Improvements to the Electronic Return Originator Monitoring Program Are Needed
Reference Number: 2003-30-039
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.
January 15, 2003
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Acting Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Improvements to the Electronic Return Originator Monitoring Program Are Needed (Audit # 200230023)
This report presents the results of our review of the Internal Revenue Service’s (IRS) Electronic Return Originator (ERO) Monitoring Program. The overall objective of this review was to determine if the IRS’ program for annually monitoring the performance of the ERO Program effectively ensures ERO compliance with IRS policy and procedures for originating tax returns electronically and maintaining required documentation.
The Congress has mandated that the IRS significantly increase the number of taxpayers who file their returns electronically. In particular, Title II of the IRS Restructuring and Reform Act of 1998 (RRA 98) provides that:
· The goal of the IRS is to have at least 80 percent of all such returns filed electronically by Calendar Year (CY) 2007.
· The IRS should cooperate with and encourage the private sector to increase electronic filing of such returns.
According to the IRS’ document, Electronic Tax Administration – A Strategy For Growth (December 2000), to the extent practicable, all returns prepared electronically should be filed electronically for taxable years beginning after 2001 (i.e., by CY 2003). Since approximately 60 percent of all individual tax returns are prepared electronically, this establishes a formidable goal of about 80 million returns being filed electronically by CY 2003.
At present, the majority of tax returns filed in the IRS electronic filing (e-file) Program are through Authorized IRS e-file Providers. An ERO is the Authorized IRS e-file Provider that originates the electronic submission of a return to the IRS. Over 119,000 EROs are authorized to participate in the IRS e-file Program.
One of the IRS’ major controls over the e-file Program is the ERO Monitoring Program. The purpose of monitoring visits is to verify EROs’ compliance with the requirements for participating in the IRS e-file Program. In Fiscal Year (FY) 2001, the IRS issued new procedures for monitoring visits and set a goal of conducting monitoring visits to 1 percent of all EROs.
In summary, the ERO Monitoring Program can be improved to better evaluate, document, and ensure the compliance of EROs. Specifically, the IRS has not established a performance measure to determine the ERO Monitoring Program’s impact on ERO compliance, implemented a planning process for the ERO Monitoring Program that provides for timely training and use of effective case building information, or developed a risk-based methodology for selecting monitoring visits. Further, program coordinators and monitors have difficulty determining the level of infractions, and are not ensuring case documentation is complete.
Management’s Response: The Commissioner, Small Business/Self-Employed (SB/SE) Division, has planned or taken full or partial corrective actions for eight of our nine recommendations. The analyst responsible for the ERO Monitoring Program will also be responsible for planning, training, and case building, and the IRS will issue a memorandum providing additional guidance and direction on ERO monitoring case documentation. CY 2002 train-the-trainer classes included training on all pertinent e-file systems, and guidance will be issued to coordinators who did not attend the training. In addition, the IRS will provide written guidance to all coordinators to consider the best balance of geographic coverage possible when choosing the location of random visits, and the IRS will also issue guidance on using available information to pinpoint EROs for visitations. ERO Monitoring Program training materials were revised to include additional examples of infraction and sanction guidelines, and complete case documentation was emphasized during training. The IRS also instructed monitors to pursue due diligence penalties when appropriate, and will provide written guidance on and reinforce the importance of complete case documentation.
The Commissioner, SB/SE Division, disagreed with our recommendation to establish a goal and method for measuring program effectiveness in improving ERO compliance. He stated that although the SB/SE Division could track and measure the results on specific cases, types of cases, or trends, it would be impossible to measure the effect on voluntary compliance for all Authorized IRS e-file Providers. According to the Commissioner, factors other than IRS visitations may influence compliance of the Providers. He further stated that if the SB/SE Division established a goal and measures to track the results of follow-up visits, the results would not be significant in determining the effect on voluntary compliance.
Management’s complete response to the draft report is included as Appendix V.
