More Progress Is Needed to Reduce the Millions of Dollars Paid in Interest on Improperly Frozen Refunds
August 18, 2009
Reference Number: 2009-30-106
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 |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 18, 2009
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – More Progress Is Needed to Reduce the Millions of Dollars Paid in Interest on Improperly Frozen Refunds (Audit # 200930016)
This report presents the results of our review to determine whether the Internal Revenue Service (IRS) has made
progress in strengthening the controls over taxpayer accounts containing the
automatic large dollar refund freeze.[1] This
review was part of our Fiscal Year 2009 Annual Audit Plan and addresses the
major management challenge of Erroneous and Improper Payments.
Impact on the Taxpayer
The IRS issues millions of refunds worth billions of
dollars to taxpayers each year through its automated and manual systems. The IRS’ inability to promptly resolve some accounts
with a large dollar refund freeze can adversely affect taxpayers who may need
the refunds to help meet their financial obligations. These delayed actions may also negatively impact
the IRS’ mission of providing top-quality customer service, in addition to costing
the Federal Government millions of dollars in additional interest.
Synopsis
We reported in September 1999[2] and again in
March 2002[3] that the IRS was
experiencing problems with the process of freezing large dollar refunds. In those reports, we recommended that
computer programming changes be made to periodically alert employees to review accounts
with large dollar frozen refunds and systemically release these refunds if the credit
amount went below the large dollar refund freeze threshold (currently $10
million). In addition, we recommended
that the IRS create processing procedures and provide training for employees
responsible for large dollar frozen refunds.
In this followup review, we found fewer accounts with the large dollar
refund freeze. Nevertheless, the amount
of interest the IRS continues to owe taxpayers with improperly frozen refunds is substantial because it has yet
to implement our recommendations from the prior reviews. Overall, we found 152 taxpayer
accounts on the IRS Master Files with the large dollar refund freeze, of which 75
(49 percent) were improperly frozen. The
75 improperly frozen accounts included 49 accounts for which refunds totaling $620
million were not timely issued and resulted in the Government incurring $62.9 million
in additional interest.
Recommendations
We recommended the
Deputy Commissioner for Services and Enforcement coordinate with the
appropriate functional areas and follow through with implementing our prior
recommendations to: 1) properly
implement computer system modifications to provide alerts to review
large dollar frozen taxpayer accounts for credits that can be released and to
systemically release the freeze on accounts when credits fall below the large
dollar refund freeze threshold; 2) ensure procedures for processing large dollar
frozen refunds adequately address common issues that arise and delineate
responsibilities of the various functions that are most involved with the
processing and monitoring of these taxpayer accounts; and 3) ensure training materials
cover the procedures for processing large dollar frozen refunds.
Response
IRS management agreed with our recommendations. Computer programming requests have been submitted to systemically release the refund freeze when credits fall below the $10 million threshold and to establish a report of all taxpayer accounts containing a refund freeze that will be used to ensure employees review for credits that can be released. In addition, procedures for processing large dollar refunds have been updated. Also, training materials created for and used by the Wage and Investment Division Accounts Management function will be sent to other business organizations responsible for large dollar refunds for use in their upcoming training. Management’s complete response to the draft report is included as Appendix VI.
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.
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 – Glossary of Terms
Appendix
VI – Management’s Response to the Draft Report
Abbreviations
|
IRS |
Internal Revenue Service |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
The Internal Revenue Service (IRS) issues millions of refunds worth billions of dollars each year through its automated and manual systems. For example, in Fiscal Year 2008, the IRS issued 121 million refunds totaling $330 billion.[4] However, if a taxpayer’s account has a filed tax return and a credit balance[5] of $10 million or more, the IRS’ computer system places a freeze on the taxpayer’s account to prevent it from automatically refunding or offsetting to another liability. This freeze is intended to alert IRS employees that a refund, if appropriate, must be issued manually because the computer system does not allow for the number of digits needed to automatically issue the refund. Also, this freeze situation allows an opportunity for IRS employees to review the account for errors before taking action to resolve the account. Taxpayer accounts with the large dollar refund freeze must be properly processed to avoid paying additional interest to taxpayers and burdening taxpayers by preventing timely access to funds.
In September 1999, we reported that the IRS was experiencing problems releasing large dollar frozen refunds, for which the IRS incurred additional interest expense of $17.5 million on 44 business taxpayer accounts.[6] Recommendations were made to 1) modify the computer program to provide an option of releasing refunds when business taxpayer account credit balances fall below the large dollar refund freeze threshold, 2) generate periodic followup transcripts for business taxpayer accounts with a large dollar refund freeze, 3) display the large dollar refund freeze on critical IRS computer screens, and 4) enhance procedures to identify and expedite the resolution of a large dollar refund freeze.
