TD P 15-71
Review of the Nationwide Electronic Tax Forum Conferences
and Exhibitions Contract
July 2004
Reference Number:
2004-10-128
July
28, 2004
MEMORANDUM FOR
CHIEF, AGENCY-WIDE SHARED SERVICES
CHIEF,
COMMUNICATIONS AND LIAISON
FROM: Gordon C. Milbourn
III /s/ Gordon C. Milbourn III
Acting Deputy
Inspector General for Audit
SUBJECT: Final Audit Report –
Review of the Nationwide Electronic Tax Forum Conferences and Exhibitions
Contract (Audit # 200410008)
This
report presents the results of our review of the Internal Revenue Service’s
(IRS) Nationwide Electronic Tax Forum Conferences and Exhibitions
Contract. The overall objective of this
review was to determine if the contractor billed the IRS accurately and according
to the contract’s terms and conditions.
The
Treasury Inspector General for Tax Administration (TIGTA) initiated this audit
as the result of concerns raised by the IRS.
These concerns included the timeliness and outcome, which was always
close to break-even, of the contractor’s reconciliation of tax forum[1] income with
expenses. The expectation of the Chief,
Communications and Liaison’s office was that there would be a greater amount of
excess income that could be used to help defray the cost of the contract (i.e.,
reduce the management fee due the contractor).
In
summary, the contractor’s documentation was not adequate to support the tax
forum income and expenses reported to the IRS for Fiscal Years 2002 and
2003. In addition, we identified
significant indications of potential fraud concerning the accuracy and validity
of the contractor’s reported tax forum income and expenses. We referred our findings to the TIGTA Office
of Investigations (OI) for further inquiry and development.
The
contract allowed the IRS to reduce the contractor’s management fee by the
amount by which tax forum income exceeded expenses. Therefore, both amounts directly affected the
calculation of the management fee due from the IRS. Because we could not verify the accuracy or
validity of the reported amounts of tax forum income and expenses, we
questioned the approximately $684,000 in management fees the IRS paid the
contractor during 2002 and 2003.
We
recommended the Director, Procurement, coordinate all remedies with the United
States Attorney’s Office and the TIGTA OI regarding all appropriate legal
actions. Additionally, the Director,
Procurement, in conjunction with the Director, Office of National Public
Liaison, should regularly review and monitor registration data to better
evaluate the accuracy of the resulting income and consider revising the
participant registration fee structure to simplify accounting for income. Further, the Director, Procurement, in
conjunction with the Director, Office of National Public Liaison, should review
tax forum expenses and investigate significant differences in budgeted versus
actual expenses.
Management’s
Response:
IRS management agreed with the recommendations presented in our report
and initiated corrective actions.
Specifically, the IRS will provide all requested assistance to the
United States Attorney’s Office.
Additionally, the new contract put a process in place to monitor
registrations before and after each tax forum, and established a registration
fee of $99 per person, per forum if the registrant registers before established
preregistration deadlines, and $200 per person, per forum after established
deadlines. The IRS also established a
process to periodically review and investigate, as necessary, tax forum
expenses for the new contract.
Management’s complete response to the draft report is included as
Appendix V.
The
TIGTA has designated this report as Limited Official Use (LOU) pursuant to
Chapter III, Section 2 of the Treasury Security Manual (TD P 71-10) entitled,
“Limited Official Use Information and Other Legends.” Because this document has been designated
LOU, it may only be made available to those officials that have a need to know
the information contained within this report in the performance of their
official duties. This report must be
safeguarded and protected from unauthorized disclosure; therefore, all requests
for disclosure of this report must be referred to the Disclosure Section within
the TIGTA’s Office of Chief Counsel.
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.
TD P 15-71
Inadequate
Documentation and Indications of Potential Fraud Signal Inaccurate Contractor
Billing
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix IV
– Outcome Measures
Appendix V –
Management’s Response to the Draft Report
TD P 15-71
In February 2000, the Internal Revenue Service (IRS) awarded the Nationwide Electronic Tax Forum Conferences and Exhibitions (tax forum) contract. The IRS conducts tax forums to provide information to the tax professional community on current IRS policies, programs, procedures, and initiatives. The tax forums also provide the IRS with an opportunity to promote the use of its Internet web site and market electronic filing by encouraging tax practitioners to join the Electronic Return Originator (ERO)[2] program.
