Management Advisory Report:
Restricting the Release of Information Through the Exempt Organization
Return Imaging Project
November 2001
Reference Number: 2002-10-017
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.
November
6, 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 Management Advisory Report - Restricting the Release of Information Through the Exempt
Organization Return Imaging Project (Audit # 200110032)
This
report presents the results of our review of the Tax Exempt and Government
Entities (TE/GE) Division’s return imaging project. The overall objective of this review was to determine
whether sufficient controls exist to provide reasonable assurance that
disclosure regulations and statutes have been followed when releasing exempt
organization returns through the return imaging project.
In
summary, we found from a statistically valid sample of 655 returns that, in
most instances, documents were released in accordance with the statute and
regulations. We found that images of 13
returns contained information that should not have been released to the
public. Our analysis of the returns
determined that these mistakes were most likely attributable to human
error. While documents were generally
released in a manner consistent with the statute and regulations, our audit
also identified occurrences where personal and tax payment information were
being released to the public. The
personal information consisted of home addresses, telephone numbers, Social
Security Numbers, and financial account numbers. Although the statute and regulations do not prohibit releasing
these data, our recommendations to assess whether this information is necessary
for tax administration and to educate taxpayers on the requirement to provide
this information will enhance taxpayer privacy and protect the Internal Revenue
Service (IRS) from inappropriate refund claims.
Management’s
Response: IRS management agreed with the
recommendations cited in the report and is taking appropriate corrective
actions. The Commissioner, TE/GE
Division, has agreed to evaluate whether all the personal information requested
on Return of Organization Exempt From Income Tax (Form 990) is necessary for
tax administration. TE/GE management
will design and implement a customer education initiative on ways to reduce the
release of sensitive, personal information through the Form 990. TE/GE management will also determine whether
the excise tax credit information can be redacted from the Return of Private
Foundation (Form 990-PF) before they are released to the public and, if so,
will take appropriate actions to accomplish this. Management’s complete response to the draft report is included as
Appendix VI.
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 Daniel R. Devlin, Assistant Inspector
General for Audit (Headquarters Operations and Exempt
Organizations Programs), at (202) 622-8500.
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 – Detailed Sampling Plan
Appendix VI – Management’s
Response to the Draft Report
Background
The Internal Revenue Code (I.R.C.) requires most tax-exempt organizations to make annual information returns available for public inspection. Department of the Treasury regulations provide that the public may request these returns directly from the tax-exempt organization or by written request to the Internal Revenue Service (IRS).
As a general rule, the statute,
regulations, and IRS procedures require the release of Form 990 returns for
most tax-exempt organizations, except for the following categories of
information:
·
Names and addresses of contributors to an organization
other than private foundations.
·
Amounts of contributions
unless the disclosure of such information will not reasonably be expected to
identify any contributor. Amounts of
contributions to private foundations will be disclosed notwithstanding the preceding
sentence.
·
Names, addresses, and amounts
of contributions of persons who are not citizens of the United States to a
foreign organization.
·
Confidential business
information.
·
Correspondence between the
IRS and the organization.
In 1996, a joint effort between 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 some of the
Form 990 returns.
In Calendar Year (CY) 2000, the IRS imaged 380,451 documents through
this project.
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 Form 990 returns to the non-profit organization on a monthly basis. The images are then made available to the general public through the non-profit organization’s Internet site.
This audit was conducted at the IRS offices in Ogden, Utah, and Washington, D.C., between December 2000 and July 2001. This audit was conducted in accordance with the President’s Council on Integrity and Efficiency’s Quality Standards for Inspections. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Imaged Exempt Organization Returns Are
Usually Redacted in Accordance with the Statute and Regulations
In most instances, the IRS appropriately restricted exempt organization return information released through the imaging project in accordance with the statute and regulations. Our statistically valid sample of 655 Form 990 returns identified 13 returns (2 percent) that contained information that should not have been released to the public. These cases included:
·
Three cases with information
on the contributors to the organization. Each of these cases contained names of
contributors in attachments to the Form 990 returns. This information is specifically exempt from
release under I.R.C. § 6104(b) (1994 & Supp. V 2000).
·
Ten cases containing correspondence
between the IRS and the exempt organization that could affect the public’s
perception of the organization. The
correspondence was attached to the Form 990 returns. IRS procedures generally require correspondence to be withheld
from public release.
These errors were primarily the
result of mistakes made by employees responsible for redacting this information
from the attachments to the Form 990 returns.
The employees reviewing for disclosure issues are required to perform
many other tasks in addition to their disclosure responsibilities. These tasks include:
·
Disassembling the returns.
·
Loading them into the
document scanners.
·
Manually keypunching required
data fields from the returns as well as verifying the keypunching.
·
Evaluating the quality of the
images produced from the scanned document.
·
Reviewing the return and
removing information that must be redacted.
