Additional Management Actions Should Be Taken to Ensure That
Government Entities’ Customers Meet Their Federal Tax Obligations
September
2002
Reference
Number: 2002-10-123
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.
September 11, 2002
MEMORANDUM FOR
COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Acting Inspector General
SUBJECT: Final Audit Report - Additional
Management Actions Should Be Taken to Ensure That Government Entities’
Customers Meet Their Federal Tax Obligations (Audit # 200110011)
This
report presents the results of our review to determine whether the Federal, State, and Local Governments and Indian
Tribal Government Organizations have effective processes to monitor taxpayer
compliance with their federal tax requirements.
The
primary mission of the Government Entities (GE) organization is to assist
customers in understanding their tax obligations, to identify compliance
issues, and to correct non-compliance through customer education and outreach
programs. Our review found that the GE
organization does not have an effective agreement with the Small
Business/Self-Employed (SB/SE) Division to ensure its customers comply with the
federal tax requirements for the submission of tax returns and related
payments. Over 12,000 federal, state,
and local entities were identified as delinquent during Calendar Years 1999,
2000 or 2001.
Management’s
Response: The Tax Exempt and Government Entities
(TE/GE) Division agreed with the general findings, specifically that the
organization can improve its processes of providing tax obligation assistance
to its GE customers by working more closely with the SB/SE Division. The TE/GE Division has developed a more
detailed Memorandum of Understanding and is working with the SB/SE Division to
determine ways to provide a higher priority for their cases. They are also working to deal with their
customers in a customer-friendly manner instead of relying on enforcement tools to ensure tax compliance.
Although TE/GE management agreed to initiate adequate corrective action
in response to our recommendations, their comments on the draft report
indicated that cases related to federal, state, and local governments represent
a small portion of the IRS’ accounts receivable. As such, they do not believe a good case for increased emphasis
exists. In response to their concern,
we conducted additional analysis to provide management with the number of
government entities with tax balances due or tax returns outstanding as of July
13, 2002, for calendar years 1999 through 2001. A revised draft report was provided to TE/GE management with this
information; however, they have advised us that they do not plan on updating
their original response. Management’s
complete response to the draft report is included as Appendix V.
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 – Management’s Response to the Draft Report
The Internal Revenue Service (IRS) Restructuring and Reform
Act of 1998 (RRA 98) resulted in the IRS designing a new Tax Exempt and
Government Entities (TE/GE) Division built around specific groups of taxpayers
with similar needs. Although generally
paying no income tax, the TE/GE sector does pay over $220 billion in employment
taxes and income tax withholding. The
TE/GE Division assumed responsibility for the customers of the Employee Plans
and Exempt Organizations functions that existed prior to the Division’s
creation. In addition, it has
responsibility for serving the needs of the federal, state, and local
government entities as well as sovereign Indian tribal governments. A critical challenge facing the TE/GE
Division is the establishment of its Government Entities (GE) organization.
The GE organization is designed around its customer
segments. The GE organization consists
of three functional offices: Tax Exempt
Bonds; Federal, State, and Local Governments (FSLG); and Indian Tribal Governments
(ITG). These offices did not exist
prior to the creation of the new TE/GE Division.
The primary mission of the GE organization is to assist
customers in understanding their tax obligations, to identify compliance
issues, and to correct non-compliance through customer education and outreach
programs. The FSLG office will address
the tax issues of approximately 86,000 federal, state, and local
government entities, as well as United States possessions and several
quasi-governmental entities. The ITG office
customers include over 800 federally and non-federally recognized Indian tribes
and their government subdivisions and agencies, as well as numerous economic
enterprises, including gaming casinos.
There are unique challenges associated with meeting the
expectations of each GE customer segment.
The Indian tribal government gaming and related economic development is
rapidly expanding nationwide. For
example, the number of Indian casinos has grown from just 2 in 1990 to 270 in
2000. With almost $10 billion in
revenues last year, the Indian-owned gaming industry has surpassed Nevada as
the top revenue-producing gaming market.
As a result of the increase in Indian tribal revenue and related
enterprises, the tax reporting requirements for these Indian tribal nations has
become highly complex and will place greater demands on the GE organization’s
compliance programs.
Historically, there has been limited oversight of tax
compliance by the federal, state, and local government entities and the Indian
tribal nations. Prior to the IRS
modernization, addressing the tax compliance issues that these customers
experienced was the responsibility of several organizational entities within
the IRS. For instance, the IRS
Collection office was responsible for resolving the compliance issues that
occurred when IRS customers did not timely comply with the federal tax laws for
submitting tax returns and related payments.
The GE organization now has primary responsibility for its
assigned customer groups. However, some
of the support work is performed by other IRS business units. For example, the GE organization collection
support actions are performed by the Small Business/Self-Employed (SB/SE)
Division.
