Fiscal
Year 2005 Statutory Audit of Compliance With Legal Guidelines Prohibiting the
Use of Illegal Tax Protester and Similar Designations
July
2005
Reference
Number:
2005-40-104
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.
Redaction Legend:
1 = Tax Return/Return Information
July 5,
2005
MEMORANDUM
FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
DEPUTY COMMISSIONER FOR OPERATIONS SUPPORT
FROM: (for) Pamela J. Gardiner /s/ Margaret E.
Begg
Deputy Inspector General for Audit
SUBJECT: Final Audit Report -
Fiscal Year 2005 Statutory Audit of Compliance With Legal Guidelines Prohibiting
the Use of Illegal Tax Protester and Similar Designations (Audit #
200440052)
This review
presents the results of our review of the Internal Revenue
Service’s (IRS) use of the designation “Illegal Tax Protester” (ITP) and
similar designations. The overall
objective of this review was to determine whether the IRS complied with IRS
Restructuring and Reform Act of 1998 (RRA 98)
Section
(§)
3707 and
internal IRS guidelines that prohibit IRS officers and employees from referring
to taxpayers as ITPs or any similar
designations.
Prior to enactment of the
RRA 98, taxpayers were referred to the ITP Program when their tax returns or
correspondence contained specific indicators of noncompliance with the tax law,
such as the
use of arguments that had been repeatedly rejected by the courts. Once a taxpayer’s account was coded as
an ITP, certain tax enforcement actions were accelerated. The designation was also intended to
alert IRS employees to be cautious so they would not be drawn into
confrontations with taxpayers.
RRA 98 § 3707 prohibits the IRS from referring to taxpayers as ITPs
or any similar designations. The
Treasury Inspector General for Tax Administration (TIGTA) is required to
annually evaluate IRS compliance with the prohibition on the use of ITP or any
similar designations.
In summary, the IRS has not
reintroduced past ITP codes on the Master File, and formerly coded ITP taxpayer
accounts have not been assigned similar Master File designations. In addition, the IRS does not have any
current publications with ITP references and has initiated actions to remove ITP
references from the various forms of the Internal Revenue Manual (IRM).
In 309 isolated instances,
IRS employees continued to make references to taxpayers as ITPs and other
similar designations in case narratives.
The IRS has taken steps in directing its employees to prevent ITP and
similar designations from appearing in case narratives. However, in its response to our Fiscal
Year (FY) 2003 report, the IRS disagreed with our determination that, to comply
with this provision, IRS employees should not designate taxpayers as ITPs or
similar designations in case narratives.
As a result, we elevated this disagreement to the Assistant Secretary for
Management and Chief Financial Officer of the Treasury but have not yet received
a response.
Management’s
Response: Since the IRS Office of the Chief
Counsel issued an opinion that references to taxpayers as ITPs or similar
designations in case narratives are not a violation of RRA 98 § 3707, the IRS continues
to disagree with our determination on
this issue. As a result, the IRS
does not concur with our outcome measure as claimed. In addition, the IRS
stated that all ITP designations will be removed from the IRM by the end of FY
2005. We will confirm whether all
ITP designations have been removed from the IRM during next year’s mandatory
review. Management’s complete response to the draft report is
included as Appendix VII.
Office of Audit
Comment: We continue to believe it is reasonable
to conclude that, based upon the language of RRA 98 § 3707, IRS officers and
employees should not label taxpayers as ITPs or similar designations in any IRS
records, which include paper and electronic case files. IRS officers and employees should not
designate taxpayers as ITPs or similar designations because such a designation
alone contains a negative connotation and appears to label the taxpayer.
RRA 98 § 3707
provides that officers and employees of the IRS shall not designate taxpayers as
ITPs or any similar designations.
While there is little interpretive information provided concerning this
provision, the Senate Committee Report (S. Rep. No. 105-174) states that the
Committee is concerned taxpayers might be stigmatized by designation as an ITP.
Further, the Report’s explanation
of this provision states that existing designations in the Master File must be
removed and any other designations, such as on paper records that have been
archived, must be disregarded.
We have not reported that
those taxpayers designated by IRS employees as ITPs or similar designations have
been harmed by these designations. Only a thorough review of each taxpayer’s
case and the treatment accorded the taxpayer would determine if these taxpayers
have been harmed. Because the TIGTA is required to annually evaluate
the IRS’ compliance with this provision of the law, we have elevated the
disagreement about whether employees are labeling taxpayers as ITPs to the
Department of the Treasury and encourage the IRS to raise the issue as
well.
