Additional Process Improvements Are Needed Due to Continued Growth in the Voluntary Correction Program for Retirement Plans
December
11, 2009
Reference Number: 2010-10-012
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
December 11, 2009
MEMORANDUM FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Additional Process Improvements Are Needed Due to Continued Growth in the Voluntary Correction Program for Retirement Plans (Audit # 200910015)
This report presents the results of our review to assess the Internal Revenue Service’s (IRS) efforts to 1) improve the efficiency of processing Employee Plans Voluntary Correction Program (VCP) cases to ensure timely processing and 2) increase participation through outreach efforts. The former Tax Exempt and Government Entities Division Commissioner requested this review, which was part of the Treasury Inspector General for Tax Administration’s Fiscal Year (FY) 2009 Annual Audit Plan coverage under the major management challenge of Tax Compliance Initiatives.
Impact on the Taxpayer
The VCP permits retirement plan sponsors to pay a fee and receive
the IRS’ approval for correction of retirement plans any time before an audit. While the IRS has taken actions that have significantly
reduced the number of calendar days required to process VCP applications,
further improvements will be needed due to increased customer demand, reduced
staffing, and the significant number of applications not being closed within
timeliness goals. Providing timely
service on VCP applications is important because correcting errors in a timely
and efficient manner protects the favorable treatment of employees’ retirement
benefits and reduces the uncertainty of any potential tax liabilities for both
employees and retirement plan sponsors.
Synopsis
To assist retirement plan sponsors, the Employee Plans function completed a significant number of actions to promote the VCP with preparers and sponsors responsible for administering retirement plans. While we could not determine whether there is a direct link between outreach activities and the number of VCP applications received, we have noted that increased outreach activities have corresponded with an increasing number of VCP applications being received. The number of VCP applications increased nearly 60 percent (from 1,877 to 2,973) between FYs 2006 and 2008.
To meet the increased customer demand, VCP management made several changes to VCP applications and procedures that reduced processing time from 379 to 195 calendar days, nearly 50 percent. In addition, VCP management addressed a key Pension Protection Act of 2006[1] provision by continually updating and improving the system of correction programs already available and making the programs more accessible to small business employers.
However, about 22 percent of applications were still not being closed within timeliness goals in FY 2008, and there is no guarantee that future budgets and priorities will allow for increased staffing to work the growing number of applications. Taking these factors into account, additional processing improvements will need to be made to cut down on the time it takes to process certain applications and handle the increasing volume of applications.
Providing timely service on VCP applications allows
plan sponsors to make needed changes and ensures that both employees and plan
sponsors continue to receive favorable treatment for retirement benefits. Based on our review of 220 VCP applications
that were closed in FY 2008 and interviews with VCP personnel, we identified 5 areas
where we believe additional processing improvements can be made that will
further improve the Employee Plans function’s ability to timely process VCP applications.
Recommendation
To ensure the VCP provides timely service to those in the retirement plan community who are voluntarily attempting to bring their retirement plan into compliance with tax‑exempt laws, we recommended the Director, Employee Plans: a) reinforce the need for staff conducting the initial screening of VCP applications to determine whether case files have all needed information, b) expand the “streamlined” application process to include more common types of failures, c) expand the VCP Revenue Procedure to include a checklist that provides retirement plan sponsors with specific options they can use to identify the type of plan failure, d) analyze the staffing mix for VCP revenue agent groups to determine the most effective mix of positions and responsibilities, and e) survey retirement plan sponsors upon completion of the VCP process to ask how it could be improved.
Response
Tax Exempt and Government
Entities Division management agreed with our recommendation and outlined
several planned corrective actions, as well as one alternative corrective
action. They have hired additional staff
and created a hiring proposal for FYs 2010 through 2012 based on a review of
the current staffing mix to improve initial screening and processing timeliness. Management also agreed with our
recommendation to expand the streamlined application process and plans to seek
input from stakeholders to develop process improvements. Lastly, they plan to develop a survey to
obtain feedback on an ongoing basis to identify and make further improvements
to the VCP. Management’s complete
response to the draft report is included as Appendix IV.
Office of Audit Comment
Tax Exempt and Government
Entities Division management provided
an alternate corrective action for our recommendation to expand the VCP Revenue
Procedure to include a checklist that provides retirement plan sponsors with
specific options for identifying the type of retirement plan failure that led
to the VCP application and the actions they are taking to correct them. We recommended this as an interim step until
a VCP application form could be developed.
Tax Exempt and Government Entities
Division management commented that it currently has two sample application
forms (one for streamlined applications and another for more complex plan
failures). Tax Exempt and Government
Entities Division management plans to gain experience with these forms and create
an official IRS form. Since management
has developed sample application forms which include the information we
recommended, we agree with the IRS’ alternate corrective action.
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 (Management Services and Exempt Organizations), at
(202) 622-8500.
Additional Actions Are Needed to Improve Voluntary
Correction Program Case Processing Efficiency
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Management’s Response to the Draft Report
Abbreviations
|
EP |
Employee Plans |
|
FTE |
Full-Time Equivalent |
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
|
VCP |
Voluntary Correction Program |
The Internal Revenue Code provides significant tax incentives for retirement
plan sponsors that establish and maintain retirement plans that comply with Internal
Revenue Code requirements. Generally
under these plans, income set aside for retirement is deductible by employers
and not taxable to employees until distributed after retirement. By statute, plan sponsors not properly
maintaining retirement plans can lose the tax‑exempt status of these
deductions. In addition, employees whose
funded benefits have grown tax-free lose the right to protect their benefits
from current taxation.
In 1998, the Internal Revenue Service (IRS) consolidated a set of
programs designed to assist plan sponsors whose retirement plans had been
noncompliant with applicable Internal Revenue Code requirements. The Employee Plans (EP) Compliance Resolution
System is a comprehensive group of correction programs available to retirement
plan sponsors to correct Qualification Failures[2] while
continuing to provide employees with retirement benefits on a tax‑exempt
basis. The three components of the EP
Compliance Resolution System are:
The
Voluntary Correction Program allows retirement plan sponsors to inform the IRS
about certain types of errors in their plans and obtain approval of their
proposed method for correcting them.
