TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
Progress Has Been Made to Reengineer the Examination Program, but Additional Improvements Are Needed to Reduce Taxpayer Burden
February 18, 2011
Reference
Number: 2011-30-016
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:
1 = Tax Return/Return Information
Phone
Number | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
PROGRESS HAS BEEN MADE TO REENGINEER THE EXAMINATION
PROGRAM, BUT ADDITIONAL IMPROVEMENTS ARE NEEDED TO REDUCE TAXPAYER BURDEN
Highlights
Final Report
issued on February 18, 2011
Highlights
of Reference Number: 2011-30-016 to the
Internal Revenue Service Commissioners for the Small Business/Self-Employed
Division and the Wage and Investment Division.
IMPACT ON
TAXPAYERS
The
Correspondence and Discretionary Examination Program (hereafter referred to as the
Program) conducts examinations exclusively by mail to reduce Internal Revenue
Service (IRS) operational costs and minimize the burden on taxpayers. However, taxpayers have expressed concerns
with the length of the examination process, the lack of consideration given to their
information sent to the IRS, and treatment by IRS employees. While the IRS is reengineering the examination
process, taxpayer burden continues to exist.
WHY TIGTA
DID THE AUDIT
This
audit was initiated at the IRS Oversight Board’s request for TIGTA to assess
whether recent IRS efforts to identify weaknesses and take actions in its Program
actually improved results. Our overall
objective was to determine whether the IRS’s reengineered Program resulted in a
more responsive and less burdensome process for taxpayers.
WHAT TIGTA
FOUND
Steps
have been taken to reengineer the Program and improve employee compliance with
Program guidelines, which could ultimately lessen taxpayer burden and increase
taxpayer rights and entitlements. TIGTA
selected and reviewed two samples to evaluate employee performance before and
after the Program implemented a new mail model process at one processing
site. Our results showed that after
implementing the process, the Program reflected significant improvements in
several attributes used to measure performance.
Despite the progress, results from our statistical sample of cases where
taxpayers agreed to the additional tax assessments showed 28 of 62 cases
contained errors. The majority of these
errors related to employees untimely closing cases.
Our
analyses of another statistical and two judgmental samples of cases where the
taxpayer did not agree with the additional assessment showed Program employees
did not always consider the taxpayer’s correspondence before closing the
case.
WHAT TIGTA
RECOMMENDED
TIGTA
recommended that the IRS ensure all Program employees 1) follow mail processing
guidelines until the mail model process is fully implemented in all sites and 2)
follow guidelines for handling, responding to, and considering taxpayer
correspondence.
Although the IRS agreed with our recommendations, it did not agree
with our outcome measure. Specifically,
the IRS stated that many of the errors do not impact taxpayer rights and
entitlements because the absence of a date stamp on a taxpayer’s correspondence
would not constitute burden to the taxpayer.
In addition, the IRS expressed concerns with TIGTA’s use of the word
“error” because it could lead readers to believe that an incorrect conclusion
was reached during the examination.
Our audit findings and recommendations address results that showed
IRS employees did not adhere to established procedures and/or guidelines when
processing correspondence taxpayers submit for examinations of their tax
returns. For example, when date stamps
which are applied to assist employees control of documents received from
taxpayers are missing, the IRS cannot ensure a timely response to the taxpayer. When employees do
not adhere to IRS guidelines and procedures, it is simply an error. TIGTA continues to believe that when these
errors occur, taxpayers are at risk of not receiving their rights,
entitlements, and protection of due process when they question the accuracy of
tax liabilities resulting from Program examinations.
February 18, 2011
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Progress Has Been Made to Reengineer the Examination Program, but Additional Improvements Are Needed to Reduce Taxpayer Burden (Audit # 201030034)
This report presents the results of our review to determine whether the
Internal Revenue Service’s (IRS) reengineered Correspondence and Discretionary
Examination Program (hereafter referred to as the Program) process resulted in
a more responsive and less burdensome process for taxpayers. The Program’s process includes mail
processing, information document requests, and telephone access and
service. The IRS Oversight Board
(hereafter referred to as the Board) and tax practitioners expressed concerns
with the execution of Program examinations.
Specifically, the excessive time it takes to reach final resolution of a
taxpayer’s case, the inability of the taxpayer to contact the IRS to obtain
definitive information on the questionable tax issue, and the fact that
taxpayer inquiry calls are not being returned. In February 2009, the IRS responded to the
Board that it had taken a series of actions to identify and address key
weaknesses in its Program processes that contributed to taxpayer
dissatisfaction in the past. This
review was requested by the Board and was part of our Fiscal Year 2010 Annual
Audit Plan and addresses the major management challenge of Tax Compliance
Initiatives.
Management’s complete response to the draft report is
included as Appendix VIII. 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.
