Additional Management Actions Are Needed to Better Process and Safeguard Tax Exempt and Government Entities Division User Fee Payments

August 2001

Reference No. 2001-10-136

Executive Summary

Section 10511 of the Revenue Act of 1987 provides that the Secretary of the Treasury or his delegate shall establish the payment of user fees for customer requests to the Internal Revenue Service (IRS) for private letter rulings, opinions, determinations, and similar requests. The user fee amount can range from $80 to $10,000. During Fiscal Year (FY) 2000, the Tax Exempt and Government Entities (TE/GE) Division processed user fees totaling $29.6 million at the Cincinnati Submission Processing Center (CSPC).

The Internal Revenue Manual (IRM) requires that a minimum of 90 percent of the dayís remittances must be deposited by the next business day. The remaining balance of the dayís remittances must be deposited the following day. TE/GE Division procedures provide that any overpayment conditions be resolved as soon as possible.

The overall objective of this audit was to evaluate the effectiveness of the TE/GE Divisionís efforts to process and safeguard user fee payment information.


Additional managerial actions are needed to minimize the risks associated with processing TE/GE Division customersí user fee payments. Specifically, the TE/GE Division has not ensured that:

The TE/GE Division has initiated an EDS Improvement Project Plan that should improve the quality of processing user fee payment information. However, in the interim, we believe that further actions can be taken to control user fee payment information on the existing Letter Information Network User System (LINUS).

Without taking additional management actions, the TE/GE Division increases its risk that funds may be lost or misappropriated and customers may not be provided quality customer service.

Increased Managerial Attention Is Needed to Enhance the Timely Deposit of User Fee Payments and to Monitor Dishonored Payments of User Fees

Controls do not ensure that all user fee payments are timely deposited

An analysis of deposit actions conducted at the CSPC between January 1 and March 31, 2000, identified 18,661 user fee payments totaling $6.7 million that were not deposited within 2 business days. We estimate that these late deposit actions cost the government approximately $6,500 in lost revenue.

Determination specialists in EP/EO field offices also receive user fee payments and transmit these payments to the CSPC for processing. The actual date the payment is received in the field office is not consistently entered on the LINUS because the determination specialists have not been instructed to report this information to the CSPC. Although we were unable to capture when these payments were actually received by the determination specialists, we were able to perform a computer analysis using the date the cases were closed on the EDS. The computer analysis of the EO determination cases reported as closed on the EDS for FY 2000 identified 359 user fee payments totaling $101,005 that were deposited on an average of 11 days after the EO determination case was closed. Also, we identified 21 EP user fee payments totaling $8,375 that were deposited on an average of 42 days after the EP case was closed on the EDS.

The Service Level Agreement (SLA) that the TE/GE Division has established with the Small Business/Self Employed (SB/SE) Division for processing user fee payments at the CSPC adequately defines the performance targets for processing user fee remittances. However, TE/GE Division management has not established an effective process to notify SB/SE Division management when the CSPC processing support actions are performed in an unsatisfactory manner.

Increased managerial actions are needed to ensure customer applications are not processed when personal checks are dishonored

Current practices do not always prevent the issuance of determination letters when applicants do not pay the required user fee amount. Also, efforts to recover the lost revenue have not always been successful.

Our analysis of EDS data identified 10 determination letters that were issued to customers, even though their personal checks were dishonored. All of the applicants were subsequently notified that their checks had not cleared and were requested to resubmit the proper user fee payment amount. However, only one applicant complied with the TE/GE Divisionís request. We did not identify any additional follow-up action to collect the delinquent user fee amount totaling $4,050 for the remaining 9 cases.

TE/GE Division management was unaware that determination letters had been issued without the receipt of the required user fee payments because the LINUS does not provide this information. The inability to ascertain when determination letters should be issued provides additional risk that the TE/GE Division will not be properly reimbursed for its determination actions.

Customers Who Overpay Their User Fees Are Not Receiving Timely Refunds

Refund processing standards have not been established

TE/GE Division management has not established specific processing standards that will ensure overpayments of user fees are timely refunded. Our analysis of processing actions for 54 user fee refunds determined that 34 EO user fee overpayments totaling $11,480 took an average of 178 days to issue the refund after the overpayment condition was identified by the TE/GE Division. An analysis of the remaining 20 EP overpayments, totaling $5,875, determined that it took an average of 57 days to refund these overpayments. Without additional TE/GE Division managerial actions to expedite the resolution of overpayment conditions, customers will not receive quality service.

