TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Progress Has Been Made but Further Improvements Are Needed in the Administration of the Low Income Taxpayer Clinic Grant Program

 

 

 

September 2005

 

Reference Number:  2005-10-129

 

 

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.

 

Web Site           |  http://www.tigta.gov

 

September 21, 2005

 

 

MEMORANDUM FOR NATIONAL TAXPAYER ADVOCATE

 

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

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Progress Has Been Made but Further Improvements Are Needed in the Administration of the Low Income Taxpayer Clinic Grant Program (Audit # 200510009)

 

This report presents the results of our review of the Low Income Taxpayer Clinic (LITC) grant program.  The overall objective was to determine whether the LITC grant program is effective and is in compliance with legal requirements.  We also evaluated corrective actions taken by the Internal Revenue Service (IRS) in response to a prior report we issued in May 2003.[1]

Synopsis

Since taking over responsibility for the LITC program in May 2003, the Taxpayer Advocate Service (TAS) has focused on the quality of the clinics by establishing standards of operation and communicating these requirements in the Low Income Taxpayer Clinic Grant Application Package and Guidelines (Publication 3319).  The TAS also provides training on these standards to clinics during site visits and at its annual LITC program conference.

In response to a recommendation in our prior report on the LITC program, the IRS stated it would establish performance measures to determine the success of the LITC program.  However, it does not appear the IRS followed through to implement this recommendation.  The TAS’ focus is to have at least one clinic in every State that represents taxpayers in tax controversies with the IRS and one to educate those taxpayers for whom English is a second language.  However, the TAS has not developed or communicated the overall program goals and performance measures that would enable it to better measure the success of the LITC program.  Measures such as customer satisfaction, quality of service, timeliness of service, number of taxpayers assisted, and type of service provided are areas which could be evaluated against goals so Congress and other stakeholders can evaluate the benefits provided by the program in comparison to the money spent.

The number of taxpayers assisted, as reported by the clinics, is not reliable.  Some clinics did not submit the required interim and final reports or did not submit the reports timely.  For the reports that were submitted, the information contained in the reports was not validated by the TAS.  Moreover, the methods used by the clinics to report their results were inconsistent.  These inconsistencies prevented us from determining the accuracy of the numbers reported.  Reports were generally in narrative format.  Some were very detailed in providing the number of taxpayers assisted and the type of assistance provided, while others were brief and vague.  To improve the consistency of the reports, the TAS developed new forms for clinics to use for the 2006 grant period.

In 2004, the TAS performed 77 site visits to the clinics and attended 17 outreach sessions provided by the clinics.  However, these site reviews were not comprehensive or timely.  During the site reviews, the TAS did not validate information contained in the clinics’ interim and final yearend reports or review the information needed to determine whether the clinics were in compliance with legal requirements.  Furthermore, the TAS did not visit new clinics until after the grant funds were awarded.

Some clinics were not in compliance with their Federal tax obligations.  During the application period for the 2004 grants, 5 of the 134 clinics were awarded grant funds of $154,300 and were not in compliance with their Federal tax filing and/or payment requirements.  These 5 clinics subsequently received $127,500 in grant funds for 2005.  The TAS revised the 2005 Publication 3319 to emphasize that clinics must be in compliance with their Federal tax responsibilities.  However, during the application period for the 2005 grants, nine clinics were not in compliance with their Federal tax requirements.  These 9 clinics owed approximately $850,000 in taxes and had not filed 9 tax returns.  The TAS awarded the 9 clinics $513,500 in grant funds for 2005.  While the TAS indicated it would conduct compliance checks on organizations applying for a 2005 grant, no one within the LITC program office had access to the computer system needed to verify tax compliance until April 2005.  Moreover, the TAS does not have procedures in place to ensure the verification of tax compliance is comprehensive and timely.

Recommendations

We recommended the National Taxpayer Advocate (NTA) establish goals and performance measures for the LITC program to assist Congress and the IRS in evaluating the success of the program.  The NTA should suspend or terminate grant funds for clinics that are not in compliance with reporting requirements, provide guidance to indicate whether a clinic may receive funding solely for making referrals to other clinics, and provide guidance as to the types of media broadcasts and articles that will qualify under the LITC program.  We also recommended the NTA establish a policy to visit potential new clinics before awarding grant funds.  During indepth site visits, TAS representatives should verify information reported by the clinics and that clinics are following all LITC program requirements.  Moreover, the NTA should develop a sampling methodology to prioritize site visits to clinics based on indications that clinics are preparing tax returns or charging fees.  Finally, we recommended the NTA establish procedures to check for tax compliance before awarding LITC program grant funds and freeze funding for clinics that fail to become compliant with their tax responsibilities.

Response

The NTA generally agreed with our results and recommendations.  The TAS will identify possible goals and performance measures for the LITC program.  Once finalized, the goals and performance measures will be included in Publication 3319.  The TAS will include language in Publication 3319 to clarify that a controversy LITC solely making referrals to another LITC will not be funded.  Publication 3319 will also indicate that indirect outreach must include substantive information and that clinics should strive to include face-to-face contact as a primary method for educating taxpayers.  The TAS will develop a weighted criteria list to determine which clinics should be visited each year and will visit new clinics prior to making funding decisions to the extent that time and staffing limitations allow.  The TAS contacted all of the clinics we identified as not compliant with Federal tax requirements and informed them their grants will be terminated if the noncompliance is not resolved within a reasonable time period.  Furthermore, the TAS will verify that all 2006 grantees are compliant with all Federal tax responsibilities prior to awarding grant funds.

The NTA agrees the problem of untimely reporting must continue to be addressed; however, the NTA believes that, in most cases, suspending funds may not be effective.  The TAS will continue to use untimely reporting by the clinics as a factor in its funding decisions of future grant periods and in selecting clinics for site visits.  The TAS will review and strengthen procedures for following up on late reports and for taking the necessary corrective actions.  Reporting requirements will also be discussed at the 2005 LITC Annual Conference.

