The Internal Revenue Service Has Implemented a New Policy to
Reduce Future Relocation Costs, But Improvements Are Needed in Its Cost
Tracking Systems
September 2002
Reference Number: 2002-10-190
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
24, 2002
MEMORANDUM FOR
CHIEF FINANCIAL OFFICER
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Acting Inspector General
SUBJECT: Final Audit Report - The Internal Revenue Service Has Implemented a New
Policy to Reduce Future Relocation Costs, But Improvements Are Needed in Its
Cost Tracking Systems (Audit # 200210018)
This
report presents the results of our review of the Internal Revenue Service’s
(IRS) Employee Relocation Program. We
conducted this review to address questions raised by Senator Charles Grassley,
Ranking Member of the Senate Finance Committee, and the Director of the Office
of Management and Budget concerning relocation costs at the IRS. The overall objective of this review was to
determine if the IRS relocation program is in compliance with existing
regulations and is comparable to other agencies’ relocation programs.
In
summary, we found that the IRS has implemented a new policy to help reduce
relocation costs in the future. This
policy should help reduce costs, especially those associated with the use of
relocation service companies for the sale of employees’ real estate. In addition, for the sample of employee
relocation case files that we reviewed, relocation expenses claimed by
employees were valid and conformed to guidelines. However, because of limitations in its cost tracking systems, the
IRS cannot readily determine the number of actual employee relocations, the
total cost, or the reasons for the relocations.
Management’s
Response: IRS management agreed with the report’s
recommendation; however, because it is implementing a new accounting system,
the Integrated Financial System , it will implement the corrective action on
its new system and ensure it has the capability to produce desired data in
standard report format.
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 recommendation. 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 Has Implemented a New Policy to Reduce Future
Relocation Expenses
Relocation Expenses Claimed By Employees Were Valid and Conformed to Guidelines
The Internal Revenue Service’s Systems Do Not Adequately Track
Relocation Costs
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Major Relocation Costs and Limitations
Appendix V – Management’s Response to the Draft Report
Recent press coverage and Congressional inquiries have raised questions about the Internal Revenue Service’s (IRS) employee relocation program. Questions about the rationale for some of the moves and the reasonableness of the expenses incurred have appeared in the news media and in a letter from Senator Charles Grassley, Ranking Member of the Senate Finance Committee, to the Office of Management and Budget (OMB) Director. To address these concerns, we conducted this review of the IRS’ relocation program. The overall objective of this review was to determine if the IRS’ relocation program was in compliance with Federal regulations.
We reviewed relocations that occurred in Fiscal Years (FY) 1998 to 2001 and conducted our work at the IRS’ Headquarters Office in Washington, DC, and at the Beckley Finance Center in Beckley, WV. We performed our audit work from January through July of 2002. The audit was conducted in accordance with Government Auditing Standards. Detailed information of our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Comparison of Relocation Costs
An Employee Relocation Council survey published last year summarized relocation costs incurred by private sector companies. This survey of 237 current employees and 129 new hires showed that homeowners comprised 56 percent of the relocations. American companies paid an average of $57,279 (current employees) and $45,948 (new hire employees) to relocate a home owning employee. The average cost of relocating a non-home owning employee was $16,701 for current employees and $13,456 for new hires.
Data provided by the Department of the Treasury for its bureaus/offices showed a similar range of relocation costs but was not broken down between home owning and non-home owning employees. Average relocation cost by bureaus/offices ranged between $19,837 and $60,375. See the following table for a comparison of Treasury agencies and bureaus. Data provided by the IRS is roughly comparable; however, there are factors which affect the accuracy of the IRS data as discussed later on pages 8 and 9.
