Continuing Oversight is Needed to Ensure the Success of the Exempt Organization Imaging Project
Reference Number: 2001-10-180
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.
September 25, 2001
MEMORANDUM FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Audit Report Ė Continuing Oversight is Needed to Ensure the Success of the Exempt Organization Imaging Project
This report presents the results of our review of the Tax Exempt and Government Entities (TE/GE) Divisionís return imaging project. The overall objective of this review was to determine whether the project to image exempt organization annual information returns (Form 990) 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. We also 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.
In summary, IRS management has achieved the most significant goals for this project by improving the process of creating copies of Form 990 returns and by increasing access to the return data. However, several significant goals for the project have not been achieved. For example, we determined that the IRS has not completed actions necessary to:
Our audit also identified an opportunity to reduce the resources needed to process Form 990 return information by leveraging data that are accumulated by an external non-profit organization. The IRS can better accomplish project goals and derive maximum benefits from this program by implementing the report recommendations to assign appropriate functional responsibility, develop appropriate service level agreements and apply formal project management techniques.
IRS management agreed with the recommendations cited in the report and is taking appropriate corrective actions. The Commissioner, TE/GE Division, will assign the responsibility for the imaging project to a manager, establish service-level agreements with the affected IRS functions, and evaluate whether products from non-IRS sources can be used to reduce costs or improve services of the imaging project. Managementís complete response to the draft report is included as Appendix IV.
Copies of this report are also being sent to the IRS managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or John Wright, Acting Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 927-7077.
Table of Contents
The Most Significant Project Goals Were Attained, But Some Benefits Remain Outstanding
Recommendations 2 and 3:
Appendix I Ė Detailed Objectives, Scope, and Methodology
Appendix II Ė Major Contributors to this Report
Appendix III Ė Report Distribution List
Appendix IV - Managementís Response to the Draft Report
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 organizationís 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:
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:
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:
The Office of Management and Budget Circular A-123 and the General Accounting Officeís 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.
Imaging 100 percent of the Form 990 returns filed with the IRS
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.
Reducing resources needed to provide access to Form 990 return information
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.
Increasing timeliness for providing access to Form 990 returns
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.
Reducing storage costs associated with filing of the original Form 990 returns
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.
Additional opportunity to reduce resources needed to process Form 990 return information
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.
Managementís 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.
Managementís 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.
Managementís 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.
I. To evaluate whether IRS management is achieving overall planned program benefits, we:
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
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
Director, Communications and Liaison T:CL
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.