The TAS will consult with other Federal Government grant-making agencies to determine how these agencies verify grantee information while still maintaining client confidentiality.  However, the NTA noted that the LITC grant program is unlike any other Federal Government agency program in that the IRS, the grantor, is the opposing party in any tax controversy handled by the clinics, which could raise concerns about protection of attorney-client data and information.  Additionally, the NTA indicated that the recommendation to develop a method to verify the accuracy of information provided by clinics in their interim and final reports has already been adequately addressed by the TAS’ three-tier site assistance visit process.  Management’s complete response to the draft report is included as Appendix VI.

Office of Audit Comment

Publication 3319 states that clinics not timely reporting may have their grant funds suspended or terminated.  As such, the TAS should have a consistent process for following up with the clinics that have not filed timely to advise them that the grant funds will be suspended or terminated and follow through with these actions if clinics do not comply by the deadline set.  If the NTA is unable to determine an adequate method of verifying compliance with grant requirements, we believe the NTA should elevate this concern to Congress for a potential legislative remedy.  Although the site visit assistance checklists require that information provided by clinics in their interim and final reports are to be reviewed, the site assistance visit process does not contain a method to verify the accuracy of information provided by clinics in their interim and final reports.  As such, we do not believe the related TAS response addresses our recommendation. 

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

Results of Review

Standards of Operation for the Low Income Taxpayer Clinic Program Have Been Established

Program Goals and Performance Measures Are Needed to Evaluate the Success of the Program

Recommendation 1:

The Reported Number of Taxpayers Assisted by Clinics Is Not Reliable

Recommendation 2:

Recommendations 3 and 4:

Site Reviews Were Not Comprehensive or Timely

Recommendations 5 and 6:

Recommendations 7 and 8:

Some Clinics Are Not in Compliance With Their Federal Tax Responsibilities

Recommendations 9 and 10:

Appendices

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 – Low Income Taxpayer Clinics per State or Territory

Appendix VI – Management’s Response to the Draft Report

 

 

Background

 

The Low Income Taxpayer Clinic (LITC) grant program was initiated by a provision of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998.[2]  Congress wanted the LITC program to offer assistance to provide low income taxpayers, who are involved in controversies with the IRS, with free or nominal cost legal assistance.  Another goal of the LITC program is to provide education of tax rights and responsibilities to taxpayers for whom English is a second language.  The LITC program is not intended to help taxpayers prepare their tax returns.  Clinics are only allowed to prepare tax returns if it is ancillary to the education of a taxpayer for whom English is a second language and/or when it is necessary to resolve a taxpayer’s controversy with the IRS.

Since the inception of the program, the total funding for LITC program grants has increased significantly, from $1.5 million in 1999 to $8 million in 2005.  The numbers of clinics and the States represented have also increased.[3]  Table 1 shows the funding level, number of clinics, and States represented each year since the inception of the program.

 

Table 1:  LITC Program Grant Funding, Clinics, and States Represented (1999 – 2005)

Year

Grant
Funding

Number of Clinics

States/Territories
Represented

1999

$1.5 million

34

19

2000

$4.4 million

70

33

2001

$6 million

102

39

2002

$7 million

127

43

2003

$7 million

138

49

2004

$7.5 million

134

51

2005

$8 million

145

51

 

Source:  Internal Revenue Bulletins and News Releases.

Low Income Taxpayer Clinic Grant Application Package and Guidelines (Publication 3319) explains the LITC program requirements and award process.  To qualify for a grant, an organization must be an accredited law, business, or accounting school or a nonprofit organization.  Clinics must submit interim and yearend financial statements along with a description of their goals, strategy, and program results to the IRS.  Failure to provide this required information can result in the loss of grant funding.  Clinics with an approved program plan can receive grant funding for up to a 3-year period.

Clinics that receive grant funding to represent taxpayers in controversies must ensure the amount in controversy does not exceed $50,000 per case.[4]  In addition, these clinics must ensure at least 90 percent of the taxpayers they represent have incomes which do not exceed 250 percent of the poverty level.  The poverty level is based on the size of the family unit and is published annually by the Department of Health and Human Services.  Table 2 shows the 2004 poverty levels and maximum taxpayer income amounts for the LITC program.

 

Table 2:  The 2004 Poverty Levels and Maximum Taxpayer Income for the LITC Program

Size of
Family Unit

Poverty
Level
[5]

Maximum Taxpayer Income for LITC Program

1

$9,310

$23,275

2

$12,490

$31,225

3

$15,670

$39,175

4

$18,850

$47,125

For each additional
person, add

$3,180

$7,950

 

Source:  The 2004 Health and Human Services Guidelines.

Congress designated the IRS to provide administrative oversight and guidance for the LITC program.  From the program’s inception in 1999 through April 2003, the Wage and Investment Division had this responsibility within the IRS.  In May 2003, the IRS Commissioner transferred this responsibility to the Taxpayer Advocate Service (TAS).

This review was performed at the TAS offices in Washington, D.C., and Atlanta, Georgia, during the period February through June 2005.  This 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.

 

 

Results of Review

 

Standards of Operation for the Low Income Taxpayer Clinic Program Have Been Established

 

In May 2003, we reported on a number of problems with the administration of the LITC program.  One action the IRS planned to take to remedy these problems was to establish standards of operation for the clinics and provide training on these standards.[6]  Since taking over responsibility for the LITC program, the TAS has focused on the quality of the clinics by establishing standards of operation and communicating these requirements in Publication 3319.  The TAS also provides training on these standards to clinics during site visits and at its annual LITC program conference.  These standards of operation include:

·              Qualified tax expert on staff.

·              Qualified business administrator on staff.