Examination
Program Changes Were Successfully Piloted, but Challenges Still Exist
Additional
Steps Are Needed to Ensure Employees Follow Procedures to Improve Customer Satisfaction
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix III – Report Distribution
List
Appendix
VI – Letter 3219 Notice of Deficiency
Appendix
VII – Glossary of Terms
Appendix
VIII – Management’s Response to the Draft Report
Abbreviations
|
IRS |
Internal Revenue Service |
|
SB/SE |
Small Business/Self-Employed |
|
W&I |
Wage and Investment |
The Correspondence and
Discretionary Examination Program (hereafter referred to as the Program)[1] plays a vital role in the Internal Revenue Service’s
(IRS) mission of promoting voluntary compliance with the tax law. Program examinations are conducted at 10
sites[2] in the Small Business/Self-Employed (SB/SE) Division
as part of the Campus Compliance Services function and in the Wage and
Investment (W&I) Division under the Reporting Compliance function. Figure 1 reflects the volume of examinations
and additional tax revenue generated from October 1, 2007, through March 10, 2010,
for both Divisions.
Figure 1: Volume
of Examinations and Additional Tax Revenue
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Number of Examinations |
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Source: Our analysis of the Audit Information
Management System[3]
for October 1, 2007, through March 10, 2010.
By conducting examinations,
Program examiners are primarily responsible for determining the correct tax liabilities
for taxpayers. Examinations of
individual taxpayers can range from reviewing their tax returns and resolving
questionable items by corresponding with them through the mail to a detailed
face-to-face examination of a taxpayer’s financial records at his or her place
of business. In contrast to the more
labor-intensive, face-to-face examination, the correspondence examination
process is less intrusive, more automated, and conducted by examiners who are trained
to address and focus on less complex tax issues. Importantly, correspondence examinations also
enable the IRS to reach more taxpayers at a lower cost, minimize taxpayer burden,
and release resources for face-to-face examinations focused on more complex
noncompliance tax issues.
Once a tax return is
selected for examination, taxpayers are issued a letter requesting additional
information to support the questionable tax items. If the taxpayer does not respond, the IRS
issues a second letter informing the taxpayer of the proposed tax
assessment. If the taxpayer does not
respond to the second letter or if the response is insufficient to address the
items in question, the IRS will issue a Notice of Deficiency (Letter 3219).[4] This Letter
gives the taxpayer 90 days[5] to pay the tax assessment or file a petition
with the Tax Court. If resolution has
not occurred by the end of the 90-day period, the Program examination is closed
and the assessed tax is posted to the taxpayer’s account.
In 2008, practitioners stated the IRS had increased the number of
Program audits and expressed concern about the extraordinary amount of time
required to reach a final resolution.
In the 2008 IRS
Oversight Board (hereafter referred to as the Board) Annual Report to Congress,
practitioners expressed concern about the increased number of Program examinations
and the extraordinary amount of time required to reach
a final resolution. In addition,
practitioners shared that the IRS did not designate, in the various letters, an
employee who could be contacted to further define the issues or answer taxpayer
questions. The current process requires
taxpayers to call the number listed on letters and leave a voice mail
message. Practitioners stated IRS
employees are not responding to these calls and suggested a telephone help line
for taxpayers to call when they have questions.
Finally, some practitioners stated their clients get repeat notices over
several years for the same issue even after prior examinations were closed without
a tax assessment (i.e., referred to by the Program as a no-change case).
In February 2009,
the IRS briefed the Board on research it conducted which confirmed that many
taxpayers and practitioners find the process too lengthy and the IRS
correspondence difficult to understand.
The IRS indicated that it had identified key weaknesses and had
developed solutions that would focus on three areas for improvement – mail processing, requests for taxpayer information
documents, and telephone access and service. The Board requested the Treasury Inspector General
for Tax Administration assess whether the recent efforts the IRS made to
reengineer its Program resulted in a more responsive and less burdensome
process for taxpayers.
We identified two internal IRS studies of the correspondence examination process that responded to the Board’s concerns. The purposes of the studies were to evaluate if Program employees were adhering to Program guidelines and make recommendations to reduce the burden on taxpayers. The two studies and reported results were as follows:
·
In
January 2009, the SB/SE Division Taxpayer Improvement Initiative study
recommended solutions to improve Program employees’ communication with
taxpayers and improve taxpayers’ ability to receive assistance when they call
the IRS. The SB/SE Division developed
job aides to help Program employees communicate to taxpayers what documentation
is required to substantiate questionable items on the tax return. As of July 2010, the SB/SE Division completed
implementation of the toll-free call routing system currently being used by the
W&I Division. Taxpayers will be able
to speak directly with assistors when they have questions about their Program examination.
·
In
February 2010, the W&I Division Lean Six Sigma study began piloting a
centralized model for processing incoming mail at the Austin Compliance Site. This model will centralize all mail
processing and increase the flexibility in planning, staffing, and
teamwork. The W&I Division plans to
implement the model in all its sites by June 2011. The SB/SE Division plans to pilot the process
in December 2010 at one of its five sites and implement the process in the
remaining sites by April 2011.
