Additional Improvements Will Better Focus the Employee Plans
Function’s Examinations Workplan on Areas That Identify and Correct
Noncompliance
August 2002
Reference
Number: 2002-10-143
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.
August 16,
2002
MEMORANDUM
FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report – Additional Improvements Will Better Focus the Employee Plans Function’s Examinations Workplan on Areas That Identify and Correct Noncompliance (Audit # 200110051)
This report presents the
results of our review of the Employee Plans (EP) function’s annual examination
workplan. The objective of this review
was to assess the effectiveness of the EP
function’s examination planning process.
In
summary, we found that, with the
exception of the Local Classified Issues category, the workplan is structured
to enable EP to identify and correct noncompliance within employee benefit
plans. Local Classified Issues
examinations did not help EP Examinations meet its mission because this
category was not designed to focus on areas representing the greatest risk of noncompliance.
Our review of recent selections from this category determined that most
were not directed to known areas of noncompliance nor were they designed to
develop areas of noncompliance.
Although these selections provided work to examiners and helped the EP
function meet its performance goals, such as “total closures,” they were not an
effective use of EP’s resources and they added unnecessary burden, in terms of
time and expense, to taxpayers.
In addition, we determined
that Local Classified Issues selections were often employee benefit plans with
less than 25 participants. This was not
in accordance with the Internal Revenue Service’s (IRS) Fiscal Year 2002 Annual
Performance Plan, which states that available examination resources would focus
on employee benefit plans that cover the greatest number of participants.
Furthermore, our review
indicated that EP Examinations’ workplan does not include various scenarios
upon which to base the selection of additional returns when examination
resources are not used to process determination letters.
We noted that the Director,
EP Examinations, envisions future examination workplans will contain more specialized
work because the EP function has incorporated a market segmentation approach to
achieve its mission of identifying and correcting noncompliance.
Management’s Response: The
Commissioner, Tax Exempt and Government Entities Division, has implemented our
recommendations by taking the following actions.
·
Establishing the Risk
Assessment Program and engaging the services of the Research and Analysis staff
to ensure that returns selected for examination have a high probability of
noncompliance.
·
Continually updating
the risk assessment data and changing examination focus when warranted, based
on the results of examinations, to ensure returns selected for examination
further EP’s mission of identifying and correcting noncompliance.
·
Incorporating language
into the workplan guidelines on how to use the number of participants in a plan
when selecting returns for examination.
In addition, the EP function
is attempting to change the determination letter process to improve the flow of
applications by considering 10 possible long-term options. This, along with the possible establishment
of a dedicated workforce to process determination letters, will simplify the
process for developing the examination workplan. Management’s complete response to the discussion draft report is
included as Appendix IV.
Copies of this report are
also being sent to the Internal Revenue Service 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.
Including Scenarios Can Be Integral in Developing Flexible Future Workplans
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Management’s Response to the Draft Report
The Employee Plans (EP)
function within the Tax Exempt and Government Entities (TE/GE) Division has
responsibility for ensuring compliance with the Internal Revenue Code (I.R.C.)
sections and regulations governing employee benefit plans. Employers
or other plan sponsors operate approximately 969,000
tax-qualified employee benefit plans with approximately $4.1 trillion in assets. Employers or plan sponsors are required to
submit an Annual Return/Report of Employee
Benefit Plan (Form 5500) or Annual Return of One-Participant Retirement
Plan (Form 5500-EZ) each year.
The qualification requirements under the I.R.C. for
employee benefit plans are enforced by the EP function. A benefit plan that meets the qualification
standards of the I.R.C. is accorded special tax treatment under present
law. The employer is entitled to a
current deduction for contributions to a qualified employee benefit plan even
though the contributions are not currently included in an employee’s
income. Contributions to a qualified
employee benefit plan are held in a tax-exempt trust.
If an employee benefit plan fails to meet the
qualification requirements, then the favorable tax treatment for such plans may
be denied; that is, the employer may lose tax deductions and employees may have
to report benefits on their tax returns.
As a practical matter, the EP function rarely disqualifies an employee
benefit plan. Instead, it may impose
sanctions short of disqualification and require the employer to correct any
violation of the qualification rules.
