TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Attestation Review of the Internal Revenue Service’s
Fiscal Year 2006 Annual Accounting of Drug Control Funds
February 1, 2007
Reference Number: 2007-10-046
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
February 1, 2007
MEMORANDUM FOR CHIEF FINANCIAL OFFICER
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Attestation Review of the Internal Revenue Service’s Fiscal Year 2006 Annual Accounting of Drug Control Funds (Audit # 200710032)
This report presents the results of our attestation review of the Internal Revenue Service’s (IRS) Fiscal Year (FY) 2006 Office of National Drug Control Policy (ONDCP)[1] detailed accounting submission. The purpose of this review was to express a conclusion about the reliability of each assertion made in the detailed accounting submission.
Impact on the Taxpayer
The IRS reported that it expended $55.484 million on ONDCP-related
activities in FY 2006. Reliable financial
information is critical to the IRS’ ability to accurately report on the results
of its operations to both internal and external stakeholders, including
taxpayers.
Synopsis
We determined that the IRS’ FY 2006 ONDCP detailed accounting submission and assertions, submitted to us on January 11, 2007, did not include all required material information or a reasonably detailed explanation regarding the methodology used to calculate funds expended. Specifically, ONDCP reporting guidelines require that all funds expended on ONDCP-related activities during a fiscal year be clearly reported. However, the IRS simply re-reported the funding of $55.028 million it had received for the ONDCP in FY 2006 and noted that funds actually expended were not materially different. ONDCP guidelines also require that the methodology used to calculate funds expended be fully explained. However, the IRS noted only that ONDCP funds expended were calculated based on direct investigative time without any detailed explanation regarding the methodology used to accomplish this calculation.
In fact, the only methodology clearly outlined by the Criminal Investigation (CI) function during our inquiries was the unit cost approach associated with the funding transfer, after rescission, of $55.028 million. As part of our fieldwork, we did inquire as to whether funds expended during FY 2006 were considered in preparing the ONDCP report and were informed by the CI function at the time that this was not done.
On January 25, 2007, we provided a discussion draft audit report notifying the IRS that its ONDCP detailed accounting submission was materially incomplete. We also informed the IRS that the unit cost methodology was inadequate for the purpose of calculating funds expended in FY 2006, in the event it relied on this approach in any way.
In response to this report, the IRS indicated it had calculated funds expended on the ONDCP program in FY 2006 to be $55.484 million. In addition, the IRS indicated that this calculation was based on the application of direct investigative time attributable to the ONDCP program to CI function funds expended in FY 2006. The IRS’ response also noted that this calculation included a number of adjustments it had made to reflect costs specifically attributable to the ONDCP.
In general, we found the overall cost allocation methodology described in the IRS’ response to our discussion draft report to be adequately explained and documented, with the exception of one matter. Specifically, the IRS adjusted its allocation-based estimate of ONDCP funds expended upwards by $2 million primarily to reflect salary and benefits related to program management and analytical support staff costs it directly attributed to the program. However, the IRS did not provide an explanation as to why these types of costs were so unique that that they would not also be incurred by other CI function programs and therefore already be reflected in the overall allocated cost calculation.
Based on our review, if the IRS’ FY 2006 ONDCP report were adjusted to reflect the additional information and cost calculation methodology included in the IRS response to our discussion draft report, nothing came to our attention, with the exception of the matter discussed in the preceding paragraph, to indicate that the assertions are not presented in all material respects in accordance with ONDCP-established criteria.
Recommendation
We recommended the Chief Financial Officer ensure future ONDCP reports use an analysis of current period financial activity in determining the funds expended.
Response
The IRS agreed with our recommendation and, as discussed above, included in its response a description of the method used to calculate the FY 2006 drug resources based on current period funds expended. Management’s complete response to the draft report is included as Appendix V.
Copies of this
report are also being sent to the IRS managers affected by the report
recommendation. Please contact me at
(202) 622-6510 if you have questions or Nancy Nakamura, 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
Appendix V
– Management’s Response to the Draft Report
Abbreviations
|
CI |
Criminal Investigation |
|
FTE |
Full-Time Equivalent |
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
|
ONDCP |
Office of National Drug Control Policy |
National Drug Control Program agencies are required to submit to the Director of the ONDCP, not later than February 1 of each year, a detailed accounting of all funds expended.
The Anti-Drug Abuse Act of 1988[2]
establishes as a policy goal the creation of a drug-free
This review was conducted as required by the National Drug
Enforcement Policy (21 U.S.C. Section 1704(d)) and
the ONDCP Circular entitled Annual
Accounting of Drug Control Funds, dated April 18, 2003. The National Drug
Control Program agencies[3] are required to submit to the Director of the ONDCP, not
later than February 1 of each year, a detailed accounting of all funds expended
(the ONDCP Circular requires amounts obligated) during the previous fiscal
year. Further, it requires such
accounting to be authenticated by the Inspector General of each agency prior to
its submission.
The Transportation, Treasury, Housing and Urban Development, the
Judiciary, the
This review was performed in the IRS Headquarters offices of
the Chief Financial Officer and Chief, CI, in
Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The Methodology Used
to Calculate the Internal Revenue Service’s Fiscal Year 2006 Annual Drug
Control Funds Expended Was Generally Well Documented
We reviewed the IRS ONDCP detailed accounting submission and assertions for Fiscal Year (FY) 2006, which ended September 30, 2006 (see Appendix IV). This submission, including the assertions made, was prepared pursuant to 21 U.S.C. § 1704(d) and the ONDCP Circular Annual Accounting of Drug Control Funds, and is the responsibility of the IRS. The assertions, as required by Section 5.b. of the ONDCP Circular, include statements that the methodology used is reasonable and accurate, including explanations and documentation of estimation assumptions used; the methodology disclosed was the actual methodology used; and the data presented are associated with obligations against a financial plan that reflects changes, if made. The ONDCP Circular also requires that such accounting be authenticated by the Inspector General of each agency prior to its submission.
In FY 2006, ONDCP funding became a permanent part of the IRS’ budget. In prior years, IRS-related ONDCP funds expended were reimbursed by the Department of Justice. The IRS noted in its FY 2006 ONDCP report that, in conjunction with this change in funding structure, the Department of Justice transferred 329 Full-Time Equivalents (FTE)[5] and associated funding of $55.584 million to the IRS in FY 2006. This amount was reduced by a subsequent 1 percent Department of the Treasury budget rescission to $55.028 million and 326 FTEs. The IRS also noted in its FY 2006 ONDCP report that the resources associated with this transfer were calculated by multiplying the FTEs transferred by a unit cost rate.
Overall, we found the IRS’ FY 2006 ONDCP Report, which was submitted to us on January 11, 2007, did not include all required material information or a reasonably detailed explanation regarding the methodology used to calculate funds expended. Specifically, ONDCP reporting guidelines require that all funds expended on ONDCP-related activities during a fiscal year be clearly reported. However, the IRS simply re-reported the funding of $55.028 million it had received for the ONDCP in FY 2006 and noted that funds actually expended were not materially different. ONDCP guidelines also require that the methodology used to calculate funds expended be fully explained. However, the IRS noted only that ONDCP funds expended were calculated based on direct investigative time without any detailed explanation regarding the methodology used to accomplish this calculation.
In fact, the only methodology clearly outlined by the CI function during our inquiries was the unit cost approach associated with the funding transfer, after rescission, of $55.028 million. As part of our fieldwork, we did inquire as to whether funds expended during FY 2006 were considered in preparing the ONDCP report and were informed by the CI function at the time that this was not done.
On January 25, 2007, we provided a discussion draft audit report notifying the IRS that the January 11, 2007, FY 2006 ONDCP Report was materially incomplete. We also informed the IRS that the unit cost methodology was inadequate for the purpose of calculating funds expended in FY 2006, in the event it relied on this approach in any way.
Specifically, although historical costs were used by the IRS in developing the unit cost rate for special agents, this rate was subsequently inflated by numerous material, unsupported adjustments. For example, the unit cost rate calculation for special agent-related indirect costs such as rent, supplies, and other services was subsequently increased by 75 percent by the IRS CI function as part of the ONDCP calculation process. The CI function was unable to provide any detailed analysis or documentation to support any of these adjustments.