·
Reassembling the
returns.
The Form 990 returns processed
through the imaging unit in CY 2000 averaged 17 pages in length, and the terminal
operators processed approximately 8.2 Form 990 returns per hour. This production volume results in each
employee evaluating approximately 1,100 pages for potential disclosure
violations each day.
OSPC
management advised us that it planned to establish a quality assurance process,
which would include a check for compliance with disclosure regulations and
statutes. If this process is
implemented, the IRS would have additional assurances that the disclosure
regulations and statutes are being followed.
The Tax Exempt and Government Entities Division Can Improve Protection of Personal Information and Tax Payments When Imaging Form 990 Returns
Although the I.R.C. and
regulations do not prohibit releasing the data, our review of 655 Form 990
returns identified 494 (75 percent) that contained sensitive personal
information about individuals associated with, or receiving grants from, these
exempt organizations. This information
included:
·
Home addresses.
·
Telephone numbers.
·
Social Security Numbers (SSN)
of paid tax return preparers.
·
Financial institution account
numbers.
The Tax Year 2000 Form 990 returns
require exempt organizations to provide business contact information. This contact information includes the:
·
Names and addresses of
Officers, Directors, Trustees, and Key Employees.
·
Names and addresses of the
five highest paid employees other than Officers, Directors, and Trustees.
·
Names and addresses of grant
recipients.
·
Preparer Taxpayer
Identification Numbers (PTIN) or SSNs of the paid tax return preparer.
The instructions for the various
sections of the Form 990 returns either do not indicate the type of address to
provide or state, “Give the preferred address at which officers, etc., want the
Internal Revenue Service to contact them.”
From the wording of this instruction it appears that the purpose of the
address information is for the IRS to contact the individual. The forms contain a line for an SSN or PTIN
to be entered if the preparer of the return is paid for the return preparation. Paid tax return preparers were given the
option of using either their SSN or PTIN on tax returns they prepare beginning
January 1, 2000. There are no
requirements to provide officers, employees, or grant recipients telephone
numbers or financial institution account numbers on the Form 990 returns.
Statutes provide for public inspection of annual information
returns filed by exempt organizations.
In addition, the Secretary of the Treasury, through
forms and regulations, requires sufficient information to carry out the
internal revenue laws. Although the
contact information for individuals
associated with these exempt organizations is requested by the Form 990
returns, it is not clear whether the personal
information provided is necessary for tax administration.
Some Form 990-PF returns contain
entries for overpayments of excise taxes, which the exempt organization
requests to be applied to a subsequent year tax liability. From our statistically valid sample, we
determined that more than 15,000 of the 77,154 Form 990-PF returns contained
credit elections applying overpayments to the subsequent tax year. The individual credits ranged from $6 to
$140,286. The total dollar amount of
these credit elections is estimated to be approximately $104.4 million.
The credit election information is
required by the form and is necessary for tax administration. However, because these forms are available
to the public, the IRS is providing all the necessary information for an
individual with knowledge of IRS processing procedures to file a false refund
claim.
Although we did not attempt to identify whether false claims using the Form 990-PF returns have been submitted, there is a substantial risk of monetary losses to the government if an effective strategy is not developed to balance the public release requirements of I.R.C. § 6104 (1994 & Supp. V 2000) with the necessity to combat fraud.
While the public may use the
exempt organization return information to make informed decisions on whether to
support an organization, there is a risk that employees and individuals
associated with exempt organizations may be contacted and subjected to
harassment or other unlawful acts as a result of the personal information
provided to and released by the IRS.
Additionally, releasing SSNs or financial account numbers to the public
may result in illegal use of this information and subsequent financial harm.
Representatives of some
exempt organizations have made requests to have their personal information
removed from the Form 990 return that was placed on the Internet by the
non-profit organization. Actions which
limit the collection and release of this
personal information would be consistent with the IRS policy to handle tax matters in a manner that
promotes public confidence, safeguards taxpayer privacy, and limits and
controls information use.
Recommendations
1. The Commissioner, TE/GE Division, should determine whether
the personal information on exempt organization returns is required to carry
out the internal revenue laws. If it is
not required, the Commissioner should revise the forms and recommend to the
Secretary of the Treasury that applicable regulations be revised.
Management’s Response: TE/GE Division management will evaluate whether all the personal information requested on Form 990 is necessary for tax administration, or whether some or all of it can be omitted and the Form 990 and associated regulations changed accordingly.
2. The Commissioner, TE/GE Division, should initiate actions
to educate paid return preparers and tax exempt organizations on how to
complete the Form 990 returns to reduce the occurrences of personal information
being released to the public and develop a methodology to monitor the
effectiveness of this effort.
Management’s Response: TE/GE Division management will design and implement a customer education initiative on ways to reduce the release of sensitive, personal information through the Form 990, and evaluate whether there is a means to monitor the effectiveness of this initiative.