This review was performed at the W&I Division Headquarters and sites at the Atlanta Campus in Atlanta, Georgia; the Austin Campus in Austin, Texas; the Kansas City Campus in Kansas City, Missouri; the Memphis Campus in Memphis, Tennessee; and, the SB/SE Division Headquarters in New Carrolton, Maryland, during the period January through August 2010. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Examination Program Changes Were Successfully Piloted, but Challenges Still Exist
For our review, we selected a statistical sample of 62 W&I
Division and SB/SE Division closed agreed cases from a population of 251,215 for
the period April through December 2009.[6]
Results showed 28 (48 percent)[7] contained errors where Program employees did not
follow guidelines while completing the Program examination. The majority of these errors related to
employees untimely closing cases. We also selected and reviewed a judgmental
sample of 35 closed agreed cases from the Austin Compliance Site for the month
of May 2010. The Austin Compliance Site was
selected because the IRS chose it to pilot the changes to the mail process recommended
from the Lean Six Sigma study. We compared
the results from this sample to the results from our statistical sample for
several Program attributes to determine if the implemented changes improved
Program results.
The IRS implemented a new mail model process that has improved Program compliance and could ultimately reduce taxpayer burden
Our review showed measurable differences between the two samples,
indicating the new mail model process has improved compliance with Program
guidelines and could ultimately lessen taxpayer burden. For example, prior to implementing changes at
the Austin Compliance Site, it took the Program an average of 27 days to close
an agreed case. Based upon the sample
results, after implementing the changes, 100 percent of the cases were closed within
an average of 7 days.[8] Figure
2 reflects a comparison of the attributes used by the Program before and after
the changes were implemented at the Austin Compliance Site.
Figure 2: Comparison of Pilot and Program Results
for Compliance With Program Guidelines
|
Program Attributes |
Results From the Program Before Changes
Were Implemented[9] |
Results From Pilot Site After Changes Were
Implemented |
|
Cases were not
stamped with Program received date. |
5% (3 of 62) |
0% All stamped correctly |
|
Cases were
not routed to Program employees to work within 1 to 3 days. |
5% (3 of 59) Ranged from 4 to 14 days |
0% All routed timely |
|
Cases were not
closed within the required number of days from the Program received date.[10]
|
37% (21 of 62) |
17% (6 of 35) |
|
Case actions
were not documented in automated history sheets. |
***1*** |
***1*** |
Source:
Our analyses of closed agreed cases from
both Divisions.
Program
management has not established guidelines for the number of days it should take
examiners to close agreed cases.
However, when asked, the SB/SE Division considered 21 days as reasonable
to close agreed cases and the W&I Division had an expectation of 7 days. Government Accountability Office standards
provide that management conduct reviews to compare actual performance to planned
results and analyze significant differences. Based on our analysis and for Program consistency,
we believe the opportunity exists for Program management to strengthen its
controls by revisiting what is reasonable and their expectation for the number
of days it takes to close agreed cases.
Overall, we believe the changes the Program has taken to improve its processes are a positive step in the right direction. However, until the Program can implement the planned changes at all sites, taxpayers will continue to experience increased burden and inconsistencies with the process. Based on our results, we project 108,092[11] closed agreed cases from April through December 2009 contained an error that decreased the Program’s performance measures and increased the risk that taxpayers were not afforded the rights and entitlements to due process as protected by employees’ adherence to Program guidelines. See Appendix IV for our projection details.
Recommendations
The Commissioners, SB/SE and W&I Divisions, should:
Recommendation 1: Ensure that all Program employees follow current mail processing guidelines until the pilot mail model is fully implemented in all 10 sites.
Management’s Response: IRS management agreed with this recommendation. They will continue to ensure adherence to their procedures in all aspects of their Program through their annual operational and program reviews.
Recommendation 2: Strengthen controls over processing agreed cases and, for consistency between the two Business Divisions, establish a specific time constraint for Program employees to close agreed cases.
Management’s Response: IRS management agreed with this recommendation. They will establish a standard timeframe and incorporate this into their Internal Revenue Manual guidance. They also agreed to implement a processing change to make it easier to identify agreed cases that are delayed more than 7 days.
Additional Steps Are Needed to Ensure Employees Follow Procedures to Improve Customer Satisfaction
Our audit results showed the Program process continues to be lengthy and, prior to closing the case, Program employees did not always consider the information taxpayers provided in response to IRS letters. We completed analyses of three additional samples of default cases and cases that were closed but were reopened because taxpayers provided new information for audit reconsideration. We selected these samples to determine whether employees adhered to Program guidelines. We did not evaluate whether Program changes, made as a result of the IRS studies, improved the examination process.[12]
Process improvements are needed to close cases when the taxpayer responds but disagrees with the proposed tax assessment
From a population of
137,294 cases, we selected and reviewed a statistical sample of 60 closed
default cases for the period April through December 2009 for the W&I and
SB/SE Divisions to determine if employees followed Program guidelines. Our results showed 47 (83 percent) contained errors that indicate Program
employees did not always follow procedures when closing cases. For example,
after responding to correspondence received from the Program, taxpayers experienced
delays ranging from 32 to 137[13] days waiting for Program employees to take
action with the correspondence that was sent.
Guidelines require Program employees to evaluate the taxpayers’
correspondence and take the next action within 30 days from the IRS received
date. Figure 3 reflects the results for
the Program attributes used to measure performance in both Divisions.
