TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Information Report Referrals Are Properly Evaluated,
but Processing Controls Need to Be Improved
September 18, 2006
Reference Number: 2006-30-130
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
September 18, 2006
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Information Report Referrals Are Properly Evaluated, but Processing Controls Need to Be Improved (Audit # 200530016)
This report presents the results of our review of the Internal Revenue Service’s (IRS) information report referrals. The overall objective of this review was to determine whether the Small Business/Self-Employed (SB/SE) Division Examination classification functions effectively controlled and evaluated information report referrals received from other sources. To make these determinations, we visited four IRS offices to review the classification activities evaluating information report referrals during Fiscal Year 2005. We did not evaluate the handling of information report referrals associated with informant claims.
Impact on the Taxpayer
The information report referral
program alerts IRS employees of situations where potential noncompliance may
have occurred, but it is not a high priority for IRS managers because the work
is considered discretionary. Information report referrals are being
properly evaluated, but processing controls need to be strengthened. This is significant to ensure that
allegations of taxpayer noncompliance are addressed.
Synopsis
In the SB/SE
Division, Examination classification functions evaluate information report
referrals to determine whether examinations of the related accounts would be
beneficial in promoting taxpayer compliance.
In Fiscal Year 2005, the SB/SE Division closed 1,583 examinations with information report
referrals involving recommended assessments of nearly $57 million.
SB/SE Division management
recognizes the need to improve its handling of the information report referral
program. In June 2005, the handling of
low-dollar Collection function information referral reports was centralized at
the Philadelphia Campus.[1]
Management also established the Significant Noncompliance Factor Program
at the Brookhaven Campus to identify highly noncompliant taxpayers.
Our review of 224 information
report referrals determined that classifiers generally made the proper decision
when selecting a return for examination or when accepting the return as
filed. However, SB/SE Division
management still needs to place more emphasis on strengthening the controls over
the processing of information report referrals.
The information report referral
program is not a high priority for IRS managers because the work is considered discretionary. Therefore, management has not established any
performance measures or goals to evaluate the
program. Since no results are measured,
management does not obtain the data necessary to provide feedback to the
functions submitting the information report referrals to improve the program’s
overall productivity. In addition, we found little evidence that management provided effective oversight of this program.
We also determined the four offices were not effectively controlling
information report referrals. Although
two classification functions started to implement controls over the receipt of
their information report referrals, no process was implemented during Fiscal
Year 2005. At the other two
classification functions, no attempt was made to establish an inventory control
system. Finally, offices did not retain
information report referrals for the appropriate time
periods.
Management
believed that Fiscal Year 2005 transitions had an impact on the handling of
information report referrals with the consolidation of field offices and the
reassignment of former Collection and Examination function processing
activities to the campuses.
Recommendations
Response
IRS management agreed with two of our four
recommendations, partially agreed with one recommendation, and disagreed with
one recommendation.
SB/SE Division management agreed that
procedures for work reviews should be followed and the Director, Examination
Planning and Delivery, will provide guidance to Area Directors and the Planning
and Special Program Staff on managerial reviews of information report referral evaluations
and record retention.
The Directors, Campus Reporting Compliance,
and Examination Policy, agreed to provide correct retention period information
and establish a consistent
storage method so that information referral reports may be easily retrieved for
review purposes.
The Director, Examination Planning and Delivery,
will consider implementing a control system after a feasibility study is
conducted to determine the cost of establishing a tracking system to control
information report referrals. We
agree with the IRS decision to evaluate the feasibility and cost effectiveness
of implementing an inventory control system.
SB/SE management disagreed to devise measurements to evaluate nonselected and selected cases related to information report referrals because to develop such a system could be labor intensive and potentially not cost effective. Management’s complete response to the draft report is included as Appendix IV.