In March 2002, we reported the IRS had not implemented our prior recommendations as agreed and instead, in January 2001, increased the threshold for automatically freezing refunds from $1 million to $10 million.[7] The threshold increase did not solve the problems, as we identified 209 improperly frozen accounts resulting in the IRS issuing approximately $185.8 million in delayed refunds to taxpayers and paying them an additional $15.4 million in interest. Recommendations were again made to 1) modify the computer program to release refunds when business taxpayer account credit balances fall below the large dollar refund freeze threshold, 2) establish indicators on key computer screens and generate periodic alerts for employees to review business taxpayer accounts with a large dollar refund freeze, and 3) provide updated training for employees that manually initiate refunds. IRS management’s response was not received before the final report was issued, but the IRS subsequently reported to the Department of the Treasury’s Joint Audit Management Enterprise System that it had implemented the corrective actions.
This review was performed in the Large and Mid-Size Business Division, the Small
Business/ Self-Employed Division, the Tax Exempt and Government Entities
Division, and the Wage and Investment Division during the period October
2008 through June 2009. An onsite review
was performed at the IRS campus in
Since our 2002 report, there are fewer taxpayer accounts containing a large dollar refund freeze. However, the percentage of accounts with credits that continue to be improperly frozen remains high, and the interest the IRS will pay on these accounts is substantial.
Although Fewer Accounts Have the Large Dollar Refund Freeze, the Percentage of Improperly Frozen Accounts Remains High
In
2002, we identified 412 business
taxpayer accounts with large dollar refund freezes and found that 209 (51
percent) improperly frozen accounts resulted in the IRS issuing approximately
$185.8 million in delayed refunds to taxpayers and paying them an additional
$15.4 million in interest. In this followup
review, we identified 152 taxpayer
accounts with large dollar refund freezes, of which 75 (49 percent) were
improperly frozen. Those 75 taxpayer accounts (70 businesses
and 5 individuals) included 49 taxpayer accounts for which refunds totaling $620 million
were not timely issued, resulting in the Government incurring $62.9 million in
additional interest that could have otherwise been avoided.[8]
Although the remaining 26 taxpayers
were not due refunds, the large dollar refund freeze will need to be removed so
the credits can be properly applied to the accounts. For example, some of the 26 taxpayers have
outstanding liabilities from other tax periods in their account that can be
satisfied by transferring the credits to offset the amounts owed. As Figure 1 shows, the 75 taxpayer accounts involved
multiple IRS functional areas and contained $1.288 billion of credits that were
improperly frozen for an average of 1,154 days.
Figure 1: Improperly Frozen Taxpayer Accounts at the
End of Fiscal Year 2008
|
IRS |
Accounts |
Credits |
Average |
|
Submission Processing Function |
14 |
$348.2 million |
2,676 |
|
Accounts Management Function |
34 |
$569.2 million |
744 |
|
Examination Function |
22 |
$282.2 million |
1,008 |
|
Office of Appeals and the Collection Function[9] |
5 |
$88.7 million |
319 |
|
ALL
FUNCTIONAL AREAS |
75 |
$1.288
billion |
1,154 |
Source: Treasury Inspector General for Tax Administration’s (TIGTA) review of taxpayer accounts and information from IRS personnel.
To their credit, IRS officials were already taking
steps to release the freezes for 12 of the 49 accounts by issuing refunds
to the taxpayers before we brought the improperly frozen accounts to their
attention. The officials also initiated actions
to release the refunds associated with the remaining 37 accounts once we
brought the accounts to their attention.
Taking these actions is important because we estimate that if the 37 taxpayer
accounts had continued to go undiscovered, an additional $5.94 million of
interest would have been owed to the taxpayers each year, or $29.7 million
over 5 years.[10]
The Government
Accountability Office’s Standards for Internal Control in the Federal
Government recommends that managers take prompt action to correct problems
identified by auditors. Specifically,
Federal managers are to evaluate findings and recommendations reported by
auditors, determine the actions to take in response to the findings and
recommendations, and complete actions that correct the problems brought to
their attention. Although the IRS reported through the Department of the Treasury’s Joint
Audit Management Enterprise System that it had corrected the problems we had
previously reported related to large dollar frozen refunds, we found four areas
where the actions taken were either inadequate or not completed.
