Review of the Effectiveness of Criminal Investigationís Strategic Planning Process

June 2001

Reference Number: 2001-10-098

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

June 7, 2001

MEMORANDUM FOR CHIEF, CRIMINAL INVESTIGATION

FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner

Deputy Inspector General for Audit

SUBJECT: Final Audit Report - Review of the Effectiveness of Criminal Investigationís Strategic Planning Process

This report presents the results of our review of the Criminal Investigation (CI) functionís Strategic Planning Process. The objective of the review was to assess the CI functionís ability to properly refocus its resources into legal source tax-related areas.

In summary, we recommended that the CI function take additional steps to determine whether resources are being refocused to investigate legal source tax violations. Specifically, the CI function needs to develop and communicate a detailed compliance strategy, establish an effective process to measure the shift of resources to investigate legal source tax violations, and develop a methodology to ensure that resources are effectively allocated. Implementation of these recommendations will assist the CI function in accomplishing its overall mission. CI management agreed to the recommendations presented in this report and has developed an implementation schedule for its corrective actions. Managementís comments have been incorporated into the report where appropriate, and the full text of their comments is included as an appendix.

Copies of this report are also being sent to the Internal Revenue Service managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Maurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

Table of Contents

Executive Summary

Objective and Scope

Background

Results

The Criminal Investigation Function Needs to Develop and Communicate a Detailed Compliance Strategy Based Upon the Criminal Investigation Strategy and Program Plan

The Criminal Investigation Function Needs to Establish an Effective Process to Measure the Shift in Resources to Legal Source Tax Violations

The Criminal Investigation Function Needs to Determine a Methodology for Effectively Allocating Resources

Conclusion

Appendix I Ė Detailed Objective, Scope, and Methodology

Appendix II Ė Major Contributors to This Report

Appendix III Ė Report Distribution List

Appendix IV Ė Managementís Response to the Draft Report

Executive Summary

In July 1998, the Internal Revenue Service (IRS) Commissioner appointed Judge William Webster to direct an independent review of the Criminal Investigation (CI) function. Judge Webster assembled a task force to assess the CI functionís effectiveness in accomplishing its mission as the IRSí criminal law enforcement arm. The CI function is the only federal law enforcement agency with the authority to investigate criminal tax violations. The task force determined that the CI function had drifted from its primary mission of investigating tax crimes affecting tax compliance and emphasized the need for the CI function to refocus its resources to investigate tax-related crimes.

The overall objective of our review was to assess the CI functionís ability to properly refocus its resources into legal source tax-related areas.

Results

The CI function recognizes the need to establish an effective process to measure the shift in resources to legal source tax violations and develop a methodology for effectively allocating resources. The CI function has taken steps to refocus its resources into investigations involving legal sources of income. However, the full impact of these initiatives will not be realized for some time. Our review showed that the CI function had not developed and communicated a detailed compliance strategy, had not established an effective process to measure the shift in resources to legal source tax violations, and had not developed a methodology to ensure that resources are effectively allocated.

The Criminal Investigation Function Needs to Develop and Communicate a Detailed Compliance Strategy Based Upon the Criminal Investigation Strategy and Program Plan

The CI function is not operating within the framework of a current functional compliance strategy as envisioned by the Webster Report. This condition exists because the CI function did not revise its Interim Compliance Strategy for Fiscal Year (FY) 2001. The CI function is now required to develop a Strategy and Program Plan (SPP) to be aligned with the Strategic Planning and Budgeting Process. For FY 2000, the CI function had an Interim Compliance Strategy that defined the key investigative emphasis areas and provided guidelines for the identification, development, and investigation of cases in each program area. The CI function should develop and communicate the FY 2001 goals and priorities as defined in the CI SPP. Without a detailed compliance strategy in place, the CI function cannot determine whether its tax enforcement mission will be accomplished.

The Criminal Investigation Function Needs to Establish an Effective Process to Measure the Shift in Resources to Legal Source Tax Violations

The CI functionís current practices do not provide an effective means for measuring the success of shifting resources to legal source tax violations. Sound management practices dictate that the CI function use all appropriate information to determine the effectiveness of its program goals. Indicators used by CI management did not show conclusive evidence that the CI function was shifting resources to investigate more legal source tax violations because they relied on summary data at the national level. CI officials used either case initiations or direct investigative time (DIT) as indicators to determine if they were undergoing a successful shift in resources nationwide. However, our analysis of the Criminal Investigation Management Information System (CIMIS) data provided by the CI function showed that the indicators were not effective in measuring the shift in resources to investigate more legal source tax violations. In fact, our analysis showed very little change in the DIT among the field offices and showed that the number of cases initiated was ineffective in measuring any shift in resources. Without a combined analysis of field office process indicators, the CI function will be unable to determine whether it is refocusing its efforts to investigate legal source tax violations.