Figure 3: Analyses of 60 Closed Default Cases[14]
|
Program Attributes |
Error Rates for |
|
Cases were not stamped with Program received date. |
6% (4 of 60) |
|
When warranted, taxpayers were not contacted by Program employees when
additional information was needed. |
18% (5 of 34) |
|
Program employees did not evaluate the taxpayers’ correspondence within
30 days from the IRS received date. |
72% (40 of 60) Ranged from 32 to 137
days |
|
Cases were not routed to Program employees within 5 business days. |
45% (14 of 41) Ranged from 7 to 130 days |
|
The computer system was not updated within 5 business days of the
Program received date. |
63% (27 of 44) Ranged from 8 to 71 days |
Source: Our analyses of the sampled closed default cases from April through December 2009.
The Program’s Fiscal Year 2009 operational reviews showed similar results to the types of errors identified in our sample. In response to the operational reviews, Program management stated that an adequate process to update its computer system with correspondence received from taxpayers was not in place to meet Program requirements. We shared our sample results with Program management and were advised that the lack of a process to handle the high volume of correspondence was a critical challenge during Fiscal Year 2009. Many of the delays IRS employees experienced working the cases could be attributed to correspondence and claims associated with the First-Time Homebuyer Credit. For example, the volume of claims and original tax returns associated with the Credit steadily increased from 1,466 in April 2009 to 89,338 by September 2009. The unexpected increase caused Program management to shuffle resources in an effort to keep up with the demand. Based on our results, we project 101,787[15] closed default cases contained an error that decreased the Program’s performance measures and increased the risk that taxpayers were not afforded the rights and entitlements to due process as protected by employees’ adherence to Program guidelines. See Appendix IV for our projection details.
Process improvements are needed to ensure correspondence received
from the taxpayer is considered before the case is closed
We selected a judgmental sample of 24[16] default cases after receiving concerns that Program employees were not following procedures requiring them to consider taxpayer correspondence prior to closing the cases. Our results showed for 17 of the cases, Program employees did not consider the taxpayers’ correspondence prior to closing the case. In addition, for 10 (59 percent) of the 17 cases, the taxpayers’ correspondence was not input to the Integrated Data Retrieval System and/or the Correspondence Examination Automation Support System within the required time period to alert Program employees that correspondence had been received. This situation was attributed to Program employees storing taxpayer correspondence on shelves instead of entering the information in the computer systems.
When correspondence is not timely entered into the systems,
IRS employees who work the Toll-Free telephone lines cannot advise taxpayers when
they call that their correspondence has been received and is being
considered. In addition, Program
employees are unable to consider the taxpayer’s correspondence because the
computer systems have no record of the correspondence being received. Our
analyses showed that taxpayer correspondence was stored on the shelves from 13
to 822[17] days prior to closing. Shelving the correspondence resulted in a
backlog of work that employees could not process until Program resources were
allocated to enter the correspondence in the computer systems.
Guidelines state the Program employees should, before deciding whether to assess additional taxes, consider all correspondence received from the taxpayer within 7 days after the case is closed. Further, if correspondence is received and a decision to close the case cannot be made within 14 days from the date the taxpayer responds, the correspondence should be input into both computer systems. Finally, if correspondence is received after the case is closed, the correspondence should be reviewed as an audit reconsideration. Figure 4 shows the results for the Program attributes used to measure Program performance for default cases closed.
Figure 4: Analyses
of Correspondence Received
Prior to Closing the Default Cases
|
Program Attributes |
Error Rate |
|
Decision to close the case was not made
within the required 14 days of receipt of correspondence. |
96% (23 of 24) |
|
Correspondence was not controlled
within the required 14 days after correspondence was received. |
54% (13 of 24) Ranged from 20 to 707
days |
|
Cases were not worked within 30 days of
receipt. |
92% (22 of 24) Ranged from 68 to 822
days |
|
Cases were not stamped with a Program
received date. |
*****1***** |
|
Correspondence received either prior to
closing or within 7 days after closing but was not considered.[18] |
71% (17 of 24) |
|
Correspondence received more than 7
days after the case was closed but was not worked as an audit reconsideration
case as required. |
29% (7 of 24) Ranged from 9 to 357
days |
Source: Analyses of 24 judgmentally selected default cases from one Program site.
Since Program employees did not consider the correspondence prior to closing the case, 17 taxpayers were assessed $38,591 in additional taxes and experienced increased taxpayer burden. Our analyses of the cases showed the taxpayers questioned the assessments and resubmitted information that was not considered during the original examination. We did not evaluate if the information provided by the taxpayer would have substantiated the items in question on the tax returns. However, after reviewing the information provided by the taxpayer, Program employees agreed to reduce the total assessments by 34 percent, or $13,287.
Program employees considered taxpayer correspondence after the case was closed.
We selected and reviewed a judgmental
sample of 14[19]
cases after receiving concerns that taxpayer correspondence was not being considered
before the case was closed. Our results
showed that for 11 (79 percent) of the cases, Program employees met expectations
when completing audit reconsideration cases.
