The Wage and Investment Divisionís Discretionary Examination Program Effectively Monitored Performance Data to Meet Annual Program Goals

 

October 2004

 

Reference Number: 2005-40-007

 

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.

 

October 29, 2004

 

 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

 

FROM: †††††(for) Gordon C. Milbourn III /s/ Margaret E. Begg

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

 

SUBJECT:†††† Final Audit Report - The Wage and Investment Divisionís Discretionary Examination Program Effectively Monitored Performance Data to Meet Annual Program Goals (Audit # 200440009)

 

This report presents the results of our review of the Wage and Investment (W&I) Division Discretionary Examination Program. The overall objective of this review was to determine whether the Program is effectively managed to help ensure it meets its intended goals, including the evaluation of Program performance through adequate data collection, evaluation of Program deficiencies, and Program manager accountability.

To assess the Discretionary Examination Program, we used the Program Assessment Rating Tool (PART) criteria created by the Office of Management and Budget to rate Federal Government programs.The PART is a systematic method of assessing the performance of program activities across the Federal Government.The PART is a diagnostic tool with the main objectives being to improve program performance and link performance to budget decisions.

In summary, Discretionary Examination Program managers effectively used management information data to monitor annual Program goals and took corrective actions when appropriate. Our analysis of national- and campus-level management information reports confirmed that the Discretionary Examination Program was on schedule to meet its Fiscal Year 2004 goals.Discretionary Examination Program managers were held accountable for annual goals in their annual performance expectations.Further, we found that Reporting Compliance function management had initiated operational reviews that would help manage and enhance the Discretionary Examination Program.

However, Discretionary Examination Program managers were not effectively using Customer Satisfaction Survey results.Customer Satisfaction Survey results indicated that the combined W&I Division Earned Income Tax Credit (EITC) and Discretionary Examination Programsí percentage of taxpayers dissatisfied as of December 31, 2003, was 51 percent, which was over their goal of 42 percent.Although W&I Division Reporting Compliance function managers are developing an initiative in part to help address taxpayer concerns regarding the length of the examination process and the time spent on the examination, the Customer Satisfaction Surveys identified other areas in which taxpayer satisfaction could be enhanced.

We recommended that the Commissioner, W&I Division, evaluate the Customer Satisfaction Survey results to identify which taxpayer concerns are being addressed through ongoing initiatives and which concerns still need to be addressed by the Discretionary Examination Program.

Managementís Response:Internal Revenue Service (IRS) management disagreed with the report recommendation and the finding which noted that they were not effectively using the Customer Satisfaction Survey results.They contend that the survey vendor provides an analysis of results which identifies improvement priorities.According to the vendor, improvements in these areas have the greatest potential to improve taxpayer satisfaction. As a result, IRS management continually focused their efforts on those areas identified as improvement priorities.

Additionally, IRS management does not believe our report adequately recognizes all of the efforts the IRS has taken to improve taxpayer satisfaction. Managementís complete response to the draft report is included as Appendix IV.

Office of Audit Comment:Although the W&I Division Reporting Compliance function has initiatives to improve taxpayer satisfaction, we did not find any Discretionary Examination Program manager or employee that was aware of any use or detailed analysis of the surveys.The surveys raised taxpayersí concerns beyond those cited by the IRS, provided insightful taxpayer comments, and outlined details of the Customer Satisfaction ratings by campus.We believe using this information would focus the W&I Division Reporting Compliance functionís ongoing improvement initiatives and highlight continuing taxpayer concerns.This information would also allow Discretionary Examination Program campus managers to timely initiate corrective actions when a campus was not meeting their goal for Customer Satisfaction.

In their response, W&I Division executives cited an increase in the level of Customer Satisfaction reported in a recent survey.A prior vendor report had mentioned a similar increase but had also noted that this increase was not statistically significant.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 recommendation.Please contact me at (202) 622-6510 if you have questions or Michael R. Phillips, Assistant Inspector General for Audit (Wage and Investment Income Programs), at (202) 927-0597.