Office of Audit Comment
We continue to believe that the IRS needs some method of capturing the results to evaluate the usefulness of the information report referral program. For another recommendation, the IRS will consider implementing a control system after it conducts a feasibility study to determine the cost of establishing a tracking system to control information report referrals. IRS management could consider expanding that study to include an evaluation of nonselected and selected cases by tracking the results. Currently, IRS management cannot provide data on the program’s effectiveness which would greatly facilitate ascertaining the program’s value. Without such information, IRS management cannot determine the potential of the information reports referred by various sources outside the normal examination selection process. Rather, the IRS has opted not to identify the program’s benefits for evaluating what costs would be reasonable toward developing a management system.
Copies of this report are also being sent to IRS officials who are affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-8500.
Oversight of the Information Report
Referral Program Needed to Be Improved
Retention Procedures Were Not Followed
for Storing Information Report Referrals
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Management’s Response to the Draft Report
Abbreviations
|
AIMS |
Audit Information Management System |
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
|
SB/SE |
Small Business/Self-Employed |
The Internal Revenue Service (IRS) frequently
receives allegations of situations in which taxpayers may not be compliant with
tax laws. These allegations are received
from many sources including IRS employees from various business functions,
Federal and State government agencies, and individuals from the public. For example, IRS employees prepare information
report referrals when they identify potential noncompliance while performing
their duties. In other instances, State
taxing authorities send information to the IRS on State information referral
forms. Individuals such as neighbors,
ex-spouses, and former employees sometimes call the IRS and report the
nonfiling or underreporting of income.
IRS functions use the following reports to record and refer allegations
of noncompliance:
Generally,
classification personnel in the Examination Field function are responsible for
reviewing the information report referrals to determine whether the allegations
have examination potential.
Classification personnel performing
this work are experienced employees with appropriate tax law training. This process is a manual evaluation to select returns that contain significant issues likely to result in
changes to taxes owed or that require examinations to achieve voluntary
compliance by an identifiable group of taxpayers.
The IRS identifies information report referrals as discretionary work that may be appropriate to work based upon workload availability and resources. IRS functions have the discretion to select the next best return available within a broad category of other work. During Fiscal Year (FY) 2005, the Small Business/Self-Employed (SB/SE) Division recommended assessments of nearly $57 million on 1,583 closed examinations with information report referrals. In addition, SB/SE Division management has established a Significant Noncompliance Factor Program to handle information report referrals involving highly noncompliant taxpayers. An example of such a taxpayer would be a construction worker not reporting payments for work performed. In June 2005, the handling of low-dollar Collection function information referral reports was centralized at the Philadelphia Campus.[2]
Government Accountability Office guidance
recommends that management should account for and control records, oversee
activities, and evaluate programs. To
assist in this effort, managers at all levels should provide a positive control environment;
identify potential risk areas; ensure adequate and effective controls are in
place; report results of reviews to the next level of supervision; ensure
reports are supportable, accurate, and candid; provide adequate resources to
correct identified control deficiencies; and implement corrective actions
timely and validate outcomes.
This review was
performed at the Campus Compliance Services offices located in
SB/SE Division management has
taken actions to improve the handling of the information report referral
program. The Significant Noncompliance
Factor Program has been implemented at the Brookhaven Campus for identifying
highly noncompliant taxpayers, and low-dollar Collection function referrals
have been centralized at the Philadelphia Campus for processing. We selected 224 information report referrals
closed by the 2 campus and the 2 field offices and identified only a few
instances where classifiers had not taken proper action when selecting a return
for examination or accepting the return as filed.
Even though employees are
reaching the correct determinations, management still needs to improve some of
the controls for processing information report referrals. Management has not established goals
or performance measures to evaluate the activity of the information report
referral program and, as a result, does not obtain the necessary
information to provide feedback to the functions submitting the information
report referrals so they can identify ways to improve the process. Controls such as use of logs to track cases
were not consistently used and information report referrals were not always available
to allow an evaluation of the effectiveness of the work. Such controls can assist managers to ensure
better case selection for promoting compliance among taxpayers and for making a
fairer system for all taxpayers.
Management
believed that the consolidation of field offices and reassignment of former
Collection and Examination function processing activities to campuses had a negative
impact on the handling of information report referrals.
