The Criminal Investigation Function Has Made Progress in Investigating Criminal Tax Cases; However, Challenges Remain

 

March 2005

 

Reference Number: 2005-10-054

 

 

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 31, 2005

 

 

MEMORANDUM FOR CHIEF, CRIMINAL INVESTIGATION

 

FROM:†††† Pamela J. Gardiner /s/ Pamela J. Gardiner

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

 

SUBJECT:†††† Final Audit Report - The Criminal Investigation Function Has Made Progress in Investigating Criminal Tax Cases; However, Challenges Remain (Audit # 200310042)

 

This report presents the results of our review of the Criminal Investigation (CI) functionís efforts to increase the number of legal source income tax investigations.In general, legal source investigations involve legal occupations or industries and legally earned income in which the primary motive is the violation of tax statutes.The CI function also conducts investigations relating to illegally earned income and illegal activities.During Fiscal Year (FY) 2004, the CI function reported that legal source investigations represented about 35 percent of all subject investigations opened and about 43 percent of all direct investigative time (DIT).This audit was initiated as part of the Treasury Inspector General for Tax Administrationís FY 2004 Annual Audit Plan and due to concerns raised by the Senate Finance Committee about the CI functionís efforts to increase legal source income tax investigations.

In summary, the CI function began addressing these concerns by creating a revised mission statement, developing a compliance strategy designed to guide the CI function to develop and investigate cases that foster confidence in the tax system, publicizing the results of its investigations, and conducting an empirical study to determine the effect investigations have on voluntary compliance.

The CI functionís compliance strategy is comprised of three distinct, yet interdependent, program areas: legal source tax crimes, illegal source financial crimes, and narcotics-related financial crimes.Various strategic documents issued since July 2000 illustrate the CI functionís commitment to legal source and other tax-related investigations.The CI function made a slight change to its investigative strategy (as illustrated in the FYs 2004 and 2005 Annual Business Plans) that emphasizes maintaining a focus on legal source investigations, rather than increasing, its resources on these investigations.According to CI function executives, this current strategy focuses on developing and investigating those cases which would have the greatest compliance impact.The CI function will continue to emphasize investigations, both legal and illegal source, that adversely affect tax administration.Further, CI function management believes success toward achieving this strategy is measured by such case closing statistical indicators as completed investigations, Department of Justice acceptance rates, publicity rates, and average months sentenced.

We compiled various statistics that depict the CI functionís inventory and results for all tax-related and legal source income tax investigations for FYs 1999 through 2004.The CI function has made progress in increasing all tax-related investigations, but the level of legal source income investigations did not materially change during this period.Further, recent trends for FYs 2002 through 2004 are mixed for both tax-related and legal source investigations.

Because there are no specific criteria that govern the mix of the CI functionís workload, we could not conclusively determine whether the CI function is conducting enough legal source income tax investigations or to what extent it can or should increase the number.We believe it is up to CI function management and the Internal Revenue Service (IRS) Commissioner, in concert with Congressional and Administration budget and tax law enforcement priorities, to determine how the CI function should devote resources to pursue those cases that have the greatest impact on voluntary compliance.

To assist in this effort, we identified several areas in which the CI function can make improvements to the legal source investigative program and more effectively measure the program.First, we believe the CI function can do more to increase its focus on investigations developed from internal sources, starting with the fraud referral program.Although the CI and compliance functions have made efforts, they have been unable to reinvigorate the fraud referral program.In addition, the CI function has not fully maximized the use of general investigations (GI) as a means to identify and develop legal source income investigations.

In addition, the CI function faces a continuing challenge to make choices on the types of investigations to pursue that have the greatest impact on tax compliance.The CI function has a reputation as being one of the best financial investigative agencies in the Federal Government, and other agencies are continually asking for assistance.The CI function also participates in many other Federal law enforcement initiatives.Its participation in these investigations has to be balanced with the need to ensure the CI function meets its primary mission of investigating criminal tax violations.

We also identified inaccuracies and inconsistencies in the recording of data in the CI functionís management information system that may prevent CI function management from properly evaluating the status or effectiveness of their programs, including efforts in the legal source investigations program.

We recommended the Chief, CI, establish a fraud coordinator in each field office, establish control procedures for processing fraud referrals, issue guidelines to emphasize the use of GIs, ensure appropriate management tools are used to monitor and evaluate the results of GIs, and issue guidelines on the types of GIs that should be classified as legal source investigations.We also recommended the Chief, CI, establish national goals on key statistical indicators (such as the percentage of legal source income investigations or DIT) the CI function should strive to achieve and establish additional criteria for accepting referrals from other government agencies and the United States Attorneys Offices. Finally, we recommended the Chief, CI, conduct an analysis to determine the impact inconsistent coding has on the classification of investigations and, if warranted, modify the management information system so the coding properly reflects the nature of the investigation and the measurement of the CI functionís compliance strategy.

Managementís Response:The Chief, CI, agreed with seven of the eight recommendations in this report and has already taken steps to correct some of the issues identified.The Chief, CI, issued a detailed policy memorandum designating fraud referral coordinators and reemphasizing fraud referral operating procedures.The Chief, CI, also agreed to reemphasize the need to monitor all GIs and CI function management will issue a memorandum reminding the field not to neglect the appropriate use of GIs in developing future legal source income investigations. In addition, the CI functionís Annual Business Plan requires CI function management to continue to focus its investigative resources on legal source tax investigations and the FY 2005 performance agreements contain a commitment to work cooperatively with the Department of Justice and law enforcement partners to investigate other high-impact financial crimes and money laundering cases, with an emphasis on increasing or maintaining the balance of Title 26 and Title 31 violations.Finally, the Chief, CI, agreed to clarify the fraud scheme code section of the CI functionís management information system (CIMIS) and to determine what investigations are incorrectly coded in the CIMIS and correct them.

The Chief, CI, did not agree with our recommendation to establish a national goal on key statistical indicators such as the percentage of legal source income investigations or direct investigative time.The Chief, CI, believes that since there is no empirical data on which to base a specific target level of legal source investigations, creating such a goal would be arbitrary.Further, the statistical indicators reveal the CI function is currently working at or near an optimal case mix, which is supported by the conclusions of a recent empirical study.Managementís complete response to the draft report is included as Appendix V.

