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

The Congress passed the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98) in part to address concerns about protecting the innocent spouse who signed a joint return without knowledge of specific items on the return, and became personally liable for the errors of the other spouse. The IRS Commissioner considered the provisions for innocent spouse relief to be 1 of the 10 most significant areas of the legislation.

In May 2000, the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report on the Innocent Spouse Program (ISP) which stated that the IRS was not prepared to effectively process the increased volume of claims for innocent spouse relief that were received after the passage of the RRA 98. The report recommended that the IRS set goals and standards for the ISP, upgrade the Innocent Spouse Tracking System (ISTS) that serves as the primary management information system, and incorporate additional controls into the ISP that address quantity, cost, and timeliness of the program. The objective of this review was to evaluate how effectively the IRS has implemented the specific recommendations to set goals and standards for the ISP and upgrade the management information system.

Since our earlier review, the IRS has taken steps to implement corrective actions that we previously recommended. However, additional actions need to be taken to formalize goals and standards, and additional controls need to be implemented to ensure the accuracy of the ISTS. The ISP has made significant progress – especially at the Central Site. The Central Site at the Cincinnati Service Center (CSC) has grown to over 145 full-time and 35 temporary employees under the direct line authority of the ISP Manager. Unfortunately, the same degree of progress has not been made in completing claims assigned to Small Business/Self-Employed (SB/SE) personnel in the field.

Some of the more significant achievements include the following:

• Accurately date stamping and recording received dates on claims.
• Properly receiving, controlling and shipping returns from the CSC Central Site to field office examiners.
• Designing a computer application to enhance the quality of casework and accelerate the determinations on claims at the CSC Central Site.
• Developing an automated system of reporting data from the ISTS for use by all managers.
• Updating features on the ISTS that simplify input and improve the quality of data.
• Refining the model used to project future inventory levels. This occurred several times to compensate for increased claim receipts and decreased closures.

While the IRS has made these improvements, corrective actions have not been fully implemented. Management still needs to formalize comprehensive program goals and standards to fully measure and report accomplishments of the program. The inventory of claims continues to grow and old claims remain in inventory. Also, the ISTS, while improved, needs additional controls to ensure that it is properly implemented. This is particularly true in SB/SE field units that are not under the direct control of the ISP Manager.

Management has not placed enough emphasis on setting goals and standards for the ISP. The effect of not having comprehensive goals and standards for the ISP can be seen in the inventory of claims for relief. Since the RRA 98 liberalized the innocent spouse provisions, receipts of claims for relief have increased dramatically and continue to exceed projections. The ISP Manager stated that they were making progress on reducing the number of taxpayers who have not yet been notified of the disposition of their claims. However, as of December 24, 2000, there were 66,741 claims for relief in open inventory. This is a significant increase over the approximately 46,000 claims in inventory as of December 31, 1999. In addition to the number of claims getting larger, the claims also remain in inventory longer. Thirty-nine percent of the claims had been in inventory between 1 and 2 years, and 5 percent had been in inventory longer than 2 years.

Not having adequate goals and standards has made it difficult to properly manage the ISP. It is even more difficult to manage SB/SE resources used to evaluate claims because the ISP Manager does not have direct control over those resources. As a result, significant inventory backlogs continue, program resources may not be properly directed, program accomplishments may not be accurately measured, and program results may not be accurately reported to the IRS Commissioner and to the Congress. At the same time, taxpayers’ total liabilities are increased because penalties and interest continue to accrue while the claim is being considered. The longer it takes to work the claim, the greater the resulting tax liability.

We reviewed 250 randomly selected innocent spouse claims and determined that 20 percent were either not properly updated in the ISTS or were not accurately reflected in reports generated from the ISTS. However, the ISTS accurately reflects the total number of claims received and has the ability to generate numerous reports. Most of the errors in the ISTS were on cases assigned to field examiners in the SB/SE business unit. The CSC Central Site more accurately maintains its segment of the ISTS and uses the management information generated from the ISTS.

Several factors contributed to the inaccuracies in the ISTS. First, management had not developed adequate inventory controls. Second, the inventory controls that had been developed were not properly implemented. Third, field managers relied primarily on traditional Examination inventory controls such as the Audit Information Management System (AIMS) and the Examination Returns Control System (ERCS) instead of the ISTS.

