initial level appealed this decision and about two-thirds of 
those who appealed were awarded benefits at a hearing.[Footnote 13] The 
large proportion of cases awarded benefits at the hearings level and 
the potential inconsistency of decisions at these two levels has raised 
questions about the fairness, integrity, and cost of SSA's disability 

SSA is at a crossroads in its efforts to redesign and improve its 
disability claims process. SSA's new Commissioner has acknowledged the 
limited progress to date, has made the issue one of the agency's 
priorities, and has taken the first steps to address this problem. 
However, as we testified in May 2002, the agency's past experience may 
argue for SSA to undertake a new and comprehensive analysis of the 
fundamental issues impeding progress.[Footnote 14] Such an analysis 
should include reassessing the root causes contributing to the 
programmatic weaknesses in the agency's disability determination 
process that we noted earlier. The outcome of this analysis may, in 
some cases, require legislative changes to the disability determination 

Reassessing What Government Does: Disability Programs Must be 

Although SSA's disability claims process requires urgent management 
attention, the policies underlying federal disability programs also 
require transformation. Federal disability programs represent an 
example of a disconnect between program design and today's world--a 
disconnect great enough to warrant our designation as a high-risk area 
this year.[Footnote 15] Already growing, SSA's disability programs are 
poised to surge as baby-boomers age, yet the programs remain mired in 
outdated economic, workforce, and medical concepts and are not well 
positioned to provide meaningful and timely support to Americans with 
disabilities. These outdated concepts persist despite scientific 
advances and economic and social changes that have redefined the 
relationship between impairments and the ability to work. In addition, 
while SSA has taken some steps in trying to return beneficiaries to 
work, it has not developed, as we have recommended, a comprehensive 
return-to-work strategy that focuses on identifying and enhancing 
beneficiaries' work capacities.

Over the last 10 years, the number of working-age beneficiaries of the 
DI and SSI programs has increased by 38 percent even as changes in 
medicine, technology, society, and the nature of work have increased 
the potential for some people with disabilities to return to, or remain 
in, the labor force. In addition, legislative changes have also focused 
on returning disability beneficiaries to work. Specifically, the 
Americans with Disabilities Act of 1990 supports the premise that 
people with disabilities can work and have the right to work and the 
Ticket to Work and Work Incentives Improvement Act of 1999 increased 
beneficiaries' access to vocational services.

About 12 years ago, SSA began reviewing relevant medical advances and 
updating the criteria used to evaluate disability claims.[Footnote 16] 
SSA's efforts to update the criteria were curtailed in the mid-1990s by 
staff shortages, competing priorities, and lack of adequate research on 
disability issues. The updates resumed in 1998, but progress has been 
slow and the lengthy time frames could undermine the very purpose of an 

Using outdated information calls into question the validity of 
disability decisions and raises the risk of overcompensating some 
individuals while under compensating or inappropriately denying 
compensation entirely to others. SSA needs to reexamine the criteria--
both medical and vocational--it uses to determine whether individuals 
are eligible for benefits.

Even if SSA modernizes its criteria, it will continue to face 
difficulties in returning beneficiaries to work, in part, due to 
weaknesses in the design of the disability programs.[Footnote 17] The 
current process produces a strong incentive for applicants to establish 
their inability to work to qualify for benefits. Moreover, instead of 
receiving assistance to stay in the workforce or return to work--and 
thus to stay off the long-term disability rolls--an individual can 
obtain assistance through DI or SSI only by proving his or her 
inability to work. And even in its efforts to redesign the decision-
making process, SSA has yet to incorporate into these initiatives an 
evaluation of what an individual may need to return to work.

Although the agency has taken a number of actions to improve its 
return-to-work practices, it has achieved poor results in this arena 
and few DI and SSI beneficiaries leave the disability rolls to work. As 
we have recommended previously, SSA still needs to move forward in 
developing a comprehensive return-to-work strategy that integrates, as 
appropriate, earlier intervention, including earlier and more effective 
identification of work capacities and the expansion of such capacities 
by providing essential return-to-work assistance for applicants and 
beneficiaries.[Footnote 18]

Modernizing and fully incorporating work-oriented policies in the 
disability programs requires fundamental change, such as revisiting the 
programs' basic orientation. Such a reorientation would require 
examining complex program design issues such as beneficiaries' access 
to medical care and assistive technologies, the benefits offered and 
their associated costs, mechanisms to return beneficiaries to work, as 
well as the integration of SSA's programs with other programs and 
policies affecting people with disabilities. Success in implementing 
fundamental change to the orientation of the disability programs will 
be dependent upon consultation and cooperation between the executive 
and legislative branches as well as cross-agency efforts, and will 
likely require statutory as well as regulatory action.


We have identified program integrity weaknesses similar to those we 
have identified in the SSI program in another program that falls under 
this committee's jurisdiction: the Department of Labor's (Labor) 
Unemployment Insurance (UI) program. We found problems at both the 
federal and state level that contribute to overpayments in this 
program, including an insufficient balance between the need to process 
and pay UI claims in a timely manner with the need to control program 

Of the $30 billion in UI benefits paid in calendar year 2001, Labor 
estimates that a total of about $2.4 billion in overpayments occurred, 
including about $577 million (24 percent) attributable to fraud or 
abuse. Overpayments in the UI program result from management and 
operational practices we identified at both the state and federal 
level. At the state level, we found that many states do not 
sufficiently balance the need to quickly process and pay UI claims with 
the need to control program payments. For example, we found that five 
of the six states we visited had diverted staff from benefit payment 
control operations to claims processing activities over the past year 
in response to increases in the volume of UI claims. Moreover, while a 
number of states we visited routinely use independent automated data 
sources to verify key information that can affect claimants' 
eligibility for benefits--such as an individual's wages and employment 
status--they also rely heavily on self-reported information from 
claimants for other important data, such as a claimant's receipt of 
other federal or state program benefits and whether they are citizens 
of the United States. Many of these states lack access to data sources 
for verifying claimants' identity in a timely manner and thus rely on 
verification processes that are incomplete or information sources that 
are only checked periodically.

In addition to the practices we identified at the state level that 
contribute to overpayments, we found that policies and directives from 
the Department of Labor affect states' priorities and procedures in a 
manner that makes overpayments more likely. For example, the 
performance measures that Labor uses to gauge states' operations tend 
to emphasize payment timeliness more heavily than payment accuracy. 
Labor has also been reluctant to link the states' performance on 
payment accuracy to the annual administrative budget as a way of 
providing incentives or sanctions for good or poor performers. Despite 
these problems, we found that Labor has taken actions to improve UI 
program integrity by working to obtain data from additional sources 
that could help states make more accurate eligibility decisions and 
developing a performance measure in its fiscal year 2003 performance 
plan for gauging state payment accuracy in future:

years. In addition, under the leadership of this committee, the House 
recently passed the Welfare Reform bill of 2003 (H.R. 4), which 
authorizes state unemployment insurance agencies to obtain wage and new 
hire information from the Department of Health and Human Service's 
National Directory of New Hires.[Footnote 19] These data could be used 
to more effectively verify individuals' eligibility for UI benefits.


Medicare is one of the largest and most complex programs in the federal 
government, making it highly vulnerable to waste, fraud, abuse, and 
mismanagement. We placed Medicare on our list of high-risk programs 
more than a decade ago and it remains on that list today. In fiscal 
year 2002, Medicare paid about $257 billion for a wide variety of 
inpatient and outpatient health care services for over 40 million 
elderly and disabled Americans. The Centers for Medicare & Medicaid 
Services (CMS) contracts with 38 health insurance companies to pay and 
process about 1 billion fee-for-service claims submitted each year by 
over 1 million hospitals, physicians, and other health care providers. 
Over the years, we have reported on challenges the agency has faced to 
safeguard billions of program dollars and obtain current and reliable 
data to set payments and monitor its programs. While CMS has made 
progress in improving Medicare's financial management, much more could 
be done to improve Medicare's operations.

Oversight of Contractor Performance Critical to Program Integrity:

Medicare contractors are charged with ensuring that claims are paid 
properly and that fraud or abuse is prevented or detected. However, 
contractors' performance has varied and CMS has not always overseen 
their efforts effectively, as the following illustrates:

Medical review--Medical review is a program safeguard designed to 
detect improper billing and payment. Medical reviews involve detailed 
examinations of a sample of claims by clinically trained staff and 
require that physicians submit medical records to substantiate their 
claims. Although our assessment found that claims administration 
contractors' decisions to pay or deny claims were generally accurate, 
contractors were less effective at targeting for review those claims 
most likely to be billed inappropriately.[Footnote 20] Furthermore, CMS 
did not guide the contractors in selecting the most effective criteria 
for medical review or encourage them to share best practices--two steps 
that could help reduce improper payments.

Communication with physicians--In order to bill Medicare correctly, 
physicians need to understand program rules and how to implement 
billing changes as they occur. We found that contractors' 
communications with physicians were often incomplete, confusing, 
untimely, or even incorrect--making it more difficult for physicians to 
bill correctly.[Footnote 21] For example, only 15 percent of the calls 
we placed to contractors' call centers asking "frequently asked 
questions" were answered accurately and completely by contractors' 
staff. CMS has set few standards to guide claims administration 
contractors' communications with physicians.

