TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Improved Controls Over Grants Provided to Low Income Taxpayer Clinics Would Lower the Risk of the Inappropriate Use of Federal Government Funds

 

 

 

July 31, 2008

 

Reference Number:  2008-10-142

 

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

 

Redaction Legend:

2(e) = Law Enforcement Procedure(s)

5 = Information Concerning a Pending Law Enforcement Proceeding

Phone Number   |  202-622-6500

Email Address   |  inquiries@tigta.treas.gov

Web Site           |  http://www.tigta.gov

 

July 31, 2008

 

 

MEMORANDUM FOR NATIONAL TAXPAYER ADVOCATE

 

FROM:                            Michael R. Phillips /s/ Michael R. Phillips

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Improved Controls Over Grants Provided to Low Income Taxpayer Clinics Would Lower the Risk of the Inappropriate Use of Federal Government Funds (Audit # 200710009)

 

This report presents the results of our review to determine whether clinics participating in the Internal Revenue Service’s (IRS) Low Income Taxpayer Clinic (LITC) program complied with the grant terms and conditions and the applicable laws and regulations related to the management of Federal Government funds.  This audit was conducted as part of our Fiscal Year 2007 Annual Audit Plan.

Impact on the Taxpayer

For the 2006 grant cycle,[1] the IRS awarded $8 million in Federal Government grants to 149[2] taxpayer clinics.  These clinics provide education to taxpayers who speak English as a second language and assist low-income taxpayers involved in controversies with the IRS by protecting their rights and helping to ensure fair results.  However, we found that controls over the financial management of the LITC program need to be improved to ensure that clinics submit complete and accurate year-end financial reports in a timely manner.  Without adequate controls, the IRS cannot ensure that the clinics are properly using Federal grant monies. 

Synopsis

Clinics are required to use the funds granted to them to provide taxpayer outreach services to taxpayers for whom English is a second language and/or legal representation of low-income taxpayers involved in tax controversies before the IRS.  LITC program guidelines require that participating clinics submit a year-end financial report (Standard Form 269) and supporting financial narrative by March 31st after the year the grant funds were received.  The supporting financial narrative should contain a detailed breakdown of actual expenses incurred during the grant cycle and the source and amount of matching funds received for the program.  The IRS also conducts onsite reviews of selected clinics to verify each clinic’s adherence to program guidelines. 

Overall, controls over the financial management of the LITC program need to be improved in three key areas.  First, prompt follow-up is needed when clinics fail to file required year-end financial and program information.  LITC program guidelines require that participating clinics submit the year-end financial report and supporting financial narrative by March 31st after the year the grant funds were received.  Without these reports, the IRS has no basis to evaluate whether grant funds were utilized appropriately. 

Our review identified that 98 (66 percent) of the 149 clinics that were awarded grant funds in the 2006 grant cycle had not submitted all required year-end financial and program information as of August 2007, 4 months after the required submission date.  After being advised of our findings, the IRS immediately began reviewing the case history files associated with clinics having missing or incomplete year-end reports and started contacting the clinics that had not submitted the required financial and program information.  The LITC Program office also prepared draft procedures outlining a timeline and process for following up with clinics that do not submit the required reports in a timely manner. 

Because of the ongoing efforts of the LITC Program office, our subsequent review of this area in November 2007 showed that the number of clinics not submitting the necessary year-end information had been reduced from 98 to 21.  Further analysis of the 21 clinics identified 3 instances in which clinics received grant funds during the 2006 grant cycle but still had not provided information to the IRS regarding how these funds were spent.  One of the three clinics also had not provided any information to the IRS regarding how the grant money was spent during the 2005 grant cycle.  The total amount of funds disbursed to these 3 clinics during the 2005 and/or 2006 grant cycles was $43,577.  At the conclusion of our fieldwork in March 2008, these clinics still had not provided information to the IRS regarding how the grant funds were spent.  Current IRS procedures allow for the LITC Program office to terminate the grant or freeze funds should a clinic fail to submit the required reports in a timely manner.  ****5, 2(e)**** 

Second, a program of regularly scheduled, comprehensive reviews of clinic year-end financial information needs to be implemented to ensure that reported expenses are adequately supported and allowable under LITC program guidelines.  We did not find evidence that a comprehensive review of a clinic’s reported expenditures and matching contributions was performed for any clinic that received funds in the 2006 grant cycle.  The IRS awarded 149 LITC program grants in the 2006 grant cycle.

