The Large and
Mid-Size Business Division Should Consider Changes to the Computer Audit
Specialist Program to Address Operational Priorities
September 2002
Reference
Number: 2002-30-148
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
September
11, 2002
MEMORANDUM FOR
COMMISSIONER, LARGE AND MID-SIZE BUSINESS DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Acting Inspector General
SUBJECT: Final Audit Report - The Large and
Mid-Size Business Division Should Consider Changes to the Computer Audit
Specialist Program to Address Operational Priorities (Audit # 200230011)
This
report presents the results of our review
to assess how timely the expertise of Computer Audit Specialists (CAS) is
requested by and delivered to Large and Mid-Size Business (LMSB) Division
examiners.
In summary, the Coordinated
Industry Case (CIC) Program is responsible for examining the approximately
1,300 largest and most complex corporations, while the Industry Case (IC)
Program is responsible for the remaining 56,700 large corporations. Examiners in both programs may call upon
different types of LMSB Division specialists to assist with their work. For example, CASs provide support to the CIC
examination teams by performing various computer applications to extract,
convert, transfer, and print data from corporate systems for examiners to
analyze.
CIC Program managers were
very satisfied with the services they requested and received from the CAS
Program. However, examiners performing
IC corporate examinations do not consistently request the assistance of a CAS
when appropriate. This may lead to
examiners spending more time examining records than would be required if an
automated analysis was performed.
Finally, the 335 CASs serve primarily as advisors to other
examiners. However, they are first and
foremost highly skilled examiners that could be a resource to help the LMSB
Division replace its experienced examiners nearing retirement.
The Director, Field
Specialist Program, needs to coordinate with other LMSB Division officials to
improve controls that would ensure IC Program cases are referred to the CAS
Program when appropriate. In addition,
the CAS Program needs better management information, performance measures, and
a reevaluation since it may present opportunities to better use the LMSB
Division resources and address operational priorities.
Management’s
Response: Internal Revenue Service (IRS) management
agreed with two of the three recommendations presented in the report. Management indicated that they are
developing an Electronic Referral System to provide the necessary tools to
better monitor the referral process and will work with the Office of
Performance, Quality, and Innovation to develop performance measures.
Management
did not agree with our recommendation to consider
modifying the structure of the CAS Program, particularly focusing on whether
CASs could become responsible for conducting their own examinations and how
more comprehensive computer analysis training could be provided to all
examiners to facilitate their work.
Management cited, among other factors, that CASs would have minimal
impact on audit coverage and a negative impact on cycle time due to reduced
availability for their CAS duties.
Management’s complete
response to the draft report is included as Appendix IV.
Office of Audit Comment: We continue
to believe that, once the CAS Program benefits can be measured, its staffing
concepts need to be reevaluated to determine whether the opportunity exists to
more fully use the skills of the CASs in providing examination coverage and
addressing attrition. However, we do
not intend to elevate our disagreement to the Department of the Treasury for
resolution.
Copies of this
report are also being sent to IRS officials who are affected by the report
recommendations. 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.
Coordinated
Industry Case Managers Were Very Satisfied with Computer Audit Specialists’
Services
Computer Audit
Specialists Had Limited Involvement in Examinations of Industry Cases
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 Computer Audit Specialist (CAS) Program has existed
since the early 1970s when the need was identified to have specialists trained
to work with the various computer systems coming into use by businesses. Now, as then, experienced Internal Revenue
Service (IRS) examiners are selected and trained specifically to assist in the
IRS’ examination efforts by applying statistical sampling methods and performing
data extracts and analyses requested by other examiners. The approximately 335 CAS examiners continue
to be almost exclusively involved in the IRS’ large corporate team
examinations.
Organizationally, the Commissioner, Large and Mid-Size
Business (LMSB) Division, has overall responsibility for the CAS Program, and
it is directed within the LMSB Division under the Field Specialist
Program. Among its responsibilities,
the LMSB Division is tasked with examining the nation’s largest corporations. For examination purposes, the LMSB Division
splits these corporations into two groups.