The EP function consists of three major program
areas, each of which focuses on ensuring employers and plan sponsors are
complying with the law: Customer
Education and Outreach (CE&O), Rulings and Agreements (R&A), and
Examinations.
·
The CE&O Program focuses
on helping EP external customers understand their tax responsibilities by
developing tailored education programs.
·
The R&A Program focuses
on up-front compliance programs, such as determination letters. Many employers request a determination
letter from the IRS to obtain assurance that the terms of their plans satisfy
the qualification requirements. The
Determination Letter Program receives priority over other compliance activities
because EP is required by law to issue determination letters upon request.
·
The Examinations Program
seeks to
identify and correct noncompliance by conducting focused, efficient
examinations; resolving issues at the lowest possible level (to allow employers
to identify and correct deficiencies prior to IRS adjudication); and ensuring
consistency and fairness in the application of the law.
In April 2000, the TE/GE Division commenced centralizing the EP
Examinations Program in Baltimore and established six new area offices,
replacing the former Key District Office structure. The area offices report to the Director, EP Examinations, located
at the new centralized examination site.
By making this change, the TE/GE stated it would be in a better position
to manage its resources and respond quickly to customer needs.
The EP Examination Planning and Programs (EPP) staff has responsibility for developing the annual workplan guidelines and preparing and monitoring the examination workplan. The workplan shows how resources will be allocated to the various examination categories.
The EP Examinations’ workplans prepared for Fiscal Years (FY) 2001 and 2002 were affected by the number of requests for determination letters expected during these years. The Director, EP Examinations, expected that 63 percent of examination resources would be used to process these determination letters in FY 2002.
We conducted this audit from September 2001 to April 2002 at
the National Headquarters Office, the centralized examination site, and the
Central Mountain, Great Lakes, Northeast, and Pacific Coast Area Offices. This audit was conducted in accordance with Government Auditing Standards; however, we did not verify the accuracy of
the data obtained from EP’s management information reports.
Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Our review determined that the EP Examinations’ workplan did not ensure
that discretionary examination work (primarily the Local Classified Issues
category) was effective in identifying and correcting noncompliance. Over half of the available examination
resources in FY 2001 were spent auditing employee benefit plans that were primarily
compliant. The trend in FY 2002, through
the first quarter, was to continue with these same types of examinations.
According to the FY 2002 Examinations’ workplan, the EP function
expected to close approximately 6,000 employee benefit plan examinations. In FY 2001, EP Examinations closed approximately
11,000 examinations. The reduced level of examination closures
expected for FY 2002 reflects the diversion of significant resources to process
the anticipated volume of determination letter requests.
The FY 2002 Examinations’ workplan allocated 27,465 workdays for direct
examinations, with the majority of the workdays directed to four major
categories. Three of the four are
mandatory (non-discretionary) work that examiners will work each year. Some
of this work, such as referrals and claims, is dependent on the number that are
available for examination. The three
non-discretionary categories include:
·
Casework. These are defined as examinations
that arise from known noncompliance activities of taxpayers. Examples include referrals and claims. This
also includes the Employee Plans Team Audit that focuses on plans with 2,500 or
more participants, among other criteria.
·
Nationwide Examinations. These are defined as mandatory compliance
activities such as examining pension underfunding, issued waivers, and
multiemployer plans.
The remaining workdays
are assigned to discretionary work, which are general examinations that provide
flexibility to EP Examinations in years when examiners are needed to process
determination letter requests. The
category receiving the largest allocation of these remaining workdays is known
as:
·
Local Classified Issues. These are defined as examinations based on using the Returns and
Inventory Classification System (RICS) to identify potential issues of
noncompliance but where the population may be too small to warrant a research
sample.
