Government Accounting, Audits & Improper Payments

The federal government's financial accountability framework — spanning the Chief Financial Officers Act (1990), the Government Management Reform Act (1994), and the Payment Integrity Information Act (2019) — requires every major federal agency to produce annual audited financial statements, maintain internal controls over financial reporting, and identify and reduce improper payments: disbursements made to the wrong recipient, in the wrong amount, or for an ineligible purpose. The scale of the problem is significant: the federal government reported approximately $236 billion in improper payments in fiscal year 2023 — covering everything from Medicare and Medicaid overpayments to SNAP errors to fraudulent pandemic relief claims. The Pandemic Response Accountability Committee (PRAC) estimated COVID-19 relief programs alone saw $200+ billion in potential fraud. The Office of Management and Budget (OMB) sets government-wide standards for improper payment reporting; the Government Accountability Office (GAO) audits financial statements and maintains a High Risk List of programs most vulnerable to waste, fraud, and mismanagement — currently including Medicare, Medicaid, and the earned income tax credit. The Department of Defense has failed to produce a clean audit for decades, representing one of the largest accountability gaps in the federal government. The Single Audit Act (1984) extends financial oversight beyond federal agencies to the 30,000+ state, local, and nonprofit entities that receive federal grants above $1,000,000/year (the threshold raised from $750,000 by the 2024 OMB Uniform Guidance revision, effective for fiscal years beginning on or after October 1, 2024), requiring independent audits to catch misuse of federal funds at the state and local level.

Current Law (2026)

Legal Authority

• 31 U.S.C. § 3512 — Chief Financial Officers Act requirements (agency CFOs establish and maintain integrated accounting and financial management systems; prepare annual financial statements)
• 31 U.S.C. § 3515 — Financial statements of agencies (24 major agencies must prepare annual financial statements audited by the agency IG or independent auditor; consolidated governmentwide financial statements prepared by Treasury)
• 31 U.S.C. § 3321 — Disbursing authority (executive agency may disburse only in amounts allowed by law; Treasury Department processes federal payments)
• 31 U.S.C. §§ 3351-3358 — Payment Integrity Information Act (agencies must identify programs susceptible to significant improper payments; estimate and report improper payment rates; develop corrective action plans; report to OMB and Congress; programs exceeding statutory thresholds must implement additional controls)
• 31 U.S.C. §§ 7501-7507 — Single Audit Act (non-federal entities receiving $1,000,000+ in federal awards (the threshold raised from $750,000 by the 2024 OMB Uniform Guidance revision, effective for FY beginning on/after Oct 1, 2024) must undergo a "single audit" covering all federal programs; auditors test compliance with federal requirements; findings reported to Federal Audit Clearinghouse)
• 31 U.S.C. § 3562 — Do Not Pay Initiative (agencies must check payment eligibility against the Do Not Pay database before making payments — cross-referencing against death records, debarment lists, debt databases, and other exclusion sources)

How It Works

The federal government's accounting and payment integrity framework is designed to ensure that the $6.5+ trillion in annual federal spending — authorized through the congressional budget process — is properly managed, accurately reported, and free from waste, fraud, and error. Despite these efforts, improper payments — payments made in the wrong amount, to the wrong person, or without proper documentation — remain one of the most persistent challenges in government.

An "improper payment" — defined under the Payment Integrity Information Act (31 U.S.C. §§ 3351–3358) — is any payment that should not have been made, was made in the wrong amount, was made to an ineligible recipient, or lacked sufficient documentation to determine correctness. In FY2023, federal agencies reported an estimated $236 billion in improper payments — the highest figure ever reported — concentrated in healthcare programs (Medicaid ~$50B, Medicare ~$47B), refundable tax credits (EITC ~$22B), and other large benefit programs. Most improper payments result from documentation errors, eligibility verification failures, and administrative mistakes rather than fraud, but the magnitude underscores the challenge of accurately distributing benefits at massive scale. The Chief Financial Officers Act (1990) (31 U.S.C. § 3512) established CFO positions at the 24 largest federal agencies, requiring them to maintain proper accounting systems and produce annual audited financial statements; the Government Management Reform Act (1994) extended this to consolidated governmentwide financial statements prepared by Treasury and audited by GAO. The federal government has received a "disclaimer of opinion" — the worst audit outcome — on its consolidated financial statements for over 25 years, primarily due to DOD's inability to produce auditable records and interagency reconciliation issues.

