Fiscal Year 2003 Statutory Audit of Compliance With Legal
Guidelines Restricting the Use of Records of Tax Enforcement Results
March 2003
Reference Number:
2003-40-090
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
27, 2003
MEMORANDUM FOR
ACTING COMMISSIONER WENZEL
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Acting Deputy Inspector General
for Audit
SUBJECT: Final Audit Report - Fiscal Year 2003
Statutory Audit of Compliance With Legal Guidelines Restricting the Use of
Records of Tax Enforcement Results (Audit # 200240070)
This
report presents the results of our review to determine if the Internal Revenue Service (IRS)
complied with legal guidelines set forth in the IRS Restructuring and Reform Act of 1998 (RRA 98)
Section (§) 1204.
RRA
98 § 1204 (a) prohibits the IRS from
using a record of tax enforcement results (ROTER) to evaluate employees or to
impose or suggest production quotas or goals.
Section 1204 (b) requires that employees be evaluated using the fair and
equitable treatment of taxpayers as a performance standard. Section 1204 (c) requires each appropriate
supervisor to certify quarterly whether tax enforcement results were used in a
prohibited manner. The Treasury
Inspector General for Tax Administration (TIGTA) is required under Internal
Revenue Code (I.R.C.) § 7803(d)(1)
(Supp. IV 1998) to annually evaluate the IRS’ compliance with the provisions
of RRA 98 § 1204.
In summary, a review of 74
judgmentally sampled employees’ performance and related supervisory
documentation prepared between October 1, 2001, and August 31, 2002, showed
that the IRS is generally in compliance with RRA 98 § 1204. No instances of potential violations of the
use of ROTERs were found. In 96 percent
of the employee performance evaluations reviewed, documentation also supported
that employees were evaluated on the fair and equitable treatment of
taxpayers. The IRS incorporated this
standard into one performance evaluation document for all employees. This reduced potential violations and
improved compliance with § 1204 (b). In
addition, a review of a statistical sample of 21 appropriate supervisors’
certifications indicated the IRS is in compliance with § 1204 (c). All 21 of these supervisors completed a
consolidated office certification memorandum to the Commissioner certifying
that ROTERs were not used in a prohibited manner.
Management’s
Response: The IRS’ Chief Financial Officer (CFO)
agreed with our finding in the report.
The CFO stated that the IRS’ goal is to achieve full compliance with the
provisions of the law. The CFO added
that to continue improving the IRS’ program, the IRS is using an electronic
spreadsheet to identify all managers and executives who must complete § 1204 (c) quarterly certifications. The IRS is also centralizing the annual
independent review process of § 1204 (c) into a single
IRS-wide review. The CFO stated these
enhancements will allow the IRS to more accurately assess the effectiveness of
the § 1204 (c) quarterly
certification process.
Copies
of this report are also being sent to the IRS managers who are affected by the
report finding. Please contact me at
(202) 622-6510 if you have questions, or your staff may contact Michael R.
Phillips, Assistant Inspector General for Audit (Wage and Investment Income
Programs), at (202) 927-0597.
The Internal Revenue Service Is Generally Complying With the Law
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Sampling Methodology
Appendix V – Management’s Response to the Draft Report
On July 22, 1998, the President signed the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98) into law. Among many other requirements contained in the law, Section (§) 1204 restricts the use of enforcement statistics. Specifically, RRA 98 § 1204 (a) prohibits the IRS from using a record of tax enforcement results (ROTER) to evaluate employees or to impose or suggest production quotas or goals.
The IRS defines ROTERs as data, statistics, compilations of information, or other numerical or quantitative recordations of the tax enforcement results reached in one or more cases. A ROTER does not include the tax enforcement results of an individual case when used to determine whether an employee exercised appropriate judgment in pursuing enforcement of the tax laws based upon a review of the employee’s work on that individual case. Examples of ROTERs include the amount of dollars collected or assessed, the number of fraud referrals, and the number of seizures conducted.