Table 1 shows the
allocation of the 27,465 workdays to the various direct examination categories:
Table 1. FY 2002 Direct Examination Budgeted Workdays
|
Examination Category |
Workdays Budgeted |
Percentage of Total Direct Exam Time for Each Category |
|---|---|---|
|
Casework |
10,647 |
39 |
|
Local
Classified Issues |
8,858 |
32 |
|
Compliance
Research Program |
5,708 |
21 |
|
Nationwide
Examinations |
1,101 |
4 |
|
Training
Cases |
891 |
3 |
|
Sample
Result Cases |
146 |
.5 |
|
General
Cases |
114 |
.4 |
|
|
Source:
FY 2002 Examinations’ Workplan
We analyzed EP accomplishment
reports, examination data from the RICS, and held discussions with applicable
EP personnel to determine if the major categories of the FY 2002 Examinations’
workplan are designed to accomplish the EP function’s goal of identifying and
correcting noncompliance. This goal is
also part of the Internal
Revenue Service’s (IRS) Strategic Plan which states that it is essential that the
IRS apply its limited resources where they will be of most value in reducing
noncompliance while ensuring fairness, observing taxpayer rights, and reducing
the need to burden those who do comply.
We determined that the three non-discretionary categories of EP
Examinations’ workplan are focused on identifying and correcting noncompliance
within employee benefit plans. The
Casework and Nationwide Examinations categories are currently designed to
examine the types of employee benefit plans that prior examinations have shown
are not always in compliance with the law.
The Compliance Research
Program has a different purpose. It is designed to determine the extent of
noncompliance within EP’s market segments.
For example, examiners conduct examinations using statistically
valid samples to measure the level of compliance within EP’s market
segments. If there is a high no change
rate (no adjustments are needed to the Form 5500 returns) for examinations in
one of the market segments, it is an indication that the benefit plans in that
market segment are compliant with the law.
If there is some degree of noncompliance requiring changes to the Form
5500 returns, EP can: conduct a follow-up
project to identify specific noncompliant areas, incorporate the area of noncompliance
into the workplan in one of the non-discretionary examination categories, or
notify CE&O about the area of noncompliance identified so it can implement
a customer education program.
However, the remaining
major category, Local Classified Issues, did not help EP Examinations meet its
mission of identifying and correcting noncompliance because this category is
not designed to focus on areas representing the greatest risk. This is evidenced by the 79 percent no
change rate for examinations of Local Classified Issues closed during FYs 1997
through 2001.
Table 2 shows the
percentage of the examinations for these four categories that resulted in “no
change” according to EP accomplishment reports for FYs 1997 through 2001.
Category
|
Total Number of Examinations |
Percentage of Examinations With No Change |
|---|---|---|
|
8,696 |
31 |
|
|
27,805 |
60 |
|
|
Nationwide Examinations |
3,713 |
31 |
|
Local Classified Issues |
11,078 |
79 |
Source: EP
Function Accomplishment Reports
Effectiveness of
Local Classified Issues condition codes
The Local Classified
Issues category consists of condition codes, created by EP, that specify the
primary issue for the selection of a return for examination. In FY 2001, there were just over 100 total condition codes, with each
of the four geographic areas having its own set of condition codes.
This led to
inconsistencies in the types of returns selected for examination within this
category. In FY 2002, those condition
codes were consolidated into a single, uniform listing of 17 condition codes
based on a review by EP management of historical examination information and
consideration of their own past experience.
To determine the cause
of the high no change percentage for the Local Classified Issues category, we
analyzed the examination selections for FY 2001 and the first quarter of FY
2002, with information from the RICS.
We determined the total number of selections for each of the condition
codes used during those periods. We
then compared this information to the results of previous examinations
conducted within those condition codes to determine if the prior activity
warranted those selections. In
addition, we reviewed the condition codes used to determine if they contained
issues or characteristics that would enable EP to identify noncompliance within
its market segments.
Our review of those
recent selections from the Local Classified Issues category determined that
most condition codes are not directed to known areas of noncompliance nor are
they designed to develop areas of noncompliance.
There were nearly 7,000 Local Classified Issues selections in FY 2001 and approximately 1,450 in the first quarter of FY 2002.
We analyzed
approximately 6,900 selections made in FY 2001 and determined that nearly 5,100
(74 percent) were not focused towards areas of risk. As of December 2001, we found that approximately 2,700 of these
6,900 selections were examined and closed.
Of the 2,700 closed examinations, 91 percent resulted in a no change.
