The Internal Revenue Service Needs to Improve Oversight of Remittance
Processing Operations
October 2002
Reference
Number: 2003-40-002
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.
October
7, 2002
MEMORANDUM FOR
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Acting Inspector General
SUBJECT: Final Audit Report - The Internal Revenue
Service Needs to Improve Oversight of Remittance Processing Operations (Audit #
200240026)
This
report presents the results of our review to determine whether the Internal
Revenue Service (IRS) has established adequate controls to ensure that payments
are accurately posted to taxpayers’ accounts.
Each year the IRS Submission
Processing Campuses (SPC) receive millions of remittances totaling billions of
dollars. In Fiscal Year (FY) 2001
alone, the IRS processed more than 40 million remittances totaling over
$171 billion. The IRS has several
initiatives to improve the accuracy of processing payments to Wage and
Investment (W&I) taxpayers’ accounts, including a local quality review
program and a new national performance measurement process called the Deposit
Error Measure. These reviews are based
on evaluations of statistically valid samples of remittances randomly selected
from work in process. However, the IRS
needs to improve oversight at both the national and local levels to ensure that
review programs are conducted consistently and correctly to maintain the
statistical validity of the review results and that cases are properly reviewed
to ensure the accuracy of feedback to management. The actual error rates on the reports that we reviewed should
have been much higher than the deposit error rates that were reported.
In summary, our review
showed that the Deposit Error Measure has a statistically valid sampling plan;
however, the plan is not being consistently implemented by the SPCs. Although we visited only two campuses, there
were significant differences in both the determination of the number of cases
to select for review and the methods of selecting the cases.
We believe that a
combination of factors contributed to the problems. First, this is a new measure and each location is still
experimenting to identify the best way to implement the program. Second, at the time of our review, there had
been limited national visitations to ensure that the program has been implemented
consistently and correctly. As a
result, review results may not be statistically valid and management may not be
able to make proper decisions to improve the remittance processing operation.
We also
determined that Deposit Error reviewers did not identify all deposit
errors. Based on our re-evaluation of
the same sample cases used to prepare the April 2002 report for the Austin and
Fresno SPCs, the actual error rates for April were 37.5 and 31.8 percent higher
than the error rates that were reported, respectively. The error rate in Austin increased from 4.8 percent
to 6.6 percent, and the error rate in Fresno increased from 10.7 percent to
14.1 percent. The deposit error rate goals for FY 2002 were 2.6 percent for
Austin and 3.4 percent for Fresno.
We attribute the problem to a lack of effective
managerial oversight. In Austin, the
manager did not review all the sample cases, only the error cases. Although this would ensure that identified
errors were properly reported, it would not identify undetected errors on cases
considered error-free. In Fresno, the
manager did not perform any reviews of the analyst’s work. As a result, management did not receive
accurate feedback on the quality of remittance processing and was limited in
identifying sources of errors, analyzing error trends, and recommending
corrective actions.
Management’s Response: IRS
management agreed with our recommendations and has already completed corrective
action. Specifically, the Director,
Submission Processing (SP), sent an e-mail to all SP Directors asking them to
ensure the appropriate sampling techniques are followed and to review monthly a
sample of all measured cases.
Conferences were held with the sites and visits to campuses began June
17, 2002. In addition, Program Analysis
System (PAS) managers were reminded during the Balanced Measures conference
that they must adhere to the procedures in the Balanced Measure Internal
Revenue Manual 3.0.275.1.3.2(2). These
procedures require them to review monthly a sample of all work assigned to PAS
analysts. Management’s complete
response to the draft report is included as Appendix IV.
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 Michael R. Phillips, Assistant
Inspector General for Audit (Wage and Investment Income Programs), at (202)
927-0597.
The
Internal Revenue Service Has Initiatives to Improve the Accuracy of Processing
Payments
The Deposit Error Measure Sampling Plan Is Not Consistently Implemented
All Payment Processing Errors Are Not Being Identified
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Management’s Response to the Draft Report
Each year the Internal Revenue Service (IRS) Submission Processing Campuses (SPC) receive millions of remittances totaling billions of dollars. Some of these remittances are sent directly to the campuses by taxpayers, some are forwarded from Lockbox banks, and some are forwarded from IRS field office personnel to the campuses for processing. In Fiscal Year (FY) 2001 alone, the IRS processed more than 40 million remittances totaling over $171 billion.
When remittances arrive
at the SPCs, they are reviewed to determine whether enough information is
available for the payment to be processed and posted to the correct taxpayer’s
account. Perfect documents are sent
directly to the Residual Remittance Processing System (RRPS), while those
requiring additional research (imperfect documents) are sent to the Payment
Perfection Unit. Once the research has
been completed and the remittance is considered perfect, it is sent to the RRPS
for processing.
In the RRPS, information
from the source document and the remittance are input to the computer system. The remittances are then scanned into
another system that provides validity checks for the dollar amounts previously
entered. After these validity checks,
the remittances are sent to the Federal Reserve Bank for deposit.
During FY 2001, the IRS
implemented a national Deposit Error Measure designed to assess the accuracy of
posting remittances to taxpayer accounts.
This measurement is based on a statistically valid sampling plan. The sample is randomly selected from all
types of remittances coming into the SPCs, regardless of deposit method. Each day cases such as perfected
remittances, imperfect remittances, field offices remittances, large dollar
cases, and Lockbox payments are randomly selected. Case file information is copied and retained, and the case is
returned to the work stream. After
approximately 2 weeks, Program Analysis System (PAS) analysts review cases to
determine if the IRS correctly followed the initial taxpayer intent in
processing the deposit and, if clear taxpayer intent was not present, if the
IRS followed correct procedures. The
errors found during the analysis are compiled and used to compute the Deposit
Error Rate (cases with errors/total cases reviewed). The overall Deposit Error Rate is a cumulative figure computed at
the end of the fiscal year.
Wage and Investment
(W&I) Headquarters set a cumulative target Deposit Error Rate of 3.4
percent for SPCs for FY 2002. This goal
was based upon the average of the May 2001 cumulative rates, excluding the
highest and lowest individual campus rates.
As of May 2002, the cumulative W&I measure was 3.8 percent. Goals were also set for the individual
SPCs. These goals were based on the FY 2002
corporate goal and the campus’ May 2001 cumulative rate. If the campus’ May 2001 cumulative rate met
or exceeded the FY 2002 corporate goal, the campus’ goal was set at its May 2001
cumulative rate. If the campus’ May 2001
cumulative rate did not meet or exceed the FY 2002 corporate goal, then the
campus’ goal was set at the FY 2002 corporate goal.
The IRS expects to
achieve its targets based upon the monitoring and reviewing of deposit errors,
resulting in systemic and procedural change requests. The results of these structured statistical reviews are captured
in national databases and reports are updated monthly. The local review staffs provide feedback to
the processing areas and to National Headquarters analysts.
Our overall objective was to determine whether the IRS has established adequate controls to ensure that payments are accurately posted to taxpayers’ accounts. We conducted this review from May to July 2002 at the Austin and Fresno SPCs and in New Carrollton, Maryland. The audit was conducted 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.
The IRS has several initiatives to improve the accuracy of
processing payments to W&I taxpayers’ accounts. It established both a local quality review program and a new
national performance measurement process called the Deposit Error Measure. The new Deposit Error Measure provides an
estimate of the accuracy of payments posting to taxpayers’ accounts on both
national and individual SPC levels. The
results of the program can be used by
managers to improve operations at individual sites and to help set performance
goals to improve the overall deposit program.
The success of the Deposit Error Measure depends in large part on the IRS’ ability to establish meaningful standards, to measure the success of the program, and to correct errors and improve deposit activity. To its credit, the IRS used historical data to establish national and local goals for the Deposit Error Rates. It also recognizes that the Deposit Error Measure is new and program results need to be monitored to make meaningful and necessary adjustments to goals for subsequent years.
The IRS also provides a certain amount of national oversight over the measure to assess its success. The oversight actions include holding periodic conference calls with nationwide PAS analysts to discuss deposit measure issues, monitoring the monthly samples being collected, and reviewing how error cases are coded. In addition, the National Headquarters Deposit Error Balanced Measure staff has recently begun making visitations to the SPCs.
The IRS developed a statistically valid sampling plan to randomly select actual remittances for review. To ensure consistent application of the sampling plan and comparable review results, the IRS developed written instructions called the Deposit Accuracy User Guide. With the help of this User Guide and the sampling plan, reviewers – whose duties are independent from the functions being reviewed – select and analyze the remittances to determine whether payments are accurately posted to taxpayers’ accounts.
Moreover, to effectively collect accurate data, the IRS created a national computerized database called the Submission Processing Measures Analysis and Reporting Tool (SMART). The data collected by the reviewers is annotated on a case review form and then entered into the SMART. Reports are then generated that provide accuracy rates and other quality-related information.
The IRS uses the review results to improve the Deposit Error Measure. At the national level, management uses the review results to assess the overall quality of payment processing. At the local level, management uses the findings to correct errors and develop local improvement actions. The reviewers generally pull their sample and complete their analyses in time to promptly correct any errors on individual cases included in the review. However, the IRS needs to improve oversight at both the national and local levels to ensure that the review programs are conducted consistently and correctly.
The Statistics of Income Division must accurately determine the sample size and skip interval for the Deposit Error Measure to be statistically valid. While there is some flexibility from campus to campus, the sample must be reflective of the entire universe of remittances processed. To ensure this, PAS clerks are required to follow a systematic sampling technique based on the pre-determined skip intervals and sample size. The sample selection guidelines provide that clerks manually count all available remittances and select every “nth” document. PAS reviewers are mandated to input all cases selected for the sample in a database system and examine each case thoroughly.
Our review showed that the Deposit Error Measure has a statistically valid sampling plan; however, the plan is not being consistently implemented by the SPCs. Although we visited only two campuses, there were significant differences in both the determination of the number of cases to select for review and the methods of selecting the cases. Our evaluation of the samples that had been taken and our observation of cases being sampled identified the following problems:
· The analyst at the Fresno SPC incorrectly used an old sample plan and selected 261 cases for review instead of the required 168 cases. Also, to get the necessary remittances to achieve the above sample size, the analyst had a clerk select the additional remittances judgmentally instead of using the stated skip interval.
· At the Austin SPC, a clerk made hourly trips to count the remittances that had been received and selected a remittance for the sample whenever the skip interval was reached. This required a count of all remittances received and resulted in a very labor-intensive process that was an inefficient use of the clerk’s time.
· A new sampling technique being tested at the Fresno SPC may be more efficient but may not allow each remittance an equal chance of being selected. The clerk uses daily incoming volume tabulations and the predetermined skip interval to determine the number of remittances to be pulled. However, the clerk judgmentally selected the remittances from those available rather than selecting every “nth” remittance as prescribed by the skip interval.
We believe that a combination of factors contributed to the problems. First, this is a new measure and each location is still experimenting to identify the best way to implement the program. Second, at the time of our review, there had been limited national visitations to ensure that the program has been implemented consistently and correctly. As a result of the inconsistent implementation of and deviations from the sampling plan, the review results may not be statistically valid and management may not be able to make proper decisions to improve the remittance processing operation.
1. The Director, W&I Division, Customer Account Services, should ensure that the sampling plan is being implemented consistently at the SPCs. Field visitations and increased oversight by the National Headquarters Deposit Error Balanced Measure staff could provide additional guidance and direction to the individual campuses.
Management’s Response: The IRS stated, “The Director, Submission Processing (SP) sent an e-mail to all SP Directors asking them to ensure the appropriate sampling techniques are followed and to review monthly a sample of all measured cases. Conferences have been held with the sites and visits to campuses began June 17, 2002.”
The Deposit Error Measure is one of the IRS’ balanced measures and is used to show the percentage of misapplied payments at SPCs. PAS Deposit Error reviewers are required to thoroughly examine a copy of the remittances and associated posting documents that were sampled. The results are compared with established procedures to assess the accuracy of case processing.
Unfortunately, the reviewers did not identify all deposit errors. In Austin, the actual error rate was 37.5 percent higher than the rate reported; and in Fresno, the actual rate was 31.8 percent higher than the rate reported. Our results are based on re-evaluating the same cases that PAS analysts reviewed to prepare the April 2002 report and include the following errors:
·
The Austin SPC
PAS staff identified 8 remittances out of their sample of 166 that contained
deposit-related errors (4.8 percent error rate). We identified 3 additional cases with errors that increased the
error rate to 6.6 percent.