3. The Commissioner, TE/GE Division, should determine whether
the excise tax credit information identified in our review could be redacted
from the Forms 990-PF being released to the public to protect the IRS from
inappropriate refund claims. Following
this determination, the Commissioner may need to initiate actions to revise
Treasury Regulation § 301.6104(b)-1 accordingly.
Management’s Response: TE/GE Division management will determine whether the excise tax credit information can be redacted from the Forms 990-PF before they are released to the public and, if so, will take appropriate actions to accomplish this.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether sufficient controls exist to provide reasonable assurance that disclosure regulations and statutes have been followed when releasing exempt organization return information through the return imaging project. We reviewed a random sample of imaged returns to determine whether the controls are sufficient to identify risks and correct errors made in redacting information required by disclosure regulations. Specifically, we:
1. Developed a stop-and-go sampling plan and case review methodology with input from Internal Revenue Service (IRS) management.
2. Selected an appropriate number of Form 990 returns, imaged during Calendar Year 2000 to determine the error rate for unauthorized disclosures.
3. Reviewed cases to determine if the information release was in accordance with the statutes, regulations, and IRS procedures. In addition, we determined the number of occurrences where the personal information of individuals associated with or receiving grants from the exempt organization was released.
The detailed statistical sampling plan is included as Appendix V.
Appendix
II
Major Contributors to This Report
Daniel
R. Devlin, 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
Steven
R. Bohrer, Auditor
Gwendolyn
S. Gilboy, Auditor
Gregory
W. Holdeman, Auditor
Una K.
Smith, Auditor
Marjorie
A. Stephenson, Auditor
Appendix III
Report Distribution
List
Commissioner N:C
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
Director, Governmental Liaison and Disclosure CL:GLD
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
Audit Liaison:
Director, Communications and Liaison T:CL
Appendix IV
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.
Type and Value of Outcome Measure:
· Taxpayer Privacy – Potential; a minimum of 281,153 taxpayers are affected (see page 3).
Methodology Used to Measure the Reported Benefit:
From our statistical sample of 655 cases from a population of 380,451 documents released through the imaging project, we determined that 75 percent (± 1.1 percent) of the returns contained sensitive personal information about individuals associated with, or receiving grants from, these exempt organizations. A minimum number of taxpayers is reported, although each of the imaged documents could include more than one category of sensitive personal information about one or more taxpayers. This figure is calculated based on the following:
380,451 imaged documents * (75 percent – 1.1 percent) = 281,153.
Type and Value of Outcome Measure:
· Increased Revenue Protection – Potential; $104.4 million (see page 3).
Methodology Used to Measure the Reported Benefit:
We estimated the number of Return of Private Foundation (Form 990-PF) with credit elections to a subsequent year by multiplying the percentage of returns identified in our sample of 328 (24.7 percent) by the population of Form 990-PF returns (77,154). We computed the sampling error (+ or – 4.6 percent). To ensure we conservatively estimate the total dollar amount, we used the low end of the range of Form 990-PF returns containing credit elections (15,483).
To estimate the total dollar amount, we calculated the mean ($6,740.23) and the standard deviation ($21,249.97) of the 81 credit elections identified. We multiplied the estimated number of Form 990-PF returns containing credit elections (15,483) by the mean ($6,740.23) to estimate the total dollar amount of the credit elections ($104,358,996.38). We then determined the standard error of the mean ($2,354.92) and multiplied this estimated number in the population containing credit elections (15,483) to calculate the one standard error of the estimated total ($36,461,274.28). One standard error of the estimated total provides 68 percent confidence that the actual total falls within the estimated range. To estimate the range with 95 percent confidence, we multiplied one standard error of the total ($36,461,274.28) by 1.96 ($71,464,097.58). By subtracting and adding 1.96 standard errors of the mean ($71,464,097.58) to and from the estimated total ($104,358,996.38) we calculated the range of the dollar amount at risk ($32,894,898.80 to $175,823,093.96).
Appendix V
Overall Sample Criteria -
|
Type
of Sample: |
Attribute.
Errors in redacting items from publicly available images will be
considered exceptions. |
|---|---|
|
Confidence
Level: |
95% |
|
Desired Precision Rate: |
+/- .5% (one half) |
|
Expected Rate of Occurrence: |
Not to exceed 1% |
|
Formula Used to |
n = p(1-p)/(SE/t)**2 +
p(1-p)/N where: |
We prepared a statistical sampling plan with input from management of the Tax Exempt and Government Entities and Statistics of Income Divisions. The sampling plan was reviewed and validated by a statistician under contract with the Treasury Inspector General for Tax Administration.
A request to extract all cases processed through the imaging
system for the Calendar Year (CY) 2000 was submitted to Internal Revenue
Service management responsible for the imaging project. Management data showed that 380,451
documents were imaged in CY 2000.