First, we recommended that
periodic notices be generated by IRS computers to alert employees to perform a
manual review of large dollar frozen taxpayer accounts for credit amounts that
could be released. However, we learned
that, during clarification of the work requested by IRS computer programmers,
the recommended alert was discontinued at the request
of Submission Processing, who thought it duplicated another alert. The other alert is produced only once to address
large credits occurring during the initial processing of tax returns and
possibly for other situations such as subsequent payments, transfers, or abatements. However, that one-time alert is given to the
Submission Processing function, which may overlook the large dollar refund freeze,
and may not be effective when the account is controlled by another functional area. If the recommended periodic alert had been
implemented, 74 of the 75 taxpayer accounts with an improper large dollar
refund freeze would have received at least one alert for manual review and 70 taxpayer
accounts would have received at least a second alert.
Second, we recommended
another computer programming change to systemically release credits when the
taxpayer account went below the $10 million threshold due to payment
transfers or adjustments, so that manual intervention would not be
necessary. This change was not included
in the work request to the Information Systems function to make the other
recommended programming modifications. If the systemic release had been implemented, 36 of the 75 taxpayer
accounts with an improper large dollar refund freeze would have been released,
but still subject to remaining account freeze conditions.
Third, the IRS developed written
procedures for the processing of large dollar frozen refunds as directed by our
previous recommendations. However,
feedback from the IRS following their review of taxpayer accounts noted that
these procedures needed to be enhanced. During our review, Accounts Management personnel
informed us that they started updating their written procedures and have updated five Internal Revenue Manual sections to
help further clarify that a manual refund must be input to release amounts over
$10 million. Also, the three functional
areas most involved with the processing and monitoring of the frozen accounts (Submission
Processing, Accounts Management, and Examination) had difficulty delineating
responsibilities for releasing the large dollar refund freeze. In addition, the Examination function has no
specific procedures to address large dollar frozen refunds when establishing or
closing audits.
Fourth, following our last
review, the IRS proposed adding refresher training
and employee alerts in conjunction with the implementation of new
procedures.
This action was later deemed unnecessary by the IRS due to the low
volume of large dollar frozen refunds. However,
current training materials for the three functional areas most involved
with the processing and monitoring of large dollar
frozen refunds do not contain specific information to address these
accounts.
We believe it is important to
recognize that the number of improperly frozen large dollar refunds is very
small when compared to the millions of refunds the IRS successfully processes
each year. Nevertheless, this is a
long-standing condition that can adversely affect taxpayers and negatively impact
the IRS’ mission of providing top-quality customer service in addition to
costing the Federal Government millions of dollars in additional interest.
Recommendations
Because several IRS functional areas are involved, we are recommending that the Deputy Commissioner for Services and Enforcement coordinate with the respective functional areas and follow through with implementing the recommendations we made in earlier reports.
Recommendation 1: Ensure employees receive periodic computer alerts to review large dollar frozen taxpayer accounts for credits that can be released and that the freeze on accounts is systemically released when credits fall below the $10 million threshold by implementing agreed-upon computer programming modifications.
Management’s
Response:
IRS management agreed with our
recommendation. Computer
programming requests have been submitted to
systemically release the refund freeze when credits fall below the $10 million threshold
and to establish a report of all taxpayer accounts containing a refund freeze
that will be used to ensure employees review for credits that can be released.
Recommendation 2: Ensure procedures for processing large dollar frozen refunds are available, adequately address common situations, and effectively delineate the responsibilities of the various functions that are most involved with the processing and monitoring of these accounts.
Management’s
Response:
IRS management agreed with our
recommendation. All
procedures contained in the Internal Revenue Manual sections for processing large dollar refunds have been updated. These revisions contain common situations and
include detailed procedures for working and monitoring the taxpayer accounts.
Recommendation 3: Ensure the training materials for the functions involved with frozen refund accounts include the procedures for processing large dollar frozen refunds.
Management’s
Response:
IRS management agreed with our
recommendation. Training materials
created for and used by the Wage and Investment Division Accounts Management
function will be sent to other business organizations responsible for large
dollar refunds for use in their upcoming training. The other business organizations responsible
for large dollar frozen refunds will review the training material and use it as
determined by the business organization to train their employees working the
cases.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to
determine whether the IRS has made progress in strengthening the controls over
taxpayer accounts containing the automatic large dollar refund freeze.[11] To
accomplish our objective, we:
I.
Determined
if recommendations from the TIGTA’s March 2002 report were implemented.[12]
A.
