The Compliance Initiative Projects Program Performed Some
Examinations After the Projects Expired or Were Terminated
June 23, 2009
Reference Number: 2009-30-085
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:
3(d) = Identifying Information - Other Identifying Information of an Individual or Individuals
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
June 23, 2009
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 – The Compliance Initiative Projects Program Performed Some Examinations After the Projects Expired or Were Terminated (Audit # 200830005)
This report presents the results of our review to determine whether
the Small Business/Self-Employed Division is meeting its goal of identifying
areas of noncompliance and controlling returns for Compliance Initiative
Projects (CIP).[1]
This audit was conducted as part of the
Treasury Inspector General for Tax Administration’s Fiscal Year 2008 Annual
Audit Plan under the major management challenge of Tax Compliance Initiatives.
Impact on the Taxpayer
The CIP Program identifies and examines tax returns from a
group of taxpayers (e.g., a particular type of occupation, tax issue, or tax
return) that may have a specific area of tax noncompliance. However, the CIP Program was not effectively
managed or monitored to prevent new examinations from being started after the
CIP authority expired or the project was terminated. We identified 134 unique taxpayer accounts
that were subjected to examinations after the projects expired or were
terminated, which potentially resulted in violations of the taxpayers’ rights to
privacy and security.
Synopsis
The
Small Business/Self-Employed Division Examination function examines tax returns
to promote the highest degree of voluntary compliance by taxpayers. The CIP Program is one method used to
identify tax returns for such examinations by authorizing examiners to contact
individuals within a group of taxpayers for the purpose of identifying and
correcting any noncompliance.
Our review showed that two Area Offices[2] maintained
adequate physical security over the CIP tax returns, and CIP authorizations
were properly approved. However,
****(3d)**** did not properly monitor the
projects to ensure that examinations were not conducted after the CIP expired
or was terminated. In addition, the
Internal Revenue Manual does not identify the responsibilities and reporting
expectations of the Headquarters CIP Program Analyst, which led to insufficient
communication and coordination between the Headquarters CIP Program Analyst and
the local coordinators.
We identified 134 taxpayer accounts for 135 tax returns where
the examination started after the CIPs expired or after the CIPs were
terminated. Examination of taxpayer
returns after the CIPs’ expiration or termination date could potentially
violate taxpayers’ rights to privacy and security of their tax returns.
The National CIP Database for the CIP Program was not accurate
and did not capture and report examinations started after the expiration or
termination date. We identified four
projects that were not updated on the Database for new expiration, termination,
and/or extension dates. Although the Internal
Revenue Service (IRS) was later able to provide us supporting documentation for
the extensions of these projects, the Database did not accurately capture the
current status of these projects, which involved 517 unique taxpayer accounts
and 526 tax returns. We also identified other
inaccuracies in the Database such as incorrect dates and untimely data entries. As a result, the Database that the Headquarters
CIP Program Analyst and local CIP coordinators use to manage individual
projects and the Program contains different and sometimes erroneous information
than what is reported to senior management.
Recommendations
We recommended that the Director, Examination Planning and Delivery, 1) update the CIP section of the Internal Revenue Manual to define the specific responsibilities and expectations of the Headquarters CIP Program Analyst and the CIP Program. This update should also describe the purpose of the National CIP Database and provide guidance on how it should be used to monitor the Program. The Director, Examination Planning and Delivery, should also 2) create a report that alerts management about projects with pending expiration and termination dates and a report that lists any examinations that were started after the project expiration or termination dates, and 3) ensure that the National CIP Database is current and accurate and the contents are appropriate for effective monitoring of expiration and termination dates.
Response
IRS management agreed with all of our recommendations. The Director, Examination Planning and Delivery, will 1) ensure that the CIP Handbook is updated to address the Headquarters CIP Program Analyst’s responsibilities and provide a description of the National CIP Database and how it should be used to monitor the CIP program, and 2) create reports that alert management about projects with pending expiration and termination dates and list any examinations that were sent to field offices after the project expiration or termination dates. The Internal Revenue Manual will be updated to clearly indicate that additional cases should not be sent to the field offices after the project’s expiration or termination date. In addition, the Director, Examination Planning and Delivery, will 3) update the CIP Handbook to require reviews for accuracy and currency of the data in the National CIP Database at least annually. Although IRS management agreed with the recommendations and plans to take corrective actions, they did not agree that starting an examination after a project’s expiration or termination date constituted a violation of taxpayers’ rights to privacy and security. IRS management acknowledged that submitting timely extensions and terminations is important to the proper administration of the CIP Program, but contended that once an examination has started, they are obligated to complete it even after the expiration or termination date of the project. Management’s complete response to the draft report is included as Appendix V.
