TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Trends in
Employee Plans Function Enforcement Activities for
Fiscal Years 2000 – 2005
August 24, 2006
Reference
Number: 2006-10-116
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.
Phone Number | 202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 24, 2006
MEMORANDUM FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM:
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Trends in Employee Plans Function Enforcement Activities for Fiscal Years 2000 – 2005 (Audit # 200610007)
This report presents the results of our review of relevant statistical data for trends in the Employee Plans function’s enforcement activities for Fiscal Years 2000 – 2005.
Synopsis
Changes in the way the Employee Plans function applied
resources and selected returns for examination resulted in improvements to key
compliance indicators. The Employee
Plans function adopted a market-segment approach for identifying and selecting
returns for examination and increased resources devoted to the Examination
program. These initiatives were the
primary reasons for improvements in key compliance indicators.
Overall,
compliance activities increased and results improved during Fiscal Years 2004
and 2005, reversing a downward trend in key compliance indicators during the
previous 4 fiscal years. Specifically, there
were increases in the number of returns examined and amount of additional tax
assessments. There was also an overall
decrease in the number of returns that were selected for audit but closed
without any change to the original return. In addition, the Employee Plans function
reported an improvement in the quality of examinations from the early periods
of our review, and Customer Satisfaction ratings were generally consistent and
met established goals.
Recommendations
We made no
recommendations in this report. However,
key Internal Revenue Service management officials reviewed it prior to issuance
and agreed with the facts and conclusions presented.
Copies of this report are also being sent to the Internal Review Service managers affected by this report. Please contact me at (202) 622-6510 if you have any questions or Nancy A. Nakamura, Acting Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.
Appendices
Appendix I –
Detailed Objective, Scope, and Methodology
Appendix II – Major
Contributors to This Report
Appendix III – Report
Distribution List
Abbreviations
|
AIMS |
Audit
Information Management System |
|
|
Exempt Organizations
Total Examination Program |
|
EP |
Employee Plans |
|
EPTA |
Employee Plans Team
Audit |
|
FTE |
Full-Time Equivalent |
|
FY |
Fiscal Year |
|
I.R.C. |
Internal Revenue Code |
|
IRS |
Internal Revenue
Service |
|
LMSB |
Large and Mid-Size
Business |
|
RAP |
Remedial Amendment
Period |
|
RICS |
Returns Inventory and
Classification System |
|
TE/GE |
Tax Exempt/Government
Entities |
|
TEQMS |
Total Examination
Quality Measurement System |
|
U.S.C. |
|
The Employee Plans (EP) function is part of the Tax Exempt and Government Entities (TE/GE)
Division that was established in Fiscal Year (FY) 2000. Within the Division, the EP function Examination operation is
responsible for ensuring pension plans and the variety of employee benefit
plans are in compliance with Internal Revenue Code (I.R.C.) sections and
regulations. Plans meeting I.R.C. qualification
standards are accorded special tax treatment under the law. This includes a current tax deduction for
employers for contributions to qualified plans; for employees, the contributions
are not currently included in income. If
employee plans fail to meet the qualification requirements, this favorable tax
treatment may be denied, meaning the employer may lose tax deductions and
employees may have to report the benefits on their tax returns.
One
of the goals of the EP function Examination operation is to promote voluntary
compliance by identifying and correcting noncompliance by conducting focused,
efficient examinations, and by analyzing operational features of retirement
plans.
To meet its responsibility,
the EP function Examination operation promotes voluntary
compliance by:
During FYs 2000 – 2005, the EP function issued annual workplans setting forth specific program priorities within its Examination operation in support of priorities described in the IRS Strategic Plan. The EP function aligned its Examination operation emphasis to be consistent with the overall goals for the IRS.
Annual workplans also included the activities and projects EP function employees would work on during the year and the types of cases that would be assigned. For example, the FY 2005 annual workplan showed the EP function Examination operation would continue work in key compliance programs such as abusive tax avoidance transactions and risk analysis of compliance levels in various market segments.
The EP function Examination operation priorities have evolved
during the period included in our review.