·              Internal controls to safeguard assets and determine allowable costs.

·              Effective publicity and marketing.

·              Mentoring programs for clinic staff and volunteers.

·              Networking with other community-based organizations.

·              Tax library.

·              Continuing professional education.

·              Qualified volunteers.

·              Referral service to assist taxpayers in controversies.

In addition to the standards of operation listed above, the TAS encourages clinics to participate in a work group to share information and identify best practices.  The work groups focus on topics including IRS notices, financial literacy, multilingual initiatives, offers in compromise, and the Earned Income Tax Credit.

 

Program Goals and Performance Measures Are Needed to Evaluate the Success of the Program

 

In response to a recommendation in our May 2003 report on the LITC program,[7] the IRS stated it would establish performance measures to determine the success of the LITC program.  However, it does not appear the IRS followed through to implement this recommendation.

We asked TAS officials about the implementation of performance measures for the LITC program.  TAS officials responded stating they are focusing their efforts on the National Taxpayer Advocate’s overall goal to have at least one clinic in every State that represents taxpayers in controversies with the IRS and one to educate those taxpayers for whom English is a second language.  The TAS has made significant progress in this area and has almost accomplished its goal (see Appendix V for coverage of the LITC program by State in 2004 and 2005).  The TAS is also taking steps to identify organizations that may be interested in becoming an LITC in under-represented States and cities with large populations.

Other than this goal to expand the areas covered, the TAS could not identify any other goals or the performance measures it would use to gauge its progress meeting the goals.  The TAS requires, as stated in Publication 3319, that clinics develop their own individual goals and report on the progress of those goals; however, the TAS does not have similar overall goals for the LITC program.  Measures such as customer satisfaction, quality of service, timeliness of service, number of taxpayers assisted, and type of service provided are areas which could be evaluated against goals so Congress and other stakeholders can evaluate the benefits provided by the program in comparison to the money spent.

Moreover, communicating the goals and performance measures for this program would help current and future clinics to better understand their role in meeting the expectations of the LITC program.  The current Publication 3319 does not communicate to prospective clinics the program goals, challenges, or expectations for the success of the LITC program.

The National Taxpayer Advocate indicated specific concerns related to the performance of the clinics in the LITC program.  These concerns included the following:

  • Some clinics engage in routine tax preparation.
  • Some clinics run by academic institutions are not working enough cases.
  • Some legal aid societies that run clinics lack tax expertise.

To help address these issues, the TAS should establish and communicate the goals and performance measures so it can set expectations for the clinics; otherwise, it will be difficult to maintain accountability and ensure the program produces benefits commensurate with the costs.

 

Recommendation

 

Recommendation 1:  The National Taxpayer Advocate should establish goals and performance measures for the LITC program to assist Congress and the IRS in evaluating the success of the program.  In addition, the National Taxpayer Advocate should communicate general expectations derived from these measures to prospective clinics during the application process and reinforce these measures to grant recipients during the annual LITC program conference and site visits to clinics.

Management’s Response:  The TAS will assemble a team of TAS personnel and LITC representatives to identify possible goals and performance measures for the LITC program.  In addition, the TAS will observe how other similar grant programs measure success.  Once finalized, the goals and performance measures will be included in Publication 3319.

 

The Reported Number of Taxpayers Assisted by Clinics Is Not Reliable

 

To establish program goals and measures for the LITC program and to evaluate the performance of the clinics, the TAS will need to take steps to ensure the information reported by the clinics is accurate and classified properly.  We reviewed summary information provided by the TAS and all interim and final reports submitted by clinics for the 2004 grant period, but we could not determine the number of taxpayers assisted because of missing reports and inconsistencies.

Clinics are required to submit two reports for each grant year describing their accomplishments, including the number of taxpayers assisted.  The interim report is due July 31 during the grant year with the final report due March 31 after the year end.  The TAS has developed a database to track the number of taxpayers assisted by each clinic based on these reports.

 

Some clinics are not submitting reports timely

 

Clinics are submitting interim and final yearend reports late or not at all.  For the 2004 grant period, of the 134 clinics in the program, 17 clinics were more than 2 weeks late in submitting their interim reports; 7 of these 17 clinics were over 10 weeks late.  One clinic did not submit an interim report at all.  As of April 15, 2005, the TAS had received 39 final reports late and had yet to receive final reports for 16 clinics; 7 of these 16 clinics had been more than 2 weeks late with their previous interim report.  These 16 clinics were awarded grants of $626,850, of which 10 were also awarded grants totaling $400,000 for the 2005 grant period.  Table 3 shows the 2004 clinics’ compliance with the requirements for submitting reports.

 


Table 3:  Status of Interim and Final Reports for 2004

Status of Report

Interim
Report

Final Report
As of 4/15/2005

Timely

105

79

Fewer than 2 weeks late

11

39

More than 2 weeks late

17

N/A

Not Received

1

16

TOTAL

134

134

 

Source:  The Treasury Inspector General for Tax Administration’s (TIGTA) review of the 2004 LITC program files.

The total number of taxpayers assisted by clinics cannot be determined without these missing reports.  Publication 3319 warns clinics their funding may be suspended or terminated if they do not submit interim and final yearend reports.  For the clinics receiving funding in 2004, the TAS had not suspended or terminated funding for delinquent interim reporting or final reporting as of April 15, 2005, when we reviewed the reports.  To ensure it receives the information needed, the TAS should suspend or terminate grant funds for clinics not in compliance with reporting requirements.

 

Reporting inconsistencies prevent an accurate assessment of the number of taxpayers assisted

 

The interim and final yearend reports for the 2004 grant period did not consistently report the number of taxpayers assisted and the types of assistance provided.  These inconsistencies prevented us from determining the accuracy of the numbers reported.  Reports were generally in narrative format.  Some were very detailed in providing the number of taxpayers assisted and the type of assistance provided, while others were brief and vague.