(1) Self-Correction Program: Permits retirement plan sponsors to correct
plan failures without contacting the IRS or paying a fee.
(2) Voluntary Correction Program
(VCP): Permits retirement plan sponsors
to pay a fee and receive the IRS’ approval for correction of plan failures any
time before an audit.
(3) Audit Closing Agreement
Program: Permits retirement plan sponsors
to pay a tax as a sanction and correct a plan failure while the plan is being audited
by the IRS.
Sponsors of retirement plans apply to
operate their plans as tax exempt by submitting to the IRS a retirement “plan
document” that describes how the plan is organized and how it should
operate. Because of frequent tax law
changes, retirement plan documents require periodic revision to ensure
retirement plans remain in compliance with all current regulations. If changes are not made timely or the
retirement plan sponsor determines that their retirement plan is not operating
in accordance with tax-exempt laws, the plan sponsor may prepare a VCP
application for submission to the IRS.
The application, required fee, and all information required by Revenue
Procedure 2008-50[3] are then sent to the EP function offices located in Washington, D.C., where
EP function staff remove and deposit remittances for the associated VCP fees and forward the application to a VCP
assistant who “pre-screens” the application for obvious omissions.
If the VCP application was submitted as a “streamlined”
application,[4] it could be worked by EP function staff
at either the National Headquarters or one of four IRS area offices.[5] While
most non‑streamlined applications are examined by revenue agents in the field
offices, revenue agents in the National Headquarters review applications involving
more complex issues. If
EP function staff agree that the actions proposed by a retirement plan
sponsor to bring a retirement plan back into compliance are adequate, the EP
function issues a “compliance statement,” which serves as the IRS’ written
concurrence to the corrective actions proposed for the retirement plan.
The VCP experienced significant growth from Fiscal Year (FY) 2006 to FY 2008. As shown in Figure 1, while the number of VCP applications increased nearly 60 percent, the number of resources, or full‑time equivalents (FTE),[6] dedicated to the program dropped 37 percent during this same period.
Figure 1: Total VCP Applications Compared to VCP
Resources
(FY 2006 to FY 2008)
Figure 1 was removed due to its size. To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.[7]
The former Tax Exempt and Government
Entities Division Commissioner recommended we perform an audit of VCP case
processing procedures to identify potential suggestions that would assist with reducing
the time needed to process cases and reduce inventory. We determined that the VCP
accounts for about 80 percent of EP Compliance Resolution System
cases. As a result, we limited our
review to the VCP portion of the EP Compliance Resolution System.
This audit was conducted while changes were being made to the VCP, such as moving certain types of cases to another program within the EP function. As a result, this report might not reflect the most current status of the EP function’s VCP.
This review was performed at the EP function’s National
Headquarters in Washington, D.C., and also included interviews of VCP group
managers and revenue agents from Baltimore,
Maryland; Brooklyn, New York; Chicago, Illinois; Dallas, Texas; El Monte,
California; Evansville, Indiana; Philadelphia, Pennsylvania; and Seattle,
Washington.
We conducted this performance audit during the period November
2008 through June 2009 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
The Employee Plans function has completed a significant number of actions to promote the VCP. In addition, VCP management has taken actions that have significantly reduced the number of calendar days required to process VCP applications, from 379 calendar days in FY 2006 to 195 calendar days in FY 2008. However, about 22 percent of applications were still not being closed within timeliness goals in FY 2008. In addition, the number of VCP applications has increased nearly 60 percent from 1,877 applications in FY 2006 to 2,973 applications in FY 2008, and there is no guarantee that future budgets and priorities will allow for increased staffing. Taking these factors into account, additional processing improvements will need to be made to cut down on the time it takes to process certain applications and handle the increasing volume of applications.
Providing timely service on VCP applications is important because correcting errors in a timely and efficient manner protects the favorable treatment of employees’ retirement benefits and reduces the uncertainty of any potential tax liabilities for both employees and plan sponsors. Based on our review of 220 VCP applications that were closed in FY 2008 and interviews with VCP personnel, we identified 5 areas where we believe additional processing improvements can be made that will further improve the EP function’s ability to timely process VCP applications.
A Significant Number of Outreach Activities Were Completed and the Number of Voluntary Correction Program Applications Received Has Increased
The EP function strives to provide retirement plan sponsors with information on the laws and processes for receiving and maintaining tax‑exempt status and assist with correcting mistakes that may occur during plan administration. To assist retirement plan sponsors, the EP function completed a significant number of actions to promote the VCP with preparers and sponsors responsible for administering retirement plans. While we could not determine whether there is a direct link between outreach activities and the number of VCP applications received, we have noted that increased outreach activities have corresponded with an increased number of VCP applications being received. The following are several of the outreach activities that have been completed by the EP function.
· Creating “Fix-It Guides.”
· Conducting workshops at IRS Tax Forums and providing presentations to practitioner groups.
· Creating newsletters.
· Responding to Advisory Committee on Tax Exempt and Government Entities recommendations.
The EP
function addressed a key Pension Protection Act of 2006 provision by increasing
activities to promote the VCP.
Collectively, these actions address a key Pension Protection Act of 2006[8] provision: continually updating and improving the system of correction programs already available and making the programs more accessible to small business employers. Media coverage related to the September 2008 revision of the procedures for submitting a VCP application included very favorable comments about the IRS’ continued efforts to improve the program and make it more accessible to small business employers by simplifying the application process.
Creating “Fix-It Guides”
In
response to customer feedback, the EP function’s “Correcting Plan Errors”
webpage includes user-friendly “Fix-It Guides” with tips on how to find, fix,
and avoid common mistakes in retirement plans. The Fix-It
Guides detail the most common mistakes that the IRS sees and how to find them,
fix them, or prevent them from happening.