Goals and Measures Were Not Established to Analyze the Effectiveness of the Information Report Referral Program
Management is
responsible for maintaining management information that can be used to evaluate
the results of various programs. Our
review determined that management does not obtain the necessary data on the
information report referral program to assess the effectiveness of the program
or provide feedback to improve the quality of the information report referrals
received. While
management has recognized the need to improve the program by implementing the Significant
Noncompliance Factor Program and the low-dollar Collection function referrals,
establishing program goals would provide the baseline to measure the success of
the program.
At the other field office, personnel could only provide Audit Information Management System (AIMS)[5] information based on source and project codes. However, management has found that using such data on the information report referrals was not reliable because field offices were not consistently using the AIMS source and project codes for various compliance initiatives.
At one campus, personnel could not provide
any statistics covering the handling of information report referrals. Classification personnel stated they had not
selected an information report referral for examination in the last 18
months. At the other campus, personnel
could only provide AIMS information on their handling of Collection function
information report referrals.
Without capturing
and comparing measurements between examination activities, management cannot
evaluate whether the information report referral program can or cannot impact
the Examination function program at any significant level. Furthermore, performance measures can help to ensure that appropriate goals are
met and reliable data are obtained,
maintained, and fairly disclosed.
Recommendation
Recommendation 1: The Commissioner, SB/SE Division, should devise measurements that evaluate nonselected and selected cases related to information report referrals.
Management’s Response: IRS management did
not agree with the recommendation because the IRS does not currently have a measurement system in place that would allow
the tracking of this type of information.
The IRS uses project and tracking codes for a variety of purposes, and
there are limits to the number of codes that can be used for each case. Also, the IRS’ ability to track all selected
cases on a consistent basis is limited.
In addition, the IRS does not have the ability to track results of
nonselected cases. Therefore, a new
system would have to be created that would allow the IRS to evaluate both
nonselected and selected cases. The cost
to develop such a labor intensive system is disproportionate to the benefits
that would be realized, and a manual tracking system is not practical at the
national level. Consequently, IRS
management believes that trying to incorporate measurements into the existing
systems is not operationally feasible.
Office of Audit
Comment:
We continue to believe that the
IRS needs some method of capturing the results to assess the effectiveness of
the information report referral program.
For another recommendation, the IRS will consider implementing a control system after they conduct a feasibility
study to determine the cost of establishing a tracking system to control
information report referrals. IRS
management could consider expanding that study to include an evaluation of
nonselected and selected cases by tracking the results.
Currently, IRS management could not provide statistics showing the volume or the examination potential of information report referrals received to assess the effectiveness of the program. Obtaining information on the effectiveness would greatly facilitate ascertaining the program’s value. Without such information, IRS management cannot determine the potential of the information reports referred by various sources outside the normal examination selection process. Rather, the IRS has opted not to identify the program’s benefits for evaluating what costs would be reasonable toward developing a management system.
Oversight of the Information Report Referral Program Needed to Be Improved
Managers did not
provide the necessary oversight to classification personnel reviewing the
information report referrals. In the
four offices visited, we only identified one manager that performed and
documented reviews of the classifier’s work.
Even at this location, the manager only documented the formal
evaluations of the full-time classifier and did not document reviews by some
part-time classifiers even though review results were discussed with them. In addition, we identified one annual
operational review where a manager commented on the handling of information
report referrals.
IRS procedures require managers
to review, document, and discuss completed referral work with each
classifier. Furthermore, managers should conduct reviews
of each classifier to determine whether performance indicates a need for additional
training on handling computer-identified or manually-classified tax returns. Some items to verify are whether selected
returns have sufficient potential tax change to warrant an examination or
whether accepted returns had little or no examination potential.
Without documented work reviews, management
cannot ensure the classification determinations related to information report
referrals are proper. These managerial
reviews can help to ensure that
appropriate goals are met and
that resources are used efficiently and effectively.