We evaluated the GE organization’s efforts to build a
customer tax compliance program. We
focused our efforts on the business relationship that the GE organization has
established with the SB/SE Division because this relationship is critical to
the effectiveness of the collection actions taken by the SB/SE Division.
The audit was conducted between May 2001 and February 2002
at the TE/GE Division Headquarters Office in Washington, DC. In response to TE/GE management’s comments
on the draft report, additional data analysis was conducted in August 2002. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objective,
scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The GE organization does not have an effective agreement
with the SB/SE Division to ensure its customers comply with the federal tax
requirements for the submission of tax returns and related payments. We determined that 74,990 federal, state,
and local entities filed tax returns and/or submitted tax payments to the IRS
during Calendar Years (CY) 1999, 2000 or 2001.
However, 12,878 of these entities were identified as delinquent during
CYs 1999, 2000 or 2001. At the time of
our initial review, historical data were unavailable for us to assess the
compliance rate for Indian tribal governments.
Federal, state, and local entities and the Indian tribal
nations are required to comply with federal tax requirements. The GE organization established a Memorandum
of Understanding (MOU) with the SB/SE Division to obtain collection services;
however, the MOU expired in September 2001 and the GE organization had not
finalized a new agreement. The expired
MOU provided general descriptions of the collection services to be performed
but did not clearly define the processes that would be used to ensure that GE
customer non-compliance issues are addressed by the SB/SE Compliance
organization.
Although the TE/GE Division and GE organization strategic
plans developed for Fiscal Year 2002 recognized the necessity to establish a
partnership with the SB/SE Division, the plans did not specify the process to
be implemented by the GE organization to coordinate and evaluate the support
work performed by the SB/SE Division.
Until the strategic plans include clear objectives for coordinating and
evaluating the collection support services, the GE organization management team
will not be able to ensure that its customers’ compliance issues are addressed
by the SB/SE Division.
Additional analysis of the federal, state, and local
entities that were delinquent during CYs 1999, 2000 or 2001 showed that as of
July 13, 2002:
Neither the GE organization nor the SB/SE Compliance
organization developed an effective process to monitor GE organization
customer compliance issues. Even though
the employment codes on IRS automated systems that identify federal, state, and
local entities do not distinguish between state and local agencies, the tax
information on the systems may still be used to monitor customer compliance
with the federal tax laws. However,
neither the GE organization nor the SB/SE organization effectively used
available tax data to plan the collection support work. The GE organization expressed concerns that
it did not have the necessary resources to properly evaluate the non-compliance
issues.
The SB/SE Compliance organization managers indicated that GE
organization customers would continue to not receive a high priority next
year. The SB/SE Compliance organization
uses a risk analysis that does not place a high priority on working GE customer
cases because the GE organization customer compliance issues were not
known when the collection support actions were planned.
Because the GE organization must compete with other IRS
organizations for collection resources, some GE customer compliance issues may
not be addressed. We believe the GE
organization has an opportunity to ensure GE customer compliance issues are
considered by the SB/SE Division when it plans the collection support
work. This collection support work will
help educate the GE customers on the tax laws.
Until GE customers are informed of their compliance issues, they may
experience recurring tax delinquencies, which will create additional burden for
these taxpayers and the IRS.
The SB/SE Office of Compliance Policy informed us that it
welcomed a partnership with the GE organization to better plan the collection
work. Currently, the SB/SE Compliance
organization develops the annual collection strategy and action plans without
any significant input from the GE organization. The collection plans determine the emphasis areas and priority
for working the inventory of collection cases.
The managers responsible for planning the collection work informed us
that the GE organization could play a key role in the annual planning process
if processes were developed to work together to plan the GE organization
collection work.
In addition, the SB/SE Compliance organization advised us
that its Strategy, Research & Performance Management office could provide
the GE organization with the necessary collection information to facilitate its
planning of collection actions for GE customers. The information provided could enhance the GE organization’s
efforts to determine the effectiveness of collection support actions. Also, the information could provide
statistical data related to the current inventory of collection cases (for
example, the customer type for cases worked, percentage of dollars collected,
and priority of cases scheduled to be worked by the SB/SE Compliance
staff). We believe the information
provided by the SB/SE Compliance organization would benefit the GE organization
planning processes.
The establishment of a partnership between the GE and the
SB/SE Compliance organizations would enhance the GE organization’s
efforts to improve its customers’ ability to comply with the federal tax
laws. Without using the SB/SE
Compliance organization resources that are trained to address non-compliance
issues, the GE organization is limiting its ability to address the
non-compliance conditions that its customers experience. Also, without an effective partnership with
the SB/SE Compliance organization, the GE customers’ compliance issues may not be
timely addressed and, as a result, create additional recurring burden for the
GE organization and its customers.
