Letter Report: Centralizing the Processing of Business Tax Returns Ė The Internal Revenue Service Considered Pertinent Risk Factors, but Needs to Update and Test Business Recovery Plans
Reference Number: 2001-30-060
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.
March 21, 2001
MEMORANDUM FOR COMMISSIONER, Small Business/Self-Employed Division
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Letter Report: Centralizing the Processing of Business Tax Returns Ė The Internal Revenue Service Considered Pertinent Risk Factors, but Needs to Update and Test Business Recovery Plans
This report presents the results of our review of the Internal Revenue Serviceís (IRS) process for deciding to migrate to two centers for processing business tax returns.
In summary, the IRS identified and gave adequate consideration to pertinent risk factors when deciding to centralize the processing of business tax returns in two submission processing centers. However, the Small Business/Self-Employed Division needs to ensure that contingency plans are both updated to reflect the new organization, and tested to ensure that business returns will continue to be processed if one of these two submission processing centers experiences a disaster or significant downtime.
The Deputy Director, Customer Accounts Services agreed to review, update and test contingency plans for the new organization and new workload. Managementís comments have been incorporated into the report where appropriate, and the full text of their comments is included in Appendix III.
Copies of this report are also being sent to the IRS managers who are affected by the report recommendation. Please contact me at (202) 622-6510 if you have any questions, or your staff may call Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
Objective and Scope
The objective of this audit was to determine whether the Internal Revenue Service (IRS) considered all relevant risk factors in making its decision to migrate to two centers for processing business tax returns. This is the first of two audits on the centralization of business returns processing.
To accomplish our objective, we identified factors which we considered significant in making the decision. We interviewed members of the Service Center Transition Team, including the Modernization Team Executive and the Ogden and Cincinnati Team Leaders, and reviewed documentation provided to us by these individuals to ensure that the factors we considered to be significant were given proper consideration during the decision-making process. In a parallel review, other auditors from the Treasury Inspector General for Tax Administration will look at the decision to use eight centers for processing individual income tax returns.
We conducted this audit from August to December 2000. Audit work was conducted in the Ogden IRS Center in accordance with Government Auditing Standards.
Major contributors to this report are listed in Appendix I. Appendix II contains the Report Distribution List.
As part of the IRSí modernization and workload transition efforts, the IRS Commissioner challenged the Service Center Transition Team to re-examine options for processing tax returns, with a focus on maximizing Business Master File (BMF) centralization. An internal task force provided two options: (1) a combination of eight Individual Master File (IMF) and two BMF processing centers, and (2) mixed scenarios of either five IMF and five IMF/BMF centers, or seven IMF and three IMF/BMF centers.
The teamís decision to have individual tax returns processed at eight centers and business tax returns processed at two centers (Ogden and Cincinnati) will cause significant changes in all submission processing centers. For instance, the number of states whose returns are processed at the two BMF centers will increase from 38 percent in 2000 to approximately 68 percent in 2001, and to 100 percent in 2002. The number of BMF returns processed by the Ogden Submission Processing Center alone will increase 92 percent, from approximately 5.3 million in 2000 to 10.2 million in 2001.
In making this decision, it was important that the IRS consider all pertinent risk factors that could hinder the timely and accurate processing of tax returns. Adequate planning and effective implementation of the workload transition to maximize BMF centralization are key to the IRSí modernization efforts.
In its decision to process business tax returns in only two submission processing centers, the IRS identified and gave adequate consideration to all the risk factors that we had determined to be significant to that decision. The factors included such things as taxpayer education, availability and skills of personnel, training needs, equipment and space needs, and oversight.
Simply considering these factors does not necessarily guarantee that the IRSí implementation of its decision will be without problems. However, the IRS plans to implement the decision over a 2-year period to allow time to identify and deal with problems as they arise.
During the transition period, all ten submission processing centers will have the ability to process both individual and business tax returns. Consequently, a problem experienced in one center during this period may not be highly significant. However, once the transition is complete, only two centers will be fully equipped to process business returns. Therefore, the IRS should have a well-documented contingency plan to address the continuation of business return processing should one of these two centers experience significant downtime.
The Internal Revenue Service Needs to Develop a Contingency Plan in the Event of a Disaster Affecting One of Its Two Business Submission Processing Centers
The IRS has not prepared contingency plans which specifically address its new configuration for processing business tax returns. Each of the IRSí Operating Divisions is responsible for developing its own Business Recovery Plan documenting procedures to be used for the resumption of business after a disaster. In the Ogden Submission Processing Center, comprehensive Business Recovery Plans for the Processing Division and Post Processing Division were prepared in October 2000, just months prior to the beginning of the migration to two BMF Submission Processing Centers. The plans tell personnel, in detail, what has to be done to resume business in the event of a disaster or unplanned work stoppage (e.g., shipping work to a backup center if necessary). However, the plans have not been updated to reflect the IRSí reorganization of submission processing activities and do not take into consideration that, beginning in 2002, only one other submission processing center will be equipped to process business tax returns.
Contingency plans are vital to ensure that an organization can continue to function in the event of a disaster. Above all, these plans should be practical, tested, and up-to-date.
IRS management acknowledged that the migration to two BMF Submission Processing Centers would result in reduced flexibility in case of a disaster in one of these centers, and that contingency plans should address this issue. However, they have not taken action to update contingency plans to reflect the reduction in BMF Submission Processing Centers. Until an up-to-date contingency plan is developed and tested, processing of business tax returns is unnecessarily exposed to risk.
Managementís Response: The Deputy Director, Customer Accounts Services, will review, update, and test the contingency plans to reflect the workload migration to the two BMF processing centers and to ensure returns are processed if one of the two centers experiences a disaster or significant downtime.
The IRS identified and gave adequate consideration to pertinent risk factors when deciding to process business tax returns in two submission processing centers. However, the IRS needs to ensure that contingency plans are updated to reflect the new organization, and tested to ensure that business returns will continue to be processed if one of the two BMF Submission Processing Centers experiences a disaster or significant downtime. The corrective action planned by the IRS will adequately address the concern discussed in this report.
Major Contributors to This Report
Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs)
Richard J. Dagliolo, Director
Kyle R. Andersen, Audit Manager
Scott D. Critchlow, Senior Auditor
Larry Madsen, Senior Auditor
Roy E. Thompson, Senior Auditor
Report Distribution List
Deputy Commissioner N:DC
Director, Customer Account Services S:CAS
Modernization Team Executive C:MOD:SCTT
Chief Information Officer IS
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
National Taxpayer Advocate C:TA
Office of the Chief Counsel CC
Commissioner, Small Business/Self-Employed Division S
Director, Customer Account Services S:CAS
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.