As a result, the ISTS did not provide accurate information on the status and location of claims assigned to the field, and SB/SE managers were not using the ISTS to effectively manage inventory and resources. Also, the ISP Manager did not receive accurate information to update the inventory model or to evaluate and report program results to the IRS Commissioner and to the Congress.

IRS management needs to continue to follow through with the corrective actions stated in the response to our original report. Accordingly, we recommend that the IRS develop a formal program letter for the ISP to direct program resources and measure program accomplishments. At the same time, controls need to be strengthened over the management information system to ensure that it provides timely, accurate information that is used by management. Management initiated some corrective actions in March 2001, and is considering additional actions.

Management’s Response: The Wage and Investment (W&I) Division Strategy and Program Plans contain goals and measures for personnel resources applied and determinations made for innocent spouse claims. Target levels of pre- and post-determination inventories are a fundamental part of developing these goals and measures. The IRS is committed to monitoring these inventories and will evaluate and revise these standards semiannually. In addition, the Project Office, in partnership with SB/SE and the CSC Central Site, will provide specific guidance for conducting inventory validations in the multi-functional Innocent Spouse section of the Internal Revenue Manual. The IRS also made the computer-based ISTS training universally and easily available for download from the W&I Electronic Learning System.

Objective and Scope

The objective of this review was to evaluate how effectively the Internal Revenue Service (IRS) implemented the corrective actions recommended in a previously issued report on the Innocent Spouse Program (ISP). Our earlier report recommended the following:

1. Set goals and standards for the ISP.
2. Upgrade the current management information system (MIS) and ensure that it provides complete, accurate, and useful feedback.
3. Design and implement a system of internal controls that addresses the quantity, cost, and timeliness of the ISP to complement the existing controls over the quality of the Program.

This report specifically addresses the actions taken to correct the two recommendations dealing with setting goals and standards and upgrading the MIS.

We performed the review in the IRS National Office, the Innocent Spouse Central Site at the Cincinnati Service Center (CSC), and four field offices (Cincinnati, Los Angeles, Phoenix, and Richmond), between July and December 2000. The review was performed in accordance with Government Auditing Standards. Details of the audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

The Congress passed the IRS Restructuring and Reform Act of 1998 (RRA 98) in part to address concerns about protecting the innocent spouse who signed a joint return without knowledge of specific items on the return and became personally liable for the errors of the other spouse. This became more critical if the taxpayers divorced and the innocent spouse was the best source for collecting the unpaid tax. In effect, the legislation liberalized the ISP provisions and made it easier to file a claim and qualify for relief as an innocent spouse. The IRS Commissioner considered the provisions for innocent spouse relief to be 1 of the 10 most significant areas of the legislation.

In May 2000, TIGTA issued an audit report on the ISP which stated that the IRS was not prepared to effectively process the increased volume of claims for innocent spouse relief that were received after the passage of the RRA 98. IRS management had not reacted to predictions of significant increases in the number of claims that would be filed and was slow to increase staffing when the predicted number of claims was received. Also, management did not set goals for the ISP and did not have an adequate MIS to measure program accomplishments.

The IRS has taken steps to implement corrective actions that we previously recommended. However, additional actions need to be taken to formalize goals and standards, and additional controls need to be implemented to ensure the accuracy of the MIS. Overall, the ISP has made significant progress - especially at the CSC Central Site. The CSC Central Site presently has 145 full-time and 35 temporary employees under the direct line authority of the ISP Manager. Unfortunately, the same degree of progress has not been made in completing the claims assigned to Small Business/Self-Employed (SB/SE) personnel in the field.

Results

Since our earlier review, the IRS has made improvements to the ISP that include the following:

• Accurately date stamping and recording received dates on claims.
• Properly receiving, controlling and shipping returns from the CSC Central Site to field office examiners.
• Designing a computer application to enhance the quality of work and speed up the determinations on claims at the CSC Central Site.
• Developing an automated system of reporting data from the Innocent Spouse Tracking System (ISTS) for use by all managers.
• Updating features on the ISTS that simplify input and improve the quality of data.
• Refining the model used to project future inventory levels. This has had to be done several times to compensate for increased claim receipts and decreased closures.