Office of Audit Comment:We made the recommendation to establish a national goal on key statistical indicators because we believe it is difficult to effectively measure program success or identify and investigate deviations without having an established standard or goal.In the formal response, the Chief, CI, indicated the priority given to legal source income tax cases is clearly stated in the performance management commitments as follows, ďI will continue to focus on legal source tax investigations by increasing or maintaining the percentage of legal source inventory and legal source direct investigative time (DIT) to reinforce CIís core mission.ĒWe believe it is necessary to establish a numeric goal to provide an effective means for measuring and analyzing progress.While we recognize the CI functionís concerns that its work is cyclical and it needs flexibility to be able to respond to emerging issues, we believe establishing any goal as a range would provide the needed flexibility.While we still believe our recommendation is worthwhile, we do not intend to elevate our disagreement concerning it 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

The Criminal Investigation Function Has Taken Actions to Address Concerns About Criminal Tax Investigations

The Status of the Criminal Investigation Functionís Legal Source Program

Improvements Are Needed in the Fraud Referral Program and the Use of General Investigations

Recommendation 1:

Recommendations 2 through 4:

The Criminal Investigation Function Must Make Choices on the Types of Investigations to Pursue That Affect Compliance

Recommendation 5:

Recommendation 6:

The Criminal Investigation Management Information System Does Not Accurately Reflect Efforts to Increase Legal Source Investigations

Recommendations 7 and 8:

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 Criminal Investigation Function Statistical Indicators

Appendix V Ė Managementís Response to the Draft Report

 

Background

In support of the overall Internal Revenue Service (IRS) mission, the Criminal Investigation (CI) functionís mission 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 law.

The IRS Strategic Plan for Fiscal Years (FY) 2005 to 2009 provides that enforcing tax compliance is critical to maintaining Americansí expectation that the system is fair and outlines several objectives to meet the goal of enhanced enforcement, including discouraging and deterring noncompliance with emphasis on corrosive activity by corporations, high-income individual taxpayers, and other contributors to the tax gap (the difference between taxes paid and owed).The IRS Commissioner has also repeatedly stressed the importance and role of tax enforcement in overall tax compliance by recognizing the need to increase levels of various enforcement activities to provide a proper balance between service and enforcement.

The CI function is the only law enforcement organization with the authority to investigate criminal tax violations.Its financial investigative expertise has been recognized and increasingly sought by prosecutors and other investigative agencies, and its investigative jurisdiction has expanded over the years to include money laundering and Bank Secrecy Act criminal violations.These laws have led to greater participation by the CI function in the financial investigative environment and have enabled the IRS to identify and investigate tax evasion cases involving legal and illegal income sources.The CI function also participates in many other Federal Government enforcement initiatives.

In general, legal source investigations involve legal occupations or industries and legally earned income in which the primary motive is the violation of tax statutes.Illegal source investigations involve illegally earned income and include money laundering and currency reporting crimes.Illegal source investigations may or may not include tax or tax-related violations.

This review was performed in the CI function National Headquarters (HQ) office in Washington, D.C., and the Denver, Colorado; New York, New York; and Charlotte, North Carolina, CI function field offices during the period February through August 2004.In December 2004, we updated the charts that depict various statistical indicators relating to the CI functionís workload and performance to incorporate FY 2004 data.The review was initiated as part of the Treasury Inspector General for Tax Administrationís (TIGTA) FY 2004 Annual Audit Plan and because the Senate Finance Committee (SFC) raised concerns about the CI functionís efforts to increase legal source income tax cases.

Our overall objective was to evaluate the CI functionís efforts to increase the number of legal source income tax investigations.We encountered a significant scope limitation that precluded us from fully addressing this objective.We were not granted full access to entire administrative investigative case files.Rather, the CI function provided, as mutually agreed, the requested case information necessary to accomplish our objective, which we did not review at the source point.

However, we did not receive sufficient, competent, relevant, and timely information to complete all of our audit tests, particularly those tests that involved a review of grand jury cases.Under Federal rules of evidence, certain investigative information in grand jury cases may not be shared with individuals who are not shown on a list authorizing such access.As part of the grand jury procedures governing disclosure of information, the CI function engaged local IRS Criminal Tax Counsel and the Assistant United States Attorneys (AUSA) to determine what information, if any, from the cases we requested was considered grand jury material and, thus, was restricted from being provided to us.Ultimately, the AUSAs were the final authority on what we could review.

In addition, the CI function instituted procedures that prevented us from obtaining any documents directly from the field offices, requiring the field offices to first provide the information to the CI function HQ office to determine if the request was within the scope of the audit.The purpose of this procedure was to ensure we received requested information timely and in an orderly manner and all documents provided were responsive to our request.We are unaware of any instances in which the CI function HQ office eliminated documents from the field in responding to the audit.Nonetheless, because we could not examine documents at the source, we could not independently confirm that all examples of pertinent documents submitted to the CI function HQ office from the field were, in turn, forwarded to us.

CI function and TIGTA management cooperated to the fullest extent possible on this matter; however, due to the aforementioned grand jury process, we either did not receive any information, or received only partial and incomplete information, on a majority of the grand jury cases.Since a majority of investigations are categorized as grand jury, without access to certain information from those investigations, we could not fully answer our objectives with a sufficient degree of confidence.Therefore, some of our review results are based on limited observations and analyses and may not be representative of the population.

With the exception of the scope limitation described above, 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.

Throughout this audit, we discussed our preliminary results with CI function management and made changes to the report where applicable.In the management response to this report, the Chief, CI, provided further explanation on the CI functionís position on many of the issues presented in this report.We acknowledge this additional information, and believe we previously addressed the underlying issues in the report text, footnotes, or appendices.Further, we are pleased that the Chief, CI, has already taken or plans to take corrective actions to seven of our eight recommendations, which should strengthen the legal source income tax program.Managementís complete response to the draft report is included as Appendix V.

The Criminal Investigation Function Has Taken Actions to Address Concerns About Criminal Tax Investigations

Through the years, the Government Accountability Office (GAO) and the Webster Report have raised concerns about the CI functionís ability to show how its resources were being used to address allegations of criminal tax violations.

The CI function addressed these concerns by taking three major steps:

Compliance strategy

The CI functionís revised strategy, established in October 1999, is comprised of three distinct, yet interdependent, program areas: legal source tax crimes, illegal source financial crimes, and narcotics-related financial crimes.

Various strategic documents issued since July 2000 illustrate the CI functionís commitment to legal source and other tax-related investigations.The priority for legal source income tax investigations follows from the fact that the CI function is the only law enforcement organization with the authority to investigate these types of allegations.CI management clearly articulated this priority in its strategic documents.For example:

In the FYs 2004 and 2005 ABPs, the CI function made a slight change to its investigative strategy that emphasizes maintaining a focus on legal source investigations, rather than increasing its resources on these investigations.The CI function will continue to emphasize investigations, both legal and illegal source, that adversely affect tax administration.

According to CI function executives, this current strategy focuses on developing and investigating those cases which would have the greatest compliance impact.Further, CI function management believes success toward achieving this strategy is measured by such case closing statistical indicators as completed investigations, Department of Justice acceptance rates, publicity rates, and average months sentenced.

The CI function believes it has achieved its strategic goal of optimizing the number of tax investigations.In addition, the Chief, CI, stated that, with a renewed focus on investigative priorities, the CI function is pursuing exactly the right mix of cases that will most effectively target the compliance gap.