Of the approximately 58,000 large corporations, about 1,300 of the
largest and most complex are classified as Coordinated Industry Cases (CIC),
while the remaining are referred to as Industry Cases (IC). In both CIC and IC cases, examiners may call
upon different types of LMSB Division specialists, such as a CAS, to assist
with their work.
Although CIC and IC corporate examinations account for $14
billion (70 percent) of the $20 billion in recommended additional taxes from
all IRS examinations, the length of time it takes to complete the examinations
has been an ongoing concern of both the IRS and stakeholders. Large corporate examinations may not start
for several years after the corporate return is filed and take several more
years to complete. As part of an ongoing effort to improve
the post-filing examination process, the LMSB Division has a strategic
initiative to reduce the cycle time on CIC and IC corporate examinations.
This review is part of our Fiscal Year (FY) 2002 emphasis on
the LMSB Division’s post-filing examination process. We performed our work at the LMSB Division’s Headquarters and
offices in the New York, Chicago, and Los Angeles metropolitan areas from
October 2001 to March 2002 in accordance with Government Auditing Standards.
Detailed information on our audit objective, scope, and
methodology is presented in Appendix I.
Major contributors to the report are listed in Appendix II.
At any given time, the IRS has approximately 1,300 CIC
corporations under examination, and the approximately 335 CAS examiners focus
most of their efforts on these examinations.
Once assigned to a CIC corporate examination, the CASs spend, on
average, about 330 hours on various computer applications to extract, convert,
transfer, and print out automated accounting data for the examination teams to
analyze.
The CIC case managers that we interviewed were generally
very satisfied with the work of the CASs.
They indicated that while they could not cite specific resource or time
savings, they believed the CASs made important contributions to their efforts
in examining automated accounting data.
One interview with a case manager and a CAS summed up their opinions:
In the past, corporate officers
would give the CAS access to their mainframe computers to extract data. However, the process did not always work
well because mainframe computers were slow as they struggled to both process
the corporation’s day-to-day business transactions and the CAS’s request. With the advent of Personal Computers (PC),
the CAS can now request a flat file transfer from the corporations, which can then
be converted to a format that the other team members can use on their PCs for
analysis purposes.
Our review of a judgmental sample of 18 open CIC corporate
examinations in the Manhattan and Los Angeles metropolitan areas confirmed the
case managers’ observations. We found
that the CASs (1) applied statistical sampling techniques, (2) converted
electronic accounting data residing on taxpayer computer systems into
spreadsheet or database formats that could be used by other examiners, (3)
summarized taxpayer accounting data, (4) selected detailed accounts to examine,
and (5) helped assure taxpayers retained critical data necessary for current
and future examinations. In addition to
making these important contributions to LMSB Division’s examination efforts,
the CASs were generally involved early in the examination process and did not
cause any unwarranted delays.
LMSB Division examiners are
required to request the assistance of a CAS to determine whether the examination
could be conducted more efficiently with computer applications. While the required referrals to CASs were
made in the CIC corporate examinations, we found that examiners performing IC
corporate examinations do not consistently request the assistance of a CAS when
appropriate.
We judgmentally selected for
review 33 IC corporations reporting $50 million or more in assets from across
the nation whose examinations were completed in FY 2001 and FY 2002. Although we did not identify instances where
a CAS unnecessarily extended an examination, examiners did not make mandatory CAS referrals in
16 (48 percent) of the 33 cases reviewed.
Several CASs reviewed our exception cases and indicated that
their assistance may have saved time and contributed to the quality of the
examinations. As previously stated, the
length of time it takes to complete the examinations has been an ongoing
concern of both the IRS and stakeholders.
For example, the Tax Executives Institute has indicated that when
examinations are not current, record keeping burdens are created for
corporations (i.e., if examinations were closed in a timely manner there would
be less need to retain records).
The General Accounting Office’s
(GAO) Standards for Internal Control in the Federal Government describe
control activities as the policies, procedures, techniques, and mechanisms that
enforce management’s directives. We
applied these standards in evaluating the problem with the limited number of
referrals made to CASs in IC corporate examinations and concluded that the LMSB
Division controls for involving CASs in examinations were not always adequate
or effective.