The Criminal Investigation Function Needs to Determine a Methodology for Effectively Allocating Resources

The CI function did not conduct a workload analysis to determine the optimal number, placement, and size of field groups. This condition existed because the CI modernization design teams were unable to evaluate the effectiveness of the CI functionís field structure to accomplish its tax enforcement mission and to implement the IRS Commissionerís mandate to shift resources to legal source tax violations. Consequently, the CI function has been staffing the organization without a workload analysis of the 35 field offices to ensure proper placement of resources. Placing resources within an organization without a workload analysis could jeopardize the CI functionís primary mission, which is to investigate tax crimes related to legally earned income.

Summary of Recommendations

The CI function needs to develop and communicate a detailed compliance strategy that will assure resources are being allocated to investigate more legal source tax violations. Also, an effective process needs to be established to ensure that management can adequately assess the progress of program initiatives, and a methodology needs to be developed to determine where resources should be allocated.

Managementís Response: To effectively communicate a detailed compliance strategy, the Director of Strategy will issue the Annual Compliance Guidance (ACG) beginning with FY 2002 and the Internal Revenue Manual will require the issuance of the ACG by October 1 of each fiscal year. The ACG will be distributed and discussed at the bi-annual Special Agent-in-Charge meetings, posted on the CI homepage, and announced to all CI employees on the weekly CI bulletin. Since the staffing of the Planning and Strategy Sections has been completed, a senior analyst is assigned to monitor CIMIS data on a monthly basis. The Directors of Planning, Strategy, and Research will meet with their respective staffs each fiscal year and, based on the results, assess the appropriateness of the diagnostic indicators used during the fiscal year. The CI function entered into a project agreement with the Office of Program Evaluation and Risk Analysis (OPERA) to develop workload and attrition models. A beta version of the models was completed in May 2001, and a contractor will test and validate the system during the fourth quarter. The workload model developed by the OPERA will be used to continuously validate current resource distribution; however, due to cost considerations, the CI function can only remedy inequities by distributing recently hired special agents.

Managementís complete response to the draft report is included as Appendix IV.

Objective and Scope

Our overall objective was to assess the Criminal Investigation (CI) functionís ability to properly refocus its resources into legal source tax-related areas. In particular, we wanted to determine the success of its Interim Compliance Strategy to commit resources to investigate tax violations involving legal sources of income. We also evaluated the functionís role in the development and implementation of the Internal Revenue Serviceís (IRS) National Compliance Strategy and determined whether the CI functional compliance strategy was aligned with the National Compliance Strategy.

To accomplish our objective, we analyzed data maintained in the Criminal Investigation Management Information System (CIMIS). We were unable to test the reliability of the CIMIS because the CIMIS database contains sensitive investigative information. We also interviewed CI executives and managers in the Headquarters office and area offices. Audit work was performed primarily in the National Headquarters from September 2000 through January 2001 and, except for the scope limitation involving the CIMIS database, the audit was performed in accordance with Government Auditing Standards.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

The CI functionís mission is to serve the American public by investigating potential criminal violations of the Internal Revenue Code (I.R.C.) and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.

In July 1998, the IRS Commissioner appointed Judge William Webster to direct an independent review of the CI function. Judge Webster assembled a task force to assess the CI functionís effectiveness in accomplishing its mission as the IRSí criminal law enforcement arm. The task force issued a report in April 1999 entitled, Review of the Internal Revenue Serviceís Criminal Investigation Division.

The report recognized the CI function as the only federal law enforcement agency with the authority to investigate criminal tax violations. The task force determined that the CI function had drifted from its primary mission as a likely result of expanded jurisdiction to cover money laundering, currency reporting, and drug-related financial crimes. It further emphasized the need for the CI function to refocus its resources towards tax crimes affecting compliance.

The task force concluded, and the IRS Commissioner agreed, that the CI function would have a principal role in assisting the IRS with establishing an overall National Compliance Strategy. The report also recommended the development of a functional compliance strategy in alignment with the National Compliance Strategy. Until a National Compliance Strategy could be developed, the CI function developed an Interim Compliance Strategy for Fiscal Year (FY) 2000. The objective of the interim strategy was to help identify, develop, and investigate cases that foster confidence in the tax system and compliance with the law. Legal source tax crime investigations were to account for a major percentage of the CI functionís nationwide criminal inventory for FY 2000.

