Terrorist Victims’ Tax Relief Refunds Were Accurate, but
Some Were Delayed
March 2003
Reference Number: 2003-40-080
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.
March
20, 2003
MEMORANDUM FOR
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 - Terrorist Victims’
Tax Relief Refunds Were Accurate, but Some Were Delayed (Audit # 200240055)
This
report presents the results of our review to determine if the Internal Revenue
Service (IRS) provided accurate and timely tax relief when processing individual income tax returns for the victims of
terrorist attacks. We also determined
if the IRS adequately informed victims’ families and/or representatives of the
actions taken and if victims’ returns were identified for special processing as
intended.
On
September 11, 2001, terrorists attacked the United States of America and
thousands of people perished as a result.
In order to provide relief to families of the victims of these and
certain other acts, the Congress passed the Victims of Terrorism Tax Relief Act
of 2001. This legislation typically
exempts victims from income tax for the year of their death and for the prior
taxable year. It provides a minimum tax
relief benefit of $10,000 for each deceased victim.
The
IRS implemented special procedures to process tax relief refunds for tax
returns filed for deceased victims of these terrorist attacks. The program for processing these returns was
referred to as the Killed in Terrorist Action (KITA) Program. Employees were to be trained at IRS Campuses
throughout the country to be prepared and available to work KITA returns. The IRS expected the processing of these
highly sensitive KITA returns to be expedited at all times.
The
KITA Project Office identified approximately 2,900 KITA victims. When we began our review, approximately
1,500 of these victims had returns that were being processed using the special
KITA procedures. During our review, the
IRS made special efforts to notify victims’ families who had not yet filed KITA
returns that tax relief was available.
As of October 31, 2002, the IRS had received approximately 4,500 returns
for 2,400 victims to be processed in the KITA Program.
Tax relief for processed KITA returns ranged
from the $10,000 minimum to $11 million per victim.
Based
on information submitted by victims’ families, IRS employees correctly computed
tax relief amounts for returns processed in the KITA Program and issued manual
refunds to speed relief to victims’ families.
However:
·
The IRS did not issue
40 percent of the tax relief refunds in our sample within the time period set
as a goal by KITA Project management or within a time period that we would
consider to be expedited. Of our sample
of 156 victims, these refund delays affected 76 victims’ families.
Based on our concerns about
processing delays and our suggestions to both clarify expected processing time
periods and notify victims’ families of processing results, KITA Program
management took actions to improve KITA processing during our review. In addition, most returns expected for the
KITA Program have already been filed and processed by the KITA Program. Therefore, we limited our report
recommendations to those that could affect victims’ families that have KITA
returns yet to be filed or processed.
To help ensure that victims’
families receive the tax relief that the Congress intended and the expedited
return processing that the IRS expects, we recommended that the KITA Project
Office compare its list of victims to its list of KITA-processed returns and
research the accounts with no KITA-processed returns. The KITA indicator should be input to those accounts identified
as needing it. In addition, for those
same accounts researched, any returns filed where tax relief was not granted
should be corrected. We have also
included some observations that the IRS could consider in implementing other
sensitive programs such as the KITA Program in the future.
Management’s
complete response to the draft report is included as Appendix VI.
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.
Employees Correctly Computed Tax Relief Refunds
Forty Percent of the Tax Relief Refunds Were Delayed
Most Victims’ Families Were Not Informed of Processing Results for
Their Tax Relief Requests
Victims’ Accounts Were Not Always Identified and Returns Did
Not Always Receive Special Processing
Issues Encountered Could Provide Useful Guidance for the Future
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 – Timeliness of Refunds – Complete Return to
Manual Refund
Appendix VI – Management’s Response to the Draft Report
On September 11, 2001, terrorists attacked the United States of America and thousands of people perished as a result. In order to provide relief to families of the victims of these and certain other acts, the Congress passed the Victims of Terrorism Tax Relief Act of 2001, which the President signed into law on January 23, 2002. This tax relief applies to victims who died as a result of:
The Relief Act typically exempts the above victims from income tax for the year of their death and the prior taxable year. It provides a minimum tax relief benefit of $10,000 for each victim regardless of the individual’s income tax liability for the eligible tax years.
The Internal Revenue Service (IRS) developed Tax Relief for Victims of Terrorist Attacks (Publication 3920) to assist victims’ families and representatives in filing returns for tax relief. This Publication includes instructions and worksheets for filing returns and computing the tax relief amounts. The IRS mailed this Publication and related tax forms and instructions in March 2002 to identified victims’ families.