This document is geared to retirement plan sponsors of both
sophisticated larger employers and also less sophisticated smaller employers,
as the guides are designed to identify and correct very common errors.
Data provided by the EP function showed the “Correcting Plan Errors” webpage[9] averaged 3,664 accesses per month during 2008 versus 3,362 per month in 2006, an increase of 9 percent.[10] The “Correcting Plan Errors” webpage also includes fill-in “streamlined application” forms. In addition, video instructions from the VCP manager are available to assist retirement plan sponsors with using the Fix-It Guides.
Conducting workshops and providing presentations
The EP function staff delivered 93
presentations and exhibits to an estimated 43,500 event attendees between
FY 2006 and FY 2008.[11] While
the number of events attended remained stable during this period, the total
number of customers reached increased by nearly 60 percent. These presentations are usually made by VCP
revenue agents at the request of various practitioner groups, such as the
American Institute of Certified Public Accountants, and include general
information about the types of retirement plans available, the process of
obtaining tax‑exempt status, and some of the more common problems
practitioners may experience when setting up and administering a retirement
plan.
In addition to the general presentations, EP function
staff developed a Retirement Plan Pitfalls Workshop that was presented at each
of the six IRS Nationwide Tax Forums in FY 2008. The workshop was developed to encourage
small-business practitioners to use online IRS Fix-It Guides.
The workshop sessions also provided practitioners
with the opportunity to ask questions about specific issues they may be dealing
with or are having difficulty resolving.
According to IRS documentation, more than 300 (61 percent) of the
493 attendees at the workshops completed the surveys and indicated an
overwhelmingly positive response to the materials presented. For example, nearly 90 percent of the respondents
felt the material was helpful in understanding how to find and fix errors in
their retirement plans.
Creating newsletters
The EP function publishes two newsletters that
have frequent articles on current VCP issues.
These are available on the EP function’s “Retirement Plans
Community” webpage.
·
The Retirement
News for Employers newsletter is designed for employers/business owners and
their tax advisors. This newsletter
provides practical retirement plan information and every issue contains
VCP-related information. From the
beginning of FY 2006 to the end of FY 2008, there was an increase of more than 300
percent in the number of newsletter subscriptions (from 7,868 to 33,663 per
month).[12]
·
The Employee
Plans News is geared toward retirement plan practitioners (attorneys,
accountants, actuaries, and others) and presents information about retirement
plans. The average number of queries of
this newsletter increased nearly 30 percent between FYs 2006 and 2008. The majority of this growth took place during
FY 2008, when the number of queries increased from 22,000 per month to nearly 44,000
per month.[13]
Responding to Advisory Committee on Tax Exempt and Government
Entities Recommendations
The Advisory Committee on Tax Exempt and Government Entities was established in May 2001 to provide a public forum for discussion of relevant issues between IRS officials and representatives of the entities served by the Tax Exempt and Government Entities Division. This provides a means for the IRS to receive regular input on developing and implementing IRS policy issues related to these groups.
In June 2008, the Committee issued its annual report with seven VCP-related recommendations, and the EP function has completed or is working the majority of these recommendations. For example, EP is working to establish a new program that would allow retirement plan sponsors to submit a notice that a VCP application is forthcoming and, in the event of an audit in the interim, the notice would allow the sponsor to be treated as though a VCP application was actually filed.
The Employee Plans Function Has Reduced the Time Needed to Process Voluntary Correction Program Applications
To meet increased customer demand, the EP function made several changes to VCP applications and processing procedures that increased application closures and reduced application processing time. For example, receipts of VCP applications have increased nearly 60 percent between FY 2006 and FY 2008, while the resources devoted to the program dropped by 37 percent. However, despite the reduction in VCP staff, the EP function was able to reduce both the amount of time needed to review and evaluate VCP applications as well as the in-process inventory of VCP applications assigned to revenue agents. These improvements resulted from several actions by EP function management and are discussed in the following sections.
The EP function completed a process analysis study and created a streamlined application process
During FY 2007, VCP
management implemented the recommendations of a process analysis team, which
contributed to a 42 percent reduction in the time taken to complete work on a
VCP application. These improvements,
made at the group level, included having the VCP coordinators or group
managers close some cases based solely on information included with the VCP application,
allowing certain cases to bypass a review by the VCP coordinator while still being
reviewed by the group manager.
Also, EP function management worked to update the VCP Revenue Procedure in both FY 2007 and FY 2008 to implement and
further improve the streamlined application process. Following these changes, VCP closures increased by more
than 10 percent. Our analysis of management
information data showed the relative small number of hours used to close streamlined
cases accounted for decreases of 61 and 71 calendar days needed to process a
VCP application during FY 2007 and FY 2008, respectively.
In addition, overall VCP application processing
time dropped by 184 days (nearly 50 percent) between FY 2006 and FY 2008. As shown in Figure 2, most of these
improvements can be attributed to implementing the streamlined application
process in FY 2007.
Figure 2: Average
Calendar Days Required to Process VCP Applications
From FY 2006 Through FY 2008
Figure 2 was removed due to its size.
To see Figure 2, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.
Making these changes improved customer service by providing more timely responses to retirement plan sponsors who submitted VCP applications and also allowed sponsors to reduce the amount of time that their plans were not in compliance with tax‑exempt statutes. This reduces a retirement plan’s risk of losing tax‑exempt status or suffering revenue losses for penalties and/or taxes.
The EP function changed the way it processed applications that included a determination letter request
When submitting a VCP application, retirement plan sponsors may sometimes need to obtain the IRS’ assurance that their retirement plan is designed to comply with applicable tax-exempt laws by requesting an IRS determination letter. The determination letter process is a key interaction with the IRS because a favorable determination letter gives retirement plan sponsors assurance their retirement plans qualify for favorable tax treatment, as long as the plan operates under the terms on which the determination letter was issued.