Recommendation
Recommendation 2: The Commissioner, SB/SE Division, should ensure procedures covering work reviews are followed so managers and personnel can determine whether the classification determinations involving information report referrals are proper. Managerial reviews provide assurance work is performed properly.
Management’s Response: IRS management
agreed with the recommendation. The Campus Reporting Compliance function will
gather information from the campuses and formulate guidance for referrals to
ensure consistency when counting receipts, retaining records, and for reviewing
determinations. The Director,
Examination Planning and Delivery, will provide guidance to Area Directors and
the Planning and Special Program Staff on managerial reviews of information
report referral evaluations and record retention.
Procedures Were Not Established to Control the Receipt and Disposition of the Information Report Referrals
The IRS had not established a process to control the information report referrals. The offices did not maintain complete reports or logs showing the volume of information report referrals received or how the allegations were processed. As a result, management could not provide reliable statistics showing the volume of information report referrals received, the number of information report referrals with examination potential, or the information report referrals with no examination potential.Of the four offices visited, two offices did not maintain any type of reports or logs showing the volume or status of the information report referrals received and processed. The other two offices were in the process developing control logs. However, no process was implemented during FY 2005. Even when data were available from these control logs, the information captured did not supply sufficient detail to determine why the information report referrals were or were not selected for examination.
Offices were not required to document or report their accomplishments because they were not being measured on the information report referral work. A management controls system to document the receipt and handling of information report referrals was not needed because no oversight reporting requirement existed. As a consequence, management cannot identify what work is available or determine how the work is handled. In addition, management cannot measure the effectiveness of the program, provide feedback on the quality of the information received, or make recommendations to improve the process.Recommendation
Recommendation 3: The Commissioner, SB/SE Division, should implement procedures to account for information report referrals from receipt to disposition. Establishing a control system should enable management to identify the work available and how the work is processed.
Management’s Response: IRS management
partially agreed with the recommendation.
The current IRS systems do not have the capacity or capability of
tracking all information referral reports, summarizing the quality of the
information received, and tracking the disposition of each report. The Director,
Examination Planning and Delivery, will evaluate the projected volume of
reports that would need to be tracked and the cost of establishing such a
tracking system to determine the feasibility of implementing an inventory
control system.
Office of Audit Comment: We agree with the IRS decision to evaluate the feasibility and cost-effectiveness of establishing an inventory control system.
Retention
Procedures Were Not Followed for Storing Information Report Referrals
Record control schedule procedures require
that campuses maintain retention files of nonselected referrals for 90 days and
field offices maintain retention files for over 2 years. The offices visited did not maintain
retention files as required or did not have adequate control over the files to
permit retrieval of filed documents. The
offices had not implemented records management procedures for maintaining
referral documents on cases not selected for examination or ensured that
storage procedures permitted IRS personnel to retrieve records from retention
files. Thus, managers cannot always
obtain records to determine that the classification actions on information
report referrals are proper.
Adherence to the retention requirements
varied between the offices visited. At
one office, the classifier placed selected cases in a locked cabinet but threw
the nonselected cases into a classified trash container. At another office, the classification
personnel did not maintain retention files of nonselected cases unless a claim
by an informant was included with the case.
We did identify two offices where the
classification function retained the information report referrals not selected
for examination. However, at one of the offices
the files were shipped to another location where the files were not adequately
maintained and the reports could be retrieved.
At the other office, the files were transferred to another storage
location and the receiving office could not locate most of the information
report referrals we requested to review.
Recommendation 4: The Commissioner, SB/SE Division, should ensure procedures covering record retention are followed so managers and other reviewers can obtain records as needed for evaluating whether the classification determinations are proper.
Management’s Response: IRS management
agreed with the recommendation. The Director, Campus Reporting Compliance, and the
Director, Examination Policy, will
provide correct retention period information and establish a consistent storage
method so that referrals may be easily retrieved for review purposes.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the SB/SE Division Examination classification functions effectively controlled and evaluated information report referrals received from other sources. To make these determinations, we visited four IRS offices to review their classification activities evaluating information report referrals during FY 2005. We used IRS AIMS[6] data only for comparisons to Taxpayer Delinquency Investigations information; the data were not critical to the audit results.