Copies of
this report are also being sent to the IRS managers affected by the report
results. 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.
Illegal Tax Protester Codes Were Not Used on the Master File
Internal
Revenue Service Publications Do Not Contain Illegal Tax Protester
References
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix
VI – Examples of Illegal Tax Protester and Similar Designations Found in Case
Narratives
Appendix
VII – Management’s Response to the Draft Report
Internal Revenue Service (IRS) Restructuring
and Reform Act of 1998 (RRA 98)
Section (§) 3707 prohibits the
IRS from referring to taxpayers as Illegal Tax Protesters (ITP) or any similar
designations. In addition, the RRA
98 requires the removal of all existing ITP codes from the IRS Master
File and instructs IRS employees to disregard any
such designation not located on the Individual Master
File.
Prior to enactment of the
RRA 98, taxpayers were referred to the ITP Program when their tax returns or
correspondence contained specific indicators of noncompliance with the tax law,
such as the use of arguments that had
been repeatedly rejected by the courts.
Once a taxpayer’s account was coded as an ITP, certain tax enforcement
actions were accelerated. The
designation was also intended to alert IRS employees to be cautious so they
would not be drawn into confrontations with taxpayers.
The Congress had concerns that some taxpayers were being permanently labeled and stigmatized by the ITP designation. Taxpayers who subsequently complied with the tax laws could continue to be labeled as ITPs, which could bias IRS employees and result in unfair treatment.
Internal Revenue Code §
7803(d)(1)(A)(v) (2000) requires the
Treasury Inspector General for Tax Administration to annually evaluate IRS
compliance with the prohibition against using ITP or any similar
designations. This is our seventh
review since Fiscal Year (FY) 1999. These reviews have identified areas for
improvement to help the IRS comply with the ITP designation
prohibition.
This review was
performed in the Appeals function, Criminal Investigation function, National
Taxpayer Advocate function, and Office of Chief Counsel in
In prior reviews, we reported the IRS had
removed the ITP codes from the Master File as required by RRA 98 § 3707.
The ITP designation has not been reintroduced on the Master
File.
RRA 98 § 3707
also prohibits using any designation similar to ITP. A review of the approximately 57,000
taxpayer accounts formerly coded as ITPs on the Master File identified no
reassignments of these taxpayer accounts to any other Master File designation
similar to ITP.
To help promote
compliance with RRA 98 § 3707, IRS management issued directives for employees to
update various publications to eliminate references to ITP terminology and
programs. A review of IRS
publications identified no ITP references.
In each of the six prior reviews, we identified multiple subsections throughout the various forms of the Internal Revenue Manual (IRM) that contained ITP references. During our FY 2004 review, we reported that there were 24 unique ITP references throughout the various forms of the IRM. In response to our report, the IRS stated that it had initiated actions to remove all remaining ITP references from the IRM.
In our current review, we found 19 unique ITP references in
various versions of the IRM. Office
of Chief Counsel management had already updated and removed 18 of these
references from their functional IRM maintained on the IRS Intranet. IRS management informed us that 18 of the 19
references we identified should be removed as other IRM versions are updated to
incorporate functional IRM revisions.
One additional ITP reference was identified in the SB/SE Division
functional IRM. In January
2005, we notified SB/SE Division management of this remaining ITP reference for
correction.
Removing all ITP references from the various forms of the IRM
would prevent IRS employees from being inadvertently encouraged to improperly
label taxpayers as ITPs. Based on
the actions taken, we believe no further recommendations are warranted at this
time.
Our FY 2005 review of a sample of computer
systems used by IRS employees to document case activity identified 309 isolated
instances in which 272 employees designated taxpayers as “tax protesters,”
“ITPs,” “constitutionally challenged,” or other similar designations. These actions are prohibited by RRA 98 §
3707. However, employees are
allowed to document any statements made by a taxpayer or his or her representatives, and quoting a taxpayer’s
self-designation as an ITP is not prohibited by RRA 98 § 3707. A chart detailing where inappropriate
IRS employee comments were made can be found in Appendix V, and examples of the
inappropriate comments can be found in Appendix VI.