In the past, revenue agents in VCP groups simultaneously worked both VCP applications and any related determination letter requests to provide retirement plan sponsors with a “one-stop shopping” approach. While we applaud the IRS’ efforts to provide a one-stop shopping approach, we noted that VCP revenue agents often did not have the full skill set needed to process determination letter requests and would need to consult with EP Determinations program personnel to ensure the determination letter request was completed satisfactorily. In addition, the inclusion of a determination letter request with a VCP application often increased the amount of time it took to process VCP applications.
The EP function completed a study in February 2009 which proposed changes to how it processes VCP applications with related determination letter requests. This was based on the premise that the EP Determinations program was better equipped to deal with issues related to retirement plan documents that were not timely amended. As a result of the study, when a VCP application is received with a determination letter request, the Determinations program will address the determination letter request and the VCP will address the remainder of the VCP application. This change was intended to provide more timely processing of VCP applications by eliminating the need for VCP revenue agents to evaluate determination letters.
Based on our analysis of VCP applications that were closed in FY 2008, this action should further improve the number of calendar days needed to process a VCP application. For example, 547 (22 percent) of 2,492 VCP applications closed during FY 2008 had a related determination letter request. Figure 3 illustrates the potential additional improvement in the number of calendar days required to process a VCP application by comparing calendar days for VCP applications received with and without a related determination letter request.
Figure 3: Average Calendar Days to Process VCP
Applications Received During FY 2008 – With and Without a Determination Letter
Request
|
|
Calendar Days |
Calendar Days |
Additional Calendar Days Needed to Process
VCP Applications With a Determination Letter Request |
|
Average Calendar Days to Review VCP Applications
|
289 |
168 |
121 |
Source: Analysis of the EP Compliance Resolution System Research and
Inventory Management System database.
Additional Actions Are Needed to Improve
Voluntary Correction Program Case Processing Efficiency
While VCP management has taken actions that
have significantly reduced the number of calendar days required to process VCP applications,
further improvements will be needed to increase the number of VCP applications
that receive timely service. One
of the EP function’s FY 2008 and FY 2009 Work Plan priorities is to improve
customer service by reducing VCP application inventory and processing
time. The FY 2008 and FY 2009 goal
for processing VCP applications was 250 days and 225 days, respectively.
We
identified five opportunities for further improving the timeliness of VCP
application processing.
Our analysis showed that the VCP did not
always meet its timeliness goals. For
example, in FY 2008, 543 (22 percent) of the 2,492 closed VCP applications
exceeded the 250 calendar day goal in the EP function’s Work Plan. Opportunities to improve the number of
VCP applications processed within the EP function’s established goals are
discussed in the sections that follow.
Screeners who review incoming VCP applications do not determine whether all information is provided
Once VCP application cases are received by revenue
agents in field offices, many require followup with the retirement plan sponsor
to obtain documentation not provided with the original application. VCP procedures require screeners to look
for obvious omissions in applications as they are received; however, the scope
of their review is very limited due to the large volume of applications received
and the limited number of staff available to review them.
We determined that 91 (41 percent) of the
220 closed VCP applications included at least 1 request for additional
information. In total, these 220 cases
included 394 instances where revenue agents requested additional
information. An in-depth review of the
10 most common types of information requested showed that 8 were included
on a checklist of everything required to be submitted with a VCP application,
which is contained in the VCP Revenue Procedure. This indicates that some retirement plan
sponsors are unaware of IRS information about the types of information not
included with the VCP application.
Figure 4 provides the results of our analysis.
Figure 4: Analysis of Additional Information
Requested From Retirement Plan Sponsors
|
Ten Most Common Types of Additional
Information Requested |
Total Requests |
Percentage of all
Requests |
Requested
Information on VCP Checklist (Yes/No) |
|
Plan Details |
49 |
12.4% |
Yes |
|
Failure Specifics and Steps to Prevent It in the Future |
45 |
11.4% |
Yes |
|
Error Correction/Interest Calculations and Terms |
25 |
6.3% |
Yes |
|
Compliance Statement Sent to Power of Attorney to Be Reviewed |
24 |
6.1% |
No |
|
Standard VCP Forms |
21 |
5.3% |
Yes |
|
Individual Participants Information (Contributions, Personal Information,
etc.) |
20 |
5.1% |
No |
|
Payroll Correction/Match Correction Calculation |
14 |
3.6% |
Yes |
|
Request Additional Fees |
11 |
2.8% |
Yes |
|
Taxpayer Financial Information/Assets |
11 |
2.8% |
Yes |
|
Number of Affected Participants |
9 |
2.3% |
Yes |
|
|
|
|
|
|
Total Requests for the Ten Most Common Types of Additional
Information |
229 |
58.1% |
|
|
Other Types of Information Requested |
165 |
41.9% |
|
|
Total Number of Requests for Additional Information |
394 |
|
|
Source: Analysis of a judgmental sample of 220 VCP application
files closed during FY 2008.
While VCP procedures require screeners to scan
for obvious omissions in applications as they are received, the scope of their
review is very limited due to the large volume of applications received and the
limited number of staff available to review them. Also, since the majority of VCP applications
are received during a relatively short time period (usually in late January and
early February), there are very large spikes in receipts. During these periods, revenue agents from
nearby offices assist the three
While it is understandable why the screening
of applications is limited, we believe performing a more thorough upfront
screening would be worthwhile because having revenue agents in field offices subsequently
request additional information significantly increases case processing
time. As shown in Figure 5, our
analysis of 220 sample application cases showed a 200 percent increase in the average
number of calendar days needed to process a VCP application (from 104 days
to 316 days) when revenue agents had to request additional information from
retirement plan sponsors.
Figure
5: Impact on Case Processing Time When
Additional Information Is Requested From Retirement Plan Sponsors
Figure 5 was removed due to its size.
To see Figure 5, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.
The streamlined application process does not include some frequent types of errors that cause retirement plan sponsors to submit VCP applications
The VCP Revenue Procedure lists the errors
retirement plan sponsors can correct via the streamlined process. However, we identified additional frequent
errors that are not included in the streamlined process. If the streamlined process was expanded to
include additional types of retirement plan errors, application processing time
would be further reduced.
