Management Advisory Report:
The Small Business/Self-Employed Division’s Collection Process
Improvement Effort Will Not Adversely Affect Internal Controls,
but Potential Risks Still Exist
May 2002
Reference
Number: 2002-30-091
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.
May
17, 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 - The Small Business/Self-Employed
Division’s Collection Process Improvement Effort Will Not Adversely Affect
Internal Controls, but Potential Risks Still Exist (Review #200230004)
This
report represents the results of our review of the preliminary recommendations
of the Small Business/Self-Employed (SB/SE) Division’s Collection Process
Improvement Team. The overall objective
of this review was to provide ongoing input regarding the SB/SE Division’s
collection process improvement effort.
Specifically, we assessed the impact of the team’s recommendations on
the internal control environment and on taxpayer relations/rights. This management advisory report is provided
for informational purposes to assist Internal Revenue Service (IRS) management
in its efforts to modernize the IRS.
In
summary, the preliminary recommendations proposed by the SB/SE Division’s
Collection Process Improvement Team should not adversely affect the existing
control environment. The Team has been
proactive in identifying risks and working to reduce them, has involved other
appropriate IRS functions on an ongoing basis, and has considered communication
and training needs to be addressed for successful implementation of the
recommendations.
However,
we believe some risks still need to be considered as the recommendations are
being implemented. These risks include
the feasibility of getting managers more involved in case guidance, the
difficulty in measuring the impact that changes will have on collection
effectiveness, and potential security risks when using Microsoft Outlook
Calendar to schedule meetings. Also,
some of the sub-teams are still actively identifying issues to consider, so
risks should continue to be identified and resolved as improvement efforts
continue. Finally, the executive in charge of the Collection Reengineering
projects recently received a new job assignment. We believe that the Commissioner, SB/SE Division, should appoint
a new executive leader to facilitate project direction and implementation of
the recommendations.
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.
Initial Recommendations Should Not Adversely Affect Internal Controls
Many Risks Are Being Addressed, but Some
Still Exist in Implementing the Current Recommendations
Risks Still Need to be Addressed as
Improvement Efforts Continue
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
The Small Business/Self-Employed (SB/SE) Division’s
Collection function is responsible for promptly collecting the proper amount of
federal tax due from taxpayers. This
includes securing tax returns that are not filed in order to determine the tax
due. Over the last several years,
collection business results, such as the number of accounts closed, have
declined, and the number of accounts not being worked has increased. In an effort to improve operations, the
Commissioner, SB/SE Division, established teams staffed with employees of the
Internal Revenue Service (IRS) and an outside consulting agency to review
Collection function operations and suggest methods for improvement. These teams are commonly referred to as
Collection Reengineering teams.
One of the Collection Reengineering teams is the Collection
Process Improvement Team. Its project
work plan includes an assumption that the Team would recommend process
improvements in key areas, but would not produce an overall reengineering of
all processes and procedures. Another
assumption was that the Team would not analyze or recommend system or
technology improvements that would involve a major commitment of computer
programming resources. These
assumptions allowed the Team to concentrate on incremental process improvements
that could be accomplished in a relatively short time frame without redesigning
the overall process. As a result, this
project is truly what its name suggests – a “process improvement” effort –
rather than a full-scale “reengineering” of Collection function processes. In a 1997 guide, the General Accounting
Office distinguishes “reengineering” efforts that focus on redesigning a
process as a whole, from “process improvement” efforts that focus on functional
or incremental improvement.
The objective of the Collection Process Improvement Team was
to stabilize and improve the SB/SE Division Collection function’s operational
performance by identifying and implementing high-impact, near-term improvements
to case assignment, processing and resolution processes. The project’s scope included the three
Collection functions: the Service
Center Campus Collection Branch, the Automated Collection System (ACS), and the
Collection Field function (CFf).
We conducted this review in the Oxon Hill and New
Carrollton, Maryland, IRS offices from July 2001 to April 2002. It was conducted in accordance with the
President’s Council on Integrity and Efficiency’s Quality Standards for
Inspections. Information on our objective,
scope, and methodology is presented in Appendix I. Major contributors to this report are listed in Appendix II.
Another Collection Reengineering project, the Collection
Quick Hits, was tasked with identifying some ideas that could be implemented in
a very short time frame. One idea that
came out of that project was a new method to prioritize inventory for
assignment in the field. Since we were
not involved in that project, the observations in this report are limited to
the Collection Process Improvement project.
We will be assessing the effectiveness of the inventory prioritization
method in a separate review.
The preliminary recommendations made by the Team should not
negatively affect the existing internal control environment. In fact, some of the proposed
recommendations could improve the control environment. For example, the CFf team is recommending a
structured approach to drive discussions between group managers and revenue officers
(RO) on each case assigned to an RO.
The team believes this will facilitate timely case decisions and
resolution. Other recommendations are
designed to facilitate workload selection or improve existing processes.