Finally, additional guidance for clinics is needed to ensure that clinics are properly managing and reporting on their use of grant funds.  The primary source of both operational and financial guidance for LITC program participants is the LITC Low Income Tax Clinic Grant Application Package and Guidelines (Publication 3319).  Publication 3319 describes the information and records the clinics need to maintain to account for expenses incurred using the grant funds and to account for the matching funds received.  However, we found that 7 (58 percent) of the 12 clinics sampled reported expenses or matching contributions on their 2006 year-end financial report that were not supported by complete and reliable documentation or were not allowable expenses under LITC program grant guidelines.  Specifically, clinics 1) did not always use a consistent methodology to substantiate reported salary expenses, 2) reported expenses or matching contributions related to expenditures which are not allowable under LITC program guidelines, and 3) did not always maintain adequate documentation to substantiate volunteer services.  The IRS cannot ensure that the clinics are adequately managing their grant funds without both establishing clear guidelines regarding documentation and calculation of expenses and taking proactive steps to ensure that clinics understand and are following these guidelines.

Recommendations

We recommended that the National Taxpayer Advocate, in coordination with the IRS Office of Chief Counsel, develop and implement procedures to address instances in which grant funds have been disbursed to a clinic that cannot, or will not, document that grant funds were used appropriately.  We also recommended that the National Taxpayer Advocate 1) take appropriate action to address the noncompliance of the 3 clinics which failed to provide support for $43,577 in grant funds they received, 2) develop and implement a process for conducting random onsite financial reviews of a sample of participating clinics, 3) update the guidelines provided to program participants to include information regarding the performance of periodic grant audits or reviews by the IRS and the potential disallowance and recovery of improper/unsupported costs identified as a result of these reviews, 4) revise and expand the instructions and guidelines provided to clinics participating in the LITC program, 5) re-emphasize the documentation requirements for volunteer services to all current program participants, 6) and take appropriate follow-up action regarding $17,750 of expenditures reported by clinics that are not allowable per LITC program guidelines.

Response

The National Taxpayer Advocate generally agreed with all of our recommendations.  The LITC Program office has developed and implemented procedures for following up with grantees that have not filed required reports in a timely or complete manner, and the National Taxpayer Advocate is considering sending demand letters to the three clinics in question.  In addition, the LITC Program office has developed and is implementing procedures to randomly sample invoices and receipts during site-assistance visits.  The National Taxpayer Advocate noted, however, that the LITC Program office lacks individuals experienced with in-depth financial audits and lacks the personnel needed for a substantive financial review.  If the sampling of invoices and receipts yields results that require a deeper review, the program office will refer those cases up the chain of command, and where appropriate, to the Treasury Inspector General for Tax Administration.  Clearer language regarding the possible disallowance and recovery of improper grant fund expenditures will be included in future instructions and will be highlighted at the next annual LITC conference.  The LITC Program office will also work to make requirements regarding the calculation and documentation of salary expenses clearer through edits to Publication 3319 and will discuss them at the annual LITC conference.  In addition, the LITC Program office is developing clinic guidelines regarding the documentation of volunteer services.  Finally, the LITC Program office will determine how best to address the unallowable expenditures of grant funds, including identifying unclaimed allowable expenses or recouping those funds.  Clinics will also be made aware of the consequences for unallowable expenses at the next annual LITC conference.  Management’s complete response to the draft report is included as Appendix V.

Office of Audit Comment

We concur that the review of clinics’ invoices and receipts during site-assistance visits should help facilitate early identification of some potential problems.  However, because site-assistance visits are typically performed before clinics are required to submit any financial information regarding how grant funds were spent, these reviews alone do not provide sufficient assurance that the financial information reported by clinics is accurate.  We do not believe that periodically performing reviews focused on verifying the financial information reported by clinics to supporting documentation would be unduly difficult or burdensome, especially if performed on a sample basis.  As such, we believe the National Taxpayer Advocate should reconsider conducting periodic random reviews of the financial information reported by clinics.