The
following is an approximated breakdown of these exceptions and why we believe
they did not fulfill the EP function’s objective for examinations.
Ø
Approximately
1,300 selections were from condition codes where the
previous examinations (as of October 1, 2000) within those condition codes did
not indicate noncompliance. For
example, we took exception to a selection if 200 previous examinations, within that
condition code, collectively had a no change rate of 88 percent.
Ø
Approximately 3,800 selections were general in nature and either contained no
criteria or issues to identify potential noncompliance or placed emphasis on
the experience level of the examiner, which may not be an indication of noncompliance. For example, employee benefit plans were
selected because they were not examined during the last 5 years. This selection criterion did not contain
attributes that would identify a pattern of noncompliance.
From our
analysis, we concluded that there appeared to be no compliance related
justification for spending over half of the available examination resources in
this category during FY 2001.
Our
review of the approximately 1,450 selections made during the first quarter of
FY 2002 determined that nearly 800 (53 percent) were made from condition codes
where the previous examinations within those condition codes did not indicate
noncompliance. In addition, nearly 400
of the 1,450 selections (27 percent) were made from a condition code with a
history of 50 previous examinations resulting in a no change rate of 94
percent.
The ineffectiveness of
these selections occurred because existing procedures for selecting returns
from the Local Classified Issues category did not ensure that returns were
selected either from known areas of noncompliance or to develop the extent of
noncompliance within an area. The lack
of a clear goal or purpose for these examinations led to this ineffectiveness.
As stated earlier,
according to the workplan guidelines, Local Classified Issues examinations
should be selected to identify issues of noncompliance where the population may
be too small to warrant a research project.
Selection criteria for these cases include factors in addition to
geographic location and/or case grade.
The EPP staff believed that cases are selected from Local Classified
Issues condition codes where previous examinations resulted in the lowest no
change percentage. As stated earlier,
our analysis did not show this. In
addition, various EP Examinations management referred to the Local Classified
Issues examinations as more general in nature or “filler work.”
Another factor in the
ineffectiveness of these examinations could be a competing performance
goal. The Local Classified Issues types
of examinations helped EP meet its performance goal for “total closures” in FY
2001. EP closed a total of
approximately 11,000 examinations in FY 2001, with approximately 6,000 of these
being Local Classified Issues closures.
Consequently, EP Examinations
resources assigned to examine returns selected as part of this category are not
the most effective use of resources.
Also, auditing compliant employee benefit plans with little or no
indication of noncompliance adds unnecessary burden, in terms of time and
expense, to taxpayers.
Employee benefit
plan participants affected by Local Classified Issues selections
In addition to our review of the effectiveness of the Local Classified Issues condition codes, we reviewed participant information to determine the number of participants affected by these selections. The IRS’ FY 2002 Annual Performance Plan states that available examination resources would focus on employee benefit plans that cover the greatest number of participants. However, our review of Local Classified Issues examination selections for FY 2001 and the first quarter of FY 2002 determined that these selections were often employee benefit plans with less than 25 participants.
We analyzed approximately 8,400 employee benefit plans selected in FY 2001 and the first quarter of FY 2002 and found that approximately 4,200 had fewer than 25 participants. These plans represented about 33,200 plan participants, or an average of 8 per plan.
One reason we believe this occurred is because the workplan guidelines did not specify to use the size of the employee benefit plan as a factor when selecting discretionary work. IRS management informed us that another factor in assigning plans with smaller numbers of participants was the grade level of the employee. Smaller plans were assigned to lower graded employees. Nonetheless, the small size of the plans (together with the ineffectiveness of the condition codes) added to the inefficient use of examination resources.
While a
majority of the employee benefit plans nationwide have fewer than 10 participants,
we believe EP should select plans with the largest possible
number of participants when all other selection criteria are equal. For example, EP should select an employee
benefit plan with 65 participants, rather than a plan with 2 participants if
both plans can be worked by examiners at a particular grade level. This
approach would mirror the expectation for
the EP Examinations Program as stated in the IRS’ FY 2002 Annual Performance
Plan.