Between its inception in 2006 and the latest
update in 2008, the streamlined process has evolved to include more types of
errors. For example, initially the only
error eligible for streamlined processing was related to not timely amending retirement
plans to reflect tax law changes. The
latest Revenue Procedure included eight additional schedules with errors that
can be corrected using this process.
The streamlined application process has
improved service by reducing the amount of time needed to process applications
with common and oftentimes easily resolved issues. For example, nearly 70 percent of all VCP
closures in FY 2008 were submitted using the streamlined procedure. However, the IRS would realize additional
benefit by continuing to expand the process to include additional types of common
errors.
At the present time, the EP function has not
fully identified all types of errors that could be processed using streamlined
procedures. For example, several VCP staff
we interviewed thought that opportunities existed to expand the streamlined
application process to include additional types of plan failures.
Continuing to increase the number and types
of errors eligible for streamlined processing benefits both retirement plan
sponsors and the IRS by providing a more timely, efficient, and less cumbersome
option for retirement plan sponsors to correct errors.
Checklists in the Revenue Procedure do not include a list of options that clearly identifies the type(s) of errors that would result in submitting a VCP application
The VCP Revenue Procedure includes a series
of forms and checklists to assist retirement
plan sponsors and their representatives in preparing an application and
ensuring it contains all required information. However, when analyzing the information
provided, VCP staff often have difficulty identifying the specific issue(s)
which led to the VCP application being submitted. For example, VCP applications usually
have many attachments that provide additional details about the error(s)
leading to the VCP application and can be very lengthy. Revenue agents must sort through large
amounts of data to locate specific pieces of information needed to clearly
identify and understand the exact nature of both the retirement plan failure
and the proposed method of making corrections.
The forms used for a VCP application do not
include a list of options to identify the type of retirement plan failure or the
proposed corrective action. The VCP Program
Manager views Appendices D and F of the current Revenue Procedure as its VCP “application
forms,” while Appendix C helps retirement plan sponsors ensure the application is
complete. VCP management plans to make
these forms “official” after gaining more experience and perfecting them.
Having an application form specific to the VCP
would provide a means of more clearly identifying the nature of the plan failure
and proposed corrective action. Doing so
would improve the review process by reducing the amount of time needed to locate
this information in documentation provided with the VCP application.
The staffing mix for VCP revenue agent groups has not been analyzed
In addition to the
VCP, there are two other groups staffed by revenue agents in the EP
function. These are the Examinations program
(where revenue agents audit retirement plans to ensure they are following applicable
Internal Revenue Code regulations) and the Determinations program (where revenue
agents assess whether retirement plans qualify for tax‑exempt status).
Within the VCP, revenue agents examine VCP
applications and determine if proposed corrective actions will bring retirement
plans into compliance with tax-exempt laws.
However, there are some revenue agents who serve as coordinators and provide
program support to VCP group managers. This
support consists of advising the manager and other personnel working VCP applications
on the correct fee amounts required for processing a VCP application, the
development of issues associated with the retirement plan failure, the proposed
action that will correct the plan failure, and the drafting of compliance
statements notifying the retirement plan sponsor of the results of the IRS’
review of the VCP application.[14]
We compared revenue agent staffing in the Examinations
and Determinations programs with the VCP and identified a relatively large
difference (25 and 32 percent, respectively) in the ratio of revenue agents to
supervisors. However, as shown in Figure
6, if plans to hire five additional revenue agents come to fruition, the VCP would
have a far more comparable staffing pattern.
Figure 6: VCP Revenue Agent Staffing Compared to Similar
EP Programs
|
EP
Function |
Current
Ratio: Revenue Agents to Supervisors |
Difference
Between VCP Ratio and Other EP Programs |
Revised
Ratio: Revenue
Agents to Supervisors (Adding 5 Revenue Agents |
Difference
Between Revised VCP Ratio |
|
VCP |
6.3 |
|
7.5 |
|
|
Examinations |
7.8 |
24% |
7.8 |
4% |
|
Determinations |
8.3 |
32% |
8.3 |
11% |
Source: Analysis of the IRS’ Discovery Directory.
Though each program has a different
expertise and revenue agents from each of these programs serve a separate and
distinct function in the administration of the overall EP function, the skill
sets of the revenue agents in these programs and the issues they deal with are often
similar. Under the current alignment,
every VCP group has about five revenue agents working cases and one revenue
agent serving as a coordinator with either no inventory of cases or a limited
inventory of cases. Conversely,
Examinations and Determinations programs have approximately eight revenue
agents working cases in each group. We
question why the ratio of revenue agents working cases to supervisors is
significantly lower in the VCP groups.
The VCP Program
Manager views the coordinator position as one that is critical to maintaining a
high level of quality in the VCP, since no formal quality review program exists
for VCP application cases and there is a need to balance assurance that applications
are processed accurately with the need to process cases faster. In addition, the VCP Program Manager noted
that other EP function programs (such as Examinations and Determinations) have
similar positions which provide the same type of support and have an entirely
separate function devoted to quality review (one of the primary
responsibilities of the coordinator position).
However, since the coordinators are primarily managed within the
individual groups and no statistical information is tracked, it is difficult to
measure the impact the position is having on the quality of case work.
The VCP Program
Manager also noted that coordinators oftentimes maintain their own inventory in
addition to performing their coordinator responsibilities. However, our analyses showed their impact on
reducing the inventory backlog has been minimal since the four coordinators
combined accounted for only 360 of the closures in FY 2008, and the majority of
these closures involved simpler issues that lower-graded employees could have
worked. For example, VCP management
information reports showed that 285 (79 percent) of the 360 cases met the
criteria of work that is typically performed by revenue agents at the GS-11 and
GS-12 levels[15] (while all VCP coordinators
who worked them were GS-13 revenue agents).