RRA 98 § 1204 (b) requires that employees be evaluated using the fair and equitable treatment of taxpayers as a performance standard. The IRS requires that employees administer the tax laws fairly and equitably; protect all taxpayers’ rights; and treat each taxpayer ethically with honesty, integrity, and respect. This provision of the law was enacted to provide assurance that employee performance is focused on providing quality service to taxpayers instead of achieving enforcement results.
RRA 98 § 1204 (c) requires each appropriate supervisor to certify quarterly whether tax enforcement results were used in a prohibited manner. The IRS defines an appropriate supervisor as the highest-ranking executive in a distinct organizational unit that supervises directly or indirectly one or more § 1204 employees. IRS procedures require that, beginning with first-line managers of § 1204 employees, each level of management self-certify that they have not used ROTERs in a manner prohibited by RRA 98 § 1204 (a). The appropriate supervisor is to then prepare a consolidated office certification covering the entire organizational unit.
Internal Revenue Code (I.R.C.) § 7803(d)(1) (Supp. IV 1998) requires the Treasury Inspector General for Tax Administration (TIGTA) to determine annually whether the IRS is in compliance with restrictions on the use of enforcement statistics. The TIGTA previously evaluated the IRS’ compliance with RRA 98 § 1204 provisions in Fiscal Years (FY) 1999 through 2002 and reported the following:
· In FY 1999, the IRS had controls in place to identify and report violations; however, there were still instances when ROTERs were used to evaluate employees or to impose or suggest production quotas or goals.
· In FYs 2000 and 2001, most employee evaluations and management documents did not contain tax enforcement results and did not impose production quotas and goals. However, employees were not always provided with or evaluated on the performance standard requiring the fair and equitable treatment of taxpayers.
· In FY 2002, the employee evaluations and management documents did not contain ROTERs to evaluate employees or to impose or suggest production quotas or goals. However, documentation was not always available to support that employees were evaluated on the performance standard requiring the fair and equitable treatment of taxpayers.
The TIGTA FY 2000 report recommended that the IRS incorporate the performance standard of fair and equitable treatment of taxpayers into the evaluation forms of all employees to ensure they were evaluated on the standard. This corrective action was implemented in time to affect the results of this review, which encompassed employee performance results from October 1, 2001, through August 31, 2002.
This audit was performed between August 2002 and December 2002. The review included testing in the Organizational Performance Division in the IRS National Headquarters; the Wage and Investment, Small Business/ Self-Employed, Large and Mid-Size Business, and Criminal Investigation Divisions; the National Taxpayer Advocate; and Appeals. The review included visits to IRS offices located in Atlanta, Georgia; Baltimore, Maryland; Kansas City, Missouri; Houston, Texas; and Seattle, Washington. This audit was conducted in accordance with Government Auditing Standards with the following scope limitation.
We were not allowed access to performance documentation maintained by the IRS’ Criminal Investigation Division. The performance documentation is maintained electronically, and the TIGTA is not allowed access to this electronic system due to the Grand Jury information maintained on the same system. Therefore, the auditors had to rely on documents provided by the IRS for the Criminal Investigation Division employees sampled. The IRS provided copies of documents such as annual evaluations, performance plans, drop files, workload reviews, mid-year reviews, and award narratives.
Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
A review of 74 judgmentally sampled enforcement employees’ performance and related supervisory documentation prepared between October 1, 2001, and August 31, 2002, revealed no instances of the use of ROTERs, production quotas, or goals to evaluate employee performance. There was also improvement over the previous year in documenting the evaluation of employees on the fair and equitable treatment of taxpayers. In addition, a review of 21 statistically sampled appropriate supervisors showed the IRS completed the required consolidated office certification memoranda on whether ROTERs were used in a prohibitive manner.