After receiving the selected sample cases, we reconciled the number of cases received to the number of sample cases requested. As recommended by our statistician, we then ran a Chi-square test on the form types and processing months for our selected cases to ensure that the distribution is representative of the universe. The results of the test indicated that there was no significant deviation between our sample and the total population.
To minimize the time necessary to complete the testing and address the potential of finding very few errors, we used a stop-and-go (i.e., sequential) sampling technique to complete our case review. We stopped our case review after confirming that the actual error rate could be less than 1 percent. In finding 13 errors in 655 cases, we calculated the error rate to be 2 percent (±1.1 percent), with 95 percent confidence.
Calculating Sampling Error -
Where
all numbers are rounded to tenths
|
Type
of Sample: |
Attribute.
Errors in redacting items from publicly available images will be
considered exceptions. |
|---|---|
|
Confidence
Level: |
95% |
|
Rate of Occurrence: |
2% |
|
|
SE = +-t *(Öp(1-p)/n)*(Ö1-n/N) where: t = confidence level factor =
1.96 |
|
Formula to calculate the upper and lower confidence interval limits: |
where: p = actual error rate = 2% SE = actual
precision = ± 1.1% lower limit =
(p-SE) = .9% upper limit = (p+SE) = 3.1% |
Calculating the Percentage of Form
990-PF Returns with Credit Elections
Because our initial sampling methodology was not designed to estimate the value of the credit elect attribute, the resulting sampling error rate is higher than expected.
There were 77,154 Return of Private Foundation (Form 990-PF) returns in the total volume of 380,451 Form 990 returns processed through the imaging unit in CY 2000. We estimated the number of Form 990-PF returns with credit elections to a subsequent year by multiplying the percentage of returns identified in our sample of 328 (24.7 percent) by the population of Form 990-PF returns (77,154). We computed the sampling error (+ or – 4.6 percent). To ensure we conservatively estimate the total dollar amount, we used the low end of the range of Form 990-PF returns containing credit elections (15,483).
|
Type
of Sample: |
Attribute.
Errors in redacting items from publicly available images will be
considered exceptions. |
|---|---|
|
Confidence
Level: |
95 % |
|
Rate of Occurrence: |
24.7 % (81 of 328) |
|
Sampling Error Rate Calculation |
SE = +-t *(Öp(1-p)/n)*(Ö1-n/N) where: t
= confidence level factor = 1.96 |
|
Estimated number of Form 990-PF returns with credit elections |
where: estimated
volume = N * (p) p
= actual rate of occurrence = 24.7 % |
|
Upper and Lower Confidence Interval Calculations |
where: range
= (N * (p-SE)) to (N * (p+SE)) p
= actual rate = 24.7 % |
Calculating the Total Value of Credit Elections on Form 990-PF Returns
To estimate the total dollar amount, we calculated the mean ($6,740.23) and the standard deviation ($21,249.97) of the 81 credit elections identified. We multiplied the estimated number of Form 990-PF returns containing credit elections (15,483) by the mean ($6,740.23) to estimate the total dollar amount of the credit elections ($104,358,996.38). We then determined the standard error of the mean ($2,354.92) and multiplied this estimated number in the population containing credit elections (15,483) to calculate one standard error of the estimated total ($36,461,274.28). One standard error of the estimated total provides 68 percent confidence that the actual total falls within the estimated range. To estimate the range with 95 percent confidence, we multiplied one standard error of the total ($36,461,274.28) by 1.96 ($71,464,097.58). By subtracting and adding 1.96 standard errors of the mean ($71,464,097.58) to and from the estimated total ($104,358,996.38) we calculated the range of the dollar amount at risk ($32,894,898.80 to $175,823,093.96).
Formulas for estimating the mean and standard deviation
n = number sampled with attribute = 81
N= estimated minimum volume of 990-PF returns with
credit elections = 15,483 with 95 % confidence
f = sampling fraction = (n/N) = 0.005231
m = mean (average of credit amounts)= $6,740.23
s.d. = Standard
deviation of credit amounts =
Ö (sum of all (x-m)2 )/(n-1)= $21,249.97
x = value for each credit identified
Estimated total dollars in the population of 990-PFs
(m * N) = $104,358,996.38
Standard Error of the Mean = (((s.d.) * Ö (1-f))/ Ö n) = $2,354.92
1 Standard Error of the Estimated Total = (standard
error * N) = $36,461,274.28
1.96 Standard Errors of Estimated Total (1.96 =
conversion to 95% confidence) = Standard Error * N* 1.96) = $71,464,097.58
Estimated range of total credit elections applied to subsequent year
Form 990-PF returns
Estimated total = $104,363,239 (± $71,464,097.58)
Low estimate = $32,894,898.80
High estimate = $175,823,093.96
Appendix VI
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.