Shifting resources
to a span of control that is more consistent with the EP Examinations and
Determinations functions should enable the VCP to work more cases. As the volume of retirement plans using the
VCP increases, there will be a need to devote staff to work the growing inventories. The EP function may need to consider other
options for filling this resource void by either reducing the number of
coordinators or reducing some of the responsibilities required of the
coordinator position so that the coordinators can have a bigger impact on
reducing case inventories. For example,
while resources devoted to the VCP dropped from a total of 30 FTEs in FY 2006
to 19 FTEs in FY 2008, the VCP continued with a structure that maintained four
group managers with each manager having one coordinator.
VCP management has not surveyed customers to obtain feedback for improving the program
Feedback enables management to identify
program deficiencies, address customer service issues, and recognize
opportunities for improvement. A Treasury
Inspector General for Tax Administration report issued in September 2003[16] noted that the Tax Exempt and Government Entities Division had not established clear, measurable goals for the three EP Compliance
Resolution System programs (including
the VCP) or an effective way to measure the impact educational and marketing
efforts have on compliance.
In response, the EP function advised it
planned to analyze the feasibility of surveying VCP applicants to help
determine the impact of its outreach efforts. Ultimately, the Tax Exempt and
Government Entities Division decided
to forgo this action because of challenges involved with developing and
obtaining approval for using surveys.
There were several focus group sessions held
during FY 2008 to obtain input from benefits groups and professionals. This included identifying areas where the VCP
was both working well or could be improved.
In total, the groups made 12 recommendations, 2 of which were included
as updates in the latest VCP Revenue Procedure.
However, we did not identify any efforts to obtain feedback on an
ongoing basis from those who have filed a VCP application. By not conducting surveys to obtain ongoing feedback from VCP customers,
the EP function could miss opportunities to identify and make further improvements
to the program.
Recommendation
Recommendation
1: To ensure the VCP provides timely service to
those in the retirement plan community who are attempting to bring their
retirement plans into compliance with tax‑exempt laws, the Director,
Employee Plans, should:
a.
Reinforce the
need for staff conducting the initial screening of VCP applications to determine
whether case files have all needed information prior to sending them to revenue
agents in field offices for evaluation.
b.
Evaluate
whether opportunities exist to expand the “streamlined” application process to
include more common types of failures.
c.
Until a VCP application
form is developed, expand the VCP Revenue Procedure to include a checklist that
provides retirement plan sponsors with specific options for identifying the
type of retirement plan failure that led to the VCP application and the actions
they are taking to correct them.
d.
Analyze the
staffing mix for VCP revenue agent groups to determine the most effective mix
of positions and responsibilities. This
analysis should include reviewing the duties of the coordinator position and
analyzing the span of control between group managers and revenue agents.
e.
Survey retirement
plan sponsors upon completion of the VCP process to determine what components
of the program worked well and how it could be improved.
Management’s Response: Tax Exempt and Government Entities Division management
agreed with our recommendation and outlined several planned corrective actions,
as well as one alternative corrective action.
Tax Exempt and Government Entities Division management also provided
comments on its corrective actions. Tax
Exempt and Government Entities Division management’s corrective actions and
selected comments are as follows:
a.
Management commented that
perfecting VCP applications
as much as possible on the front-end would promote more efficient case
processing by the agents in the groups. They
hired additional staff for the VCP, which will assist in improving initial
screening.
b.
Management commented
that they agreed with our recommendation to expand the streamlined application
process and plans to reevaluate the program and seek input from
stakeholders in order to continue developing process improvements
c.
Management commented
that it has two sample application forms (one for streamlined applications and
another for more complex plan failures) and stated that, after gaining experience with the sample VCP
application form and streamlined application form, the EP function will
finalize them and create an official IRS form.
d.
Management analyzed
the staffing mix for the VCP. The EP
function recently submitted a hiring proposal for FYs 2010 through 2012
based on a review of the current staffing mix, span of control, and assigned
duties. As a result of this proposal,
the Tax Exempt and Government Entities Division has approved six new hires for FY
2010. The additional staffing is intended
to promote improved upfront case processing as well as case processing
timeliness. Tax Exempt and Government
Entities Division management is also in the process of developing a FY 2012
Hiring Initiative to meet future program needs.
e.
The EP
function is working with the Tax Exempt and Government Entities Division’s
Strategic Planning Office to develop a survey for users of the VCP to obtain
feedback on an ongoing basis to help identify and make further improvements to
the program.
Office of Audit Comment: Tax Exempt and Government Entities Division management provided an alternate corrective action for our recommendation to expand the VCP Revenue Procedure to include a checklist that provides retirement plan sponsors with specific options for identifying the type of retirement plan failure that led to the VCP application and the actions they are taking to correct them. We recommended this as an interim step until a VCP application form could be developed. Management commented that it currently has two sample application forms and plans to create an official IRS form. Since management has developed sample application forms which include the information we recommended, we agree with the IRS’ alternate corrective action.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to assess the IRS’ efforts to 1) improve the efficiency of processing VCP applications to ensure timely processing and 2) increase participation through outreach efforts. To accomplish the objective, we:
I.
Obtained
current and historical staffing and receipt information and determined whether
the current staffing and procedures enabled the EP function to timely process
VCP applications.
A.
Evaluated
staffing devoted to the VCP during FYs 2006 through 2008 in comparison to VCP application
receipts, inventory-in-process, and VCP closures.
B.
Evaluated
whether existing processes and procedures were sufficient for timely processing
VCP applications and ensuring that incoming applications were appropriate for
the VCP.
1.
Obtained
an extract from the EP Compliance Resolution
System Research and Inventory Management
System to identify any processing delays by quantifying the amount of time
expended to control, assign, review, and close VCP application cases. This was accomplished by selecting a
judgmental sample of 220 (8.8 percent) of 2,492 closed VCP application cases
from FY 2008. We used judgmental sampling because we did not plan to project our
results. We did not verify the
completeness of the System because we did not have a basis for
comparison. In addition, we did not
verify the accuracy of the data in the System because doing so was not
necessary to accomplish our audit objective.
2.
