Background

The Most Significant Project Goals Were Attained, But Some Benefits Remain Outstanding

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to this Report

Appendix III – Report Distribution List

Appendix IV - Management’s Response to the Draft Report

Background

The Internal Revenue Code (I.R.C.) requires that annual information returns filed by certain tax exempt organizations be made available for public inspection. The associated Treasury Regulation requires the Internal Revenue Service (IRS) to make these returns available for public inspection upon written request. The regulations are designed to ensure that state enforcement agencies and the general public can make informed decisions as to whether these organizations are using donated funds for tax exempt purposes.

Historically, the demand for Form 990 returns has been very high. The IRS frequently receives requests for large volumes of Form 990 returns, such as all of the returns from a geographic area, or all organizations that are exempt under specific sections of the I.R.C. Prior to imaging technology, requests for large volumes of information were completed through a process of copying the return information that was maintained on aperture cards. Requests for individual Form 990 returns were completed by providing the requester with a photocopy of the paper Form 990 return filed with the IRS.

In 1996, a joint effort by the Tax Exempt and Government Entities (TE/GE) Division, the Statistics of Income Division (SOI), and the Ogden Submission Processing Center (OSPC) was initiated to provide better service to customers and other stakeholders. The project enabled the IRS to electronically image the Form 990 returns.

The imaging equipment was partially funded through a reimbursable agreement with a non-profit organization that provides data to the public and conducts research on many public/social welfare improvement efforts. The reimbursable agreement requires the IRS to deliver electronic images of the Forms 990 to the non-profit organization monthly. The images are then made available to the general public through the non-profit organization’s Internet site.

When considering whether to invest in the imaging technology, the IRS documented several benefits that the technology would provide to the IRS and its customers. These benefits included:

• Increasing the availability of Form 990 return information without impacting the timeliness of pipeline processing.
• Increasing the ability to complete requests for Form 990 returns by having an electronic index of the returns.
• Removing reliance on outdated aperture card technology.
• Imaging 100 percent of the Form 990 returns filed with the IRS.
• Reducing resources needed to provide access to Form 990 return information.
• Increasing the timeliness for providing access to Form 990 returns.
• Reducing storage costs associated with the filing of original Form 990 returns.

We conducted our review at IRS offices in Ogden, Utah, and Washington, D.C., between December 2000 and July 2001. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to this report are listed in Appendix II.

The Most Significant Project Goals Were Attained, But Some Benefits Remain Outstanding

The IRS achieved the most significant goals by improving the process of creating copies of Form 990 returns and by increasing access to the return data. Through the reimbursable agreement, the IRS has facilitated an increase in general public access to the Form 990 returns, along with achieving the following program goals:

• Increasing the availability of Form 990 return information without impacting timeliness of pipeline processing.
• Increasing the ability to complete requests for Form 990 returns by having an electronic index of the returns.
• Removing the reliance on outdated aperture card technology.

The agreement with the non-profit organization enabled the IRS to successfully improve public access to Form 990 return information. By providing the imaged tax return data to the non-profit organization, immediate retrieval of Form 990 return information is available to the public. The non-profit organization freely provides access and retrieval of the Form 990 returns.

The combined efforts of the IRS and the non-profit organization have reduced burden and increased access by enabling customers to request Form 990 returns without a formal written request to the IRS. These efforts have also improved the response time in obtaining the information because Internet access is virtually instantaneous. Another non-profit organization is licensing access to its data analysis products, which has increased opportunities to research the charitable tax-exempt sector.

By using the imaged data to complete requests received directly from the general public, the IRS also improved the process of providing copies of Form 990 returns to external customers. In the past, the IRS would have had to expend a significant amount of resources to manually complete these requests. The availability of electronic images and index of documents has improved the ability to timely provide Form 990 returns to customers.

The imaging process has eliminated the manual process of storing Form 990 returns on aperture cards. The aperture card process required the use of large photographic equipment that was necessary to create copies of the Form 990 returns. The IRS indicated that as a result of centralizing the Form 990 return processing in the OSPC, the use of this equipment was no longer feasible due to the age of the equipment, as well as the physical size and number of machines necessary to process the large volume of returns.

Although the IRS has accomplished its most significant improvements, several actions still need to be completed to accomplish the remaining goals of the imaging project. In addition, our audit identified an opportunity to reduce the resources needed to process Form 990 return information by using data already accumulated and keypunched by an external non-profit organization in conducting IRS programs. Because of this, we believe the IRS has not yet realized all of the benefits that could be derived from integrating imaging technology into its processes and exploring opportunities that would reduce the resources needed to process Form 990 return information.

The remaining project goals were not achieved because the IRS did not use project management techniques when implementing the imaging project. While a Memorandum of Understanding was drafted and disseminated to all of the affected IRS functions, it was never formally accepted. Also, action plans were not developed and no official was designated the responsibility for ensuring that all of the benefits were realized. In addition, the IRS has not implemented a process to compare program goals with actual results.