The IRS implemented special procedures to process tax relief refunds for tax returns filed for deceased victims of these terrorist attacks. The program for processing these returns was referred to as the Killed in Terrorist Action (KITA) Program. The IRS’ goal was to expeditiously process these sensitive KITA returns.
In order to expedite refunds and speed relief to the victims’ families, the IRS established a KITA Project Office at the Andover Campus and provided special Andover mailing addresses for KITA returns. The KITA Project Office in Andover received original and amended returns claiming KITA tax relief, controlled them on the KITA inventory data file, and used express shipping to send the returns to the various KITA Campuses for processing.
Employees were to be trained at IRS Campuses throughout the country to be prepared and available to work KITA returns. These employees verified the computations of tax relief amounts and issued “manual” refunds to expedite the refunds. Tax relief for processed KITA returns ranged from the $10,000 minimum to $11 million per victim.
This audit was conducted at the national KITA Project Office and at the Andover, Atlanta, Austin, Fresno, Kansas City, and Philadelphia Campuses. The audit was conducted from July through October 2002 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.
The KITA Project Office identified approximately 2,900 KITA victims. When we began our review, approximately 1,500 of these victims had returns that were being processed using the special KITA procedures.
Because some victims’ families had not filed returns requesting tax relief, KITA Project officials took actions to help ensure victims’ families were aware of available relief. The KITA Project Office informed us that reminder notices for the Oklahoma City victims’ families were mailed in mid-September 2002 and that reminder notices for other victims’ families were planned for early November 2002. These actions were coordinated with state authorities in Oklahoma and New York. As of October 31, 2002, the IRS had received approximately 4,500 KITA returns for 2,400 victims to be processed in the KITA Program.
A number of factors are involved when calculating tax relief amounts. On joint returns, only the decedent’s part of the joint income tax liability is eligible for tax relief, which requires an allocation of income and deductions between the spouses. Certain types of income are exempt from tax while other types of income are not exempt and not eligible for tax relief. In addition, some taxes are not eligible for tax relief (e.g., self-employment tax). Victims whose tax relief for eligible years totals less than $10,000 are entitled to the $10,000 minimum tax relief.
After considering the above factors, return preparers completed IRS-required worksheets showing the tax relief calculations and filed the worksheets with the KITA tax returns. IRS employees used the information from the worksheets to verify the accuracy of the requested tax relief amounts.
We reviewed 86 KITA tax returns and did not identify any
material problems with the accuracy of IRS employees’ calculations of tax
relief amounts. Based on the
information provided by return preparers, the IRS verified and corrected, as
necessary, the requested tax relief amounts.
In conjunction with this, “other” taxes were forgiven or not forgiven as
appropriate, and the $10,000 minimum relief was allowed when applicable.
The IRS procedures required employees to expedite KITA tax return processing at all times. To implement this, the KITA Project Office goal was for the KITA Campuses to issue a manual refund within 30 days of receiving a “complete” return – one with all the information needed to process the return. The IRS’ 30-day period began on:
· The date the IRS received the return at the special Andover mailing address designated for filing KITA returns, if a return was complete when filed.
However, the 30-day goal did not consider delays to request additional information or routing delays when the IRS received a return at an address other than the designated KITA address. In our review, we used both the IRS’ 30-day goal and an additional goal that, in our opinion, needed to be met to consider a refund to be expedited. We considered a refund delayed if it was issued within the IRS’ 30-day goal, but the total time the IRS spent processing the return was 40 days or more.
To evaluate the timeliness of the KITA refunds, we selected 156 victims who had at least 1 return identified for KITA processing as of June 4, 2002. Of the 272 returns reviewed, a total of 109 returns (40 percent) had delayed refunds. These delays affected 76 victims’ families and involved refunds that totaled $5 million and averaged $65,000 per victim.
Refunds for the 272 returns reviewed were issued in an average of 24 days from the date the returns were complete. However, 109 returns had delayed refunds.
·
Of these, 78 returns (52 taxpayers) were not refunded
within the IRS’ goal of 30 days from the date the return was complete. See Appendix V for the days, by Campus, from
return completion to the manual refund for the 272 returns reviewed.