The control system is not adequate
because there is no assurance that CASs have an opportunity to review all large
corporations in the examination stream.
In the past, establishing such a control was difficult because all large
corporate returns were placed in the examination stream so that they could be
manually screened for tax issues by examiners or their managers in local IRS
offices. The screening process and
criteria used could vary by office, and most of the returns that were entered
into the examination stream were eventually eliminated from consideration.
The controls were not effective
because the requirement to request referrals is known but sometimes
ignored. In discussions with several
LMSB Division managers and IC examiners, they admitted they were aware of the
guideline to request the assistance of CASs.
However, they did not always follow the guideline because they did not
want to involve an “outside” specialist due to concerns that the process could
be time consuming, thus delaying the completion of the examination.
Unlike the previous IRS geographic
structure, the LMSB Division uses a centralized and much more structured
approach to select large corporate returns for examination. All large corporate returns are now filed
with 1 rather than 10 submission processing centers. To determine which return to select for discretionary
examination, the LMSB Division scores the returns on specific criteria that
result in about 90 percent fewer returns entering the examination stream.
Given the extensive technical
training of the CASs, they should not have to depend on examiners less
qualified and experienced in computer applications to determine if and when
their involvement is needed. Rather, a
control is needed to ensure they have the opportunity to evaluate all returns
selected for examination, particularly now that significantly fewer returns are
entering the examination stream and are doing so from a centralized location.
1.
The Director, Field Specialists Program, should
coordinate with the LMSB Division’s Industry Directors to establish a control
process that cannot be easily ignored, so CASs have
an opportunity to assist in determining which IC corporate examinations could
benefit the most from their involvement.
Management’s response: Management is
developing an Electronic Referral System (ERS) to establish a control process
for monitoring case referrals.
Our work and that of the GAO have shown the importance of
having performance measures and reliable management information for both
assessing whether program benefits are being realized and identifying
improvement opportunities. However,
neither the LMSB Division officials nor we could accurately quantify the
benefits delivered by the CAS Program because (1) performance measures have yet
to be implemented and (2) it has multiple management information systems with
no central focus. Without key
information to assess both the contributions of the CASs and alternatives for
achieving the same results, officials could be missing opportunities to more
fully use the skills of the CASs.
The LMSB Division has an operational priority to pursue
staffing to provide appropriate examination coverage and address
attrition. Once the CAS Program benefits
can be measured, we believe that its staffing concepts need to be reevaluated
to determine whether the opportunity exists to use CASs to help address this
operational priority.
The CAS Program has existed since the 1970s when private
sector companies began keeping accounting records on mainframe computers. Then, as now, the IRS trains many highly
experienced tax examiners in computer auditing techniques so that they can
assist other examiners in analyzing electronic accounting data. As advisors, these CASs are not assigned
inventories of tax returns to examine even though they are, first and foremost,
highly skilled examiners capable of conducting examinations of LMSB Division
taxpayers.
However, mainframe computers from the 1970s and 1980s no longer
dominate business. Mainframes have been
largely replaced with smaller “user-friendly” PCs, which store data in ways
that do not always require extensive expertise to access. Likewise, software is widely available for
statistical sampling and other analytical methods that non-CAS examiners could
quickly learn to use effectively in analyzing electronic data.
Considering the advances in computer technologies and the
dwindling pool of experienced examiners, there is an opportunity to make CASs
responsible for conducting their own examinations. At the same time, the LMSB Division would need to train non-CAS
examiners in more comprehensive computer data access and analysis
techniques. By broadening the skill
sets of the non-CAS examiners, the LMSB Division could reduce the need for
specialized support from the CASs.
Reevaluation of the CAS Program structure is necessary
because the number of experienced examiners that can retire in the near future
presents a huge compliance risk for the LMSB Division. Almost 40 percent of the Division’s examiner
workforce could retire by FY 2005, which could leave a significant knowledge
gap. We believe the approximately 335
CASs could be a resource that would help close this gap.