The IRS has taken steps in directing its employees to prevent ITP and similar designations from appearing in case narratives. On October 11, 2002, the IRS issued a Servicewide Electronic Research Program (SERP) alert reminding employees of the prohibition regarding the use of ITP or any similar designations. Business and functional units independently continued to take additional steps to address this issue. These included sending out additional guidance in the form of SERP alerts, email alerts, and memoranda; updating training; conducting quality reviews for ITP use; and counseling employees that continued to designate taxpayers as ITPs or other similar designations.
However, in response to our FY 2003 report, the IRS disagreed with our determination that, to comply with this provision, IRS employees should not designate taxpayers as ITPs or similar designations in case narratives. As a result, we elevated this disagreement to the Assistant Secretary for Management and Chief Financial Officer of the Treasury but have not yet received a response.
We believe it is reasonable to conclude that, based upon the language of the statute, IRS officers and employees should not label taxpayers as ITPs or similar designations in any IRS records, which include paper and electronic case files. IRS officers and employees should not designate taxpayers as ITPs or similar designations because such a designation alone contains a negative connotation and appears to label the taxpayer.
In isolated instances, employees referred to taxpayers specifically using ITP or similar designations in case narratives input on the following IRS computer systems between October 2003 and September 2004:
This is the first year we evaluated the Activity Code field
on the TIF. In addition to the 40 account history
notes input between October 2003 and September 2004, we identified 315 additional instances in which account
history notes contained ITP or similar designations input prior to and after FY
2004.
We notified W&I Division and SB/SE Division management of the instances in which employees had used the account history notes section on the TIF to label taxpayers as ITPs or similar designations. W&I Division management immediately issued an alert to remind employees not to designate taxpayers as ITPs or anything similar in the account history notes. W&I Division management is also working with SB/SE Division management to eliminate the existing ITP and similar designations from the TIF.
In addition, we identified 116 instances in various case narratives in which employees had made references or inferences about the taxpayers’ actions (e.g., ****1****). We agree with the IRS that merely making references to a taxpayer’s actions does not constitute a designation prohibited by this statutory provision. However, we are concerned these references could become, or be considered, permanent labels that could subsequently stigmatize taxpayers in future contacts with the IRS.
Since the IRS has previously taken actions to address many of these issues and there is an outstanding question concerning the legal interpretation of RRA 98 § 3707, we believe no further recommendations are needed at this time.
Appendix
I
Detailed Objective, Scope, and
Methodology
The objective
of this review was to determine whether the Internal Revenue Service (IRS)
complied with IRS
Restructuring and Reform Act of 1998 (RRA 98) Section (§) 3707 and internal IRS
guidelines that prohibit IRS officers and employees from referring to taxpayers
as Illegal Tax Protesters (ITP) or any similar designations. The Treasury Inspector General for Tax
Administration (TIGTA) is required to annually evaluate the IRS’ compliance with
the prohibition against using ITP or any similar designations. To complete this objective,
we:
I. Determined if the ITP coding on the IRS Master File was removed by reviewing all Accelerated Issuance Codes (Transaction Code 148) as of November 2004 for Business Master File (BMF) records and Individual Master File (IMF) records. We analyzed 102,860 BMF records and 614,246 IMF records containing a Transaction Code 148 on the account. We generally relied on the TIGTA Office of Information Technology for validation of the data provided to us. However, we did a limited validation of the data by researching a judgmental sample of 25 Taxpayer Identification Numbers (TIN) and 25 Employer Identification Numbers on the Integrated Data Retrieval System (IDRS).
We also
compared our historic computer extract of approximately 57,000 taxpayers
designated as ITPs before the RRA 98 was enacted to our BMF and IMF records with
an Accelerated Issuance Code (Transaction Code 148) to determine if any new common codes were
being used to classify the taxpayers as ITPs.
II. Determined if the IRS Internal Revenue Manual (IRM) contained ITP or any similar designations by performing key word searches of the Servicewide Policy, Directive, and Electronic Research system; the Servicewide Electronic Research Program (SERP); the IRS electronic publishing Intranet web site; the IRS public Internet web site; and paper IRMs in December 2004. In addition, we determined if the Chief Counsel Directives Manual located on the IRS Office of Chief Counsel web site contained ITP or any similar designations by performing key word searches in December 2004. We specifically searched for corrections to the exceptions identified in our Fiscal Year 2004 report and determined if there were any new references.
III. Determined if IRS publications still contained ITP or any similar designations by performing key word searches of the SERP, the IRS public Internet web site, and the IRS electronic publishing Intranet web site in October 2004 and the IRS 2004 Federal Tax Products CD-ROM in December 2004.
IV. Determined if employees were using ITP or any similar designations within taxpayer case narratives on the IRS Integrated Collection System (ICS) by securing a copy of the ICS database and analyzing 1,083,521 ICS records open as of September 2004 with history action dates between October 2003 and September 2004. We did not perform a detailed validation of the ICS data because this information was provided directly from the IRS through the TIGTA Data Center Warehouse (DCW). However, we did a limited validation of the data by matching a judgmental sample of 25 TINs to the IDRS to determine if the accounts were in current collection status.
V. Determined if employees were using ITP or any similar designations within taxpayer case narratives on the IRS Automated Collection System (ACS) by securing a copy of the ACS database and analyzing 2,398,739 ACS records open as of September 2004 with history action dates between October 2003 and September 2004. We did not perform a detailed validation of the ACS data because this information was provided directly from the IRS through the TIGTA DCW. However, we did a limited validation of the data by matching a judgmental sample of 25 TINs to the IDRS to determine if the accounts were in current collection status.
VI. Determined if employees were using ITP or any similar designations within taxpayer case narratives on the IRS Taxpayer Advocate Management Information System (TAMIS) by securing a copy of the TAMIS database and analyzing 34,537 open TAMIS records with activity between October 2003 and September 2004. The Taxpayer Advocate Service provided the data and validation information to us. The TIGTA DCW staff validated the TAMIS data received. In addition, we did a limited validation of data accuracy and completeness by looking up a judgmental sample of 25 cases by accessing TAMIS online.
VII. Determined if employees were using ITP or any similar designations within taxpayer case narratives on the IRS Appeals Centralized Database System (ACDS) by securing a copy of the ACDS database and analyzing 93,961 open Appeals narrative comment records identified as received in the Appeals function between October 2003 and September 2004. The data were provided directly from the IRS through the TIGTA DCW. However, we did a limited validation of data accuracy and completeness by looking up a judgmental sample of 31 case records by accessing the ACDS online.
VIII. Determined if employees were using ITP or any similar designations within taxpayer case narratives on the IRS Criminal Investigation Management Information System (CIMIS) by securing a copy of the CIMIS database and analyzing 19,020 cases opened on the CIMIS between October 2003 and September 2004. The data were provided directly from the IRS and validated by the TIGTA Chicago Audit group.
IX.
Determined if
employees were using ITP or any similar designations on the Taxpayer Information
File (TIF) by analyzing 12,341,522 IMF and 4,901,558 BMF taxpayer accounts open
on the IDRS as of January 2005 with Activity Code dates input between October
2003 and September 2004. Since
this was the first year we looked at the Activity Code field on the TIF,
we also looked at taxpayer accounts that contained ITP or similar designations input
before October 2003 and after September 2004.
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
Tanya Boone, Senior
Auditor
Julia Tai, Senior
Auditor
Craig Pelletier,
Auditor
Appendix
III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Commissioner, Small
Business/Self-Employed Division
SE:S
Commissioner, Wage and Investment Division SE:W
Chief, Appeals AP
Director, Office of Research, Analysis, and Statistics RAS
Chief, Criminal Investigation SE:CI
Chief Information Officer OS:CIO
Director, Communications and Liaison, National Taxpayer Advocate TA:CCL
Director, Office of Servicewide Policy, Directives, and Electronic Research RAS:SPDER
Director, Collection, Small Business/Self-Employed Division SE:S:C
Director, Communications, Government
Liaison, and Disclosure, Small Business/Self-Employed Division SE:S:CGL&D
Director, Compliance, Wage and Investment Division SE:W:CP
Acting Director, Strategy and Finance, Wage and Investment Division SE:W:S
Acting Chief,
Performance Improvement, Wage and Investment Division SE:W:S:PI
Chief Counsel CC
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 Liaisons:
GAO/TIGTA Liaison, Deputy Commissioner for Operations Support OS
GAO/TIGTA Liaison, Deputy Commissioner for Services and Enforcement SE
GAO/TIGTA Liaison, National Taxpayer Advocate TA
GAO/TIGTA Liaison, Appeals AP:P:S
Acting Chief, Customer Liaison, Small Business/Self-Employed Division SE:S:COM
Acting Senior Operations Advisor, Wage and Investment Division SE:W:S
GAO/TIGTA Liaison, Chief
Information Officer
OS:CIO:SM:
GAO/TIGTA Liaison, Criminal Investigation SE:CI:S:PS
Appendix
IV
This appendix presents detailed information on the measurable impact that the review results will have on tax administration. While no recommendations were made in this report, the Treasury Inspector General for Tax Administration has made prior recommendations that continue to provide benefits. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Actual; 309 taxpayers affected (see page 3).
Methodology Used to Measure the Reported Benefit:
We reviewed the following:
· From the Appeals Centralized Database System (ACDS) – a total of 93,961 open Appeals narrative comment records received between October 2003 and September 2004 and ****1****
· From the Automated Collection System (ACS) – approximately 2.4 million records open as of September 2004 from a database with history action dates between October 2003 and September 2004 and identified 49 taxpayer case narratives that contained ITP or a similar designation.
· From the Criminal Investigation Management Information System (CIMIS) – a total of 19,020 cases opened between October 2003 and September 2004 and identified 3 taxpayer case narratives that contained ITP or a similar designation.
· From the Integrated Collection System (ICS) – approximately 1.1 million records open as of September 2004 from a database with history action dates between October 2003 and September 2004 and identified 214 taxpayer case narratives that contained ITP or a similar designation.
· From the Taxpayer Advocate Management Information System (TAMIS) – a total of 34,537 open cases with activity between October 2003 and September 2004 and identified 2 taxpayer case narratives that contained ITP or a similar designation.
· From the Taxpayer Information File (TIF) – approximately 17.2 million taxpayer accounts open on the IDRS as of January 2004 with TIF Activity Code dates input between October 2003 and September 2004 and identified 40 taxpayer history notations that contained ITP or a similar designation.
Type and Value of Outcome Measure:
· Reliability of Information – Actual; 19 unique Internal Revenue Manual (IRM) subsections (see page 2).
Methodology Used to Measure the Reported Benefit:
In December 2004, we searched various versions of the IRM available to Internal Revenue Service (IRS) employees for ITP references. These were found on the Servicewide Electronic Research Program (SERP), the IRS publishing web site, the IRS public Internet web site, and paper.
Appendix
V
Use of Illegal Tax Protester and Similar
Designations in Case Narratives by Internal Revenue Service Employees During
Fiscal Years 2003, 2004, and 2005
|
Exception Location |
Fiscal Year 2003
Review |
Fiscal Year 2004
Review |
Fiscal Year 2005
Review | ||||||
|
Employees |
Protester Use |
Similar Designation
Use |
Employees |
Protester Use |
Similar Designation
Use |
Employees |
Protester Use |
Similar Designation
Use | |
|
Appeals Centralized Database System
(ACDS) |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
|
Automated Collection System (ACS) |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
|
Criminal Investigation Management Information
System (CIMIS) |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
|
Integrated Collection System (ICS) |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
|
Taxpayer Advocate Management Information System
(TAMIS) |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
|
Taxpayer Information File (TIF) |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
|
TOTALS |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
Source: Various Internal Revenue Service case narratives and Treasury Inspector General for Tax Administration reports entitled Fiscal Year 2003 Statutory Audit of Compliance With Legal Guidelines Prohibiting the Use of Illegal Tax Protester and Similar Designations (Reference Number 2003-40-098, dated April 2003) and Fiscal Year 2004 Statutory Audit of Compliance With Legal Guidelines Prohibiting the Use of Illegal Tax Protester and Similar Designations (Reference Number 2004-40-109, dated June 2004).
Appendix
VI
Examples of Illegal Tax Protester and
Similar Designations Found in Case
Narratives
During our Fiscal Year 2005
review, we searched for the following words and abbreviations to identify
Illegal Tax Protester (ITP) and other similar designations being used by
Internal Revenue Service (IRS) employees in their
case narratives. We did not take exception to employee
comments quoting a taxpayer’s self-designation as an ITP.
|
·
CHALLENGE |
·
CHLLNG |
·
CNSTTTNL |
·
CONGRESSIONAL |
|
·
CONSTITUTIONAL |
·
ITP |
·
OBJECTOR |
·
PROTESTER |
|
·
PROTESTOR |
·
PROTESTR |
·
PROTSTR |
·
PRTSTR |
The following comments made by employees are a few examples of ITP and similar designations found in IRS employees’ case narratives.
Appendix
VII
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.