Increased publicity

The CI function established an aggressive media campaign to publicize the results of its investigations.A former Chief, CI, stated publicity helps accomplish the Webster Report recommendation to increase public knowledge and respect for the CI functionís tax deterrence mission.The CI function established Public Information Officer positions in each of its field offices to serve as a liaison to promote publicity of its cases and to provide outreach of CI function activities.

These efforts have resulted in an increase in publicity on both legal and illegal income source investigations.Since FY 1999, the publicity rates for legal and illegal source investigations have increased 13 and 8 percentage points, respectively.

Empirical study

According to the Webster Report, it was unknown with reasonable certainty what, if any, effect the CI functionís investigations have upon voluntary compliance or general deterrence.The Webster Report recommended the CI function craft its caseload based on empirical research and an IRS compliance strategy that focuses on tax enforcement and the fostering of voluntary compliance.

To address this, the CI function contracted with a consultant to conduct a study using empirical data to determine whether its investigative activities have a measurable impact on compliance.The CI function also requested the outside consultant test three other variable data sets as they relate to compliance impact as follows: 1) mix of investigation type, 2) impact of publicity, and 3) difference in impact of incarceration versus probation.

The study concluded CI function activities have a measurable effect on voluntary compliance and the mix of CI function sentenced cases (relating to tax versus money-laundering investigations) is not a significant determinant of tax compliance, perhaps because the mix has already been optimally set.As of December 2004, the study results had not been formally published.

The Status of the Criminal Investigation Functionís Legal Source Program

The premise of the Webster Report was the CI function had drifted from its primary mission and needed to redefine its strategy to focus its investigations on legal occupations in legal industries where the untaxed income is derived from legal sources.Also, as historically perceived by the IRS, legal source income tax investigations, on average, carry a stronger deterrent against tax crimes to the American public than illegal source tax investigations.In an October 2003 memorandum to the TIGTA, the SFC expressed concerns about the CI functionís efforts to increase legal source income tax investigations and requested we begin our planned coverage of this issue.

We compiled various statistics that depict the CI functionís inventory and results for all tax-related and legal source investigations for FYs 1999 through 2004.The CI function has made progress in increasing all tax-related investigations, but the level of legal source investigations did not materially change during this period.Also, recent trends for FYs 2002 through 2004 are mixed for both tax-related and legal source tax investigations.Appendix IV provides graphs that depict these trends.

Because there are no specific criteria that govern the mix of the CI functionís workload, we could not conclusively determine whether the CI function is conducting enough legal source income investigations or to what extent it can or should increase the number.Furthermore, the aforementioned scope limitations precluded us from reviewing sufficient numbers of investigations to determine the nexus of these investigations to tax administration.

In discussing our preliminary review results, the Chief, CI, expressed concern that our conclusion might imply that the sheer number of increases in legal source investigations is the goal, rather than an inventory of high-quality, high-impact legal source cases balanced with illegal income source cases.Also, the Chief, CI, stated the CI function has attained 4-year highs in several case closing statistical indicators in the legal source program, which convey progress in achieving the CI functionís strategies.

We recognize that mere increases in legal source investigative activity are not the only measure of program success and the results of the investigations also play an important role in evaluating program achievements.

We agree with the CI function that setting the right mix of case types is a matter of skilled judgment.CI function management and the IRS Commissioner, in concert with Congressional and Administration budget and tax law enforcement priorities, should determine how the CI function devotes its resources to pursue those cases that have the greatest impact on voluntary compliance.We also believe, when results of the previously mentioned study are published, the CI function should consider them in the context of all of its stated objectives and investigative priorities when evaluating the proper mix of legal source, tax-related, and nontax-related types of investigations.To assist in this effort, we identified several areas in which the CI function can make improvements to the legal source investigative program and more effectively measure the programís impact on tax compliance.

Improvements Are Needed in the Fraud Referral Program and the Use of General Investigations

Historically, internal IRS programs have been the primary sources of cases involving pure tax violation investigations.Between FYs 1999 and 2004, almost 60 percent of legal source investigations came from within the IRS, while less than 20 percent of legal source investigations came from a United States Attorney Office (USAO) or other government agencies.We evaluated certain aspects of the CI functionís fraud referral and general investigation (GI) programs to gauge their effectiveness in the CI functionís efforts to increase legal source tax investigations.

In our opinion, the CI function could do more to cultivate investigations from within the IRS to address the various concerns that have been raised by the Webster Report, the Congress, and the GAO on increasing legal source investigations or to fully conform to its stated ABP priorities.Specifically:

IRS efforts to reinvigorate the fraud referral program have not been effective

The Webster Report cited concerns about the declining number of quality criminal referrals to the CI function from the IRS compliance functions.In response, both the CI and compliance functions took steps to reinvigorate the fraud referral program, including:

According to the IRS Strategic Plan for FYs 2000 to 2005, the IRS will focus on increasing tax compliance in legal source income investigations through invigorating the fraud referral program.An operational priority, as listed in the CI functionís FY 2004 ABP, is to continue to promote fraud awareness, actively support efforts to enhance the fraud referral program, timely evaluate referrals, and hold conferences with the compliance functions.

Despite these attempts, the fraud referral program has not been reinvigorated.After a dramatic decline in FY 2000, referrals increased steadily through FY 2003.However, even with the emphasis on referrals, the total number of referrals decreased slightly in FY 2004 and is still below the level at the time the Webster Report was issued, as shown by Chart 1.

Chart 1: Summary of Fraud Referrals

 

FY 1999

FY 2000

FY 2001

FY 2002

FY 2003

FY 2004

Referrals Received

605

436

486

526

559

530

Percentage of Referrals Accepted

44.3%

50.8%

53.8%

62.9%

61.2%

58.0%

Percentage of Subject Investigations from Referrals

9.4%

9.3%

9.3%

11.1%

10.9%

10.7%

Percentage of Prosecution Recommendations from Referrals

11.5%

11.0%

8.7%

8.8%

7.6%

8.1%

Source: The CI functionís Business Performance Reviews, TIGTA analysis of the CI function Management Information System (CIMIS), or CIMIS Report 11, Program Summary Analysis.

We analyzed the CIMIS data relative to fraud referrals, reviewed all 25 fraud referrals rejected by the 3 field offices, and interviewed CI function field office management and compliance function fraud referral specialists.The results of these reviews indicate the CI function has not placed enough emphasis on timely working referrals, communicating results with the compliance functions, and establishing or using existing controls to manage the processing of referrals.For example:

We believe these factors contribute to the inability to increase the number and quality of fraud referrals.We also believe the absence of a fraud referral coordinator in the CI function field offices has a negative impact on the fraud referral program.We had recommended in a prior review of the LDCs that fraud referral coordinators in the CI function field offices, rather than the LDCs, receive, number, and assign fraud referrals.In response to our LDC report, the CI functionís proposed redesign of the LDCs provided that fraud referrals would be sent directly to the CI function field offices.However, the three field offices we visited during our current review did not have a fraud referral coordinator.