The sampling methodology was judgmental because there was no viable method to determine the population so each record would have an equal opportunity to be included in the sample.
To accomplish our objective, we:
I.
Determined whether information report referrals
received at the campuses[7]
and field offices were properly evaluated for audit potential.
A.
Interviewed responsible SB/SE Division managers
in various classification functions to identify the procedures for controlling,
evaluating, and selecting referral reports for audit.
B.
Selected judgmental samples of 103 information
report referrals selected as having audit potential received from the various
IRS functions (Collection, Criminal Investigation, Examination, Customer Account Services, etc.) to
ensure the referral reports were being properly evaluated.
C.
Selected judgmental samples of 121 information
report referrals not selected as having audit potential received from the
various IRS functions (Collection, Criminal Investigation, Examination,
Customer Account Services, etc.) to ensure the referral reports were properly
evaluated.
II.
Interviewed Agency-Wide Shared Services function
personnel to identify the records management procedures for controlling
information report referrals to ascertain the retention periods for referral
reports selected for audit and not selected for audit.
III.
Evaluated the monitoring activities to ensure
management reviews were properly conducted and documented to verify information
report referrals were properly considered for audit potential or other
noncompliance issues.
A.
Interviewed appropriate IRS personnel to obtain
procedures and criteria for determining the audit potential.
B.
Reviewed management reports covering the
evaluations of information report referrals to ensure the cases related to
those referral reports were properly evaluated for audit potential or other
noncompliance issues.
IV.
Evaluated whether the information report
referrals selected for audit were the cases that had the most potential for
increasing compliance among taxpayers.
A.
Interviewed responsible officials to determine
the procedures for selecting information report referral cases regarding
allegations of tax evasion versus selecting other work.
B.
Reviewed statistical data of referral reports to
determine whether the dispositions of those cases showed audit results to
justify their selection.
C.
Analyzed AIMS files to identify trends from
FYs 2004 and 2005 for Examination, Collection, and Criminal Investigation
functions and nonfiler referral reports.
V.
Analyzed the
Collection function Taxpayer Delinquency Investigation files and the AIMS files
to determine whether the Taxpayer Delinquency Investigation information sent to
the Examination function was controlled, evaluated for audit potential, and
productive.
Appendix II
Major Contributors to This Report
Daniel R. Devlin, Assistant Inspector
General for Audit (Small Business and Corporate
Programs)
Parker F. Pearson, Director
Edward Gorman, Audit Manager
Lisa
Stoy, Senior Auditor
Denise M. Gladson, Auditor
Stephen A. Elix, Student Trainee
Appendix III
Office
of the Commissioner – Attn: Chief of
Staff C
Deputy
Commissioner for Services and Enforcement
SE
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Acting Director, Campus Compliance Services SE:S:CCS
Director, Examination, Small Business/Self-Employed Division SE:S:E
Director, Examination Planning and Delivery, Small Business/Self-Employed Division SE:S:E:EPD
Headquarters Program Manager, Examination, Small Business/Self-Employed Division SE:S:E:EPD:ERS
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 Internal Control OS:CFO:CPIC:IC
Audit Liaison: Commissioner,
Small Business/Self-Employed Division
SE:S
Appendix IV
Management’s Response to the Draft
Report
The response was removed due to its
size. To see the response, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.
[1] The data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.
[2]
The data processing arm of the IRS. The campuses process paper and electronic
submissions, correct errors, and forward data to the Computing Centers for
analysis and posting to taxpayer accounts.
[4] A Territory is an organizational subdivision within a Compliance area.
[5] The AIMS is a computer system used by the IRS to control returns, input assessment/adjustments to IRS data records, and provide management reports.
[6] The AIMS is a computer system used by the IRS to control returns, input assessment/adjustments to IRS data records, and to provide management reports.
[7] The data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts.