Executive Summary

Objective and Scope

Background

Results

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Management’s Response to the Draft Report

Executive Summary

Audit reconsideration cases create an unnecessary burden on both the taxpayer and the Internal Revenue Service (IRS). In Fiscal Year (FY) 1999 alone, the IRS abated audit assessments on the accounts of approximately 106,000 individual taxpayers through its audit reconsideration process. This represents a burden on taxpayers because it requires them to address excessive tax assessments that should have been resolved during the initial audit. The IRS is also burdened by this rework because it must redirect its current compliance resources away from today’s compliance issues.

The National Taxpayer Advocate’s Fiscal Year 1999 Annual Report To Congress ranked audit reconsiderations 12^th out of the 20 most serious problems facing taxpayers today. This was an elevation from the prior year’s report, which had ranked audit reconsiderations 19^th. According to the 1999 report:

• Taxpayers and their representatives complained that the IRS is neither consistent nor timely in handling requests for audit reconsiderations.
• Audit reconsiderations consistently ranked among the top three major issues of Problem Solving Days, the Senate Finance Committee, and Taxpayer Advocate Service cases.

While the National Taxpayer Advocate’s report indicates an ineffective audit reconsideration process, the volume of tax abatements may indicate a problem with inappropriate audit assessments. The Taxpayer Advocate Service worked approximately 24,000 audit reconsideration cases in FY 1999. The National Taxpayer Advocate said this represents a major problem for taxpayers and it consumes a great deal of Taxpayer Advocate Service resources. The report strongly recommended proactive strategies to reduce audit reconsideration case inventories. This audit was performed to determine whether the IRS effectively gathers and uses information from its audit reconsideration process to increase taxpayer compliance and improve customer service.

The IRS does not effectively gather and use information available from the audit reconsideration process to improve its compliance program and increase customer service. As part of the IRS’ increased emphasis in this area, a task force was formed to review processes, procedures, and related information in the four program areas responsible for audit assessments. The task force found deficiencies in the closure procedures for the original audit assessments and the absence of an information system to track audit reconsideration case trends. One of the task force’s recommendations was to develop a management information system to capture pertinent data on audit reconsideration processing. However, the proposed management information reports fall short of senior IRS management expectations. These reports do not measure the total volume of audit reconsideration cases. Specifically, ASFR and AUR assessments are not addressed, even though they make up the majority of audit reconsideration cases worked by the IRS. Identifying the total volume of audit reconsideration cases and their specific causes is essential for developing effective and efficient methods to reduce the number of future audit reconsideration cases. A reduction in the total volume of audit reconsideration cases would directly reduce unnecessary burden on taxpayers and the IRS.

The IRS cannot reduce the burden it causes taxpayers and itself unless it develops an adequate management information system to account for all audit reconsideration cases. The management information reports currently under development will not accurately capture the total volume of audit reconsideration cases processed by the various functions within the IRS. These reports were being designed to only track audit reconsideration cases currently reopened in the Examination function and any of those cases that are subsequently closed with a full or partial abatement of tax. As a result, these reports will not account for any audit reconsideration cases worked outside the Examination function or closed without any tax abatement.

Audit reconsideration cases opened outside of the Examination function are primarily related to prior assessments made by the ASFR or AUR programs. Our analysis showed that approximately 81,000 (76 percent) of the audit reconsideration abatements in FY 1999 were related to prior ASFR or AUR assessments. The IRS cannot reduce the burden it causes to taxpayers and itself unless it develops an adequate management information system to account for all audit reconsideration cases. Without this information, the IRS will not be able to effectively increase compliance and improve customer service.

We recommend the IRS improve its proposed management information reports to accurately account for the total volume of audit reconsideration cases and to identify their related account characteristics to determine their cause.

Management’s Response: IRS Management agreed with our recommendations and stated, "We created a Management Information System (MIS) to provide data from reconsideration cases worked by ASFR, AUR, Appeals, and Examination. We will provide a monthly report to the applicable functions using data from the MIS. Each of the functions will be responsible for reviewing this report to identify trends, including the causes of audit reconsideration, and for developing corrective actions to reduce the volume of future audit reconsideration cases."

Objective and Scope

This audit was initiated as part of the Treasury Inspector General for Tax Administration’s coverage to evaluate the effectiveness of the Internal Revenue Service’s (IRS) system of controls over the audit reconsideration process. The primary objective of this audit was to determine whether the IRS effectively gathers and uses information from its audit reconsideration process to increase taxpayer compliance and improve customer service.

