Controls Need to Be Strengthened Over the Internal Revenue Service’s Taxable Travel Reporting
Reference Number: 2002-10-107
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.
June 19, 2002
MEMORANDUM FOR CHIEF FINANCIAL OFFICER
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Controls Need to Be Strengthened Over the Internal Revenue Service’s Taxable Travel Reporting (Audit # 200110027)
This report presents the results of our review of the Internal Revenue Service’s (IRS) taxable travel reporting. The overall objective of this review was to determine whether the IRS had developed and implemented effective procedures and system corrections necessary to address long-term taxable travel reporting requirements. This audit was performed at the request of the IRS to evaluate the final procedures and system corrections that the Chief Financial Officer (CFO) developed to address the long-term taxable travel issue on the Travel Reimbursement Accounting System (TRAS).
In summary, we found that the IRS has taken positive steps to implement processes to address the reporting requirements of long-term taxable travel transactions. Further, our tests of a judgmentally selected sample of travel transactions and adjustments showed that Federal, Medicare, and Federal Insurance Contribution Act (FICA) taxes were accurately calculated. However, we identified deficiencies in manually recording long-term taxable travel transactions, withholding state income taxes on adjustment entries, requiring supervisory approval for adjustment entries, and accurately classifying travel vouchers.
Management’s Response: IRS management agreed with three of the recommendations contained in the report. They are in the process of evaluating a fourth recommendation and will make a decision before the end of this fiscal year on whether they will change current policy. Corrective actions taken or to be taken include updating the TRAS to perform the long-term taxable travel withholding process, including systemic controls to ensure the computations and amounts are correct; providing oral direction to reject requests for long-term taxable travel adjustments that do not reflect supervisory approval; issuing policies and procedures for long-term taxable travel and making them available on the CFO travel and relocation website; and issuing a memorandum to all Heads of Office re-emphasizing the policies and procedures associated with the classification of long-term taxable travel situations. Management’s complete response to the draft report is included as Appendix IV.
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 (Headquarter Operations and Exempt Organization Programs), at (202) 622-8500.
When Internal Revenue Service (IRS) employees incur and are reimbursed for long-term travel to temporary duty locations, the reimbursement, when meeting certain criteria, must be included as ordinary income and is taxable. Long-term taxable travel is typically described as either:
Ø Travel away from the employee’s home for more than one year or for which there is a reasonable expectation that such travel will last for more than one year; or
Ø Daily travel between the employee’s residence and a work location that is for more than one year or for which there is a reasonable expectation that such travel will last for more than one year.
When a long-term travel situation is identified, a Form 12654, Authorization for Long-Term Taxable Travel should be prepared by the employee and approved by the employee’s supervisor. The taxable situation results in the IRS withholding appropriate taxes from the employee’s travel reimbursement.
The IRS pays an Income Tax Reimbursement Allowance (ITRA) to employees incurring an additional income tax liability as a result of long-term travel reimbursements. The ITRA is designed to reimburse employees for Federal, state, and local income taxes. It does not reimburse employees for Federal Insurance Contribution Act (FICA) or Medicare taxes. The ITRA is authorized by the General Services Administration in the Federal Travel Regulations.
This audit was performed at the request of the IRS to evaluate the final procedures and system corrections that the Chief Financial Officer (CFO) developed to address the long-term taxable travel issue on the Travel Reimbursement Accounting System (TRAS).
Our review was conducted at the IRS’ National Headquarters in Washington DC; the Administrative Accounting Division in Bethesda, MD; and, the Beckley Finance Center (BFC) in Beckley, WV during the period May through October 2001. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The IRS has issued various memoranda and alerts announcing the long-term taxable travel rules. Implementation and processing personnel were generally aware of long-term taxable travel requirements. The IRS has also updated its TRAS to identify long-term taxable travel vouchers for manual withholding purposes.
Employees generally prepare and submit travel vouchers through the IRS’ TRAS. After approval by the employee’s supervisor, the travel voucher is up-loaded to the IRS’ Automated Financial System (AFS) for processing. Long-term taxable travel reimbursements are automatically suspended by the AFS for manual calculation of taxes to be withheld. Amounts are withheld for Federal and state income, Medicare, and FICA taxes. The IRS’ BFC performs these manual withholding calculations. The calculated amounts are netted from the employee’s travel cost reimbursement prior to disbursement. In addition, the BFC also processes adjustments that are necessary to correct prior withholding or non-withholding of taxes.
During calendar year (CY) 2000, the IRS withheld in excess of $1 million in Federal income taxes, $107,000 in state income taxes, $74,000 in FICA taxes, and $54,000 in Medicare taxes associated with long-term taxable travel reimbursements for 1,702 IRS employees.