· Of these, 31 additional returns (24 taxpayers) had refunds issued within the IRS’ 30-day goal, but the total IRS processing time was 40 days or more. These included 26 returns where the KITA Campus took 1 week or more after receiving the return to request additional information needed to complete the return. These also included 5 returns incorrectly mailed by victims’ families to the Brookhaven Campus, with routing delays contributing to the excessive processing time.
The refund delays occurred for a number of reasons.
Better
controls would have helped the KITA Project Office identify and prevent delays
The KITA Project
Office could have reduced the number of delayed refunds by:
· Clearly communicating the IRS’ 30-day goal to the KITA Campuses early in the Program. The goal was not clearly communicated until late June 2002, after we notified the Project Office of this issue and after many of the returns had been worked.
Initial procedures established by the KITA Project
Office contributed to the delays
Procedures for working and reviewing the KITA returns caused delays at some Campuses.
· To reduce burden and avoid unnecessary contacts with victims’ families, procedures required employees to reconstruct taxpayers’ allocations of income and deductions used to compute the tax relief amounts if this information was not provided by the return preparer. Because this information was not required with the return, KITA employees at several Campuses spent a significant amount of time trying to determine the allocations and compute the refunds. After we brought this issue to the attention of the KITA Project Office, these procedures were changed to expedite processing.
Some KITA Campuses did not provide sufficient staffing
to timely work the returns
The IRS stipulated
that each Campus working KITA returns should have 15 employees available at any
given time to process the returns. We
analyzed hours applied to the KITA Program for the approximate time period of
our sample. The two Campuses with the
highest percentages of delayed refunds had significantly fewer than 15
employees working full time on KITA cases during this time. We were informed that 1 of these 2 Campuses
had only 4 employees trained to work KITA cases by late May 2003, approximately
30 days after the Campus received the majority of its KITA returns. Approximately 2 weeks later, the KITA
Project Manager noted in his review of this Campus that only one employee was
working KITA cases. The understaffing,
in conjunction with the Campuses receiving the majority of their return
inventory over a short period of time, caused delays.
In general, taxpayers who request tax adjustments should be provided with the tax adjustment amount, any applicable refund amount, the anticipated refund date, and a telephone number and address to contact with any questions. The IRS typically mails several million notices every year to provide taxpayers with this information about their tax adjustments. This information helps prevent uncertainty as to whether the IRS has taken needed action, helps prevent unnecessary contact with the IRS, and provides a source to call or write if refunds are not received by the date promised or there are other questions.
After processing KITA returns, the IRS did not provide most KITA victims’ families with the basic information described above. Consequently, the IRS did not provide these families with the high level of customer service one would expect for these very sensitive returns. Only one of the six KITA Campuses routinely informed victims’ families of the results of their tax relief requests. The other five Campuses did not inform most victims’ families of processing results because:
· KITA processing procedures did not require employees to contact victims’ families with the results.
· Employees were expected to follow general IRS processing procedures when KITA procedures did not provide guidance on an issue. These general procedures included using codes to suppress normal notices for tax adjustments to decedents’ accounts. Consequently, IRS employees would need to contact the deceased taxpayers’ families via telephone or letter to inform them of the adjustments. However, the general IRS procedures were not clear and led employees at the five KITA Campuses to believe they needed to make contact only if the actual refund amounts differed from the requested refund amounts.
During our review, we informed the KITA Project Office of
our concerns about not notifying victims’ families of processing results for
their tax relief requests. Based on our
concerns, the IRS changed the KITA procedures to require this notification for
all tax relief requests. The IRS also
clarified its general procedures affecting tax adjustments to all decedents’
accounts to require explanations by telephone or letter when notices are
suppressed.
The IRS used a special code (the KITA indicator) on the IRS computer system to identify KITA victims’ accounts. This indicator allows employees and the IRS computer system to identify victims’ tax returns for special KITA processing rather than normal processing. Employees processing KITA returns were to input the indicator if it was not already on the account.
In a previous review, we reported that the IRS had not always updated KITA victims’ accounts with the KITA indicator, and recommended researching identified victims’ accounts and inputting the KITA indicator if necessary. The KITA Project Office responded that all updates to its computer records were completed by April 1, 2002.
To determine in this review if the IRS properly coded victims’ accounts and identified KITA returns for special processing, we reviewed 92 victims’ accounts from 1,460 victims with no returns included in the KITA Program. We also reviewed 160 victims’ accounts from approximately 1,500 victims with returns included in the KITA Program.