We evaluated the audit reconsideration process through interviews with analysts and operational personnel in the Collection, Customer Service, and Examination functional processes. We met with analysts from the Taxpayer Advocate Service and the Office of Revenue Analysis to discuss the causes related to audit reconsideration cases. We also performed a review of the centralized audit reconsideration process being prototyped in the service centers and their related field offices.

We conducted our fieldwork in the National Headquarters, the Fresno and Ogden Service Centers, and the Northern California and Pacific-Northwest Districts from May to August 2000. This audit was performed in accordance with Government Auditing Standards.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

To prevent needless financial hardship on taxpayers, the IRS instituted a process to reconsider tax assessments made during audits. Discretionary authority is granted to the IRS under the Internal Revenue Code to abate any unpaid portion of tax where the tax is determined to be excessive. This provides taxpayers the opportunity to request a reduction in the amount of their tax by presenting information not previously considered during the original audit assessments.

As a result of the Senate Finance Committee hearings in September 1997, the IRS instituted Problem Solving Days. Audit reconsideration requests were among the most significant problems brought forward by taxpayers at these events and have been included in the National Taxpayer Advocate’s last three annual reports to the Congress. The latest report, National Taxpayer Advocate’s Fiscal Year 1999 Annual Report To Congress, ranked audit reconsiderations 12^th out of the 20 most serious problems facing taxpayers today. This was an elevation from the prior year’s report, which had ranked audit reconsiderations 19^th. According to the 1999 report:

• Taxpayers and their representatives complained that the IRS is neither consistent nor timely in handling requests for audit reconsiderations.
• Audit reconsiderations consistently ranked among the top three major issues of Problem Solving Days, the Senate Finance Committee, and Taxpayer Advocate Service cases.

While the National Taxpayer Advocate’s report indicates an ineffective audit reconsideration process, the volume of tax abatements may indicate a problem with inappropriate audit assessments. The Taxpayer Advocate Service worked approximately 24,000 audit reconsideration cases in Fiscal Year (FY) 1999. The National Taxpayer Advocate said this represents a major problem for taxpayers and it consumes a great deal of Taxpayer Advocate Service resources. The report strongly recommended proactive strategies to reduce audit reconsideration case inventories.

In January 1998, the IRS Commissioner established the Taxpayer Treatment and Service Improvement Program (TSI). The TSI created the Audit Reconsideration Task Force in February 1998 to review the IRS’ processes, procedures, and related information in the four program areas responsible for audit assessments. The Task Force noted deficiencies in the closure procedures for the original audit assessments. In addition, it found the IRS did not have a management information system that provided complete or accurate information on the number of audit reconsiderations and their related account characteristics.

The Task Force issued its report in April 1999. The report included recommendations to:

• Reaffirm, as IRS policy, a taxpayer’s right to request and receive an audit reconsideration.
• Improve the locator processes for taxpayers prior to assessing tax.
• Centralize the audit reconsideration process in each service center.
• Develop a management information system to capture and report data pertinent to audit reconsideration processing.

The TSI Executive Steering Committee immediately approved these recommendations. In September 1999, the IRS issued Policy Statement P-2-89, which reaffirms a taxpayer’s right to request an audit reconsideration of an unpaid tax assessment. To reduce the number of excessive tax assessments, both the Customer Service and Examination functions have enhanced their locator procedures and discontinued assessing tax on the accounts of unlocatable taxpayers. The Audit Reconsideration Task Force noted the success of the centralized audit reconsideration processes being prototyped in the Fresno and Ogden Service Centers. As a result, the IRS committed to a nationwide rollout of a centralized audit reconsideration process in the beginning of FY 2001.

Results

Audit reconsideration cases create an unnecessary burden on both the taxpayers and the IRS. In FY 1999 alone, the IRS abated audit assessments on the accounts of approximately 106,000 individual taxpayers through its audit reconsideration process. This represents a burden on taxpayers because it requires them to address excessive tax assessments that should have been resolved during the initial audit. The IRS is also burdened by this rework because it must redirect its current compliance resources away from today’s compliance issues.

The IRS cannot address the problems related to audit reconsiderations because it does not effectively gather and use information available from the audit reconsideration process. Without an adequate management information and reporting system, the IRS cannot track these cases, determine their causes, and implement measurable corrective actions that will reduce their number and ultimately decrease taxpayer burden.