The Director, Field Specialists Program should:
2.
Improve the management information system and accelerate
implementing performance measures so the CAS Program’s benefits can be measured
and opportunities for improvement identified.
Management’s response: Management will use the new ERS to provide the necessary tools to
better monitor the referral process and will work with the Office of
Performance, Quality, and Innovation to develop performance measures.
3.
Consider modifying the structure of the CAS Program,
particularly focusing on whether CASs could become responsible for conducting
their own examinations and how more comprehensive computer analysis training
could be provided to all examiners to facilitate their work.
Management’s response: Management did
not agree with this recommendation citing,
among other factors, that having the CASs conduct examinations would
have minimal impact on audit coverage, while having a negative impact on cycle
time due to reduced availability for their CAS duties.
Office of Audit Comment: We
continue to believe that, once the CAS Program benefits can be measured, its
staffing concepts need to be reevaluated to determine whether the opportunity
exists to more fully use the skills of the CASs in providing examination
coverage and addressing attrition.
Appendix I
Detailed Objective, Scope, and Methodology
Our objective was to assess how timely the expertise of
Computer Audit Specialists (CAS) is requested by and delivered to the Large and
Mid-Size Business (LMSB) Division examiners.
We performed our work at the LMSB Division’s Headquarters and
offices in the New York, Chicago, and Los Angeles metropolitan areas.
To meet our objective, we relied on Internal Revenue Service
(IRS) internal management reports and databases. We did not establish the reliability of these data because
extensive data validation tests were outside the scope of this audit. Except as noted above, our work was
conducted in accordance with Government Auditing Standards. Our specific audit tests included the
following:
I.
Defined the purpose, scope, inputs, outputs, and customer
needs of the CAS Program by reviewing the LMSB Division’s guidelines and
interviewing LMSB Division executive level, mid-level, and front-line managers.
II.
Analyzed Fiscal Year (FY) 2000 and 2001 Examination Program
Monitoring Table 37, the Audit Information Management System, and the
Coordinated Examination Management Information System to determine the CAS
staffing levels, where they applied their time, and the number of examinations
they assisted in completing.
III.
Analyzed the Examination Return Control System and a
judgmental sample of 18 open Coordinated Industry Case corporate examinations
from the Los Angeles and New York metropolitan areas to determine whether
examiners were requesting the assistance of CASs as required, the amount of
time involved in requesting and delivering the assistance, and if the CASs were
unnecessarily extending the length of examinations. A judgmental sample was used because a statistical sample to
project results would have required unnecessary resources and time.
IV.
Reviewed a judgmental sample of 33 closed Industry Case
corporate examinations from across the nation to determine whether examiners
were requesting the assistance of CASs as required, the amount of time involved
in requesting and delivering the assistance, and if the CASs were unnecessarily
extending the length of examinations. A
judgmental sample was used because a statistical sample to project results
would have required unnecessary resources and time.
V.
Verified whether specific time frames and other performance
measures had been established for requesting and delivering the technical
advice from CASs and if the measures were aligned with those in the LMSB
Division.
VI.
Reviewed the General Accounting Office’s (GAO’s) Executive
Guide: Effectively Implementing the
Government Performance and Results Act and prior reports issued by the
Treasury Inspector General for Tax Administration to assess the applicability
of performance measures for the CAS Program.
VII.
Applied the GAO’s Standards for Internal Control in the
Federal Government to existing controls over requests for, and delivery of,
CASs’ services and evaluated whether risks were sufficiently minimized.
Appendix II
Major Contributors to This Report
Gordon C. Milbourn III, Assistant Inspector
General for Audit (Small Business and Corporate Programs)
Phil Shropshire, Director
Frank Dunleavy, Audit Manager
Stanley Pinkston, Senior Auditor
William Tran, Auditor
Appendix III
Commissioner N:C
Deputy
Commissioner N:DC
Deputy
Commissioner, Large and Mid-Size Business Division LM
Director,
Field Specialists, Large and Mid-Size Business Division LM:FS
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,
Large and Mid-Size Business Division LM
Appendix IV
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.