Program management does not have specific time constraints for Program
employees to close audit reconsideration cases.
However, we were advised that Program employees are expected to review
taxpayer correspondence and complete audit reconsideration cases within 120
days from the date the correspondence is received. We determined that the average number of days
to work and close all 11 cases was 104 days.
*********1****************while the
remainder ranged from 13 to 123 days to close.
Further, after considering the taxpayers’ correspondence, Program
employees reduced the additional tax assessments by 63 percent, or from $36,075
to $22,720.
For the remaining 3 cases, Program employees classified and
worked the cases as audit reconsiderations even though the taxpayers’
correspondence was actually received an average of 26 days prior to the case closing. Because the taxpayers’ correspondence was not
considered before the cases were closed, the Program assessed the taxpayers $11,282
in additional taxes. After considering
the correspondence during the audit reconsideration, Program employees abated
the entire $11,282 in additional tax assessments.
In most instances,
we believe Program management has established guidance for its employees when
responding to and controlling taxpayer correspondence. However, when Program employees do not follow
procedures or consider taxpayers’ correspondence, the burden on taxpayers increases.
For example, taxpayers in our sample would have eventually received
notices demanding payment for taxes that were not owed. Taxpayers could have incurred additional
expenses if they had to hire a certified public accountant or attorney to
represent them before the IRS. In addition,
the IRS inefficiently used its resources because Program employees performed additional
work abating taxes that should not have been assessed if the taxpayers’
correspondence had been considered when it was initially received. Government Accountability Office standards
provide that transactions are to be accurately and timely recorded to maintain
their relevance and value to management in controlling operations and making
decisions. When this efficiency occurs, management
is able to achieve effective results both within its Program and with its customers.
Program improvements could increase
taxpayers’ customer satisfaction
As
part of the IRS agency-wide initiative to monitor and improve taxpayer
satisfaction, the IRS provides a Customer Satisfaction Survey to taxpayers whose
tax returns were examined by Program employees.
Our review of the survey results from the SB/SE and W&I
Divisions for the period October through December 2009[20]
showed, on average, a 44 percent dissatisfaction rate when taxpayers were
questioned about the length of the examination process, time spent on the examination,
consideration given to information sent to the IRS, and fairness of treatment by
Program employees. These issues were rated by taxpayers as very important and consistent with
concerns expressed by the Board.
The IRS’ contractor that analyzed the survey results suggested that
“making improvements to areas in which customers are relatively dissatisfied
and/or where the item is very important to them will improve overall
customer satisfaction.” See Appendix V for taxpayers’ responses to the
Customer Satisfaction Survey on their examination experience.
Recommendation
Recommendation 3: The Commissioners, SB/SE and W&I Divisions, should ensure employees follow all Program guidelines for handling, responding to, and considering taxpayer correspondence when working Program cases.
Management’s Response: IRS management agreed with this recommendation. They will continue to ensure adherence to their procedures in all aspects of their Program through their annual operational and program reviews.
Office of Audit Comment: The IRS agreed with our recommendations, but did not agree with our reported outcome measure. Specifically, the IRS stated many of the errors do not impact taxpayer rights and entitlements because the absence of a date stamp on a taxpayer’s correspondence would not constitute burden to the taxpayer. In addition, the IRS expressed concerns with our use of the word “error” when referring to delayed processing because it could lead readers to believe that an incorrect conclusion was reached during the examination.
Our audit findings and recommendations address results that showed IRS employees did not adhere to established procedures and/or guidelines when processing correspondence taxpayers submit for examinations of their tax returns. For example, when date stamps, which are applied to assist employees’ control of documents received from taxpayers, are missing, the IRS cannot ensure a timely response to the taxpayer. We used the IRS’s criteria, which included some inconsistency between the W&I and SB/SE Divisions, for measuring timeliness to identify errors. When employees do not adhere to IRS guidelines and procedures, it is simply an error. We continue to believe that when these errors occur, taxpayers are at risk of not receiving their rights, entitlements, and protection of due process when they question the accuracy of tax liabilities resulting from Program examinations. For example, we reported 17 instances where taxpayers were assessed additional taxes and interest totaling $38,591 because the IRS did not timely consider the information submitted by taxpayers. After taxpayers questioned the assessments and resubmitted information, Program management agreed to reduce the assessments by $13,287.
The overall objective of our review was to determine whether the IRS’s reengineered Program process resulted in a more responsive and less burdensome process for taxpayers. We clearly state in the report that it did not evaluate whether the information provided by the taxpayer would have substantiated the items in question. The IRS’s guidelines and procedures are designed to ensure fair and equitable treatment for all taxpayers and to control and monitor employee work. We reported the IRS’s new mail process has improved Program results and could, once implemented at all sites, lessen taxpayer burden. These results were based on valid statistical samples which were shared with the IRS throughout this review. It is unclear to us why the IRS disagrees with our outcome measure when it agreed to take corrective actions for all of our recommendations.