ROTERs were not used in
evaluation files, and employees were generally evaluated on the fair and
equitable treatment of taxpayers
A review of employees’ performance and related supervisory files prepared between October 1, 2001, and August 31, 2002, for 74 judgmentally sampled enforcement employees revealed that no ROTERs were used in evaluating performance. There was also no indication that ROTERs were used to impose or suggest production quotas or goals. In addition, 71 (96 percent) of the 74 files included evidence that the employee was evaluated on the fair and equitable treatment of taxpayers. The remaining three files did not contain evidence that the employee had been evaluated on the fair and equitable treatment of taxpayer standard. In all three files, the newly revised evaluation form was not used to document the evaluation of the employee. However, we believe that this was the result of human error and that the use of the new evaluation form, required as of October 1, 2001, will continue to reduce the recurrence of these potential violations.
Appropriate supervisors
completed the quarterly consolidated office certification memorandum to the
Commissioner
A review of 21 statistically sampled appropriate supervisors for the first 3 quarters of FY 2002 showed the consolidated office certification memoranda were completed and the IRS is in compliance with RRA 98 § 1204(c). A review of supporting documentation for 19 of the 21 memoranda showed that 1 did not include 1 ROTER violation that was identified in a lower level certification. However, this particular appropriate supervisor had approximately 1,500 supporting documents for the consolidated office certification memorandum. We believe it to be human error that this one ROTER was overlooked and that this does not significantly affect the overall results.
The IRS was able to provide the supporting
documents for only 19 of the 21 consolidated office certification
memoranda. The IRS advised us that the
supporting documentation for the two remaining memoranda had been misplaced or
did not exist. We do not believe these 2
missing packages would have significantly affected the review results since we
did not identify any material problems with the other 19 certification
packages.
The IRS designated executive level managers to serve as appropriate supervisors at various times during FY 2002 for the purpose of certifying that no § 1204 violations had occurred during the applicable time period. These executive level managers include the highest-level manager in IRS offices, for example the Deputy Commissioner, the National Taxpayer Advocate, or the Chief, Appeals.
Management’s Response: The IRS’ Chief Financial Officer (CFO) stated that the IRS’ goal is to achieve full compliance with the provisions of the law. The CFO added that to continue improving the IRS’ program, the IRS is using an electronic spreadsheet to identify all managers and executives who must complete § 1204 (c) quarterly certifications. The IRS is also centralizing the annual independent review process of § 1204 (c) into a single IRS-wide review. The CFO stated these enhancements will allow the IRS to more accurately assess the effectiveness of the § 1204 (c) quarterly certification process.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine if the Internal Revenue Service (IRS) complied with legal guidelines set forth in the IRS Restructuring and Reform Act of 1998 (RRA 98) Section (§) 1204.
We conducted the
following tests to accomplish the objective:
A.
Identified
procedures used to ensure compliance with the provisions of RRA 98 §
1204 (a) by interviewing IRS management and reviewing the Internal Revenue
Manual (IRM), IRS memos, and the IRS’ 1204 Intranet Website.
B.
Identified the
potential enforcement employee population using Treasury Integrated
Management Information System (TIMIS) data
and the IRS’ Discovery Directory. We
judgmentally selected five audit sites and made unannounced visits to each
site. We judgmentally selected 5
managers per site to be reviewed and then judgmentally selected 3 employees per
manager for review, for a total sample of 75 enforcement employees. (See Appendix IV for details on how the
population of potential enforcement employees was identified and the audit
sites were selected.)
C.
Reviewed 74
enforcement employees’ performance evaluations, Employee Personnel Files, drop
files, and performance plans, and 23 related enforcement employee managers’
organizational read files and operational reviews to determine if ROTERs were
used in evaluating employees or to impose production goals or quotas. Documents prepared between October 1, 2001,
and August 31, 2002, were included in the review. Documents prepared in September 2002 were not included because
the first unannounced site visit began during this month and all sites were
treated consistently. The
Criminal Investigation Division maintains its evaluation documentation
electronically. The Treasury Inspector
General for Tax Administration is not allowed access to this electronic system
due to the Grand Jury information maintained on the same system. Therefore, the auditors had to rely on
documentation provided by the IRS for the nine Criminal Investigation Division
employees in the sample.