A formal project management process would have established a structured approach to:

• Identify customers and goals.
• Plan specific tasks and assign responsibilities for completing the tasks.
• Describe deliverables and establish timelines for accomplishing tasks and goals.
• Develop objective measures to evaluate the project.
• Monitor progress and evaluate results.

The Office of Management and Budget Circular A-123 and the General Accounting Office’s Standards for Internal Control require agencies to design management structures that establish accountability for results when strategies for implementing or reengineering programs and operations are developed and executed. Managers should ensure that appropriate authority, responsibility and accountability are defined and delegated to accomplish the mission of the organization, and that an appropriate organizational structure is established to effectively carry out program responsibilities.

The following describes the progress that the IRS has made in achieving each of the remaining goals, as well as an additional opportunity to reduce the resources needed to process Form 990 return information.

Upon initiating the imaging project, the IRS had established a goal to image all of the Form 990 returns. However, the IRS has not been able to image all of the Form 990 returns with existing resources. The IRS is currently imaging approximately 66 percent of the Form 990 returns that are filed each year and it has focused on Form 990 returns that report the largest amounts of revenue for the tax-exempt sector. We determined that approximately 12,100 of the 30,000 Form 990 returns that are needed annually to operate IRS programs are not available as images.

The IRS is evaluating the possibility of expanding the imaging operation to include the remaining 34 percent of Forms 990. The IRS is preparing estimates of the necessary staffing increases and hardware needed to image the remaining Form 990 returns.

The IRS planned to achieve a reduction of labor costs associated with making Form 990 returns available to internal customers by implementing processes to enable other functions such as the Exempt Organization (EO) Examination and SOI to use images instead of the original Form 990 returns. However, the images are not currently available for immediate access by internal users because the system architecture does not permit multiple users to immediately access the imaged returns. The IRS plans to install additional hardware that will improve access for internal customers. As a result, the IRS is not using the Form 990 images in any of its programs. In the meantime, the IRS will have to physically locate and retrieve approximately 30,000 original hardcopy Form 990 returns needed to annually conduct EO examinations and perform SOI special studies.

In addition to improving access to internal customers, the IRS estimates that expanding the imaging project could reduce the staff time needed to process some external requests by approximately 20 percent because all public requests currently cannot be provided from the images. The existing process requires employees to manually determine whether the Form 990 return is available as an image or whether the original return has to be retrieved and photocopied.

The IRS demonstrated that most of the Form 990 returns are available for public release within 2 months after they are received at the OSPC. However, the IRS has experienced difficulty in completing the actions that would enable it to provide timely service to all of its customers. To illustrate, some customers request large volumes of the Form 990 returns, such as all the returns filed by charitable organizations. The IRS concluded that the best way to complete these requests was to provide the images of all the Form 990 returns filed with the IRS on Compact Disc-Read Only Memory format.

The IRS has been unable to complete these requests because it has not established a process for receiving and approving requests for large volumes of Form 990 returns and has not established an appropriate cost to the customer for providing the information. As a result, at least 12 requests for large volumes of Form 990 returns dating back to January 25, 1999, have not been completed.

The IRS has planned to reduce the cost of storing original Form 990 returns, but has not taken actions to accomplish the goal. To achieve this goal, the IRS will need to revise record retention requirements. If the IRS imaged all of the Form 990 returns, the storage cost savings should total approximately $53,802 annually.

One of the barriers to achieving the goal of reducing storage costs is the need to maintain the original returns due to the timing difference between the creation of the image and the processing of the Form 990 return. IRS managers advised us that since the images are created prior to the completion of processing, the electronic copies may not document changes made to the returns during processing, and problems could arise in using the images in litigation. The IRS has not addressed the legal requirements of using the images in place of the original returns and has not achieved its goal to image all Form 990 returns. In addition, the IRS has plans to implement an electronic filing initiative for Form 990 returns during Fiscal Year 2003, which will reduce the reliance on imaging technology.

With the implementation of the imaging project, a second non-profit organization initiated a process to transcribe nearly all of the imaged Form 990 return information into a proprietary database. The organization uses the information in the database to conduct research projects and produces reports on the tax-exempt sector. This organization is also licensing access to its database for use by other businesses.

The IRS may be able to leverage the data currently being transcribed by the non-profit organization. The IRS could also use its architecture to increase public access to Form 990 returns. Specifically, the IRS could provide links from its Internet site to other external Internet sites that offer access to the imaged Form 990 returns.

In previous efforts to accomplish IRS goals, such as increasing the volume of electronic filing, the IRS has enlisted the assistance of private firms. The IRS may be able to achieve additional benefits from this project by exploring partnerships with external parties.