Appendix I
Detailed Objective, Scope, and Methodology
Our overall objective was to determine whether the IRS’s reengineered Program process (i.e., mail processing, information document requests, and telephone access and service) resulted in a more responsive and less burdensome process for taxpayers. To accomplish this objective, we:
I. Determined what changes, if any, had been implemented to improve procedures in place for processing incoming mail. This included following up to determine if any Taxpayer Improvement Initiative study team and Lean Six Sigma[21] Mail study recommendations were implemented and whether the Mail study met its April 2010 completion date. In addition, we reviewed quarterly Customer Satisfaction Survey results for the satisfaction levels of taxpayers with the Program.
II. Determined whether the Program effectively and efficiently followed procedures to process taxpayer correspondence.
A. Selected a statistical sample of 62 agreed and 60 default cases from Audit Information Management System to determine if Program employees adhered to existing guidelines when completing Program examinations. In addition, we assessed the reliability of the data in the Examination databases used during the audit by comparing selected fields from our sampled cases to the Integrated Data Retrieval System. We did not identify any reportable differences. We used attribute sampling and selected cases from the SB/SE and W&I Divisions.
1. For the agreed cases sample, we used a 90 percent error rate, a 90 percent confidence interval, and a ±6.25 percent precision level. We used the weighted average method to determine the number of cases selected from each Division.
Weighted Sample
Cases Average Size
SB/SE population of cases 94,931 .38 23
W&I population of cases 156,284
.62 39
251,215
100% 62
2.
For the default cases sample, we used an 80 percent
error rate, a 90 percent confidence interval, and a ±8.5 percent precision
level. We used the weighted average method
to determine the number of cases selected from each Division.
Weighted Sample
Cases Average Size
SB/SE population of cases 51,588
.38 23
W&I population of cases
85,706 .62 37
137,294
100% 60
B. We selected a judgmental sample of 24[22] cases in one Program site to determine whether Program employees adhered to guidelines for processing and closing default cases. We used judgmental sampling because we could not define the population and did not plan to project our results.
C. We selected a judgmental sample of 14[23] cases in one Program site using the Treasury Inspector General for Tax Administration Data Center Warehouse Individual Return Transaction File and Audit Information Management System to determine whether Program employees adhered to guidelines for processing and closing default cases that were reopened to consider new information provided by the taxpayer. We used judgmental sampling because we could not define the population and did not plan to project our results.
III. Monitored whether the SB/SE Division toll-free call routing system was on target for the July 2010 rollout.
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. We determined the
following internal controls were relevant to our audit objective: IRS guidelines for timely and effectively
routing, handling and closing Program cases.
We evaluated these controls through discussions with Program management
and employees, and by selecting and reviewing closed agreed and default Program
cases.
Appendix II
Major Contributors to This Report
Margaret E. Begg, Assistant Inspector General for Audit (Compliance and
Enforcement Operations)
Frank Jones, Director
Deborah Smallwood, Audit Manager
Sylvia Sloan-Copeland, Lead Auditor
Cindy Harris, Senior Auditor
Lynn Ross, Senior Auditor
Chanda Stratton, Auditor
Michele Strong, 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
Deputy Commissioner, Wage and Investment Division SE:W
Director, Campus Compliance Services, Small Business/Self-Employed Division SE:S:CCS
Director, Campus Reporting Compliance, Small Business/Self-Employed Division SE:S:CCS:CRC
Director, Compliance, Wage and Investment Division SE:W:CP
Director, Reporting Compliance, Wage and Investment Division SE:W:CP:RC
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Commissioner, Small Business/Self-Employed Division SE:S
Commissioner, Wage and Investment Division SE:W
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Potential; taxpayers represented by 108,092 agreed[24] closed cases and 101,787[25] closed default cases that contained an error because Program employees did not adhere to Program guidelines (see pages 4 and 6).
Methodology Used to Measure the Reported Benefit:
Closed Agreed
Cases
We selected a statistical sample of 62 W&I Division and
SB/SE Division closed agreed cases from a population of 251,215 for the period
April through December 2009. Our results
showed 28 (48 percent) contained errors
where employees did not follow guidelines while completing the Program
examination.
- The W&I Division had 24 of 39 closed
agreed cases with errors and the SB/SE Division had 4 of 23, totaling 28 of
62.
- To determine the combined error rate for
both Divisions, we weighed the error rate for each Division by the population for both Divisions. Specifically,
o
Agreed W&I
Division population + agreed SB/SE Division population = agreed total
population: (156,284 + 68,523[26] = 224,807).
o
Agreed
W&I Division population percent: 69.5 percent (156,284/224,807).
o
Agreed SB/SE
Division population percent: 30.5
percent (68,523/224,807).
o
Error rate
for the W&I Division is 61.5 percent and the SB/SE Division is 17.4 percent.
o
Error rate
for both Divisions is 0.695 x 0.615 + 0.305 x 0.174 = 0.4278 + 0.0530 = 0.4808 or
48 percent.
- Projected number of Program cases with an error
that represented taxpayers (0.4808 x 224,807) = 108,092.[27]
Closed Default Cases
We selected a
statistical sample of 60 closed default cases from a population of 137,294 for
the period April through December 2009 for the W&I and SB/SE Divisions to
determine if employees followed Program guidelines. Results showed 47 (83 percent) contained errors that indicate Program employees
continue to not always follow procedures when closing cases.