EP’s reliance
on Local Classified Issues examinations when expected determination letter
requests do not materialize
EP has anticipated a significant increase in the amount of resources needed to process requests for determination letters since FY 1998 based on changes in laws affecting employee benefit plans. Accordingly, EP has allocated more resources to the Determination Letter Program and fewer resources to the Examinations Program. When the volume of determination letter requests was not as high as anticipated, EP shifted resources back to the Examinations Program and has increasingly relied on the Local Classified Issues category in assigning work to examiners. Table 3 illustrates the affect on the Local Classified Issues category when the expected amount of determination letters did not materialize.
Table 3. Comparison of Planned vs. Actual Workdays (Fiscal Years) |
|||
|
|
1999 |
2000 |
2001 |
|---|---|---|---|
|
Planned Workdays for Determinations |
38,814 |
39,721 |
41,109 |
|
Actual Workdays for Determinations |
28,161 |
25,103 |
25,228 |
|
Planned Workdays for Local Classified Issues |
1,573 |
7,831 |
13,910 |
|
Actual Workdays for Local Classified Issues |
7,206 |
18,914 |
26,053 |
Source: EP
Function Technical Time Reports
In FY 2002, the EP function initiated additional research projects after it learned that determination letter receipts would be delayed. These four Compliance Research projects were based on a risk assessment conducted in FY 2001. Even though EP has undertaken these new compliance initiatives, the Local Classified Issues category is still a large part of the Examinations Program.
The amount of time budgeted for the Local Classified Issues category for FY 2002 was 8,858 workdays. As of mid-year, EP exceeded this amount by spending 9,397 workdays on these types of examinations. If EP continues to work Local Classified Issues at this pace for the remainder of the year, it will spend nearly 19,000 workdays conducting these types of examinations.
The Director, EP Examinations stated that he foresees the Local Classified Issues category as being a small part of future workplans as EP Examinations progresses towards a market segmentation approach. He added that this category will not drive future workplans but will remain as a training tool for future agents.
Until the Local Classified Issues category becomes a small part of future workplans, we believe that EP needs to institute procedures to ensure these types of examinations are effective in helping EP meet its mission of identifying and correcting noncompliance.
The Commissioner, TE/GE Division, should:
1.
Issue guidance clarifying the expectation for the Local
Classified Issues category of examinations to ensure returns selected further
EP Examinations’ mission to identify and correct noncompliance.
Management’s Response: In order to
ensure that returns selected for examination have a high probability of
noncompliance, TE/GE management implemented a new process called the Risk
Assessment Program. A key part of the
program includes refinement of their methodology for selecting returns for
examination by using the compliance history of both individual taxpayers
and market segments. Returns are no
longer being selected using the Local Classified
Issues category. TE/GE management has
actively engaged the services of their Research and Analysis staff in this
process to ensure that returns with the highest probability for noncompliance
are selected for examination.
2.
Develop
formal procedures to ensure that, periodically, condition codes are properly
added (when there are indications of noncompliance) or removed (when previous
examinations do not indicate an area of noncompliance) from the Local
Classified Issues category of examinations to achieve the goal(s) established
in Recommendation 1.
Management’s Response: TE/GE management is no longer using the Local Classified Issue category of examinations. They are continually updating the risk assessment data and will change their examination focus when warranted, based on the results of examinations.
3.
Add language to future workplan guidelines to ensure that
employee benefit plans covering the greatest number of participants are
selected for examination when all other selection criteria are equal.
Management’s Response: TE/GE management
will include a comment in the FY 2003 workplan guidelines on how they will use
the number of participants in the selection of returns for examination.
The EP Examinations’ workplan does not include various scenarios upon which to base the selection of additional returns when examination resources are not used to process determination letters. This condition existed because the workplan was structured to support the volume of determination letter receipts and did not contain alternatives if the volume did not materialize. For example, prior to FY 2001, the EP function anticipated that determination letter receipts would total 100,000. As a result, the FY 2001 workplan assumed these projected receipts in allocating staffing resources and did not consider other alternatives. When these projected receipts did not materialize, the EP function allocated its available examination resources to conducting Local Classified Issues examinations. As we have previously shown, these examinations are not an effective use of EP’s resources.