The contractor was responsible for planning, managing, and coordinating each tax forum. The contract guaranteed the IRS would hold a minimum of four, and a maximum of eight, tax forums per year, with the contractor receiving a fixed management fee for each tax forum held. Over the 4-year life of the contract,[3] the contractor received management fees in excess of $1.4 million.
The structure of the contract was unusual because it stipulated that no appropriated funds would be provided to reimburse the contractor for the expenses necessary to conduct the tax forums. Instead, these expenses were to be paid from the registration fee and sponsorship income that the contractor collected from tax forum participants and exhibitors. If the contractor collected more income than it incurred expenses, the excess proceeds were to be carried forward to support the costs of that year’s subsequent tax forums. If excess income remained at the conclusion of a year’s final tax forum, the IRS was to reduce the contractor’s management fee by the same amount.
The contractor provided the IRS with the results of each year’s tax forums in a final report. The report detailed tax forum income and expense information and included the contractor’s calculation of the reduction to its management fee. The contractor then offset this reduction (i.e., the amount by which the year’s total tax forum income exceeded expenses) to arrive at the total management fee it invoiced the IRS.
We analyzed the invoices and final reports the contractor had submitted to the IRS since the contract’s inception. We selected the 2 most recent years, Fiscal Years 2002 and 2003, to verify the contractor’s claimed management fee reduction by reviewing the supporting documentation for the entire amount of reported tax forum income, over $1.7 million, and an all but equal amount of tax forum expenses.
The Treasury Inspector General for Tax Administration (TIGTA) initiated this audit as the result of concerns raised by the IRS. These concerns included the timeliness and outcome, which was always close to break-even, of the contractor’s reconciliation of tax forum income with expenses. The expectation of the Chief, Communications and Liaison’s office was that there would be a greater amount of excess income that could be used to help defray the cost of the contract (i.e., reduce the management fee due the contractor).
During this audit, we identified indications of potential fraud by the contractor. We referred our findings to the TIGTA Office of Investigations (OI) for further inquiry and development.
The audit work was performed during the period December 2003
through April 2004 in the National Public Liaison directorate within the office
of Communications and Liaison in
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.
TD P 15-71
Inadequate Documentation and Indications of Potential Fraud Signal Inaccurate Contractor Billing
The contractor’s documentation was not adequate to support the tax forum income and expenses reported to the IRS in 2002 and 2003. In addition, we identified significant indications of potential fraud concerning the accuracy and validity of the contractor’s reported tax forum income and expenses. Since the contract allowed the IRS to reduce the contractor’s management fee by the amount by which tax forum income exceeded expenses, both amounts directly affected the calculation of the management fee due from the IRS. Because we could not verify the accuracy or validity of the reported amounts of tax forum income and expenses, we questioned the approximately $684,000 in management fees the IRS paid the contractor during 2002 and 2003.
Specifically, the contractor was unable to provide us with any records or documentation in support of 2002 tax forum income and expenses. The contractor claimed that the 2002 information had been “discarded” and the company could not “retrieve or otherwise obtain any of this information or documentation.” The documentation the contractor provided in support of 2003 was incomplete and insufficient to verify the accuracy or validity of the reported tax forum income and expenses.
The Federal Acquisition Regulation (FAR)[4] stipulates that a contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation adequate to demonstrate that costs claimed have been incurred. The FAR also requires that contractors make records available to satisfy contract administration and audit requirements for 3 years after final payment. In addition, the FAR requires that certain financial records, including cancelled checks and vendor invoices, be retained for 4 years. Therefore, the contractor should have been able to produce all records related to the 2002 and 2003 tax forum income and expenses.
Using the documentation provided for 2003, we identified several significant issues involving tax forum income and expenses.