- The W&I Division had all 37 closed
default cases with errors and the SB/SE Division had 10 of 23, totaling 47
of 60.
- To determine the combined error rate for
both Divisions, we weighed the error rate for each Division by the population for both Divisions. Specifically,
o
Default W&I
Division population + default SB/SE Division population = the default total population: (85,706 +
37,018[28] = 122,724).
o
Default
W&I Division population percent: 69.8
percent (85,706/122,724).
o Default SB/SE Division
population percent: 30.2 percent (37,018/122,724).
o
Error rate
for the W&I Division is 100 percent and the SB/SE Division is 43.5 percent.
o
Error rate
for both Divisions is 0.698 x 1.00 + 0.302 x 0.435 = 0.6980 + 0.1314 = 0.8294 or
83 percent.
- Projected number of Program cases with an
error that represented taxpayers (.8294 x 122,724) = 101,787.
Appendix V
Taxpayer Feedback From the Fiscal
Year 2010 Customer
Satisfaction Survey on Their Experience With the Examination
Process
“I
had to use the Taxpayer Advocate due to no response to phone calls or fax
requests; the examiner had terrible professional contact.”
“The
frustrating part is that I made sixteen phone calls and left messages, and not
one call was returned.”
“I
left several messages with my case worker, and she would never get back to me.”
“It
took seven months to resolve this issue.”
“The
length of time during the audit can cause anxiety!”
“I
feel like I have been singled out, picked on, and harassed by the IRS.”
“I
am still waiting for my refund. I feel
this is very unfair.”
“I
spent hours on the phone with the IRS going from one person to the next trying
to get guidance as to what to do.”
“It
takes a lot of time to get all of the paperwork together. How do people with full-time jobs handle
this?”
“The
wait time to actually get my case assigned and my information in front of an
agent was way too long. It took
approximately six to eight months.”
“Find
a way to have these matters resolved quicker than one year.”
“I
sent in a copy of my divorce agreement with my taxes but it was never looked
at.”
“When
a person sends court papers for proof in a case for the audit, they should
consider them and not let them be ignored.”
“Original
notice of adjustment to my return gave no explanation as to why changes were
made.”
“I
think the IRS needs to give a more clear explanation of their findings during
the audit.”
Appendix VI
Letter 3219 Notice of Deficiency
Letter 3219was
removed due to its size. To see the Letter, please go to the Adobe PDF version of the report
on the TIGTA Public Web Page.
Appendix VII
Abating – The act of reducing or eliminating unpaid taxes.
Agreed – Cases are considered agreed when the taxpayer signs the proposed tax
assessment report agreeing to changes made.
Assessment – An assessment is the
statutorily required recording of the tax liability. This generally happens when the IRS
determines the taxpayer owed more taxes than reported on the tax return.
Audit Information Management System – An
IRS computer system that provides inventory and activity control of active
examinations.
Audit Reconsideration – The process the IRS uses to reevaluate the
results of a prior examination where additional tax was assessed and remains
unpaid or a tax credit was reversed. If
the taxpayer disagrees with the original determination, he or she must provide
information that was not previously considered during the original examination.
Automated History Sheet – An electronic workpaper in IRS computer systems
which captures the actions taken on a case (e.g., contacts with taxpayers and
research conducted).
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.
Correspondence Examination Automation Support
System – The IRS suite of
web-based applications developed to enhance the site examination process. The system enables case assignment and
transfer between examination groups and batch groups, facilitates a universal
view of the campus examination case inventory, and allows the display of the
client-generated tax reports and letters associated with the examination case.
Defaulted – Cases
are defaulted when the taxpayer fails to sign the proposed tax assessment
report, contacts the IRS to appeal the tax assessment, or petitions the Tax
Court.
Individual Return Transaction File – One of the IRS data files stored at the Data
Center Warehouse. The Return Transaction
File contains all edited, transcribed, and error-corrected data from the U.S.
Individual Income Tax Return (Form 1040) series and related forms for the
current processing year and 2 prior years.
Integrated Data Retrieval System – An IRS computer system with the capability to instantaneously retrieve or update stored taxpayer information. The system tracks taxpayer status and allows for post transaction updates back to the Master File.
IRS Received Date
– The date the IRS stamps on correspondence designating the date it was
received at any IRS office or campus.
Lean Six Sigma – Lean is a time
and value-based process improvement philosophy designed to eliminate waste and nonvalue-added
activities. Six Sigma
is a business process improvement
method that uses data and facts to produce bottom-line measurable results
through reduction in process variation.
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.
Program Received Date – The date the Discretionary Examination and
Correspondence Examination Program receives and date stamps mail for processing.
Treasury Inspector
General for Tax Administration Data Center Warehouse – A centralized storage and administration
of files that provides data and data access services of IRS data.