Most of the clinics that assist taxpayers with tax controversies did not report their results using an inventory method, so the TAS could not determine how many cases were received, how many were in process, and how many were closed in any given period.  Because of this, it is not possible to determine whether taxpayers counted in one report were also counted in the previous report and will continue to be counted until the case is resolved.  This could result in significantly overstating the number of taxpayers assisted.  The 119 clinics funded to work controversy cases reported assisting 11,296 taxpayers; however, we were unable to determine the number of taxpayers the clinics received prior to 2004 that could have been included in previous reports to the IRS.

Some clinics did not provide the number of taxpayers they assisted in tax controversy cases even though the grants were awarded for that activity.  For example, six clinics specifically funded in 2004 to assist both taxpayers with tax controversies and taxpayers for whom English is a second language reported no tax controversy cases, and three of the six did not report the number of taxpayers assisted for whom English is a second language.  Either they are being funded for activities they are not performing or they failed to report the information to the IRS.

There is a wide variance in the number of taxpayers assisted with tax controversies as reported by each clinic.  In 2004, the number ranged from no taxpayers assisted to, in 1 instance, 1,303 taxpayers assisted.  For the 119 clinics funded to work tax controversy cases, 60 percent of the clinics assisted 92 percent of the taxpayers.  The remaining 40 percent of the clinics, which were funded approximately $2 million, assisted only 8 percent of the taxpayers with tax controversies.  Based on the information in the reports, we could not determine the cause for the differences.  It could be a reporting error, or, in some instances, it could be due to the complexity of the cases.  However, it is also possible that some clinics are just not helping very many taxpayers.

There were some clinics that referred tax controversy cases to other clinics for resolution.  When two clinics are involved with one controversy case, it is possible that each reported assisting that taxpayer, which results in double counting and inefficient use of grant funds.  For example, 1 clinic received a grant of $10,150 to assist taxpayers with tax controversy cases and stated it assisted 17 taxpayers.  Nonetheless, this clinic referred 16 of the 17 cases to another clinic.  The remaining case was referred to a pro bono legal group.  Internal Revenue Code (I.R.C.) Section (§) 7526 states a clinic may represent taxpayers or refer taxpayers to qualified representatives; however, it is unlikely the intent of the law is to provide funding to a clinic solely for making referrals to other clinics.  TAS officials stated they were aware of this situation and that they advised this particular clinic that referrals to other clinics were not appropriate; clinics should develop their own pro bono panels.  While the issue of referrals is addressed in Publication 3319, we believe the guidance needs to be clarified to adequately cover this type of situation.

Methods used by clinics to educate taxpayers for whom English is a second language varied significantly.  These methods included direct consultations; outreach sessions which included face-to-face contact; booths at community functions; and various media such as radio, television, and newspapers.  Based on the specific examples of activities in clinic reports involving mass media, some of the activities appeared to have been more of an effort to publicize the clinic than an effort to educate taxpayers as to their tax rights and responsibilities.

Information provided over the radio, television, or in print media would likely be less helpful to individuals than face-to-face outreach sessions or direct contact where taxpayers are present and can ask questions about their specific issue.  Without more information as to the format or information provided in media broadcasts, it is difficult to determine whether such broadcasts could be classified as an activity that is intended under the LITC program.  Assisting a taxpayer in person may take a significant amount of time and effort but is counted as assistance to only one taxpayer.  A media broadcast may take the same amount of time and be counted as assistance to thousands of taxpayers even though the broadcast only provided general information and did not respond to taxpayer questions.  One clinic stated it provided a radio broadcast to a listening audience of approximately 160,000, of which an estimated 80 percent were taxpayers for whom English is a second language.  The TAS documented that this clinic educated 160,000 taxpayers for whom English is a second language.  We believe further guidance should be provided by the IRS as to the types of activities that qualify as clinical activities.

The TAS has acknowledged many of these reporting inconsistencies and developed new forms for clinics to use when reporting their results.  These new forms are part of Publication 3319 to be used for grant year 2006.  The new forms are more specific as to the information requested and where on the form it should be recorded.  For example, the forms request specific information as to the number of cases open prior to the start of the reporting period, cases opened during the period, and those closed during the period as well as the type of assistance provided.  The forms also request clinics to provide information specifically related to the number of direct contacts or consultations with taxpayers for whom English is a second language and to separately provide the number of radio or television advertisements/appearances or newspaper articles.  The new reporting format should make the reported information more consistent and easier for the TAS to reconcile and interpret.

 

Recommendations

 

To increase the reliability of the total number of taxpayers assisted by clinics, the National Taxpayer Advocate should:

Recommendation 2:  Suspend or terminate grant funds for clinics not in compliance with reporting requirements as stated in Publication 3319.

Management’s Response:  The TAS agrees it must continue to address the problem of untimely reporting; however, the TAS believes that, in most cases, suspending funds may not be effective.  The TAS will continue its current practice of using timeliness of reports as a factor on which it bases its funding decisions for future grant periods.  In addition, the TAS will use untimely reporting as a factor in determining which clinics receive site visits.  Reporting requirements will also be discussed at the 2005 LITC Annual Conference.  The TAS will review and strengthen its procedures for following up on late reports and for taking the necessary corrective actions.

Office of Audit Comment:  Publication 3319 states that clinics not timely reporting may have their grant funds suspended or terminated.  As such, the TAS should have a consistent process for following up with the clinics that have not filed timely to advise them that the grant funds will be suspended or terminated and follow through with these actions if clinics do not come into compliance by the deadline set.

Recommendation 3:  Provide guidance in Publication 3319 to indicate whether a clinic may receive funding solely for making referrals to other clinics.