Determined
whether EP function management had made modifications to or considered
modifying its staffing to address the increase in VCP receipts.
3.
Interviewed
management officials and frontline staff to obtain their input on whether
existing Internal Revenue Manual processes and procedures contained sufficient
detail for both timely processing VCP applications and identifying cases that
should be worked outside of the VCP.
4.
Determined
whether any analyses had been conducted to identify inefficiencies and update
processes and procedures to improve screening, determining eligibility, or
overall processing of VCP applications.
II.
Evaluated
the EP function’s outreach efforts to increase retirement plan sponsors’
participation in the VCP and what measures EP function management used to
evaluate the program’s performance.
A. Interviewed
EP function management and reviewed both existing Internal Revenue Manual
procedures and EP function directives to identify what processes are in place
to measure the VCP.
1. Determined whether the Internal Revenue Manual contained any measures (e.g., days to process VCP applications) for the VCP.
2. Identified any division-level documentation containing measures or goals (e.g., volume of closures) for the VCP.
B. Determined the extent and nature of completed and planned actions by EP function management to make small employers more aware of the VCP and to address recommendations and suggestions from the Advisory Committee on Tax Exempt and Government Entities.
1. Interviewed management to determine whether the IRS developed promotional materials for use at the 2008 IRS Tax Forum and obtained feedback on what methods were used to gauge the overall success of these efforts (e.g., any statistics showing attendance at VCP-related presentations and documentation for any issues or questions submitted by preparers).
2. Obtained documentation of other outreach methods to make the retirement plan community more aware of the types of voluntary compliance programs that are available. We determined if EP function management had statistical data for gauging how many practitioners are using available educational materials as well as any past/ongoing efforts to increase their awareness of such information.
Internal Controls
Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. While part of our objective was to assess IRS efforts to improve the efficiency in the processing of VCP applications, our assessment did not evaluate controls for ensuring accuracy of actions. Instead, the assessment was generally limited to activities relevant to the timely processing of VCP applications. In addition, we reviewed outreach efforts to increase participation in the VCP. We determined that the following internal controls were relevant to our audit objectives: the EP function’s policies, procedures, and practices for processing VCP applications and the EP function’s outreach efforts to increase retirement plan sponsors’ participation in the program. We evaluated these controls by interviewing management and other employees associated with the processing of VCP applications, reviewing application case files, and reviewing materials used to promote the VCP.
Appendix II
Major Contributors to This Report
Nancy
A. Nakamura, Assistant Inspector General for Audit (Management Services and
Exempt Organizations)
Troy
D. Paterson, Director
James
V. Westcott, Audit Manager
John
M. Jarvis, Auditor
Donald
J. Martineau, Auditor
Jeffery
R. Stieritz, Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Tax Exempt and Government Entities Division SE:T
Director, Employee Plans, Tax Exempt and Government Entities Division SE:T:EP
Director, Employee Plans, Rulings and Agreements, Tax Exempt and Government Entities Division SE:T:EP:RA
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: Director, Communications and Liaison, Tax Exempt and Government Entities Division SE:T:CL
Appendix IV
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D. C. 20224
COMMISSIONER
TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
November 17, 2009
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Sarah Hall Ingram, Commissioner /s/ Sarah Hall Ingram
Tax Exempt and Government Entities Division
SUBJECT: Draft Audit Report - Additional Process Improvements Are Needed Due to Continued Growth in the Voluntary Correction Program for Retirement Plans (Audit # 200910015)
I reviewed the subject draft report and agree with your findings. I appreciate your recognition of the importance of timely service in the area of retirement plan voluntary compliance, and its impact on the protection of the retirement savings of the American taxpayer, as well as your acknowledgement of the significant strides we have made in improving customer service under the Voluntary Correction Program (VCP) despite an unprecedented increase in filings.
The VCP promotes the proper maintenance of retirement plans and the provision of benefits promised to participants by permitting a plan sponsor to correct errors it has discovered in its retirement plan and preserve the tax benefits available for employer and employees. Since its inception, there have been more than 20,000 users of this program.
The Tax Exempt and Government Entities Division has been a forerunner in promoting taxpayer voluntary compliance, and we are continually looking for ways to improve our services and programs. Partnering with our customer stakeholders has been critical to the development of our correction programs over the past 20 years, and we welcome your suggestions as to how to further improve our VCP processes to ensure quality customer service.
A detailed response to your recommendations is attached. If you have questions, please call me at (202) 283-2500, or Joyce Kahn at (202) 283-9586.
Attachment
Attachment
To ensure the VCP provides timely service to those in the retirement plan community who are attempting to bring their retirement plans into compliance with tax-exempt laws, the Director, Employee Plans should:
RECOMMENDATION 1a.
Reinforce the need for staff conducting the initial screening of VCP applications to determine whether case files have all needed information prior to sending them to revenue agents in field offices for evaluation.
CORRECTIVE ACTION 1a.
We agree that perfecting a VCP application as much as possible on the front-end would promote more efficient case processing by the agents in the groups. We have hired additional staff to assist in this endeavor. We have allotted six new hires for Voluntary Compliance, which will enable us to improve initial screening.
IMPLEMENTATION DATE
Completed September 30, 2009
RESPONSIBLE OFFICIAL
Manager, Employee Plans Voluntary Compliance
RECOMMENDATION 1b.
Evaluate whether opportunities exist to expand the "streamlined" application process to include more common types of failures.
COMMENT
We agree with your recommendation to expand the streamlined application process to include more common types of failures. As is acknowledged in your report, creating a streamlined application process has resulted in improvements to case processing time and has increased the number of cases closed. During the past several years, Employee Plans has adopted numerous process efficiencies, some of which are identified in your report. As is true generally in regard to the development of our correction programs, many of these efficiencies were adopted as a result of stakeholder input and the experience we acquire in processing our cases. Partnering with our customer base has been one of the cornerstones upon which the Employee Plans Compliance Resolution System is based.
CORRECTIVE ACTION 1b.