Office of Audit
Comments
At the time of our
review, the Internal Revenue Manual prohibited Examination function employees
from beginning new examinations after the project had expired when taxpayer
contact had not yet been made. The
examinations we identified were examinations where no taxpayer contact had been
made and the examinations had not yet started prior to the expiration or
termination date of the project. Therefore,
we did not adjust the outcome measures in this report.
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 Margaret E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement Operations), at (202) 622-8510.
Some Examinations Were
Conducted After Compliance Initiative Projects Had Expired or Were Terminated
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
|
ACIS |
Audit Information Management System Centralized
Information System |
|
CIP |
Compliance Initiative Project |
|
IRM |
Internal Revenue Manual |
|
IRS |
Internal Revenue Service |
|
PSP |
Planning and Special Procedures |
The Small Business/Self-Employed Division Examination function examines tax returns to promote the highest degree of voluntary compliance by taxpayers. The Compliance Initiative Projects (CIP)[3] Program is one method used to identify and examine tax returns from a group of taxpayers (e.g., a particular type of occupation, tax issue, or tax return) that may have a specific area of tax noncompliance. Some CIP examples that have been worked include projects on alimony and projects on the child care credit. However, the CIP Program is just one part of the entire Examination function plan and makes up only about 1 percent of the entire Examination Program.
These areas of possible noncompliance can originate in the field or can be identified by local and national CIP personnel. When an area of possible noncompliance is identified, an authorization must be approved by the appropriate Examination function Planning and Special Procedures (PSP) Manager/Director before compliance contacts with taxpayers are made.
An initial CIP authorization is limited to a maximum of 50 tax returns and must include an expiration date, usually not more than 12 to 18 months from the authorization date. The initial CIP can be terminated before the expiration date if the noncompliance has been addressed, resources are not available, results are not productive, or the project is no longer viable. They may also extend the initial CIP for up to 6 months when additional time is required to complete the examinations of the original 50 tax returns. A productive CIP may be converted to an advanced CIP at any time, for which there is no limit on the number of returns or the amount of time it can remain open. However, the project must still have an expiration date that is agreed upon at the time of expansion.
Local CIP coordinators are responsible for initiating and perfecting[4] local CIP authorizations; perfecting Midwest Audit Control System[5] filters to identify the specific population of tax returns that will be examined under the CIP; assigning Audit Information Management System[6] and Examination Returns Control System[7] tracking codes for monitoring purposes; preparing status reports and termination reports to ensure requirements are met; providing guidance, assistance, oversight, and monitoring of all CIP activity to ensure activities are completed timely, procedures are followed, and objectives are met; and ensuring data are returned or disposed of timely. The Headquarters CIP Program Analyst is responsible for monitoring the local projects and the overall status of the CIP Program and helps determine if a local project should be expanded nationwide.
The Examination function controls the tax returns selected for review for both national and local CIPs using the Audit Information Management System and the Audit Information Management System Centralized Information System (ACIS).[8] The ACIS is a sub-component of the Audit Information Management System and is periodically reconciled and updated by direct interface. The PSP function also uses the National CIP Database to capture information not included in the ACIS.
This review was performed at the Internal Revenue Service (IRS)
office in
Area Offices[9]
Received Proper Approval for Authorizations and Maintained Adequate Physical
Security for Tax Returns
When the IRS identifies
an area of possible tax noncompliance, the appropriate Examination function PSP
Manager or Director must approve a CIP before any contact is made with the
taxpayers. This is necessary to ensure
taxpayer rights to privacy and security are protected and also helps to ensure
the IRS’ resources are used productively.