Management’s Response:  The TAS will continue, during site visits, to determine whether clinics have pro bono panels to which they can refer cases.  In addition, the TAS will revise Publication 3319 for the 2007 grant cycle to clarify that a controversy LITC solely making referrals to another LITC will not be funded.  The TAS stresses this issue during its annual training of TAS employees who are responsible for ranking clinic applications.

Recommendation 4:  Provide guidance in Publication 3319 as to the types of media broadcasts and articles that will qualify under the LITC program.

Management’s Response:  The TAS plans to emphasize the value and importance of direct contact with taxpayers to clinics at the next annual LITC conference.  The TAS also plans to revise Publication 3319 to indicate that, while advertising is an acceptable activity, indirect outreach must include substantive information and clinics should strive to include face-to-face contact as a primary method for educating taxpayers.

 

Site Reviews Were Not Comprehensive or Timely

 

To ensure the quality of service and compliance with grant funding requirements, we previously recommended the IRS conduct site reviews of clinics prior to and subsequent to acceptance into the LITC program.[8]  The TAS has established procedures for a three-tier site visit process.  Initial site visits are designed to give TAS management basic information about the clinic’s operation.  This includes evaluating office hours, publicity efforts, the clinic facilities, and security of records.  There are two types of indepth site visits that are less frequent and are intended to address whether the clinics are in compliance with the standards of operation and financial requirements.  TAS management also attended some of the clinics’ outreach sessions to educate taxpayers for whom English is a second language.

In 2004, the TAS performed 77 site visits and attended 17 outreach sessions.[9]  Table 4 shows the reviews of clinics performed by the TAS in 2004.

 

Table 4:  Reviews Performed During 2004

Tier

Type of Site Visit Review

Number of Reviews

1

Initial basic information

54

2

Indepth standards of operation

23

3

Indepth standards of operation and financial requirements

0

*

Attended outreach session

17

Total Reviews

94

 

Source:  TIGTA’s review of the 2004 LITC program files.

While this is an improvement over prior years, all of the site reviews of new clinics were performed after the TAS awarded the grant funds to the clinics.  In addition, the indepth site visits do not ensure all program requirements are met and do not verify the reliability of information reported to the TAS.  Furthermore, the site visits are not prioritized to ensure clinics that do not appear to be following program requirements are visited.

 

New clinics are not reviewed before awarding grants

 

The TAS visited 10 of the 12 new clinics which were awarded grants in 2004.  However, the TAS did not visit these clinics until after the grant funds were awarded.  We believe, before granting the funds, the TAS should perform site visits to ensure the new clinics are familiar with the program requirements and are qualified to assist taxpayers.

We found one example of a problem that could have been prevented by a timely visit.  An initial site visit by the TAS in March 2005 found a returning clinic which had been awarded funds in 2003 and 2004 did not have office space and was operating out of an apartment.  The initial funding for this clinic in 2003 occurred before the TAS assumed responsibility for the LITC program.  The TAS had already funded $50,000 to the clinic for 2004 but, after the site visit, cut off funding of $30,000 for 2005.  If this clinic had been visited before grant funds were initially approved, the fact that it was not equipped to assist taxpayers would have been identified before money was disbursed.

TAS officials stated they plan to continue visiting each new clinic within the first 6 months of operation.  For the 2005 grant period, TAS representatives will visit 21 new clinics by the end of June 2005, and returning clinics will also be selected for reviews as appropriate.  TAS officials stated they do not have the necessary resources to visit sites prior to awarding grants to new organizations.  However, since the TAS was able to visit all but 2 of the new clinics in 2004 and plans to visit all 21 new clinics in 2005, we believe the resources are available.  The TAS needs to improve its scheduling so the timing of the visits by TAS representatives coincides with the grant approval process for new clinics.

 

The TAS does not verify whether clinics meet all program requirements

 

For indepth site visits, the TAS has developed comprehensive check sheets to determine if the clinics meet the program requirements.  Based on the guidance associated with these check sheets, the TAS should be checking files to ensure the clinics are assisting qualified taxpayers.  However, we found the indepth reviews only address general information about the clinic and do not answer the specific questions on the check sheet.  TAS officials advised us, to respect the attorney-client privilege between the taxpayer and the clinic, reviewers do not obtain or validate specific taxpayer information (e.g., name, Social Security Number, income level, reason for seeking help, controversy amount, and nominal fee amount, including purpose for fee).

Without requesting this information, the TAS cannot validate that the clinics are complying with LITC program requirements, including the following:

  • At least 90 percent of the taxpayers represented by the clinic have incomes which do not exceed 250 percent of the poverty level.[10]
  • The amount in controversy for any taxable year does not exceed $50,000.[11]

Of the $7.5 million in grant funds provided to 134 clinics in 2004, approximately $4.7 million was awarded to 119 clinics to assist taxpayers in tax controversies with the IRS.  Since taxpayer income levels and amounts in controversy are not being verified, the TAS cannot ensure the $4.7 million in grant funds are being used as required.

Based on an opinion from the IRS Office of Chief Counsel, the TAS has concluded that it cannot obtain certain information from clinics because it would interfere with attorney-client privilege.  This conclusion conflicts with the TAS’ duties as a grant administrator.  Certain information (e.g., the taxpayer’s name, Social Security Number, income level, reason for seeking help, controversy amount, and nominal fee information) could be requested and obtained from intake sheets and clinic-created listings to validate program requirements without receiving documented discussions and correspondence between the taxpayer and clinic.  The Office of Management and Budget Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations (Circular No. A-110) Section 53(e) states the Federal Government awarding agency has the right of timely and unrestricted access to any books, documents, papers, or other records or recipients that are pertinent to the awards, in order to make audits, examinations, excerpts, transcripts, and copies of such documents.  As such, we believe the TAS should develop a method to obtain information necessary to determine whether the clinics are meeting program requirements without infringing on attorney-client privilege.