While the IRS has made improvements to the ISP, management had not yet fully implemented the corrective actions to our previously issued report. Management still needs to formalize comprehensive program goals and standards to fully measure and report accomplishments of the program. Also, the ISTS, while improved, needs additional controls to ensure that it was properly implemented. This is particularly true in SB/SE field units that are not under the direct control of the ISP Manager.

A Comprehensive Set of Goals and Standards Has Not Been Formalized and Developed for the Innocent Spouse Program

IRS management is responsible for establishing, communicating and maintaining program goals and standards, and monitoring and measuring program accomplishments against those goals and standards. The mission of the ISP includes ensuring that each claim receives timely and consistent treatment, and that work be done correctly and accurately. The program has developed estimates of the number of claims that will be closed during a year, how long claims should stay in the various steps of processing, and the staff resources to be applied to the program.

However, management has not placed enough emphasis on setting goals and standards for the ISP. This information is not consolidated into one document, such as an annual program letter, as used by most other IRS functions and programs. Some ISP goals and standards are not specific, and measurement techniques are not clearly identified.

The importance of goals, standards, and management information has recently been emphasized in the IRS Management Control Accountability Program: MCAP Handbook for Managers, published in February 2001. Included is the IRS Management Model that is designed to ensure effective management and protection of assets.

The following diagram illustrates the model.

We believe that formalizing goals, standards, and measurement techniques will bring the ISP more in line with the IRS Management Model. Not having adequate goals and standards has made it difficult to properly manage the ISP.

The effects of not having comprehensive goals and standards for the ISP can be seen in the inventory of claims for relief. Since the RRA 98 liberalized the innocent spouse provisions, receipts of claims for relief have increased dramatically and continue to exceed projections. The ISP Manager stated that they were making progress on reducing the number of taxpayers who have not yet been notified of the disposition of their claim. However, as of December 24, 2000, there were 66,741 claims for relief in open inventory. This is a significant increase over the approximately 46,000 claims in open inventory as of December 31, 1999.

The following chart tracks the inventory growth.

In addition to the number of claims getting larger, the claims are remaining in inventory longer. The following chart shows that 39 percent of the claims had been in inventory between 1 and 2 years and 5 percent had been in inventory over 2 years, as of December 24, 2000.

In addition to the lack of comprehensive goals and standards, we believe that the organizational structure of the ISP complicates the role of the ISP Manager. Both the Program Manager and the staff at the CSC Central Site are part of the Wage and Investment (W&I) business unit. The Program Manager has direct control over the CSC Central Site staff. However, none of the field examiners assigned to work claims that require field contact (for instance, face to face contact with taxpayers or coordination with other IRS functions) are under the direct control of the ISP Manager. Instead, they are part of the SB/SE business unit.

As a result, it is difficult to properly manage the ISP. Significant inventory backlogs continue, program resources may not be properly directed, program accomplishments may not be accurately measured, and program results may not be accurately reported to the IRS Commissioner and to the Congress.

At the same time, taxpayers’ total liabilities are increased because penalties and interest continue to accrue while the claim is being considered. The longer it takes to work the claim, the greater the accumulation of penalties and interest on the tax liability. If a claim is ultimately denied, collection actions are reactivated on a tax liability that is larger than before the claim was filed. Even when relief is granted to one spouse, the other spouse is still liable for the resulting larger tax liability.

Formalizing the goals and standards should help identify the claims that have been in inventory too long and specific actions that can be taken to finalize the resolution of the claims. Specifically, the goals and standards should help complete the processing of the 66,741 claims in open inventory and minimize the time needed to process future claims received.

At the time of our audit, the IRS did not have a definition of overage claims or an action plan to deal with claims that reached an overage status. Since then, IRS management has informed TIGTA that W&I is collaborating with SB/SE to consider initiatives to reduce the backlog of claims in the stage of processing known as local review, and to determine more efficient ways to address inventories. In March 2001, management defined aging criteria for each of the claim processing stages. This new procedure will include monthly reports and require feedback on each claim exceeding the aging criteria.

1. In addition to the corrective actions already taken, the IRS needs an annual program letter for the ISP that will formalize a comprehensive set of goals and standards to direct program resources, and establish criteria to measure program accomplishments. These goals, standards, and criteria could then be used to evaluate and report program results. Specifically, these would address factors such as the target inventory level for innocent spouse claims, a definition of overage claims that have been in the system too long, an acceptable level of overage cases, the number and type of resources needed to achieve these goals, and actions to be taken if these goals are not met. Because the program is comprised of two separate and distinct business units, it may be wise to establish two sets of goals and standards, one for the CSC Central Site and one for field SB/SE operations.