Copies of this report are also being sent to the IRS managers affected by the report recommendations.  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

Prompt Follow-up Is Needed When Low Income Taxpayer Clinics Fail to File All Required Year-end Financial and Program Information

Recommendations 1 and 2:

A Program of Regularly Scheduled, Comprehensive Reviews of Low Income Taxpayer Clinic Year-end Financial Information Needs to Be Implemented

Recommendation 3:

Recommendation 4:

Additional Guidance Is Needed to Ensure That Low Income Taxpayer Clinics Are Properly Managing and Reporting on Their Use of Grant Funds

Recommendations 5 through 7:

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Management’s Response to the Draft Report

 

 

Abbreviations

 

IRS

Internal Revenue Service

LITC

Low Income Taxpayer Clinic

TAS

Taxpayer Advocate Service

 

 

Background

 

Low Income Taxpayer Clinics were created to assist low-income taxpayers involved in controversies with the IRS and provide tax education for taxpayers who speak English as a second language.

The Low Income Taxpayer Clinic (LITC) program was initiated by a provision of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998[3] to offer more assistance to low-income taxpayers involved in controversies with the IRS to protect their rights and to help ensure fair results.  The LITC program was designed to provide low-income taxpayers who are involved in tax disputes with free or nominal cost legal assistance.  Another goal of the LITC program is to provide education and outreach to taxpayers who speak English as a second language by informing them of their tax rights and responsibilities.  As such, the LITC program serves a valuable role in the IRS’ efforts to provide quality taxpayer service and ensure compliance with the tax laws. 

Because clinics represent low-income taxpayers before the IRS during disputes involving audits, appeals and collection issues, and matters before the United States Tax Court, the clinics are required to include a Qualified Tax Expert – generally a tax attorney, Certified Public Accountant, or an Enrolled Agent on their staff.  The LITC program is not intended to help taxpayers prepare their tax returns.  Clinics are only allowed to prepare tax returns if it is ancillary to the education of a taxpayer for whom English is a second language and/or when it is necessary to resolve a taxpayer’s controversy with the IRS.

The IRS administers the LITC grant program by providing Federal grant money, on a calendar year basis,[4] to clinics that apply for the program each year and agree to provide tax services to low-income taxpayers.  These clinics involve a variety of organizations, including accredited law schools, business schools, and 501(c) nonprofit organizations.  The IRS provides grant funds up to $100,000 for each clinic.  Participating clinics are required to provide matching funds on a dollar-for-dollar basis for all grant funds received.  Matching funds can include salaries and the value of volunteer services of individuals performing services for the clinic.  Since the inception of the program, the total funding for grants has increased significantly.  In 1999, the funding for grants was $1.5 million to 34 clinics in 19 States.  During the 2006 grant cycle, funding for grants totaled $8 million for 149[5] clinics representing 50 States plus the District of Columbia and Puerto Rico.  Because the LITC program uses Federal grants, clinics must demonstrate that they have adequate internal controls in place to ensure that grant expenditures are allowable, authorized, and allocable to the program.  Clinics must also submit to the IRS year-end financial statements along with a narrative describing their goals, strategy, and program results.  Failure to submit the required financial reports could result in a loss of further funding for the clinic.

This review was performed at the Charlottesville, Virginia; Columbus, Ohio; Concord, New Hampshire; Corpus Christi, Texas; Dallas, Texas; Pittsburgh, Pennsylvania; San Diego, California; Santa Ana, California; Washington, D.C.; Weslaco, Texas; Wichita, Kansas; and Wilmington, Delaware, LITCs.  This review was also performed at the Health and Human Services Department and Taxpayer Advocate Service National Headquarters in Washington, D.C., during the period July 2007 through March 2008.  This review focused on the financial controls over the grant money disbursed by the IRS to participating clinics.  We did not review the quality of the performance of services provided to taxpayers by participating clinics.  We conducted this performance audit in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.  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

 

For the 2006 grant cycle, the IRS awarded grants totaling $8 million to 149 clinics.  As of July 2007, $7.7 million had been disbursed.  Based on our review of the financial reports submitted by the clinics and the IRS’ financial management oversight of the clinics’ expenditures, we could not always determine whether the clinics were properly using grant funds.  Without improved controls over the grant funds, the IRS maintains the risk of inappropriate use of Federal Government funds.  We found that controls over the financial management of the LITC program need to be improved in three key areas.  Specifically:

Prompt Follow-up Is Needed When Low Income Taxpayer Clinics Fail to File All Required Year-end Financial and Program Information

LITC program guidelines require that participating clinics submit a year-end financial report (Standard Form 269) and supporting financial narrative by March 31st after the year the grant funds were received.  The supporting financial narrative should contain a detailed breakdown of actual expenses incurred during the grant cycle and the source and amount of matching funds received for the program.  However, in a Treasury Inspector General for Tax Administration review[6] of the LITC program performed in Fiscal Year 2005, we identified that many clinics did not submit their required program reports in a timely manner.  In response, the Taxpayer Advocate Service (TAS) stated that it would review and strengthen its procedures for following up on late reports and for taking the necessary corrective actions. 