Reviewed
the Department of the Treasury’s Joint Audit
Management Enterprise System reports to determine the IRS’ corrective
actions, implementation dates, current status, history of actions, and
responsible officials.
B.
Interviewed
employees and reviewed documents (e.g., Request for Information Services, updates
to Internal Revenue Manuals, training materials, memoranda, employee alerts) to
support the IRS’ corrective actions.
C.
Reviewed
Internal Revenue Manuals and training materials for consistency and up‑to‑date
procedures for large dollar frozen refunds.
D.
Performed
a walkthrough at the Ogden Campus to determine what procedures were implemented
or in place to expedite the resolution of large dollar frozen refunds.
II.
Determined
if current taxpayer accounts are improperly frozen due to the large dollar
refund freeze.
A.
Obtained
a computer extract from TIGTA’s Data Center Warehouse of all business (144) and
individual (8) taxpayer accounts with a large dollar refund freeze as of Master
File processing cycle 200839 (the end of Fiscal Year 2008). To ensure data were sufficiently reliable for
our review, we scanned
field elements for expected values and completeness as well as compared computer
information with Master File transcripts used in the next step, below.
B.
Reviewed
Master File transcripts, case control bases on the Integrated Data Retrieval
System, and other applicable case-specific information from IRS personnel to
determine if the large dollar refund freeze was improper at the time of our
computer extract (i.e., no case action or delayed case action for the credits
to be refunded, transferred, or adjusted).
C.
Quantified
the effect of the accounts improperly frozen due to the large dollar refund
freeze. This includes the number of
taxpayer accounts affected, additional interest paid to the taxpayers, the
amount of credits, and the duration of time for the delay. We confirmed results with designated
technical experts and IRS officials.
D.
Interviewed
IRS officials responsible for the identified exception taxpayer accounts (those
with improper freezes) to determine what missing or ineffective controls over
large dollar frozen refunds may have allowed these accounts to go unresolved.
Appendix II
Major Contributors to This Report
Margaret E.
Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Frank
Dunleavy, Director
Robert M.
Jenness, Audit Manager
Aaron R.
Foote, Lead Auditor
Cynthia
Dozier, Senior Auditor
Appendix III
Commissioner C
Office of the Commissioner Attn: Chief of Staff C
Deputy
Commissioner for Operations Support OS
Assistant
Deputy Commissioner for Services and Enforcement SE
Assistant
Deputy Commissioner for Operations Support
OS
Commissioner, Large
and Mid-Size Business Division SE:LM
Commissioner, Small
Business/Self-Employed Division SE:S
Commissioner, Tax
Exempt and Government Entities Division
SE:T
Commissioner, Wage
and Investment Division SE:W
Chief, Appeals AP
Chief Counsel CC
National Taxpayer Advocate TA
Chief Technology Officer OS:CTO
Director, Campus
Compliance Services SE:S:CCS
Director, Customer Account Services
SE:W:CAS
Director,
Examination SE:S:E
Director, Accounts
Management SE:W:CAS:AM
Director,
Submission Processing SE:W:CAS:SP
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:
Deputy Commissioner for
Operations Support OS
Deputy Commissioner for Services
and Enforcement SE
Commissioner, Large and Mid-Size Business
Division SE:LM
Commissioner, Small Business/Self-Employed
Division SE:S
Commissioner, Tax Exempt and Government Entities
Division SE:T
Commissioner, Wage and Investment Division SE:W
Chief,
Appeals AP
Chief
Technology Officer OS:CTO
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:
· Cost Savings – Funds Put to Better Use – Actual; $62.9 million in additional interest expense for the 49 improperly frozen taxpayer accounts that were corrected by issuing a refund during our review (see page 3).
Methodology Used to Measure the Reported Benefit:
We obtained a computer extract from TIGTA’s Data Center Warehouse of all taxpayer accounts with a large dollar refund freeze as of the end of Fiscal Year 2008 (152 accounts with $5.2 billion in credits). We determined that the IRS improperly prevented the release of $1.288 billion in credits for 75 taxpayer accounts for an average of 1,154 days. We confirmed our results with IRS officials. During the course of our review, the IRS initiated corrective action for 49 improperly frozen taxpayer accounts by issuing a refund with interest for the total period applicable for the credit. Calculating the elapsed time from the day the refund could have been released to the day the refund was actually released, we determined that the IRS incurred $62.9 million in additional interest expense for the 49 improperly frozen taxpayer accounts that required a refund.
