Letter Report: Improvements at the Lockbox Bank in Atlanta Are Needed to Better Protect Taxpayer Payments and Minimize Processing Costs
Reference Number: 2001-40-048
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.
February 26, 2001
MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Letter Report - Improvements at the Lockbox Bank in Atlanta Are Needed to Better Protect Taxpayer Payments and Minimize Processing Costs
This letter report presents the results of our review of the lockbox program in an Atlanta bank. The overall objective was to determine whether controls over the lockbox program provided reasonable assurance that taxpayer payments were processed in accordance with established guidelines. In summary, we found that the lockbox bank timely deposited all the taxpayer payments we reviewed. However, opportunities exist to improve the lockbox program in the areas of bank security and tax return sorting.
We recommended that the Commissioner, Wage and Investment Division, ensure that all required security measures are implemented and enforced and that the lockbox bank correctly sorts tax returns.
Management agreed to the recommendations we presented. 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 IRS managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions, or your staff may call Walter Arrison, Associate Inspector General for Audit (Wage and Investment Income Programs), at (770) 936-4590.
Objective and Scope
The overall objective of this review was to determine whether controls over the lockbox program in an Atlanta bank provided reasonable assurance that taxpayer payments were processed in accordance with established guidelines. To achieve our objective, we:
Audit work was performed at the Atlanta Submission Processing Center (ATSPC) and the Atlanta lockbox bank from May 2000 through June 2000. The audit was performed in accordance with Government Auditing Standards.
Major contributors to this report are listed in Appendix I. Appendix II contains the Report Distribution List.
The IRS lockbox program consists of commercial banks that have contracted with the Financial Management Service (FMS), another government agency, to process tax payments. This program was designed to accelerate the deposit of tax payments by having taxpayers send their payments to commercial banks rather than to the IRS. According to the IRS, from January through April 2000 this bank processed over 3.4 million tax payments totaling over $17 billion. The bank also received over 1 million tax returns.
The Statement of Work (SOW) and Lockbox Processing Guidelines are agreements between the FMS and the bank detailing the specific services that the bank will perform for the IRS. These services include tasks that the IRS would otherwise have to do, such as ensuring checks are made payable to "Internal Revenue Service," "IRS," or the "United States Treasury," providing security over the remittances and taxpayer data, and creating computer tapes of payment transactions that are sent to the IRS. The bank also receives, sorts, and ships tax returns to the IRS.
The IRS is responsible for providing oversight of bank activities to ensure the lockbox banks adhere to the procedures in the SOW.
The IRS provided adequate oversight of bank activities by conducting required reviews such as on-site visitations and monthly performance reviews.
The bank timely deposited all 150 tax payments that we reviewed. Ninety-nine percent of those payments also posted correctly to taxpayersí accounts. While these are significant accomplishments, opportunities exist to improve the Atlanta lockbox program in the following areas:
Bank Security Needed Improvement
The bank was contractually required to provide adequate security, equipment, and facilities to safeguard all taxpayer payments and data that it received. During our visit to the bank, we found that the bank complied with some of the security requirements. For example:
Our visit to the bank identified the following security risks:
The SOW requires that checks over $50,000 be deposited immediately. A local procedure requires that managers walk these checks through the deposit process. Instead, the checks were put in a filing cabinet with other checks and apparently fell beneath the drawer, where they remained undetected. The government lost approximately 3 weeks of interest (approximately $16,000) on these funds, and the checks were vulnerable to theft.
We also determined that security weaknesses existed at the IRS when IRS employees did not sign for lockbox bank packages containing tax returns, unprocessed tax payments, and other IRS documents upon arrival at the ATSPC. The SOW requires the courier to obtain a signature from the IRS employee accepting the packages and add the time delivered to account for and verify the timeliness of the package. However, ATSPC personnel were not aware of this requirement.
The bank and ATSPC personnel have not implemented or enforced all existing security requirements. Inadequate security over personnel, tax returns, and tax payments can lead to embezzlements and/or unauthorized disclosure of taxpayer information. As stated previously, during the period January through April 2000, the bank processed over 3.4 million tax payments totaling over $17 billion that were vulnerable to theft. The bank also handled over 1 million tax returns that were vulnerable to unauthorized use and disclosure of taxpayer information.
Managementís Response: The IRS responded that, "We directed all Lockbox Coordinators to complete their monthly reviews until implementation of the new Quality Review Process. The first phase of the Quality Review Process began on January 15, 2001. This phase includes a procedural and administrative review of lockbox processing from the time the lockbox site receives the mail to the time the lockbox site forwards the package to the SPC and the money is deposited.
"The second phase will focus on reviewing the process from the time the SPC receives the package to just before the transaction posts to the taxpayerís account. The National Deposit Accuracy Measure will then see if the deposit posted correctly to the taxpayerís account."
The Bank Did Not Correctly Sort All Tax Returns
The SOW and the Lockbox Processing Guidelines describe the criteria for sorting the various types of tax returns. For example, returns with tax payments are to be sorted separately from returns that do not have tax payments. From January through April 2000, this bank was paid $842,000 to sort over 1 million tax returns.
Our review of a judgmental sample of 228 tax returns received at the ATSPC between May 24, and May 31, 2000, showed that 87 of the returns (38 percent) were sorted incorrectly.
Bank personnel stated that bank employees may not have understood the sorting requirements and may not have been adequately trained in this area. When returns are not properly sorted, the IRS must spend additional resources to correctly sort them, which could result in processing delays.
Managementís Response: The IRS responded that, "The Headquarters Lockbox staff will research the feasibility of having SPC employees who are knowledgeable in sorting returns train employees at the Lockbox sites prior to the April peak. The SPC Lockbox Coordinators and the Headquarters Lockbox staff will review the April Peak On-Site Review reports to determine the benefits of the training. If the return sort error rate remains high, they will convene a task force to reanalyze the return sort process and develop other initiatives for improvement."
The Atlanta lockbox bank timely deposited all of the reviewed tax payments. However, security at the bank should be improved. Also, additional emphasis should be placed on the quality of the tax returns sorted by the bank.
Major Contributors to This Report
Walter E. Arrison, Associate Inspector General for Audit (Wage and Investment Income Programs)
M. Susan Boehmer, Director
Deborah H. Glover, Audit Manager
Gregory A. Dix, Senior Auditor
Gail Yorgason, Senior Auditor
Robert A. Baker, Auditor
Arnita F. Brown, Auditor
Andrea M. Hayes, Auditor
Kathy Henderson, Auditor
Report Distribution List
Director, Customer Account Services (CAS) W:CAS
Director, Submission Processing W:CAS:SP
Director, Submission Processing, Atlanta W:CAS:SP:AT
Director, Legislative Affairs CL:LA
National Taxpayer Advocate TA
Office of Management Controls N:CFO:F:M
Office of the Chief Counsel CC
Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O
Director, Strategy and Finance W:S
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.