Our review of the LITC 2006 grant cycle identified that the LITC Program office still had not developed effective controls to ensure that follow-up contact was routinely conducted with clinics that did not submit their program reports in a timely manner.  We found that 98 (66 percent) of the 149 clinics that were awarded grants for the 2006 grant cycle still had not submitted all required year-end financial and program information as of August 2007, 4 months after the required submission date.  At the time of our review, LITC Program office records indicated that follow-up contact with clinics that either did not submit or submitted incomplete year-end information occurred with only 24 (24 percent) of the 98 clinics.

After being advised of our findings, the IRS immediately began reviewing the case history files associated with clinics having missing or incomplete year-end reports and started contacting the clinics identified as not having submitted the necessary financial and program information.  The LITC Program office also prepared draft procedures outlining a timeline and process for contacting the clinics that do not submit required reports in a timely manner.  These new procedures include the use of a checklist to allow LITC Program office staff to readily determine whether all necessary program information reports have been received and whether the submitted reports contain all the necessary information.  The IRS also informed us that as a result of the reviews of the case history files, some clinics had actually submitted the required information in a timely manner, but program office records were never updated to reflect receipt of these reports.  We were unable to readily verify the exact number of cases in which this occurred because of limitations in the LITC Program office records system.

Because of the ongoing efforts of the LITC Program office, our subsequent review of this area in November 2007 showed that the number of clinics not submitting the necessary year-end information had been reduced from 98 to 21.  Further analysis of the 21 clinics identified 3 instances in which clinics received grant funds during the 2006 grant cycle but had not provided the IRS with any information regarding how these funds were spent.  One of the three clinics also had not provided any information to the IRS regarding how the grant money was spent in 2005.  The total amount of funds disbursed to these 3 clinics during the 2005 and/or 2006 grant cycles was $43,577.  At the conclusion of our fieldwork in March 2008, these clinics still had not provided information to the IRS regarding how the grant funds were spent.  Without this information, the IRS has no basis to determine whether grant funds were utilized appropriately.

In addition, the procedures recently drafted by the IRS regarding follow-up on missing year-end reports do not specify what action should be taken when IRS contacts do not result in the submission of missing year-end reports.  Current IRS procedures do state that the LITC Program office should consider freezing remaining, undistributed funds granted to a clinic or terminate the grant entirely should a clinic fail to submit the required reports in a timely manner.  Although this procedure eventually results in a stoppage of funds, it does not address grant funds which have already been distributed to the clinic.  Therefore, the IRS, in coordination with the IRS Office of Chief Counsel, needs to determine what actions can be taken against clinics which have already received grant funds and have not submitted the required reports.  ****5, 2(e)****

Recommendations

Recommendation 1:  The National Taxpayer Advocate, in coordination with the IRS Office of Chief Counsel, should develop and implement procedures to address instances in which grant funds have been disbursed to a clinic that cannot, or will not, document that grant funds were used appropriately.

Management’s Response:  The National Taxpayer Advocate agreed with this recommendation.  The LITC Program office has developed and implemented procedures for following up with clinics that fail to file interim and year-end reports in a timely or complete manner.  The LITC Program office will also continue to publicize the problem of late and incomplete reports and stress their importance during site-assistance visits, through periodic communications, and at the annual LITC conference.

Recommendation 2:  The National Taxpayer Advocate should take appropriate action to address the noncompliance of the 3 clinics which failed to provide support for $43,577 in grant funds.   

Management’s Response:  The National Taxpayer Advocate agreed with this recommendation and is considering sending demand letters to the three clinics in question.