For example, with the establishment of the TE/GE Division in FY 2000,
the EP function Examination operation’s FYs 2000 and 2001 workplans included guidance on “research
programs,” described as a systematic method of defining the EP function universe
by examining samples from different market segments and using the results to
profile those segments. In FY 2002, the EP
function Examination operation started documenting compliance baseline data
from previously completed audits to assess the impact of EP function compliance
efforts on three market segments. In FY
2003, the EP function Examination operation began assigning returns from four
market segments for which previous examinations showed the percentage of
returns having a tax change was relatively high but the number of returns
examined from those segments was relatively low.
This review was performed at the TE/GE Division Headquarters
in
Overall, compliance
activities improved as both the number and quality of completed examinations
increased during FYs 2004 and 2005, reversing a downward trend in key
compliance indicators during the previous 4 fiscal years.
For example, while the total number of returns examined in FY
2005 was 31 percent below the total for FY 2000, there was a 34 percent
increase in the number of examinations in comparison to FY 2003 (see Figure 4). This increase coincides with the end of the Remedial
Amendment Period (RAP) in January 2004, when revenue agent resources were
reassigned to address significant increases in requests for a determination
letter[1] and inventories of in-process
determination applications.[2]
There was a corresponding trend in total additional tax
assessments. From FYs 2000 – 2003, the amount
of additional tax assessed fell from a high of $103.5 million to a low of $1.7
million. Over the past 2 fiscal years,
there have been steady increases, with a total of $38.7 million of additional
assessments for FY 2005 (see Figure 15).
The average time per examination increased in all but 1 year
since FY 2000, with a 29.4 percent increase overall from FYs 2000 to 2005. Since the EP function Examination operation adopted
a “market-segment” examination approach in FY 2003, time per case increased
13.5 percent, primarily due to conducting audits of more complex issues and a
significant hiring initiative in FY 2005 that resulted in increased training
for the less experienced staff (see Figure 8).
The number of returns for which examinations resulted in no
change to tax increased overall from FYs 2000 – 2004.
For example, the “no-change” rate was 59.4 percent in FY 2000, and it peaked at
73.0 percent in FY 2002. However, since the
EP
function Examination operation
adopted a market-segment approach in FY 2003, the no-change rate dropped
to 57.1 percent in FY 2005, the lowest level since FY 2000 (see Figure 12).
The following sections of this report describe the efforts of the EP function Examination operation to enforce compliance with I.R.C. provisions related to pension plans. This includes analyses of EP function enforcement and staffing data for FYs 2000 – 2005 to identify trends in the following areas:
An increase in Determination applications resulted in fewer resources
being applied to EP function Examination operation activities
Data from the TE/GE Division
Technical Time Reporting System[5] showed the number
of FTEs applied to EP function Examination operation activities increased in FY
2004 following a significant decline in
resources expended in this area from FYs 2000 – 2003. A major factor driving this trend was a
decision to redirect revenue agent resources to the
Determination operation to assist with a large influx of Determination applications
resulting from a RAP. EP function
Examination operation management made this decision to give plan sponsors good
customer service on their Determination application requests. This also enabled EP function management to
ensure employers had correctly amended their pension plans upfront instead of
waiting to examine the corrections through the Examination operation. However, because the RAP was extended several
times over a multiyear period, EP function Examination operation management had
a difficult time planning the Examination operation resources and workload for
each upcoming year. Their intent was to
shift Examination operation resources to work Determination applications as
they were needed during the year. When assigning
work, EP function Examination operation managers were aware the ability to complete
their regular work could be affected by the need to reassign staff to the
Determinations program.
Figures 1 – 3 present the following:
Figure 1:
Total FTEs Planned and Expended by the EP Function on
Direct Examination Activities (FYs 2000 – 2004)
Figure 1 was
removed due to its size. To see Figure
1, please go to the Adobe PDF version of the report on the TIGTA Public Web
Page.
During the early periods shown in Figure 1, there were sizeable differences in total planned and actual direct Examination operation FTEs. The differences were attributable primarily to the anticipated need for revenue agent resources to assist with the processing of Determination applications that did not materialize until FY 2003.