II.
To determine if the IRS complied with provisions of RRA
98 § 1204 (b), which states the IRS shall use the fair and equitable treatment
of taxpayers by employees as one of the standards for evaluating employee
performance, we:
A.
Identified
procedures used to ensure compliance with the provisions of RRA 98 §
1204 (b) by interviewing IRS management and reviewing the IRM, IRS memos, and
the IRS’ 1204 Intranet Website.
B.
Reviewed the same 74 enforcement employees’ performance
evaluations from Sub-objective I to determine if the employees were evaluated
on the fair and equitable treatment of taxpayers.
C.
Interviewed applicable employee managers to determine
why potential exceptions occurred.
III. To determine if the IRS complied with provisions of RRA 98 § 1204 (c), which states each appropriate supervisor shall certify quarterly by letter to the IRS Commissioner whether tax enforcement results are being used in a manner prohibited by subsection (a), we:
A.
Identified
procedures used to ensure compliance with the provisions of RRA 98 §
1204 (c) by interviewing IRS management and reviewing the IRM, IRS memoranda,
and the IRS’ 1204 Intranet Website.
B.
Obtained a listing
from the IRS of the appropriate supervisors for the first 3 quarters of FY
2002. We selected a statistical sample
of 21 appropriate supervisors from the total population of 176 appropriate
supervisors using a desired confidence level of 95 percent, an expected error
rate of 1 percent, and a precision level of 4 percent. (See Appendix IV for details on how the
population and sample were selected.)
We obtained from the IRS the quarterly self-certification documentation
for 19 of the 21 appropriate supervisors.
The supporting documentation for two of the appropriate supervisors’
consolidated certifications was not available.
C.
Reviewed the
supporting documentation received to determine if all managers completed the
required quarterly self-certification documents.
Appendix
II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs)
Augusta R. Cook, Director
Deann L. Baiza, Audit Manager
Lynn Faulkner, Senior Auditor
Sharla J. Robinson, Senior Auditor
Karen C. Fulte, Auditor
Gwendolyn M. Green, Auditor
Sylvia Sloan-Copeland, Auditor
Appendix III
Assistant Deputy
Commissioner N:ADC
Commissioner, Large and Mid-Size Business Division LM
Commissioner, Small Business/Self-Employed Division S
Commissioner, Wage and Investment Division W
Chief, Appeals AP
Chief, Criminal Investigation CI
Chief Financial Officer N:CFO
Director, Strategy and Finance W:S
Director, Tax Administration Coordination N:ADC:T
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:AR:M
Audit Liaisons:
Assistant Deputy Commissioner N:ADC
Commissioner, Large and Mid-Size Business Division LM
Commissioner, Small Business/Self-Employed Division S
Commissioner, Wage and Investment Division W
Chief, Appeals AP
Chief, Criminal Investigation CI
Chief, Customer Liaison S:COM
Director, Tax Administration Coordination N:ADC:T
National Taxpayer Advocate TA
Appendix
IV
Judgmental sample of
enforcement employees
Because the Internal Revenue Service (IRS) has no systemic way to identify which employees have enforcement-related responsibilities, and since an employee’s duties may change regularly, there is no way of knowing at any given time the total number of employees engaged in enforcement activities. In order to conduct the audit, it was necessary for the Treasury Inspector General for Tax Administration (TIGTA) to identify a potential enforcement employee population from which to select employee documentation for review. We obtained a computer download of the Treasury Integrated Management Information System (TIMIS) data for all IRS employees for the period June 2, 2002, through June 15, 2002. We relied on the data obtained from the TIMIS and did not attempt to validate the data.
To create the potential population of enforcement employees, we extracted from the TIMIS database a listing of enforcement employees based on many of the same criteria used for the previous year’s audit. The criteria used were:
§ Work location in the 48 continental United States except for employees in functional areas that received a waiver from the IRS Commissioner in Fiscal Year (FY) 2001 because the function did not have duties covered by the IRS Restructuring and Reform Act of 1998 (RRA 98) Section (§) 1204.