The Commissioner, TE/GE Division, should:
1. Provide the necessary resources to better evaluate the
collection compliance issues experienced by GE organization customers. Additional efforts should be taken to use
the SB/SE’s Strategy, Research & Performance Management office to extract and report the collection information that is
currently available through access to IRS automated systems. The results of the analysis should be used
to better plan the collection support work actions that are requested by the GE
organization.
Management’s Response: The TE/GE Division
developed a MOU with the SB/SE Compliance organization which includes a process
to provide FSLG balance due account data to plan collection support work.
2.
Ensure that the TE/GE
Division strategic planning process includes the objective to develop an
effective planning process with the SB/SE Compliance organization when
requesting collection services. Also,
the strategic plans should specify that processes be developed to better
determine if the support actions will meet the GE organization’s vision to
improve customer compliance with the federal tax laws.
Management’s
Response:
FSLG will include an objective in the strategic plan to develop an
effective planning process with SB/SE Compliance to ensure the support actions
from SB/SE Compliance meet FSLG’s vision to improve customer compliance when
requesting collection services.
3.
Include in the MOU with the SB/SE
Division a process for planning the collection support work. The process should describe the methodology
for providing GE organization input when the SB/SE Compliance organization
prepares its annual work plans. The
methodology should include the processes for providing the GE organization
collection emphasis areas and the priority for working these areas.
Management’s
Response:
The TE/GE Division developed a MOU with the SB/SE Compliance
organization that describes the methodology for providing collection support
work for FSLG priority cases.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of the audit was to determine whether
the Federal, State, and Local Governments (FSLG) and Indian Tribal Governments
(ITG) Organizations have effective processes to monitor taxpayer compliance
with the federal tax requirements. To
accomplish this objective, we:
I.
Evaluated FSLG and ITG offices’
efforts to develop an effective program to monitor taxpayer compliance with
federal tax laws.
A. Researched
the federal tax requirements for Federal, State, and Local governments and
Indian tribal entities and evaluated the FSLG and ITG offices’ efforts to
identify these requirements.
B.
Evaluated the status of Tax
Exempt and Government Entities Division modernization plans and initiatives to
develop an effective process to identify and resolve compliance issues.
C.
Evaluated the effectiveness
of any procedures/tools used by the FSLG and ITG offices to monitor taxpayer
compliance with the federal laws.
D.
Identified and evaluated any
processes and procedures established with the Small Business/Self-Employed
Division Compliance organization when resolving compliance issues.
II. Evaluated
federal entity tax compliance information reported by the Summary Report for
Federal Late Filers and identified federal entity customer accounts with:
·
Missing or late tax returns.
·
Missing or late tax payments.
III.
Obtained an extract of
customer tax information as of July 13, 2002, for 12,878 federal, state, and local government entities that did not
file tax returns and/or did not submit tax payments in accordance with the
federal tax laws during Calendar Years 1999, 2000 or 2001. Analyzed this extract to identify:
A.
Accounts/modules with tax
returns due that had not been filed.
B.
Accounts/modules with balance
due conditions.
Appendix II
Major Contributors to This Report
Daniel R.
Devlin, Assistant Inspector General for Audit (Headquarters Operations and
Exempt Organizations Programs)
Michael E.
McKenney, Director
Scott P. Begley,
Audit Manager
Michael A.
Levi, Audit Manager
Regina A.
Dougherty, Senior Auditor
William A.
Floyd, Senior Auditor
S. Kent
Johnson, Senior Auditor
Thomas F.
Polsfoot, Senior Auditor
Barbara A.
Sailhamer, Senior Auditor
Angela
Garner, Auditor
Richard E.
Louden, Auditor
Carolyn D.
Miller, Auditor
Appendix III
Commissioner N:C
Commissioner,
Small Business/Self Employed Division S
Deputy
Commissioner, Tax Exempt and Governmental Entities Division T
Director,
Compliance S:C
Director,
Government Entities T:GE
Deputy Director,
Compliance Policy S:C
Director,
Federal, State, and Local Governments
T:GE:FSLG
Director, Indian
Tribal Governments T:GE:ITG
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: Tax Exempt and Government
Entities Division T
Appendix IV
This appendix presents detailed information on the
measurable impact that our recommended corrective actions will have on tax
administration. This benefit will be
incorporated into our Semiannual Report to the Congress.
Type and
Value of Outcome Measure:
Methodology
Used to Measure the Reported Benefit:
The balance due tax accounts were identified using an
extract of tax information (as of July 13, 2002) that federal, state,
and local government entities submitted to the IRS for their 1999, 2000 or 2001
tax periods. The extract was analyzed
to identify federal, state, and local government entities that had not
submitted the required tax payments at the time of our analysis.
Appendix V
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.