Management’s Response: The W&I Division Strategy and Program Plans contain goals and measures for personnel resources applied and determinations made for innocent spouse claims. Target levels of pre- and post-determination inventories are a fundamental part of developing these goals and measures. The IRS is committed to monitoring these inventories using the current system process operating data from the ISTS. It will use this data to benchmark improvement of current processes against the "best case scenarios" it currently uses in the planning model. This will tie process improvement to the same inventory model used to set goals in the Strategy and Program Plans. The IRS will evaluate and revise these standards semiannually.

Small Business/Self-Employed Field Personnel Have Not Properly Implemented the Innocent Spouse Tracking System

Management is responsible for implementing a comprehensive set of internal controls. The ISTS is the primary management information system for the ISP. It is a database of all innocent spouse claims that have been received and processed by the IRS.

Designated personnel in each local IRS office that processes innocent spouse claims are responsible for updating and maintaining ISTS data on the claims assigned to that office. Our review showed that personnel at the CSC Central Site did a good job of maintaining the ISTS and managers used ISTS data. We also confirmed that the ISTS accurately reflects the total claims received. However, SB/SE personnel in field offices did not timely or accurately update the ISTS.

Our review of 250 innocent spouse claims randomly sampled from the ISTS in 5 locations clearly showed the inaccuracies in the inventory data. We determined that 49 claims (20 percent) were either not properly updated in the ISTS, or were not accurately reflected in reports generated from the ISTS. Most of the errors (45 of 49) occurred on claims assigned to field offices.

Fifteen of the claims were not properly reflected in reports generated from data in the ISTS, primarily due to data input errors that could not be properly interpreted by the computer program used to generate the reports. The other 34 claims simply had not been updated when the claim moved to the next stage in processing. Two months after our field tests, research showed that 24 of these 34 still had not been updated. These claims had been in the wrong processing stage in the database anywhere from 104 to 585 days.

Several factors contributed to the inaccuracies in the ISTS. First, inventory controls did not require field managers to report the results of validations to the ISP Manager. Second, the inventory controls that had been developed were not properly implemented. Third, SB/SE field managers relied primarily on traditional IRS Examination inventory controls such as the Audit Information Management System (AIMS) and the Examination Return Control System (ERCS) instead of the ISTS.

All three of these factors are strongly influenced by a previously mentioned concern with the organizational structure of the ISP. The SB/SE examiners operate under a "Memorandum of Understanding" (MOU) between W&I and SB/SE. The MOU states that the responsibility of SB/SE innocent spouse coordinators includes "maintaining the Innocent Spouse Tracking System (ISTS) database, and validating inventories monthly." Unfortunately there was no control that required the field to report the results of the validations. As a result, the ISP Manager was not aware that the monthly validations were not being conducted. Management has informed TIGTA that as of March 2001, reports on the monthly validations will be required to be reported to the ISP office.

Field managers rely more on the AIMS than the ISTS. Local SBSE offices are also required by IRS procedures to control innocent spouse claims on the AIMS as well as the ISTS. These offices control innocent spouse claims the same as regular tax audits, including using the AIMS as the primary control database, instead of the ISTS. Some question the need for the ISTS at all. We believe that SB/SE field managers are much more comfortable with the AIMS. Consequently, it has not been a priority for SB/SE personnel to maintain the accuracy of the ISTS.

As a result, the ISTS did not provide accurate information on the status and location of claims, and SB/SE managers did not use the ISTS to effectively manage inventory and resources. Also, the ISP Manager did not receive accurate information to update the inventory model, or to evaluate and report program results to the IRS Commissioner and to the Congress.

Recommendation

2. Management needs to improve the inventory controls over Innocent Spouse claims for relief. Specifically, ISP management needs to develop uniform procedures to update and validate the ISTS that include criteria for identifying inventory inaccuracies, making necessary corrections, and forwarding the results to the ISP Manager. The new requirement implemented in March 2001 partially addresses this recommendation. Management still needs to ensure that the various offices utilize uniform validation methods and make all necessary corrections.