A Program of Regularly Scheduled, Comprehensive Reviews of Low Income Taxpayer Clinic Year-end Financial Information Needs to Be Implemented

As discussed previously, the clinics are required to submit annual financial reports regarding grant expenses and matching contributions.  These financial reports, along with the program narrative, contain the total amount of grant funds expended and a breakdown listing the services and items purchased with grant funds or contributed as a matching donation.  Clinics are not required to submit any accompanying documentation, such as invoices or receipts, with the financial reports and program narrative to substantiate the information reported in those documents.  In the Fiscal Year 2005 Treasury Inspector General for Tax Administration review of the LITC program, we identified that clinic program and financial reports were not subject to periodic review.  In response to the Fiscal Year 2005 review, the TAS developed a three-tier site assistance process intended to ensure that clinics are complying with the terms and conditions of the LITC program.  One of the key objectives of this process is to ensure that clinics use grant funds appropriately.

However, we did not find any evidence that a review of a clinic’s reported expenditures and matching contributions was performed to ensure that reported expenses are adequately supported and allowable for any of the clinics which received funds during the 2006 grant cycle.  The IRS awarded 149 LITC grants in the 2006 grant cycle.

The TAS informed us that in the 2006 grant cycle it began performing onsite reviews of the financial internal controls of clinics new to the LITC program.  In addition, if the TAS finds during the performance of a general site visit that a clinic is not adhering to basic LITC program guidelines, a more comprehensive onsite review of clinic operations, including a review of financial internal controls, will be performed.  To assist in conducting the comprehensive financial reviews, the TAS developed a checklist to be used by program analysts conducting field visitations to review clinics’ financial internal controls.  The checklist includes reviewing compliance with basic financial requirements such as an effective system of control and accountability for funds and property.  The checklist does not specifically require the documented review of a sample of clinics’ reported expenditures and matching contributions with supporting documents, such as invoices or receipts.

However, although the TAS records indicated it performed onsite visitations to 11 clinics that were new for the 2006 grant cycle, we found that a documented assessment of financial controls was not completed for any of these clinics.  Further, we did not find any evidence that a documented review of a sample of participating clinics’ reported expenditures and matching contributions with supporting documents was performed for any of these 11 clinics.  Finally, we found that the program guidelines, which are provided to all grant recipients, do not include any information regarding the performance of grant audits or reviews by the IRS and the potential disallowance of improper/unsupported costs.  Providing this information to the clinics could increase their awareness of the IRS’ program review authority and lead to increased compliance with program requirements.

Without a system of periodic reviews of the supporting documentation of reported financial transactions relating to LITC program grant funds, the IRS has no effective way of ensuring that 1) financial information reported by clinics is accurate and 2) Federally provided grant funds are used only for appropriate purposes.

Recommendations

Recommendation 3:  The National Taxpayer Advocate should develop and implement a process to conduct periodic random onsite financial reviews of a sample of clinics.  The financial reviews should include the verification of a sample of reported expenditures with source documents, such as invoices and receipts.

Management’s Response:  The National Taxpayer Advocate partially agreed with this recommendation.  The LITC Program office has developed and is implementing procedures to randomly sample invoices and receipts during site-assistance visits.  If the sampling of invoices and receipts during site-assistance visits yields results that require a deeper review, the Program office will refer those cases up the chain of command.  The National Taxpayer Advocate noted, however, that the LITC Program office lacks individuals experienced with in-depth financial audits and lacks the personnel needed for a substantive financial review.  

Office of Audit Comment:  We concur that the review of clinics’ invoices and receipts during site-assistance visits should help facilitate early identification of some potential problems.  However, because site-assistance visits are typically performed before clinics are required to submit any financial information regarding how grant funds were spent, these reviews alone do not provide sufficient assurance that financial information reported by clinics is accurate.  We do not believe that periodically performing reviews focused on verifying the financial information reported by clinics to supporting documentation would be unduly difficult or burdensome, especially if performed on a sample basis.  As such, we believe the National Taxpayer Advocate should reconsider conducting periodic random reviews of the financial information reported by clinics.

Recommendation 4:  The National Taxpayer Advocate should update the guidelines provided to program participants to include information regarding the performance of periodic grant audits or reviews by the IRS and the potential disallowance and recovery of improper/unsupported costs identified as a result of these reviews.

Management’s Response:  The National Taxpayer Advocate agreed with this recommendation.  The LITC Low Income Tax Clinic Grant Application Package and Guidelines (Publication 3319) has been updated and now includes language referring to periodic sampling and verification of expenses.  The LITC Program office will draw attention to the periodic reviews and audits during upcoming LITC conferences.  The LITC Program office will include clearer language regarding the possible disallowance and recovery of improper grant fund expenditures in future versions of Publication 3319 and will also highlight this information at the next annual LITC conference and during site-assistance visits.