According to the General Accounting Office standards for effective internal controls, management should identify and analyze risks that could impede the efficient and effective achievement of program objectives. This includes identifying any risks inherent to the nature of the program’s mission or to the significance and complexity of any activities it undertakes. The EP function’s management should include in the EP Examinations’ workplan different options or scenarios in case examination resources are not needed to process determination letters during the year. The scenarios should identify how available resources should be directed to examinations that will help accomplish the mission of the program.
The EP function has historically overestimated the number of determination receipts expected because planning for the number of receipts is an imprecise science. The EP function tries to estimate how many employers or plan sponsors will request a determination letter. It has erred on the conservative side, preferring to commit resources upfront to process determination letters rather than trying to reassign examiners in the middle of an examination to process determination letters as they are received.
Table 4 illustrates the planned and actual determination letter receipts for FYs 1999 through 2001 and the effect on the Examinations Program when the expected receipts did not materialize.
Table 4. Impact of Determination Receipts on the Examinations Program |
|||
|
|
FY 1999 |
FY 2000 |
FY 2001 |
|---|---|---|---|
|
Determination
Letters Expected |
216,300 |
70,000 |
100,000 |
|
37,177 |
27,005 |
30,492 |
|
|
40,386 |
31,013 |
34,964 |
|
|
Actual
Direct Examination Workdays |
53,498 |
50,271 |
48,854 |
Source: EP Function
Management Information Reports and Workplans
The EP function acknowledges that its workplans must be flexible to adjust for significant changes, especially a shortfall, in the timing or number of determination receipts received during the year. For example, EP revised the FY 2001 workplan at mid-year because EP management realized their methodology for estimating the timing of receipts incorrectly assumed the increase would begin earlier and progress ratably throughout the fiscal year. As a result, approximately 13,000 workdays were reprogrammed into the Local Classified Issues category. According to EP Examinations staff, this was done because these examinations result in a quick turnaround time, thereby providing a smooth transition later in the year if a sudden increase in requests for determination letters required movement of the examiners back to processing determination letters. However, the increase did not materialize and the resources were spent conducting Local Classified Issues examinations the rest of the year.
During FY 2002, EP management implemented additional research projects when determination letter requests did not materialize as anticipated. The FY 2002 EP Examinations’ workplan was developed assuming determination receipts of about 145,000. Accordingly, EP budgeted 63 percent of examination resources to assist in processing these determination receipts. In November 2001, the Manager, EP Examination Programs and Review, issued a memorandum notifying the EP Area Office Managers of a temporary respite from determination receipts. Based on this information, EP Examinations allocated these available resources to four new market segment research projects, in addition to conducting Local Classified Issues examinations. The memorandum also contained guidance on the priority of assigning new casework and indicated that EP was prepared to target other market segments if additional examination resources became available.
In addition, the Director, EP issued an all employee memorandum in February 2002 indicating that the overall volume of requests for determination letters remained much lower than anticipated for the year. However, EP did not revise the workplan at that time to reflect this change. Although EP Examinations implemented some interim measures in FY 2002 to address the initial shortfall in receiving requests for determination letters, these measures were reactive in nature and were not specified in the workplan guidelines. In addition, these measures did not ensure that EP would no longer rely primarily on Local Classified Issues examinations. As we have previously shown, EP is still projected to spend nearly half of its examination resources during FY 2002 conducting Local Classified Issues examinations.
In our opinion, the consideration of various scenarios during the annual planning process can assist EP in focusing more of its resources on identifying and correcting noncompliance. This can ensure the effectiveness of its Examinations Program by establishing priorities for work set aside as a result of fluctuations in resource commitments to the Determination Letter Program.
4.
The
Commissioner, TE/GE Division, should ensure that future examination workplans
incorporate various scenarios to direct available examination resources into
areas that achieve the EP Examinations’ mission of identifying and correcting
noncompliance when anticipated determination letter receipts do not
materialize.