 

Table of Contents

Background

Discretionary Examination Program Managers Effectively Used Data to Monitor Their Annual Performance Goals

Discretionary Examination Program Managers Could Expand Their Use of the Customer Satisfaction Survey Results

Recommendation 1:

Discretionary Examination Program Managers Were Held Accountable for Program Performance Results

Reporting Compliance Function Management Initiated Operational Reviews to Evaluate Management Effectiveness

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 Managementís Response to the Draft Report

 

Background

The Internal Revenue Serviceís (IRS) Wage & Investment (W&I) Division serves approximately 121 million taxpayers who file a U.S. Individual Income Tax Return (Form 1040) with no accompanying Schedules C, E, or F; no Employee Business Expenses (Form 2106); and no international activity. The W&I Division Reporting Compliance function conducts examinations of tax returns filed by W&I Division taxpayers that meet certain examination criteria.These examinations look at the less complex issues on tax returns that can be verified from records that could be easily submitted by mail.

The W&I Division Reporting Compliance function is made up of several programs.The Earned Income Tax Credit (EITC) Program is responsible for the examination of tax returns with EITC claims.The Discretionary Examination Program is responsible for the examination of all non-EITC tax returns.Even though these are separate program areas, the examination of tax returns is done by the same employees in the five W&I Division campuses.

The W&I Division, in its strategic assessment, identified the risk of declining compliance as a key issue and recognized the continuing need to improve its enforcement programs to reduce the risk of noncompliance.As a result, the workload for the Discretionary Examination Program has been increased from 44,117 examination closures in Fiscal Year (FY) 2002 to almost 80,000 examination closures planned for FY 2004.

To assess the Discretionary Examination Program, we used the Program Assessment Rating Tool (PART) criteria created by the Office of Management and Budget (OMB) to rate Federal Government programs.The PART is a systematic method of assessing the performance of program activities across the Federal Government.It is a diagnostic tool with the main objectives being to improve program performance and link performance to budget decisions.

This is the second in a series of reviews using the PART process to focus on the Discretionary Examination Program.Our first review found that the W&I Division Compliance function has a comprehensive strategic planning process to help ensure it manages resources and meets its annual goals and performance levels for the Discretionary Examination Program.However, we reported that the IRS will not be able to measure the success of its efforts to improve the goal of service to all taxpayers through the fair and uniform application of the tax law because the Discretionary Examination Program currently does not have long-term outcome goals to assess the Programís effect.

Our current review assessed Discretionary Examination Program management effectiveness using Section III of the PART.This section focuses on whether a program is effectively managed to meet annual program performance goals.Key areas include evaluation of program improvements, performance data collection, and program manager accountability.Specifically, we looked at the following FY 2004 annual performance goals for the W&I Division Discretionary Examination Program using the PART process:

         Discretionary Audit Closures.

         Service Center (SC) Examination Customer Satisfaction/Dissatisfaction.

         Correspondence Examination Embedded Quality.

         SC Examination Employee Satisfaction.

         Percentage of Aged Mail to Total Started Inventory.

         Discretionary Cycle Time.

  • Projected New Start Volume.

This review was performed at the W&I Division Headquarters in Atlanta, Georgia, in the Discretionary Examination Program Office during the period April through July 2004.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.

Discretionary Examination Program Managers Effectively Used Data to Monitor Their Annual Performance Goals

Our analysis of national- and campus-level management information reports confirmed that the Discretionary Examination Program was on schedule to meet its FY 2004 goals. Discretionary Examination Program management had timely initiated corrective actions when management information reports indicated that interim monthly performance goals were not met or when there was an indication that the data in the management information reports were incorrect.

When performance results did not meet expected outcomes, management took immediate action.For example, Discretionary Examination Program staff identified, through their reviews of management information reports, a potential problem in meeting the Programís annual goal for starting over 95,000 new examinations in FY 2004.To accomplish the goal, each program area within the Discretionary Examination Program was given specific monthly and annual goals.

