Improvements Are Needed to Ensure Large Dollar Manual
Refunds Are Issued Accurately and Timely
August 2003
Reference
Number: 2003-30-183
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.
Redaction
Legend: 1 = Tax return/Return information
August
29, 2003
MEMORANDUM FOR
COMMISSIONER EVERSON
FROM: for Gordon C. Milbourn III /s/ Daniel R.
Devlin
Assistant Inspector General for
Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report – Improvements Are
Needed to Ensure Large Dollar Manual Refunds Are Issued Accurately and Timely
(Audit # 200230051)
This
report presents the results of our review of large dollar manual refunds. The overall objectives of this review were
to evaluate whether large dollar manual refunds were being processed
appropriately and whether established controls were being followed in approving
and issuing these refunds.
The
Internal Revenue Service (IRS) issues refunds manually, rather than by
computer, when taxpayers demonstrate significant need for refunds to be issued
immediately rather than waiting for normal processing, or when refund amounts
are so great that waiting for normal processing would result in significant
interest charges to the Government.
These large refunds warrant further review by IRS employees to ensure
they are accurate before they are issued.
The IRS issued $62.8 billion in manual refunds in Calendar Year (CY)
2002, a significant increase from CY 2001 when $38.5 billion was issued.
****1**** the incident
prompted the Submission Processing Site to review and strengthen its controls
over manual refunds. We initiated this
audit to review controls over large dollar manual refunds issued to business
taxpayers by the Cincinnati, Ohio, and Ogden, Utah, Submission Processing
Sites, from which most of these manual refunds are issued.
In
summary, we found that while controls over large dollar manual refunds were in
place, we identified two areas where improvements need to be made to ensure
that manual refunds are processed accurately and timely. We reviewed a judgmental sample of 72 closed
cases consisting of paper, direct deposit, and wire transfer manual refund
cases from the Cincinnati and Ogden Business Submission Processing Sites. We found that 13 cases (18 percent) had tax
or interest computation problems amounting to $238,324,164 where taxpayers were
underpaid, and $1,756,750 where taxpayers were overpaid. As we described in a prior audit report, one
cause for these errors is the complexity of manual interest calculations. Also, the officers approving the manual
refund requests did not identify the computation errors. Finally, some manual refunds were being
delayed due to incorrect or incomplete information contained on the forms used
to request the refunds by electronic deposit.
In the 88 rejected manual refund cases we reviewed, it took an average
of 17 additional calendar days to properly reissue the rejected manual
refunds. The amount of these rejected
refunds was over $730 million.
We
recommended that the Commissioner of the IRS ensure that the Commissioners of
the four operating divisions establish stronger management reviews over large
dollar manual refund cases to ensure that final refund amounts and interest
computations are accurate. This could be accomplished by establishing centralized
staffs within the divisions or by appointing individual interest specialists
within each division who are properly trained and perform interest calculations
on a full-time basis. The Commissioners
of the Large and Mid-Size Business (LMSB) and Small Business/Self-Employed
(SB/SE) Divisions should coordinate to ensure that the 13 incorrect refund amount
cases identified from this review are corrected. In addition, the Program Manager, Office of Penalties and
Interest, SB/SE Division, should ensure that proper training materials are provided, quality reviews are performed,
and Internal Revenue Manual procedures contain adequate instructions for
computing interest on large dollar manual refund cases. Finally, the Commissioner, SB/SE
Division, should coordinate with the Director, Tax Forms and Publications, Wage
and Investment Division, to ensure that the forms used to request electronic
deposits, Direct Deposit of Tax Refund of $1 Million or More (Form 8302) or
Direct Deposit of Corporate Tax Refund (Form 8050), include the financial
institution information necessary to reduce the number of rejected electronic
refunds.
Management’s
Response: IRS management agreed to the recommendations
presented in this report. A SB/SE
Division executive is leading a team that will study the feasibility of
establishing specialized units at SB/SE Division sites to work interest
computations on large dollar refunds.
The Ogden Accounts Management Site has worked with the LMSB Division on
the majority of the 13 cases identified in the audit and will continue to work
with the appropriate areas to resolve the remainder of the cases. Interest training covering basic through
complex interest topics is being developed and is scheduled for publication by
October 30, 2003. The revision of Forms
8302 and 8050 will include adding the bank name, address, and check boxes to
both forms for better clarification of the routing number based upon the types
of deposit being made.
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 questions or your staff may call Parker F.
Pearson, Director (Small Business Compliance), at (410) 962-9637.
Controls Were in Place, but Some Need to Be Strengthened to
Ensure Manual Refunds Are Accurate
Appendix I – Detailed Objectives, 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
Most refunds issued by the Internal Revenue Service (IRS) are generated automatically by its computer system. Generally, it takes weeks from the time a credit first becomes available on a taxpayer’s account until a refund is issued. However, under certain circumstances, the IRS manually issues refunds. Rather than weeks, manual refunds can be issued to taxpayers in a matter of days. Manual refunds can be issued by paper check or electronically, either by direct deposit or by same day wire transfer through the FEDWIRE network.
Two of the most common reasons for manual refunds are:
· Taxpayers demonstrate significant need for refunds to be issued immediately rather than waiting for normal processing.
Although requests for manual refunds can originate in IRS field offices or in almost any operation of an IRS Campus, the final processing must occur in the Accounting Operation at the IRS Submission Processing Sites.
****1**** the incident prompted the Submission Processing Site to review and strengthen its controls over manual refunds.
We initiated this audit to review controls over large dollar manual refunds issued to business taxpayers by the two IRS Business Submission Processing Sites, from which most of these manual refunds are issued. In fact, the Accounting Operations at the Cincinnati, Ohio, and Ogden, Utah, Business Submission Processing Sites processed 90 percent of the nationwide Business Master File (BMF) manual refund requests of $1 million or greater in Calendar Year (CY) 2002. The volume and the dollar amount of these refunds significantly increased during CY 2002.
The chart was
removed due to its size. To see the chart,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Audit work was conducted at the Cincinnati, Ohio, and Ogden, Utah, Business Submission Processing Sites from September 2002 through May 2003. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objectives, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Although we found processing controls such as proper approval procedures, proper case control, and adequate instructions and procedures to be in place, we did find that some manual refunds were being issued for incorrect amounts. We reviewed a judgmental sample of 72 BMF manual refund requests processed at the Cincinnati and Ogden Business Submission Processing Sites. Of the 72 sample cases reviewed, 13 cases (18 percent) had incorrect refund amounts.
Manually generated refund requests are required to be reviewed by an approving officer (manager or designated alternate) for accuracy. The reviewer must sign the request form to authorize the manual refund. Although reviews were done on the above error cases, the reviews did not identify the computation errors, most of which (12 of the 13) involved the calculation of interest.
In a prior audit report regarding manual interest calculations, we described how interest calculations may need to take into account multiple tax assessment amounts and dates, payment amounts and dates, penalties, accruals, specific tax laws, etc. In addition, many of the IRS employees manually calculating interest do so only a small percentage of their work time and, consequently, do not become skilled in applying the various rules associated with restricting, calculating, and documenting interest adjustments.
We believe the interest errors referred to in this report were also made because of the complexity of manual interest calculations. Of the 13 error cases identified above, only 1 involved a tax computation error while, as previously mentioned, the other 12 involved interest computation errors. These errors amounted to $238,324,164 where taxpayers were underpaid, and $1,756,750 where taxpayers were overpaid.
1. The Commissioner of the IRS should ensure that the Commissioners of the four operating divisions establish stronger management reviews over large dollar manual refund cases to ensure that final refund amounts and interest computations are accurate. This could be accomplished by establishing centralized staffs within the various divisions or by appointing individual interest specialists within each division who are properly trained and perform interest calculations on a full-time basis. In either scenario, this review should be performed by a qualified technician prior to authorizing the refunds for processing.
Management’s Response: An executive from the Small Business/Self-Employed (SB/SE)
Division, Compliance function, is leading a team studying the feasibility of
establishing specialized units at SB/SE Division sites to work interest
computations on large dollar refunds.
They expect to have their final recommendations within the next 90
days. They will share the team’s
recommendations with the Large and Mid-Size Business (LMSB), Tax Exempt and
Government Entities, and Wage & Investment (W&I) Divisions to develop
the next steps for addressing this issue.
2. The Commissioners of the LMSB and SB/SE Divisions should coordinate to ensure that the 13 incorrect refund cases identified in this review are corrected. Coordination should also involve personnel from the Ogden Accounts Management Site where corrective action has already been taken on most of the 13 cases. However, some of the cases were unable to be corrected because they are currently under control by other areas of the IRS.
Management’s Response: Ogden Accounts Management has worked with the LMSB Division on the majority of the 13 cases identified in the audit. They will continue to work with the appropriate areas to resolve the remainder of the cases. Because some of the remaining cases have various compliance related problems, they could not provide a date when they will be resolved. However, Ogden Accounts Management will continue to work them until they are resolved.
3. The Program Manager, Office of Penalties and Interest, SB/SE Division, should ensure that proper training materials are provided, quality reviews are performed, and Internal Revenue Manual (IRM) procedures contain adequate instructions for computing interest on large dollar manual refund cases.
Management’s Response: Interest training covering basic through complex interest topics
is in the clearance process, with Chief Counsel providing technical
review. The Interest Training courses
are scheduled for publishing by the Learning and Education function, SB/SE
Division, by October 30, 2003. In
addition, the IRM will be revised to require a technical review of manual
refunds over $1,000,000 by a senior Interest Specialist before the refund is
submitted to the Accounting function.
Electronic deposits are requested on Direct Deposit of Tax
Refund of $1 Million or More (Form 8302) or Direct Deposit of Corporate Tax
Refund (Form 8050). Between January
2002 and April 2003, records at 1 IRS Business Submission Processing Site
showed that 88 electronic deposit manual refunds totaling over $730 million
were not processed timely. These
refunds were rejected because taxpayers provided incorrect or incomplete
financial information (bank routing number or account number) on these forms.
Several factors may have contributed to this problem. First, some financial institutions have one
routing number for wire transfers and another routing number for direct
deposits. If taxpayers are not aware of
this fact, they may provide the routing number for a direct deposit when the
actual deposit is to be made by wire transfer.
The refund would be rejected because the routing number was not correct
for the type of deposit being requested.
Forms 8302 and 8050 do not provide for identification of the type of
electronic transfer to be made. Also,
Forms 8302 and 8050 no longer call for verification by bank personnel of the
correct routing number. The forms no
longer call for other information which was useful in correcting incomplete or
inaccurate routing information, such as name and location of the financial
institution to receive the electronic deposit, and an attached voided check or
deposit slip.
Based on the 88 rejected manual refund cases reviewed, we
found it took an average of 17 additional calendar days to properly reissue the
rejected manual refunds. In some
instances, the manual refunds had to be reissued by paper check rather than
electronically. The benefits of an
electronic deposit include a faster refund, the added security of a paperless
payment, and the savings of tax dollars associated with reduced processing
costs. These benefits may not be
realized if the electronic deposits are rejected or delayed.
4. The Commissioner, SB/SE Division, should coordinate with
the Director, Tax Forms and Publications, W&I Division, to ensure that
Forms 8302 and 8050 include the financial institution information necessary to
reduce the number of rejected electronic refunds. Check boxes should be added to the forms to indicate whether the
deposit is a wire transfer or a direct deposit. This could help assist the IRS in determining the correct routing
number for the financial institution if that institution has different routing
numbers for the different types of deposits (i.e., wire transfer versus direct
deposit). In addition, the forms should
specify the name of the financial institution, city, and state. A caution statement should also be added to
both forms to alert the taxpayer that there could be two different routing
numbers depending on the type of deposit being made.
Management’s Response: Preliminary
discussions were held between the SB/SE Division’s Customer Account Services
and the W&I Division’s Business Tax Forms and Publications functions to
discuss the revision of Forms 8302 and 8050.
They agreed that the Tax Forms and Publications function would add the
bank name, address, and check boxes to both forms. They will continue to explore various wire transfer and direct
deposit options to make it less confusing to taxpayers.
Appendix I
Detailed Objectives, Scope, and Methodology
Our overall objectives were to evaluate whether large dollar manual refunds were being processed appropriately and whether established controls were being followed in approving and issuing these refunds. To accomplish our objectives, we:
I.
Determined the number of
business returns with manual refunds $1 million or greater.
A.
Obtained a computer listing
from the Internal Revenue Service (IRS) Business Master File of accounts with
manual refunds issued for $1 million or greater during Calendar Years 2000,
2001 and 2002 (through December 20, 2002).
In addition, we extracted the accounts with a cancelled refund check and
also the accounts with an erroneous refund from the computer listing.
B.
From the computer listing, we
determined the number of accounts and refund dollar amounts for accounts with a
manual refund issued for $1 million or greater, along with any corresponding
cancelled or erroneous refunds.
Reviewed the corresponding cancelled or erroneous refund accounts.
II.
Determined whether instructions
and procedures were adequate for reviewing and processing large dollar manual
refunds by reviewing the Internal Revenue Manual, desk procedures, and any
available training materials. We
conducted walkthroughs of the manual refund processing areas at the Cincinnati,
Ohio, and Ogden, Utah, Business Submission Processing Sites to identify any
inconsistencies in processing.
III.
Determined the adequacy of
inventory and transfer controls.
Reviewed 88 rejected manual refund cases to determine what caused the
rejection and what delays were experienced by having to reissue the rejected
manual refunds.
IV.
Determined the adequacy of
processing controls by analyzing daily processing procedures and whether review
procedures were being used. Reviewed
manual refund request forms to determine whether the forms could be revised to
make the refund approval and/or processing procedures more effective and
efficient.
V.
Determined whether processing
procedures were adequate to ensure that manual refund cases were processed accurately.
A.
We analyzed 72 closed manual
refund cases issued for $1 million or greater to determine whether the cases
were processed correctly, refund amounts were correct, interest was calculated
accurately, and any duplicate or erroneous refunds were issued. We selected a judgmental sample due to the
volume of cases processed and time necessary to fully analyze each case. Our sample consisted of one closed case of
each type of manual refund (paper, direct deposit, wire transfer) from each
month processed at each IRS Business Submission Processing Site.
Appendix II
Major Contributors to This Report
Richard Dagliolo, Director
Parker F. Pearson, Director
Kyle R. Andersen, Acting Director
Larry
Madsen, Audit Manager
Douglas C. Barneck, Senior Auditor
W. George Burleigh, Senior Auditor
Scott Critchlow, Senior Auditor
James E. Adkisson, Computer Specialist
Appendix III
Deputy Commissioner, Services and Enforcement N:SE
Commissioner, Large and Mid-Size Business Division LM
Commissioner, Small Business/Self-Employed Division S
Commissioner, Tax Exempt and Government Entities Division T
Commissioner, Wage and Investment Division W
Deputy Commissioner, Large and Mid-Size Business Division LM
Deputy Commissioner, Tax Exempt and Government Entities Division T
Deputy Commissioner, Wage and Investment Division W
Acting Deputy Commissioner, Small Business/Self-Employed Division S
Staff Assistant, Small Business/Self-Employed Division S
Director,
Communication & Liaison, Small Business/Self-Employed Division S:M:CL
Director, Compliance, Small Business/Self-Employed
Division S:C
Director, Customer Account Service, Small Business/Self-Employed Division S:CAS
Director, Reporting Enforcement, Small
Business/Self-Employed Division
S:C:CP:RE
Program Manager, Office of Penalties and Interest, Small
Business/Self-Employed Division
S:C:CP:RE:P
Chief Counsel CC
National Taxpayer Advocate
TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk
Analysis N:ADC:R:O
Office of Management Controls N:CFO:AR:M
Audit Liaisons:
Commissioner N:C
Commissioner,
Large and Mid-Size Business Division LM
Commissioner,
Small Business/Self-Employed Division S
Commissioner,
Tax Exempt and Government Entities Division
T
Commissioner,
Wage and Investment Division W
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:
· Taxpayer Rights and Entitlements – Actual; $238,324,164 in understated refunds on 8 taxpayer accounts (see page 3).
Methodology Used to Measure the Reported Benefit:
Selection of Sample –
We selected a judgmental sample of 72 closed manual refund cases processed during Calendar Year 2002 from the Cincinnati, Ohio, and Ogden, Utah, Business Submission Processing Sites.
Sample Results –
We determined that 8 of the 72 cases reviewed had errors that caused refunds on these cases to be understated by $238,324,164.
Type and Value of Outcome Measure:
· Cost Savings (Funds Put to Better Use) – Actual; $1,756,750 in overstated refunds on 5 taxpayer accounts (see page 3).
Methodology Used to Measure the Reported Benefit:
Selection of Sample –
We selected a judgmental sample of 72 closed manual refund cases processed during Calendar Year 2002 from the Cincinnati and Ogden Business Submission Processing Sites.
Sample Results –
We determined that 5 of the 72 cases reviewed had errors that caused refunds on these cases to be overstated by $1,756,750.
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.