Management Advisory Report: Improvements Have Been Made in Processing Gift Tax Payments and Associated Extensions to File
Reference Number: 2002-30-066
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 docoument.
April 29, 2002
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF EMPLOYED DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Management Advisory Report - Improvements Have Been Made in Processing Gift Tax Payments and Associated Extensions to File (Audit # 200130035)
This report presents the results of our follow up review of the processing of gift tax payments and associated extensions to file. The overall objective of this review was to evaluate the effectiveness of the corrective actions taken in response to the recommendations in our report entitled, Significant Improvements Are Needed in Processing Gift Tax Payments and Associated Extensions to File (Reference Number 2000-30-154, dated September 2000).
In summary, we found that the Internal Revenue Service (IRS) effectively implemented the corrective actions agreed upon. There appear to be improvements in the processing of gift tax payments and extensions to file gift tax returns.
Since we are making no recommendations in this management advisory report, a response is not required. Copies of this report are also being sent to the IRS managers affected by the report. Please contact me at (202) 622-6510 if you have questions or Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
The processing of extensions to file gift tax returns and associated payments is currently performed at Internal Revenue Service (IRS) Submission Processing Centers and designated lockbox facilities. If these extensions and payments are not posted properly to taxpayer accounts, erroneous refunds are generated and incorrect notices are sent to taxpayers. This results in additional taxpayer burden, increased IRS processing costs, and increased risk of lost revenue.
Since 1989, several audit reports have been issued to the IRS regarding the incorrect processing of Applications for Automatic Extension of Time to File U.S. Individual Income Tax Return (Forms 4868) and payments to gift tax accounts. This review evaluated the effectiveness of the corrective actions taken in response to the recommendations in our September 2000 report.
The review was conducted at the Customer Accounts Services function in the Small Business/Self-Employed (SB/SE) Division’s Headquarters, and the Brookhaven and Cincinnati Submission Processing Centers from August 2001 through January 2002. We conducted the review in accordance with the President’s Council on Integrity and Efficiency’s Quality Standards for Inspections. Detailed information on our objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
We found that the IRS effectively implemented the actions agreed upon in response to our previous report. To correct the problems with processing gift tax payments and associated extensions to file, the IRS took the following actions.
§ New Quality Review Lockbox Measures were developed, including updated versions that were forwarded to coordinators throughout the year.
§ Lockbox guidelines were clarified for the processing of payments and extensions submitted by taxpayers “for gift tax only.”
§ The Notice Review function has mandated the review of certain gift tax balance due notices to help prevent the issuance of erroneous notices and refunds.
At one Submission Processing Center where we performed more in-depth testing, an additional action was taken to evaluate the quality of processing the payments and extensions. The Lockbox Coordinator requested that the IRS’ Management Accountability Review Team (MAR) review gift tax extensions that were processed through the lockbox for indications of processing errors. The Lockbox Coordinator reviewed extensions processed from January through April 2001, and the MAR Team reviewed extensions processed during April 2001. Of 23,110 extensions reviewed, only 41 misapplied payments were found. All 41 misapplied payments were subsequently corrected on the taxpayers’ accounts.
At the same Submission Processing Center, balance due notices for gift tax returns issued to taxpayers after the extended due date of August 15, 2001, decreased approximately 50 percent from the previous year. A decrease of misapplied payments appears to be the reason for the lower volume.
Finally, our judgmental sample of 50 balance due notices for gift taxes also showed that the Notice Review function stopped 19 notices involving misapplied credits, thereby identifying and correcting errors made in processing. Although the number of errors in our sample was high, there were only 200 such notices generated during the period August 13 through December 31, 2001, when most of these notices are generated.
Because of the IRS’ reorganization into separate business units, we believe that the new SB/SE Division was better able to focus on the correction of these problems. Previously, analysts had to cover both these gift tax issues and individual tax issues.
The overall review objective was to evaluate the effectiveness of the corrective actions taken in response to the recommendations in our prior report entitled, Significant Improvements Are Needed in Processing Gift Tax Payments and Associated Extensions to File.
To accomplish the objective, we:
I. Determined whether the Internal Revenue Service (IRS) took effective corrective actions to ensure that gift tax payments and associated gift tax extensions were processed correctly and timely.
A. Reviewed corrective actions taken by the IRS to resolve processing problems as a result of previous audit findings and recommendations.
1. Reviewed the IRS Commissioner’s response to the original report to identify which findings required a corrective action on the part of the IRS and identified how and when the corrective action was implemented.
B. Evaluated the adequacy / effectiveness of corrective measures taken.
1. Interviewed appropriate Customer Accounts Services staff to obtain information and input regarding corrective procedures and controls.
a) Interviewed the Senior Operations Advisor and Management Analysts responsible for corrective actions.
b) Compared current lockbox procedures to previous procedures to ensure that corrective measures had been implemented.
c) Compared the Internal Revenue Manual (IRM) to the previous year’s IRM to ensure corrective measures had been implemented.
d) Evaluated the adequacy of new training material used and when training occurred.
C. Interviewed processing personnel at one Submission Processing Center to determine if new procedures were effective and adhered to.
D. Reviewed a judgmental sample of gift tax payments and associated extensions to file to determine if they were processed correctly.
1. At one Submission Processing Center, we determined the number of balance due notices (CP 161) generated for gift tax returns for Tax Year (TY) 2000 and compared to TY 1999 to determine if there was a decrease in the number of notices issued. Evaluated whether the corrective actions significantly reduced the number of these erroneous notices and corresponding erroneous Individual Masterfile refunds.
2. Selected a judgmental sample of 50 CP 161 notices generated from August 2001 through November 2001 for issuance to taxpayers who filed gift tax returns for TY 2000, in order to identify misapplied credits from the filing of gift tax extensions. A judgmental sample was used because statistical projections were considered to be unnecessary. Performed research on these cases on the Integrated Data Retrieval System.
Gordon C. Milbourn III, Assistant Inspector General for Audit (Small Business & Corporate Programs)
Richard J. Dagliolo, Director
Robert K. Irish, Audit Manager
Paul R. Baker, Auditor
Dolores M. Castoro, Auditor
Deputy Commissioner N:DC
Deputy Commissioner, Small Business/Self-Employed Division S
Director, Customer Accounts Services, Small Business/Self-Employed Division S:CAS
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
Commissioner, Small Business/Self-Employed Division S