Treasury Relocation Data (FY 1999-2001)
|
Bureau/Office |
Total
Relocation Expenses |
Percent
of Total Budget |
Employees Relocated |
Percent
of Employees Relocated |
Average
Relocation Cost |
|---|---|---|---|---|---|
|
Alcohol,
Tobacco, and Firearms |
$40,330,637 |
2.08% |
668 |
5.07% |
$60,375 |
|
Internal
Revenue Service* |
$53,680,382 |
0.22% |
1,543 |
0.45% |
$36,067 |
|
Engraving
and Printing |
$102,425 |
0.01% |
3 |
0.04% |
$34,142 |
|
Secret
Service |
$46,530,525 |
2.06% |
1,418 |
9.01% |
$32,814 |
|
Customs
Service |
$47,200,000 |
0.75% |
1,572 |
2.68% |
$30,025 |
|
United
States Mint |
$831,384 |
0.02% |
38 |
0.49% |
$21,879 |
|
Office
of the Comptroller of the Currency |
$14,359,402 |
1.17% |
704 |
8.09% |
$20,397 |
|
Financial
Management Services |
$416,571 |
0.06% |
21 |
0.35% |
$19,837 |
Sources: United States Treasury Department
*Internal Revenue Service
Process for Paying Relocation Expenses
The Federal Travel Regulations (FTR) address relocation expenses for which the federal government can pay directly or reimburse employees. The FTR is the regulation contained in Title 41, Code of Federal Regulations (CFR), which implements statutory requirements and Executive Branch policies for travel by Federal civilian employees and others authorized to travel at the Government’s expense.
The IRS’ relocation process involves the four offices shown in the following table.
Offices Involved in the Relocation Process
|
Office: |
Role: |
|---|---|
|
“gaining
office” |
The office
hiring the employee. It authorizes
and pays for the relocation. |
|
Travel
Relocation Office (Agency-Wide Shared Services [AWSS]) |
Helps
employees prepare the relocation documents. |
|
Office of
Travel Management and Relocation (Chief Financial Officer [CFO]) |
Issues
relocation policies and administers the relocation services contract. |
|
Relocation and
Travel Office at the Beckley Finance Center |
Obligates
funds and records the related relocation expenses into the Program for
Relocation Information and Moving Expense (PRIME) system, which updates the
Automated Financial System (AFS).
Audits vouchers, determines any debts and establishes for collection
as needed. |
Source: Internal Revenue
Manual
When the IRS decides to relocate an employee, the employee signs a Form 4282 (12-Month Service Agreement) and then, with the assistance of a relocation coordinator, estimates the total cost of the relocation on the Form 4253 (Authorization for Moving Expenses). This is reviewed by an approving official and then is sent to the Beckley Finance Center where they set aside (obligate) funds on the Automated Financial System (AFS) to pay for the relocation. As employees incur relocation expenses, they submit the amounts for reimbursement on an expense voucher. After approval, the voucher along with the expenses directly invoiced to the government, are sent to the Beckley Finance Center for input into the Program for Relocation Information and Moving Expense (PRIME) system and AFS. Relocating employees typically have 2 years from the effective date of the employee’s transfer to incur relocation expenses.
While the FTR lists authorized expenses, it has few monetary limitations (See Appendix IV). There is no standard relocation cost or established average cost. Each relocation is unique in that a number of factors affect the eventual total cost of the relocation. Factors such as the distance from the old office to the new, the number of dependents moving with the employee, and whether the employee rents or owns a home all impact the total cost of the relocation. Additionally, employees are sometimes allowed a house-hunting trip and may incur lodging costs for temporary quarters at the old and new duty station.
Usually, real estate expenses are the largest portion of the expenses incurred by, and reimbursed to, relocating employees. There are three types of real estate expenses:
· Costs incurred if the employee sells his/her home. The amount reimbursed is limited to 10 percent of the sales price.
· Costs incurred if the employee uses the relocation services contract. The fee is a percentage of the appraised value of the employee’s home and depends on the type of service provided by the relocation company. The highest fee is when the relocation company purchases the home from the employee for the appraised value.
The prior relocation guidelines in the Internal Revenue Manual conformed to the Federal Travel Regulations (FTR). However, there are certain optional provisions in the FTR that are used by other agencies to reduce relocation costs associated with real estate transactions that were not used by the IRS. Agencies have the option to use any or all of the following:
· A policy requiring employees to market their home for a set period of time before accepting the guaranteed offer from the relocation services company (guaranteed home sale program).
· A policy capping the value of a home that can be sold under the guaranteed home sale program.
· A policy allowing agencies to offer an incentive payment to relocating employees.