The initial methodology for delivering the National Compliance Strategy was replaced when the IRS decided to use the Strategic Planning and Budgeting Process as the basis for its development for FY 2001. The Strategic Planning and Budgeting Process will establish the priorities for each operating division and the compliance linkages among the divisions and functions.

Results

The CI function recognizes the need to establish an effective process to measure the shift in resources to legal source tax violations and develop a methodology for effectively allocating resources. The CI function has taken steps to refocus its resources into investigations involving legal sources of income. However, the full impact of these initiatives will not be realized for some time. If it is to be successful in implementing the primary tax enforcement mission, the CI function needs to:

The Criminal Investigation Function Needs to Develop and Communicate a Detailed Compliance Strategy Based Upon the Criminal Investigation Strategy and Program Plan

The CI function is not operating within the framework of a current functional compliance strategy as envisioned by the Webster Report. This condition existed because the CI function did not revise its Interim Compliance Strategy for FY 2001. The CI function is now required to develop a Strategy and Program Plan (SPP) to be aligned with the Strategic Planning and Budgeting Process. It is important that the CI function develop a detailed compliance strategy based upon the CI SPP to communicate the FY 2001 goals and priorities as defined in its SPP. This detailed compliance strategy needs to establish accountability for the initiatives and foster coordination among the field offices to ensure a successful shift in resources to investigate more legal source tax violations.

The CI function developed an Interim Compliance Strategy for FY 2000 to provide guidance until the IRS could develop a National Compliance Strategy. The CI Interim Compliance Strategy is comprised of three interdependent programs: Legal Source Tax Crimes, Illegal Source Financial Crimes, and Narcotics-Related Financial Crimes. The strategy defines the key investigative emphasis areas for FY 2000 and provides guidelines for the identification, development, and investigation of cases in each program area. It was not possible to coordinate the strategy with the other operating functions since these functions were not operational. One of the goals of the Interim Compliance Strategy was to efficiently direct the CI resources to accomplish the IRS tax mission. The strategy was to be revised and reissued each fiscal year. However, the CI function chose to issue the SPP instead of revising the Interim Compliance Strategy. Traditionally, the CI function used program letters to communicate the revised major emphasis areas and emerging issues to its field offices. We believe a more formalized process is needed to effectively communicate the CI functionís SPP to the field offices.

In the absence of communicating a detailed compliance strategy aligned with the SPP, the CI function may not be assured that resources are being properly allocated. Also, without a current detailed compliance strategy in place, the CI function has no means for determining whether the program will accomplish its primary mission of investigating tax-related violations of the I.R.C.

Recommendations

The CI function should immediately implement a current detailed compliance strategy that will provide some assurance that initiatives are based on the intent of its tax enforcement mission. Specifically, we recommend:

  1. The Office for the Director of Strategy develop a detailed compliance strategy in alignment with the CI SPP. This compliance strategy should establish accountability within the CI function and foster coordination among IRS divisions.
  2. Managementís Response: CI management agreed with our recommendation. The CI function will issue the Annual Compliance Guidance (ACG) on an annual basis beginning with FY 2002. Also, the Internal Revenue Manual (IRM) will require the issuance of the ACG by October 1 of each fiscal year.

  3. The Office for the Director of Strategy communicate the detailed compliance strategy in a form that will expedite the process of informing the CI personnel of the intent and direction of the organization.
  4. Managementís Response: CI management agreed with our recommendation. The CI function will issue the ACG in support of the SPP by October 1 of each fiscal year. The ACG will be distributed and discussed at the bi-annual Special Agent-In-Charge (SAC) meetings, posted on the CI homepage, and announced to all CI employees on the weekly CI Bulletin. Also, the IRM will require the issuance and communication of the ACG by October 1 of each fiscal year.

    The Criminal Investigation Function Needs to Establish an Effective Process to Measure the Shift in Resources to Legal Source Tax Violations

    The CI functionís current practices do not provide an effective means for measuring the success of shifting resources to legal source tax violations. This condition exists because the CI function has not developed effective processes to monitor the progress of shifting resources to legal source investigations. Indicators used by CI management to determine the success of this initiative did not show conclusive evidence that the CI function was making the transition to shift resources because they relied on summary data at the national level. CI officials used either case initiations or direct investigative time (DIT) as indicators to determine if they were undergoing a shift in resources nationwide. As a result, CI officials did not have sufficient information to determine if the shift in focus was actually occurring. In the absence of any analysis by the CI function to determine results at the individual field offices, we performed our own analysis.

