The Exempt Organizations Examination Support Section
Accurately
and Timely Processed Closed Examinations, but Controls Over Case Receipt Can Be
Improved
February 2003
Reference Number: 2003-10-065
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.
February
28, 2003
MEMORANDUM FOR
COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector
General for Audit
SUBJECT: Final Audit Report - The Exempt Organizations Examination Support Section
Accurately and Timely Processed Closed Examinations, but Controls Over Case
Receipt Can Be Improved (Audit #
200210021)
This
report presents the results of our review of the Internal Revenue Service’s
(IRS) process to close examinations of exempt organizations. The overall objective of this review was to
determine if the Exempt Organizations (EO) Examination Support Section (ESS)
properly controlled and accurately processed EO cases after examinations were
completed.
In
summary, we determined that the ESS
accurately and timely closed EO Examination cases. However, we identified a control weakness that increases the risk
that completed examination cases may not be received by the ESS. At the time of our review, the closing
unit’s personnel could not be certain that completed examinations assigned to the
unit were actually received. If the cases
had not been received, any additional tax proposed after an examination may not
have been assessed.
We
recommended that the IRS establish written procedures and goals for case
processing and case monitoring. In
addition, the IRS should provide additional training on the use of management
reports generated from the Exempt Organizations Inventory Control (EOIC)
system. Furthermore, the IRS should
complete its review of 269 cases identified from an EOIC system report to
ensure that these cases were received and processed.
Management’s
Response: The Commissioner, Tax Exempt and Government
Entities (TE/GE) Division, agreed with the recommendations presented in the
report. Management will prepare written
timeliness guidelines for case processing.
Written guidelines have been established to ensure that ESS personnel
receive completed examination cases. In
addition, ESS management has initiated a review of the 269 cases to determine
if they were accounted for appropriately.
Further, TE/GE Division management will cover the use of EOIC system
management reports at a Fiscal Year 2003 training session for ESS personnel.
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
recommendations. Please contact me at
(202) 622-6510 if you have any questions or Daniel R. Devlin, Assistant
Inspector General for Audit (Headquarters Operations and Exempt Organizations
Programs), at (202) 622-8500.
Cases Were
Accurately and Timely Processed After Examination
Controls Over the Receipt of Cases Can Be Improved
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Management’s Response to the Draft Report
The mission of the Exempt Organizations (EO) Examination program is to identify and correct noncompliance. If, upon review, EO Examination personnel determine that an organization is not operating consistently with its tax-exempt purpose, the EO function may revoke the organization’s tax exemption or impose taxes, depending on the type and severity of the violation. Once an organization loses its tax-exempt status, it will be subject to federal income tax.
Currently, there are more than 1.5 million exempt organizations that control assets of over $2 trillion. EO Examination closed 5,342 tax returns during Fiscal Year (FY) 2001 and estimated that 6,100 tax returns would be closed during FY 2002.
Generally, after a revenue agent in an EO Examination field group completes an examination, the results are recorded on the Exempt Organization/Government Entities Examined Closing Record (Form 5599). This form, along with the case file, is sent to the EO’s Examination Support Section (ESS) in Dallas, Texas, or Brooklyn, New York, for processing.
ESS personnel are responsible for ensuring all necessary documentation is included in the case file, inputting the examination results (as shown on the Form 5599) to the taxpayer’s account on the IRS’ computer system, and sending the closed case file to the appropriate IRS campus for filing. ESS personnel also input to the IRS’ computer system any tax change proposed by the revenue agents and send a letter to the exempt organization notifying it of the official results of the examination. In addition, ESS closing units have a quality review process that checks the accuracy of sampled cases at the time of data input.
This audit was
initiated in response to a request from the Director, EO, after additional tax
resulting from the revocation of an organization’s tax-exempt status was not
timely assessed by the EO ESS function.
The Director, EO, requested the Treasury Inspector General for Tax
Administration’s (TIGTA) assistance in evaluating the process used to close EO Examination
cases and determining the risk that examination results may not be timely
assessed during the closing process.
The TIGTA also plans to conduct an audit assessing the adequacy and
effectiveness of EO Examination statute controls in FY 2003.
During this review, we performed fieldwork in the ESS offices located in Dallas, Texas, and Brooklyn, New York. Our work was performed from April through September 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.
Overall, the ESS accurately and timely processed EO cases after examination. Specifically, we determined that ESS personnel accurately input to the IRS’ computer system the examination results proposed by the revenue agents. In addition, we determined that, overall, the ESS closing units timely processed examination cases that were assigned to the units for administrative closure.
Accurate and timely processing of cases after examination protects the government’s interest for any examination assessments and ensures the correct tax account and program data are entered on the IRS’ computer system. It also reduces taxpayer burden by eliminating unnecessary contact with taxpayers to resolve problems due to processing errors.
Cases were accurately processed
Our analysis indicated that ESS personnel accurately entered the examination results on the IRS’ computer system for 246 (95 percent) of the 260 cases reviewed. In one case, ESS personnel did not input the correct tax adjustment on the IRS’ computer system. Specifically, they did not enter an interest restricting code as requested by the EO Examination group. This resulted in an erroneous interest charge of $5,207 to the tax account. The IRS removed the interest charge prior to any payment being made by the taxpayer, thus limiting any burden to the taxpayer. For the remaining 13 cases, insufficient information was available to determine the accuracy of case processing.
Overall, cases were timely closed
According to the responsible ESS manager, the closing unit expects to complete its case closure responsibilities within 30 days of case assignment. However, the unit does not have written guidelines regarding time periods for closing a case. The General Accounting Office’s (GAO) Standards for Internal Control in the Federal Government state that internal controls are to be clearly documented and should appear in management directives, administrative policies, or accounting manuals and may be in paper or electronic form.
Our detailed review of the 260 sampled cases indicated that 243 (93 percent) of the cases were closed within the ESS’ 30-day goal. Of the 17 cases that were not closed within 30 days, 14 were closed within 60 days of being assigned to the ESS unit. The causes of the delays in case closings included end-of-year computer maintenance preventing input of case closure data from mid-December to early January, delays by EO Examination field groups in physically mailing the case files to the ESS, delays in the assignment of the cases to tax examiners after receipt by the ESS, and not having tax specialists to work complex cases involving restricted interest.
Although many of the above causes were outside of the ESS’ control, establishment of written guidelines should help to ensure that the ESS continues to timely close cases.
We
recommend that Tax Exempt and Government Entities (TE/GE) Division management:
1.
Establish written timeliness goals for ESS case
processing.
Management’s Response: TE/GE Division management will establish
written timeliness goals for ESS case processing.
Although the ESS accurately and timely closed EO Examination cases, we identified a control weakness that increases the risk that completed examination cases may not be received by the ESS. As a result, any additional tax proposed after an examination may not be assessed. At the time of our review, ESS personnel could not be certain that completed examinations assigned to the unit were actually received. The Exempt Organizations Inventory Control (EOIC) system is the primary indicator to show that a case has been assigned to the ESS for closure. However, the ESS was not effectively using an available management information report from the EOIC system to ensure all cases assigned to them for closure by field groups were actually received.
The EOIC system is an inventory and management control system for EO Examination groups and is used to show where the case is currently assigned, as well as to transfer cases among the various EO Examination functions. The Internal Revenue Manual (IRM) states that the EOIC system is an important tool for effective management. Furthermore, the IRM states that EO managers should ensure employees receive training for the EOIC system, and that system reports are analyzed to help assess group effectiveness. The GAO’s Standards for Internal Control in the Federal Government state that the entire process of a transaction should be promptly and accurately recorded.
We conducted a “walk-through” of the closing unit to obtain an understanding of its operations. During this process, we requested a copy of the unit’s Cases Transferred But Unacknowledged EOIC system report; however, the EOIC Clerk for the closing unit was not aware of the report and stated the report was not used within the unit. This EOIC system report lists each case recorded on the system as being sent but not acknowledged as being received. As such, it is important that ESS management regularly review this report and follow up on any cases not yet received to ensure they are not lost between the EO Examination groups and the ESS.
A staff member from another EO Examination unit printed a copy of the report, dated February 27, 2002. The report listed 269 cases as being sent to a closing unit but not acknowledged as being received in the unit. Because ESS management had not worked this report, we identified what appeared to be extremely lengthy delays in acknowledging receipt on the EOIC system of the completed examination cases. The following shows the number of days these 269 cases were unacknowledged as being received:
· In 33 cases (12 percent), the cases were unacknowledged 400 or more days. One case was unacknowledged for 1,315 days.
· In 108 cases (41 percent), the cases were unacknowledged between 100 and 399 days.
· In 36 cases (13 percent), the cases were unacknowledged between 21 and 99 days.
· In 92 cases (34 percent), the cases were unacknowledged 20 or fewer days.
After we brought this issue to the attention of EO Examination management, they promptly took the following steps to address it:
· Conducted an EOIC system training class, primarily for Dallas ESS personnel, that included the use of various EOIC system reports.
· Initiated a weekly review of the EOIC system’s Cases Transferred But Unacknowledged report and began contacting functions to inquire about the location of a case that has not been received within 10 days of being assigned to the closing unit.
· Initiated a review of the 269 cases to determine if the closing unit received these cases. ESS personnel were still reviewing these cases at the end of our fieldwork.
We obtained an EOIC system extract and identified 80 cases sent to the closing unit during the period October 1, 2001, through January 31, 2002, that were still unacknowledged as being received as of March 15, 2002. Based upon our analysis, we determined that EOIC system case status information was not accurate on 58 cases because the EOIC system data indicated that the cases had not been received in the ESS, yet other IRS data showed that the ESS had processed and closed the cases. For the remaining 22 cases, insufficient information was available on the IRS’ computer system to determine if the cases were received and processed by the closing unit. As a result, we could not determine if the examination results had been assessed on the IRS’ computer system.
ESS management cannot be assured that examination cases were properly accounted for or timely processed because the EOIC system’s Transferred But Unacknowledged report was not used. Furthermore, by not using this report, ESS management could not ensure that the applicable examination results were input to the IRS’ computer system, or that the EOIC system was updated to accurately reflect the current status of the case. Additionally, delays in case processing adversely affect taxpayer burden through delays in receiving refunds and an official notification about the final outcome of the examination.
To strengthen controls over
the transfer of cases to the ESS, we recommend TE/GE Division management:
2. Establish written procedures for the weekly review of the Cases Transferred But Unacknowledged EOIC system report.
Management’s Response: TE/GE Division management has established written procedures for a bi-weekly review of the Cases Transferred But Unacknowledged EOIC system report.
3. Complete review of the 269 cases shown on the February 27, 2002, Cases Transferred But Unacknowledged report to ensure these cases were received and appropriately processed.
Management’s Response: ESS management has initiated a review of the 269 cases. As of January 7, 2003, ESS has accounted for all cases except for 17. The remaining 17 cases will be researched to determine if they were accounted for appropriately.
4. Provide EOIC system training to Brooklyn ESS personnel to ensure they are fully aware of how to use this system, including the availability of EOIC system management reports.
Management’s Response: TE/GE Division management will cover the use of EOIC management reports at a FY 2003 training session for Dallas and Brooklyn ESS personnel.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine if the Exempt Organizations (EO) Examination Support Section (ESS) properly controlled and accurately processed EO cases after examinations were completed. Specifically, we:
Appendix II
Major Contributors to This Report
Daniel R. Devlin, Assistant Inspector General for Audit
(Headquarters Operations and Exempt Organizations Programs)
Nancy Nakamura, Director
Jeffrey M. Jones, Audit Manager
Margaret Anketell, Senior Auditor
Allen Brooks, Senior Auditor
Kenneth Forbes, Senior Auditor
Donald Martineau, Auditor
Appendix III
Acting
Commissioner N:C
Director, Exempt Organizations, Tax Exempt and Government Entities Division T:EO
Director, Communications and Liaison, Tax Exempt and Government Entities Division T:CL
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
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Reliability of Information:
Actual – 58 cases for which case receipt information on the Exempt Organizations Inventory Control (EOIC) system was not accurate (see page 4).
Potential – 230 cases for which case receipt information on the EOIC system may not be accurate (see page 4).
Methodology Used to Measure the Reported Benefit:
Actual – We obtained an EOIC system extract and identified 80 cases sent to the closing unit during the period October 1, 2001, through January 31, 2002, that were still unacknowledged as being received as of March 15, 2002. Based upon our analysis, we determined that EOIC system case status information was not accurate on 58 cases because the EOIC system data indicated that the cases had not been received in the Examination Support Section (ESS), yet other Internal Revenue Service (IRS) data showed that the ESS had processed and closed the cases.
Potential – 1) We obtained the February 27, 2002, Cases Transferred But Unacknowledged report from the EOIC system. Our analysis of this report listed 269 cases as being sent to a closing unit but not acknowledged as being received in the unit. IRS management initiated a review of the 269 cases to determine if the closing unit received these cases. ESS personnel were still reviewing these cases at the end of our fieldwork.
2) We obtained an EOIC system extract and identified 80 cases sent to the closing unit during the period October 1, 2001, through January 31, 2002, that were still unacknowledged as being received as of March 15, 2002. We compared the 80 cases to the 269 cases listed on the February 27, 2002, Cases Transferred But Unacknowledged report to determine if any cases were duplicated on both listings. Of the 58 cases where we determined that the EOIC database was incorrect (see Actual above), 39 were also included in these 269 cases. As a result, these 39 cases were subtracted from the 269 cases (269 cases – 39 cases = 230 cases). For the remaining 22 of the 80 cases, insufficient information was available on the IRS’ computer system to determine if the cases were received and processed by the closing unit. However, these 22 cases are also included in the 269 cases as Potential outcomes.
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.