Tax forum income
For 2003, the contractor provided a database of tax forum participants, including the registration fee paid, to both the IRS and us. We compared the two databases and determined that the information was not consistent. We identified the following irregularities:
· Both databases listed 10,587 total participants, but we identified 1,334 (approximately 13 percent) who were shown paying different registration fees. For example, a participant may be shown paying $80 on the database provided to the IRS, while the same individual is shown paying $60 on the database provided to us.
·
For the tax forum held in
Additionally, the contractor reported that 9,229 (87 percent) of the 10,587 participants for 2003 paid a $60 registration fee. The registration fee was structured so that the first member of a business or organization paid $80, the second member paid $70, and each subsequent member and/or spouse paid $60. Because of this sliding scale, we believe more participants should have paid the $80 registration fee.
Using the registration forms provided by the contractor, we
requested confirmation of the registration fee paid from a judgmental sample of
57 tax forum participants. We selected
participants whose registration forms indicated an amount paid that was greater
than the amounts the contractor reported on both databases.[5] Of the 31 participants who responded by
providing an amount, all 31 reported paying a larger registration fee than that
reported by the contractor on its databases.[6] In 4 of these 31 instances, all involving the
Tax forum expenses
The contractor provided copies of vendor invoices for approximately $911,500 of $971,660 in reported 2003 tax forum expenses. However, the contractor did not provide documentation (e.g., cancelled checks, money orders) to support payment of these invoices. As a result, we could not verify the accuracy or validity of the entire amount of reported 2003 tax forum expenses.
In addition, we identified indications of potential fraud with respect to six vendor invoices the contractor provided. We contacted these six vendors directly because the invoices were unprofessional in appearance and similar in amount. We secured a copy of the actual invoices that each of these vendors sent the contractor and/or the documentation supporting the actual amount they billed the contractor. We determined that all six vendors billed the contractor for an amount less than the amount shown on the invoice copies the contractor provided to us. The total difference, which amounted to over $10,000, is outlined in Table 1.
Table 1:
Schedule of Questionable Vendor Invoices
|
Vendor |
Amount per
Contractor |
Amount per Vendor |
Difference |
|---|---|---|---|
|
1 |
$3,360.00 |
$1,572.00 |
$1,788.00 |
|
2 |
$3,350.00 |
$1,362.52 |
$1,987.48 |
|
3 |
$3,150.00 |
$1,524.00 |
$1,626.00 |
|
4 |
$3,360.00 |
$1,897.00 |
$1,463.00 |
|
5 |
$3,000.00 |
$ 815.50 |
$2,184.50 |
|
6 |
$3,000.00 |
$1,748.98 |
$1,251.02 |
|
Total |
$10,300.00 |
||
Source: TIGTA analysis of six vendor invoices.
The audit results outlined above indicate that the contractor underreported tax forum income and overreported tax forum expenses to the IRS in 2003. Inaccurately reporting the tax forum results allowed the contractor to overbill the IRS by requesting payment for a larger management fee than the company was entitled. Because we identified indications of potential fraud and referred the contract to the TIGTA OI, we did not continue audit work to determine the actual amount of overbilling.
The IRS accepted the contractor’s final reports and performed little, if any, verification. After discussions with IRS personnel involved in administering this contract, we concluded that more emphasis was placed on whether the tax forums were held than whether the contractor was properly billing the IRS by accurately accounting for tax forum income and expenses. One Contracting Officer Technical Representative (COTR) specifically stated that he was not worried about the tax forum income and expenses, only that the contractor was putting on the tax forums. Another COTR did identify irregularities in the number of participants and the amount of participant registration fee income the contractor reported in 2003. However, a procurement official accepted the contractor’s questionable explanation and paid the management fee without receiving any additional supporting documentation.
In addition, IRS personnel did not compel the contractor to
submit all the reports required by the contract. As a result, the IRS could not effectively
monitor the contractor and the tax forum results on an ongoing basis. Despite the fact that the contract required
the contractor to provide the IRS with numerous reports, none of the IRS
personnel involved in the administration of this contract during 2002 and 2003 could provide us with any other
reports besides the contractor’s final reports.