 

Information in the clinics’ reports is not verified during site visits

 

Based on our review of program files and discussions with TAS officials, information reported by the clinics for the 2004 grant period in the interim and final reports was not verified during the site visits.  This increases the risk of misreporting and reduces the reliability of information.  Because of the number of clinics, it would be difficult to verify all information within the interim and final reports.  However, sampling the information for some of the clinics to verify the information reported would help to evaluate and verify the reliability of the information provided.

 

Site visits are not prioritized to evaluate clinics which appear to be performing routine tax return preparation

 

Because the IRS has another program, known as the Volunteer Income Tax Assistance Program, to assist taxpayers with tax return preparation, the LITC program is not intended for this purpose.  As such, clinics are only allowed to prepare tax returns if it is ancillary to the education of a taxpayer for whom English is a second language and/or when it is necessary to resolve a taxpayer’s controversy with the IRS.  However, some clinics appear to be doing routine tax return preparation.  During 2004, 76 (57 percent) of the 134 clinics reported they prepared a total of 22,819 tax returns.  Moreover, 25 of these clinics accounted for 94 percent of the total number of returns prepared.  Furthermore, some clinics provided copies of flyers advertising free tax preparation in their interim and final yearend reports to the TAS.

In addition, some clinics were charging fees to prepare tax returns.  Clinics are allowed to charge a nominal fee to taxpayers in addition to requesting reimbursement for expenses, such as filing fees for Tax Court.  In 2004, 4 clinics reported charging a total of $41,528 in nominal fees.  Seven other clinics indicated in their grant applications they may charge a nominal fee but did not report any fees to the TAS.  Although clinics can charge a nominal fee, Publication 3319 prohibits clinics from charging fees for preparing tax returns.  Nonetheless, we found two clinics that appear to be charging fees to prepare tax returns.

  • A clinic received a grant of $50,000 and charged taxpayers $18,861 in fees during 2004.  This clinic charged taxpayers a fee of one-fourth of 1 percent of their projected gross income to prepare their tax returns.  For example, the clinic would charge a taxpayer that earned $20,000 a fee of $50 for tax return preparation.  This clinic disclosed this information on its application and during its interim and yearend 2004 reports.
  • A clinic received a grant of $50,000 and charged taxpayers $15,522 in fees during 2004.  This clinic stated it solicits donations of $20 from taxpayers who used its tax preparation services and received refunds.  This clinic stated on its application it would not charge fees but did not disclose it solicits donations from taxpayers for tax preparation.  Only in its yearend 2004 report did the clinic mention soliciting donations for tax return preparation.

The TAS has emphasized to clinics that tax return preparation must be related to the LITC program requirements, and clinics cannot charge fees for tax return preparation.  However, it did not appear that the TAS contacted or visited these two clinics to warn them that their practices appeared to violate program requirements.  TAS officials recently told us the LITC program office will complete an indepth site visit to at least 25 percent of the clinics funded in 2006.  To ensure grants are used as intended, we believe the TAS should review interim and yearend reports for any indications that clinics are not following the intent of the grant program and prioritize site visits to these clinics to further evaluate the clinics’ practices.

 

Recommendations

 

The National Taxpayer Advocate should develop:

Recommendation 5:  A policy to conduct initial site visits for potential new clinics before the TAS awards grant funds.

Management’s Response:  The TAS will visit new clinics prior to making funding decisions, to the extent that time and staffing limitations allow.

Recommendation 6:  A method to obtain information necessary to verify clinics are following all LITC program requirements, including taxpayer income levels, and controversy limits.

Management’s Response:  The TAS will consult with other Federal Government grant-making agencies to determine how these agencies verify grantee information while still maintaining client confidentiality.  In addition, the TAS revised Publication 3319 to include new reporting forms to help in the evaluation of clinics’ compliance with LITC program requirements.  However, the National Taxpayer Advocate noted that the LITC grant program is unlike other such Federal Government agency programs in that the grant-making agency, the IRS, is the opposing party in any tax controversy handled by clinics.  This raises specific concerns about protection of client data and information.

Office of Audit Comment:  If the National Taxpayer Advocate is unable to determine an adequate method of verifying compliance with grant requirements, the National Taxpayer Advocate should elevate this concern to Congress for a potential legislative remedy.

Recommendation 7:  A method to verify the accuracy of information provided by clinics in their interim and final reports.

Management’s Response:  The TAS indicated that the corrective action for this recommendation has been completed by a three-tier site assistance visit process which is intended to ensure clinics use grant funds appropriately and effectively and are complying with the terms and conditions of the LITC program.

Office of Audit Comment:  Although the site visit assistance checklists require that information provided by clinics in their interim and final reports is to be reviewed, the site assistance visit process does not contain a method to verify the accuracy of information provided by clinics in their interim and final reports.  As such, we do not believe the TAS response addresses our recommendation.

Recommendation 8:  A sampling methodology that prioritizes clinics based on indicators, including tax return preparation and fees charged, in clinics’ applications and in their interim and final reports.

Management’s Response:  The TAS will develop a weighted criteria list to determine which clinics should be visited each year.

 

Some Clinics Are Not in Compliance With Their Federal Tax Responsibilities

 

To receive grants to assist taxpayers with tax controversies and/or to educate taxpayers for whom English is a second language about their tax rights and responsibilities, it is important that clinics be compliant with their own Federal tax responsibilities.  However, during the application period for the 2004 grants, 5 of the 134 clinics awarded grant funds totaling $154,300 were not in compliance with their Federal tax filing and/or payment requirements.  These 5 clinics subsequently received a total of $127,500 in grant funds for 2005, with 1 clinic receiving increased funding from 2004 to 2005.