Failure to obtain approval could result in tax examinations being
performed after the expiration or termination date, duplication of effort by IRS
employees, and a missed opportunity to improve tax compliance for a larger
number of taxpayers. We judgmentally selected
53 of 149 CIP authorizations (dated from October 2005 to July 2008) and determined
that the appropriate PSP Manager had properly approved all of the projects. These results suggest the IRS has sufficient
controls in place to ensure procedures are being followed prior to contacting
taxpayers and initiating the examinations.
In addition, to help
protect taxpayers’ rights to privacy and security, the Internal Revenue Manual (IRM)
requires CIP tax returns to be secured in locked containers and the keys
secured in a separate locked container.
The tax returns in both Area Offices that we visited were locked in
either filing cabinets or a locked storage room. Keys were also maintained by the office
manager and in a separate locked desk at each office. Based on this, we believe the IRS followed
procedures for securing tax returns at the locations we visited during this
review.
Some Examinations Were
Conducted After Compliance Initiative Projects Had Expired or Were Terminated
All CIP
authorizations have an expiration date to prevent employees from starting new CIP-related
examinations for an indefinite period of time.
The examination of new tax
returns after the expiration or termination date could subject taxpayers to a
potential violation of their rights to privacy and security. Consequently, the IRM prohibits
Examination function employees from beginning new examinations after the CIP
authorization period has expired.
After a project’s expiration date, there is a period of time where
Examination function employees may continue working on tax examinations that
had been started before the expiration date. This period ends when the project’s
termination report is issued, and the date that the termination report is
issued is referred to as the project termination date. Even if a termination report is not issued,
the termination date will still be a maximum of 6 months after the expiration
date. Examination function employees
should not begin any new tax examinations after the expiration date and should
not continue any work on tax examinations after the termination date.
However, we
identified 20 CIPs[10] open at some point between October 1, 2005,
and July 30, 2007, that potentially violated the IRM restriction on initiating
new examinations and potentially resulted in a violation of taxpayers’ rights to
privacy and security. Specifically, in these
20 projects, new examinations were started after the expiration and termination
dates of the project. These examinations
involved 134 taxpayers and 135 tax returns, and examinations were started
between 9 and 175 days after the expiration date and 1 to 342 days after the
termination date.
These examinations
occurred, in part, because the roles and responsibilities of the Headquarters CIP
Program Analyst were not adequately defined and, therefore, ****(3d)****. In addition,
the management information system for the CIP Program was inaccurate. Management should take corrective action to
improve the information available from the management information system.
The responsibilities of the Headquarters CIP Program Analyst were
not established
The Headquarters CIP Program Analyst has the primary responsibility for monitoring the overall status of the CIP Program and also helps assess the feasibility of expanding local projects to the rest of the nation. However, since the position was established, the IRM has not been updated to describe the specific duties and responsibilities for the Headquarters CIP Program Analyst. As a result, the coordination between the Headquarters CIP Program Analyst and the local CIP coordinator did not prevent examinations from occurring after the expiration or termination date.
When a CIP expires
or is terminated, the local CIP coordinators are required to obtain any
remaining tax returns or ensure that the tax return data are destroyed. ****(3d)****
The Headquarters CIP Program Analyst has quarterly conference calls with the local CIP coordinators to discuss the projects being worked in their areas.
****(3d)****
Although the Headquarters CIP Program Analyst is mentioned throughout the IRM, the IRM does not include the specific responsibilities, procedures, goals, or reporting expectations for the position. Without these requirements, senior management does not have assurance that employees are following procedures that protect taxpayer rights to privacy and security or that Program goals are established, communicated to local CIP coordinators, and met.
The
National CIP Database was inaccurate
The National CIP Database was not accurate, and it did not capture and report examinations performed after the expiration or termination date. While the Headquarters CIP Program Analyst provides senior management with a quarterly report, it does not identify the projects that have expired or are close to expiration, nor does it disclose if examinations occurred after the expiration date of the project.