We will continue to reevaluate the program and seek input from our stakeholders in order to continue developing process improvements.
IMPLEMENTATION DATE
September 30, 2011
RESPONSIBLE OFFICIAL
Manager, Employee Plans Voluntary Compliance
RECOMMENDATION 1c.
Until a VCP application form is developed, expand the VCP Revenue Procedure to include a checklist that provides retirement plan sponsors with specific options for identifying the type of retirement plan failure that led to the VCP application and the actions they are taking to correct them.
COMMENT
We agree that there is merit in developing tools that assist plan sponsors in clearly identifying the plan failures and the correction methods that are the subject of their VCP submissions. In addition to the EPCRS revenue procedure, which sets forth in detail the information and documents required to identify a plan failure and proposed correction method in a VCP application, Employee Plans has created several tools designed to assist plan sponsors in developing quality VCP submissions. These include: (1) Fix-It Guides, which assist plan sponsors in identifying plan errors, (2) a mandatory VCP application checklist, which is designed to ensure that plan sponsors address each requirement of the revenue procedure; (3) a web-based application guide, which focuses on what a plan sponsor must do to properly and completely identify a plan failure and the proposed correction method; (4) newsletter articles providing VCP application filing tips; (5) an online list of common failures in filing VCP applications; and (6) a streamlined VCP application, which pre-populates the description of the failure and correction method for simpler failures. Setting forth the failure and correction method for the plan sponsor, as is done in the VCP streamlined applications, ensures that the statements of the failure and proposed correction method are clear; however, that format does not lend itself well to more complex plan failures. To assist plan sponsors with more complex plan failures, Employee Plans has provided another sample application form, which leads the plan sponsor into presenting the plan failure and correction method in an organized manner. Use of this sample application form is not mandatory at present. We continue to investigate additional ways of improving the quality of VCP submissions.
CORRECTIVE ACTION 1c.
After we gain experience with the sample application form and the streamlined application form, Employee Plans will finalize them and create an official IRS form.
IMPLEMENTATION DATE
September 30, 2011
RESPONSIBLE OFFICIAL
Manager, Employee Plans Voluntary Compliance
RECOMMENDATION 1d.
Analyze the staffing mix for VCP revenue agent groups to determine the most effective mix of positions and responsibilities. This analysis should include reviewing the duties of the coordinator position and analyzing the span of control between group managers and revenue agents.
CORRECTIVE ACTION 1d.
We agree with your recommendation to analyze the staffing mix for VCP. Employee Plans recently submitted a hiring proposal for fiscal years (FY) 2010-2012 based on our review of our current staffing mix, span of control and assigned duties. As a result of this proposal, TE/GE has approved six new hires for Voluntary Compliance for FY 2010. The additional staffing is intended to promote improved up-front case processing as well as case processing timeliness. We are also in the process of developing a FY 2012 hiring initiative to meet future program needs.
IMPLEMENTATION DATE
Completed October, 2009
RESPONSIBLE OFFICIAL
Manager, Employee Plans Voluntary Compliance
RECOMMENDATION 1e.
Survey retirement plan sponsors upon completion of the VCP process to determine what components of the program worked well and how it could be improved.
COMMENT
We agree with your recommendation to obtain feedback from VCP filers on an ongoing basis. As your report notes, several years ago Employee Plans analyzed the feasibility of surveying VCP applicants to help determine the impact of outreach efforts and abandoned that endeavor based on the challenges involved in developing and obtaining approval for using surveys. Instead, Employee Plans gathered input from benefits groups and professionals through focus group discussions. Last year. Employee Plans developed an online survey, the first of its kind in TEIGE to obtain feedback on the Self-Correction Program.
CORRECTIVE ACTION 1e.
Employee Plans is working with TE/GE's Strategic Planning Office to develop another survey for users of VCP to obtain feedback on an ongoing basis to help identify and make further improvements to the program.
IMPLEMENTATION DATE
September 30, 2010
RESPONSIBLE OFFICIAL
Manager, Employee Plans Voluntary Compliance
[1] Pub. L. No. 109-280, 120 Stat. 1055.
[2] A Qualification Failure occurs when a plan does not meet all Internal Revenue Code requirements in a manner that adversely affects the qualification of the plan for tax-exempt status.
[3] I.R.B. 2008-35, 464.
[4] Streamlined applications involve common retirement plan errors that can be corrected quickly.
[5] 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.
[6] A measure of labor hours in which 1 FTE is equal to 8 hours multiplied by the number of compensable days in a particular fiscal year. For FYs 2006 and 2007, 1 FTE was equal to 2,080 staff hours. For FY 2008, 1 FTE was equal to 2,096 staff hours.
[7] This information was not independently verified because the accuracy of these statistics did not affect the accomplishment of our audit objective.
[8] Pub. L. No. 109-280, 120 Stat. 1055.
[10] This information was not verified because there was no independent source of data to validate the number of accesses to the webpage.
[11] While many of these presentations included information about the VCP, there is no means of positively correlating how many people attended presentations that included VCP-related information. In addition, this information was not verified because there was no independent source of data to validate the number of presentations and attendees.
[12] Information on newsletter accesses and queries could not be verified because there was no independent source of data available for verification.
[13] Information on newsletter accesses and queries could not be verified because there was no independent source of data available for verification.
[14] The coordinator also provides input to the National Headquarters analysts on VCP procedure updates, supplies information to the revenue agents about the procedure updates, and serves as the contact person for customer inquiries about the VCP.
[15] VCP applications at the Grade 11 level can be closed quickly based on the information submitted and generally require no additional contact with the retirement plan sponsor or representative. Cases at the Grade 12 level may require additional contact with the retirement plan sponsor or representative, but no coordinator approval of correction method is required. In other words, VCP revenue agents can generally close the case assuming information in the initial submission will not materially change during the course of their review.
[16] Additional Strategies Are Needed to Ensure the Employee Plans Compliance Resolution System Will Accomplish Its Intended Purposes (Reference Number 2003-10-190, dated September 12, 2003).