·
The Fresno SPC
PAS staff identified 28 remittances out of their sample of 262 that contained
deposit-related errors (10.7 percent error rate). We identified 9 additional cases with errors that increased the
error rate to 14.1 percent.
Our analysis of the error cases did not identify any new trends. The errors consisted primarily of incorrect transaction dates, incorrect transaction codes, incorrect tax periods, and incorrect payee information. We did not identify any cases in which the remittance was posted to the incorrect taxpayer’s account.
We attribute the problem to a lack of
effective managerial oversight. PAS
managers are charged with maintaining the integrity and quality of the program
by monitoring and reviewing the work of the PAS analysts assigned to them. However, this is not always taking
place. In Austin, the manager did not
review all the sample cases, only the error cases. Although this would ensure that identified errors were properly
reported, it would not identify undetected errors on cases considered
error-free. In Fresno, the manager did
not perform any reviews of the analyst’s work.
Closer managerial involvement could help identify any omissions or
oversights on the part of the analysts.
The
error rates that we recomputed for April at both locations exceeded the FY 2002
goals (Austin 2.6 percent and Fresno 3.4 percent). As a result, the Deposit
Error Rates for both Austin and Fresno were significantly understated and there
were more remittance processing errors than previously reported. Unless feedback on the quality of remittance
processing is accurate, management will be limited in identifying sources of errors, analyzing error trends, and recommending
corrective actions.
2. PAS first-line managers should provide increased oversight to ensure that all processing errors are identified during the Deposit Error Measure sample review. Specifically, PAS managers at SPCs should include all cases in their reviews to ensure that all errors are identified and reported.
Management’s Response: The IRS stated, “We told PAS managers during the Balanced Measures conference that they must adhere to the procedures in the Balanced Measure Internal Revenue Manual 3.0.275.1.3.2(2). These procedures require them to review monthly a sample of all work assigned to PAS analysts.”
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the Internal Revenue Service (IRS) has established adequate controls to ensure that payments are accurately posted to taxpayers’ accounts. We performed the following tests to accomplish this objective:
I. Determined whether the IRS had established standards for accuracy of applying payments. We identified the corporate Deposit Error Rate goals for the National level, Wage and Investment (W&I) Division, and W&I Submission Processing Campuses (SPC) and determined how the goals were set.
II.
Determined
whether the IRS had established an effective system to measure the accuracy of
applying payments and whether the system is properly and consistently applied
at the various sites.
A.
Determined
how the IRS’ Deposit Error sampling plan was developed and whether the plan is
valid.
B.
Evaluated
the IRS’ implementation of the sampling plan and whether the Program Analysis
System (PAS) Deposit Error review process is effective and consistently
applied.
C.
Selected
and analyzed a sample of cases that had been selected for the PAS review
function and determined whether we agreed with the results.
III.
Evaluated
how the IRS identified problems and analyzed the cause for inaccurate and
untimely payment applications.
A.
Identified
and obtained reports on Deposit Error Rates and evaluated the effectiveness of
the data and analyses contained in the reports.
B.
Determined
how errors identified during the PAS review were corrected, selected a sample
of identified errors, and verified whether the corrections had been made.
IV.
Evaluated
the corrective actions taken by the IRS to improve the application of
remittances to taxpayers’ accounts.
A.
Interviewed
National Headquarters and local management officials to determine what steps
were taken to address and improve deposit accuracy.
B.
Evaluated
corrective actions by management based on the results of the PAS review.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs)
Stanley C. Rinehart, Director
Stephen S. Root, Audit Manager
Cari D. Fogle, Senior Auditor
Jacqueline D. Nguyen, Senior Auditor
Susan A. Price, Senior Auditor
Gene Luevano, Auditor
Appendix III
Commissioner N:C
Deputy
Commissioner N:DC
Deputy
Commissioner, Wage and Investment Division
W
Director, Customer
Account Services, Wage and Investment Division
W:CAS
Director, Submission Processing, Wage and Investment
Division W:CAS:SP
Director, Strategy
and Finance W:S
Chief Counsel CC
National Taxpayer Advocate
TA
Director, Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
Office of Management Controls N:CFO:F:M
Audit Liaisons:
Director, Submission Processing, Wage and Investment Division W:CAS:SP
Program/Process Assistant Coordinator, Wage and Investment Division W:HR
Appendix IV
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.