Additional Guidance Is Needed to Ensure That Low Income Taxpayer Clinics Are Properly Managing and Reporting on Their Use of Grant Funds

Another requirement of the financial reports is to include a detailed breakdown of actual expenses incurred during the grant cycle and the source and amount of matching contributions provided by the grant recipient.  Clinics are required to match the amount granted to them on a dollar-for-dollar basis.  The primary source of both operational and financial guidance for LITC program participants is Publication 3319.  Publication 3319 describes the information and records the clinics need to maintain to account for expenses incurred using the grant funds and to account for the matching funds received.  Clinics that fail to comply with the terms of the grant guidelines, including required documentation of expenses and matching contributions, are subject to administrative remedies, including suspension or termination of the grant award.

We found that 7 (58 percent) of the 12 clinics sampled reported expenses or matching contributions on their 2006 year-end financial report that were not supported by complete and reliable documentation or were not allowable expenses under LITC program grant guidelines.  Specifically:

Although salary expense is frequently the largest single expense reported by the clinics, Publication 3319 does not include any specific instruction or guidance regarding how this expense should be calculated and what documentation is required to support this calculation.  We believe that the best approach for addressing clinic compliance with existing financial requirements such as the standards for recording volunteer hours is the implementation of a program of regular financial site reviews as discussed previously in this report.

The IRS cannot ensure that the clinics are adequately managing their grant funds without establishing clear guidelines regarding documentation and calculation of expenses.  The IRS also needs to take proactive steps to ensure that clinics understand and are following these guidelines.

Recommendations

Recommendation 5:  The National Taxpayer Advocate should revise and expand the instructions and guidelines provided to program participants to include specific guidelines regarding how salary expense should be calculated.  The instructions and guidelines should describe what documentation is required to support the salary expense calculation.  A discussion of the expanded instructions should also be included as a topic at the next annual LITC program all clinic conference.

Management’s Response:  The National Taxpayer Advocate agreed with this recommendation.  The LITC Program office will work to make this information clear to participating clinics in subsequent edits to Publication 3319.  In addition, this information will be discussed at the annual LITC conference and in site-assistance visits.

Recommendation 6:  The National Taxpayer Advocate should re-emphasize the documentation requirements for volunteer services to all current program participants.  For example, the National Taxpayer Advocate could consider including in the LITC program user guidelines a pro forma volunteer log sheet for use by volunteers/clinics in recording time spent on LITC program-related activities.

Management’s Response:  The National Taxpayer Advocate agreed with this recommendation.  The LITC Program office is developing clinic guidelines regarding the documentation of volunteer services and will develop a pro forma log sheet and instructions that meet the needs of all clinics.  This sample log sheet will be incorporated into the next Publication 3319. 

Recommendation 7:  The National Taxpayer Advocate should take appropriate follow-up action regarding the $17,750 of expenditures reported by clinics which are not allowable per LITC program guidelines.  These actions can range from recouping grant funds, not awarding future grants, and/or providing technical advice to the clinics, as appropriate.

Management’s Response:  The National Taxpayer Advocate agreed with this recommendation.  The National Taxpayer Advocate and LITC Program office will determine how best to address the unallowable expenditures of grant funds, including identifying unclaimed allowable expenses or recouping those funds.  Clinics will also be made aware of the consequences for unallowable expenses at the next annual LITC conference.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine whether clinics participating in the IRS’ LITC program complied with the grant terms and conditions and the applicable laws and regulations related to the management of Federal Government funds.  To accomplish this objective, we:

 I.                  Determined whether the clinics were properly managing grant funds.

A.    Reviewed the applicable legislation, Office of Management and Budget policies, and IRS procedures and determined the allowability and allocability of expenses.

B.     Randomly selected a sample of 12 clinics out of a total population of 149[7] clinics that were in the LITC program in the 2006 grant cycle and determined whether the clinics’ reported expenses were allowable, allocable, and reasonable.  We used a random sample to ensure that each clinic had an equal chance of being selected, which enabled us to obtain sufficient evidence to support our results.

 II.               Determined whether the clinics were appropriately matching the IRS grant funds.

A.    Reviewed the applicable legislation, Office of Management and Budget policies, IRS procedures, and grant applications and determined the requirements for matching funds. 

B.     Using the same sample as in Step I.B., conducted detailed testing of grant recipients.

 III.            Determined whether the IRS has established adequate financial controls to effectively administer the LITC grant program and ensured that LITC program transactions were accurately recorded.   