Management’s Response: In the event that
planned determination receipts do not materialize, TE/GE management will be
able to select returns under the Risk Assessment Program. TE/GE management is also attempting to change the
determination letter process to improve the flow of applications. Further, TE/GE management is considering
establishing a dedicated workforce to process determination letters, which
would simplify the process of developing the examinations workplan.
In future years and after the current determination letter “crunch,” the Director, EP Examinations, envisions changing the planning process by moving into more specialized work and away from general examinations, such as Local Classified Issues. He wants the program to incorporate a market segmentation approach of auditing similar types of benefit plans to learn more about the compliance risks in each market segment. It would also enable the EP function to provide better service to its customer segments and address emerging market segments that have the greatest impact on participants’ retirement benefits.
To accomplish this change in the planning strategy, the EP function revamped the Compliance Research Program and commenced three national research projects under this program in FY 2001. The projects are designed to define the employee benefit plans universe by conducting research samples and using the results from these samples to profile compliance levels in the applicable market segments. The goal of this program is to continually build information and knowledge about the level of compliance within the various market segments of the employee benefit plans universe in order to direct compliance activities to areas of known or potential noncompliance.
Three additional compliance research projects, Simplified Employee Plans Adopters, Third Party Administrators, and Non-Filers were proposed for FY 2002. However, because of the expected influx of requests for determination letters, the EP function did not expect to begin these projects during the year. The Director, EP Examinations, hopes to have the resources available in the future to conduct seven to eight of these types of research projects each year.
The current Compliance Research Program differs from the program in prior years because these current projects are to contain statistically reliable samples that will allow the EP function to determine a baseline (the level of compliance based on prior completed examinations) of compliance within each market segment. The baseline information will be used to direct and assess the impact of future compliance activities by reviewing their effect (i.e., whether plans have a higher or lower level of compliance as a result of the market segmentation approach) against this baseline level of compliance. In addition, the current projects will be more national in scope than those conducted in the past.
If current projects identify an area of noncompliance, the EP function plans to first emphasize outreach efforts (publish documents, speeches, etc.) by CE&O educating taxpayers that may not be in compliance. EP management believes this approach would be more effective and efficient in “getting the word out” than by conducting individual examinations. Management plans to incorporate high noncompliance areas into future examination workplans. We see value with this approach, as long as it also provides an effective enforcement presence to ensure that outreach efforts were successful in addressing the identified areas of noncompliance to complement the Compliance Research Program. The EP function needs to effectively use the results from its Compliance Research Program to ensure areas of noncompliance are addressed.
The EP function conducted a risk assessment in FY 2001 to identify market segments and associate a level of risk and reliability to them. This risk assessment profiled the EP universe based on plan year 1998 filings. For each segment within the universe, the EP function researched historical examination information on the RICS and determined the statistical reliability (number of prior examinations) and risk (no change percentage) associated with each. The Director, EP Examinations, sees the information obtained from this assessment as being a primary tool in deciding future compliance projects and studies.
In the past, the EP function did not effectively learn from and follow through on the results from their research projects. This is evidenced by the amount of general work, such as Local Classified Issues, conducted by EP in recent years after years of doing research projects. For example, EP conducted approximately 28,000 research examinations during FYs 1997 through 2001. We could not identify any significant changes in their allocation of examination resources towards areas of noncompliance that resulted from these projects. EP management acknowledged that they did not adequately analyze the data from past market segmentation efforts. This included not gathering sufficient information to refine their market segments.
It appears that current efforts can be successful as long as EP incorporates, as planned, the results of research projects into future examination workplans so that examination resources are directed at achieving EP Examinations’ mission of identifying and correcting noncompliance.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to assess the effectiveness of the Employee Plans (EP) function’s examination planning process. To accomplish our objective, we interviewed applicable EP executives, managers, and staff. We also analyzed data available through EP’s management information reports for Fiscal Years (FY) 1997 through the first half of FY 2002. However, we did not verify the accuracy of the data obtained from EP’s management information reports.
I.
Determined how EP
Examinations would ensure adequate audit coverage and effectively manage their
resources if actual determination letter applications fell short of their
projected amount.
A.
Interviewed EP and EP
Examinations management and determined:
1. The degree of coordination between EP Examinations and Rulings and Agreement staff regarding expected determination letter receipts.