Office of Audit Comment: We are concerned about the IRS’ response to two of our nine recommendations. First, regarding the IRS’ decision not to establish a goal and method for measuring program effectiveness in improving ERO compliance, the President’s Management Agenda includes a requirement to link performance with the budgeting process. Further, the Government Performance and Results Act, the General Accounting Office’s Standards for Internal Control in the Federal Government, and the Office of Management and Budget’s Circular A-123, Management Accountability and Control, all discuss the need to set performance goals and report annually on actual performance compared to goals. These activities are designed to ensure that (i) programs achieve their intended results; (ii) resources are used consistent with the agency’s mission; (iii) programs and resources are protected from waste, fraud, and mismanagement; (iv) laws and regulations are followed; and (v) reliable and timely information is obtained, maintained, reported and used for decision-making. The goal of the ERO Monitoring Program is to ensure and improve compliance with e-file requirements. Without measuring the impact monitoring visits are having on compliance, it is impossible to determine if budget expenditures made for those visits are contributing to the goal. Therefore, taxpayers and the Congress cannot be assured that monitoring activities they are paying for are economically and efficiently achieving the goal of improving ERO compliance. We recognize that indicators may be difficult to develop, but believe the benefits will far outweigh the costs in linking performance with the budget process, and in allocating resources where they will have the most impact.
Second, while the IRS agreed to ensure that monitors and coordinators are sufficiently trained on all e-file systems, this is only partial corrective action to our recommendation. Our recommendation also included ensuring that future e-file systems meet user requirements. The IRS did not respond to that portion of our recommendation.
While we still believe these recommendations are worthwhile, we do not intend to elevate our disagreement concerning these matters to the Department of Treasury for resolution.
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 questions or Parker F. Pearson, Acting Assistant Inspector General for Audit (Small Business and Corporate Programs), at (410) 962-9637.
The Congress has mandated that the Internal Revenue Service (IRS) significantly increase the number of taxpayers who file their returns electronically. In particular, Title II of the IRS Restructuring and Reform Act of 1998 (RRA 98) provides that:
According to the IRS’ document, Electronic Tax Administration – A Strategy For Growth (December 2000), to the extent practicable, all returns prepared electronically should be filed electronically for taxable years beginning after 2001 (i.e., by CY 2003). Since approximately 60 percent of all individual tax returns are prepared electronically, this establishes a formidable goal of about 80 million returns being filed electronically by CY 2003. About 47 million tax returns were filed electronically in CY 2002.
The majority of tax returns filed in the IRS electronic filing (e-file) Program are through Authorized IRS e-file Providers. According to the IRS, the best opportunity for increasing the number of electronically filed tax returns is to encourage more tax return preparers to become e-file Providers. An Authorized e-file Provider is a business authorized by the IRS to participate in the IRS e-file Program. The business may be a sole proprietorship, partnership, corporation, or other organization.
An Electronic Return Originator (ERO) is the first point of contact for most taxpayers filing a tax return through the IRS e-file Program. An ERO is the Authorized IRS e-file Provider that originates the electronic submission of an income tax return to the IRS. EROs may originate the electronic submission of income tax returns they either prepared or collected from taxpayers. There are over 119,000 authorized EROs, by far the largest category of e-file Provider.
One of the IRS’ major controls over the e-file Program is the ERO Monitoring Program. The purpose of monitoring is to verify compliance with the requirements for EROs participating in the IRS e-file Program. In Fiscal Year (FY) 2001, the IRS issued new procedures for monitoring and set a goal of conducting monitoring visits to 1 percent of all EROs.
E-file Monitoring Coordinators (EMC) in field offices are responsible for the monitoring of EROs’ operations. Monitoring is accomplished through visits to EROs’ establishments either by EMCs or by multi-functional team members trained by EMCs to perform visits and monitoring functions. Violations of IRS ERO requirements may result in a verbal or written warning, written reprimand, suspension, or expulsion of the ERO from the IRS e-file Program, depending on the seriousness of the infraction.
The IRS has two categories of ERO monitoring visits: random and mandatory. Random visits are used to determine general compliance within the IRS e-file Program, and mandatory visits are used to investigate allegations and complaints submitted against EROs. During monitoring visits, EMCs or team members should take appropriate measures to ensure compliance with e-file requirements.
We performed this audit from April to August 2002 in the IRS’ Small Business/Self-Employed (SB/SE) Division’s Atlanta, Georgia; Brooklyn, New York; Dallas, Texas; and Nashville, Tennessee field offices. The audit was performed 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.