In response to the discussion draft report, the IRS indicated it had calculated funds expended on the ONDCP program in FY 2006 to be $55.484 million. In addition, the IRS indicated that this calculation was based on the application of direct investigative time attributable to the ONDCP program to CI function funds expended in FY 2006. The IRS’ response also noted that this calculation included a number of adjustments it had made to reflect costs specifically attributable to the ONDCP.
In general, we found the overall cost allocation methodology described in the IRS’ response to our discussion draft report to be adequately explained and documented, with the exception of one matter. Specifically, the IRS adjusted its allocation-based estimate of ONDCP funds expended upwards by $2 million primarily to reflect salary and benefits related to program management and analytical support staff costs it directly attributed to the program. However, the IRS did not provide an explanation as to why these types of costs were so unique that that they would not also be incurred by other CI function programs and therefore already be reflected in the overall allocated cost calculation.
Based on our review, if the IRS’ FY 2006 ONDCP report were adjusted to reflect the additional information and cost calculation methodology included in the IRS response to our discussion draft report, nothing came to our attention, with the exception of the matter discussed in the preceding paragraph, to indicate that the assertions are not presented in all material respects in accordance with ONDCP-established criteria.
Recommendation
Recommendation 1: The Chief Financial Officer should ensure future ONDCP reports use an analysis of current period financial activity in determining the funds expended.
Management’s Response: The IRS agreed with our recommendation and included in its response a description of the method used to calculate the FY 2006 drug resources based on current period funds expended.
* * * * *
While this report is an unrestricted public document, the
information it contains is intended solely for the use of the IRS, the United
States Department of the Treasury, the ONDCP, and Congress. It is not intended to be, and should not be,
used by anyone other than these specified parties.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to perform an attestation review of the IRS’ reporting of FY 2006 ONDCP obligations for the purpose of expressing a conclusion on the reliability of the assertions made in the detailed accounting submission. To accomplish our objective, we:
I.
Obtained
an understanding of the process used to prepare the IRS FY 2006 ONDCP detailed
accounting submission.
A. Discussed the process to record and report ONDCP expenditures with responsible IRS personnel.
B. Obtained any documents such as the detailed accounting submission, written procedures, supporting worksheets, and recording modifications that evidence the methodology used.
II. Evaluated the reasonableness of the drug methodology process.
A. Reviewed data supporting the detailed accounting submission to establish its relationship to the amounts being reported.
B. Reviewed the estimation methods used for consistency with reported amounts.
III. Performed sufficient verifications of reported obligations to support our conclusion on the reliability of the assertions.
A. Verified whether the detailed accounting submission includes all of the required elements.
B. Verified the mathematical accuracy of the obligations presented, traced the information to the supporting documentation, and reviewed the supporting documentation for reasonableness.
Appendix II
Major Contributors to This Report
Nancy Nakamura,
Assistant Inspector General for Audit (Headquarters
Operations and Exempt Organizations Programs)
John
R. Wright, Director
Anthony
J. Choma, Audit Manager
Mildred
Rita Woody, Lead Auditor
Robert
Beel, Senior Auditor
Kanika
Kals, Auditor
Richard
Louden, Auditor
Appendix III
Commissioner C
Office of the Commissioner - Attention: Chief of Staff C
Deputy Commissioner for Operations Support OS
Deputy Commissioner for Services and Enforcement SE
Chief, Criminal Investigation SE:CI
Deputy Chief, Criminal Investigation SE:CI
Deputy Chief Financial Officer OS:CFO
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 Liaisons:
Chief, Criminal Investigation SE:CI
Chief Financial Officer OS:CFO
Appendix IV
Internal Revenue Service Fiscal Year 2006 Detailed Accounting
Submission of Drug Control Funds
The document was
removed due to its size. To see the
document, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.
Appendix V
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 ONDCP was established in 1988 to set priorities, implement a national strategy, and certify Federal Government drug control budgets. Pub. L. No. 105-277 (Division C-Title VII), Section 707(d) (1988).
[2] Pub. L. No. 105-277 (Division C-Title VII), Section 707(d) (1988).
[3] National Drug Control Program Agencies are defined as
any agency that is responsible for implementing any aspect of the National Drug
Control Strategy.
[4] Pub. L. No. 109-115 (2005).
[5] 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 2006, 1 FTE was equal to 2,080 staff hours.