As of March 2004, the Discretionary Examination Program was exceeding the expected volume for starting new examinations.However, the unallowable deductions program area had not received enough cases to meet its monthly or annual goals.Since there is no way to control the number of tax returns with unallowable deductions, the Program manager reduced the annual goal for the unallowable deduction cases and increased the goal for another program area.This timely action ensured resources were productively used and that the Discretionary Examination Programís annual goal for new examinations would be met.

The Program manager and his staff are currently working with the Small Business/Self-Employed Division and the Submissions Processing function to improve the unallowable deduction case selection process.

The Program manager also provided us an example of where his staff identified that the performance data for measuring Discretionary Examination Program quality was coded for the incorrect Program.EITC and Discretionary Examination Program cases were sometimes incorrectly coded, causing some of the Discretionary Examination Program quality results to be reported under the EITC Program and vice versa.While the overall combined quality results for correspondence examinations was correct, management does not know if the Discretionary Examination Program is meeting its individual quality goal.

This was the first year that EITC Program quality and Discretionary Examination Program quality have been reported with different codes.The Program manager and his staff were working closely with the Quality Team and the campus managers to prevent the incorrect coding issue from recurring in the next fiscal year.

The OMB PART process stresses that agencies need to ďregularly collect timely and credible performance informationÖand use it to manage the program and improve performance.Ē By effectively gathering performance data and continuing to monitor their Programís success in achieving its annual goals, Discretionary Examination Program management can ensure their resources are maximizing their compliance efforts.

Discretionary Examination Program Managers Could Expand Their Use of the Customer Satisfaction Survey Results

Discretionary Examination Program management was not effectively using the Customer Satisfaction Survey results. The W&I Division EITC and Discretionary Examination Programs were meeting their overall FY 2004 combined goal for percentage of taxpayers satisfied. However, the Programs were not meeting their goal of limiting the percentage of taxpayers that were dissatisfied.As of December 31, 2003, based on the Customer Satisfaction Survey results, the percentage of taxpayers satisfied met the 30 percent goal.However, the percentage of taxpayers dissatisfied was 51 percent, which was over the taxpayer dissatisfaction goal of 42 percent.In addition, 19 percent of the taxpayers responding to the surveys were neither satisfied nor dissatisfied with the W&I Division EITC and Discretionary Examination Programsí service.

Our analysis of the Customer Satisfaction Survey results for the W&I Division EITC and Discretionary Examination Programs indicated that only two W&I Division campuses were actually meeting or exceeding the goal for percentage of taxpayers satisfied and only one W&I Division campus was meeting the goal for limiting the percentage of taxpayers dissatisfied.Table 1 compares the goals with the actual survey results by W&I Division campus.

Table 1:Fiscal Year 2004 EITC and Discretionary Examination Programs Customer Satisfaction Survey Results (as of December 2003)


Campus

Taxpayers Satisfied

Taxpayers Dissatisfied

FY 2004 Goal

30 percent

42 percent

Andover

27 percent

45 percent

Atlanta

25 percent

55 percent

Austin

27 percent

60 percent

Fresno

30 percent

52 percent

Kansas City

38 percent

42 percent

W&I Division Combined

30 percent

51 percent

Source:IRS Customer Satisfaction Survey for Compliance Center Examination W&I Division National Report (issued May 2004) and the FY 2004 Examination Work Plan and Guidelines Report.

Although the Customer Satisfaction Survey process has provided feedback on the quality of service received by taxpayers, the Program manager informed us that he did not believe that the survey results were reflective of his Program because the survey results for the EITC and Discretionary Examination Programs were combined.Even though the same employees work both Programs, the Program manager told us that combining the survey results for both Programs might adversely affect their reliability as related to the Discretionary Examination Program.We believe the Program manager could decrease taxpayer dissatisfaction by analyzing the cause of these fluctuations and taking further corrective actions to address them.