Although the ERO Monitoring Program has only been in the SB/SE Division for 2 years, the Program has made significant strides with its monitoring efforts. Management developed and revised procedures and training materials and provided train-the-trainer sessions for EMCs who, in turn, trained monitors. The Program also defined mandatory and random visits and established a goal to visit 1 percent of all EROs, which the Program achieved in both CYs 2001 and 2002. There are, however, three areas where the ERO Monitoring Program can be improved.
In CYs 2001 and 2002, the principal measurable goal for the ERO Monitoring Program was the number of visits conducted. In both years, the IRS set a goal of conducting visits to 1 percent of all EROs. However, the IRS had no corresponding goal for measuring the impact that the Program had on improving ERO compliance.
According to the General Accounting Office’s (GAO) Standards for Internal Control in the Federal Government and the Government Performance and Results Act of 1993 (GPRA), management should establish and review performance measures. Performance measures should assess not only relevant outputs (i.e., number of visits completed), but also program outcomes (i.e., the impact of the ERO Monitoring Program on compliance). Program measures should be expressed in an objective, quantifiable, and measurable form.
Performance measures for the ERO Monitoring Program should focus on results and the desired program achievements of determining and improving the compliance of EROs. One method of measuring the ERO Monitoring Program’s impact on compliance is through follow-up visits to EROs who were sanctioned in the prior year. The IRS already classifies these visits as mandatory.
Overall, the number of follow-up visits is small compared to the total number of visits conducted in the four offices reviewed. Specifically, the 4 offices reviewed conducted a total of 359 monitoring visits, of which only 23 (6 percent) were follow-up visits. Two of the four offices reviewed did not conduct any follow-up visits to EROs. Of the 23 follow-up visits conducted:
Follow-up visits were not conducted primarily because EMCs considered follow-up visits lower priority than new complaint and referral visits for CY 2002. Additionally, in three of four offices visited, historical files for prior year visits were not associated with current year visits, so monitors may not have been aware of ERO case histories.
The 23 follow-up visits resulted in the following:
· Two warnings.
· One “no additional sanctions” determination.
· Six “in compliance” determinations.
Results of follow-up visits from the two offices indicate that initial monitoring visits did not always result in improved ERO compliance. In 70 percent of the follow-up cases reviewed, EROs were subsequently issued reprimands or warnings, or suspended from the ERO Monitoring Program. The IRS, however, did not assess the impact the ERO Monitoring Program had on ERO compliance because it did not establish such a performance measure. By establishing a meaningful goal and measure, and ensuring that the ERO Monitoring Program conducts required follow-up visits, the IRS can better manage the Program and also assess the impact monitoring has on improving ERO compliance.
The planning process is not timely
The ERO Monitoring Program runs from mid-January through mid-April, corresponding with the filing season. While management issued revised monitoring guidelines and delivered training to EMCs and monitors, the planning process for the 2002 Filing Season did not allow sufficient time for EMCs to train new monitors and also select and prepare monitoring cases for field visits. The ERO Monitoring Program guidelines require EMCs to solicit volunteers and train them as monitors prior to the start of the filing season. EMCs should also identify and perform research for cases requiring follow-up visits from prior years, and identify and select EROs for random visits.
As with other parts of the IRS, the reorganization of the IRS from functional lines to business divisions affected the ERO Monitoring Program. For example, CY 2002 was the National Headquarters Senior Analyst’s first year in charge of the ERO Monitoring Program, and two of the four EMCs interviewed during our audit did not work in the ERO Monitoring Program in CY 2001 or in prior years.
After selection, EMCs were trained in October 2001 and directed to train monitors by January 2, 2002, prior to the start of the 2002 Filing Season. The IRS starts accepting electronically filed tax returns in mid-January. However, in all four offices we reviewed, EMCs did not train monitors by January 2, 2002, as directed. In fact, in one office, training for monitors was not completed until April 2, 2002.
As a result of the late training, monitors were not prepared to begin visits at the start of the filing season. By the beginning of April, the IRS had already received approximately 87 percent of all electronic returns filed by EROs during the 2002 Filing Season. Because of the large percentage of electronic tax returns received early in the filing season, it is important that the ERO Monitoring Program is prepared at the start of the filing season for visits to have maximum impact.
Monitoring visits should be conducted as early as possible during the filing season because it is important to identify noncompliant EROs as soon as possible. The earlier in the filing season monitors visit EROs, the sooner noncompliant EROs may be identified and brought into compliance or appropriately sanctioned. Early identification of noncompliant EROs should improve the overall quality of the IRS e-file Program.