Better Information on Audit Reconsiderations Should Help Reduce Taxpayer Burden

Management accountability is the expectation that managers are responsible for mitigating adverse aspects of agency operations. The IRS cannot reduce the burden caused by audit reconsideration cases because it does not have an adequate management information system from which to make informed decisions. The IRS needs an effective system for tracking case trends to determine their cause and for developing corrective actions to reduce the number of audit reconsideration cases it processes each year.

The Office of Revenue Analysis is in the process of developing monthly reports that forecast audit reconsideration trends and plan for resource allocations. These reports were to be part of the regular Enforcement Revenue Information System (ERIS) production. However, the proposed management information reports fall short of senior IRS management expectations and do not capture information on all audit reconsiderations. These reports were designed to track only those audit reconsideration cases currently reopened in the Examination function and any of those cases that are subsequently closed with a full or partial abatement of tax. By tracking only these cases, the reports do not capture information for the majority of audit reconsideration cases. The audit reconsideration cases not included are those:

• Reopened outside the Examination function.
• Closed without an abatement of prior tax assessments.

Most audit reconsideration requests opened outside the Examination function are related to ASFR and AUR assessments. According to the IRS, these accounts were not included in the design of the ERIS reports because they are not a true reconsideration of audit tax issues. Instead, these are situations where the IRS has third-party information showing the taxpayer had taxable income and either did not file a return or omitted income from his/her filed return. This contradicts the fact that the National Taxpayer Advocate’s Fiscal Year 1999 Annual Report To Congress stated that a large number of audit reconsideration cases were the result of assessments made through the ASFR program.

Our analysis showed that the IRS processed audit reconsideration tax abatements on the accounts of approximately 106,000 individual taxpayers in FY 1999. These abatements totaled over $711 million. In addition, we determined that approximately 81,000 (76 percent) of these accounts were audit reconsideration abatements to ASFR or AUR assessments.

When taxpayers request an audit reconsideration but do not provide documentation or the documentation provided does not support a reduction in tax, the cases are closed by the IRS without an abatement. In these situations, the IRS does not retain any specific information that shows an audit reconsideration request was processed or even received. As a result, the true number of audit reconsideration cases closed by the IRS is unknown.

However, the Taxpayer Advocate Management Information System (TAMIS) does track some audit reconsideration information on a very limited basis. We determined that the Taxpayer Advocate Service closed approximately 24,000 individual taxpayer audit reconsideration cases in FY 1999. Approximately 17,000 (71 percent) of these cases were closed without an abatement of tax.

Most audit reconsideration cases closed without an abatement of tax would still involve a significant investment of IRS resources. At a minimum, these types of case closures would require some form of taxpayer contact. A case that is ultimately denied would generally require a review of the circumstances leading to the prior assessment, as well as a review of any new supporting documentation.

The IRS needs to accurately track case trends for all audit reconsideration cases, regardless of their final resolution, in order to:

• Identify the specific causes.
• Develop corrective actions to reduce audit reconsiderations.
• Measure the effectiveness of implemented corrective actions.
• Forecast and plan for sufficient resource allocations.

The IRS cannot provide top quality service to taxpayers unless it has the ability to track the causes of audit reconsideration cases. The IRS needs the ability to determine whether there are systemic problems with current audit assessment procedures or whether a lack of taxpayer education is responsible for the large number of audit reconsideration requests. A reduction in the total volume of audit reconsideration cases would directly reduce unnecessary burden on taxpayers and the IRS.

1. The IRS should redesign its management information reports to account for all audit reconsideration cases. These reports need to include all audit reconsideration requests, regardless of which function processes them, and identify whether the case was closed with or without an abatement of tax. Once the IRS has accounted for all audit reconsideration cases, it needs to track the case trends to identify the causes of the audit reconsideration cases, their final dispositions, and the resources it uses to process the cases. This information should then be used to develop effective corrective actions to reduce the total volume of future audit reconsideration cases.

Management’s Response: IRS Management agreed with our recommendations and stated, "We created a Management Information System (MIS) to provide data from reconsideration cases worked by ASFR, AUR, Appeals, and Examination. We will provide a monthly report to the applicable functions using data from the MIS. Each of the functions will be responsible for reviewing this report to identify trends, including the causes of audit reconsideration, and for developing corrective actions to reduce the volume of future audit reconsideration cases."