Non-federal entities — state and local governments, tribal governments, and nonprofits — that spend $1,000,000 or more in federal awards in a fiscal year (the threshold raised from $750,000 by the 2024 OMB Uniform Guidance revision, effective for FY beginning on/after Oct 1, 2024) must undergo a Single Audit under 31 U.S.C. §§ 7501–7507: a comprehensive annual audit covering both the entity's financial statements and compliance with major federal program requirements. This replaces the need for separate program-by-program audits and provides a standardized framework for accountability over federal funds flowing through states, localities, and grantees, with findings reported to the Federal Audit Clearinghouse for review by federal grant-making agencies. Separately, the Do Not Pay Initiative (31 U.S.C. § 3562) requires agencies to check payment eligibility against multiple databases before disbursing funds — including SSA death records, the GSA's System for Award Management exclusion list, Treasury's delinquent debt databases, and state new-hire directories — preventing payments to deceased individuals, debarred contractors, and entities with outstanding federal debts.

How It Affects You

State Variations

Implementing Regulations

• 31 CFR Part 901 — Federal Claims Collection Standards — demand for payment: procedures agencies must follow when attempting to collect debts owed to the federal government, including written demand, due process notice, opportunity to inspect records, and right to dispute the debt

• 31 CFR Part 902 — Federal Claims Collection Standards — Compromise of Claims: the standards governing when and how federal agencies may settle debts owed to the government for less than the full amount. Compromise authority allows agencies to resolve uncollectable or legally uncertain debts without costly litigation. Key provisions:

  • § 902.2 — Bases for compromise: an agency may compromise a federal debt (up to $100,000 excluding interest and penalties, unless referred to DOJ) if: (1) the debtor cannot pay the full amount in a reasonable time, as verified through credit reports or financial information; (2) the government is unable to collect the full amount by enforced collection proceedings within a reasonable time (because the debtor has no attachable assets); (3) there is substantial doubt as to the government's ability to prove its claim in court — legal uncertainty about liability, evidence problems, or defenses raised; or (4) the cost of collection would not justify full collection enforcement; these four bases are disjunctive — any one is sufficient to support compromise
  • § 902.3 — Enforcement policy: agencies may compromise statutory penalties, forfeitures, or compliance-enforcement claims if compromise is consistent with the agency's enforcement goals — deterrence and compliance are the standard; a compromise that is too generous may undermine the deterrent effect of the underlying penalty and should be avoided if full collection is feasible
  • § 902.4 — Joint and several liability: when multiple debtors are jointly and severally liable (co-signers, co-contractors), agencies should generally pursue all debtors rather than compromising one's debt and leaving others to pay; accepting a compromise from one co-debtor does not automatically release others unless the compromise agreement explicitly says so; agencies must consider whether accepting a partial payment from one debtor will impair collection from others
  • § 902.6 — Tax consequences: when negotiating a compromise, agencies must consider the tax implications to the government; specifically, agencies should consider requiring the debtor to waive any tax-loss-carry-forward or tax-loss-carry-back rights arising from the compromise (which could generate future tax deductions that partially offset the government's recovery)
  • § 902.7 — Mutual releases: when a compromise is accepted, it should be implemented through a mutual release — the debtor is released from further non-tax liability on the compromised debt in exchange for the agreed payment; the release protects the debtor from future collection attempts on the same debt and provides finality; the release does not cover tax liabilities, criminal penalties, or claims not encompassed by the compromise agreement

  Part 902 sets the policy framework within which federal contracting officers, grant administrators, and program offices negotiate debt settlements. The $100,000 threshold for agency-level compromise authority (beyond which DOJ approval is required) means most routine contractor overpayment settlements and grant recovery negotiations can be resolved without DOJ involvement. The four bases in § 902.2 create a structured analysis that must be documented: a compromise accepted without identifying the applicable basis is legally deficient and may be disallowed by the Inspector General or GAO. In practice, the "cost of collection exceeds the debt" basis in § 902.2(a) is the most commonly used for small debts — pursuing a $500 overpayment through formal collection proceedings that cost $2,000 in staff time is not in the government's interest.

• 31 CFR Part 903 — Federal Claims Collection Standards — Standards for Suspending or Terminating Collection Activity: the rules governing when agencies may stop pursuing a delinquent debt before it is paid. Key provisions:

  • § 903.1 — Scope: agency authority to suspend or terminate applies to debts of $100,000 or less (principal, net of partial payments, exclusive of interest and penalties); debts exceeding $100,000 require DOJ approval before suspension or termination — the agency must refer to DOJ's Civil Division and request authorization
  • § 903.2 — Suspension (pause collection, may resume): an agency may suspend collection when (a) the debtor cannot be located, (b) the debtor's financial condition is expected to improve, or (c) a waiver or review of the debt is pending; suspension may also be warranted based on the debtor's current financial condition if the statute of limitations has not expired, or if administrative offset (including Treasury Offset Program) remains available — notably, the 10-year administrative offset window under 31 U.S.C. 3716(e)(1) can extend collection past the applicable civil statute of limitations for litigation
  • § 903.3 — Termination (stop collection, cannot usually resume): agencies may terminate collection when: (1) the agency cannot collect any substantial amount through its own efforts or contractors; (2) the debtor cannot be located; (3) collection costs will exceed the amount recoverable; (4) the debt is legally without merit or barred by the statute of limitations; (5) the debt cannot be substantiated; or (6) the debt has been discharged in bankruptcy — termination does not bar retaining the account for future sale or offset if circumstances change
  • § 903.4 — Enforcement policy exception: even when termination would otherwise be appropriate, an agency may refer a debt for litigation when significant enforcement policy is at stake or when a court judgment is a prerequisite to imposing administrative sanctions (e.g., a civil monetary penalty or license revocation)
  • § 903.5 — Discharge vs. termination: discharge (also called "close-out") is distinct from termination — discharge requires exhausting all collection tools first (offset, garnishment, credit bureau reporting, litigation); once a debt is discharged, further collection is prohibited; discharge triggers IRS Form 1099-C reporting to the IRS and the debtor for any debt of $600+ where the agency determines there is no reasonable expectation of repayment; suspended or terminated debts do NOT trigger 1099-C because collection may resume

  The suspension/termination/discharge framework is part of the Federal Claims Collection Standards (31 CFR Parts 900–904). The key operational distinction: suspending a debt keeps it active but pauses collection; terminating closes the file but theoretically allows future collection if circumstances change; discharging ends all collection and triggers tax reporting. Agencies routinely use the "cost exceeds recovery" basis in §903.3(3) for small debts — a $200 overpayment that would cost $1,500 in staff time and contractor fees to pursue meets the standard.

• 31 CFR Part 904 — Federal Claims Collection Standards — Referrals to the Department of Justice: the rules governing when and how federal agencies transfer uncollectable debts to DOJ for civil litigation. Key provisions (CORRECTED — Part 904 governs DOJ litigation referrals, not credit bureau reporting):

  • § 904.1 — Prompt referral: agencies must promptly refer debts to DOJ after exhausting administrative collection under Parts 901–903; debts with a principal amount over $1,000,000 (exclusive of interest and penalties) go to DOJ Civil Division in Washington, DC; debts at or below $1,000,000 go to DOJ's Nationwide Central Intake Facility using the Claims Collection Litigation Report (CCLR); agencies should refer as early as practical — waiting until the statute of limitations is about to expire weakens DOJ's litigating position
  • § 904.2 — Claims Collection Litigation Report (CCLR): agencies must complete the CCLR for each referred debt, accompanied by a signed Certificate of Indebtedness; the CCLR specifies what DOJ action is requested — enforced collection, judgment lien only, renew judgment lien, foreclosure, or program enforcement; agencies also use the CCLR to refer debts for DOJ approval of proposed compromises or suspension/termination decisions that exceed agency authority
  • § 904.3 — Evidence preservation: referring agencies must include certified copies of the underlying debt documentation; originals must be provided immediately on DOJ request; failure to preserve documents can result in dismissal or adverse judgments in litigation
  • § 904.4 — Minimum referral amount: agencies may not refer debts of less than $2,500 (exclusive of interest, penalties, and administrative costs) unless: (a) litigation is important to enforce agency program policy; (b) the referral is solely to secure a judgment for filing as a lien; or (c) the debtor clearly has ability to pay and collection can be effectively enforced; the Attorney General may adjust this threshold by notice

Pending Legislation

• S 269 (Sen. Kennedy, R-LA) — Link SSA death records to Do Not Pay system, stop improper payments. Status: Became law.
• HR 4311 (Rep. Bean, R-FL) — Require agencies to report Treasury payment data, use records to recover improper payments. Status: Introduced.
• HR 2716 (Rep. Higgins, R-LA) — Require SSA to share death records with Do Not Pay system. Status: In committee.
• HR 2242 (Rep. Arrington, R-TX) — Apply payment-integrity rules to state TANF programs. Status: Introduced.
• HR 1771 (Rep. Yakym, R-IN) — Require President's budget to report improper payment trends and corrective actions. Status: Introduced.
• S 747 (Sen. Ricketts, R-NE) — President's budget must show improper payment amounts and corrections. Status: Introduced.
• S 78 (Sen. Lankford, R-OK) — Require emergency-ready internal controls to curb improper payments during crises. Status: Introduced.
• HR 7720 — Require states to report fraudulent/improper child care payments. Status: In committee.

Recent Developments

• Improper payment estimates have risen dramatically, driven in part by pandemic-era programs with rapid disbursement and reduced verification
• GAO continues to report the federal government's inability to produce clean consolidated financial statements — DOD is the largest barrier
• The Do Not Pay system has been expanded and modernized, but data quality and interagency data sharing remain challenges
• AI and data analytics are increasingly being applied to improper payment detection and prevention
• Pandemic fraud (especially in unemployment insurance and SBA loan programs) has heightened focus on payment integrity across all federal programs