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.

 

 

Table of Contents

 

Background

Results of Review

The Methodology Used to Calculate the Internal Revenue Service’s Fiscal Year 2006 Annual Drug Control Funds Expended Was Generally Well Documented

Recommendation 1:

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Internal Revenue Service Fiscal Year 2006 Detailed Accounting Submission of Drug Control Funds

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

 

 

Background

 

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 America.  A key provision of the Act is the establishment of the Office of National Drug Control Policy (ONDCP) to set priorities, implement a national strategy, and certify Federal Government drug control budgets.  The Internal Revenue Service’s (IRS) Narcotics Program supports the National Drug Control Strategy through continued support of the Organized Crime and Drug Enforcement Task Force.

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 District of Columbia, and Independent Agencies Appropriations Act, 2006,[4] was enacted on November 30, 2005.  Within this law is a specific appropriation of $55.584 million to fund the IRS Criminal Investigation (CI) function drug enforcement actions. 

This review was performed in the IRS Headquarters offices of the Chief Financial Officer and Chief, CI, in Washington, D.C., during the period December 2006 through January 2007.  Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.  An attestation review is substantially less in scope than an examination, the objective of which is the expression of an opinion on the ONDCP detailed accounting submission assertions.  Accordingly, we do not express such an opinion.

Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

 

 

Results of Review

 

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

 

Report Distribution List

 

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.