The Director, Reporting Compliance, stated that he and his staff used the Customer Satisfaction Survey results and they have taken actions, including developing a Reporting Compliance function initiative called the 80/20 concept. The initiative was designed, in part, to increase productivity and taxpayer satisfaction by reducing the length of the audit process and the time spent on the audit.In addition, in June 2004 an analyst prepared a summary of the ongoing W&I Division Reporting Compliance initiatives that addressed the Customer Satisfaction Survey results.

We believe that Discretionary Examination Program management could further improve taxpayer satisfaction by evaluating the Customer Satisfaction Survey results to identify which taxpayer concerns are being addressed through ongoing Reporting Compliance function initiatives and which concerns still need to be addressed.The contractor that conducted the survey recommended several areas for management to direct their focus.For example, the contractor highlighted the time spent on the examination process as one area for improvement.While the W&I Division Reporting Compliance function has taken steps to address this issue, the surveys identified other areas in which taxpayer satisfaction could be enhanced.These areas included providing the taxpayer a clearer explanation of the adjustment, keeping the taxpayer informed of the status of their cases, and ensuring the taxpayers understood the report they received.

Although the Discretionary Examination Program followed the OMB PART process by regularly collecting timely and credible performance information, it did not make effective use of all the data to manage the Program and improve performance.Effectively using these data would support the IRS Commissionerís goal for the IRS to expand its focus towards taxpayer compliance without comprising the strategic goal of customer service.The Commissioner stated that, ďThe IRS commitment to service continues, even as we sharpen our focus on enforcement. This is, therefore, not an issue of service OR enforcement, but of service AND enforcement. They are both important priorities, as reflected in our working equation Service + Enforcement = Compliance

Recommendation

The Commissioner, W&I Division, should:

1.      Evaluate the Customer Satisfaction Survey results to identify which taxpayer concerns are being addressed through ongoing initiatives and which concerns still need to be addressed by the Discretionary Examination Program.

Managementís Response:IRS management disagreed with our finding that they were not effectively using the Customer Satisfaction Survey results. They contend that the survey vendor provides an analysis of results which identifies improvement priorities. According to the vendor, improvements in these areas have the greatest potential to improve taxpayer satisfaction.As a result, IRS management continually focused their efforts on those areas identified as improvement priorities.

Additionally, IRS management does not believe our report adequately recognizes all of the efforts the IRS has taken to improve taxpayer satisfaction.

Office of Audit Comment:Although the W&I Division Reporting Compliance function has initiatives to improve taxpayer satisfaction, we did not find any Discretionary Examination Program manager or employee that was aware of any use or detailed analysis of the surveys. The surveys raised taxpayersí concerns beyond those cited by the IRS, provided insightful taxpayer comments, and outlined details of the Customer Satisfaction ratings by campus.

We believe using this information would focus the W&I Division Reporting Compliance functionís ongoing improvement initiatives and highlight continuing taxpayer concerns. This information would also allow Discretionary Examination Program campus managers to timely initiate corrective actions when a campus was not meeting their goal for Customer Satisfaction.

In their response, W&I Division executives cited an increase in the level of Customer Satisfaction reported in a recent survey.A prior vendor report had mentioned a similar increase but had also noted that this increase was not statistically significant.

Discretionary Examination Program Managers Were Held Accountable for Program Performance Results

In addition to the general performance standards required for all IRS managers, specific performance standards related to the Discretionary Examination Program were documented in the Program managerís and the five campus managersí annual performance expectations.Although these expectations did not individually address each specific Program goal, they did set the expectation that the managers would be evaluated on their ability to meet the Discretionary Examination Programís annual goals.

The OMB PART process stresses that program management identify the managers who are responsible for achieving key program results and establish performance standards for them. This established a link for Discretionary Examination Program managers between management performance and Program results.It also emphasized the importance of Program accomplishments by forcing management to focus their personal performance towards achieving their Programís annual goals.

Reporting Compliance Function Management Initiated Operational Reviews to Evaluate Management Effectiveness

Reporting Compliance function management initiated operational reviews to help manage and enhance the Discretionary Examination Program.As of May 2004, Reporting Compliance function management had completed and reported the results for operational reviews at the Atlanta, Georgia, and Austin, Texas, Campuses.The operational reviews addressed the entire Reporting Compliance function, including specific Discretionary Examination Program annual goal activities, and identified several areas of concern.