Weaknesses in contractor performance and agency oversight increase the 
risk of improper payment. Since 1996, the Department of Health and 
Human Services' (HHS) Office of the Inspector General (OIG) has 
estimated that Medicare's contractors improperly paid claims worth 
billions of dollars each year--more than $13 billion in fiscal year 
2002 alone. While useful to focus attention on the extent of the 
problem, this error rate did not provide CMS with information to target 
improvements. To address this shortcoming, in August 2000, CMS began 
implementing a new error rate measurement methodology that will provide 
national error rates beginning in fiscal year 2003, as well as error 
rates by contractor, provider type, and benefit category. Better error 
rate data is a first step toward enhancing CMS's ability to hold 
individual Medicare contractors accountable or help contractors 
identify and take steps to correct problematic billing practices.

Difficulties in Setting Appropriate Payment Rates Increase Medicare 

We have reported in many instances that Medicare has paid too much for 
items and services provided to its beneficiaries. Such wasteful 
spending is disturbing news for both the American taxpayer and Medicare 
beneficiaries, who pay higher co-payments when the amount Medicare pays 
is too high. While the problem of excessive Medicare payments has been 
clearly identified, solutions may not be quick or easy.

Skilled nursing facilities and home health agencies--Medicare payments 
are significantly more than the cost of caring for beneficiaries in 
most skilled nursing facilities and by most home health 
agencies.[Footnote 22] In 2000, Medicare paid nearly one quarter of 
skilled nursing facility providers over 30 percent more than 
costs.[Footnote 23] In the first 6 months of 2001, Medicare paid, on 
average, 35 percent more than providers' costs for home health 
care.[Footnote 24] We have recommended that CMS minimize excessive 
payments to home health agencies by 
introducing risk sharing.[Footnote 25] Risk sharing would limit the 
total losses or gains a home health agency could experience by sharing 
them with the federal government. Such an approach would protect the 
Medicare program from overpaying for services and home health agencies 
from the financial risk of serving beneficiaries with greater than 
average needs, when those service costs are not accounted for under the 
current payment system.

Medical equipment and supplies--Over the years, studies have shown that 
Medicare has been paying too much--in some cases more than three times 
suppliers' acquisition costs--for certain medical equipment and 
supplies.[Footnote 26] For example, we estimated that Medicare could 
have saved over $500 million in fiscal year 1996 if it paid rates for 
home oxygen services comparable to those paid by the Department of 
Veterans Affairs (VA).[Footnote 27] Since then, the Balanced Budget Act 
of 1997 reduced oxygen payment rates by 25 percent effective in 1998, 
and by an additional 5 percent effective in 1999. Nevertheless, in a 
demonstration of competitive acquisition, CMS was able to reduce 
Medicare's payments by at least 16 percent more in the demonstration 
areas, while requiring suppliers to meet additional quality standards. 
Medicare pricing for medical equipment and supplies is problematic 
because payments are based on fee schedules that are generally tied to 
suppliers' historical charges to the program--not to current actual or 
market prices. Moreover, the process for adjusting these fees 
nationally has been cumbersome and rarely used.

Covered prescription drugs--The pricing of covered prescription drugs-
-for which Medicare and its beneficiaries paid more than $8.2 billion 
fiscal year 2002--is particularly 
problematic. In 2000, Medicare paid over $1 billion more than other 
purchasers for outpatient drugs that the program covers.[Footnote 28] 
Medicare's method for establishing drug payments is flawed because it 
is based on 95 percent of the average wholesale price (AWP), which is 
neither an average, nor a price that wholesalers charge. For example, 
in January 2003, we reported that Medicare paid significantly more than 
the two major types of suppliers for blood clotting factor, which is 
used to treat people with hemophilia. While Medicare received a 5 
percent discount from AWP, one type of supplier acquired the clotting 
factor at a discount of 35 percent to 48 percent.[Footnote 29] 
Similarly, we reported in 2001 that pharmacy suppliers could acquire 
the two most common inhalation drugs, which are among the five drugs 
with the highest Medicare payments, for a 78 percent to 85 percent 
discount from AWP.[Footnote 30] As a consequence of Medicare's pricing 
method, its payments are not related to market prices that physicians 
and suppliers actually pay.

We made two recommendations to improve drug pricing that could also be 
applicable to pricing for medical equipment and supplies. They are to: 
1) use information on market transactions already available to VA and 
HHS as a benchmark for Medicare payment and 2) examine the benefits and 
risks of expanding competitive bidding.

CMS's recent competitive bidding demonstration to set fees for selected 
medical equipment, supplies, and covered outpatient drugs suggests that 
such competition can lead to lower prices. Preliminary annual gross 
savings from competitive bidding were estimated to range from 17 
percent to 22 percent for the products bid compared to fee schedule 
amounts. However, CMS would need statutory authority to use this method 
of setting fees on a wider scale.

Current Legislation Introduces Operational Changes To Address Certain 
Program Administration and Payment Issues:

In this session of the Congress, both Houses have passed major 
legislation that--if reconciled and signed into law--would restructure 
Medicare through adding a prescription drug benefit. Depending on how 
it is finalized, this legislation may also introduce significant 
operational changes to the Medicare program.

²	 Competitive contracting for claims administration--Under Medicare's 
current statute and regulations, its contracting authority and 
practices differ from those embodied in standard federal contracting 
law and regulations. One key difference is that CMS generally does not 
competitively bid for the services of its claims administration 
contractors. Both the Senate and the House bills amend the Medicare 
statute to require competitive contracting for claims administration. 
This authority has the potential for significantly improving Medicare 
program administration. Nevertheless, managing the transition to a 
competitive contracting environment will be an enormous new challenge. 
Federal agencies that manage large procurements of contracted services-
-such as the departments of Energy and Defense--have had problems with 
cost and schedule overruns and have failed to hold their contractors 
accountable for performance.[Footnote 31] CMS would need to carefully 
manage its own contracting efforts to avoid some of the pitfalls 
experienced by other agencies.

Setting payments for medical equipment and supplies and covered 
outpatient drugs--The House and the Senate bills have taken different 
approaches to this issue, but both have sections that are designed to 
address payment-setting for medical equipment, supplies, and currently 
covered prescription drugs. The House passed legislation that would 
give CMS authority to use competitive bidding to set payments for 
certain medical equipment, supplies, and certain drugs. It would also 
allow market information from these efforts to be used as a benchmark 
for national payments. The Senate bill continued to rely on AWP as a 
pricing mechanism for currently covered outpatient drugs. However, it 
allowed CMS to substitute payment amounts that differed from those 
linked to AWP, using amounts developed through a new process and based 
on market price information from a number of specified sources.

Medicare Reform Calls for Aligning Incentives and Strengthening 

The 2003 Trustees' annual report reminds us that Medicare as it is 
currently structured is not fiscally sustainable. The retirement of the 
baby boom generation will place huge fiscal pressures on the program. 
Between now and 2035, the number of people age 65 and older will 
double. Federal health and retirement spending on Medicare and Social 
Security are expected to increase, as people live longer and spend more 
time in retirement, as shown in figure 3.

Figure 3: Medicare Is Projected to Grow Dramatically As A Share of GDP:

[See PDF for image]

Source: CMS, Office of the Actuary:

Notes: Projections are based on the intermediate assumptions of the 
2003 Trustees' Reports for Hospital Insurance (HI) and Supplemental 
Medical Insurance (SMI).

[End of figure]

Moreover, the baby boomers will have fewer workers to support them in 
retirement. Further fiscal pressures will be placed on the program by a 
new prescription drug benefit, although adding coverage that includes 
protection against financially devastating drug costs will help 
beneficiaries who lack prescription drug coverage.

While the demographic trends will affect both Medicare and Social 
Security, Medicare spending growth also reflects rising health care 
costs. The growth of medical technology has contributed to the number 
and quality of health care services, but has helped increase health 
care costs, which have risen faster than inflation. Consumers are less 
sensitive to those costs when third parties pay most of the price tag. 
As figure 4 shows, the percentage of health care costs paid through 
out-of-pocket spending has declined in the last 40 years, with private 
and public insurance paying a larger share.

Figure 4: Out-of-Pocket Spending Has Declined Substantially Over The 
Last Four Decades:

[See PDF for image]

Source: CMS, Office of the Actuary, National Health Statistics Group:

Note: The figure for 2002 is estimated. Out-of-pocket spending includes 
direct spending by consumers on coinsurance, deductibles, and any 
amounts not covered by insurance. Out-of-pocket premiums paid by 
individuals are not counted here, but are counted as part of Private 
Health Insurance.

[End of figure] 

Providing tax preferences for health insurance further masks the full 
costs of care and can work at cross purposes to the goal of moderating 
health care spending. This suggests that some of the solutions to 
Medicare's dilemma reside outside the program--in the larger arena of 
the health care system, its cost drivers, and the tax preferences that 
support them.

Given this context, aligning incentives to restrain spending growth and 
strengthen accountability within the program--while not sufficient by 
themselves--are still necessary. This is an ongoing effort that has to 
be accomplished in myriad small and large steps in the current program 
and as changes are made to it. At present, 84 percent of beneficiaries 
are in the traditional fee-for-service Medicare program. As a 
consequence, traditional Medicare is likely to have a significant role 
for years. Addressing its flaws--such as billions in improper payments 
and sometimes overly generous payments--is critical to any effort to 
restrain spending growth.

Unfortunately, addressing these flaws is unlikely to be sufficient to 
restrain Medicare's growth. Substantive financing and programmatic 
reforms will be necessary to put Medicare on a sustainable footing for 
the future. Without such fundamental reforms, Medicare's growth 
threatens to absorb ever-increasing shares of the nation's budgetary 
and economic resources. As we seek to bring our government in line with 
21ST century challenges, we must be mindful that health care costs 
compete with other legitimate priorities in the federal budget, and 
their projected growth threatens to crowd out future generation's 
flexibility to decide which competing priorities will be met. The 
public sector can play an important role in educating the nation about 
the limits of public support. In this regard, we are preparing a health 
care framework that includes a set of principles to help policymakers 
in their efforts to assess various health financing reform options. By 
facilitating debate, the framework can encourage acceptance of changes 
necessary to put us on a path to fiscal sustainability.


Ensuring that taxpayers meet their tax obligations under an 
increasingly complex tax code has long presented the IRS with daunting 
challenges. Although the majority of taxpayers voluntarily and timely 
pay the taxes they owe, regrettably high levels of noncompliance by 
some taxpayers persist. Some noncompliance is intentional and may be 
due to outright fraud and the use of abusive tax shelters or schemes. 
In other cases, noncompliance stems from unintentional errors and 
taxpayers' misunderstanding of their obligations. Regardless of the 
cause or type of taxpayer--corporate, individual, or other--we have 
designated the collection of unpaid taxes as a high-risk area. This 
high-risk area includes detecting noncompliance and collecting taxes 
due but not paid. More broadly, Congress has created an increasing 
number of tax preferences that IRS must administer. In some cases, 
those tax preferences are among the largest federal efforts to address 
social and other problems. Yet the economy, efficiency, and 
effectiveness of those preferences in achieving their purposes are 
often not well understood. A better understanding of how well these 
preferences work would both support improving them as well as 
reconsidering whether certain preferences should be retained.

Tax Compliance and Collection Activity Declines Are Of Increasing 

Because of the potential revenue losses and the threat to voluntary 
compliance, the collection of unpaid taxes is a high-risk area. 
Collecting taxes due the government has always been a challenge for 
IRS, but in recent years the challenge has grown. Collecting taxes due 
includes both compliance programs, like audits, that identify those who 
owe more than they self-report, and collection programs that seek 
payment of taxes assessed but not timely paid. However, IRS compliance 
and collections programs have seen larger workloads, less staffing, and 
fewer cases closed per employee.

For the last several years, Congress and others have been concerned 
that the declines in IRS's enforcement programs are eroding taxpayers' 
confidence that their friends, neighbors, and business competitors are 
also paying their fair share of taxes, which may put at risk their 
willingness to voluntarily comply with the tax laws. Further, there is 
some evidence that willingness to voluntarily comply with the tax laws 
may be declining. A survey conducted by the IRS Oversight Board in 2001 
found that the percentage of respondents who thought it was never 
acceptable to cheat on their income taxes was 76 percent, which was 
down from 87 percent who felt that way in a 1999 survey. Also, 42 
percent of respondents to the 2001 survey said that they believed it 
was more likely than in it was in the past that people do not report 
and pay their fair amount of taxes and 9 percent said that they were 
more likely to take a chance on being audited than they had been 
before.[Footnote 32]

Unfortunately, not enough is known at present about the extent of 
noncompliance and where problems are the most serious. IRS only 
recently restarted the research program necessary to develop this 
information after many years without such research. When last IRS last 
conducted detailed compliance research using tax year 1988 data, some 
types of taxpayers were found to have especially serious compliance 
problems. For example, small business noncompliance was about 40 
percent, farm and non-farm sole proprietor noncompliance was about 32 
percent, and informal suppliers' noncompliance was about 81 
percent.[Footnote 33] While specific, current data is not yet 
available, the IRS Commissioner said in May 2002 congressional hearings 
that IRS was not providing taxpayers with adequate assurance that their 
neighbors or competitors were complying with the tax laws and paying 
what they owed.

The number of tax returns increases every year. Between 1993 and 2002, 
the number of individual returns filed went from 114.7 million to 
approximately 130 million--a 13 percent increase over those 10 years. 
IRS projects the number of total individual returns filed will be 132.3 
million in 2003 and continue to increase at an annual rate of 1.5 
percent until 2009. Such a rate of increase would lead to 145.3 million 
total individual returns filed in 2009. Returns from businesses and 
other entities have also increased substantially.

While the number of tax returns has increased, key compliance program 
rates have declined. In testimonies and reports, GAO has highlighted 
large and pervasive declines in IRS's compliance programs. These 
programs, not all of which have seen declines, include computerized 
checks for nonfiling and underreported income as well as audits of both 
individual taxpayers and business entities. Between 1996 and 2001, key 
programs generally experienced growing workloads, decreased staffing, 
and decreases in the number of cases closed per employee. Figure 5 
shows the decline in audit rates for different types of taxpayers.

Figure 5: Change in Percentage of Returns Audited, 1996 - 2001:

[See PDF for image]

[End of figure]

Even as these audit rates decline, IRS has faced new challenges in 
ensuring that individuals, small businesses, and corporations pay the 
taxes they owe. IRS's Chief Counsel has said that, in the 1990s, 
thousands of corporations and wealthy individuals participated in 
abusive tax shelters promoted by accounting firms, law firms, 
investment banks, and others, and the tax benefits claimed per taxpayer 
were significant. To deal with this and other problems, the President's 
fiscal year 2004 budget proposal noted that IRS is shifting enforcement 
resources from the tax returns of lower-income individuals and small 
corporations. One recent IRS initiative resulted in 1,206 taxpayers 
disclosing transactions involving $30 billion in claimed losses and 

IRS faces challenges in executing its strategy for dealing with tax 
shelters and schemes. As the former Commissioner of Internal Revenue 
noted, abusive shelters have been factually and legally complex, 
accompanied by tax opinions legitimizing transactions and encouraging 
litigation. Also, in a September 2001 report, the Treasury Inspector 
General for Tax Administration recommended that IRS start laying a 
better foundation for its strategy by more precisely estimating the 
shelter problem. IRS agreed to estimate abusive corporate shelters' 
potential tax revenue effect.

Another increasingly challenging area is that of corporate inversions. 
According to a 2002 Department of a Treasury report, corporate 
inversions are transactions that change a U.S.-based multinational 
group's structure "so that a new foreign corporation, typically located 
in a low-or no-tax country, replaces the existing U.S. parent 
corporation as the parent of the corporate group."[Footnote 34] The 
report stated that although such transactions were not new, they were 
growing in frequency, size, and profile. Instead of being motivated by 
market conditions, they were motivated largely by available tax savings 
and involved little or no immediate operational change. According to 
Treasury, the fact that our tax law operates so that substantial tax 
reductions are available through transactions of more form than 
substance is troubling to both policymakers and the public.

IRS collections programs are also increasingly stressed. As we reported 
in May 2002, between fiscal years 1996 and 2001 trends in the 
collection of delinquent taxes showed almost universal declines in 
collection program performance in terms of coverage of workload, cases 
closed, direct staff time used, productivity, and dollars of unpaid 
taxes collected.[Footnote 35] Although the number of delinquent cases 
assigned to collectors went down during this period, the number of 
collections cases closed declined more rapidly, creating an increasing 
gap. During that 6-year period, the gap between the new collection 
workload and collection cases closed grew at an average annual rate of 
about 31 percent, as shown in figure 6.[Footnote 36]

Figure 6: Percentage Gap Between New Collection Workload and Work 
Completed, Fiscal Years 1996-2002:

[See PDF for image]

[End of figure]

The increasing gap between collection workload and collection work 
completed led IRS in March 1999 to start deferring collection action on 
billions of dollars in delinquencies. Officials recognized that they 
could not work all collection cases, and they believed that they needed 
to be able to deal with taxpayers more quickly; particularly taxpayers 
who were still in business and owed employment taxes.[Footnote 37]

By the end of fiscal year 2002, after the deferral policy had been in 
place for about 3 and one-half years, IRS had deferred taking 
collection action on about $15 billion in unpaid taxes, interest, and 
penalties that are likely collectable. IRS's deferral of collection 
action has declined somewhat since the deferral policy was adopted. 
Although the rate has declined from 45 percent in 2000, in 2002 IRS was 
still deferring collection action on about one out of three collection 
cases--about 32 percent.

IRS is working to reverse these declines. One key element of improving 
IRS's compliance programs is obtaining current measures of compliance 
to use in targeting IRS's scarce resources to known compliance 
problems. The National Research Program (NRP) is a major effort now 
underway at IRS to identify the extent and sources of noncompliance. 
The current NRP initiative includes individual returns, including 
taxpayers reporting income from small businesses. IRS plans to conduct 
future iterations of NRP for different types of returns and to return 
to individual filers every 3 years. We have reported that the program's 
design is likely to yield the detailed information IRS needs about the 
extent and causes of noncompliance and enable IRS to improve its 
targeting of compliance programs.[Footnote 38]

Another key to improving IRS's compliance and collections programs is 
to make more efficient use of its resources. IRS has a number of 
reengineering efforts underway to improve its compliance and collection 
processes. These efforts range from relatively small-scale improvements 
to much more ambitious changes. For example, IRS is seeking to 
substantially increase the amount of information available to its 
auditors before they first contact a taxpayer. The goal is to make the 
best use of the information IRS already has available to it before 
commencing an audit. IRS is also seeking to change the way it 
identifies collections cases to pursue in order to improve targeting of 
scarce collections resources towards cases that it is most worthwhile 
to pursue.

Yet another key to ensuring that taxpayers meet their obligations is 
adequately staffing IRS's compliance and collections programs. Since 
2001, IRS's budget requests have made increasing its compliance and 
collection staff one of several key priorities. However, staffing in 
two key compliance and collection occupations - revenue agents and 
revenue officers - was lower in 2002 than in 2000. This continues a 
general trend of declining staffing in these occupations for a number 
of years.

While tax compliance and collection issues can be found in many areas, 
I would like to give a few examples of persistent compliance issues. 
This is by no means an inclusive list. For example, compliance issues 
are also pervasive in the area of excise taxes, such as fuel tax 

Employment Tax Compliance:

In fiscal year 2000, IRS collected $1.3 trillion in amounts withheld by 
employers from employees' salaries to cover individual federal income 
tax, Social Security, and Medicare taxes; and in employers' matching 
amounts for Social Security and Medicare taxes. Although the majority 
of employers withhold, match, and deposit these taxes as required, for 
those who fail to do so, the amount of unpaid employment taxes, penalty 
and interest has grown significantly. As of September 30, 2001, IRS 
data showed that employers owed about $49 billion in delinquent 
employment taxes, penalties and interest.

The businesses that failed to remit payroll taxes were typically in 
wage-based industries and had few available assets from which IRS could 
recover these taxes. They were usually small, closely held businesses 
using a corporate structure. The most common types of businesses or 
industries with unpaid payroll taxes included construction companies 
and restaurants, although other types of businesses (including computer 
software, child care, and professional services such as legal, medical, 
and accounting firms) also have unpaid payroll taxes. Most unpaid 
payroll taxes are not fully collectible, and there is often no recovery 
potential as many of the businesses are insolvent, defunct, and 
otherwise unable to pay.

To the extent that withholdings are not forwarded to the federal 
government, the business is liable for these amounts, as well as its 
matching contributions. Under the Internal Revenue Code, individuals--
typically officers of a corporation such as a president or treasurer--
who are determined by IRS to be "willful and responsible" for the 
nonpayment of federal income taxes and the employee's Social Security 
and Medicare taxes can be held personally liable for the unpaid taxes 
and assessed penalties. More than one individual can be found willful 
and responsible for a business's failure to pay the federal government 
withheld payroll taxes and can be assessed a penalty. IRS considers 
employment tax compliance to among the most challenging issues for 
small businesses, since delinquent tax may rapidly compound beyond the 
employers' ability to pay--ultimately placing their business in 
financial jeopardy.

In 2002, we reported that IRS had four programs to prevent or reduce 
employers' tax delinquencies. Two of these programs were designed to 
achieve early contact with employers and two were designed to identify 
employers with existing, multiple employment tax delinquencies and help 
them to return to compliance. However, we found that IRS had not 
successfully evaluated these programs. We recommended IRS do so since 
without an evaluation IRS does not know the benefits, if any, of the 
programs, whether they need to be improved, or whether the programs 
should even be continued.[Footnote 39]

Levies of Federal Payments:

Many taxpayers who are delinquent in paying their federal taxes are 
receiving billions of dollars in federal payments annually. IRS and 
federal payment records indicate that nearly 1 million taxpayers owed 
about $26 billion in delinquent taxes as of February 2002 and were 
receiving some type of federal payments. To help the IRS collect these 
delinquent tax debts, provisions in the Taxpayer Relief Act of 1997 
gave IRS authority to continuously levy[Footnote 40] up to 15 percent 
of certain federal payments made to delinquent taxpayers.[Footnote 41] 
Payments subject to IRS's continuous levy program include Social 
Security, federal salary and retirement payments, and federal vendor 
payments. According to IRS, the program resulted in collecting over $60 
million in fiscal year 2002 by directly levying federal payments.

GAO has issued three reports including several recommendations focused 
on increasing collections and assuring that safeguards are in place so 
that only taxpayers with valid tax debts are levied. Although progress 
has been made in establishing the continuous levy program, several 
changes to the continuous levy program, which have yet to be 
implemented, could yield millions of dollars in additional revenue. For 
example, in our 2000 report we estimated that as much as $77.7 
million[Footnote 42] annually in additional revenue could be generated 
if IRS broadened the program to include spouses held by IRS to be 
liable for joint tax delinquencies and individuals with multiple IRS 
identification numbers.[Footnote 43] IRS has not yet implemented this 

In our 2001 report, we found that several large agencies were not 
included in the continuous levy program.[Footnote 44] We found, that as 
of June 30, 2000, about 70,400 individuals and businesses that received 
an estimated $8.2 billion annually in federal payments collectively 
from three large agencies--the United States Postal Service, the 
Department of Defense, and CMS, which disburses Medicare fee-for-
service payments--owed over $1 billion in federal taxes. We estimated 
that IRS could recover at least $270 million annually in delinquent 
federal taxes if these payments were included in the continuous levy 

In our 2003 report we found that IRS blocks many eligible delinquent 
accounts from being included in the Federal Payment Levy Program, 
missing an opportunity to gather information on which debtors are 
receiving federal payments.[Footnote 45] IRS officials imposed these 
blocks because of concerns that the potential volume of levies--about 
1.4 million taxpayer accounts--would disrupt ongoing collection 
activities. However, we estimate that about 112,000 would actually 
qualify for levy. These taxpayers were collectively receiving about 
$6.7 billion in federal payments and owed about $1.5 billion in 
delinquent taxes. In January 2003, IRS unblocked and began matching 
delinquent taxpayer accounts identified as receiving a federal salary 
or annuity payment. IRS officials will not unblock the remaining 
delinquent accounts until sometime in 2005.

Earned Income Credit (EIC) Noncompliance:

For tax year 2001, about $31 billion was paid to about 19 million EIC 
claimants. Although researchers have reported that the EIC has 
generally been a successful incentive-based antipoverty program, IRS 
has reported high levels of EIC overpayments going back to 1985. IRS's 
most recent study, released in 2002, estimated that between $8.5 and 
$9.9 billion should not have been paid out to EIC claimants for tax 
year 1999, and earlier IRS studies also found significant problems with 
the program. Table 1 shows the rates of EIC overclaims estimated by IRS 
in three EIC compliance studies.

Table 1: EIC Overclaim Rates for Selected Years:

[See PDF for image]

Source: IRS reports.

Notes: All overclaim rates were adjusted by IRS to reflect dollars 
recovered from ineligible recipients. For 1994 only a single estimate 
was available. In 1997 and 1999, because not all individuals responded 
to audit contacts, IRS used certain assumptions to estimate an 
overclaim rate range. The lower bound assumes that the overclaim rate 
for nonrespondents is the same as for the respondents, while the upper 
bound assumes that all nonrespondents are overclaims.

[End of table]

Administering the EIC is not an easy task--IRS has to balance its 
efforts to help ensure that all qualified persons claim the credit with 
its efforts to protect the integrity of the tax system and guard 
against fraud and other forms of noncompliance associated with the 
credit. Further, the complexity of the EIC may contribute to 
noncompliance. The EIC is among the more complex provisions of the tax 
code, which can contribute to unintentional errors by taxpayers. In 
addition, unlike other income transfer programs, the EIC relies more on 
self-reported qualifications of individuals than on program staff 
reviewing documents and other evidence before judging claimants to be 
qualified for assistance.

Early in 2002, the Assistant Secretary of the Treasury and the IRS 
commissioner established a joint task force to seek new approaches to 
reduce EIC noncompliance. The task force sought to develop an approach 
to validate EIC claimants' eligibility before refunds are made, while 
minimizing claimants' burden and any impact on the EIC's relatively 
high participation rate. Through this initiative, administration of the 
EIC program would become more like that of a social service program for 
which proof of eligibility is required prior to receipt of any benefit.

According to IRS, three areas--qualifying child eligibility, improper 
filing status, and income misreporting (i.e., underreporting)--account 
for nearly 70 percent of all EIC refund errors. Although the task force 
initiative is designed to address each of these sources of EIC 
noncompliance, many of the details about its implementation are still 
to be settled. A significant change to the initiative was announced on 
June 13, 2003, when IRS said that its pilot effort to precertify the 
eligibility of qualifying children for the EIC would not include 
requesting claimants to show their relationship to the qualifying 
child. Because planning and implementation for the EIC initiative will 
proceed simultaneously, its success will depend on careful planning and 
close management attention.

As with other tax compliance issues such as corporate tax evasion, 
Congress has focused oversight attention on the EIC initiative and 
continued oversight can help ensure that the initiative balances 
efforts to reduce EIC overpayments with continued efforts to maintain 
or increase the portion of the EIC-eligible population that receives 
the credit. Further, Congress can consider making the several 
definitions of children in the tax code more uniform. The differing 
definitions contribute to the complexity taxpayers face and complexity 
is widely believed to contribute to errors taxpayers make in claiming 
the EIC. As early as 1993 we had suggested that Congress consider 
changes that would have made the definitions for children more similar 
for several tax purposes. More recently, IRS's Taxpayer Advocate, the 
Joint Committee on Taxation, and the Department of the Treasury have 
made proposals as well.

The Economy, Efficiency, or Effectiveness of Tax Preferences Are Often 
Not Well Understood:

Tax preferences are often intended to achieve policy goals that may be 
similar to those of federal spending programs. However, data on the 
economy efficiency, and effectiveness of tax preferences is often 
lacking. Further, tax preferences are not subject to some review 
processes that would support more integrated and informed decisions 
about what the government does and how it does it.

Tax preferences refer to departures from the normal tax structure 
designed to favor a particular industry, activity, or class of persons 
through special deductions, credits, and other tax benefits. Tax 
preferences currently in place include programs to encourage economic 
development in disadvantaged areas, build affordable housing, make 
education more accessible, reduce pollution, and stimulate capital 
investment, research, and development. Many tax preferences have 
counterparts in direct spending programs created to accomplish similar 
goals. In some cases, a tax preference may be among the largest federal 
efforts dealing with a social issue. For instance, we reported in 1997 
that the Low-Income Housing Tax Credit was the largest federal source 
of federal funds to develop or substantially rehabilitate rental 
housing for low-income households.

Tax preferences have become a growing part of the federal fiscal 
picture over the past 30 years. Based on Joint Committee on Taxation 
estimates, the total revenue loss due to tax preferences increased by 
twice the rate of overall federal outlays over the last 10 years. Tax 
preferences grew about 50 percent, from about $488 billion in 1993 to 
about $730 billion in 2003, while federal outlays grew about 25 
percent, from $1.7 trillion to $2.1 trillion over the same 
period.[Footnote 46]

Not only has the dollar sum associated with these tax preferences grown 
over the past 10 years, but the number of programs has also increased. 
The number of tax preference programs has doubled since the Joint 
Committee on Taxation started reporting on them in 1974, growing from 
74 to 148. As shown in figure 7, this growth continued over the past 10 
years, from 124 tax preference programs in 1993 to 148 programs in 
2002.[Footnote 47] Table 2 lists the ten largest tax preference 
programs in terms of dollars claimed in 2002.

Figure 7: Growth in the Number of Tax Preference Programs Listed in 
Joint Committee on Taxation Reports, 1993 through 2002:

[See PDF for image]

[End of figure]

Table 2: 10 Largest Tax Preferences by Estimated Dollars Claimed in 

[See PDF for image]

Briefing Book, Individual Capital Gains Tax Issues; and Federal Taxes: 
Information on Payroll Taxes and Earned Income Tax Credit 
Noncompliance, GAO-01-487T, March 7, 2001.

Note (a): This is the single largest health-related tax preference 
reported by the Joint Committee on Taxation. The Joint Committee on 
Taxation reports also includes other health-related tax preferences.

Note (b): The tax preference figure for the EIC only includes the 
portion of the EIC that offsets income taxes paid.

[End of table]

Despite the importance of tax preferences, the economy, efficiency, and 
effectiveness of tax preferences in achieving their purposes is often 
not well understood, in part because data on their use and 
effectiveness may not be available. For example, we recently studied 
business tax preferences to encourage the hiring, retention, and 
accommodation of workers with disabilities and found that information 
on the effectiveness of the programs was limited and 
inconclusive.[Footnote 48] In 2002, we studied the use of tax 
preferences intended to help families meet the costs of postsecondary 
education and found that Congress did not have the information it 
needed to weigh the relative effectiveness of the range of tools 
created to accomplish this goal.[Footnote 49] In 1999 we reviewed 
businesses' use of empowerment zone tax preferences and had to conduct 
our own survey to find information about businesses that were and were 
not using the preferences.[Footnote 50]

When critical information about the economy, efficiency, and 
effectiveness of tax preferences is made available, it can be very 
valuable to congressional decision makers. For example, in 1993 we 
described the impacts of a tax credit designed to encourage investment 
in Puerto Rico.[Footnote 51] This tax preference effectively exempted 
income earned by U.S. firms from operations in U.S. possessions from 
federal corporate income taxes. We found that the credit per employee 
was, on average, slightly higher than the wages paid per employee and 
in some industries was considerably higher. Congress subsequently chose 
to phase out the tax credit program.

A decade ago we concluded that greater scrutiny of tax preferences is 
warranted. We made a number of recommendations intended to achieve that 
end, including recommendations to OMB to incorporate tax preferences, 
to the extent possible, into the annual budget review process. Our 
intent was that tax preferences be assessed and considered along with 
related federal efforts so that the relative effectiveness of both 
spending and tax preferences could be considered jointly.

However, tax preferences are still excluded from important review 
processes that apply to spending programs. Tax preferences are not 
explicitly covered by the Government Performance and Results Act (GPRA) 
of 1993 and therefore are not subject to its requirements that are 
intended to help ensure that federal programs are achieving their 
intended results. However, the Senate Governmental Affairs Committee 
Report on GPRA says that tax preferences should be taken into 
consideration in a comprehensive examination of government 
performance.[Footnote 52] Nevertheless, tax preferences often are not 
currently covered by agencies or executive branch processes that 
consider the effectiveness of government programs. For example the new 
program performance reviews conducted by OMB in connection with the 
annual budget process generally do not cover tax preferences.

According to OMB, the Executive Branch is continuing to focus on the 
availability of data needed to assess the effects of the tax 
expenditures designed to increase savings.[Footnote 53] Treasury's 
Office of Tax Analysis and IRS's Statistics of Income Division have 
developed a new sample of individual income tax filers as one part of 
this effort. This new "panel" sample will follow the same taxpayers 
over a period of at least 10 years. Data from this sample will enhance 
OMB's ability to analyze the effect of tax expenditures designed to 
increase savings. Other efforts by OMB, Treasury, and other agencies to 
improve data available for the analysis of tax expenditures are 
expected to continue over the next several years, according to OMB. In 
practice, data availability is likely to be a major challenge, and data 
constraints may limit the assessment of the effectiveness of many 
provisions. In addition, such assessments can raise significant 
challenges in economic modeling.


Given their growth and importance, tax preferences must be part of any 
comprehensive review of existing programs and activities to adapt 
government for the challenges of this century. Any reassessment of 
federal missions and strategies should include the entire set of tools 
the federal government can use to address national objectives. These 
tools include discretionary and mandatory spending, tax provisions, 
loans and loan guarantees, and regulations. Spending is most visible 
and it is all too easy when we look to define federal support for an 
activity to only look at the spending side of the budget. Federal 
support, however, may come in the form of exclusions or credits in the 
tax code. It may come in the form of direct loans or loan guarantees. 
It may come in the design of regulations. Yet none of these tools 
should be ignored if we are to get a true picture of federal activity 
in an area. So, for example, if we are evaluating federal support for 
health care we need to look not only at spending, but also at tax 
preferences. Figure 8 shows federal activity in health care and 
Medicare budget functions in FY 2003: $48 billion in discretionary BA, 
$419 billion in entitlement outlays, $177 million in loan guarantees, 
and $129 billion in tax expenditures.[Footnote 54]

Figure 8: Relative Reliance on Policy Tools in the Health Care Budget 
Functions (FY 2003):

[See PDF for image]

Source: GAO analysis of data from the Office of Management and Budget.

Note: Loan guarantees account for about $177 million or 0.03 percent of 
the approximately $597 billion in total federal health care resources.

[End of figure]


There is a Chinese curse that goes "May you live in interesting times." 
We clearly do. I would prefer to see this not as a curse--but as a 
challenge and an opportunity.

Tackling areas at risk for fraud, waste, abuse, and mismanagement will 
require determination, persistence and sustained attention by both 
agency managers and Congressional committees. Large and complex federal 
agencies must effectively use a mixture of critical resources and 
improved processes to improve their economy, efficiency, and 
effectiveness, Congressional oversight will be key.

We should be striving to maintain a government that is effective and 
relevant to a changing society--a government that is as free as 
possible of outmoded commitments and operations that can 
inappropriately encumber the future. The difference between "wants," 
"needs," and overall "affordability" and long-term "sustainability" is 
an important consideration when setting overall priorities and 
allocating limited resources.

Government must operate in the context of broader trends shaping the 
United States and its place in the world. These include:

National and global response to terrorism and other threats to personal 
and national security;

Increasing interdependence of enterprises, economies, civil society, 
and national governments--also know as globalization;

The shift to market-oriented, knowledge-based economies;

An aging and more diverse U.S. population;

Advances in science & technology and the opportunities & challenges 
created by these changes;

Challenges and opportunities to maintain & improve the quality of life 
for the nation, communities, families & individuals; and:

The increasingly diverse nature of governance structures and tools.

In addition to the above trends, large and growing fiscal challenges at 
the federal, state, and local levels are of great concern. Furthermore, 
known demographic trends, and rising health care costs and other health 
care related challenges (e.g., access, quality) are of growing concern 
crossing all sectors of the economy and all geopolitical boundaries.

Government leaders are responsible and accountable for making needed 
changes to position the federal government to take advantage of 
emerging opportunities and to meet future challenges. Focusing on 
accountable, results-oriented management can help the federal 
government operate effectively within a broad network that includes 
other governmental organizations, nongovernmental organizations, and 
the private sector.

In view of the broad trends and large and growing fiscal challenges 
facing the nation, there is a need to fundamentally review, reassess, 
and reprioritize the proper role of the federal government, how the 
government should do business in the future, and--in some instances--
who should do the government's business in the 21ST century. It is also 
increasingly important that federal programs use properly designed and 
aligned tools to manage effectively across boundaries work with 
individual citizens, other levels of government, and other sectors. 
Evaluating the role of government and the programs it delivers is key 
in considering how best to address the nation's most pressing 
priorities. Existing programs, policies and activities cannot be taken 
as "givens." We need to look at "the base" across the board--mandatory 
and discretionary spending and tax preferences/incentives. Such 
periodic reviews of programs can prompt not only a healthy reassessment 
of our priorities but also changes needed in program design, resources 
and management to get the results we collectively decide we want from 

Needless to say, we at GAO are pleased to help Congress in this very 
important work.


For further information regarding this testimony, please contact 
Barbara D. Bovbjerg, Director, Education, Workforce, and Income 
Security Issues, at (202) 512-7215 or regarding 
Social Security and disability issues; Leslie G. Aronovitz, Director, 
Health Care, at (312) 220-7600, or and Laura A. 
Dummit, Director Health Care, at (202) 512-7119, or 
regarding Medicare; Michael Brostek, Director for Tax, Strategic 
Issues, at (202) 512-9110, or regarding tax issues; or 
Susan J. Irving, Director for Federal Budget Analysis, Strategic 
Issues, at (202) 512-9142 or regarding general budget 
and oversight issues in this testimony.

Individuals making key contributions to this testimony included Sheila 
Avruch, Sabrina Birnbaum, Jeremy Cox, Carlos Diz, Sandra Gove, Leon 
Green, David Lewis, Carol Dawn Petersen, Susan Ragland, Tamara Stenzel, 
Melissa Wolf, and Robert Yetvin.

Attachment I: GAO's 2003 High-Risk List:

2003 High-Risk Areas; Year Designated High Risk.

Addressing Challenges In Broad-based Transformations: 

Strategic Human Capital Management*; 2001.

U.S. Postal Service Transformation Efforts and Long-Term Outlook*; 

Protecting Information Systems Supporting the Federal Government and 
the Nation's Critical Infrastructures; 1997.

Implementing and Transforming the New Department of Homeland Security; 

Modernizing Federal Disability Programs*; 2003.

Federal Real Property*; 2003.

Ensuring Major Technology Investments Improve Services: 

FAA Air Traffic Control Modernization; 1995.

IRS Business Systems Modernization; 1995.

DOD Systems Modernization; 1995.

Providing Basic Financial Accountability: 

DOD Financial Management; 1995.

Forest Service Financial Management; 1999.

FAA Financial Management; 1999.

IRS Financial Management; 1995.

Reducing Inordinate Program Management Risks: 

Medicare Program*; 1990.

Medicaid Program*; 2003.

Earned Income Credit Noncompliance; 1995.

Collection of Unpaid Taxes; 1990.

DOD Support Infrastructure Management; 1997.

DOD Inventory Management; 1990.

HUD Single-Family Mortgage Insurance and Rental Assistance Programs; 

Student Financial Aid Programs; 1990.

Managing Large Procurement Operations More Efficiently: 

DOD Weapon Systems Acquisition; 1990.

DOD Contract Management; 1992.

Department of Energy Contract Management; 1990.

NASA Contract Management; 1990.

Source: GAO:

*Additional authorizing legislation is likely to be required as one 
element of addressing this high-risk area.

[End of table]

Attachment II: Selected Reports Regarding Specific Areas in Testimony:


Federal Budget: Opportunities for Oversight and Improved Use of 
Taxpayer Funds. GAO-03-922T. Washington, D.C.: June 18, 2003.

Social Security Programs:

Social Security Administration: Revision to the Government Pension 
Offset Exemption Should Be Reconsidered. GAO-02-950, Washington, D.C.: 
August 15, 2002.

Social Security: Congress Should Consider Revising the Government 
Pension Offset "Loophole." GAO-03-498T. Washington, D.C.: February 27, 

Supplemental Security Income: SSA Could Enhance Its Ability to Detect 
Residency Violations. GAO-03-724. Washington, D.C.: July 31, 2003.

Social Security: Issues Relating to Noncoverage of Public Employees. 
GAO-03-710T. Washington, D.C.: May 1, 2003.

Major Management Challenges and Program Risks: Social Security 
Administration. GAO-03-117. Washington, D.C.: January 2003.

High Risk Series: An Update. GAO-03-119. Washington, D.C.: January 

Supplemental Security Income: Progress Made in Detecting and Recovering 
Overpayments, but Management Attention Should Continue. GAO-02-849. 
Washington, D.C.: September 16, 2002.

Social Security Administration: Agency Must Position Itself Now to Meet 
Profound Challenges. GAO-02-289T. Washington, D.C.: May 2, 2002.

SSA and VA Disability Programs: Re-Examination of Disability Criteria 
Needed to Help Ensure Program Integrity. GAO-02-597. Washington, D.C.: 
August 9, 2002.

Social Security Disability: Efforts to Improve Claims Process Have 
Fallen Short and Further Action is Needed. GAO-02-826T. Washington, 
D.C.: June 11, 2002.

SSA Disability: Other Programs May Provide Lessons for Improving 
Return-to-Work Efforts. GAO-01-153. Washington, D.C.: January 12, 2001.

Supplemental Security Income: Action Needed on Long-Standing Problems 
Affecting Program Integrity. GAO/HEHS-98-158. Washington, D.C.: 
September 14, 1998.

Social Security: Better Payment Controls for Benefit Reduction 
Provisions Could Save Millions. GAO/HEHS-98-76. Washington, D.C.: Apr. 
30, 1998.

SSA Disability: Return-to-Work Strategies From Other Systems May 
Improve Federal Programs. GAO/HEHS-96-133. Washington, D.C.: July 11, 

SSA Disability: Program Redesign Necessary to Encourage Return to Work. 
GAO/HEHS-96-62. Washington, D.C.: April 24, 1996.

Unemployment Insurance:

Unemployment Insurance: Increased Focus on Program Integrity Could 
Reduce Billions in Overpayments. GAO-02-697. Washington, D.C.: July 12, 


Medicare: Financial Challenges and Considerations for Reform. GAO-03-
577T. Washington, D.C.: April 10, 2003.

Medicare: Observations on Program Sustainability and Strategies to 
Control Spending on Any Proposed Drug Benefit. GAO-03-650T. Washington, 
D.C.: April 9, 2003.

Medicare: Payment for Blood Clotting Factor Exceeds Providers' 
Acquisition Cost. GAO-03-184. Washington, D.C.: January 10, 2003.

Major Management Challenges and Program Risks: Department of Health and 
Human Services. GAO-03-101. Washington, D.C.: January 2003.

High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 

Skilled Nursing Facilities: Medicare Payments Exceed Costs for Most but 
Not All Facilities. GAO-03-183. Washington, D.C.: December 31, 2002.

Medicare Financial Management: Significant Progress Made to Enhance 
Financial Accountability. GAO-03-151R. Washington, D.C.: October 31, 

Skilled Nursing Facilities: Providers Have Responded to Medicare 
Payment System by Changing Practices. GAO-02-841. Washington, D.C.: 
August 23, 2002.

Medicare: Challenges Remain in Setting Payments for Medical Equipment 
and Supplies and Covered Drugs. GAO-02-833T. Washington, D.C.: June 12, 

Medicare: Recent CMS Reforms Address Carrier Scrutiny of Physicians' 
Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 2002.

Medicare: Using Education and Claims Scrutiny to Minimize Physician 
Billing Errors. GAO-02-778T. Washington, D.C.: May 28, 2002.

Medicare Home Health Care: Payments to Home Health Agencies Are 
Considerably Higher than Costs. GAO-02-663. Washington, D.C.: May 6, 

Medicare: Communications With Physicians Can Be Improved. GAO-02-249. 
Washington, D.C.: February 27, 2002.

Medicare: Payments for Covered Outpatient Drugs Exceed Providers' Cost. 
GAO-01-1118. Washington, D.C.: September 21, 2001.

Medicare: Comments on HHS' Claims Administration Contracting Reform 
Proposal. GAO-01-1046R. Washington, D.C.: August 17, 2001.

Medicare Management: CMS Faces Challenges to Sustain Progress and 
Address Weaknesses. GAO-01-817. Washington, D.C.: July 31, 2001.

Medicare: Successful Reform Requires Meeting Key Management Challenges. 
GAO-01-1006T. Washington, D.C.: July 25, 2001.

Medicare Contracting Reform: Opportunities and Challenges in 
Contracting for Claims Administration Services. GAO-01-918T. 
Washington, D.C.: June 28, 2001.

Medicare: Higher Expected Spending and Call for New Benefit Underscore 
Need for Meaningful Reform. GAO-01-539T. Washington, D.C.: March 22, 

Medicare Management: Current and Future Challenges. GAO-01-878T. 
Washington, D.C.: June 19, 2001.

Medicare Reform: Modernization Requires Comprehensive Program View. 
GAO-01-862T. Washington, D.C.: June 14, 2001.

Medicare: Opportunities and Challenges in Contracting for Program 
Safeguards. GAO-01-616. Washington, D.C.: May 18, 2001.

Nursing Homes: Aggregate Medicare Payments Are Adequate Despite 
Bankruptcies. GAO/T-HEHS-00-192. Washington, D.C.: September 5, 2000.

Tax Policy and Administration Issues:

IRS Modernization: Continued Progress Necessary for Improving Service 
to Taxpayers and Ensuring Compliance. GAO-03-769T. Washington, D.C.: 
May 20, 2003.

Compliance and Collection: Challenges for IRS in Reversing Trends and 
Implementing New Initiatives. GAO-03-732T. Washington, D.C.: May 7, 

Internal Revenue Service: Assessment of fiscal year 2004 Budget Request 
and 2003 Filing Season Performance to Date. GAO-03-641T. Washington, 
D.C.: April 8, 2003.

Tax Administration: Federal Payment Levy Program Measures, Performance, 
and Equity Can Be Improved. GAO-03-356. Washington, D.C.: March 6, 

Tax Administration: IRS Should Continue to Expand Reporting on Its 
Enforcement Efforts. GAO-03-378. Washington, D.C.: January 31, 2003.

Performance and Accountability Series: Major Management Challenges and 
Program Risks--Department of the Treasury. GAO-03-109. Washington, 
D.C.: January 2003.

Business Tax Incentives: Incentives to Employ Workers with Disabilities 
Receive Limited Use and Have an Uncertain Impact. GAO-03-39. 
Washington, D.C.: December 11, 2002.

Student Aid and Tax Benefits: Better Research and Guidance Will 
Facilitate Comparison of Effectiveness and Student Use. GAO-02-751. 
Washington, D.C.: September 13, 2002.

Tax Administration: New Compliance Research Effort is on Track, but 
Important Work Remains. GAO-02-769. Washington, D.C.: June 27, 2002.

Tax Administration: Impact of Compliance and Collection Program 
Declines on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002.

Tax Administration: IRS's Efforts to Improve Compliance with Employment 
Tax Requirements Should Be Evaluated. GAO-02-92. Washington, D.C.: 
January 15, 2002.

Tax Administration: Millions of Dollars Could Be Collected If IRS 
Levied More Federal Payments. GAO-01-711. Washington, D.C.: July 20, 

Tax Administration: IRS' Levy of Federal Payments Could Generate 
Millions of Dollars. GAO/GGD-00-65. Washington, D.C.: April 7, 2000.

Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty 
Assessments are owed. GAO/AIMD/GGD-99-211. Washington, D.C.: August 2, 

Community Development: Business Use of Empowerment Zones Tax 
Incentives. GAO/RCED-99-253. Washington, D.C.: September 30, 1999.

Tax Credits: Opportunities to Improve Oversight of the Low-Income 
Housing Program. GAO/T-GGD/RCED-97-149. Washington, D.C.: April 23, 

Tax Credits: Opportunities to Improve Oversight of the Low-Income 
Housing Program. GAO/GGD/RCED-97-55. Washington, D.C.: March 28, 1997.

Tax Policy: Tax Expenditures Deserve More Scrutiny. GAO/GGD/AIMD-94-
122. Washington, D.C.: June 3, 1994.

Tax Policy: Puerto Rico and the Section 936 Tax Credit. GAO/GGD/-93-
109. Washington, D.C.: June 8, 1993.

Child Support Enforcement:

Child Support Enforcement: Clear Guidance Would Help Ensure Proper 
Access to Information and Use of Wage Withholding by Private Firms. 
GAO-02-349, March 26, 2002.

Child Support Enforcement: Effects of Declining Welfare Caseloads Are 
Beginning to Emerge. GAO/HEHS-99-105. Washington, D.C.: June 30, 1999.

Welfare Reform: Child Support an Uncertain Income Supplement for 
Families Leaving Welfare. GAO/HEHS-98-168. Washington, D.C.: August 3, 

Child Support Enforcement: Early Results on Comparability of Privatized 
and Public Offices. GAO/HEHS-97-4. Washington, D.C.: December 16, 1996.

Child Support Enforcement: Reorienting Management Toward Achieving 
Better Program Results. GAO/HEHS/GGD-97-14. Washington, D.C.: October 
25, 1996.

Child Support Enforcement: States' Experience with Private Agencies' 
Collection of Support Payments. GAO/HEHS-97-11. Washington, D.C.: 
October 23, 1996.

Child Support Enforcement: States and Localities Move to Privatized 
Services. GAO/HEHS-96-43FS. Washington, D.C.: November 20, 1995.

Child Support Enforcement: Opportunity to Reduce Federal and State 
Costs. GAO/T-HEHS-95-181. Washington, D.C.: June 13, 1995.

Grant Programs:

Formula Grants: Effects of Adjusted Population Counts on Federal 
Funding to States. GAO/HEHS-99-69. Washington, D.C.: February 26, 1999.

Medicaid Formula: Effects of Proposed Formula on Federal Shares of 
State Spending. GAO/HEHS-99-29R. Washington, D.C.: February 19, 1999.

Welfare Reform: Early Fiscal Effect of the TANF Block Grant. GAO/AIMD-
98-137. Washington, D.C.: August 22, 1998.

Public Housing Subsidies: Revisions to HUD's Performance Funding System 
Could Improve Adequacy of Funding. GAO/RCED-98-174. Washington, D.C.: 
June 19, 1998.

School Finance: State Efforts to Equalize Funding Between Wealthy and 
Poor School Districts. GAO/HEHS-98-92. Washington, D.C.: June 16, 1998.

School Finance: State and Federal Efforts to Target Poor Students. GAO/
HEHS-98-36. Washington, D.C.: January 28, 1998.

School Finance: State Efforts to Reduce Funding Gaps Between Poor and 
Wealthy Districts. GAO/HEHS-97-31. Washington, D.C.: February 5, 1997.

Federal Grants: Design Improvements Could Help Federal Resources Go 
Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996.

Public Health: A Health Status Indicator for Targeting Federal Aid to 
States. GAO/HEHS-97-13. Washington, D.C.: November 13, 1996.

School Finance: Options for Improving Measures of Effort and Equity in 
Title I. GAO/HEHS-96-142. Washington, D.C.: August 30, 1996.

Highway Funding: Alternatives for Distributing Federal Funds. GAO/RCED-
96-6. Washington, D.C.: November 28, 1995.

Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity. 
GAO/HEHS-96-26. Washington, D.C.: November 13, 1995.

Department of Labor: Senior Community Service Employment Program 
Delivery Could Be Improved Through Legislative and Administrative 
Action. GAO/HEHS-96-4. Washington, D.C.: November 2, 1995.

Federal Assistance: Grant System Continues to Be Highly Fragmented. 
GAO-03-718T. Washington, D.C.: April 29, 2003.

Multiple Employment and Training Programs: Funding and Performance 
Measures for Major Programs. GAO-03-589. Washington, D.C.: April 18, 

Managing for Results: Continuing Challenges to Effective GPRA 
Implementation. GAO/T-GGD-00-178. Washington, D.C.: July 20, 2000.

Workforce Investment Act: States and Localities Increasingly Coordinate 
Services for TANF Clients, but Better Information Needed on Effective 
Approaches. GAO-02-696. Washington, D.C.: July 3, 2002.

Fundamental Changes are Needed in Federal Assistance to State and Local 
Governments. GAO/GGD-75-75. Washington, D.C.: August 19, 1975.

Flood Insurance Losses:

Flood Insurance: Information on Financial Aspects of the National Flood 
Insurance Program. GAO/T-RCED-00-23. Washington, D.C.: October 27, 

Flood Insurance: Information on Financial Aspects of the National Flood 
Insurance Program. GAO/T-RCED-99-280. Washington, D.C.: August 25, 

Flood Insurance: Financial Resources May Not Be Sufficient to Meet 
Future Expected Losses. GAO/RCED-94-80. Washington, D.C.: March 21, 



[1] In this testimony the term "tax preferences" is used to describe 
provisions in the tax code sometimes referred to as "tax incentives" or 
"tax expenditures." "Tax expenditures" are defined under the 
Congressional Budget and Impoundment Control Act of 1974 as "revenue 
losses attributable to provisions of the Federal tax laws which allow a 
special exclusion, exemption, or deduction from gross income or which 
provide a special credit, a preferential rate of tax, or a deferral of 
tax liability." The Joint Committee on Taxation describes tax 
expenditures as including any reductions of income tax liabilities that 
result from special tax provisions or regulations that provide tax 
benefits to particular taxpayers.

[2] While Social Security and Medicare are the largest direct spending 
or mandatory programs, this category also includes such others as farm 
price supports, insurance programs, food stamps, TANF block grants to 
the states, federal civilian and military pension and health.

[3] Excluding the Iraq war supplemental the figures are 56 percent 
mandatory and 37 percent discretionary.

[4] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
03-119 (Washington, D.C.: January 2003).

[5] U.S. General Accounting Office, Supplemental Security Income: 
Action Needed on Long-Standing Problems Affecting Program Integrity, 
GAO/HEHS-98-158 (Washington, D.C.: Sept. 14, 1998).

[6] GAO/HEHS-98-158.

[7] See 42 U.S.C. sec. 1382c(a)(1)(B)(i).

[8] See 42 U.S.C. sec. 1382(f).