    The CIMIS data provided by the CI function showed that its indicators were ineffective in measuring its efforts to shift the emphasis to investigating more legal source tax violations. For instance, we determined that the DIT did not change proportionally to the number of investigations initiated at the field office level. In fact, we concluded that, within the Legal program, there was very little change in the DIT among the field offices.

    Our analysis of the inventories with respect to case initiations was based on the percentage changes in cases initiated from FY 1999 to FY 2000. Based on this analysis, we concluded that case initiations was not an effective measure since there were significant percentage changes in only a small number of offices, thereby causing the national results to be skewed. For example, the Legal program inventory increased in 3 offices by 188 percent, 163 percent, and 113 percent. The Director of Field Operations representing two of the field offices and a SAC could not provide specific explanations for the cause of the significant increases in inventories.

    When the statistics from these three offices were merged with the data from other offices, the national statistics on program inventories indicated that the decline in investigations initiated for illegal source income and narcotics demonstrated that the CI function was successfully shifting its resources to investigating legal source tax violations.

    However, our analysis showed that the outcomes were considerably different after adjusting the national statistics for the bias created by the three offices with extraordinary increases in the number of legal source cases initiated. The effect that unusually large changes in a few offices have on summary information demonstrates how evaluating the shifting of resources based on national program statistics can be misleading.

    The results of our analysis are illustrated in the following table:

    The chart was removed due to its size. To see the chart, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

    A more in-depth analysis of the root causes for the fluctuations in management information system data would have placed the CI officials in a better position to make informed decisions regarding program accomplishments. Sound management practices require that the CI function use all appropriate information to determine the effectiveness of its program goals. Without a combined analysis of field office process indicators, the CI function will be unable to determine whether it is refocusing its efforts to investigate legal source tax violations.

    The CI function concurred with our determination that additional actions were needed to measure the progress of its Legal program initiatives. The CI function management team has begun to take steps that should provide meaningful information about the progress of this program.

    Recommendations

    We recommend that the CI function develop an effective process to ensure its managers can adequately assess the progress of program initiatives. Specifically, we recommend:

  5. The Office for the Director of Strategy continuously monitor CIMIS information to identify trends in inventory over some specified period of time. The results of the CIMIS data analysis should be used to identify offices for inquiry to determine the reasons for any unusual shifts in inventory.
  6. Managementís Response: CI management agreed with our recommendation. Since the staffing of the Planning and Strategy Sections has been completed, a senior analyst is assigned to monitor CIMIS data on a monthly basis.

  7. The Office for the Director of Strategy periodically assess the effectiveness of the diagnostic tools and make appropriate adjustments when necessary to ensure that they are meeting CI managementís expectations.
  8. Managementís Response: CI management agreed with our recommendation. The Directors of Planning, Strategy, and Research will meet with their respective staffs each fiscal year and, based on the results, assess the appropriateness of the diagnostic indicators used during the fiscal year. A written certification will be made by January 1 each year as to the appropriateness of the diagnostic indicators, or corrective action will be recommended.

    The Criminal Investigation Function Needs to Determine a Methodology for Effectively Allocating Resources

    The CI function did not conduct a workload analysis to determine the optimal number, placement, and size of field groups. The condition existed because the CI modernization design teams were unable to evaluate the effectiveness of the CI functionís field structure to accomplish its tax enforcement mission and to implement the IRS Commissionerís mandate to shift resources to legal source tax violations.

    Consequently, the CI function has been staffing the organization in the absence of a workload analysis of its 35 field offices to ensure proper placement of resources. Placing resources within an organizational structure without a workload analysis could jeopardize the CI functionís primary mission, which is to investigate potential criminal violations of the I.R.C.

    On July 2, 2000, the CI function reorganized with the Chief, CI, having direct reporting authority to the IRS Commissioner. The modernized infrastructure is comprised of 5 Headquarters offices and divides field operations into 6 areas with 35 SAC offices that generally parallel the judicial districts. The pre-existing investigative groups were realigned to correlate geographically with the SAC offices. The CI functionís field staffing levels were based upon span of control criteria but did not consider inventory or workload projections.

    CI officials advised us that an appropriate workload study was not conducted during the reorganization because of limited resources within the newly formed organization. In our opinion, the CI function needs to conduct a thorough workload analysis to ensure resources are allocated in an appropriate manner to support a functional compliance strategy and to accomplish its tax enforcement mission.

