Courts Are Not Always Notified When Criminals Fail to Comply With Their Sentences to Settle Civil Tax Liabilities

 

March 2004

 

Reference Number:2004-10-060

 

 

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 12, 2004

 

 

MEMORANDUM FOR CHIEF, CRIMINAL INVESTIGATION

 

FROM:†††† Gordon C. Milbourn III /s/ Gordon C. Milbourn III

†††††††††††††††† Acting Deputy Inspector General for Audit

 

SUBJECT:†††† Final Audit Report - Courts Are Not Always Notified When Criminals Fail to Comply With Their Sentences to Settle Civil Tax Liabilities(Audit # 200310012)

 

This report presents the results of our review of the Criminal Investigation (CI) functionís controls to identify, report, and monitor subjectsí accounts relating to their sentences to settle civil tax liabilities.The overall objective of this review was to determine if the CI functionís controls and procedures are effective to ensure convicted criminals comply with the terms of their sentences requiring the settlement of Internal Revenue Service (IRS) civil tax liabilities.

Upon completion of an investigation in which criminal violations of the law have been documented, the CI function forwards the results of the investigation to the Department of Justice for prosecution. The prosecution process may result in the subject of the investigation signing a plea agreement, pleading guilty, or being found guilty as the result of a trial.A sentence is then imposed on the subject and may include conditions relating to the settlement of the subjectís civil tax liabilities, such as the filing of tax returns or payment of tax liabilities.The CI function should take whatever steps are necessary to initiate appropriate legal action in any instance in which a subject has failed to comply with the conditions of a sentence relating to the settlement of civil tax liabilities.

In summary, we found that existing procedures within the CI function and Small Business/Self-Employed (SB/SE) Division did not effectively ensure convicted criminals, who did not comply with the conditional terms of their sentences requiring the settlement of their IRS tax liabilities, were reported to the courts for appropriate legal action. The IRS procedures were either unclear or did not assign specific responsibility for monitoring these taxpayers. In addition, our results indicated the CI functionís Management Information System (CIMIS) contains data errors that could affect analyses used for internal management decisions or results presented in ad hoc reports provided to either internal or external stakeholders.

We recommended the Chief, CI, in conjunction with SB/SE Division management, develop clear and concise guidelines to define responsibilities and procedures to ensure the IRS is controlling and monitoring the accounts of criminal subjects whose court sentences required the settlement of their IRS tax liabilities.To improve the monitoring of these cases within the CI function, we recommended the Chief, CI, ensure court documents are verified; provide formal training to first-line managers on the use of the Measures for Managers (MOM) system that identifies the cases; and seek the advice of the respective CI function and SB/SE Division Counsels, in concert with the Office of the Assistant Chief Counsel (Disclosure and Privacy Law), regarding the disclosure of tax returns and tax return information to probation officers.We also recommended the Chief, CI, develop a process to verify and validate the CIMIS data, and assess the clarity of guidance for coding some data fields and revise, as appropriate, to address the errors identified in the CIMIS.

Managementís Response:In general, the Chief, CI, believes certain steps can be taken to enhance the coordinating process with the SB/SE Division and the United States Attorney Offices.CI function management agreed to provide training to first-line managers to help them understand and effectively use the MOM system to identify, report, and monitor terms and conditions on tax investigations.The Chief, CI, agreed to coordinate with the SB/SE Division to review and revise as necessary existing procedures and guidance.The Chief, CI, also agreed to develop a process to identify questionable data field entries in the CIMIS and review existing procedures and CIMIS input instructions on identifying, reporting, and monitoring terms and conditions.

Although the Chief, CI, did not agree with Recommendation 1, stating that existing case closing documents instruct the case agent to attach court documents and send them to the appropriate civil functions, CI management stated they would reinforce these existing procedures.The Chief, CI, also did not agree with Recommendation 4, advising that procedures already exist regarding disclosure of tax returns and tax return information to probation officers, and both the CI function and SB/SE Division will reference these procedures in communications issued to field offices.In addition, the Chief, CI, did not agree with our statements that the CIMIS errors have a measurable impact on tax administration because the CI function does not report information from these data fields.Managementís complete response to the draft report is included as Appendix V.