One COTR stated that reports were required only if the COTR requested
them. The Contracting Officer (CO) left
it up to the COTRs to get the required reports and was not aware that they were
not receiving them. However, the
contract stated that certain reports, including interim and final, were to be
provided to the CO as well as the COTR.
Another
example of not conducting proper oversight resulted in the IRS not deducting
$5,344 of the 2002 management fee before it was paid to the contractor. The IRS paid the full management fee even
though the contractor indicated the excess income on its invoice. The IRS later realized the $5,344 should not
have been paid and deducted the amount from the contractor’s 2003 management
fee.
The contract states that the COTR will represent the CO in the administration of the technical details of the contract. However, ultimately the CO has the authority for administering the contract. Additionally, the FAR stipulates that the CO is responsible for ensuring the performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the Federal Government in its contractual relationships.
As a result of the IRS’ inadequate oversight and complacent attitude in monitoring this contract, the contractor provided the IRS with inaccurate data related to tax forum results. This allowed the contractor to overbill the IRS for its management fee. The IRS awarded a contract to a new vendor for the 2004 tax forums. The IRS should provide effective oversight and monitoring of the new contract to ensure the accuracy of all income and expenses.
The Director, Procurement, should:
1. Coordinate all remedies with the United States Attorney’s Office and the TIGTA OI regarding all appropriate legal actions.
Management’s Response: The IRS will provide all requested assistance if the United States Attorney’s Office pursues legal action against the contractor.
The Director, Procurement, in conjunction with the Director, Office of National Public Liaison, should:
2. Review and monitor registration data before and after each tax forum to better evaluate the accuracy of the reported numbers of participants and exhibitors and the resulting income generated.
Management’s Response: The new contract put a process in place to monitor registrations before and after each tax forum. The IRS has been monitoring registrations for the first forum, which begins in July 2004.
3. Review supporting documentation for tax forum expenses on a periodic basis and regularly investigate significant differences in budgeted versus actual expenses.
Management’s Response: The IRS established a process to periodically review and investigate, as necessary, tax forum expenses for the new contract. The contractor is contractually required to submit a budget report each month, and a final report following the end of the last forum. These reports are being monitored to ascertain budgeted versus actual expense and will be compared with invoices.
4. Consider revising the participant registration fee structure to one flat fee for all participants. The minimal difference ($20 in 2003) between the highest and lowest registration fees likely provides little incentive for firms to send multiple employees to the tax forums. In addition, a flat fee should make for easier accounting of the registration fee income.
Management’s Response: For the new contract, registration for the
forums is accomplished online at a contractor web site that is accessible by
the IRS. A registration fee of $99 per
person, per forum, is charged if the registrant registers before established
preregistration deadlines; online registration fees after established deadlines
increase to $200 per person, per forum.
TD P 15-71
Appendix I
Detailed Objective,
Scope, and Methodology
The overall objective of this review was to determine if the contractor billed the Internal Revenue Service (IRS) accurately and according to the contract’s terms and conditions. To accomplish our objective, we:
I.
Determined if the
contractor was accurately reconciling and reporting income received from tax
forum[7] exhibitors and participants.
A.
Reviewed IRS contract
files and identified applicable terms and conditions.
B.
Reviewed IRS
publications to determine tax forum pricing data.
C.
Interviewed IRS
personnel:
1.
Determined if concerns
existed regarding the reconciling and reporting of tax forum income.
2.
Determined how the
contractor reported tax forum income and the process in place to verify what
was reported.
D.
For the Fiscal Years
2002 and 2003 tax forums:
1.
Reviewed, analyzed,
and compared the final reports, participant registration databases, and
invoices.
2.
Selected a judgmental
sample of the participant registration forms and traced each to the final
registration listing and payment data.
We also sent confirmation requests to the selected sample
participants. A judgmental sample was
used because we did not intend to project the results to the entire
population. We selected a sample of 57
tax forum participants whose registration forms indicated payment of a
registration fee (either handwritten, circled, or underlined) higher than that
reported by the contractor. Because we
identified indications of fraud on this contract, we only wanted to confirm the
existence of irregularities with respect to the tax forum income reported by
the contractor. As such, we did not expend the staff time to calculate the
population size by counting a large number of paper registration forms.