[9] U.S. General Accounting Office, Supplemental Security Income: 
Progress Made in Detecting and Recovering Overpayments, but Management 
Attention Should Continue, GAO-02-849 (Washington, D.C.: Sept. 16, 

[10] Social Security's provisions regarding public employees are rooted 
in the fact that about one-fourth of them do not pay Social Security 
taxes on the earnings from their government jobs. Even though these 
noncovered employees may have many years of earnings on which they do 
not pay Social Security taxes, they can still be eligible for Social 
Security benefits based on their spouses' or their own earnings in 
covered employment.

[11] See U.S. General Accounting Office, Social Security 
Administration: Better Payment Controls for Benefit Reduction 
Provisions Could Save Millions, GAO/HEHS-98-76 (Washington, D.C.: Apr. 
30, 1998).

[12] See U.S. General Accounting Office, Social Security: Issues 
Relating to Noncoverage of Public Employees, GAO-03-710T (Washington, 
D.C.: May 1, 2003). 

[13] U.S. General Accounting Office, Social Security Disability: 
Efforts to Improve Claims Process Have Fallen Short and Further Action 
is Needed, GAO-02-826T (Washington, D.C.: June 11, 2002).

[14] U.S. General Accounting Office, Social Security Administration: 
Agency Must Position Itself Now to Meet Profound Challenges, GAO-02-
289T (Washington, D.C.: May 2, 2002).

[15] GAO-03-119. 

[16] These updates include adding or dropping conditions that qualify 
one for benefits, modifying the criteria needed to establish the 
presence and severity of certain medical conditions, and wording 
changes for clarification and guidance in decision making. 

[17] U.S. General Accounting Office, SSA Disability: Program Redesign 
Necessary to Encourage Return to Work, GAO/HEHS-96-62 (Washington, 
D.C.: Apr. 24, 1996).

[18] U.S. General Accounting Office, SSA Disability: Return-to-Work 
Strategies From Other Systems May Improve Federal Programs, GAO/HEHS-
96-133 (Washington, D.C.: July 11, 1996).

[19] This bill is currently pending in the Senate. 

[20] U.S. General Accounting Office, Medicare: Recent CMS Reforms 
Address Carrier Scrutiny of Physicians' Claims for Payment, GAO-02-693 
(Washington, D.C.: May 28, 2002).

[21] U.S. General Accounting Office, Medicare: Communications With 
Physicians Can Be Improved, GAO-02-249 (Washington, D.C.: Feb. 27, 

[22] In fiscal year 2001, Medicare paid $13 billion to skilled nursing 
facilities and $9 billion for home health services. 

[23] U.S. General Accounting Office, Skilled Nursing Facilities: 
Medicare Payments Exceed Costs for Most but Not All Facilities, GAO-03-
183 (Washington, D.C.: Dec. 31, 2002).

[24] U.S. General Accounting Office, Medicare Home Health Care: 
Payments to Home Health Agencies Are Considerably Higher than Costs, 
GAO-02-663 (Washington, D.C.: May 6, 2002).

[25] U.S. General Accounting Office, Medicare Home Health Care: 
Prospective Payment System Will Need Refinement as Data Become 
Available, GAO/HEHS-00-9 (Washington, D.C.: Apr. 7, 2000) and U.S. 
General Accounting Office, Medicare Home Health Care: Prospective 
Payment System Could Reverse Recent Declines in Spending, GAO/HEHS-00-
176 (Washington, D.C.: Sept. 8, 2000).

[26] Medicare fee payments and beneficiary cost sharing for medical 
equipment and supplies, which includes prosthetics (or artificial limbs 
or other body parts) and orthotics (or braces) totaled approximately $9 
billion for calendar year 2002. This category includes some drugs 
covered under part B, such as drugs used in a piece of equipment--for 
example, a nebulizer or an infusion pump.

[27] U.S. General Accounting Office, Medicare: Home Oxygen Program 
Warrants Continued HCFA Attention, GAO/HEHS-98-17 (Washington, D.C.: 
Nov. 7. 1997).

[28] While Medicare does not have a comprehensive outpatient drug 
benefit, certain drugs and biologicals are covered under part B of the 
program, which also provides coverage for certain physician, outpatient 
hospital, laboratory, and other services to beneficiaries who pay 
monthly premiums. See U.S. General Accounting Office, Medicare: 
Payments for Covered Outpatient Drugs Exceed Providers' Cost, GAO-01-
1118 (Washington, D.C.: Sept. 21, 2001). 

[29] Hemophilia treatment centers and homecare companies are the two 
major providers of clotting factors to beneficiaries. See U.S. General 
Accounting Office, Medicare: Payment for Blood Clotting Factor Exceeds 
Providers' Acquisition Cost, GAO-03-184 (Washington, D.C.: Jan. 10, 

[30] GAO-01-1118.

[31] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
01-263 (Washington, D.C.: January 2001).

[32] These two questions were new in the 2001 survey so there are not 
comparative figures from 1999.

[33] Informal suppliers are sole proprietors who operate in an informal 
business style, such as door-to-door sales and individuals who 
moonlight to augment their wage income.

[34] Department of the Treasury, Office of Tax Policy, Corporate 
Inversion Transactions: Tax Policy Implications, (Washington, D.C.: May 
17, 2002).

[35] U.S. General Accounting Office, Tax Administration: Impact of 
Compliance and Collection Program Declines on Taxpayers, GAO-02-674 
(Washington, D.C.: May 22, 2002).

[36] Workload is the number of delinquent accounts assigned to field 
and telephone collection. Work completed is the number of delinquent 
accounts worked to closure, excluding accounts for which collection 
work has been deferred. 

[37] IRS considers employment tax compliance to be among the most 
challenging issues for small business, since delinquent tax can rapidly 
compound beyond the employer's ability to pay. See U.S. General 
Accounting Office, Tax Administration: IRS's Efforts to Improve 
Compliance with Employment Tax Requirements Should Be Evaluated, GAO-
02-92, (Washington, D.C.; Jan. 15, 2002).

[38] U.S. General Accounting Office, Tax Administration: New Compliance 
Research Effort is on Track, but Important Work Remains, GAO-02-769, 
(Washington, D.C.: June 27, 2002); and U.S. General Accounting Office, 
Internal Revenue Service: Assessment of Fiscal Year 2004 Budget Request 
and 2003 Filing Season Performance to Date, GAO-03-641T, (Washington, 
D.C.: Apr. 8, 2003).

U.S. General Accounting Office, Tax Administration: IRS's Efforts to 
Improve Compliance with Employment Tax Requirements Should Be 
Evaluated, GAO-02-92 (Washington, D.C.: Jan. 15, 2002).

[40] Levy is the legal process by which IRS orders a third party to 
turn over property in its possession that belongs to the delinquent 
taxpayer named in a notice of levy. A continuous levy remains in effect 
from the date such levy is first made until the tax debt is fully paid 
or IRS releases the levy. 

[41] Specifically, the 1997 legislation allows continuous levy of 
"specified payments," including nonmeans-tested federal payments, as 
well as certain previously exempt payments. 

[42] The 95-percent confidence interval for the $77.7 million ranges 
from $73.5 million to $81.9 million. 

[43] U.S. General Accounting Office, Tax Administration: IRS's Levy of 
Federal Payments Could Generate Millions of Dollars, GAO/GGD-00-65, 
(Washington, D.C.: Apr. 7, 2000).

[44] U.S. General Accounting Office, Tax Administration: Millions of 
Dollars Could be Collected if IRS Levied More Federal Payments, GAO-01-
711, (Washington, D.C.: July 20, 2001).

[45] U.S. General Accounting Office, Tax Administration: Federal 
Payment Levy Program Measures, Performance, and Equity Can Be Improved, 
GAO-03-356, (Washington, D.C.: Mar. 6, 2003).

[46] All dollar figures are reported in 2003 adjusted dollars. Though 
it is not precisely correct to add up all tax expenditures because some 
have interactive effects though they are reported individually, these 
figures provide a useful gauge of the general magnitude of these 
provisions. The tax preference figures only include the portions of the 
refundable child tax credit and EIC that offset income taxes paid. 

[47] Although we refer to them as tax preferences, these annual figures 
come from the Joint Committee on Taxation's annual reports on tax 

[48] U.S. General Accounting Office, Business Tax Incentives: 
Incentives to Employ Workers with Disabilities Receive Limited Use and 
Have an Uncertain Impact, GAO-03-39, (Washington, D.C.: Dec. 11, 2002).

[49] U.S. General Accounting Office, Student Aid and Tax Benefits: 
Better Research and Guidance will Facilitate Comparison of 
Effectiveness and Student Use, GAO-02-751, (Washington, D.C.: Sept. 13, 

[50] U.S. General Accounting Office, Community Development: Businesses' 
Use of Empowerment Zone Tax Incentives, GAO/RCED-99-253, (Washington, 
D.C.: Sept. 30, 1999).

[51] U.S. General Accounting Office, Tax Policy; Puerto Rico and the 
Section 936 Tax Credit, GAO/GGD-93-109, (Washington, D.C.: June 8, 

[52] Report of the Committee on Governmental Affairs, United States 
Senate, Government Performance and Results Act of 1993, (June 16, 1993, 
Report 103-58).

[53] U.S. Office of Management and Budget, Analytical Perspectives, 
Budget of the United States Government, Fiscal Year 2004 (Washington, 
DC: Government Printing Office) 2003. 

[54] This represents the sum of a number of different tax provisions.