Office of Audit Comment:Regarding the case closing procedures, we believe reinforcing the existing procedures, along with the CI functionís commitment to provide additional training and revise other procedures as described elsewhere in this report, should ensure the required terms of probation are properly identified, reported, and monitored.Regarding the disclosure of information, we believe the law may allow for a broader interpretation than that provided in the procedures.Our recommendation was designed to ensure management considered whether the existing guidance covers a broader interpretation and provided clarification or examples if they believed the guidance may not be interpreted consistently.As to the impact of the CIMIS errors on tax administration, we recognized in our report that these data fields are not routinely used in external or internal reports. Nonetheless, fines and criminal deficiency amounts can be an integral part of the impact of investigative cases. Thus, these data fields should be accurate to provide management with reasonable assurance that this information is reliable if used in ad hoc reports for internal management deliberations. While we still believe our recommendations are worthwhile, we do not intend to elevate our disagreement concerning these matters to the Department of the Treasury for resolution.

Copies of this report are also being sent to the IRS managers affected by the report recommendations.Please contact me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

 

Table of Contents

Background

Criminals Who Did Not Comply Were Not Always Reported to the Courts for Additional Legal Action

Recommendations 1through 3:

Recommendation 4:

The Criminal Investigation Management Information System Contained Numerous Errors That Resulted, or Could Result, in Inaccurate Information

Recommendation 5:

Recommendation 6:

Appendix I Ė Detailed Objective, Scope, and Methodology

Appendix II Ė Major Contributors to This Report

Appendix III Ė Report Distribution List

Appendix IV Ė Outcome Measures

Appendix V Ė Managementís Response to the Draft Report

 

Background

The mission of the Internal Revenue Serviceís (IRS) Criminal Investigation (CI) function is to serve the American public by investigating potential criminal violations of the Internal Revenue Code (I.R.C.) and related financial crimes in a manner that fosters confidence in the tax system and compliance with the laws.††

Upon completion of an investigation in which criminal violations of the law have been documented, the results of the investigation are forwarded to the Department of Justice for prosecution.The prosecution process may result in the subject of the investigation signing a plea agreement, pleading guilty, or being found guilty as the result of a trial. A sentence is then imposed on the subject and may include conditional terms of probation or supervised release relating to the settlement of the subjectís civil tax liabilities, such as the filing of tax returns or payment of tax liabilities.If subjects violate a condition of their sentences, the court may resentence them to include a period of imprisonment.

The CI function and Small Business/Self-Employed (SB/SE) Division each have responsibility for monitoring compliance with conditional terms of probation or supervised release. The Technical Services organization in the SB/SE Division should notify the CI function if tax liabilities have not been fully satisfied prior to the expiration of the probationary or supervised release date.

Upon notification, the CI function should take whatever steps are necessary to initiate appropriate legal action.Vigorous enforcement of the criminal provisions of the I.R.C., along with appropriate civil sanctions, contributes to maintaining voluntary compliance and public confidence in the fairness of the tax system.

During Fiscal Years (FY) 2000 through 2002, the CI function closed about 7,000 investigations in which the subject was sentenced for a criminal violation.According to data obtained from the CI functionís Management Information System (CIMIS), approximately 1,050 of these individuals had conditional terms of their sentences relating to the settlement of their civil tax liabilities (e.g., file future returns, pay tax liabilities, etc.). The data further indicated about 200 of the 1,050 individuals had conditional terms that needed to be satisfied before October 1, 2002.

We conducted this audit between May and October 2003 in the National Headquarters CI function office in Washington, D.C., and the Chicago, Illinois; Cleveland, Ohio; Newark, New Jersey; and Portland, Oregon, CI function field offices.In addition, we contacted SB/SE Division personnel in the Chicago, Illinois; Cincinnati, Ohio; Denver, Colorado; Newark, New Jersey; and Seattle, Washington, offices.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.