2. If EP Examinations implemented monitoring procedures identifying the effect on program resources as a result of expected determination letter receipts.
3. The process for capturing and providing information to management regarding the expected volume of determination receipts.
4.
The degree of coordination
between EP and EP Examinations management regarding determination letter
receipts.
B.
Interviewed the Manager,
Examination Planning and Programs (EPP) and staff and determined the process
for revising the workplan once a significant variance (especially a shortfall)
in the receipt of determination letter applications was identified.
C.
Interviewed the Director, EP
Examinations and determined if EP Examinations has an action/contingency plan
in place detailing how they will deploy additional resources resulting from a
shortfall in determination letter receipts.
D.
Evaluated the adequacy of the
contingency plan in the previous step in ensuring that the overall objectives
of the Examinations Program are met.
E.
Determined how the processing
of determination letters has historically (FYs 1998 through 2001) impacted the
Examinations Program. For each year, we obtained and reviewed the EP guidelines,
workplan, accomplishment and technical time reports and:
1.
Identified the amount of
determination letters that were expected and ultimately received.
2.
Determined the amount of
budgeted and actual staff days allocated to process determination letters and
conduct examinations.
3.
Determined how each
examination category was affected by the amount of determination letters that
were received.
II.
Determined if the EP
Examinations’ workplan focused on known areas of noncompliance and specific
areas so the extent of noncompliance could be developed through examinations.
A.
Obtained the FYs 1998 through
2002 EP Examinations guidelines and workplans and reviewed and compared them to
identify changes in program direction, if any.
B.
Obtained and reviewed EP
accomplishment reports for FYs 1997 through the first half of FY 2002 to
identify areas with high and low no change rates.
C.
Interviewed the Manager,
Classification; Manager, EPP and various staff; and a Classification Specialist
and determined if EP Examinations has performed a trend analysis, by condition
codes, to determine the cause of the high no change rates in the Local
Classified Issues category.
D. Interviewed the Director, EP Examinations; the Manager,
Classification; and the Manager and various staff of EPP and determined how
they will utilize the results of the market segment risk assessment to improve
examination selection criteria.
E.
Interviewed Area Office
Managers and determined the procedures for selecting returns from the project
code 301, Local Classified Issues, category.
F.
Obtained a computer download
of 84,552 records of pension plan examinations created and/or disposed of
between October 1, 1996, and December 31, 2001, from the Base Inventory Master
File (BIMF) to determine the appropriateness of recent selections from the
Local Classified Issues category.
1.
Reviewed all 6,994 and 1,454 Local
Classified Issues examination selections by condition code for FY 2001 and
the first quarter of FY 2002, respectively.
2. Reviewed the results of all 4,441 completed Local Classified Issues examinations, by condition code, and determined if the results supported the selections made during FY 2001 and the first quarter of FY 2002.
3.
Obtained and matched the
participant data to the FYs 2001 and 2002 examination selections identified in step
II.F.1. and determined the number of participants affected by these examination
selections.
G.
Analyzed the 17 current
condition codes used to select project code 301, Local Classified Issues,
examinations and determined if these condition codes contained specific issues
or conditions to identify areas of noncompliance.
H.
Interviewed a Classification
Analyst and determined how the project code 301, Local Classified Issues,
category is monitored to ensure that the best returns are selected for
examination.
Appendix II
Major Contributors to This Report
Daniel R. Devlin, Assistant
Inspector General for Audit (Headquarters Operations and Exempt Organizations
Programs)
Joseph E. Edwards, Director
Nancy A. Nakamura, Director
Ronald
F. Koperniak, Audit Manager
Jeff K. Jones, Senior Auditor
Diana M. Tengesdal, Senior Auditor
Todd M. Anderson, Auditor
Appendix III
Commissioner N:C
Deputy Commissioner, Tax Exempt and Government Entities Division T
Director, Employee Plans, Tax Exempt and Government Entities Division T:EP
Director, Employee Plans Examinations, Tax Exempt and Government Entities Division T:EP:E
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,
Tax Exempt and Government Entities Division
T:CL
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.