Because of the concerns expressed by the media and members of the Congress over the high cost of relocating certain IRS employees, many of whom used the relocation services contract, the IRS developed a new policy that addressed this and other expenses in an effort to control relocation costs. The revised policy (issued July 25, 2002) incorporates the first two of the three policies noted above. Overall, the IRS’ new policy should help it better control relocation costs by limiting the use of the relocation services contract and limiting the amount spent on employees using the contract. The IRS paid $7.8 million to a relocation services company for services invoiced during FY 2001. The cost per individual to use the relocation services contract in some cases was very high; the highest in our case review occurred in FY 2000 and was approximately $160,000.
With its new policy, the IRS has created two relocation packages, a basic package and a basic plus package. The basic package includes allowances for most of the costs associated with relocation, but does not allow reimbursement for the use of the relocation services contract, the shipment of employee’s privately owned vehicle, or the use of temporary quarters for more than 60 days. The basic plus package allows for the use of the relocation services contract, an extension of temporary quarters, and the shipment of a vehicle. Employees will be required to provide an adequate written justification to use the basic plus package. Only the Deputy Commissioner may authorize an employee to use the items under the basic plus package.
The new policy requires employees that have been authorized to use the relocation services contract to first market their home on their own. The number of days employees are required to market their home depends on the number of days they have to report to their new location. For example, an employee required to report to the new location within 30 days must market his/her home for at least 15 days. An employee required to report in 90 days must market the home for 75 days. This increases the possibility that the employee will find a buyer for the home and avoid the high fees charged by a relocation company to purchase the home under the guaranteed home sale program.
The new policy also limits the value of a home for which IRS will pay the costs of the guaranteed home sale program. The IRS set this value at $500,000. The employee must pay the fee related to the value of their home that is over that amount. For example, if an employee’s home is valued at $575,000, the IRS will pay the fee allocated to the $500,000 limit (this would be $98,700 under the current contract) and the employee must pay the fee allocated to the $75,000 difference ($14,805 under the current contract). If this provision had been in effect during FY 2001, the IRS would have saved approximately $66,000.
The FTR also permits the offer of an incentive payment to employees if they find a buyer for their home on their own after contracting with a relocation services company. The relocation company that the IRS uses charges a fee of 19.74 percent under the guaranteed home sale program and only 11.44 percent of the sales price when the employee finds a buyer. With the home marketing incentive payment, an agency shares the cost savings with the employee. The payment to the employee is a percentage of the sales price of the home, usually between 1 and 5 percent. Three of the government agencies we contacted offered a home marketing incentive payment. The IRS has indicated that it may implement this in the future if it determines such a policy could further reduce relocation costs.
To address concerns that were raised as to whether or not relocation expenses claimed by IRS employees were valid and proper, we reviewed a sample of 77 relocation case files from the time period of FY 1998 to FY 2001. Our sample was selected from the following categories:
|
Category |
Number of Files |
Selection Method |
|---|---|---|
|
Critical Pay employees |
21 case files |
All files meeting this criteria |
|
Employees transferred |
21 case files (7 employees) |
All files meeting this criteria |
|
Transfers of mid and upper level
managers |
35 case files |
Judgmental Sample |
All of the 77 relocation cases
that we reviewed complied with the requirements in the FTR and the IRM.
·
Estimates were appropriately
based on IRM guidelines.
·
Expenses were within
established guidelines.
To address concerns about whether employees improperly used government travel funds to make return visits to their original locations, we also reviewed the travel vouchers of the employees for the 6-month period following their relocation. From the sample of 56 employees (77 case files) that we reviewed, 18 employees traveled to their previous location on government business. In 16 instances, the return trip appeared reasonable based on the business purpose and the time period for the trip. There were two instances in which the return trip was near a holiday and travel expenses were incurred over the holiday weekend. These two cases were referred to the IRS Deputy Commissioner for review.
The main sources for relocation data at the IRS are the PRIME and AFS. The two systems provide the amount of funds set aside for the relocation as well as the expenses to date. The PRIME also provides additional information from the moving authorization (Form 4253) and the expense vouchers. However, there is certain data that neither system provides that makes it difficult to track and manage the relocation budget. The current systems do not identify:
In certain instances, relocations have been cancelled after the funds were obligated and certain expenses paid. However neither system is updated to reflect such cancellations. This reduces the reliability of information on the number of employees relocated as well as the average cost of the relocations.