    Recommendations

    The CI function should ensure resources are properly allocated to support the accomplishment of the CI SPP. Specifically, we recommend:

  9. The Office for the Director of Strategy conduct a workload analysis in the 35 functional offices and design a staffing allocation model. In addition, to effectively monitor staffing patterns, we recommend the CI function perform periodic reviews of its inventory to identify any shifts in work or resources within each office.
  10. Managementís Response: CI management agreed with our recommendation. The CI function entered into a project agreement with the Office of Program Evaluation and Risk Analysis (OPERA) to develop workload and attrition models. A beta version of the models was completed in May 2001, and a contractor will test and validate the system during the fourth quarter.

  11. The Office for the Director of Strategy consider reviewing the entire organization structure after the establishment of a staffing allocation model to ensure the appropriateness of resource allocations.

Managementís Response: CI management agreed with our recommendation. The workload model developed by the OPERA will be used to continuously validate current resource distribution; however, due to cost considerations, the CI function can only remedy inequities by distributing recently hired special agents.

Conclusion

The CI function needs to develop and communicate a detailed compliance strategy based upon the CI SPP, establish a process to effectively measure resource shifts to investigate legal source tax violations, and establish a methodology for effectively allocating resources. Without operating within the framework of a detailed compliance strategy and having an effective process for measuring results, the CI function cannot be assured that it is accomplishing its goal of refocusing its resources into legal source investigations.

Appendix I

Detailed Objective, Scope, and Methodology

Our overall objective was to assess the Criminal Investigation (CI) functionís ability to properly refocus resources into legal source tax-related areas. In particular, we evaluated the success of the CI functionís Interim Compliance Strategy to commit resources to investigate tax violations involving legal sources of income. We also evaluated the CI functionís role in the development and implementation of the Internal Revenue Serviceís (IRS) National Compliance Strategy and determined whether the CI functionís compliance strategy was aligned with the National Compliance Strategy. In order to accomplish our objective, we performed the following audit steps:

  1. To determine whether the CI functionís Interim Compliance Strategy successfully committed resources to investigate tax violations involving legal sources of income, we:
    1. Reviewed the CI functionís methodology for measuring the effectiveness of the Interim Compliance Strategy to investigate legal source tax cases.
      1. Analyzed Criminal Investigation Management Information System data to determine trends in case inventories from Fiscal Year (FY) 1999 to FY 2000.
      2. Interviewed CI field personnel based on results of the inventory analysis.
    2. Determined whether the CI function modified its FY 2001 Interim Compliance Strategy based on its assessment of FY 2000 results and internal and external research.
    3. Identified efforts to select and develop legal source tax cases that support the Interim Compliance Strategy.
    4. Reviewed current policy and procedures governing the shift in resources to emphasize the identification of cases involving legal source income.
    5. Interviewed key CI personnel involved in the development and implementation of the October 1999 Interim Compliance Strategy and reviewed available documentation.
  2. To evaluate the CI functionís role in the development and implementation of the National Compliance Strategy, we:
    1. Determined the methodology for measuring and evaluating the success of the National Compliance Strategy to effectively address accomplishing the CI functionís mission.
    2. Evaluated the CI functionís plans for coordination and communication with the operating divisions and other compliance components to develop the National Compliance Strategy that will achieve the highest possible rate of compliance.
    3. Determined the status of the IRS Compliance Council and the stage of development for the National Compliance Strategy.
    4. Interviewed key CI personnel associated with the IRS Compliance Council and involved in the development and implementation of the National Compliance Strategy.
  3. To determine whether the CI functionís compliance strategy was properly aligned with the National Compliance Strategy, we:
    1. Evaluated whether the CI functionís compliance strategy addressed the accomplishment of its tax enforcement mission.
    2. Evaluated whether the CI functionís resources were allocated to effectively accomplish the CI functionís compliance strategy.
    3. Analyzed the CI functionís methodology for measuring and evaluating the success of accomplishing the CI functionís compliance strategy and ultimately the National Compliance Strategy.
    4. Interviewed appropriate CI personnel to determine the status of the CI functionís compliance strategy.

Appendix II

Major Contributors to This Report

Maurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

Joe Edwards, Director

Daniel R. Cappiello, Audit Manager

Rosemarie M. Maribello, Senior Auditor

Richard J. Viscusi, Senior Auditor

Robert Weiss, Senior Auditor

Appendix III

Report Distribution List

Commissioner N:C

Deputy Chief, Criminal Investigation CI

Chief Counsel CC

Director, Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O

Director, Strategy CI:S

National Taxpayer Advocate TA

Office of Management Controls N:CFO:F:M

IRSí GAO and TIGTA Liaison CI:S:PS

Appendix IV

Managementís Response to the Draft Report

The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.