A.    Analyzed IRS procedures for reviewing year-end financial information submitted by the clinics.

B.     Evaluated the methodology the IRS uses to validate, during the site visits, the financial information reported by clinics.

C.     Reviewed the status of corrective actions taken by the IRS in response to the recommendations related to financial management of clinics contained in the Treasury Inspector General for Tax Administration September 2005 report.[8]

D.    Reviewed clinic compliance with grant-related financial information filing requirements for all clinics that received grants in the 2005 and/or 2006 grant cycles.

 

Appendix II

 

Major Contributors to This Report

 

Nancy A. Nakamura, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

Alicia P. Mrozowski, Director

Anthony J. Choma, Audit Manager

Seth A. Siegel, Lead Auditor

Richard Louden, Senior Auditor

James S. Mills, Jr., Senior Auditor

Kanika Kals, Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Chief Counsel  CC

Deputy, National Taxpayer Advocate  TA

Director, Low Income Taxpayer Clinic Program Office  TA:LITC

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:  National Taxpayer Advocate  TA

 

Appendix IV

 

Outcome Measures

 

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration.  These benefits will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measures:

·         Cost Savings - Questioned Costs, Unsupported – Potential; $43,577 (see page 3).

·         Cost Savings - Questioned Costs, Unallowable – Potential; $17,750 (see page 7).

Methodology Used to Measure the Reported Benefit:

During our review of the 2006 grant cycle records of clinic financial reporting, we found that 3 of the 149 clinics participating in the LITC program did not submit the required financial reporting information attesting to the amount of grant funds used and services contributed to the LITC program.  We expanded our review of these clinics to prior year grants and found that one of the three clinics also did not submit the required financial reports for the grant funds received during the 2005 grant cycle.  Without these financial reports, the IRS does not have any evidence that the grant funds received were used appropriately by these clinics.  ****5, 2(e)****  The total amount of funds disbursed to these 3 clinics during the 2005 and/or 2006 grant cycles was $43,577.  In addition, a total of $17,750 in reimbursed expenses and matching contributions was claimed by 3 clinics for items which are not allowable under LITC program guidelines.

Type and Value of Outcome Measure:

·         Reliability of Information – Potential; $7.7 million (see pages 5 and 7).

Methodology Used to Measure the Reported Benefit:

We also found that the IRS does not have sufficient controls in place to ensure that the financial information it reports regarding the LITC program is accurate.  Specifically, we did not find evidence that a documented review of a sample of clinics’ reported expenditures and matching contributions with supporting documents was performed for any of the clinics receiving funds in the 2006 grant cycle.  In addition, we found that although salary expense is frequently the largest single expense reported by clinics, LITC Low Income Tax Clinic Grant Application Package and Guidelines (Publication 3319) does not include any specific instruction or guidance regarding how this expense should be calculated and what documentation is needed to support this calculation.  For example, 6 (50 percent) of the 12 clinics we sampled did not utilize an appropriate or consistent methodology to substantiate the salary expense reported for the 2006 grant year.  As a result of the insufficient controls, the IRS does not have assurance that the total dollar amount of the grants for the LITC program is accurately supported and verified.  For the 2006 grant cycle, the IRS awarded grants totaling $8 million to 149 clinics, and as of July 2007, $7.7 million had been disbursed.

 

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] Although Congress appropriates funds to the LITC program on a fiscal year basis, clinics participating in the LITC program are awarded funds on a calendar year basis, known as the “grant cycle.”

[2] This total does not include one 2006 grant cycle grantee whose award was terminated before the disbursement of any funds.

[3] Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).

[4] Although Congress appropriates funds to the LITC program on a fiscal year basis, clinics participating in the LITC program are awarded funds on a calendar year basis, known as the “grant cycle.”

[5] This total does not include one 2006 grant cycle grantee whose award was terminated before the disbursement of any funds.

[6] Progress Has Been Made but Further Improvements Are Needed in the Administration of the Low Income Taxpayer Clinic Grant Program (Reference Number 2005-10-129, dated September 2005).

[7] This total does not include one 2006 grant cycle grantee whose award was terminated before the disbursement of any funds.

[8] Progress Has Been Made but Further Improvements Are Needed in the Administration of the Low Income Taxpayer Clinic Grant Program (Reference Number 2005-10-129, dated September 2005).