We identified victims’ accounts without KITA indicators. Although we previously reported this issue, the KITA Project Office did not ensure that all victims’ accounts were updated with the KITA indicator. In addition, the IRS did not always process victims’ returns through the KITA Program.
Terrorist victims’ accounts were not always identified with a KITA indicator
Of the 92 victims with no returns processed in the KITA Program, 7 did not have a KITA indicator on their accounts. Two victims had no indicators on their individual accounts; five victims had no indicators on their joint accounts, even though they had a history of filing joint returns.
For the 7 victims, a total of 11 original or amended tax returns had not been filed to request KITA tax relief at the time of our review. Without the KITA indicator, when these 11 returns are filed, these victims’ families may not receive the tax relief and expedited return processing that the KITA process is designed to provide.
Terrorist victims’ tax returns were not always processed as KITA returns
Of the 92 victims with no returns processed in the KITA Program, 4 had a Tax Year (TY) 2001 return that went through normal return processing rather than KITA processing. Of the 160 victims with returns included in the KITA Program, 1 had a TY 2001 return that went through normal return processing rather than KITA processing. For these 5 returns, the victims’ families had not received a total of $60,000 in tax relief to which they were entitled. We informed KITA employees of these returns, and the employees took actions to process the returns through KITA to allow the tax relief.
Of the five returns:
1. The KITA Project Office should compare its list of victims to its list of KITA-processed returns. For those victims with no KITA-processed returns, the related accounts should be researched and the KITA indicator input when necessary.
Management’s Response: The KITA Project Office completed this action on November 15, 2002. The IRS completed its research and input the KITA indicator on affected accounts when it sent reminder letters to victims’ families who had not filed the tax returns.
2.
The KITA Project Office should compare its list of victims
to its list of KITA-processed returns.
For those victims with no KITA-processed returns, the related accounts
should be researched to identify and correct any returns filed where tax relief
was not granted.
Management’s Response: IRS management
agreed with this recommendation and corrective action is already underway.
We had some observations that the IRS may find useful if faced in the future with quickly establishing another sensitive program like the KITA Program. Additional emphasis on management controls could help the IRS avoid potential problems with future programs.
Some delayed refunds might have been avoided if critical
program goals had been established and communicated clearly in writing when the
Program started. In addition, better
inventory information and more timely operational reviews would have helped
management identify potential delays earlier in the Program.
The IRS required return preparers to file worksheets with the tax returns that partially showed how the tax relief amounts were calculated. However, at times, employees needed more information to determine the accuracy of requested tax relief on joint returns. The KITA employees at some Campuses spent a significant amount of time on joint returns trying to determine how preparers had allocated income and deductions to calculate the tax relief. If the IRS had required allocation information with the return and worksheets, the KITA returns could have been processed more efficiently.
Finally, an
existing control can be used to identify certain notices for review and help
prevent incorrect notices. Although not
required by KITA management, four of the six KITA Campuses used the Local
Control File (LCF) to help prevent incorrect notices on KITA returns. We did not identify a significant number of
incorrect notices issued by the two Campuses not using the LCF. However, its value was illustrated by one
Campus that used it to prevent mailing more than 20 incorrect balance due
notices totaling over $600,000 for KITA returns. Controls such as the LCF should be used in the future when
warranted by the volume of potentially incorrect notices and/or the program’s
sensitivity.
Appendix I
Detailed Objectives, Scope, and Methodology
The overall objective of this review was to determine if the Internal Revenue Service (IRS) provided accurate and timely tax relief when processing individual income tax returns for the victims of terrorist attacks. We also determined if the IRS adequately informed victims’ families and/or representatives of the actions taken and if victims’ returns were identified for special processing as intended.
As part of our review, we took random samples from two IRS data files. We did not plan to make projections. The sample sizes used were sufficient for our tests and could be analyzed within the time constraints of our audit.
· For the second sample, we matched the IRS’ list of victims to the KITA data file of returns received and controlled for KITA processing as of June 28, 2002. From the 1,460 victims where the KITA data file did not reflect any returns in KITA processing, we selected an interval sample of 100.
We performed the following tests to accomplish our objectives:
I. Determined if the IRS correctly processed the KITA returns.
A. Compared the Victims of Terrorism Tax Relief Act of 2001 with Tax Relief for Victims of Terrorist Attacks (Publication 3920) to determine if the Publication computations and related instructions conform to the law.
B.