Conclusion

Audit reconsideration cases create an unnecessary burden on both the taxpayer and the IRS. The taxpayer is faced with a tax liability that may be incorrect, while the IRS is faced with redirecting compliance resources to rework cases. The IRS will not be able to correct the problems caused by audit reconsiderations unless it has an adequate management information system to track these cases and determine their causes. With this in place, the IRS will be better able to develop corrective actions that increase taxpayer compliance and improve customer service.

Detailed Objective, Scope, and Methodology

The primary objective of this audit was to determine whether the Internal Revenue Service (IRS) effectively gathers and uses information from its audit reconsideration process to increase taxpayer compliance and improve customer service. To accomplish this objective, we:

1. Interviewed analysts from the Taxpayer Advocate Service function to discuss any concerns with the audit reconsideration process. Interviewed analysts and operational personnel from the Collection, Customer Service, and Examination functions to determine whether there was effective oversight of the audit reconsideration process. Specifically, identified:
1. Management’s oversight role, the involvement of the current issue owner for the audit reconsideration process, and the policies and procedures for processing audit reconsideration cases.
2. The management information systems in place to measure, monitor, and account for audit reconsideration activities.
3. The methodologies used to ensure new policies and procedures have the intended results on the audit reconsideration process.
2. Interviewed analysts from the Office of Revenue Analysis and the Taxpayer Advocate Service functions, as well as analysts and operational personnel from the Collection, Customer Service, and Examination functions, to determine whether the IRS had a process in place to identify the causes of audit reconsideration cases.
3. Interviewed analysts from the Office of Revenue Analysis and Taxpayer Advocate Service functions, as well as analysts and operational personnel from the Collection, Customer Service, and Examination functions, to determine whether the IRS had a system in place to measure the effectiveness and efficiency of the audit reconsideration process.
4. Determined whether the IRS effectively and efficiently implemented the Audit Reconsideration Task Force recommendations. Specifically:
1. Identified the recommendations and determined whether they were timely implemented.
2. Evaluated the centralized audit reconsideration processes being prototyped in the Fresno and Ogden Service Centers.
3. Reviewed the action plan for centralizing the audit reconsideration process in the service centers and determined whether the established implementation timelines were being met.
5. Quantified the outcome measures related to taxpayer rights and burden by performing the following steps:
1. Secured information from the Taxpayer Advocate Management Information System (TAMIS) database and determined that the Taxpayer Advocate Service function processed 23,656 audit reconsideration cases in Fiscal Year (FY) 1999 (October 1, 1998, through September 30, 1999).
2. Analyzed the Individual Masterfile (IMF) and determined the IRS had processed audit reconsideration tax abatements to 105,617 taxpayer accounts in FY 1999. The case population included all abatements to the Automated Substitute for Return (ASFR), the Automated Underreporter (AUR), District Office Examination, and Service Center Correspondence Examination functions.
3. Interviewed analysts from the Office of Revenue Analysis to determine the status of the audit reconsideration management information reports.
4. Matched the 23,656 taxpayer accounts from the TAMIS database to the IMF. Determined that the Taxpayer Advocate Service function processed audit reconsideration cases with tax abatements to 6,862 taxpayer accounts and closed 16,794 cases without a tax abatement.

Major Contributors to This Report

Walter E. Arrison, Associate Inspector General for Audit (Wage and Investment Income Programs)

Michael Phillips, Director

Stan Rinehart, Director

Bryce Kisler, Audit Manager

Alan Lund, Senior Auditor

Sharon Summers, Senior Auditor

Jim Traynor, Senior Auditor

Erin Kaauwai, Auditor

Kristi Larson, Auditor

Report Distribution List

Deputy Commissioner N:DC

Commissioner, Small Business/Self-Employed Division S

Commissioner, Wage and Investment Division W

Deputy Commissioner, Small Business/Self-Employed Division S

Deputy Commissioner, Wage and Investment Division W

Director, Compliance S:C

Director, Compliance W:CP

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

Director, Strategy and Finance W:S

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

Audit Liaisons:

Deputy Commissioner N:DC

Commissioner, Small Business/Self-Employed Division S

Commissioner, Wage and Investment Division W

National Taxpayer Advocate TA

Senior Operations Advisor W:S

Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.

• Taxpayer Burden – Potential; 106,000 taxpayer accounts affected; see page 6.

We analyzed an extract from the Internal Revenue Service’s Individual Masterfile for any assessments with abatements processed in Fiscal Year 1999.

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.