Appendix VIII
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
COMM1SSIONER
WAGE AND INVESTMENT DIVISION
January 6, 2011
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Richard
Byrd. Jr. /s/ Richard Byrd
Commissioner, Wage and Investment Division
SUBJECT: Draft Audit Report
– Progress Has Been Made to Reengineer the Examination Program, but Additional
Improvements Are Needed to Reduce Taxpayer Burden (Audit #201030034)
We have reviewed the
subject draft report and appreciate your recognition of steps we have taken to
reengineer the Correspondence and Discretionary Examination Program in the Wage
and Investment and Small Business/Self-Employed Divisions. Specifically, your report acknowledges the
implementation of the corporate routing of the telephone system and the pilot
of the new mail model processing for Correspondence Examination. The
implementation of the corporate routing of the telephone system enables
taxpayers to speak directly to examiners to address concerns about their
examinations. Corporate call routing has significantly increased the taxpayer’s
ability to reach an examiner. Your report also acknowledged that the new mail
model process has improved compliance with Program guidelines.
In recent years, we
implemented other processing enhancements to improve our service in response to
concerns from taxpayers and tax practitioners. These include: standardizing and
extending the time periods for taxpayers to provide supporting documentation,
granting additional time to respond to notices when requested by taxpayers,
issuing acknowledgement letters to taxpayers upon receipt of their
correspondence, providing additional training to examiners to help reduce
taxpayer burden, and providing additional tools for our telephone assistors,
which has enabled them to provide more completed and consistent answers to
taxpayers. These enhancements have
enabled us to be more responsive to taxpayers. It is also noteworthy that we
have implemented these program enhancements as a result of efficiencies in our
program, without additional funding.
Your report
addresses timeliness issues identified in the processing of sample cases. While
we agree that some of the sample cases involved processing delays, incorrect
audit determinations were not found in these cases, which is one of our
significant goals in providing service to the taxpayers. Additionally, our
existing review process and campus oversight adequately monitors these
timeliness issues.
We are concerned
with the terminology used in the report when referring to delayed processing as
“errors.” The use of “error” in this context could lead to an incorrect
conclusion that these examinations contained errors in reaching correct tax
determinations, whereas your audit did not reveal any weaknesses to audit
determinations. Additionally, we are
concerned about the small statistical samples used in your report to make
population inferences. The small samples, based on assumed error rates, could
result in inaccurate inferences to the overall population on certain measures
and be misleading to the public.
We do not agree with
the outcome measure in Appendix IV because many of the “errors” do not impact
taxpayer rights and entitlements. For example, your office has not explained to
our satisfaction how it was determined that the lack of an internal date stamp
on the taxpayer’s correspondence constitutes a burden to the taxpayer. We also
do not feel that the error rate for the agreed cases is reliable since inconsistent
time frames were used to determine errors. Cases meeting the same time period
were considered errors in some instances, but were not errors in other
instances. Additionally, while we set an expectation to address the mail within
30 days, processing variables such as surges in mail receipts often make it
difficult to meet this business expectation. We have business measures in place
to monitor overage mail specifically for this reason. We also have a process in
place (interim letters) to keep the taxpayer informed when case resolution is
delayed.
Attached are our comments to your specific recommendations.
If you have any questions, please contact me, or a member of your staff may
contact Ray Johnson, Acting Director, Reporting Compliance, Wage and Investment
Division, at (404) 338-8983.
Attachment
Attachment
The Commissioners, SB/SE and W&I Divisions,
should:
RECOMMENDATION
1
Ensure that all Program employees follow current mail processing guidelines until the pilot mail model is fully implemented in all 10 sites.
CORRECTIVE
ACTION
We will continue to
ensure adherence to our procedures in all aspects of our program through our
annual operational and program reviews.
IMPLEMENTATION
DATE
Implemented and
Ongoing
RESPONSIBLE
OFFICIALS
Director, Reporting Compliance, Wage and
Investment Division
Director, Campus
Reporting Compliance, Small Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN
We will continue to monitor
this corrective action as part of our internal management control process.
RECOMMENDATION
2
Strengthen controls over processing agreed cases and for consistency between the two Business Divisions, establish a specific time constraint for Program employees to close agreed cases.
CORRECTIVE
ACTION
We agree with this
recommendation. We will establish a
standard timeframe and incorporate this into our Internal Revenue Manual
guidance. We also agree to implement a
processing change to make it easier to identify agreed cases that are delayed
more than seven days.
IMPLEMENTATION
DATE
October 15, 2011
RESPONSIBLE
OFFICIALS
Director, Reporting Compliance, Wage and
Investment Division
Director, Campus
Reporting Compliance, Small Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN
We will monitor this
corrective action as part of our internal management control process.
RECOMMENDATION
3
The Commissioners, SB/SE and W&I Divisions,
should ensure employees follow all program guidelines for handling, responding
to, and considering taxpayer correspondence when working Program cases.
CORRECTIVE
ACTION
We will continue to
ensure adherence to our procedures in all aspects of our program through our
annual operational and program reviews.
IMPLEMENTATION
DATE
Implemented and
Ongoing
RESPONSIBLE
OFFICIALS
Director, Reporting Compliance, Wage and
Investment Division
Director, Campus
Reporting Compliance, Small Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN
We will continue to monitor
this corrective action as part of our internal management control process.