The expected rise in Determination applications started in
the spring of FY 2002. As shown in Figure
2, the number of Determination letters issued in reply to these applications reached
its peak in FY 2003. In addition, the
nearly 70,000 Determination applications received by the EP function in FY 2004
far exceeded the planned volume of 42,000.
As a result, the EP function continued using revenue agent resources to
reduce the backlog of Determination applications and issue Determination
letters during FY 2005.
Figure 2: Total
Determination Letters Issued (FYs 2000 – 2005)
Figure 2 was
removed due to its size. To see Figure 2,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
To eliminate the repeated peaks and valleys associated with Determination application receipts since adoption of the Employee Retirement Income Security Act of 1974,[7] the IRS recently published guidance on restructuring the Determinations program. The proposed changes included a process for staggering the due dates of Determination applications for future RAPs. The IRS issued these changes in final form in Revenue Procedure 2005-66, dated September 12, 2005.[8] These changes should help to prevent the RAP peak experienced in FYs 2002 and 2003.
Figure 3 shows that from FYs 2001 – 2003 there was a decrease of 61 FTEs expended on EP function direct Examination operations, while the EP function’s overall FTE usage increased by 123. The downward shift in resources devoted to the Examination program and the increase in FTEs devoted to the entire EP function were associated primarily with the need for staffing to address the increase in Determination applications.
Figure
3: Total FTEs Expended by the EP
Function on Direct Examination Operation Activities and by the EP Function
Overall (FYs 2000 – 2004)
Figure 3 was
removed due to its size. To see Figure 3,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The number of completed examinations decreased by 31 percent during
FYs 2000 – 2005
There are a variety of measures for gauging the impact of the EP function Examination operation on compliance. One primary measure is the number of examinations completed during a fiscal year. As shown in Figure 4, the total examinations completed significantly decreased during FYs 2000 – 2003, increased over the next 2 fiscal years, but remained 31 percent below the FY 2000 level by the end of FY 2005.
Figure 4:
Total Number of Closed Examinations (FYs 2000 – 2005)
Figure 4 was
removed due to its size. To see Figure 4,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Figure 5 shows that each year from FY 2000 through 2005, fewer examinations were completed per FTE assigned to the Direct Examination program.
Figure
5: Closed Examinations per Direct
Examination FTE
(FYs 2000 – 2004)
Figure 5 was
removed due to its size. To see Figure 5,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The number of examinations completed in a fiscal year is affected by many factors, including complexity of the cases, experience levels of the staff, and the time required to work cases. In addition, during FYs 2000 – 2005 the EP function Examination operation used a variety of approaches for selecting returns for examination and determining the programs that would take priority. Changes in approaches could have affected the length of examinations and the number of examinations completed.
One of the biggest changes occurred in FY 2002, when the EP function Examination operation began a market-segment Risk Assessment program. This program categorized qualified pension plans into 20 market segments and 11 different plan types within each segment, for a total of 220 distinct market segments. EP function Examination operation management gathered a significant amount of information on the risk and reliability of the different segments. The Risk Assessment program’s assumptions and sample sizes were reevaluated in FY 2004, and the number of market segments was reduced to 79. In FY 2005, the EP function Examination operation analyzed 20 market segments and had made plans to assign over 5,000 returns for examination.
With the above changes came a shift in the areas the EP function Examination operation emphasized for coverage. Examination results for the EP function Examination operation show this shift beginning in FY 2002 and becoming more prominent in FYs 2003 – 2005. To more clearly compare trends in examination coverage, Figures 6 and 7 and their accompanying Tables (as well as Figures related to time per case, no change rate, and additional assessments) show activity for FYs 2000 – 2002 separate from the activity for FYs 2003 – 2005. Figures 6 and 7 show data from closed examinations for EP function projects, which accounted for the majority of closures.
In general, during the period of this review, the total number of closed examination cases and average closures per FTE were affected by:
As shown in Figure 6, the majority of closures during FYs 2000 – 2002 were related to the Local Classified Issues and Sample Result/Converted Non-Exam categories, with the former category accounting for nearly one-half of all closures in FY 2002. These types of cases are described below.
Figure 6: Closed Examinations for Major Areas of EP Function
Emphasis (FYs 2000 – 2002)
Figure 6 was
removed due to its size. To see Figure 6,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The Figure 6 Table shows the
percentage of total examination closures for each of the above types of
examination cases during FYs 2000 – 2002.
Figure
6 Table
|
Area
of Emphasis |
FY
2000 |
FY
2001 |
FY
2002 |
|
Local Classified Issues |
30.6% |
54.9% |
46.4% |
|
EP Function Local/Multiarea Sample |
12.2% |
2.6% |
14.0% |
|
Sample Result/Converted Non-Exam |
33.0% |
23.5% |
2.9% |
|
Casework |
12.5% |
7.5% |
7.8% |
|
New Nationwide Samples[12] |
N/A |
1.1% |
19.2% |
Source: AIMS Report 20 for FYs 2000 – 2002. The notation “N/A” denotes Not Applicable.
A prior Treasury Inspector General for Tax Administration report[13] on the Examination operation workplan process showed that, while Local Classified Issues helped the EP function meet certain performance goals such as total closures, it was not designed to focus on areas representing the greatest risk of noncompliance. In response, EP function management:
Figure 7 shows that, during FYs
2003 – 2005, the majority of the EP function Examination operation workload involved
Risk Assessment program cases, which accounted for over 80 percent of all EP
function Examination operation closures in FYs 2004 – 2005. Following
are the 3 areas of examination emphasis that accounted
for all closures during these 3 fiscal years:
Figure 7:
Total Number of Closed Examinations by
Major Areas of EP Function Emphasis (FYs 2003 – 2005)
Figure 7 was
removed due to its size. To see Figure 7,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The Figure 7 Table shows the
percentage of total examination closures for each of the above types of
examination cases for FYs 2003 – 2005.
Figure
7 Table
|
Area
of Emphasis |
FY
2003 |
FY
2004 |
FY
2005 |
|
Risk Assessment |
58.4% |
80.6% |
83.0% |
|
Special Emphasis |
13.9% |
2.4% |
3.6% |
|
Casework |
27.7% |
17.1% |
13.4% |
Source: AIMS Report 20 for FYs 2003 – 2005. The totals for some fiscal years may not equal
100 percent due to rounding.
The amount of time needed to complete an examination has been
increasing
There are two measures for gauging time on examinations:
As shown in Figure 8, the average time per case increased nearly 30 percent (from 33.6 hours to 43.5 hours per case) in the 6-year period ending in FY 2005. The most noticeable increases occurred in FYs 2002 and 2005. Reviews by EP function staff indicated these increases were generally related to EP function revenue agents:
Figure 8:
Average Time per Case (FYs 2000 – 2005)
Figure 8 was
removed due to its size. To see Figure 8,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
A task group of EP and Exempt Organizations function managers and revenue agents met in 2003 to review the examination process and make recommendations that would result in selecting better cases and reducing both cycle time and customer burden. One recommendation was to expand the use of “focused” or “limited-scope” examinations. Under this approach, agents assess internal controls, use more effective interview techniques, and examine several specific issues. This allows agents to limit audit activity with compliant customers and do more comprehensive examinations of potentially noncompliant customers.
The EP function Examination operation conducted a pilot to test this concept in March 2004 and completed the test in March 2005. The 625 cases closed using this approach showed a 23 percent decrease in time per case and a 27 percent reduction in cycle time.
Other factors affecting the timeliness of EP function examinations from FYs 2002 – 2005 included the following:
· FY 2002: A shift in emphasis to more complex and time-consuming examinations of larger plans (i.e., those with more participants) resulted in an increase in the average time per case.
·
FY 2003: An
EP function operational review in May 2003 noted the slight improvement in time
per case was due to a much larger percentage of Risk Assessment program returns,
which revenue agents closed in an average of 29 hours per case. These accounted for nearly one-half of all closures in FY 2003 versus only 12.5 percent in FY
2002. There was also significant
improvement in time per case within the Other Casework category of examinations,
which includes several types of cases such as third-party referrals and reported
funding deficiencies.
· FY 2005: The overall rise in time per case primarily resulted from less experienced staff conducting more examinations of market-segment cases.
Figures 9 and 10 show average time per case for key programs, which represent the majority of total closures for each fiscal year shown (see Tables included with Figures 6 and 7).
Figure 9:
Average Time per Case, Key Program Areas (FYs 2000 – 2002)
Figure 9 was
removed due to its size. To see Figure 9,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Figure 10:
Average Time per Case, Key Program Areas (FYs 2003 – 2005)
Figure 10 was
removed due to its size. To see Figure 10,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
There was wide variation in EP function examination cycle times during the past 6 fiscal years, as illustrated in Figure 11. This trend is attributable to many of the same issues as those associated with time per case. In addition, EP function reviews completed during FYs 2002 – 2005 addressed cycle time and cited specific steps EP function management has taken to improve timeliness:
Figure 11:
Cycle Time (FYs 2000 – 2005)
Figure 11 was
removed due to its size. To see Figure 11,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The change rate
significantly improved after several years of an overall decrease
Another indicator of Examination program impact is the percentage of cases resulting in some type of change due to noncompliance with the I.R.C. Overall, the rate of change fell during the early period of our review period but in FY 2005 reached its highest level since FY 2000. Figure 12 shows the percentage of examinations resulting in either a change or no change over the past 6 fiscal years.
Figure 12:
Change Rate (FYs 2000 – 2005)
Figure 12 was
removed due to its size. To see Figure 12,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
While the number of completed examinations increased in each of FYs 2003 – 2005, there was still a significant number of closures for returns deemed to be compliant (i.e., no-change closures). The EP function workplan for FY 2006 includes two specific actions to better focus compliance activities so revenue agents can more effectively and efficiently perform audits:
Figures 13 and 14 provide the no-change rate for major Examination programs during FYs 2000 – 2002 and FYs 2003 – 2005.
Figure
13: No Change Rate, Key Program Areas
(FYs 2000 – 2002)
Figure 13 was
removed due to its size. To see Figure 13,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The above categories accounted for over 75 percent of all closures for FYs 2000 – 2002. While the no-change rate was relatively constant for the Local Classified Issues and New EP Function Nationwide Sample categories during this period, there were generally wide fluctuations in other categories.
Since the EP function adopted its market-segment approach in FY 2003, there has been an overall decrease in the no-change rate for returns EP function revenue agents examined to validate the Risk Assessment program process. For example, in the 3-year period ending in FY 2005, there was a significant drop in the no-change rate for the Risk Assessment category, from 84.6 percent to 60.7 percent. During the same period, the number of returns examined for this category increased 91 percent and accounted for over 80 percent of all closed examinations in FYs 2004 and 2005.
Figure 14: No Change Rate, Key Program Areas (FYs 2003 –
2005)
Figure 14 was
removed due to its size. To see Figure 14,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Assessment amounts for noncompliant plans have decreased from the
early periods of our review
Another indicator of the success of the Examination program is the amount assessed for the noncompliance issues identified during examinations. Figures 15 through 18 show the total amounts assessed during FYs 2000 – 2005 as well as total assessments for key EP function Examination programs.
Figure 15:
Total Additional Tax Assessed (FYs 2000 – 2005)
Figure 15 was
removed due to its size. To see Figure 15,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The EP function’s annual workplans include priorities to support the IRS Strategic Plan goal of Enhancing Enforcement of the Tax Law. In recent years, there have been numerous news articles about the dramatic increase in defunct pension plans taken over by the Pension Benefit Guaranty Corporation. Over the past few fiscal years, the EP function’s areas of examination emphasis have shifted to address these concerns and include the following strategies:
Through the end of FY 2005, there were relatively few completed examinations in the area of abusive tax avoidance transactions. However, on average, these cases resulted in a sizeable amount of additional tax assessments.
Figures 16 through 18 (and their accompanying Tables) provide a more detailed breakdown of total tax assessments by the EP function Examination operation, including:
These programs were chosen because they represent the majority of total assessments made during each fiscal year covered in our review (see Figures 16 and 17).
Figure 16:
Examination Assessments, Key Program Areas (FYs 2000 – 2002)
Figure 16 was
removed due to its size. To see Figure 16,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The Figure 16 Table shows the percentage of total additional assessments that the key program areas accounted for during this period.
Figure 16 Table
|
Area
of Emphasis |
FY
2000 |
FY
2001 |
FY
2002 |
|
Market-Segment |
N/A |
N/A |
51.7% |
|
General Cases |
30.8% |
29.9% |
0.6% |
|
Local Classified Issues |
-0.7% |
1.8% |
50.6% |
|
Casework |
33.3% |
18.0% |
-4.0% |
|
Nationwide Exams |
17.7% |
44.2% |
N/A |
Source: AIMS Report 20 for FYs 2000 – 2002. The notation “N/A” denotes Not Applicable.
Figure 17: Examination Assessments, Key Program Areas (FYs
2003 – 2005)
Figure 17 was
removed due to its size. To see Figure 17,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The Figure 17 Table shows the percentage of total additional assessments that the key program areas accounted for during this period.
Figure 17 Table
|
Area
of Emphasis |
FY
2003 |
FY
2004 |
FY
2005 |
|
EPTA & |
N/A |
N/A |
61.5% |
|
Risk Assessment |
35.3% |
33.3% |
8.8% |
|
Special Emphasis |
11.8% |
4.4% |
24.8% |
|
Casework |
52.9% |
62.2% |
4.9% |
Source: AIMS Report 20 for FYs 2003 – 2005. The notation “N/A” denotes Not Applicable.
The overall downward trend in additional tax assessments during FYs 2002 and 2003 correlates with a decrease in total direct Examination program staffing and closures. However, over the past 2 fiscal years, there has been a significant increase in total assessments.
It is important to note that assessments alone are not a reliable indicator of the effectiveness of a particular Examination program. There are often wide variances in the amount of examination assessments for the various pension plans (due to the size and complexity of the plan and the degree of noncompliance). For example, one completed case can result in several million dollars in additional assessments, but this cannot be expected year after year in the Examination program. Therefore, it would not be reasonable to expect this result the following year or to devote more resources to this type of plan in anticipation of further increases in additional tax assessments.
Figure 18: Closed Examinations by Projects Having the
Highest Average Additional Tax Assessments (FYs 2000 – 2005)
|
Project Code/Title |
FY 2000 |
FY 2001 |
FY 2002 |
FY 2003 |
FY 2004 |
FY 2005 |
|
|
Average Additional Assessment |
|||||
|
301 Local Classified
Issues |
$129 |
$306 |
$12,871 |
$702 |
N/A |
N/A |
|
445 EP Function
Risk Assessment |
N/A |
N/A |
N/A |
$21 |
$254 |
$555 |
|
069 Reported Funding
Deficiency |
$16,918 |
$118,894 |
$205,037 |
($5,198) |
$17,598 |
$215 |
|
068 Referrals |
$16,888 |
$27,155 |
$5,524 |
$863 |
$4,836 |
$5,245 |
|
000 General
Cases |
$47,303 |
$109,542 |
$6,366 |
$1,831 |
$1,325 |
$3,191 |
|
078 Coordinated Examination Program Support To Large
and Mid-Size Business |
$17,535 |
$11,068 |
$13,369 |
$1,037 |
$3,536 |
$679,741 |
Source: AIMS Report 20 for FYs 2000 – 2005. The notation “N/A” denotes Not Applicable.
The Employee Plans function reported improvement in the quality of
examinations from the early periods of our review
Overall, the quality of examinations conducted by the EP function Examination operation improved and ranged from 84 percent to 86 percent over the past 3 fiscal years. The EP function Quality Review Staff issued quarterly reports with comprehensive narratives detailing where revenue agents did well and where there was a need for improvement.
The
Total Examination Quality Measurement System (TEQMS) is designed to measure the
quality of cases. The TEQMS provides EP
function management with data to assess organizational performance and identify
improvement opportunities. For EP function
Examination operation cases, the System is designed to measure the quality of
the EP function Examination operation case process and provide statistical and
narrative commentary at the Area Office and National levels. The System includes eight quality standards,
each having specific elements, aspects, and reasons that measure case quality. The
standards provide objective criteria against which case quality is evaluated.