The CI function field offices have coordinators for many program areas (including questionable refunds, terrorism, suspicious activity reports, and more recently, corporate fraud) who act as liaisons for the respective program areas.For example, the terrorism coordinators are responsible for contacting representatives of the various terrorism-related task forces (e.g., Joint Terrorism Task Force and the USAO anti-terrorism task force) and reporting the terrorism-related activities of the field office to the CI function HQ office.We believe not having a designated fraud coordinator to handle referrals from the civil functions is an indication the CI function is not fully committed to improving the fraud referral program.

The CI function recently conducted an assessment of the fraud referral program and concluded the program continues to be a logical and critical source of legal source income tax investigations; therefore, the CI and compliance functions must continue to find ways to elevate their partnership to identify emerging areas of fraud.

The CI function has not made effective use of GIs

A GI is a study, survey, or canvassing activity on a number of individuals or entities within categories, such as occupation or industry.GIs are initiated to identify noncompliance with the laws enforced by the IRS.The CI function also uses GIs to identify the time special agents spend on specialized projects, such as imprest funds, liaison contacts, coordinating various programs, and various task forces.For purposes of our review, we considered only those GIs designed to identify noncompliance with the law.

Whether initiated as a result of noncompliance identified by the compliance function or from a CI function initiative, GIs can serve as a valuable means to identify legal source investigations.However, according to the CIMIS data, the CI function initiated a total of 1,506 legal source investigations during FY 2003, but only 120 of these (8 percent) resulted from a field-generated GI.

CI function management advised us the CIMIS does not clearly show those GIs that are designed for administrative purposes, time tracking, or legal source investigations.According to the CIMIS, there were 976 open GIs as of September 30, 2003. We analyzed 98 GIs that were open in the 3 selected field offices and determined 13 were designed to identify legal source investigations.Many of these GIs have been open for many years, and only three investigations from these GIs were opened in FY 2003.Further, as of the end of FY 2003, only 53 legal source investigations had resulted since these GIs were opened.

There was a wide range of opinion among CI function field office management regarding the value of a GI.The SAC in one field office instituted a requirement that each group open a GI to develop legal source investigations.However, the SAC in another office indicated GIs were inefficient.

In addition, we reviewed the Review and Program Evaluation (RPE) reports from 10 field offices to determine the extent they addressed the field officesí efforts to use GIs.These reports showed varying degrees of emphasis placed on GIs.Although all of the RPE reports contained a reference to GIs, they did not always address uniform issues and CI function management did not use these reports to identify trends.In fact, we are not aware of any CI function reports that will provide an analysis of the number of open GIs or the effectiveness of those GIs to identify legal source investigations.

In October 2003, the CI function proposed the realignment of the LDCs to address concerns raised by our report.The realignment specifically called for reprioritizing the work of the LDCs to include identifying and developing leads that fall within the strategic plan.Accordingly, each of the consolidated LDCs was assigned the GI case development responsibilities for a national program priority area in the strategic plan (e.g., offshore and abusive schemes).

This renewed emphasis of having the LDCs involved with developing GIs based on program priorities should help increase legal source income investigations. However, we believe the experiences of the special agents are also a valuable source to identify areas of noncompliance in which a GI would be appropriate.Therefore, we believe it is important the CI function use appropriate management tools to monitor and evaluate the effectiveness of GIs on increasing legal source cases.In addition, this information could be helpful in identifying nonproductive legal source GIs, so those resources could be directed toward other initiatives to increase legal source investigations.

Recommendations

The Chief, CI, should:

  1. Establish a fraud coordinator position in the CI function HQ office and in each of the 33 field offices.This could be a collateral duty.

Managementís Response:The Chief, CI, advised that an analyst from the Financial Crimes Section has been assigned fraud referrals as a program area and a detailed policy memorandum was issued in August 2004 directing all field offices to designate fraud referral coordinators.

  1. Establish control procedures to ensure referrals are processed timely.

Managementís Response:The Chief, CI, advised that a detailed policy memorandum was issued in August 2004 that implemented a fraud referral tracking system and reemphasized established operating procedures.In addition, the FY 2005 performance commitments for all Supervisory Special Agents include a requirement to timely evaluate fraud referrals.

  1. Ensure the appropriate management tools are used to monitor and evaluate the results of GIs on legal source investigations.

Managementís Response:CI function management will issue a memorandum that reemphasizes the need to monitor all GIs.Further, the memorandum will encourage the closure of nonproductive GIs and will remind the field offices to appropriately link any resulting primary and subject investigations to the GI.

  1. Issue guidance emphasizing the use of GIs as a means to identify legal source investigations that have the greatest impact on tax administration.

Managementís Response:The Chief, CI, stated although employees have been encouraged to use GI projects to develop investigations of noncompliant areas, experience indicates GIs are not the most productive means to develop significant legal source investigations.Nonetheless, CI management agreed to issue a memorandum reminding field offices to consider the appropriate use of GIs in developing future legal source income investigations, but will not insist they do so to the exclusion of other case development sources.

The Criminal Investigation Function Must Make Choices on the Types of Investigations to Pursue That Affect Compliance

With a reputation as being one of the best financial investigative agencies in the Federal Government and based on the various laws it is authorized to investigate, other agencies and the USAOs call upon the CI function to assist in various investigations.This often puts the CI function at odds with balancing its resources between mainstream tax compliance issues, for which it has sole investigative authority, and law enforcement against other crimes using tax or money-laundering charges as a tool.In addition to cultivating legal source investigations from within the IRS, the CI function must also be judicious in deciding which investigations to work with other agencies.The following issues, real or perceived, affect the CI functionís efforts to balance its resources and increase the level of legal source investigations:

Inherent barriers beyond the CI functionís direct control

We realize there are many barriers beyond the CI functionís direct control that affect its ability to increase the level of legal source investigations.Foremost are competing national law enforcement initiatives (e.g., terrorism, corporate fraud, etc.).While these are important in protecting our nation, they may not always result in legal source investigations.

One significant factor that influences the CI functionís selection of workload is the relationship between the CI function and the USAOs.While the CI function is responsible for investigating matters that have criminal tax fraud prosecution potential, the USAOs have the responsibility of accepting or declining the prosecution of those criminal matters.

The tax enforcement process works most effectively if the CI function and the various USAOs have the same priorities.However, where the CI functionís primary responsibility is in tax investigations, the USAOs have assorted prosecutorial goals, of which tax enforcement is only one. The acceptance of a tax case for prosecution may depend not only on the type of violation but also on the geographic location and economic and vocational status of the violator.Given the CI function in essence competes with other agencies for inclusion in the various local USAOsí agendas, there is a need for the CI function to maintain an effective working relationship with the USAOs.This relationship includes participating in joint investigations which might not always have a strong link to mainstream tax compliance.