The National CIP Database is used for the day-to-day management of the CIP Program. This database includes information, such as the approval dates, expiration dates, extension dates, and termination dates for each project. The Headquarters CIP Program Analyst manually updates the database for new CIP authorizations and any changes to existing projects. However, if the analyst is not alerted of updates or changes to the projects, the database will not be accurate and reliable. ****(3d)****
We identified four projects that were not updated with new expiration, termination, and/or extension dates on the National CIP Database. Although the IRS was able to later provide supporting documentation for the extensions of these projects, the National CIP Database did not accurately reflect the current status for the projects, which involved 517 unique taxpayer accounts and 526 tax returns. Without timely updating the National CIP Database, these taxpayers could have appeared as having examinations performed after the expiration or termination date when they were appropriately and timely examined.
We also identified other inaccuracies in the National CIP Database such as incorrect dates and projects not being input timely after they were properly authorized. As a result, the database that the Headquarters CIP Program Analyst and local CIP coordinators use to manage individual projects and the Program contains different and sometimes erroneous information than what is reported to senior management. Further, the IRS has not developed an effective control for detecting and preventing examinations after the project expiration or termination date.
Although the CIP Program is discretionary and only a small percentage of the overall Examination plan, it is necessary that monitoring, tracking, and reporting of the Program’s activities are performed regularly. Management needs to have accurate information about the goals and outcomes of the Program to make decisions, ensure taxpayers’ rights to privacy and security are protected, and balance the need for compliance with the tax laws.
Recommendations
The Director, Examination
Planning and Delivery, should:
Recommendation 1: Update the CIP section of the IRM to define the specific responsibilities and expectations of the Headquarters CIP Program Analyst and the CIP Program. The updated guidance should address responsibilities for establishing goals, monitoring progress, and reporting results. In addition, the CIP IRM should describe the purpose of the National CIP Database and provide guidance on how it should be used to monitor the Program.
Management’s Response: IRS management agreed with this recommendation. The Director, Examination Planning and Delivery, will ensure that the CIP Handbook is updated to address the Headquarters CIP Program Analyst’s responsibilities for monitoring progress and reporting results for CIP projects, and the update will provide a description of the National CIP Database and guidance on how it should be used to monitor the CIP program.
Recommendation 2: Create a report that alerts management about projects with
pending expiration and termination dates and a report that lists any
examinations that were started after the project expiration or termination
dates.
Management’s Response: IRS management agreed with this recommendation. The Director, Examination Planning and Delivery, will create a report that alerts management about projects with pending expiration and termination dates and a report that lists any examinations that were sent from the Planning and Special Procedures function to field offices after the project expiration or termination dates. The IRM will be updated to clearly indicate that additional cases should not be sent to the field offices after the project’s expiration or termination date. Although IRS management agreed with the recommendations and plans to take corrective actions, they did not agree that starting an examination after a project’s expiration or termination date constituted a potential violation of taxpayers’ rights to privacy or security. IRS management acknowledged that submitting timely extensions and terminations is important to the proper administration of the CIP Program, but contended that once an examination has started, they are obligated to complete it even after the expiration or termination date of the project.
Office of Audit Comments: At the time of our review, the IRM prohibited Examination function employees from beginning new examinations after the project had expired when taxpayer contact had not yet been made. The examinations we identified were examinations where no taxpayer contact had been made and the examinations had not yet started prior to the expiration or termination date of the project. Therefore, we did not adjust the outcome measures in this report.
Recommendation 3: Ensure the National CIP Database is current and accurate and that the contents are appropriate for effective monitoring of expiration and termination dates.
Management’s Response: IRS management agreed with this recommendation. The Director, Examination Planning and Delivery, will update the CIP Handbook to require reviews for accuracy and currency of the data in the National CIP Database at least annually.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the Small Business/Self-Employed Division is meeting its goal of identifying areas of noncompliance and controlling returns for the CIPs.[11] To accomplish our objective, we:
I. Evaluated the effectiveness of controls and procedures used in selected Area Offices[12] to authorize the CIPs.
A. Determined how the CIPs were identified.
1. Interviewed two Area Office managers to determine the process for identifying noncompliance areas in both individual and industry taxpayer segments that are forwarded for project approval.
B. Evaluated the CIP approval process.
1. Interviewed Area Office managers to determine if the CIP approval process was timely.
2. Reviewed a judgmental sample[13] of 53 of 149 CIP authorizations to determine if authorizations were properly approved and to identify any delays in the approval process.