For example, the Atlanta review team identified errors in a small sample of closed EITC and Discretionary Examination Program cases.In 27 percent of the cases reviewed, there were errors such as delayed acknowledgements, incomplete workpapers, and not giving the taxpayer enough time to respond.The review team recommended that, because of the small sample, Atlanta management review additional cases to validate the error rate and then discuss the results with their employees.If implemented, this action should help to improve the quality of the Discretionary Examination Program cases, improve customer service, and help the Discretionary Examination Program meet its annual quality performance goals.

The OMB PART process stresses that management needs to develop a system of evaluating program management and correcting deficiencies when they are identified.By using the information obtained through operational reviews, Discretionary Examination Program management could effectively monitor management effectiveness and address Program deficiencies.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine whether the Wage and Investment (W&I) Division Discretionary Examination Program is effectively managed to help ensure it meets its intended goals, including the evaluation of Program performance through adequate data collection, evaluation of Program deficiencies, and Program manager accountability.To accomplish this objective, we:

I.                   Determined whether the Discretionary Examination Program is effectively managed to meet its annual performance goals.

A.    Interviewed Program management and reviewed various national- and campus-level management information reports to determine whether management used regularly collected timely and credible performance information to manage the Discretionary Examination Program and improve performance.

B.     Interviewed Program management and reviewed various national- and campus-level management information reports to determine whether the quality assurance process for the Discretionary Examination Program ensures performance measures accurately reflect the Programís performance.

II.                Determined whether Discretionary Examination Program management is held accountable for performance results.

A.    Obtained and reviewed the Fiscal Year (FY) 2004 Internal Revenue Service (IRS) manager performance standards and additional Discretionary Examination Program expectations for the Program and campus-level managers.

B.     Compared the IRS manager performance standards and additional expectations to the Discretionary Examination Programís FY 2004 performance goals to determine whether the manager performance standards and additional expectations are linked to the Programís annual performance goals.

III.             Determined whether Discretionary Examination Program management has taken meaningful steps to evaluate Program management effectiveness and address management deficiencies.

A.    Interviewed Discretionary Examination Program management to determine how they evaluate Program management effectiveness and ensure management deficiencies are identified and addressed.

B.     Reviewed the W&I Division Business Performance Review Reports for the first 2 quarters in FY 2004 to determine whether the Discretionary Examination Program is effectively being managed and if any management deficiencies were identified during this process.

C.     Reviewed operational reviews conducted by W&I Division Reporting Compliance function management at the Atlanta, Georgia, and Austin, Texas, Campuses to evaluate Program management effectiveness and identify any management deficiencies in the Discretionary Examination Program.

 

Appendix II

 

Major Contributors to This Report

 

Michael R. Phillips, Assistant Inspector General for Audit (Wage and Investment Income Programs)

Mary V. Baker, Director

Bryce Kisler, Audit Manager

Alan Lund, Lead Auditor

Craig Pelletier, Auditor

Nelva Usher, Auditor

 

Appendix III

 

Report Distribution List

 

CommissionerC

Office of the Commissioner Ė Attn:Chief of StaffC

Deputy Commissioner for Services and Enforcement SE

Deputy Commissioner, Wage and Investment Division SE:W

Director, Compliance, Wage and Investment Division SE:W:CP

Director, Strategy and Finance, Wage and Investment DivisionSE:W:S

Chief, Performance Improvement, Wage and Investment DivisionSE:W:S:PI

Director, Reporting Compliance, Wage and Investment DivisionSE:W:CP:RC

Chief CounselCC

National Taxpayer AdvocateTA

Director, Office of Legislative AffairsCL:LA

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

Office of Management ControlsOS:CFO:AR:M

Audit Liaison:Senior Operations Advisor, Wage and Investment Division SE:W:S

 

Appendix IV

 

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.