The Webster Report raised the concern that the USAOs, and not the IRS, determine the CI functionís investigative agenda.The report concluded the CI function was pursuing overall Federal law enforcement initiatives at the expense of tax enforcement.The CI function managers we interviewed in general indicated, while the USAOsí priorities do have an influence on their workload decisions, it was not an undue influence.Some managers indicated (as do some RPE reports we reviewed) some USAOs might not be inclined to accept a lot of tax cases for prosecution.Some reasons suggested that could cause this in some locations included a generalization that tax cases are more difficult and take more time to prosecute or certain types of tax violations usually are of relatively low financial value (such as many fraudulent refund schemes).

We also believe workload decisions may be influenced because the lengths of sentences for tax violations are often less than those for sentences associated with the other criminal violations being investigated.Since sentences often run concurrently, there is no additional punitive benefit to pursuing the tax violation.

Nationally, the percentage of investigations opened based on requests from the USAOs has remained relatively constant over the past 4 fiscal years Ė between 19 and 26 percent of initiations per year.These same case initiations resulted in between 7 and 15 percent of the legal source investigations initiated during the same periods.The CI function managers we interviewed in general indicated a case is often selected based on the merits of the investigation, regardless of whether it would be a legal source investigation.The managers also indicated awareness that legal source cases were a high priority.

One of the steps in our audit plan was to review all 20 investigations (from the 3 field offices) which started as a tax investigation but the tax charges were later dropped and other nontax charges were pursued.Our objective was to determine whether the CI function was involved in the AUSAís decision to drop the tax charge.We did not receive 13 of the 20 files requested because of the grand jury restrictions previously described.As a result, we could not assess the efficacy of the observation that AUSAs influence the CI functionís workload.

The relationship of illegal source criminal investigations to tax compliance.

According to CIMIS data, about 54 percent of the CI functionís investigations during FY 2003 came from the USAOs and other government agencies; however, only 17 percent of all legal source investigations came from these sources.In addition, the CI function opened 1,535 illegal source subject investigations, 869 of which had a tax-related charge.The remaining 666 investigations did not have tax-related charges.

We selected a judgmental sample of 30 of the 205 illegal source subject investigations (from the 3 field offices) to determine if the CI function is investigating cases that have an impact on overall tax compliance.However, because of the grand jury secrecy provisions and the limited access to case information, we were able to review limited source documents on only 17 investigations opened by 2 of the offices.Based on what we could review, the case initiation documents for 7 of the 17 investigations did not describe the tax compliance of the subject, regarding either legal or illegal income, and had no tax-related allegation associated with the case.The apparent emphasis of each of the seven investigations was stopping and deterring the criminal activity of the subject.In addition, in 7 of the 17 investigations we did not identify evidence that suggested a special need for complex financial analysis warranting the assistance of the CI function; however, it was not clear if the other agency involved could have conducted the investigative steps done by the CI function.The alleged illegal activities in these investigations included crimes such as insurance, consumer, mail, or credit card fraud and embezzlement.

According to the CIMIS, during FY 2003, the CI function opened 273 subject investigations involving these 5 illegal activities.About 65 percent were referred from other agencies or the USAOs, and about 26 percent did not have a tax-related violation.

The CI function is authorized to work these types of investigations; however, other government agencies also have the authority to investigate these crimes. We are not implying that these were not the best investigations for the CI function to work at that particular time.However, given the CI functionís limited resources, the demands on these resources, and that the CI function is the only agency that can investigate tax violations, we believe these are the types of investigationsĖabsent a clear connection to taxĖthat the CI function could reevaluate before accepting.

The lack of a goal on the mix of investigations to pursue

A key management control is to establish goals and then monitor the effectiveness of the efforts to achieve those goals.In 1996, the CI function established a range of 57 to 61 percent of Direct Investigative Time (DIT) to be spent on tax gap investigations as its goal for FY 1997 and beyond. However, other than narcotics-related investigations, the CI function no longer has any goals or targets on the percent of time or number of investigations that should be targeted to legal source income investigations or other investigative program areas.

The CI function managers we talked to are aware of the emphasis to increase legal source investigations, and many stated they work the right case at the right time.The managers generally did not express a strong opinion regarding either the proper mix of investigations or the pursuit of a specific investigation to attain a certain mix.The Chief, CI, has also recently stated, with a renewed focus in investigative priorities, the CI function is pursuing exactly the right mix of cases that will most effectively target the compliance gap.

With the demands for its resources and the Congressí concerns on how these resources are used, we believe the CI function should continue to assess its impact on tax compliance and consider deriving goals for key statistical indicators, such as the percent of investigations initiated or DIT, so resources can be directed to those program areas best suited to achieve these goals.This will also allow the CI function to align its resources with the strategic objectives and investigative priorities described in SPPs and ABPs.We acknowledge the difficulty in establishing goals when existing empirical data do not directly and conclusively provide for such, but we believe some guidance is essential to measure progress in achieving SPP and ABP objectives and priorities.

Recommendations

The Chief, CI, should establish:

  1. Additional criteria to guide the field offices in accepting investigations from other government agencies or the AUSA offices when the cases do not involve tax compliance.

Managementís Response:The Chief, CI, indicated the FY 2005 ABP provides guidance to assist field offices in developing local plans and action items to support the CI functionís SPP.Special Agents in Charge (SAC) utilize the ABP strategy to set priorities based upon regional and local conditions.Additionally, all SAC performance agreements for FY 2005 include the commitment to work cooperatively with the Department of Justice and other law enforcement partners to investigate other high-impact financial crimes and money laundering cases, with an emphasis on increasing or maintaining the balance of Title 26 and Title 31 violations.

  1. National goals on key statistical indicators, such as the percentage of legal source income investigations or direct investigative time, the CI function should strive to achieve.These goals can be expressed as a range within major program areas to provide needed flexibility and can be based on the best available information from CIMIS, CI managementís strategic processes, and other data sources and studies.

Managementís Response:The Chief, CI, did not agree with this recommendation.The CI function has no empirical data on which to base a specific target level of legal source investigations.The CI HQ office has directed field management to maintain or increase levels of legal source income investigations and to direct attention to other significant financial investigations which affect tax administration.According to CI function management, the statistical indicators reveal the CI function is currently working at or near an optimal case mix.In addition, CI function management noted the only category for which the CI function can appropriately provide specific DIT target ranges is the Organized Crime Drug Enforcement Task Force Program.This target level is tied directly to the level of funding reimbursement the CI function receives as a result of its involvement in these cases.

Office of Audit Comment:We made this recommendation because we believe it is difficult to effectively measure program success or identify and investigate deviations without having an established standard or goal.In the formal response, the Chief, CI, indicated the priority given to legal source income tax cases is clearly stated in the performance management commitments as follows, ďI will continue to focus on legal source tax investigations by increasing or maintaining the percentage of legal source inventory and legal source direct investigative time (DIT) to reinforce CIís core mission.ĒWe believe it is necessary to establish a numeric goal to provide an effective means for measuring and analyzing progress.While we recognize the CI functionís concerns that its work is cyclical and it needs flexibility to be able to respond to emerging issues, we believe establishing any goal as a range would provide the needed flexibility.

The Criminal Investigation Management Information System Does Not Accurately Reflect Efforts to Increase Legal Source Investigations

As in some of our prior audits, we have identified inaccuracies and inconsistencies in recording data in the CI functionís various management information systems that may prevent management from properly evaluating the status or effectiveness of the CI functionís programs, including efforts to increase legal source investigations.Our limited tests identified the following issues relating to the CIMIS.

The definitions of legal and illegal source investigations do not accurately reflect the substance of the investigation

The Webster Report cited concerns with the CI functionís broad definition of tax gap investigations, explaining that the definition obscured any meaningful attempt to assess the degree to which the CI functionís work promotes tax compliance. As a result, the CI function changed the classification of investigations to legal source, illegal source, and narcotics-related.In simple terms, the CI function defines legal source income investigations as investigations that involve taxpayers in legal industries and legal occupations who earned income legally but chose to evade taxes by violation of the tax laws.Illegal source income involves money obtained through illegal sources (other than narcotics) and includes all tax and tax-related, as well as money-laundering and currency reporting, violations.

The CI function modified the CIMIS to reflect these changes and classified investigations based on a combination of various data entered into the CIMIS.However, in our opinion, two factors have caused inaccurate classification of the CI functionís investigations.

First, CI function officials advised us the former IRS Commissioner wanted to specifically differentiate those cases that only the CI function could investigate.As a result, the definition of legal source income includes only those investigations in which no other Federal or state agency is involved.Cases are classified as illegal source once another agency assists in the investigation.

During FY 2003, the CI function opened 4,001 investigations, 1,535 of which were classified as illegal source.Analyzing the CIMIS data, we determined that, based on the current CIMIS definitions, 406 of these 1,535 investigations were classified as illegal source solely because another agency was involved, even though the CI function was pursuing only tax or tax-related violations.Because we did not review these cases, we do not know whether any additional nontax charges were brought against the subjects of the investigations by the other agencies; the CIMIS would also not contain this information.

As a result of classifying investigations as illegal source when another agency participates, the CIMIS may be understating the time spent on and the number of legal source income investigations.As many as 48 percent of the investigations initiated and 58 percent of the DIT would have been classified as legal source for FY 2003, compared to about 38 and 42 percent, respectively, as reported.

Second, the existing data fields and codes within the CIMIS do not properly define or classify the investigation according to the CI functionís strategy, and the CIMIS does not contain a specific code that captures whether the investigation relates to legal or illegal source income.Two examples illustrate this.

         The subject was an owner of a business and allegedly skimmed receipts from the business by having checks made payable to himself or herself personally in amounts under $10,000.The CIMIS showed the taxpayer was in a legal industry and occupation, there was an alleged tax violation, and no other agency participated.However, the case was considered an illegal source investigation because the nontax-related violation of money laundering was pursued.

An analysis of the CIMIS showed there were 991 investigations opened in FY 2003 involving subjects in legal industries and occupations classified as illegal source on which the CI function pursued a nontax-related violation in addition to the tax violation.Of these, 239 were classified as illegal solely because of the nontax-related charge.Another agency also participated in the other 752 investigations.

         The subject was alleged to have embezzled a large sum of money from his or her employer and did not report the income on his or her tax returns.The CIMIS showed the taxpayer was in a legal industry and occupation, had a tax charge, had no nontax charges, and no other agency participated in the investigation.Since all existing criteria were met, the CIMIS listed this case as a legal source investigation.However, the source of the income, embezzlement, is an illegal source. The CIMIS does not use the illegal activity code when classifying cases.

The illegal activity as recorded in the CIMIS was ďembezzlementĒ in 154 investigations opened in FY 2003.However, 55 of the 154 investigations were classified as legal source.A review of the description of the allegation in the CIMIS indicates 36 of the 55 (65 percent) investigations classified as legal source income may be illegal source income investigations.

The first example results in understating the number of legal source investigations; the second example illustrates an overstatement of the number of legal source investigations because the case involves embezzlement or other illegal activity.Due to the nature of the inconsistencies of the coding within the CIMIS, we are unable to determine the overall impact the inconsistent reporting of case type had on the CI functionís compliance strategy.To do so would also require a review of investigative case files.

The CI function attempted to use the existing codes in the CIMIS to automatically define investigations according to its compliance strategy.CI function management considered having the field offices determine which codes to use but decided to use standard definitions to remove the subjectivity of the classification from the field offices.

However, as indicated by the above examples, the existing coding in the CIMIS is not flexible enough to accurately measure the CI functionís compliance strategy, especially relating to legal source investigations, which have the most significant impact on the broadest range of taxpayers.

We recognize the CI function desires to separately tabulate information on those cases that only the IRS has authority to investigate; we concur that the capability to do so has merit.However, CI function management has acknowledged the current definition applied to the legal source category is not perfect.Many of the CI function managers we interviewed agreed the current definition is not always reflective of their workload.

The classification of GIs is not accurate

The CI function originally classified all GIs as illegal source income investigations (except for those designed to identify narcotics-related investigations or questionable refund or return preparer projects) in an effort to be conservative. We questioned this because we believed this did not properly record the time devoted to legal source investigations.On April 1, 2004, the CI function issued a memorandum requesting the field offices to review all open GIs and, where appropriate, reclassify those designed to identify legal source investigations.

As a result of that memorandum and subsequent follow-up by the CI function HQ office, the CI function classified 174 GIs as legal source with over 46,000 staff days, including over 4,000 staff days of DIT in FY 2004 as of June 15.

We reviewed these 174 GIs and determined field offices were inconsistent in their classification and 38 investigations were misclassified, based on the following:

         GIs used to track administrative activities Ė 25.

These errors existed because the CI function did not issue guidelines to the field offices on the criteria to use to classify the GIs as legal source.In addition, there are no guidelines to apply as new GIs are initiated.According to the CIMIS data, as of June 15, 2004, these 38 investigations had about 1,400 staff days erroneously charged as legal source investigations in FY 2004, resulting in a potential overstatement of about 53 percent of the time recorded on legal source GIs.

The numbers of fraud referrals and rejections are overstated

According to the CIMIS, during FY 2003, the CI function rejected 194 referrals received from IRS compliance functions.We reviewed all 32 referrals rejected by the 3 field offices we visited.However, we determined the CI function misclassified 7 of the referrals (22 percent) because the CI function:

This resulted in overstating the number of referrals and understating the acceptance rate.Since these investigations were improperly classified as referrals, they would also have an adverse effect on the average time it takes the CI function to make an investigative decision on a referral.

As a result of recent reviews of the fraud referral program, the CI function and SB/SE Division plan to establish a fraud referral tracking number beginning in FY 2005.This should enhance the accuracy of controlling fraud referrals.As a result, we made no recommendations with respect to accounting for the number of fraud referrals.

Accurate management information is critical to establishing, measuring, and evaluating program goals and accomplishments.We believe the statistical information currently provided from the CIMIS, because of the issues described, may mislead or be misinterpreted and thus contribute to some of the concerns expressed by external stakeholders on the CI functionís workload, including the level of legal source investigations.

Recommendations

The Chief, CI, should:

  1. Conduct an analysis of the CIMIS to determine the impact that inconsistent coding has on the classification of investigations and, if warranted, modify the CIMIS and definitions so the coding properly reflects the true nature and disposition of the investigations and the measurement of the CI functionís compliance strategy.

Managementís Response:CI function management reemphasized that all multi-agency investigations are properly coded as illegal source investigations.However, they agreed to initiate a study to determine if there is any commonality among the use of incorrect compliance strategy codes in the CIMIS.The CI function will make appropriate corrections and recommend future changes to the new CIMIS system, if warranted.

  1. Issue guidelines on the types of GIs that should be classified as legal source.Only those GIs in which the primary purpose is to identify legal source income should be classified as legal source investigations.

Managementís Response:The CI functionís initial attempts to correct the CIMIS data were not entirely successful and it subsequently clarified the fraud scheme code section of the CIMIS handbook and provided better instructions.The Office of Financial Crimes will follow-up to ensure the necessary corrections are made.

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to evaluate the Criminal Investigation (CI) functionís efforts to increase the number of legal source income tax investigations. To accomplish our objective, we obtained an extract from the CI functionís Management Information System (CIMIS) for the period ended September 30, 2003.We validated the data received from the CIMIS by comparing the results of various queries to the CI functionís management information reports.However, we did not verify the accuracy of the data entered into the CIMIS.We selected the Denver, Colorado; New York, New York; and Charlotte, North Carolina, field offices based upon a combination of factors, including total number of investigations worked, percentage of cases that are legal source, percentage of investigations with tax-related charges, fraud referral acceptance rate, percentage of investigations with tax charges dropped, and percentage of legal source investigations resulting from a general investigation (GI).Specifically, we:

I.                   Identified the sources of the CI functionís legal source workload and determined what the CI function is doing to cultivate and increase the number of legal source income tax investigations from those sources.

A.       Conducted various analyses of the CIMIS to identify the source and other characteristics of the CI functionís inventory and results.

B.       Reviewed a judgmental sample of 10 of the 25 CI function Headquarters (HQ) Review and Program Evaluation (RPE) reports issued during Fiscal Years (FY) 2002 and 2003, including those for the 3 offices visited, and determined if the depth of review, results, and related recommendations indicated any emphasis on increasing legal source income tax investigations or investigations with tax-related statutes.We also determined if any trend reports were prepared from these reviews.We used judgmental sampling techniques since the results of evaluating reviews could not be projected to a universe.

C.       Identified and reviewed CI function studies, initiatives, or task forces that were designed to increase legal source investigations.

D.       Reviewed a judgmental sample of the Special Agents in Charge group operational reviews conducted during FY 2003 for 17 of the 32 groups in the 3 field offices visited.We used judgmental sampling techniques since the results of evaluating reviews could not be projected to a universe.

E.        Evaluated the CI functionís efforts to increase legal source investigations from the fraud referral program.

1)      Reviewed all 25 referrals rejected during FY 2003 in the 3 offices selected and determined if the required conferences were conducted, the referrals were timely evaluated, and feedback was provided and was timely.

2)      Analyzed the CIMIS to determine the time it takes the CI function field office to accept or reject a fraud referral.

3)      Determined if CI function field offices have a fraud referral coordinator.

F.        Evaluated the CI functionís efforts to increase legal source investigations from GIs.

1)      Discussed and obtained information from the CI function HQ office on the number of GIs that are designed to increase legal source investigations, the results of those projects, and if these projects were initiated based on the empirical studies or other known areas of noncompliance.

2)      Analyzed the CIMIS to determine the number of GIs opened, those that relate to legal source investigations, and the number of subject investigations resulting from the GIs.

G.       Determined if the CI function is investigating cases that have an impact on overall tax compliance by selecting a judgmental sample of 30 of the 205 illegal source investigations opened during FY 2003 in the 3 selected offices.We used judgmental sampling techniques due to the small universe and because we did not plan to project our results.

Auditorís Note: We were unable to complete this test.We did not receive 13 of the case files requested due to the grand jury secrecy provisions.Our results are based on the review of limited documentation in 17 of the 30 case files.

II.                        Identified the barriers that prevent the CI function from increasing legal source workload and determined what the CI function is doing to minimize or eliminate those barriers.

A.       Interviewed CI function management to determine their perceptions of what is preventing the CI function from increasing legal source investigations.

B.       From the 3 field offices visited, selected all 20 investigations in which the case started as a tax case but was recommended for prosecution without a tax charge and attempted to determine if the CI function was involved in the Assistant United States Attorneyís decision to drop the tax charge.

Auditorís Note:We were unable to complete this test.Due to the grand jury secrecy provisions, we did not receive 13 of the 20 investigations requested.The limited information we received precluded us from reaching any conclusions from this test.

III.                        Determined if the CIMIS is sufficiently reliable to enable CI function management to make informed decisions and evaluate its ability to increase legal source investigations.

A.       Interviewed CI function management to discuss the reasons for the existing definition of legal source tax investigations.

B.       Analyzed the CIMIS to identify investigations that were classified as illegal income because another government agency was involved in the case.

C.       Determined whether the CI function issued any guidelines for entering the Strategy Codes for GIs into the CIMIS.

D.       Analyzed the CI functionís reclassification of GIs to legal source investigations.

E.        Used the results of our tests on fraud referrals to determine the accuracy of reporting fraud referrals on the CIMIS.

 

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

Michael J. Hillenbrand, Lead Auditor

Timothy A. Chriest, Senior Auditor

Janice A. Murphy, Senior Auditor

Janis Zuika, Auditor

 

Appendix III

 

Report Distribution List

 

CommissionerC

Office of the Commissioner Ė Attn:Chief of StaffC

Deputy Commissioner for Services and EnforcementSE

Commissioner, Small Business/Self-Employed DivisionSE:S

Director, Operations Policy and Support, Criminal InvestigationSE:CI:OPS

Chief CounselCC

National Taxpayer AdvocateTA

Director, Office of Legislative AffairsCL:LA

Director, Office of Program Evaluation and Risk AnalysisRAS:O

Office of Management ControlsOS:CFO:AR:M

Audit Liaisons:

††††††††††† Commissioner, Small Business/Self-Employed DivisionSE:S

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

 

Appendix IV

 

Criminal Investigation Function Statistical Indicators

 

To evaluate the Criminal Investigation (CI) functionís progress in investigating criminal tax violations, we compiled various statistics that depict inventory and results for all tax-related and legal source tax investigations for Fiscal Years (FY) 1999 through 2004.Where data were available, we present two charts for each statistical indicator:the first chart depicts the relationship between tax-related and nontax-related investigations; the second chart depicts the relationships among the CI functionís three program areas of legal source, illegal source, and narcotics-related financial crimes (narcotics).We also calculated in the second chart within each section below the percentage of legal source investigations to the total number of investigations.We included both views because legal source investigations are an important component of all tax-related investigations, and the CI function has consistently described legal source tax cases as a top investigative priority.