Our review of judgmentally selected samples of employee long-term taxable travel vouchers processed during CY 2000 showed that Federal income, Medicare, and FICA taxes were accurately calculated. The sample included 215 travel vouchers with taxable income of approximately $522,600. These vouchers showed approximately $146,300 ($522,600 at the rate of 28 percent) in Federal income taxes withheld, $7,000 ($113,000 at the rate of 6.2 percent) in FICA taxes withheld, and $7,600 ($522,600 at the rate of 1.45 percent) in Medicare taxes withheld.
However, as presented later in this report, we believe that some of the taxes withheld were not sufficiently supported to warrant the withholding.
During the course of reviewing judgmentally selected samples of employee long-term taxable travel vouchers, we identified various instances where AFS/TRAS input errors occurred due to manually entering the transactions, including:
· One instance where an incorrect tax code was entered, resulting in an overstatement of federal wages of $13.
At the time of our review, the extent to which the IRS updated its TRAS involved only the identification by the reporting employee that taxable travel was being reported. The process of establishing taxable income and withholding taxes remained a manual system.
Entering incorrect information that affects an employee’s tax obligations could possibly cause the employee to not timely satisfy his/her tax liability. Since employees are reimbursed through the ITRA program for taxes withheld, the IRS could incur expenses associated with over-withholding. Also, the duplicate payment of a travel voucher, if not identified and returned by the receiving employee, would represent an unauthorized disbursement.
1. The IRS CFO should consider automating the long-term travel withholding process, including validity checks, as much as possible, given the types of manual errors identified during this audit.
Management’s Response: The IRS has updated the TRAS to perform the long-term taxable travel withholding process. The automated process includes systemic controls to ensure the computations and amounts are correct.
The BFC was not calculating and withholding state income taxes associated with AFS adjusting entries to correct previously recorded non-taxable travel transactions. We identified 16 adjustment entries included in our judgmental samples, totaling approximately $27,600 in taxable income, for which no withholding was made for state income taxes. These adjustment entries did, however, include withholding for Federal income, FICA, and Medicare taxes.
The BFC did not withhold state taxes because the IRS’ guidelines for correcting vouchers processed as regular travel that should have been long-term taxable travel state that, “Travelers should be informed that there will not be any state taxes withheld for these vouchers.” IRS staff informed us that this practice exists because corrected travel vouchers may involve prior tax years and the current state tax withholding may have changed. Since withholding amounts are calculated for other applicable taxes, we believe this practice is inconsistent in that the same standard should apply to all tax withholding.
Though the amounts associated with the state income tax withholdings may not be individually significant, not withholding applicable state income taxes could impact an employee’s ability to meet state income tax obligations.
2. The IRS CFO should reconsider its guidelines not to withhold state income taxes associated with long-term taxable travel adjustment entries, making them consistent with Federal income, FICA, and Medicare tax withholding practices.
Management’s Response: The IRS will evaluate this recommendation and make any necessary changes to enhance the accuracy of adjusting entries.
Our review of a judgmentally selected sample of 25 adjusting entries during CY 2000 showed that 10 were processed by the BFC without supervisory approval. These adjustment requests were received and processed based on e-mails and memorandums received directly from the requesting employees. The BFC, in an effort to be timely, processed the requests without assuring that they were approved by the traveler’s supervisor.
The Long-Term Taxable Travel guidelines require that requests for adjustments to previously recorded travel reimbursement transactions be sent through the employee’s supervisor for approval.
Without supervisory approval, unsubstantiated requests for adjustments may not be identified, especially when the adjustment is from a taxable travel status to a non-taxable status.
3. The IRS CFO should re-emphasize existing approval procedures associated with long-term taxable travel adjustments. Further, BFC managers should instruct their staff to reject all requests for long-term taxable travel adjustments that are not approved by the employees’ supervisor.
Management’s Response: The Beckley Finance Center staff implemented a requirement, in February 2001, to reject requests for long-term taxable travel adjustments that do not reflect supervisory approval.
Office of Audit Comment: We confirmed with Beckley Finance Center management that the implementation of this requirement was in the form of an oral directive during a staff meeting, and that written procedures were not prepared to reinforce the oral directive.
Our review of a judgmentally selected sample of 25 employees involving 34 low dollar/low volume long-term taxable travel vouchers processed during CY 2000 showed 22 vouchers that did not support a long-term taxable situation. These vouchers included $1,531 in taxable income, $718 in Federal taxes withheld, $55 in state income taxes withheld, $37 in Medicare Taxes withheld, and $45 in FICA taxes withheld. Most instances involved only one voucher for one month’s travel, or one adjusting entry for one to three months’ travel. Available Forms 12654 did not indicate travel of a nature that would be defined as long-term taxable travel. Further, some local travel, though performed in the same area, was to different locations.
Our review of a judgmentally selected sample of 10 employees involving 145 high dollar/high volume non-long-term taxable travel vouchers processed during CY 2000 showed 1 employee who filed 13 vouchers that appeared to support a long-term taxable situation. These vouchers totaled $16,753 and indicated regular mileage reimbursement for a 13-month period.