The teams have been proactive in identifying risks and
working to reduce them. They engaged
the employees union, SB/SE Division Counsel, functional operations, and the
Taxpayer Advocate’s Office on an ongoing basis as the recommendations
evolved. Timely addressing potential
barriers in this manner should facilitate implementation of the
recommendations. The teams have also been
considering communication and training needs to be addressed for successful
implementation of the recommendations.
However, we believe some risks still need to be considered
as the recommendations are being implemented.
Management involvement
A design concept for the CFf provides for management
involvement (i.e., consultations between group managers and ROs) on a routine
basis. Historically, however, managers
have spent a significant amount of time on administrative issues and had
limited time to spend reviewing cases.
In fact, almost 20 years ago, IRS Inspection (now the Treasury Inspector
General for Tax Administration (TIGTA)) recommended that group managers be more
actively involved in case activity at an early stage. The Collection function responded to the report by stating that
span of control, review schedules, and administrative duties hindered the
ability of group managers to become involved in active cases at an early time,
but they agreed with the recommendation’s concept and responded that they would
look at the group manager occupation in order to achieve the goal. However, the group managers are still
burdened with non‑case related activities that occupy much of their time.
The SB/SE Division established the Burden Reduction Task
Force, which presented its recommendations at the SB/SE Division’s Leadership
Conference held October 30 to November 1, 2001. Part of the team charter was to reduce non-core (e.g.,
administrative) duties to allow managers to spend at least 75 percent of their
time on core responsibilities. As the
recommendations were being discussed at the conference, managers expressed
concern that many administrative duties still continue to occupy their time.
Overcoming these beliefs and Collection function
management practices engrained over time will be significant challenges to the
successful implementation of the Collection Process Improvement Team’s
recommendations. The Team is well aware
of these challenges and is planning to address them by:
·
Requesting support for the concept from top‑level
SB/SE Division management.
·
Replacing existing group manager review requirements
with the consultations.
·
Developing measures and oversight requirements to help
ensure that the design is implemented at the group level.
·
Developing communication and training plans that are
designed to address resistance to the process expressed by managers.
Even with these planned efforts, we believe it will take a
great deal of continuing commitment and oversight from upper‑level SB/SE
Division management to effectively implement the design at the group level.
Measuring success
The CFf team is planning to incorporate measures and
oversight requirements in the design of the consultation process, mentioned
above, to identify whether group managers are effectively using the
process. While this is important, also
important is measuring the impact of process changes on collection
effectiveness and timeliness. We
believe it will be difficult to measure the impact of this process since other
initiatives are being implemented almost simultaneously that should also impact
the effectiveness and timeliness measures.
One of these initiatives is the revised inventory
prioritization recommended by the Collection Quick Hits Improvement Team. One of the elements of the revised priority
system is that taxpayers will be contacted sooner after non-compliance is
identified. It is believed that this
will decrease the time required to resolve the non‑ compliance and reduce
accounts receivable. Another team is
recommending a way to predict the outcome of a case earlier in the collection
process. This should enable the
Collection function to apply its resources to more productive cases. In addition, more employees should be able
to work cases since the SB/SE Division hired additional ROs in Fiscal Year 2001
and is re-deploying fewer employees to provide direct assistance to taxpayers
during the Filing Season.
Management will have difficulty determining whether any
productivity gains are attributable uniquely and directly to these
recommendations, to the increase in resources spent on collection activities,
or to other factors. It is also
possible that the overall results will show an improvement in the measures, but
one or more of the recommendations could actually have a negative impact. Decision-making ability is hampered when the
success of individual initiatives cannot be measured. The executive in charge of the effort also realized this could be
a concern and submitted a proposal for a study to determine the impact and
results of the project’s recommendations.
As of April 2002, SB/SE Division management had made no decision on
whether to fund the study.
Calendar use
The CFf team is recommending that group managers use
Microsoft’s Outlook Calendar for scheduling consultations with ROs on specific
cases. The Team recognized there could
be risks involved with using the Calendar and requested an opinion on the issue
from the IRS’ Information Technology and Disclosure functions. Management informed us that the Disclosure
function responded that the Team could proceed with the design as is. The Team is still working with the
Information Technology function on the issue.
We believe that security features built into the Calendar present some
disclosure risk and that the Team should continue to pursue an opinion from
Information Technology.
In July 2001, Microsoft issued an alert about the
potential for unwanted users gaining control over Outlook E‑mail and
Calendars. In August 2001, Microsoft
provided a program-ming change to fix the vulnerability addressed in the
alert. However, there may be other
concerns that have not been addressed.
A web site we researched posts concerns about many computer
programs. It has posted some concerns
regarding Microsoft Outlook and reports that Microsoft has not addressed all of
them. We did not attempt to validate
the information on the web site.