Recommendations

1. The Commissioner, TE/GE Division, should designate a manager to assume responsibility for applying project management techniques to the imaging project. Some of these techniques include:

• Evaluating the validity of each of the outstanding program goals.
• Planning specific tasks and assigning responsibilities for completing the tasks necessary to accomplish the remaining project goals.
• Describing deliverables and establishing timelines for accomplishing tasks and goals.
• Developing objective measures to evaluate the project.
• Monitoring progress and evaluating results of the project.

Management’s Response: TE/GE Division management plans to assign responsibility for the imaging project to a manager. The manager will determine the original project goals that are still valid, implement management techniques to accomplish the remaining useful goals, and monitor and evaluate the results.

1. The Commissioner, TE/GE Division, should establish service-level agreements with all of the affected IRS functions to document responsibilities for accomplishing the remaining goals that are determined to be beneficial.

Management’s Response: TE/GE Division management will enter into service-level agreements with the affected IRS functions to document responsibilities for accomplishing remaining goals determined to be beneficial.

2. The Commissioner, TE/GE Division, should determine whether products, such as links to other external web sites and licenses for the use of data accumulated by third parties, could be used to reduce IRS resources necessary for internal programs using Form 990 returns.

Management’s Response: TE/GE Division management will evaluate whether products or services from non-IRS sources can be used to reduce costs or improve services of the imaging project.

Detailed Objectives, Scope, and Methodology

The objectives of this audit were to determine whether the imaging project is achieving the planned goals of increasing availability of returns to internal and external customers and reducing costs associated with the administration of this program. In addition, we determined whether the Internal Revenue Service (IRS) had processes in place to maintain the current level of program results and increase the value of this operation.

1. Determined whether the IRS reduced its reliance on outdated aperture card processing equipment.
2. Determined whether the IRS reduced the labor costs incurred when completing requests for copies of original returns.
3. Determined whether records retention requirements had been revised for the purpose of reducing costs associated with storing the paper returns in IRS facilities and Federal Records Centers.

1. To evaluate whether IRS management has improved internal access to Form 990 returns, we:
1. Determined the number of internal customers and type of return (originals and images) provided to each during the previous 12 months.
2. Determined whether complete returns were scanned (including the information that is restricted from public disclosure) for use by internal customers.
3. Interviewed IRS managers from the Exempt Organization (EO) Examination function and reviewed applicable Internal Revenue Manual (IRM) guidance to determine the extent to which they used the return images in classifying and auditing EOs, along with identifying any impact resulting from not imaging 100 percent of the Form 990 returns. We also identified barriers to using the imaged returns.
4. Interviewed IRS managers from the Statistics of Income function and reviewed applicable IRM guidance to determine the extent to which they use the return images in preparing special studies of EOs, along with identifying any impact resulting from not imaging 100 percent of the Form 990 returns. We also identified barriers to using the imaged returns.
2. To evaluate whether the IRS has improved external access to Form 990 returns, we:
1. Determined whether the IRS has established a process to monitor success in responding to requests for Form 990 returns.
2. Determined the number of external customers and type of return (photocopies and images) provided to each during the previous 12 months.
3. Conducted interviews with customers who request large volumes of Form 990 returns to assess whether the IRS is providing quality service to its customers.
4. Determined how the IRS processes large volume requests for Form 990 returns that are currently not being imaged, or requests for copies of Form 990 returns filed prior to initiating the imaging operation.
5. Determined whether the IRS has taken actions to publicize the availability of the EO returns.
3. To evaluate whether the IRS has identified and initiated actions to maintain the current level of program results and increase the value of this operation, we:
1. Determined whether the IRS established formalized agreements that address the goals and responsibilities of each function.
2. Determined whether the IRS explored opportunities to increase the value and usage of the return images.
3. Determined whether the IRS evaluated the potential that the current operation could support scanning the remaining Form 990 returns by decreasing the time requirements to image the returns prior to regular service center processing, or imaging the remaining returns after service center processing.

Major Contributors to This Report

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

Joseph W. Edwards, Director

James V. Westcott, Audit Manager

James T. Avery, Senior Auditor

Gwendolyn S. Gilboy, Auditor

Gregory H. Holdeman, Auditor

Marjorie A. Stephenson, Auditor

Report Distribution List

Commissioner N:C

Deputy Commissioner, Operations N:D C

Commissioner, Small Business and Self-Employed Division S

Deputy Commissioner, Small Business and Self-Employed Division S

Deputy Commissioner, Tax Exempt and Government Entities Division T

Director, Research, Analysis and Statistics of Income N:ADC:R

Director, Statistics of Income Division N:ADC:R:S

Director, Submission Processing Center, Ogden S:CAS:SP:O

Chief Counsel CC

National Taxpayer Advocate TA

Director, Legislative Affairs CL:LA

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

Office of Management Controls N:CFO:F:M

Audit Liaison:

Director, Communications and Liaison T:CL

Management’s 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.