In addition, the expenses reported for recent years may not represent the total cost of the relocations because employees have up to 6 years to file relocation vouchers. There is no indication on the IRS systems as to whether all vouchers have been filed and the total relocation expenses have been finalized. Without this information, the total expenses reported for relocations in a specific year can be misleading.
The systems also do not contain
information as to the reasons for the relocations. Certain events can cause a sudden increase in the relocation
costs. For example, the IRS cannot
determine which relocations were due to its current modernization efforts or
its recent reorganization, and which are due to its normal hiring practices. This information is important for the IRS to
manage its relocation funds and formulate future relocation budgets.
1. We recommend that the CFO reprogram either the PRIME or AFS to enable it to identify:
Management’s
Response:
The IRS responded that it will implement the corrective action on its
new accounting system, the Integrated Financial System (IFS), which will
replace the existing systems in October 2003.
It will ensure that the IFS will produce the desired data in a standard
report format.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was
to determine if the Internal Revenue Service’s (IRS) relocation program was in
compliance with existing regulations and is comparable to other agencies’
relocation programs.
We received relocation data from the IRS,
and the bureaus within the Department of the Treasury. We performed tests to validate the accuracy
of certain IRS data from the records we reviewed. We did not perform tests as to the validity or completeness of
the data from other Treasury Department bureaus. We reviewed the relocation files for all 21 critical pay
employees. In addition, we selected a
judgmental sample of relocation files from 35 of the 382 mid and upper level
managers (Grade 15 and above) that were relocated. We also reviewed 21 case files which included all 7 employees for
whom the IRS obligated relocation funds 3 times within 4 years (Fiscal Years
[FY] 1998 – 2001).
In order to accomplish our objective, we:
I.
Determined whether the
relocation expenses for the critical pay employees who participated in the
relocation program were within IRS guidelines.
II.
Analyzed the IRS relocation
moves from FY 1998 to FY 2001.
III.
Evaluated the IRS relocation
regulations for conformance to the Code of Federal Regulations.
IV.
Determined whether the IRS
relocation program was comparable to the programs offered by the Department of
Defense; Department of Transportation; Alcohol, Tobacco, and Fire Arms; and
Federal Deposit Insurance Corporation.
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
Kevin P. Riley, Audit Manager
Ken E. Henderson, Senior Auditor
David P. Robben, Senior Auditor
Charles O. Ekunwe, Auditor
Gene
A. Luevano, Auditor
Appendix III
Commissioner N:C
Deputy Commissioner
N:DC
Chief, Agency-Wide Shared Services A
Director, Customer Support
A:CS
Director, Beckley Finance Center N:CFO:A:BFC
Director, Office of Travel Management and Relocation N:CFO:A:T
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 Liaisons
Chief,
Agency-Wide Shared Services A
Chief
Financial Officer N:CFO
Appendix IV
|
Type
of Expense |
Limitations
per the Federal Travel Regulations |
|---|---|
|
Transportation expense to the new post of duty. |
The cost is limited to the cost of a common carrier, local
transportation, and mileage if employees use their personally owned vehicle. |
|
Transportation of the employee’s household goods. |
There are no dollar limitations, just a limitation of
18,000 pounds that can be moved. |
|
Temporary Quarters at the new post of duty. |
There are no dollar limitations. Use of temporary quarters is limited to 60 days with an
additional 60 days permitted when approved. |
|
House hunting expenses. |
There
are no dollar limitations. The
expenses are limited to the cost of a common carrier, 10 days per diem, and local
transportation. |
|
Real Estate Transactions. |
There are no dollar limits on the expenses related to the sale or purchase of a home including the use of a relocation services contract. The relocation service company’s fee is a percentage of the appraised value of the home. |
|
Miscellaneous Expenses. |
Employees are limited to $350 without family or $700 with immediate family. |
Source: Title 41, Code of Federal Regulations.
Appendix V
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.