Incorrectly classifying regular travel as long-term taxable travel and processing the associated tax withholding causes employees to over pay FICA and Medicare taxes. Further, it causes the IRS to over-reimburse the employees for Federal and state income taxes associated with the ITRA program. Also, not classifying long-term travel accurately violates established tax reporting requirements.
4. The IRS CFO should re-emphasize existing procedures associated with the classification of long-term taxable travel situations, to ensure that all employees and managers are thoroughly familiar with long-term taxable requirements. The CFO should also consider using data analysis techniques, similar to the tests we performed, periodically to identify and correct potential misclassification of travel situations.
Management’s Response: The IRS has issued policies and procedures for long-term taxable travel and made them available on the CFO travel and relocation website. The CFO will issue a memorandum to all Heads of Office re-emphasizing the policies and procedures associated with the classification of long-term taxable travel situations, and asking them to ensure all employees and managers are thoroughly familiar with long-term taxable travel requirements.
The overall objective of this review was to determine whether the Internal Revenue Service (IRS) had developed and implemented effective procedures and system corrections necessary to address long-term taxable travel reporting requirements. To accomplish our objective, we:
A. Interviewed key Chief Financial Officer personnel familiar with long-term taxable travel recording to document the overall taxable travel recording operation.
B. Researched the laws and regulations associated with long-term taxable travel.
C. Obtained related correspondence, internal guidelines, web page announcements and memos (general and targeted), which were prepared by the IRS explaining the requirements of reporting long-term taxable travel.
D. Prepared a narrative overview of the long-term taxable travel recording operation, including associated risk if procedures are not established or followed.
E. Identified IRS processes/controls in place to ensure compliance with long-term taxable travel requirements.
F. Compared laws and regulations to IRS’ operation as documented in the cycle memo to ensure consistency.
A. Interviewed IRS functional implementation personnel regarding their responsibilities associated with long-term taxable travel recorded on the Travel Reimbursement Accounting System (TRAS).
B. Compared their responses for consistency with established requirements.
A. Obtained TRAS related updates.
B. Compared those updates to what is maintained on the system, and to established requirements.
A. Obtained an Automated Financial System (AFS) file of long-term taxable travel recorded by IRS employees for the period January 1, 2000 to December 31, 2000. This file also contains Form W-2 information.
B. Judgmentally selected a sample of long-term taxable travel vouchers obtained in step A and recalculated the withholding amounts manually assigned by the IRS’ Beckley Finance Center (BFC) for accuracy.
From the IRS-prepared database of 1,702 employees that reported long-term taxable travel on 10,292 vouchers in calendar year 2000, we judgmentally selected 25 employees based on a combination of a high number of vouchers filed (most averaged 8 vouchers during the year; 9 had less than 5) and a high dollar value (over $6,000 in the aggregate). This sample of 25 employees filed a total of 181 travel vouchers.
From this same database, we also judgmentally selected 25 employees based on a combination of a low number of vouchers filed (no more than 3) and a low dollar value (under $300 in the aggregate). This sample of 25 employees filed a total of 34 travel vouchers.
From this same database, we also judgmentally selected 25 employees that filed vouchers we considered unusual due to the reported beginning travel date being after the ending date, or the reported beginning travel date being prior to 1999.
C. Judgmentally selected a sample of Form W-2 information obtained in step A and verified in detail the accuracy of the long-term taxable travel reported using the employees’ travel vouchers and travel patterns (See above for sampling basis).
D. Obtained a file of long-term taxable travel adjustments entered into the AFS from January 1, 2000 to December 31, 2000, to identify the extent to which these adjustments were being made.
E. Judgmentally selected a sample of BFC adjustments obtained in step D and verified the accuracy of the adjustments using the employees’ travel vouchers, travel patterns, and any documentation to substantiate the adjustment.
From an IRS-prepared listing of 3,812 long-term taxable travel adjustments in calendar year 2000, we randomly selected a sample of 25 adjustments.
A. Obtained a file of non-long-term taxable travel recorded by IRS employees for tax year 2000.
B. Reviewed the file obtained in step A to identify any indicators of long-term taxable travel, i.e. high volume of high value travel vouchers, consistent monthly claims of mileage, etc.
C. Judgmentally selected a sample of travel vouchers by employee obtained in step A to identify any non-compliance with reporting requirements.
From the IRS-prepared database of 52,658 employees that reported no long-term taxable travel in calendar year 2000, we judgmentally selected 10 of 1,981 employees based on a combination of a high number of vouchers filed (15 or more), a high dollar value (over $5,000 in the aggregate), and the availability of records. We reviewed 145 available travel vouchers of the 181 filed by these 10 employees.
Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)
John R. Wright, Director
Thomas Brunetto, Audit Manager
Richard Louden, Senior Auditor
Gary Pressley, Senior Auditor
Gwen Bryant-Hill, Auditor
Linda Douglas, Auditor
Bobbie Draudt, Auditor
Deputy Commissioner N:DC
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: Chief Financial Officer N:CFO
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.