Starting in FY 2001, the EP
function Examination operation established specific goals for examination
quality. The initial goal of an 82
percent accuracy rate has increased over the past 2 fiscal years and was set at
87 percent for FY 2005. During FYs 2000
– 2002, the TEQMS showed the quality rate ranged from a high of 81 percent to a
low of 72 percent. During the latter
part of our review period (FYs 2003 – 2005), quality improved and was
consistently near 85 percent.
Figures 19 and 20 show overall TEQMS results for FYs 2000 – 2005 as well as the three standards having the lowest overall ratings.
Figure 19: Examination Quality (FYs 2000 – 2005)
Figure 19 was
removed due to its size. To see Figure 19,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Figure 20:
Examination Quality (FYs 2000 – 2005)
Figure 20 was
removed due to its size. To see Figure 20,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Below are definitions for each of these standards:
· Examination Planning: Measures whether the pre-audit identified material issues; initial requests for information were clear, concise, appropriate, and addressed the potential issues selected; and necessary steps were taken to set the groundwork for a complete examination.
· Workpapers/Reports: Measures documentation of the examination’s audit trail, techniques used, procedures applied, and examiner’s activity on the case. This standard also measures whether there is sufficient documentation to support the conclusions reached and the computations are accurate.
· Timeliness: Measures use of time and timeliness of actions throughout the examination process.
Customer Satisfaction ratings were generally consistent and met
established goals during the period of our review
Customer Satisfaction ratings for examinations were generally consistent and met the EP function Examination operation’s goals for FYs 2002 – 2005. Over the past 3 fiscal years, the EP function workplan for the Examination operation has included a section on Customer Satisfaction with comments about previous and planned actions the EP function Examination operation was taking to maintain or improve high ratings for this performance indicator.
For example, the workplan shows each of the Area Offices initiated projects to improve customer satisfaction, particularly in areas of “time spent on audit” and “explanation of process.” Customers rated these 2 items as having the highest priority for “improvement opportunities” in each of the past 3 fiscal years. Actions taken to address these areas include:
During FYs 2001 – 2005, the overall Customer Satisfaction
rating ranged from 5.69 to 5.85 on a 7-point scale (where ratings of 6 or 7
were designated as satisfied customers and ratings of 1, 2, or 3 were designated
as dissatisfied customers). Starting in
FY 2002, the EP function Examination operation established a specific goal of
achieving an overall 5.70 Customer Satisfaction rating and in FY 2005 increased
this to 5.80. In FY 2003, the EP
function Examination operation added a second goal of having 70 percent of all
customer ratings be in the “satisfied” range (rating of 6 or 7); the EP
function increas
Figure 21:
Overall Examination Customer Satisfaction (FYs 2001 – 2005)
Figure 21 was
removed due to its size. To see Figure 21,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Figure 22: Examination Customer Satisfaction –
Percentage of Satisfied Customers (FYs 2002 – 2005)
Figure 22 was
removed due to its size. To see Figure 22,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Appendix I
Detailed Objective,
Scope, and Methodology
The overall objective of this audit was to
review relevant statistical data concerning the EP function’s enforcement
activities for FYs 2000 – 2005 and analyze the data for trends. To accomplish this objective, we reviewed
Internal Revenue Service data publications and EP function Examination
operation information. We relied on information
accumulated by the IRS and EP function in established reports and did not
verify its accuracy. Specifically, we:
I.
Identified areas of
emphasis for the EP function’s enforcement activities for FYs 2000 – 2005
and determined how resources were allocated.
A.
Obtained EP function workplans
and program guidance to identify the major strategies, operating priorities,
goals, and objectives.
B.
Interviewed EP function
management to identify the factors used in determining the key program areas
(e.g., expected high rate of noncompliance).
II.
Determined the factors
EP function management used to gauge the overall success of key enforcement
areas.
A.
Interviewed EP function
management to determine the criteria used in determining the success of
individual examinations and the overall Examination program.
B.
Determined the data EP
function management used to track the measures.
III.
Analyzed data relating
to the EP function’s enforcement activities for FYs 2000 – 2005.
A.