Type and Value of Outcome Measure:
· Cost Savings – Funds Put to Better Use – Potential; $29.7 million in additional interest expense over 5 years for 37 improperly frozen taxpayer accounts with no corrective actions in process when the improper freeze was brought to the attention of IRS officials during this review (see page 3).
Methodology Used to Measure the Reported Benefit:
Using the outcome measure methodology discussed above, we confirmed with IRS officials that $62.9 million in additional interest will be paid to 49 taxpayer accounts that were improperly frozen but later corrected by issuing a refund. Of these 49 taxpayer accounts, the IRS did not discover and take action to issue the refund for 37 accounts until after we brought the improper freeze to the attention of IRS officials. If these 37 taxpayer accounts had continued to go undiscovered, an additional $5.94 million of interest would have been owed to the taxpayers each year, or $29.7 million over 5 years (using the minimal interest rate of 1.5 percent as of April 1, 2009).[13]
Appendix V
Accounts Management Function – Responds to
taxpayer inquiries for advice on a variety of tax law and procedural questions,
account inquiries and adjustments, and responses to notices that are received
via the telephone, correspondence, and email at 25 Account Management sites.
Campus – The data processing arm of the IRS.
The campuses process paper and electronic submissions, correct errors,
and forward data to the Computing Centers for analysis and posting to taxpayer
accounts.
Collection Function – Collects
delinquent taxes and secures delinquent tax returns.
Credit Balance – An amount overpaid or prepaid
on a taxpayer account.
Examination Function – Applies the tax
law through Field and Office Audit examinations.
Integrated Data Retrieval System – The IRS computer system capable of
retrieving or updating stored information; it works in conjunction with a
taxpayer’s account records.
Joint Audit Management
Large and Mid‑Size
Business Division – One of four primary IRS divisions that serve the tax needs of corporations, subchapter S corporations, and
partnerships with assets greater than $10 million.
Large Dollar Refund Freeze – A freeze code on the taxpayer’s account (shown
as “X-”) that is sometimes referred to as the “Million Dollar Refund Freeze,” although
the current threshold is $10 million or more. This freeze code prevents the credit from
automatically refunding or offsetting to another tax account period.
Master File – The IRS database that stores various types of taxpayer account
information. This database includes
individual, business, and employee plans and exempt organizations data.
Office of Appeals – The administrative forum for any taxpayer
contesting an IRS compliance action.
Small
Business/Self-Employed Division – One of four primary IRS divisions that serve the
tax needs of individual taxpayers with business income and all businesses with
assets under $10 million.
Submission Processing – Processes tax
returns, related documents, and payments at seven processing centers—
Tax Exempt and
Government Entities Division – One of four primary IRS divisions that serve the tax needs of employee plans, exempt
organizations, and Government entities.
Wage and
Investment Division – One of four primary IRS divisions that serve the
tax needs of individual taxpayers without business income.
Appendix VI
Management’s Response to the Draft Report
[1] See Appendix V for a glossary of terms.
[2] Controls Should Be Strengthened Over Business Taxpayer Accounts With Frozen Million Dollar Refunds (Reference Number 199940057, dated September 27, 1999).
[3] The Internal Revenue Service Continues to Owe Millions of Dollars in Interest to Taxpayers With Frozen Refunds (Reference Number 2002-30-062, dated March 12, 2002).
[4] This does not include the 116 million economic stimulus payments totaling $95 billion in Fiscal Year 2008.
[5] See Appendix V for a glossary of terms.
[6] Controls Should Be Strengthened Over Business Taxpayer Accounts With Frozen Million Dollar Refunds (Reference Number 199940057, dated September 27, 1999).
[7] The Internal Revenue Service Continues to Owe Millions of Dollars in Interest to Taxpayer With Frozen Refunds (Reference Number 2002-30-062, dated March 12, 2002).
[8] See Appendix IV for details.
[9] This includes collection activity performed at field and campus locations.
[10] See Appendix IV for details.
[11] See Appendix V for a glossary of terms.
[12] The Internal Revenue Service Continues to Owe Millions of Dollars in Interest to Taxpayers With Frozen Refunds (Reference Number 2002-30-062, dated March 12, 2002).
[13] Per Internal Revenue Bulletin 2009-13 (March 30,
2009), the rates of interest for the calendar quarter beginning April 1, 2009,
will be 4 percent for overpayments, or 3 percent in the case of a corporation. The rate of interest paid on the portion of a
corporate overpayment exceeding $10,000 will be 1.5 percent.