Database research capabilities and training need improvement
At the start of the 2002 Filing Season, some EMCs received numerous complaints and referrals on EROs but did not have sufficient time to prepare comprehensive case files for monitoring visits. EMCs’ planning efforts were limited in part by the On-Line Applicants (OLA) Database, the new e-file database used by field operations to research EROs. The OLA Database contains information from e-file Provider applications, as well as information on e-file firms’ responsible officials.
The OLA Database is not searchable by either name or address. It is, however, searchable by Electronic Filing Identification Number (EFIN), state, and zip code. According to our discussions with EMCs, many of the referrals received during the 2002 Filing Season were from taxpayers who did not know an ERO’s EFIN but only the name and/or address. Queries of the OLA Database by zip code, for example, returned all EROs in the zip code area. EMCs told us they had to manually sort through the EROs in a zip code area to find potential matches to referred names or addresses. They concluded that it was difficult to use the OLA Database to research these referrals.
Results of OLA Database queries may be downloaded into other computer software programs on EMCs’ computers and then queried on different database fields, such as EFIN and name. However, EMCs were unfamiliar with downloading and importing data from the OLA Database into other computer applications. Downloading from the OLA Database was not included in the training program for EMCs and monitors; therefore, EMCs were unable to effectively use the information contained in the database.
The OLA Database replaced the former District Office Applicants Database (DOADB), but does not have the same functionality as the DOADB. According to IRS management, the OLA Database is a temporary research tool and will eventually be replaced by the IRS’ Third Party Data Store. Because of the OLA Database’s limitations and not receiving the necessary training, EMCs and monitors did not have as much information as possible when planning their monitoring visits. Easier access to key information would help EMCs and monitors better plan and prepare monitoring visits.
The Director, Compliance, SB/SE Division, should:
1. Establish a goal and method for measuring program effectiveness for improving ERO compliance, such as results of follow-up visits.
Management’s response: The Commissioner, SB/SE Division, disagreed with our recommendation to establish a goal and method for measuring program effectiveness in improving ERO Compliance. He stated that although the SB/SE Division could track and measure the results on specific cases, types of cases, or trends, it would be impossible to measure the effect on voluntary compliance for all Authorized IRS e-file Providers.
Office of Audit Comment: The President’s Management Agenda includes a requirement to link performance with the budgeting process. Further, the GPRA, the GAO’s Standards for Internal Control in the Federal Government, and the Office of Management and Budget’s Circular A-123, Management Accountability and Control, all discuss the need to set performance goals and report annually on actual performance compared to goals. We recognize that indicators may be difficult to develop, but believe the benefits will far outweigh the costs in linking performance with the budget process, and in allocating resources where they will have the most impact.
2. Ensure that historical case documentation is associated with current year cases and reinforce that the purpose of follow-up visits is to measure the impact of the ERO Monitoring Program on compliance.
Management’s response: The Director, Reporting Compliance Policy, SB/SE Division will issue a memorandum providing additional direction and guidance on documentation.
3. Establish a planning process that allows sufficient time for training and case building.
Management’s response: The IRS plans to conduct training prior to the new fiscal year. Also, the analyst responsible for the program will be responsible for the planning, training, and case building.
4. Ensure that the functionality of the OLA Database’s replacement meets user requirements and that EMCs and monitors are sufficiently trained on all pertinent e-file systems.
Management’s response: All new EMCs were trained on all pertinent e-file systems in the 2002 train-the-trainer classes. Guidance will be provided to EMCs who did not attend training.
Office of Audit Comment: While the IRS agreed to ensure that monitors and coordinators are sufficiently trained on all e-file systems, this is only partial corrective action to our recommendation. Our recommendation also included ensuring that future e-file systems meet user requirements, but the IRS did not respond to this.
The ERO Monitoring Program conducted approximately 850 randomly selected and approximately 620 mandatory monitoring visits nationwide in CY 2002. Per the IRS Strategic Plan 2000-2005, since the IRS has limited resources, it is essential that it apply them where they will be of most value in reducing noncompliance while ensuring fairness, observing taxpayer rights, and reducing the need to burden those who do comply. Consequently, this would suggest that the IRS use a risk-based, data-driven process to select the potentially most non-compliant EROs for these monitoring visits.
Three of the four offices we reviewed performed random visits, but the EMCs did not use available information and data in the visit selection process. In these 3 offices, 26 of their 94 monitoring visits were randomly selected, but these random visits were not selected according to compliance-oriented factors. Instead, these offices based their selections on other factors, such as the physical location of monitors. None of the four IRS offices reviewed had established selection criteria for random monitoring visits, and only one of the four offices reviewed used an objective criterion to help select EROs for random visits.
During discussions with IRS management, we identified several sources of data and information that could contribute to the development of a data-driven random visit selection process. For example, information is available on how timely EROs submit their U.S. Individual Income Tax Declarations for an IRS e-file Return (Form 8453) to the IRS, the percentage of rejected electronically filed tax returns for each ERO, and the volume of each Error Reject Code for EROs. Additionally, the Electronic Fraud Detection System (EFDS) contains detailed information on electronically filed returns. All of these data may be potential sources for establishing ERO visit selection criteria.
In fact, experts in the area of risk management advocate the concept of “risk intelligence,” which requires data and good management information systems to create a risk “nervous system” of information. The information the IRS already has available would help lay the groundwork for such a risk “nervous system” in this area. Focusing on potentially non-compliant EROs may be more beneficial for improving compliance than a strictly random selection process.
Without determining indicators of potential ERO non-compliance and using them for random visit selection, the IRS will not be able to effectively focus its ERO Monitoring Program resources. While the IRS should focus its resources where potential ERO non-compliance is greatest, ERO monitoring visit selection criteria should also consider geographic coverage. According to the IRS Strategic Plan 2000-2005, one indicator of success is the uniformity of compliance across different geographic areas and different demographic segments. Uniformity across sectors is important for actual and perceived fairness of the tax administration system. However, IRS management did not establish nationwide standard criteria for selecting random visits in the ERO Monitoring Program.
The Director, Compliance, SB/SE Division, should:
5. Develop a process to determine the proper mix of random and mandatory ERO monitoring visits that also provides for broad geographic coverage.
Management’s response: Management will provide written guidance to coordinators advising them to consider balance of geographic coverage when selecting random visits.
6. Develop uniform risk-based selection criteria that take advantage of available information and data for selecting EROs for random monitoring visits.
Management’s response: The Director, Reporting Compliance Policy, SB/SE Division, will provide guidance to Coordinators on using available information to select EROs whose filing statistics show potential problems.
The IRS imposes sanctions on EROs found in violation of IRS e-file Program requirements. Some examples of violations are: failure to timely submit required documents to the IRS, misleading advertising, improper record keeping, convictions involving monetary or fiduciary crimes, and conduct indicative of potential fraudulent acts. Infractions of IRS e-file requirements are categorized as Levels One, Two, and Three. (See Appendix IV for complete definitions.) We identified two areas where the administration of sanctions could be improved.
Definition of infractions
According to the EMCs we interviewed, the Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns (Publication 1345) and the e-file Monitoring Program guidelines do not provide sufficient detail in defining the three levels of infractions for EMCs and monitors to consistently apply them. While the e-file Monitoring Program guidelines provide some examples of infractions and corresponding sanctions, the examples do not address sanctions for the multiple and varying infractions identified during actual monitoring visits.
Without clear guidance, monitors may classify the same infractions differently, resulting in inconsistent treatment of EROs. Our review of 94 judgmentally selected monitoring cases identified 9 cases where, in our assessment, EROs with similar or similar-level infractions were given different sanctions. Five of them were issued written reprimands, two were given warnings, and two were not sanctioned at all.
Inconsistent treatment of EROs could be detrimental to the IRS e-file Program because of perceived or actual disparate treatment. The focus of the reorganized IRS is on helping people comply with the tax laws and ensuring the fairness of compliance. Fair compliance means that the IRS should apply rules and regulations consistently and uniformly.
Earned Income Tax Credit due diligence compliance
The e-file Monitoring Program guidelines require monitors to review ERO compliance with due diligence requirements for tax returns claiming the Earned Income Tax Credit (EITC). EROs who are also tax return preparers must comply with Internal Revenue Code Section 6695-2 (2000), which details due diligence requirements for determining EITC eligibility. Return preparers may be assessed penalties for failure to satisfy these due diligence requirements. To comply with these requirements, preparers must complete an EITC eligibility checklist and a computation record, and have no knowledge that a taxpayer is not eligible for EITC. Preparers must retain copies of the eligibility checklist and computation record for 3 years.
If EMCs or monitors identify EITC due diligence problems
during monitoring visits, they are to conduct due diligence penalty
examinations and assess due diligence penalties when appropriate. However, according to the ERO Monitoring
Program’s Senior Analyst in Headquarters, due diligence determinations are not
to be considered when making determinations about ERO compliance with IRS
Due diligence is very important to the IRS’ efforts to help ensure EITC compliance. Of the estimated $31.3 billion in EITC claims made by taxpayers who filed returns in CY 2000 for Tax Year 1999, an IRS study estimated that between $8.5 and $9.9 billion (27.0 percent to 31.7 percent) should not have been paid. EROs who are also tax return preparers must be particularly diligent while acting in their capacity as the first contact with taxpayers. The EITC is a popular target for fraud and abuse schemes, and safeguarding the IRS e-file Program is the shared responsibility of the IRS and all Authorized e-file Providers.
Because of the extent of EITC overpayments, one action for improving EITC and ERO compliance may be for the IRS to take due diligence into consideration when making compliance determinations about EROs who are also tax return preparers. This would result in more severe sanctions than current procedures that only provide for penalties being assessed against preparers.
The Director, Compliance, SB/SE Division, should:
7. Provide clear and unambiguous ERO Monitoring Program infraction and sanction guidelines for EMCs and monitors.
Management’s response: Management revised training materials to include additional examples of infraction and sanction guidelines.
8. Revise e-file Monitoring Guidelines to consider EITC due diligence when determining ERO compliance with IRS e-file Program requirements.
Management’s response: The IRS instructed monitors to pursue due diligence penalties when appropriate.
According to the e-file Monitoring Program guidelines, at the conclusion of monitoring visits monitors should submit complete case files to EMCs. The case files should include the following items:
· Integrated Data Retrieval System (IDRS) research data or other internal compliance reports used in supplementing the monitoring visit.
Review of the 94 ERO Monitoring Program case files identified areas where case documentation can be improved. In most of these cases, we could not assess the quality or full impact of the monitoring visit because of missing case documentation. As shown in Figure 1, the information missing from case files ranged from 14 to 100 percent of the cases, depending upon the item.
Figure 1. Frequency of Missing and Present ERO
Time and Action Report
Summary of Findings
Daily Activity Record
ELF 1541 Report
Form 8633 Information
Missing Form 8453 Report
IDRS Research Results
OLA Research Results
Source: Treasury Inspector General for Tax Administration analysis of 94 ERO monitoring cases.
ERO visitation procedures require that monitoring visits be properly documented, and managers should ensure that quality monitoring visits are performed. Once monitoring visits are completed, monitors should review case files and ensure all necessary items are fully documented and assembled correctly. Monitors should then transmit case files to EMCs.
Monitors and EMCs did not always prepare required documents or ensure they were included in monitoring case files, and managerial reviews did not identify documentation deficiencies. Without complete case documentation, the IRS cannot determine if all visits were performed in accordance with IRS procedures or fully assess the quality of visits.
9. The Director, Compliance, SB/SE Division, should issue a memorandum reinforcing the importance of complete case documentation of ERO monitoring visits.
Management’s response: Management will issue written guidance to reinforce the importance of complete case documentation of ERO Monitoring visits.
The overall objective of our audit was to determine if the Internal Revenue Service’s (IRS) program for annually monitoring the performance of Electronic Return Originators (ERO) effectively ensures ERO compliance with IRS policy and procedures for originating tax returns electronically and maintaining required documentation.
To accomplish our objective, we:
I. Determined if the IRS effectively planned for and monitored the ERO Monitoring Program by:
A. Interviewing IRS management and stakeholders.
B. Determining if appropriate authorities, responsibilities, and resources were assigned to the officials responsible for the ERO Monitoring Program.
C. Determining the extent and quality of coordination between Electronic Tax Administration (ETA) and e-file Monitoring Coordinators (EMC) in planning and executing the ERO Monitoring Program by interviewing ERO Monitoring Program and ETA officials to obtain their perspectives on coordination.
D. Determining whether the selection process for ERO monitors provided the appropriate resources to the Program.
E. Assessing the quality of the training for monitors.
F. Determining if the ERO Monitoring Program Management Information System provided meaningful and useful information for effectively managing the Program.
II. Determined if the monitoring visit selection criteria effectively identified EROs with the highest potential for errors, violations, or abuse by:
A. Interviewing management to determine the rationale for mandatory visits and the prescribed process for selection of random visits to EROs.
B. Obtaining documentation, if any, on visit selection criteria.
C. Reviewing the source (leads) of mandatory visits and their results.
D. Comparing ERO Monitoring Program resources to results to determine the productivity of mandatory visits.
E. Interviewing four EMCs from three IRS Area Offices and reviewing and analyzing their random visit selection criteria for uniformity and consistency.
F. Determining follow-up visit requirements, if any.
G. Determining if additional data-driven criteria could be applied to better target monitoring efforts.
III. Determined if ERO monitoring visits were performed in accordance with established procedures, and if non-compliant EROs were administered appropriate sanctions by:
A. Interviewing management and discussing the process for performing monitoring reviews and obtained monitoring procedures and guidelines.
B. Assessing the quality of the monitoring visits by selecting and analyzing a judgmental sample of 94 ERO monitoring cases. We selected four offices in the IRS Small Business/Self-Employed Division that, in the IRS Senior Management Analyst’s assessment, were a representative cross-section of the nationwide ERO Monitoring Program. We then selected our case sample from CY 2002 inventory listings provided by each of these offices. We purposely selected monitoring cases with infractions and sanctions to ensure sufficient data for analyzing those two areas. While these cases were judgmentally selected, they represent approximately 6 percent of all ERO monitoring visits conducted in CY 2002.
Parker F. Pearson, Acting Assistant Inspector General for Audit (Small Business and Corporate Programs)
Amy L. Coleman, Acting Director, Small Business Compliance
Preston Benoit, Audit Manager
Cynthia Dozier, Senior Auditor
Rashme Sahwney, Auditor
Erlinda Foye, Management Assistant
Acting Commissioner N:C
Deputy Commissioner, Small Business/Self-Employed Division S
Deputy Commissioner, Wage and Investment Division W
Director, Compliance, Small Business/Self-Employed Division 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
Commissioner, Small Business/Self-Employed Division S
Commissioner, Wage and Investment Division W
Director, Compliance Policy, Small Business/Self-Employed Division S:C
Director, Electronic Tax Administration, Wage and Investment Division W:ETA
The Internal Revenue Service (IRS) categorizes infractions as Level One, Level Two, and Level Three Infractions. Sanctions that the IRS may impose range from a written reprimand to expulsion from the IRS electronic filing (e-file) Program, depending on the seriousness of the infraction.
Level One Infractions—Level One Infractions are violations of the rules governing the IRS e-file Program that, in the opinion of the IRS, have little or no adverse impact on the quality of electronically filed returns or on the IRS e-file Program. The IRS may issue a letter of reprimand for a Level One Infraction.
Level Two Infractions—Level Two Infractions are violations of the rules governing the IRS e-file Program that, in the opinion of the IRS, have an adverse impact upon the quality of electronically filed returns or on the IRS e-file Program. Level Two Infractions include continued Level One Infractions after the IRS has brought the Level One Infraction to the attention of the Authorized IRS e-file Provider. Depending on the infractions, the IRS may either restrict participation in the IRS e-file Program or suspend the Authorized IRS e-file Provider from the Program. The period of suspension includes the remainder of the calendar year in which the suspension occurs plus the next calendar year.
Level Three Infractions—Level Three Infractions are violations of the rules governing the IRS e-file Program that, in the opinion of the IRS, have a significant adverse impact on the quality of electronically filed returns or on the IRS e-file Program. Level Three Infractions include continued Level Two Infractions after the IRS has brought the Level Two Infraction to the attention of the Authorized IRS e-file Provider. Commission of a Level Three Infraction may result in suspension from the Program and, depending on the severity of the infraction, such as fraud or criminal conduct, could result in expulsion from the Program without the opportunity for future participation. If the IRS suspends an Authorized IRS e-file Provider from the Program for a Level Three Infraction, the period of suspension includes the remainder of the calendar year in which the suspension occurs plus the next 2 calendar years. The IRS reserves the right to suspend or expel an Authorized IRS e-file Provider prior to administrative review for Level Three Infractions.
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.