II. Evaluated controls to protect taxpayer privacy and security.
A. Evaluated
the physical security controls over CIP tax returns in
B. Determined if CIP tax returns were properly secured.
III. Evaluated the effectiveness of the management information system for the CIP Program.
A. Evaluated the internal controls used to prevent examinations after the expiration or termination date.
B. Determined whether all CIPs on the Examination function’s Audit Information Management System[14] were also on the ACIS.[15]
C. Determined whether all CIPs on the ACIS were controlled on the National CIP Database.
D. Reviewed 24 CIPs from the National CIP Database to determine whether tax returns related to expired CIPs were still being started after the termination date or more than 6 months after the expiration date of the project.
Appendix II
Major Contributors to This Report
Margaret
E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Carl
Aley, Director
Amy
L. Coleman, Audit Manager
Lynn
Rudolph, Lead Auditor
Frank
Maletta, Auditor
Appendix III
Commissioner C
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
Director, Communications, Liaison, and Disclosure SE:S:CLD
Director, Examination, Small Business/Self-Employed Division SE:S:E
Director, Examination Planning and Delivery, Small Business/Self-Employed Division SE:S:E:EPD
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
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 Measure:
Methodology Used to Measure the Reported Benefit:
We compared the expiration dates of Fiscal
Years 2006 and 2007 projects on the National CIP Database to the examination
start dates for the same projects listed on the Audit Information Management
System[16] and identified 20 CIPs
involving 134 taxpayers where new examinations started after the CIPs had expired. We determined that the examination of these 134
taxpayer accounts potentially violated the taxpayers’ rights to privacy and
security.
Type and Value of Outcome Measure:
·
Reliability of Information – Actual; 517 taxpayer accounts
(see page 3).
Methodology Used to Measure the Reported Benefit:
We compared the National CIP Database
Fiscal Years 2006 and 2007 projects to the same projects listed on the AIMS and
identified 4 CIPs involving 517 taxpayers where new examinations appeared to
have started after the CIPs had expired.
The IRS later provided documentation that showed the projects were
extended, but the database was not updated timely.
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] Any activities involving contact with specific taxpayers within a group, using either internal or external data to identify potential areas of noncompliance within the group, for the purpose of correcting the noncompliance. CIPs refer to activities formerly categorized as Return Compliance Programs, Information Gathering Projects, and Compliance 2000 Projects, etc.
[2] A geographic organizational level used by IRS business units and offices to help their specific types of taxpayers understand and comply with tax laws and issues.
[3] Any activities involving contact with specific taxpayers within a group, using either internal or external data to identify potential areas of noncompliance within the group, for the purpose of correcting the noncompliance. CIPs refer to activities formerly categorized as Return Compliance Programs, Information Gathering Projects, and Compliance 2000 Projects, etc.
[4] Making something as good as possible or bringing to completion.
[5] An Examination database that contains tax returns for every taxpayer for the last 3 tax years.
[6]
A computer system that
traces examination results through final determination of tax liability
including Appeals and the Tax Court.
[7]
An automated inventory
management system that is used for controlling tax returns and technical time
charges from the time returns arrive in the operating division until they are
closed on the Audit Information Management System.
[8] A computer system that tracks project activity and results.
[9] A geographic organizational level used by IRS business units and offices to help their specific types of taxpayers understand and comply with tax laws and issues.
[10] There were a total of 49 CIPs that had termination reports issued; however, only 43 CIPs had a project code.
[11] Any activities involving contact with specific taxpayers within a group, using either internal or external data to identify potential areas of noncompliance within the group, for the purpose of correcting the noncompliance. CIPs refer to activities formerly categorized as Return Compliance Programs, Information Gathering Projects, Compliance 2000 Projects, etc.
[12] A geographic organizational level used by IRS business units and offices to help their specific types of taxpayers understand and comply with tax laws and issues.
[13] The sample was judgmental because the overall sample consisted of three separate samples. We sampled 17 authorizations from the Gulf States Area Office, 6 from the Central Area Office, and 30 additional ones from the list of 149 authorizations.
[14]
A computer system that traces examination
results through final determination of tax liability including Appeals and the Tax
Court.
[15] A computer system that tracks project activity and results.
[16] A computer system that controls tax returns that have been selected for examination.