II.
Determined if the
expenses the contractor invoiced against tax forum income were accurate and
supported.
A.
Interviewed IRS
personnel:
1.
Determined if concerns
existed regarding claimed tax forum expenses.
2.
Determined the process
in place to verify the tax forum expenses invoiced against the tax forum
income.
B.
For the 2002 and 2003
tax forum invoices, obtained supporting documentation from the contractor for
expenses deducted from exhibitor and participant income.
1.
Verified the
mathematical accuracy of each invoice and supporting documentation provided.
2.
Traced expenses to
supporting documentation to determine whether charges were appropriate.
3.
Reviewed IRS contract
files and determined whether the invoiced expenses were allowable under the
contract’s terms and conditions.
C.
Using the 2000 through
2003 invoices, verified whether the IRS properly reduced the contractor’s
management fee by the amount by which income exceeded expenses.
1.
Reviewed contractor
reports and invoices to determine the claimed management fee reduction.
2.
Reviewed IRS Automated
Financial System (AFS)[8] and Web Request Tracking System (webRTS)[9] information to determine the amount of the management fee
actually paid.
3.
Interviewed IRS
personnel to identify the cause of the deficiency in the invoice review and
approval process that allowed the excess payment to occur.
TD P 15-71
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
Debra
Gregory, Audit Manager
Thomas
Dori, Lead Auditor
Richard Louden, Auditor
TD P 15-71
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy Chief
Financial Officer, Department of the Treasury
Deputy Commissioner
Operations Support OS
Director, Office of
National Public Liaison CL:NPL
Director,
Procurement OS:A:P
TD P 15-71
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Cost Savings, Questioned Costs (Unsupported) – Potential; approximately $684,000 (see page 3).
Methodology Used to Measure the Reported Benefit:
To determine the questioned costs, we requested documentation to support the Fiscal Year 2002 and 2003 tax forum[10] income and expenses the contractor reported to the Internal Revenue Service (IRS). However, the contractor was unable to provide any documentation in support of 2002 income and expenses, claiming that all the information had been “discarded.” The documentation the contractor provided in support of 2003 income and expenses was not sufficient to support either the reported income or expenses. In addition, we identified indications of potential fraud related to both the reported 2003 income and expenses.
The structure of the contract was such that both tax forum income and expenses factored into the calculation of the management fee the contractor was entitled to receive from the IRS. Because we could not verify the accuracy or validity of the reported amounts of tax forum income and expenses, we questioned the entire management fee of approximately $684,000 (approximately $350,000 in 2002 and $334,000 in 2003) the IRS paid the contractor during 2002 and 2003. Because we identified indications of potential fraud and referred the contract to the Treasury Inspector General for Tax Administration Office of Investigations, we did not continue audit work to determine the actual amount of management fee that was paid inappropriately.
TD P 15-71
Appendix V
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.
TD P 15-71
[1] The IRS conducts tax forums to provide information to the tax professional community on current IRS policies, programs, procedures, and initiatives.
[2] An ERO originates the electronic submission of a tax return to the IRS after the taxpayer authorizes the filing of the return via the IRS e-file Program.
[3] Although initially established for 5 years (1 base year and 4 option years), the contract concluded after 4 years because the IRS elected not to exercise the final option year.
[4] FAR, 48 C.F.R. pt 1-53 (2002).
[5] All 57 registration forms displayed a handwritten dollar amount or a circled/underlined registration fee amount.
[6] We did not include two participant responses that appeared to be errors. Both participants indicated paying an amount higher than that reported, but neither amount was a possible registration fee in 2003.
[7] The IRS conducts tax forums to provide information to the tax professional community on current IRS policies, programs, procedures, and initiatives.
[8] The AFS is an integrated accounting and budgeting system designed to provide administrative funds control.
[9] The webRTS provides a number of functions throughout the acquisition process. Functions include creating, routing, approving, and funding requests for goods and services, and performing electronic receipt and acceptance.
[10] The IRS conducts tax forums to provide information to the tax professional community on current IRS policies, programs, procedures, and initiatives.