§ Specific job series: 110, 301, 340, 343, 501, 503, 512, 526, 592, 598, 905, 920, 930, 950, 962, 986, 987, 1101, 1169, 1171, 1510, 1801, 1802, and 1811.
§ After selection based on the above criteria, locations with fewer than 25 employees were removed from the population because we needed locations that would likely have managers on site.
This information was used to identify the number of potential enforcement employees within each business unit and function within each city. Based on prior audit results and resource and time constraints, our review was limited to the four business units and functions with the highest percentage of potential enforcement employees based on the TIMIS data. Using this methodology, the Small Business/Self-Employed (SB/SE), Wage and Investment (W&I), Large and Mid-Size Business (LMSB), and Criminal Investigation (CI) Divisions were included in the review.
The potential enforcement employee population disbursement,
geographic coverage, travel time to the audit sites, prior audit coverage, and
audit constraints on time, resources, and budget were all factors considered in
selecting the five audit sites of Atlanta, Georgia; Baltimore, Maryland;
Kansas City, Missouri; Houston, Texas; and Seattle, Washington.
Once the audit sites were determined, the TIMIS data and the IRS Discovery Directory were used to determine the number of managers as well as the number of different addresses of the managers located within the audit sites. This information was considered when selecting the business units and functions to be reviewed at each site.
Unannounced visits were made to each of the five audit sites. The listing of potential enforcement employee managers we compiled using the Discovery Directory allowed us to identify initial contacts in order to begin our sampling. The initial contact points for some sites also identified enforcement employee managers located on site. This information was used, as well as the managers we previously identified, to judgmentally select 5 managers per site and 3 employees per manager, for a total of 75 employees. We reviewed the selected employees’ performance documentation prepared between October 1, 2001, and August 31, 2002, for compliance with the requirements of RRA 98 §§ 1204 (a) and (b).
The sample distribution follows:
|
Business Unit (BU) |
BU Reviewed at |
Number of Managers
Selected |
Number of Employees
Selected |
Percent of Total
Sample Population |
|
SB/SE |
5 sites |
14 |
42 |
56 % |
|
W&I |
3 sites |
5 |
15 |
20 % |
|
LMSB |
2 sites |
3 |
9 |
12 % |
|
CI |
2 sites |
3 |
9 |
12 % |
|
TOTALS |
|
25 |
75 |
100 % |
Statistical sample of
appropriate supervisors
A statistical sample of appropriate supervisors was selected for review to determine the IRS’ compliance with the self-certification requirement of RRA 98 § 1204 (c).
The IRS’ Organizational Performance Division, Data Analysis, Standards, and Reporting, identified the population of 176 appropriate supervisors for the first 3 quarters of FY 2002. The audit period did not allow for the fourth quarter certifications to be included in the sample. We used attribute sampling and the following formula to calculate the minimum sample size (n) of 21:
n = (NZ2 p(1-p)) / (NE2 + Z2 p(1-p).
N = Population (176 appropriate supervisors for the first 3 quarters of FY 2002).
Z = Desired Confidence Level (95 percent).
p = Expected Error Rate (1 percent).
E = Precision Level (4 percent).
The appropriate supervisors were numbered 1 through 176. We used a statistical sampling computer program to randomly select 21 numbers. The randomly selected numbers corresponded to a specific appropriate supervisor for a specific quarter.
We reviewed the supporting documentation for 19 of the 21 appropriate supervisor consolidated office certifications sampled. This included reviewing the Consolidated Office Certification Memorandum and the supporting managers’ quarterly self-certification documents. The IRS advised us that the supporting documentation for the two remaining consolidated office certifications had been misplaced or did not exist.
Although a statistical sample was taken, results were not projected due to the differences in the volume of the supporting documents for the consolidated office certifications. For example, 1 appropriate supervisor’s consolidated certification could have 1 supporting document, while another could have over 1,500 supporting documents.
Appendix
V
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.