Additional Management Actions Should Be Taken to Ensure That Government Entitiesí Customers Meet Their Federal Tax Obligations
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 Entitiesí 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.
Managementís 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 IRSí 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.† Managementís 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.
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 Divisionís 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 organizationís 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 organizationís 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 managementís 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 customersí 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 organizationís 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 organizationís efforts to improve its customersí 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 customersí 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/SEís 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.
Managementís 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 organizationís vision to improve customer compliance with the federal tax laws.
Managementís 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 FSLGís 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.
Managementís 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.
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 officesí 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 officesí 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.
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
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
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.
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.