Obtained EP function Technical
Staffday Analysis reports to identify the total planned staff days for the EP function
Examination Program.
B.
Obtained Tax Exempt
and Government Entities Division Technical Time Reporting System[16] data to determine the total time applied to EP function examination
operation activities.
C.
Obtained Statistics of
Income office data to determine the total number of returns examined and
associated results.
D.
Obtained Audit
Information Management System[17] data to identify the total number, source, type of closure,
and time expended on examinations of EP function returns.
E.
Determined the extent
of the productive and nonproductive trends for EP function-related returns.
Appendix II
Major Contributors
to This Report
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Tax Exempt and Government
Entities Division SE:T
Director, Employee Plans, Tax Exempt and Government
Entities Division SE:T:EP
Director, Employee Plans Examination Office, Tax
Exempt and Government Entities Division
SE:T:EP:E
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Controls OS:CFO:CPIC:IC
Audit Liaison: Director, Communications and Liaison, Tax Exempt and Government Entities Division SE:T:CL
[1] Many employers desire advance assurance that the terms of their plans satisfy the requirements of the I.R.C. and will submit an application to the IRS for a determination letter. EP function specialists analyze the applications to determine if the plans are established in a manner that meets current laws and are substantially compliant with the I.R.C. and any applicable Revenue Procedures.
[2] The IRS allows plan sponsors a period of time, called the RAP, to incorporate tax law changes without a penalty or sanction. The end of the RAP becomes the deadline for timely filing a determination application on the changes to the plan. The most recent RAP was scheduled to end on December 31, 2001, but was extended several times to January 31, 2004.
[3] A measure of labor hours
in which 1 FTE is equal to 8 hours multiplied by the number of compensable days
in a particular fiscal year. For FY
2004, 1 FTE was equal to 2,096 staff hours.
For FY 2005, 1 FTE was equal to 2,088 staff hours.
[4] The Non-Master
File supports processing of transactions not compatible with the IRS Master File
processing, timeliness, or data. The
Master File is the IRS database that stores various types of taxpayer account
information; it includes individual, business, and employee plans and exempt
organizations data.
[5] The TE/GE Technical Time Reporting System is used to monitor time planned for and applied by employees in TE/GE Business Segments.
[6] Direct Examination activity – Time expended to conduct an audit of a return.
[7] Pub. L.
No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of 5
U.S.C., 18 U.S.C., 26 U.S.C., 29 U.S.C., and 42 U.S.C.).
[8]
Revenue Procedure 2005-66 contains the IRS’ procedures for issuing Determination
letters pursuant to I.R.C. § 401(a) (2004) with respect to a staggered RAP system
for both plans that are and are not preapproved.
[9] During FY 2005, the EP function Examination operation hired 50 new revenue agents. Because many of these employees were either new to the IRS or had no prior EP function experience, they needed extensive training and generally worked easier examination cases.
[10] The RICS provides users with access to return and filer information related to the filing and processing of employee plans, exempt organizations, and government entities forms. It receives data from the Business Master File (the IRS database that consists of Federal tax-related transactions and accounts for businesses; these include employment taxes, income taxes on businesses, and excise taxes).
[11]
A compliance check is
a contact with the customer that involves a review of filed information and tax
returns of the entity to determine whether the entity is adhering to record
keeping and information reporting requirements.
A compliance check is not an examination, and the customer may legally
choose not to participate in the compliance check.
[12] Cases selected using a market-segment compliance approach.
[13] Additional Improvements Will Better Focus the Employee Plans Function’s Examinations Workplan on Areas That Identify and Correct Noncompliance (Reference Number 2002-10-143, dated August 2002).
[14] Revenue Procedure 2002-47 (July 22, 2002) contains provisions for updating the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of I.R.C. §§ 401(a), 403(a), 403(b), or 408(k) but that have not met these requirements for a period of time.
[15] The EP function Examination operation has five Area Offices that report to the EP function National Office and provide guidance to local EP function offices.
[16] The TE/GE Technical Time Report is used to gather information required by management at all levels for time application by TE/GE personnel in the Area Offices.
[17] The AIMS provides an automated inventory and activity control for active examination cases.