The Large and Mid-Size Business Division Should Consider Changes to the Computer Audit Specialist Program to Address Operational Priorities
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.
Managementís 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.
Managementís 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.
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 IRSí 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 IRSí 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 nationís 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 Divisionís post-filing examination process.† We performed our work at the LMSB Divisionís 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 corporationís day-to-day business transactions and the CASís 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 managersí 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 Divisionís 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 Officeís (GAO) Standards for Internal Control in the Federal Government describe control activities as the policies, procedures, techniques, and mechanisms that enforce managementís 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 ďoutsideĒ 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 Divisionís 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.
Managementís 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 ďuser-friendlyĒ 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 Divisionís 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 Programís benefits can be measured and opportunities for improvement identified.†
Managementís 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.
Managementís 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.
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 Divisionís 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 Divisionís 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 Officeís (GAOís) 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 GAOís Standards for Internal Control in the Federal Government to existing controls over requests for, and delivery of, CASsí services and evaluated whether risks were sufficiently minimized.
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
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
††††††††††† Commissioner, Large and Mid-Size Business Division† LM
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.