Subject Investigations Initiated

The CI function initiates a subject criminal investigation when it believes a taxpayer has committed a crime and there is likelihood for successful criminal prosecution.Thus, the percentage of all tax-related and legal source income tax investigations initiated is an important element in evaluating the CI functionís efforts to investigate tax fraud.

As Chart 1 depicts, tax-related investigations comprised 48.6 percent of all investigations initiated in FY 1999; that increased 6.6 percentage points to 55.2 percent in FY 2004.However, as depicted in Chart 2, the percentage of investigations initiated that were classified as legal source was virtually unchanged during the same period (34.8 percent in FY 1999 compared to 35 percent in FY 2004).Further, between FYs 2002 and 2004, the percentages of tax-related and legal source tax investigations initiated both declined, by 8 and 4.8 percentage points, respectively.CI function management has attributed the recent decline from FYs 2003 to 2004 to its efforts to reduce the number of overage investigations.Rather than opening new investigations, special agents are putting more resources into completing existing investigations.

Chart 1: Number of Tax-Related and Nontax-Related Subject Investigations
Initiated and the Percentage That Is Tax-Related (by fiscal year)

 

Chart 1 was removed due to its size.To see the Chart 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Chart 2: Number of Subject Investigations Initiated by Compliance
Strategy and the Percentage That Is Legal Source (by fiscal year)

Chart 2 was removed due to its size.To see the Chart 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Direct Investigative Time

Direct investigative time (DIT) is defined as the time spent by special agents conducting investigations and other law enforcement activities.As with investigations initiated, DIT is another important element in evaluating efforts to increase tax-related and legal source tax investigations.The percentages of DIT depict where the CI function is expending its resources.

The amount of DIT on all tax-related and legal source tax investigations shows results comparable to investigations initiated.The CI function increased its DIT on all tax-related investigations by 6.3 percentage points, from 59.9 percent in FY 1999 to 66.2 percent in FY 2004.However, the DIT spent on legal source tax investigations was virtually unchanged during the same period, having gone from 43.3 percent in FY 1999 to 43.2 percent in FY 2004.Unlike investigations initiated, the trend for the last 2 fiscal years for DIT expended is positive, with tax-related and legal source tax investigations increasing 4.9 and 3.3 percentage points, respectively.Chart 3 depicts these trends; we have included a 6-year trend line to further illustrate the relative movement for FYs 1999 through 2004 for these 2 categories.

Chart 3: Percentage of Tax-Related and Legal Source DIT

 

Chart 3 was removed due to its size.To see the Chart 3, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Subject Investigations in Inventory

Inventory levels at fiscal year end provide a snapshot of the relative mix of open subject investigations the CI function has available.Again, as shown in Charts 4 and 5, the figures are comparable.The percentage of tax-related investigations in inventory in FY 1999 was 69.7 percent and has increased 6.2 percentage points to 75.9 percent in FY 2004.However, as shown in Chart 5, the percentage of legal source tax investigations in inventory remained virtually unchanged, declining slightly from 50.7 percent in FY 1999 to 49.6 percent in FY 2004.The trends for the last 2 fiscal years for both tax-related and legal source tax investigations are relatively flat.CI function management advised that the decreases in the total number of investigations in all categories from FYs 2003 to 2004 can also be attributed to their efforts to reduce older investigations.

Chart 4:Number of Tax-Related and Nontax-Related Subject Investigations in Inventory
and the Percentage That Is Tax-Related (by fiscal year)

Chart 4 was removed due to its size.To see the Chart 4, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Chart 5: Number of Subject Investigations in Inventory by Compliance Strategy
and the Percentage That Is Legal Source (by fiscal year)

Chart 5 was removed due to its size.To see the Chart 5, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Prosecution Recommendations

When the CI function completes an investigation, the case is either discontinued, meaning there are no further prospects for proceeding with criminal charges, or the case is provided to the Department of Justice Tax Division or a United States Attorney Office for consideration of criminal prosecution.Thus, prosecution recommendations are reflective of successful criminal investigations and reflect on the quality of the investigation.

Chart 6 shows the percentage of prosecution recommendations involving tax-related investigations increased 4.6 percentage points, from 43.6 percent in FY 1999 to 48.2 percent in FY 2004.However, as shown in Chart 7, recommendations on legal source tax investigations declined 2.7 percentage points, from 31.3 percent in FY 1999 to 28.6 percent in FY 2004.Also, for FY 2004, the percentages for both tax-related and legal source tax investigations decreased to FY 2002 levels, after increasing in FY 2003.

Chart 6: Number of Tax-Related and Nontax-Related Subject Investigations Recommended
for Prosecution and the Percentage That Is Tax-Related (by fiscal year)

Chart 6 was removed due to its size.To see the Chart 6, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Chart 7: Number of Subject Investigations Recommended for Prosecution by
Compliance Strategy and the Percentage That Is Legal Source (by fiscal year)

Chart 7 was removed due to its size.To see the Chart 7, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Pipeline Inventory

The CI function defines pipeline inventory as investigations that have been recommended for prosecution and are awaiting final actions by the criminal justice system (i.e., the subject has not been convicted, acquitted, or dismissed).As shown in Chart 8, the percentage of tax-related cases in pipeline inventory decreased 1.9 percentage points from FYs 1999 to 2004.Chart 9 also shows a declining trend for legal source tax investigations for the same period.The percentage of legal source tax investigations decreased 7.4 percentage points, from 40.8 percent in FY 1999 to 33.4 percent in FY 2004. Further, while the number of tax-related pipeline cases is at a 5-year high and legal source investigations are at a 4-year high, the percentages of tax-related and legal source investigations declined from FY 2003 to FY 2004.

Chart 8:Number of Tax-Related and Nontax-Related Subject Investigations in the Pipeline
and the Percentage That Is Tax-Related (by fiscal year)

Chart 8 was removed due to its size.To see the Chart 8, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Chart 9: Number of Subject Investigations in the Pipeline by Compliance
Strategy and the Percentage That Is Legal Source (by fiscal year)

Chart 9 was removed due to its size.To see the Chart 9, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Publicity Rate

The publicity rate is the percentage of investigations that receive media exposure (whether local or national coverage) during the course of an investigation.As part of its strategy to encourage compliance, the CI function embarked on an effort to increase the publicity on cases it investigates.As depicted in Chart 10, the publicity rate on legal source investigations rose from 58 percent in FY 1999 to 71 percent in FY 2004.Similarly, the publicity rate on illegal source investigations rose from 69.7 percent to 78.1 percent.

 

Chart 10: Publicity Rate on Subject Investigations by Compliance Strategy

Chart 10 was removed due to its size.To see the Chart 10, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

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.