Management’s Response: The Project Office, in partnership with SB/SE and the CSC Central Site, will provide specific guidance for conducting inventory validations in the multi-functional Innocent Spouse section of the Internal Revenue Manual. In addition, the IRS made the computer-based ISTS training universally and easily available for download from the W&I Electronic Learning System.

Conclusion

The ISP was not prepared to timely and accurately process the increased volume of claims for relief after the RRA 98 was passed. Even though great improvements had been made at the CSC Central Site, significant problems continued to exist in managing the SB/SE resources that evaluate the claims assigned to the field. As a result, the inventory of open claims continues to grow and old claims remain in inventory for extended periods of time.

The program continues to lack the fundamental elements of the IRS Management Model. Management needs to take a long-range approach to the program and develop goals and objectives for the ISP as recommended in our earlier report. Also, we believe that the organizational structure of the ISP complicates the role of the ISP Manager. The Program Manager has direct line authority over the entire CSC Central Site operation and it has shown great improvement. The Program Manager does not have direct control over the SB/SE resources used to evaluate claims sent to the field and it continues to have problems.

Finally, the ISTS needs to furnish accurate management information. Inventory controls need to be strengthened to ensure that SB/SE field personnel timely and accurately update the status and location of claims assigned to the field.

Detailed Objective, Scope, and Methodology

As a result of our prior audit report, we conducted this follow-up review to determine if the Internal Revenue Service (IRS) had set goals and standards for managing the inventory of claims for innocent spouse relief and upgraded the management information system.

To accomplish this objective, we:

1. Determined if controls over the Innocent Spouse Tracking System (ISTS) ensured that it accurately reflected the number, status and location of all innocent spouse claims. Specifically, we:
1. Evaluated controls to ensure that innocent spouse claims, received by the IRS on Request for Innocent Spouse Relief (Form 8857), were entered into the ISTS timely and accurately. We reviewed a judgmental sample of 30 recently received claims and researched the ISTS at a later date to determine if they had been properly controlled.
2. Researched the ISTS for the sample of 30 Forms 8857 received at the Cincinnati Service Center (CSC) to determine if claim processing began immediately, or if there was a delay caused by a backlog of claims still in inventory.
3. Reviewed a sample of 250 innocent spouse claims and researched the ISTS and the Audit Information Management System/Examination Returns Control System to determine whether status updates were timely and accurately updated and recorded in the ISTS as claims progressed through the process.
4. Evaluated and compared controls in place at the CSC and the field Examination offices we visited.
5. Determined if cases assigned to an examiner matched the case assignment in the ISTS.
2. Determined if the ISTS provided timely, accurate, and useful information to management. Specifically, we:
1. Obtained monthly inventory reports generated for management use.
2. Determined if the reports were accurate.
3. Determined if management consistently used the reports to validate inventory, assign resources, or otherwise manage the program.
4. Determined the status of the automated reports that management planned to distribute to the field and how the field used that data.
3. Determined if the inventory model developed by Innocent Spouse management was based on sound assumptions and accurate historical data.
1. Evaluated whether the "historical" figures used in the model were accurate when compared to ISTS data.
2. Determined if the ratios, formulas and assumptions used in the model accurately and fairly reflect past experience based on verified data.
4. Determined if the projections resulting from the Inventory Model were obtainable, and if they were accurately communicated to senior IRS management, the Congress and the Treasury Inspector General for Tax Administration. Specifically, we:
1. Evaluated whether the IRS will be able to meet the projected inventory levels given that the underlying data is valid and the assumptions are reasonable.
2. Determined if senior IRS management is receiving complete data and able to make proper management decisions based on this data.

Major Contributors to This Report

Walter Arrison, Assistant Inspector General for Audit (Wage and Investment Income Programs)

Stanley Rinehart, Director

Stephen S. Root, Audit Manager

David Brown, Senior Auditor

Susan Price, Auditor

Cari Robben, Auditor

Gail Yorgason, Auditor

Report Distribution List

Commissioner N:C

Commissioner, Small Business/Self Employed Business Unit S

Commissioner, Wage and Investment Business Unit W

Innocent Spouse Program Manager W:ISP

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

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; 66,741 taxpayer accounts impacted; (see page 4).

We determined the number of accounts impacted from the number of claims open on the Innocent Spouse Tracking System as of December 24, 2000.

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.