Reviewed a
sample of 86 returns to determine the accuracy of the computations of the tax
relief amounts. These 86 returns were
randomly selected out of the 281 described above to limit the number reviewed
due to time constraints. Reviewed the
returns and related KITA case files to determine the accuracy of the tax relief
amounts, evaluate the forgiveness of “other” taxes (such as self-employment
taxes), and determine if the victims were allowed the minimum $10,000 tax
relief.
II. Determined if the IRS timely processed KITA returns to expedite tax relief, in the form of manual refunds, to the victims’ families.
A. Evaluated the adequacy of the IRS’
criteria for timely processing KITA returns and related refunds.
B. Reviewed the 272 returns (for 156 victims) that were available out of our sample of 281 returns (for 160 victims) to evaluate the timeliness of IRS actions from receipt of the return to issuance of the refund.
C. Followed up with the six Campuses to determine the reasons for untimely case resolution actions.
D. Reviewed inventory and visitation reports to evaluate problem information available to the KITA Project Office.
III. Evaluated the adequacy of IRS efforts to inform the victims’ families of adjustment actions and manual refunds for tax relief.
A. Determined whether contact, by telephone or letter, was made on closed KITA cases to inform the victims’ families of the tax relief amounts; refund information; and name, telephone number, and address of applicable IRS contact persons.
B. Evaluated the IRS’ process for preventing incorrect notices to the victims’ families.
IV. Determined if victims’ accounts were identified as KITA accounts and if victims’ returns were processed as KITA returns. Reviewed the 92 victims’ accounts that could be located from our sample of 100 victims described above (where the KITA data file of returns did not show any of these victims’ returns in KITA processing).
V. Obtained and reviewed information related to the IRS’ continuing efforts to notify victims’ families of the KITA tax relief available.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector General for Audit (Wage and Investment Income Programs)
Stanley Rinehart, Director
Gary
Young, Acting Director
Richard
Calderon, Audit Manager
Carola Gaylord, Senior Auditor
John Kirschner, Senior Auditor
Larry Mart, Senior Auditor
Susan
Price, Senior Auditor
Steven
Stephens, Senior Auditor
Appendix III
Acting Commissioner N:C
Commissioner, Small
Business/Self-Employed Division S
Deputy Commissioner, Wage and Investment Division W
Director, Accounts Management W:CAS:AM
Director, Strategy and Finance W:S
Field Director, Accounts Management (Andover) W:CAS:AM:AN
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:
Chief,
Customer Liaison S:COM
Program/Process Assistant Coordinator, Wage and
Investment Division W:HR
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; 5 victims’ returns went through normal return processing rather than Killed in Terrorist Action (KITA) processing, resulting in over-assessed taxes of $60,000 (see page 8).
Methodology Used to Measure the Reported Benefit:
The five returns identified were from two different sources. We matched the Internal Revenue Service’s (IRS) list of identified victims to the data file of returns received and controlled for KITA processing as of June 28, 2002, and identified 1,460 victims where the KITA data file did not reflect any returns being processed for the victims. We reviewed a random sample of 92 of these victims’ accounts and identified 4 returns that were processed normally rather than as KITA returns. From our random sample of 160 victims selected from approximately 1,500 victims with returns controlled by the IRS as KITA returns, we identified the fifth return. We calculated the tax relief amounts that the victims’ families would be entitled to for these five returns, estimating the victims’ taxes on joint returns based on available income information.
Appendix V
Timeliness
of Refunds Complete Return to Manual Refund
Campus
|
<=20 Days |
21 to 30 Days |
31 to 40 Days |
41 to 50 Days |
> 50 Days |
Total > 30 Days* |
Total Returns |
|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
|
|
|
1
|
42 |
25 |
11 |
13 |
2 |
26 (28%) |
93 |
2
|
8 |
12 |
12 |
6 |
10 |
28 (58%) |
48 |
3
|
12 |
4 |
0 |
0 |
0 |
0 |
16 |
4
|
13 |
14 |
7 |
4 |
5 |
16 (37%) |
43 |
5
|
33 |
7 |
4 |
2 |
2 |
8 (17%) |
48 |
6
|
19 |
5 |
0 |
0 |
0 |
0 |
24 |
Total
|
127 |
67 |
34 |
25 |
19 |
78 (29%) |
272 |
Source: Case reviews performed by Treasury Inspector
General for Tax Administration auditors.
*Note: Program goal is 30 days.
Appendix VI
Management’s Response to the Draft Report
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.