In addition, Calendar data flowing between IRS offices may
not be entirely secure. The IRS uses
encryption to safe-guard data flowing between its offices over communication
lines. However, in an October 2001
Limited Official Use Report, the TIGTA cited some concerns over the IRS’
encryption process. Calendar data would
flow over communication lines to display the information on remote terminals
when territory managers, group managers, and ROs are not co‑located in an
IRS office. Additional concerns exist
if the Calendars can be accessed from outside of the IRS offices where the data
might not be subject to existing IRS encryption processes.
While the Team’s design concept of only entering a few
letters of the taxpayer’s name in the Calendar should help limit disclosure
risks, there is no systemic control preventing the entire taxpayer name and
other sensitive information from being entered in the Calendar. This, combined with the issues noted above,
increases the risks that taxpayers’ identities might be disclosed to those who
do not have a need to know.
After we discussed these concerns with the team leaders,
they advised they would add additional features to the design to further limit
disclosure risks. Group managers will
be required to use a code for taxpayers with short or unique names that could
be easily identified even if only a portion of the name was entered. In addition, they will make territory
managers responsible for reviewing the Calendar to ensure that taxpayers cannot
be identified through the portion of the taxpayer name that is input. These efforts should provide interim
controls to reduce disclosure risks. A
long-term solution should be to incorporate the Calendar function into modernization
efforts to further reduce disclosure concerns and integrate the function with
the existing Collection function case database. This would also make the Calendar more efficient by eliminating
the need to enter a taxpayer identifier and action item in a separate system.
The executive in charge of the Collection Reengineering
projects recently received a new job assignment. We believe that the Commissioner, SB/SE Division, should appoint
a new executive leader to facilitate project direction and implementation of
recommendations, especially since some of the initial recommendations are close
to the implementation stage and other teams are still actively identifying
issues to address.
The following teams are still active and are identifying
issues to address. Risks should
continue to be identified and resolved as recommendations from these teams
evolve.
·
The Installment Agreement Team is just starting a risk
analysis phase. During this phase, it
will try to identify risks that indicate that taxpayers might not remain
current with their installment payments, and to develop alternate processing
actions and treatment options for these taxpayer installment agreements.
·
The ACS Team is analyzing the productivity of its case
work. An offshoot of the ACS Team is
just starting to look at the mission of the ACS and how best to accomplish the
mission.
These teams are currently identifying some preliminary
areas to make recommendations for improvement.
The following are examples of areas that need to be closely monitored by
SB/SE Division management as recommendations evolve:
First, the Installment Agreement Team is considering the
use of incentives to help ensure that taxpayers remain current with their
installment payments. We believe this
needs careful consideration to avoid inequitable taxpayer treatment and legal
issues. For example, an earlier idea
for incentives was the use of varying interest rates for balance due
amounts. This type of incentive would
require a legislative change since the Internal Revenue Code (IRC) dictates the
interest rate. While applying varying
interest rates based on risk factors is a commonly accepted practice in the private
sector, it could be considered inequitable taxpayer treatment in the public
sector and might not be well received by the Congress if a change to the IRC is
requested.
Second, the ACS Team is reviewing the impact of making
outgoing telephone calls versus sending tax balance due notices to taxpayers. Traditionally, the IRS has used notices to
try to collect accounts due, but they frequently result in telephone calls from
taxpayers to the ACS with questions about information in the notice. Historically, answering these calls limited
the IRS’ ability to make telephone calls to taxpayers in an attempt to collect
tax due. To make additional outgoing
calls, the IRS would either need to increase staffing or reduce the volume of
notices issued. Reducing the volume of
notices issued should result in fewer incoming telephone calls, thereby freeing
up resources to make outgoing calls.
However, the potential impact needs to be thoroughly studied before any
change is made, especially given the IRS’ limited ability to make outgoing
calls in the past.
Appendix I
Detailed Objective, Scope, and Methodology
The overall
objective of this review was to provide ongoing input regarding the Small
Business/Self-Employed Division’s collection process improvement effort. Specifically, we assessed the impact of the
team’s recommendations on the internal control environment and on taxpayer
relations/rights. In order to accomplish our objective,
we:
I.
Reviewed decks (documents)
the Team prepared that described its activities and recommendations.
II.
Participated in weekly
leadership meetings.
III.
Attended bi-weekly content
meetings.
IV.
Attended steering committee
meetings.
V.
Researched Internal Revenue
Service Inspection Division and Treasury Inspector General for Tax
Administration audit reports related to areas being pursued by the Team and
provided copies of the reports to the appropriate team.
Appendix II
Major Contributors to This Report
Gordon C. Milbourn III, Assistant Inspector
General for Audit (Small Business and Corporate Programs)
Parker F. Pearson, Director
Amy Coleman, Audit Manager
Anthony Choma, Senior Auditor
Joseph Snyder, Senior Auditor
Appendix III
Commissioner N:C
Deputy Commissioner
N:DC
Deputy Commissioner, Small Business/Self-Employed
Division S
Director, Collection Reengineering S:C
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:
Commissioner,
Small Business/Self-Employed Division S