Criminals Who Did Not Comply Were Not Always Reported to the Courts for Additional Legal Action

The IRSí existing procedures are ineffective in ensuring convicted criminals are referred to the courts for additional legal action when they do not comply with the terms of their sentences that require settlement of their civil tax liabilities.This ineffective coordination between the CI function and the SB/SE Division also contributed to the IRSí inability to properly identify and monitor individuals sentenced to probation or supervised release. As a result, these individuals continue to remain noncompliant, which could undermine the effectiveness of the judicial system when considering the alternatives to or the length of incarceration.This could also negatively affect the publicís confidence in the fairness of the tax system.

We reviewed all 37 cases closed in 4 CI function field offices during FYs 2000, 2001, and 2002 in which individuals had been sentenced and a probation expiration date prior to October 1, 2002, had been input to the CIMIS.We also reviewed a random selection of 136 of 627 cases closed by the same 4 CI function field offices during the same period in which the individuals had been sentenced and no probation expiration date had been input to the CIMIS.

Table 1 summarizes the conditions or errors we identified during our review of these cases.

Table 1:Case Review Results

Condition or Errors Identified

37 Cases With Probation Expiration Date

135 Cases Without Probation Expiration Date

Conditional Terms Not Imposed

11

Not Applicable

Probation Expiration Date Incorrect

14 of 26

36 of 135

Computer Transaction Code (TC) 910 Not Input

6 of 26

31 of 36

The CI Function Did Not Notify the SB/SE Division That There Were Conditional Terms

13 of 26

15 of 36

Individuals Did Not Comply With Conditional Terms

18 of 26

9 of 36

Probation Officers or Courts Were Not Notified of the Subjectís Noncompliance by the CI function or the SB/SE Division

12 of 18

7 of 9

Source:IRS and court records.

Several factors affected the IRSí collective efforts to identify individuals, who should be monitored for compliance with conditional terms of probation or supervised release, and monitor those accounts:

        The CI functionís procedures were ineffective.

        The SB/SE Divisionís procedures were ineffective.

        The CI function and SB/SE Division did not coordinate efforts effectively.

        Disclosure procedures may have prevented some criminals from being turned in for violating the terms of their sentences.

The CI functionís procedures were not effective

When a sentence imposed on a subject includes conditions relating to the settlement of the subjectís civil tax liabilities, the CI function enters the probation or supervised release expiration date in the CIMIS.This enables CI function managers to follow up prior to the expiration date to determine if individuals have complied with the conditions imposed. However, the input instructions state this data field is for ďtax casesĒ and ďan entry is required if the court specifies that probation of the sentence or supervised release is conditional upon payment or settlement of the civil tax liability.ĒSeveral managers interviewed stated they considered a ďtax caseĒ as one that involved Title 26 violations.However, there are other titles and sections of the United States Code that could involve or relate to tax violations and are investigated by the CI function.

In addition, CI function personnel can request a computer transaction code (TC 910) be entered on an individualís tax account to facilitate monitoring of the account. Quarterly listings of tax accounts having this transaction code are automatically generated and sent to CI function special agents.These listings provide details of accounts showing whether tax returns have been filed or liabilities have been paid.

However, the CI function did not have any current Internal Revenue Manual (IRM) procedures or guidelines for the following:

        Instructing when a TC 910 should be input to the tax accounts of individuals who have been given conditional terms of probation or supervised release.

        Reviewing the transcripts generated by the input of a TC 910 to an individualís account.

        Obtaining court documents when the case is closed to determine if the settlement of civil tax liabilities is part of the court sentence.

        Notifying the SB/SE Division of individuals with conditional terms of probation or supervised release requiring the settlement of civil tax liabilities.

CI managers and special agents have access to a memorandum template, through the CI functionís Document Manager, which can be used to notify the SB/SE Division if an individual has been given conditional terms of probation or supervised release relating to the settlement of tax liabilities.However, there were no procedures for completing the template.

In addition, there was no standard CIMIS-generated report distributed or made available to first-line managers to assist with monitoring probation dates that have not expired. This information is available on the CI functionís Measures for Managers (MOM) system; however, we were advised there were no formal training or instructions regarding its use.

The SB/SE Divisionís procedures were not effective

The Technical Services organization within the SB/SE Division is responsible for coordinating all civil enforcement action on individuals who are under criminal investigation and ensuring civil enforcement action is taken to collect revenue where appropriate.It should update the CI function on the status of cases assigned to it, and the responsible SB/SE Division Territory Manager should notify the CI function by memorandum if tax liabilities have not been fully satisfied 180 days prior to the expiration of the probationary or supervised release period.

Based on discussions with Technical Services organization personnel and a review of the Integrated Collection System (ICS) case histories, the CI function was notified concerning the status of the cases (either orally or by memorandum) in 6 of 15 cases.There was no indication the CI function was notified in 9 of 15 cases.Five of the 9 individuals had not complied with their conditional terms of probation or supervised release to pay their tax liabilities by the expiration date or within 180 days of the expiration.

Further, there was no indication in the ICS case histories that the Technical Services organization personnel were aware of the procedures or were appropriately monitoring the cases and ensuring actions were taken to notify the CI function of the status of the cases.

Coordination between the CI function and SB/SE Division needs improvement

Procedures for the CI function and SB/SE Division did not assign specific responsibilities for monitoring compliance of all types of conditional terms relating to the settlement of civil tax liabilities.The procedures assigning responsibility to the SB/SE Division pertained to only those individuals with outstanding tax liabilities. Conditions imposed by the courts may require additional or other terms, such as the filing of amended or delinquent tax returns or the timely filing of future tax returns.

In addition, the Technical Services organizationís procedures provide for notification by the CI function of individuals who are under investigation or who have conditional terms of probation or supervised release by means of a form the CI function uses to request input of its computer transaction codes.However, the CI function had no current procedures or instructions to send this form to the Technical Services organization.We were advised that either there were no formal procedures or instructions, or they were removed from the CI function portion of the IRM several years ago.

Several CI function managers advised us that, prior to the IRS reorganization, some offices had effective local procedures and good working relationships with the Examination and Collection Divisions.However, since the reorganization, coordination has suffered because there have been no procedures clearly outlining responsibilities for monitoring these cases.

Disclosure procedures may need clarification

Limitations on disclosure of tax returns or tax return information to probation officers may have prevented the referral to the courts of individuals who were not complying with the terms of their sentences relating to the settlement of their civil tax liabilities.CI function and SB/SE Division procedures limit information disclosed to those years specified in the conditions of probation issued by the court or, alternatively, to the conviction years and those years for which the individual is placed on probation.We believe it is possible for IRS employees to interpret these procedures, as worded, too narrowly.They could interpret the phrase ďyears specified in the conditions of probation issued by the courtĒ as meaning that, absent specific years being identified in the probation terms, permissible disclosures are limited to conviction years and those years for which the individual is placed on probation.We believe, however, the disclosure laws would permit disclosure for all tax years covered by the terms of the probation, even if no tax years are specifically identified in the terms of the probation. For example, if the terms of probation specified that the individual must file all delinquent returns, disclosure could be made with respect to years for which the individual has not filed income tax returns.

Additional legal action occurred when individuals did not comply and were reported to the courts

As previously mentioned, when the courts receive notification that individuals failed to comply with the conditional terms of their probation or supervised release, they may resentence them.We identified eight individuals that were reported to the courts for additional legal action.The courts imposed additional prison terms in 3 of these cases, ranging from 1 week to 90 days.This illustrates that the monitoring process can have the intended effect if followed.We did not obtain additional records from the courts to determine why they did not impose additional prison terms in the other five cases.

Collectively, the 27 individuals who did not comply with the conditional terms of their probation or supervised release had over $2.5 million in unpaid assessed taxes, interest, and penalties and 57 unfiled returns at the time their probationary periods expired.Although there may be reasons individuals may not be able to comply with their conditional terms requiring the settlement of their tax liabilities (e.g., inability to pay, bankruptcy proceeding, etc.), the courts should still be advised to determine if additional punitive actions are appropriate.

The CI functionís responsibilities should not end with its issuance of a case report and sentencing by the court.We believe the CI function and SB/SE Division, in their roles to ensure fairness in the tax system and voluntary compliance, share the responsibility to ensure individuals satisfy the terms of their court sentences.Promoting and encouraging increased communication, as well as ensuring adequate controls are in place over cases in which the settlement of civil tax liabilities is a condition of the sentence, can help accomplish these goals. If little or no effort is made to ensure individuals comply, not only could this result in a loss of revenue, it could also erode the publicís confidence in the tax system if the individual remains noncompliant and no action is taken to deter this behavior.

Recommendations

The Chief, CI, should:

1.      Establish procedures to ensure that, at the time of the case closing, court documents are obtained and verified to determine if the settlement of civil tax liabilities is a part of the sentence.

Managementís Response:The Chief, CI, stated that existing case closing documents in the CI functionís document manager electronic forms program instruct the case agent to attach the Judgment and Commitment Order to certain forms and memoranda sent to the civil functions for monitoring terms and conditions of probation.The CI function will take steps to reinforce these existing procedures.

Office of Audit Comment:Reinforcing these procedures, along with the CI functionís commitment to provide additional training and revise other procedures as described elsewhere in this report, should ensure the required terms of probation are properly identified, reported, and monitored based on the Judgment and Commitment Orders.††

2.      Establish periodic systemic reports for first-line managers to use to identify and monitor those closed cases requiring the settlement of IRS tax liabilities or provide formal training to first-line managers on the use of the MOM system.

Managementís Response:The Chief, CI, agreed to provide training sessions for first-line managers that will include a workshop to help managers understand and effectively use the MOM systemís existing custom query and periodic systemic report to identify, report, and monitor terms and conditions of probation on tax investigations.

3.      Coordinate with SB/SE Division management to develop clear and concise procedures to define responsibilities and ensure the IRS is controlling and monitoring the accounts of the individuals whose court sentences require the settlement of their civil tax liabilities. These procedures should address the tools needed for monitoring, as well as monitoring other types of conditional terms such as the filing of returns.

Managementís Response:The Chief, CI, agreed with the recommendation.The CI function and SB/SE Division will review and revise as necessary their existing procedures and guidance on reporting and monitoring terms and conditions of probation on tax investigations.The CI function will coordinate its revisions with the SB/SE Division to ensure closed criminal tax investigations containing terms and conditions of probation are properly identified, reported, and monitored.

4.      Seek the advice of the respective CI function and SB/SE Division Counsels, in concert with the Office of the Assistant Chief Counsel (Disclosure and Privacy Law), regarding the disclosure of tax returns and tax return information to probation officers in determining noncompliance with conditional terms of probation or supervised release, and revise the appropriate IRM procedures accordingly.

Managementís Response:The Chief, CI, advised that procedures already exist within both divisions and are referenced in an IRM section on probation proceedings used by the Disclosure function.Both the CI function and SB/SE Division will reference these IRM sources in any communication issued to field offices on identifying, reporting, and monitoring terms and conditions of probation.

Office of Audit Comment:We continue to believe U.S.C. ß 6103(h) may allow for a broader interpretation of what can be disclosed to probation officers.Our concern centers on how the IRM phrase ďÖlimited to those years specified in the conditionsÖĒ provided in each divisionís respective procedures may be interpreted when the conditions imposed by the courts do not specify the tax years to be covered.We believe the disclosure laws would permit disclosure for all tax years covered by the terms of the probation.For example, if the conditions imposed by a court provide for ďfiling all delinquent or amended returns within 6 months of the sentence date and to timely file all future returns that come due during the period of probation,Ē disclosure could be made with respect to years for which the individual had not filed income tax returns and those tax returns due during the probationary period.Our recommendation was designed to ensure management considered whether the existing guidance covers this broader interpretation and provided clarification or examples if they believed the guidance may not be interpreted consistently.

The Criminal Investigation Management Information System Contained Numerous Errors That Resulted, or Could Result, in Inaccurate Information

We identified numerous errors in the CIMIS data relating to the subjects who were sentenced.Of the 172 cases reviewed, 127 (74 percent) had 1 or more errors in the following data fields:

        Probation expiration date - 69 cases (40 percent).

        Number of months probation or supervised release - 32 cases (19 percent).

        Sentencing violation - 29 cases (17 percent).

        Number of months sentenced to confinement Ė 21 cases (12 percent).

        Other fields (judicial district code, court docket number, and terms met) - 42 cases (24 percent).

We identified significant errors in dollar amounts in two data fields: the amount of the fine to pay and the amount of criminal deficiency.Although these figures are not routinely reported to external or internal stakeholders, errors in them raise concerns about the overall accuracy and reliability of the information input to the CIMIS.As described below and in Appendix IV, we identified approximately $6 billion in overstatements in these 2 data fields, which adversely affects the reliability of management information that could be provided in ad hoc reports generated from the CIMIS.

Inaccurate fine amounts

The CIMIS contains a data field for entering the amounts of fines to be paid by individuals who are sentenced for criminal acts.We identified errors in the amounts of the fines that were input to the CIMIS of $8.4 million for 2 cases in our review.In both instances, the amount of restitution required to be paid to organizations other than the IRS was input rather than the amount of fine to pay. To evaluate whether this condition existed during the most current fiscal year available, we reviewed the 10 largest amounts input to the CIMIS for FY 2002.This revealed similar errors totaling $1.3 billion.A standard CIMIS management report reflected an average fine to pay amount of $1.2 million for FY 2002.Correcting the errors in these 10 cases alone would reduce the average fine to pay for FY 2002 to under $80,000.

Inaccurate criminal deficiency amounts

The CIMIS also contains a data field for recording the amount of criminal tax calculated in a special agentís report of an investigation when a case is recommended for prosecution.Instructions for the input of these data stated the sum of the individual criminal deficiencies should not exceed the overall deficiency for the entire investigation.If an investigation involves more than one individual, the criminal deficiency amount should be apportioned among them or input for only one, if not apportioned in the special agentís report.

Three cases included in our review were part of 1 investigation that had the criminal deficiency amount for the overall investigation input for each of numerous subjects, resulting in an overstatement of over $2.7 billion.To evaluate whether this condition existed during the most current fiscal year available, we conducted a limited review of large and/or repetitive amounts of criminal deficiencies input to the CIMIS for FY 2002.This showed that over one-half of the $7.4 billion total (approximately $4.7 billion) was in error as follows.For 2 investigations, the cents had been input as dollar amounts, resulting in overstatements of the criminal deficiency amounts of $1.2 billion.Incorrect criminal deficiency amounts had been input for 2 other investigations in addition to being input for multiple subjects, resulting in overstatements of $2.6 billion.Similar input errors occurred for another investigation, resulting in a $900 million overstatement.In addition, the actual amount for this investigation should have been input to another CIMIS data field rather than the criminal deficiency data field.

While none of the identified inaccuracies affect the CI functionís reported accomplishments to external stakeholders (for example, in IRS Data Books, in the CI functionís Annual Business Reports, or on its public web site), our results indicated the CIMIS contained many data errors that could affect analyses used for internal management decisions or results presented in ad hoc reports provided to either internal or external stakeholders.

Results of prior CIMIS reviews

In April 2003, the IRS Offices of Program Evaluation and Risk Analysis (OPERA) and Statistics of Income (SOI) issued the results of a validation of the accuracy, timeliness, and presence of documentation for various CIMIS data fields that had been conducted in collaboration with the CI function.The validation indicated that CIMIS data tested had an accuracy rate of approximately 91 percent.However, the accuracy rate was this high because of the sampling methodology used.If data were not applicable for a case, the data were considered accurate.Because criminal investigations take several years to complete, many cases selected for the validation had not yet resulted in prosecutions or sentencing.Over 300 of the 475 cases sampled did not have applicable data for the principal sentencing violations and months served data fields.

The summary of the OPERA and Office of SOI validation results also advised the validity rates for some fields were closer to the 80 percent validity rate estimated by CI function subject matter experts.The CI function may want to consider emphasizing those data fields as well as assessing the clarity of guidance for coding them.

The Treasury Inspector General for Tax Administration previously recommended the Chief, CI, establish a process by which the CIMIS data will be verified and validated. The Chief, CI, disagreed, stating project plans for a new CIMIS included verification and validation functions and, until the implementation of the new system, the CI function would continue relying on field office management officials to ensure the information in the CIMIS is both current and accurate.Based on discussions with CI function personnel regarding enhancements planned for the upgraded CIMIS, the new system will not have verification and validation functions that would identify or prevent the types of errors identified.Also, based on our tests, field office management officials were not identifying what should have been obvious errors in the CIMIS data.

An effective management information system is necessary for measuring program results and making management decisions.As such, the information recorded in the system should be accurate.Without accurate information, CI function management may rely on incorrect data for making management decisions.

Recommendations

The Chief, CI, should:

5.      Develop a process to verify and validate the CIMIS data, as previously recommended.

Managementís Response:The Chief, CI, agreed with our recommendation and stated the CI Research section will develop a process to identify questionable data field entries for those CIMIS data fields involved with reporting and monitoring terms and conditions of probation and that do not have internal validity checks.The Research section will periodically send a listing of identified questionable entries in the applicable conditional terms of probation data fields to the responsible field office(s) for verification and/or correction.

Office of Audit Comment:Although CI function management agreed to take action to correct questionable entries in the CIMIS, they did not agree with our statements that these errors have a measurable impact on tax administration because the CI function does not report information from these data fields.We previously recognized in our report that these data fields are not routinely used in external or internal reports, but they nonetheless could be used in ad hoc reports for internal management deliberations, as both fines and criminal deficiency amounts can be an integral part of the impact of investigative cases.As such, these data fields should be accurate, so management can have reasonable assurance that the information is reliable.To clarify, we characterize errors of this nature as ďreliability of information,Ē which we express as the absolute value of overstatements or understatements of amounts recorded on an organizationís systems.

6.      Assess the clarity of guidance for coding some data fields and revise as recommended by the IRS OPERA and Office of SOI.

Managementís Response:The Chief, CI, agreed with our recommendation and stated that the CI function will review its existing policy and guidance procedures and CIMIS input instructions on identifying, reporting, and monitoring terms and conditions of probation.The CI function will revise existing policy and guidance documents as needed and issue any clarifying communications to its field offices.

In addition, the Chief, CI, stated the pending upgrade of the CIMIS will require a wholesale change of the existing CIMIS manual that details the input information and criteria for each data field identifying, reporting, and monitoring terms and conditions of probation on tax investigations.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine if the Criminal Investigation (CI) functionís controls and procedures were effective to ensure convicted criminals comply with the terms of their sentences requiring the settlement of Internal Revenue Service (IRS) civil tax liabilities. To accomplish our objective, we obtained an extract from the CI functionís Management Information System (CIMIS) for the period ended September 30, 2002.We confirmed through our transaction testing, described below, that the data in the CIMIS are not completely reliable. However, in all selected cases, the subjects had been sentenced.Specifically, we:

I.        Reviewed applicable policies and procedures defining responsibilities to ensure compliance with terms of sentences relating to the settlement of civil tax liabilities. In addition, we consulted with the Treasury Inspector General for Tax Administration Counsel regarding legal matters discussed in our report.

II.     Determined if subjects identified as having had conditional terms of their sentences relating to civil tax liabilities complied with the conditional terms and if appropriate actions were taken if they did not comply.

A.     Selected all subjects for 4 judgmentally selected CI function field offices whose cases were closed as having been sentenced during October 1, 1999, through September 30, 2002, and had conditional probation expiration dates input to the CIMIS that were earlier than October 1, 2002.The Chicago, Illinois; Cleveland, Ohio; Newark, New Jersey; and Portland, Oregon, field offices were selected based on geographic location and the number of cases closed with subjects having been sentenced and having conditional probation expiration dates in the CIMIS.The total number of cases in the 4 field offices that met the criteria was 37.The total number of cases that met the criteria in all CI function field offices was 215.The sampling methodology used was due to the small number of cases and because we did not intend to project our results to the entire universe of cases.

B.     Randomly selected 34 cases that were closed during the same period but did not have conditional probation expiration dates input to the CIMIS from each of the 4 judgmentally selected CI function field offices, for a total of 136. The total number of cases from each selected office that met the criteria was 627 (146, 135, 235, and 111, respectively).The total number of cases that met the criteria in all CI function field offices was 5,946.We used this sampling methodology because we did not intend to project our results to the entire universe of cases.

For those subjects selected in tests II.A. and II.B., we:

1.      Obtained and reviewed United States (U.S.) District Court documents.

2.      Reviewed the subjectsí tax account data.

3.      Interviewed CI function and Small Business/Self-Employed Division personnel.

III.   Determined if the CIMIS accurately identified and contained information relating to the sentences of the subjects selected in tests II.A. (37 cases) and II.B. (135 cases, excluding the 1 duplicate case) and assessed the impact of any inaccuracies on the CI functionís reported accomplishments.

A.     Compared data obtained from U.S. District Court documents to data in the CIMIS relating to convictions and sentences for those cases selected in our samples.

B.     Reviewed selected CIMIS data for Fiscal Year 2002 relating to fines assessed and criminal deficiencies. We reviewed court documents and contacted CI function personnel to determine the actual amounts.

C.     Reviewed CI function accomplishments reported internally and externally in CIMIS reports, in Business Performance Review Reports, in IRS Data Books, and on the CI function public web site.

 

Appendix II

 

Major Contributors to This Report

 

Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

John R. Wright, Director

Diana M. Tengesdal, Audit Manager

Todd Anderson, Senior Auditor

Donald L. McDonald, Senior Auditor

Janice A. Murphy, Senior Auditor

 

Appendix III

 

Report Distribution List

 

CommissionerC

Office of the Commissioner Ė Attn:Chief of StaffC

Deputy Commissioner for Services and Enforcement SE

Commissioner, Small Business/Self-Employed Division SE:S

Director, Office of Governmental Liaison and DisclosureCL:GLD

Director, Operations Policy and SupportSE:CI:OPS

Division Counsel/Associate Chief Counsel (Criminal Tax)CC:CT

Division Counsel/Associate Chief Counsel (Small Business/Self-Employed)CC:SBSE

Chief CounselCC

National Taxpayer AdvocateTA

Director, Office of Legislative AffairsCL:LA

Director, Office of Program Evaluation and Risk AnalysisRAS:O

Office of Management ControlsN:CFO:AR:M

Audit Liaisons:

Director, Planning and Strategy, Criminal InvestigationSE:CI:S:PS

Commissioner, Small Business/Self-Employed DivisionSE:S

 

Appendix IV

 

Outcome Measures

 

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on the reliability of information in the Criminal Investigation (CI) functionís Management Information System (CIMIS).Reliability of information is expressed as the absolute value of overstatements or understatements of amounts recorded on the organizationís systems.These benefits will be incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

        Reliability of Information Ė Actual; an overstatement of $4.7 billion was identified for the criminal deficiency amounts recorded in the CIMIS for Fiscal Year (FY) 2002 (see page 11).

Methodology Used to Measure the Reported Benefit:

We conducted an analysis and review of select large and/or repetitive criminal deficiency amounts entered in the CIMIS for FY 2002.We subsequently reviewed court documents and followed up with appropriate CI function personnel to determine the correct amounts that should have been entered in the CIMIS.The overstatement is accounted for as follows:

For 2 investigations, the cents had been input as dollar amounts, resulting in overstatements of the criminal deficiency amounts of $1.2 billion.

Incorrect criminal deficiency amounts had been input for 2 other investigations in addition to being input for multiple subjects, resulting in overstatements of $2.6 billion.

Similar input errors occurred for another investigation, resulting in a $900 million overstatement.

Type and Value of Outcome Measure:

        Reliability of Information Ė Actual; an overstatement of $1.3 billion was identified for the fine amounts recorded in the CIMIS for FY 2002 (see page 11).

Methodology Used to Measure the Reported Benefit:

We conducted an analysis and review of the 10 largest fine amounts entered in the CIMIS for FY 2002. We subsequently reviewed court documents to determine the correct amounts that should have been entered in the CIMIS.†††

Appendix V

 

Managementís Response to the Draft Report

 

The response was removed due to its size.To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.