During the application period for the 2005 grants, nine clinics, including three of the five from the 2004 application period, were not in compliance with their Federal tax requirements.  These 9 clinics owed approximately $850,000 in taxes and had not filed 9 tax returns.  The TAS awarded the 9 clinics a total of $513,500 in grant funds for 2005.

·         A clinic was awarded a grant of $85,000 for 2004; however, this clinic did not submit the required final yearend financial report for 2002 and did not operate the clinic in 2003.  In addition, this clinic changed its name and Employer Identification Number on its 2004 application.  The Department of Health and Human Services, which monitors the payment of grant funds, recommended the TAS not fund the clinic for 2004 until the clinic’s identity could be confirmed.  The TAS did not visit the clinic and did not freeze its grant funds.  If the TAS had checked for tax compliance, it would have found an unpaid tax balance of approximately $800,000 in 2005.  Instead, the clinic was awarded a grant of $85,000 for 2005. 

  • We also identified a clinic that was tax compliant during the application period but became noncompliant during the grant year.  This clinic was awarded a grant of $85,000 for 2005 although it was 7 months late in filing the required 2004 interim report to the TAS.  In addition, this clinic did not file and pay its employment taxes timely and, by March 2005, owed approximately $180,000.  The TAS did not freeze its grant funds for 2005 or conduct any site visits during this period.

The version of Publication 3319 used for awarding 2004 LITC program grants did not explain that applicants must be in compliance with their Federal tax responsibilities.  In May 2004, the TAS recognized this problem and revised Publication 3319 for the 2005 grant period to explain that applicants must be in compliance with their Federal tax responsibilities and the TAS will conduct compliance checks on organizations applying for a 2005 grant.  However, no one within the LITC program office had access to the computer system, known as the Integrated Data Retrieval System,[12] to verify tax compliance during the remainder of the 2004 grant period for current clinics or during the application and award period for 2005.  Although access was finally provided to the LITC program office in April 2005, the TAS did not have procedures in place to ensure the verification of tax compliance was comprehensive and performed timely.

 

Recommendations

 

The National Taxpayer Advocate should:

Recommendation 9:  Establish procedures to check for tax compliance before awarding LITC program grants and consider periodic tax compliance checks during the grant period.

Management’s Response:  The TAS will verify that all 2006 grantees are compliant with all Federal tax responsibilities prior to awarding any grants.  In addition, the TAS will develop formal procedures to ensure no unauthorized disclosure of return information occurs when it contacts clinics regarding tax noncompliance.  In addition, the TAS explained this requirement in the 2005 Publication 3319.

Recommendation 10:  Identify and inform current clinics that are not tax compliant to become compliant or their funds will be frozen and they will be removed from the LITC program.

Management’s Response:  The TAS stated that all of the clinics we indicated were not in compliance with their Federal taxes have been contacted and told their grants will be terminated if they do not rectify their noncompliance within a reasonable time period.

Office of Audit Comment:  While the TAS’ corrective action appears to be adequate, the TAS further stated that the majority of the tax noncompliance we identified involved account errors on the part of the IRS or penalties for which abatement requests are pending.  We did not find evidence of IRS errors on the accounts identified.  As such, we will follow up with the TAS to evaluate the documentation used to support this assertion.  Furthermore, the TAS expressed concern as to its ability to discuss tax liabilities with clinics or withhold funding if a clinic is part of a larger academic institution or organization.  We will also follow up with the TAS to further evaluate its actions in this area.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine whether the Low Income Taxpayer Clinic (LITC) grant program is effective and is in compliance with legal requirements.  The scope of our review included organizations that received grants for Calendar Year 2004.  To achieve the objective, we:

I.                   Determined if the Taxpayer Advocate Service (TAS) completed corrective actions from prior Treasury Inspector General for Tax Administration recommendations.

A.    Reviewed standards of operation and performance measures developed by the TAS.

B.     Reviewed LITC program site reviews performed by the TAS.

II.                Reviewed LITC program interim and final yearend reports to determine the number of taxpayers for whom English is a second language that are being educated about their tax rights and responsibilities and the number of taxpayers being assisted in controversies with the Internal Revenue Service.

III.             Determined if the TAS verified whether the clinics met the legal requirements that at least 90 percent of the taxpayers they represent have incomes which do not exceed 250 percent of the poverty level (as defined by the Department of Health and Human Services) and the amount in controversy for any taxable year did not exceed $50,000.

IV.             Reviewed self-reported data provided by the clinics regarding the preparation of tax returns.

V.                Reviewed the LITC program files to determine if the clinics were charging taxpayers a fee.

VI.             Determined if the 2004 clinics were in compliance with the filing and payment of all required tax returns.

A.    Determined if the TAS researched the clinics for tax compliance.

B.     Determined if the clinics were in Federal tax compliance.

C.     Determined if the clinics that were not in Federal tax compliance also received an LITC program grant for 2005.

 

Appendix II

 

Major Contributors to This Report

 

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

Michael E. McKenney, Director

Aaron R. Foote, Audit Manager

Joseph P. Smith, Lead Auditor

Janice M. Pryor, Senior Auditor

David P. Robben, Senior Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Chief Counsel  CC

Deputy, National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Management Controls  OS:CFO:AR:M

Audit Liaison:  National Taxpayer Advocate  TA

 

Appendix IV

 

Outcome Measures

 

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:

 

  • Protection of Resources – Potential; $667,800 awarded to 11 organizations that received Low Income Tax Clinic (LITC) program grants from the Taxpayer Advocate Service (TAS) in 2004 and 2005 that were not in compliance with their Federal tax filing and/or payment requirements (see page 15).

 

Methodology Used to Measure the Reported Benefit:

 

We researched the Integrated Data Retrieval System[13] for all organizations that received LITC program grants in both 2004 and 2005.  The TAS awarded grants to 134 organizations in 2004 and 124 of these organizations also received a grant in 2005.