Some overpayments of user fees may go undetected

The TE/GE Division has not established the necessary processes to effectively determine whether its customers have paid the correct amount of user fees. As a result, the TE/GE Division may not be able to provide quality customer service when its customers overpay their user fees.

An analysis of customer accounts containing user fee payment data that posted onto the LINUS between January 1, 1998, and June 15, 2000, identified overpayment conditions that should be considered for possible refund action. The analysis identified 1,132 accounts where customersí remittances totaling $160,724 may have exceeded the required user fee amounts.

Our computer match of FY 2000 EDS closed determination case data with the LINUS user fee payment information identified 47 potential overpayment conditions. These cases were referred to TE/GE Division management. They advised us that their ongoing review of these cases has identified 31 overpayment conditions totaling $2,675 that will be refunded. For the remaining 16 cases, 6 overpayments had been previously refunded, 6 overpayments were not considered overpaid accounts, and the remaining 4 credits will require additional research to resolve the overpayment conditions.

Although our limited analysis of the LINUS identified overpayment conditions, there is no reliable method to identify all overpayment conditions using the LINUS. In our opinion, it is critical that management implement an effective automated process to resolve all overpayment conditions using accurate payment information to verify the overpayment conditions.

Additional Management Actions Are Needed When Processing User Fee Payment Information to Prevent Lost or Misappropriated Remittances

Some user fee payment data posted to the LINUS have not been properly validated

The TE/GE Division has not established an effective process to ensure that all user fee payments are posted to the LINUS using valid Employer Identification Number information. A computer match of FY 2000 closed determination cases on the EDS with LINUS payment information identified 398 cases where a computer match of the payment amounts reflected on LINUS were less then the required user fee amount to issue the determination letter. The inability to effectively identify all user fee payments submitted by TE/GE Division customers may result in additional burden when these customers are requested to verify their payment information.

User fee payments received at field offices are not always properly safeguarded

The TE/GE Division management has not ensured that all user fee payments are adequately safeguarded in secure containers. Six of the 12 TE/GE Division field offices that we contacted store user fee payments in employee folders that are accessible to other employees. Current TE/GE Division procedures do not specifically require that user fee payments be stored in locked containers. Because these remittances are being stored in an unsecured environment when received, the risk of lost or stolen remittances is increased.

User fee payments transmitted to the CSPC from field offices are not properly controlled

Our review identified missing payment data on the transmittals used to forward the payments to the CSPC Manual Deposit Unit. These transmittal documents are widely used by the IRS to monitor the mailing of sensitive materials. Because the TE/GE Division has not established a process for reviewing the transmittal documents, TE/GE management was not aware that the transmittal documents were improperly used. The inability to verify the transmission of user fee payment information could result in theft or misapplied payments.

Summary of Recommendations

Additional managerial actions are needed to minimize the risks associated with processing TE/GE Division customersí user fee payments. Specifically, TE/GE Division management should establish procedures for recording payment receive date information on the LINUS that documents when user fee payments are initially received and monitor the timeliness of the deposit actions. TE/GE Division management should also monitor the CSPCís compliance with the SLA deposit provisions and notify SB/SE Division management when the CSPC processing support actions are performed in an unsatisfactory manner. In addition, TE/GE Division management should disallow the processing of applications when personal checks are dishonored. Lastly, the TE/GE Division should ensure that customer overpayments are timely resolved and that all user fee payments are properly safeguarded.

Managementís Response: IRS management agreed with the recommendations cited in the report and is taking appropriate corrective actions. The Commissioner, TE/GE Division, will require field office employees who receive user fee payments to document when these payments are initially received. In addition, the customers who submit user fee payments will be instructed to submit the payments directly to the CSPC. Further, the Commissioner, TE/GE Division, will monitor the timeliness of deposit actions taken by the CSPC and advise the CSPC when deposit actions are not timely.

The Commissioner, TE/GE Division, has established responsibility for the identification of dishonored checks and emphasized that determination letters are not to be issued until the customerís check is honored and all user fees are paid. Also, the Commissioner, TE/GE Division, will revise the IRM to include specific processing standards for refunds of excess user fee payments and will ensure compliance with the standards. Additionally, the Commissioner, TE/GE Division, will evaluate all customer overpayments and initiate appropriate actions to resolve the overpayment conditions. Managementís complete response to the draft report is included as Appendix V.