We identified clinics that had not filed required tax returns and/or had balances owed during the period the TAS would have reviewed the grant applications.  Five organizations that owed Federal taxes received grants totaling $154,300 for the 2004 grant period.  Nine organizations, 3 of which also owed tax during the 2004 grant period, received grants totaling $513,500 for the 2005 grant period.  Organizations that are not in compliance with their Federal taxes may be unsuitable grant recipients to assist taxpayers.

 

Appendix V

 

Low Income Taxpayer Clinics per State or Territory

 

 

Type of Clinic

 

 

States and Territories

English As a Second Language

Controversy

Both
Services

Total per
State

Funding per State
or Territory

 

2004

2005

2004

2005

2004

2005

2004

2005

2004

2005

Alabama

1

1

 

1

 

 

1

2

$60,000

$70,000

Alaska

1

 

 

 

 

2

1

2

50,000

80,000

Arizona

 

 

 

 

2

1

2

1

117,399

85,000

Arkansas

 

 

1

1

 

1

1

2

80,000

110,000

California

 

1

 

 

11

12

11

13

653,453

615,000

Colorado

 

 

1

1

 

 

1

1

50,000

50,000

Connecticut

 

1

2

2

 

 

2

3

170,000

195,000

Delaware

 

 

1

 

1

2

2

2

52,000

30,000

District of Columbia

1

1

1

1

 

 

2

2

99,415

99,000

Florida

 

 

1

 

5

7

6

7

352,800

358,937

Georgia

1

1

2

2

1

1

4

4

197,000

195,000

Hawaii

 

 

 

 

2

2

2

2

115,000

82,000

Idaho

 

 

 

 

1

1

1

1

71,582

80,000

Illinois

1

1

2

2

2

2

5

5

305,250

285,000

Indiana

 

 

1

1

2

1

3

2

140,650

131,000

Iowa

 

 

 

 

1

1

1

1

85,000

85,000

Kansas

2

2

 

 

1

 

3

2

58,000

50,000

Kentucky

 

 

 

 

2

2

2

2

108,000

78,000

Louisiana

 

 

2

2

 

 

2

2

100,000

100,000

Maine

 

 

 

 

1

1

1

1

85,000

93,000

Maryland

 

 

1

1

 

 

1

1

85,000

60,000

Massachusetts

 

1

 

 

2

2

2

3

125,000

158,000

Michigan

 

 

 

 

3

3

3

3

122,667

124,000

Minnesota

 

 

 

 

2

2

2

2

145,000

145,000

Mississippi

 

 

1

1

 

 

1

1

25,000

25,000

Missouri

 

 

1

1

2

2

3

3

199,550

205,000

Montana

 

 

1

1

 

 

1

1

31,725

31,725

Nebraska

 

 

 

 

1

1

1

1

33,250

28,289

Nevada

 

 

 

 

1

1

1

1

50,000

50,000

New Hampshire

1

1

1

1

 

 

2

2

81,359

54,118

New Jersey

 

 

1

1

2

1

3

2

180,000

170,000

New Mexico

1

 

 

 

 

1

1

1

25,000

31,292

New York

 

1

4

4

12

12

16

17

912,898

928,575

North Carolina

 

1

 

1

2

2

2

4

94,695

160,000

North Dakota

 

 

 

 

1

1

1

1

28,500

28,500

Ohio

1

1

2

2

4

4

7

7

372,148

277,000

Oklahoma

 

 

1

 

2

2

3

2

137,000

115,000

Oregon

 

 

1

1

1

2

2

3

128,098

160,000

Pennsylvania

 

1

3

3

1

1

4

5

316,479

335,000

Puerto Rico

1

1

 

 

 

 

1

1

40,000

40,000

Rhode Island

 

 

1

1

1

1

2

2

150,000

150,000

South Carolina

 

 

 

 

1

1

1

1

75,000

85,000

South Dakota

 

 

 

 

1

2

1

2

47,500

97,500

Tennessee

 

1

 

 

1

1

1

2

85,000

123,000

Texas

2

3

 

 

4

4

6

7

369,500

356,500

Utah

1

 

 

 

 

 

1

0

47,250

0

Vermont

 

 

 

 

2

2

2

2

76,564

77,000

Virginia

1

1

 

 

3

3

4

4

190,000

193,000

Washington

 

 

1

1

1

1

2

2

125,136

139,000

West Virginia

 

 

1

1

1

1

2

2

70,208

43,000

Wisconsin

 

 

1

1

1

1

2

2

159,424

160,000

Wyoming

 

 

 

 

 

1

0

1

0

15,000

Totals

15

20

35

34

84

91

134

145

$7,479,500

$7,437,436

 

Source:  Low Income Taxpayer Clinic program office.

 

Appendix VI

 

Management’s 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.



[1] Improvements Are Needed in the Oversight and Administration of the Low-Income Taxpayer Clinic Program (Reference Number 2003-40-125, dated May 2003).

[2] Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).

[3] States include the District of Columbia and Puerto Rico.

[4] Internal Revenue Code Sections 7463 and 7526.

[5] The poverty levels for Alaska and Hawaii are higher than the 48 contiguous states and Washington, D.C.

[6] Improvements Are Needed in the Oversight and Administration of the Low-Income Taxpayer Clinic Program (Reference Number 2003-40-125, dated May 2003).

[7] Improvements Are Needed in the Oversight and Administration of the Low-Income Taxpayer Clinic Program (Reference Number 2003-40-125, dated May 2003).

[8] Improvements Are Needed in the Oversight and Administration of the Low-Income Taxpayer Clinic Program (Reference Number 2003-40-125, dated May 2003).

[9] These site visits covered 72 of the 134 clinics.

[10] I.R.C. § 7526.

[11] I.R.C. §§ 7463 and 7526.

[12] IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer’s account records.

[13] Internal Revenue Service computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer’s account records.