Improvements Are Needed to Ensure the Business Master File Case Creation Nonfiler Identification Process Is Working Effectively
February 17, 2012
Reference
Number: 2012-30-020
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
E-mail Address |
TIGTACommunications@tigta.treas.gov
Website |
http://www.tigta.gov
HIGHLIGHTS
IMPROVEMENTS ARE NEEDED TO ENSURE THE
BUSINESS MASTER FILE CASE CREATION NONFILER IDENTIFICATION PROCESS IS WORKING
EFFECTIVELY
Highlights
Final
Report issued on February 17, 2012
Highlights of Reference Number:
2012-30-020 to the Internal Revenue Service Commissioner for the Small
Business/Self-Employed Division.
IMPACT ON TAXPAYERS
Each year, the
IRS identifies more potential business nonfiler cases than it has the capacity
to work. Many of the worked cases are
closed because the business was not required to file a tax return, which is generally
an unproductive use of the IRS’s enforcement resources and burdensome to
taxpayers. In addition, taxpayers who do
not file and pay their taxes create an unfair burden on compliant taxpayers.
WHY TIGTA DID THE AUDIT
TIGTA
initiated this audit to determine whether the Business Master File Case
Creation Nonfiler Identification Process (BMF
CCNIP) implementation was effective in targeting business nonfilers who
may be delinquent in filing their required tax returns by improving workload
selection and casework quality.
WHAT TIGTA
FOUND
TIGTA’s comparison of the Baseline Business Case goals
to Collection Activity Report data for Fiscal Years 2010 and 2011 showed nonliable
closures increased rather than decreased as expected. In addition, the number of returns secured
increased as expected, but this may have been caused
by an increase in the total closed inventory.
The percentage of returns secured compared with the entire closed
inventory decreased in Fiscal Year 2010, but increased in Fiscal Year 2011.
IRS officials advised us that they believe it is too
early to measure BMF CCNIP performance results.
However, the Baseline Business Case established a proactive approach to
risk management and very specific goals and target dates after BMF CCNIP
implementation. TIGTA does not believe
it is proactive to allow additional time to pass when indications suggest an
opportunity to make improvements.
TIGTA also determined
that many of the BMF CCNIP cases assigned high-priority selection codes also
had conflicting, low-priority primary codes (Primary Code B). There is a higher risk that collection actions
may be delayed and revenue will remain uncollected on these
cases. In addition, some of the BMF CCNIP selection code criteria were inconsistent and not
formally documented.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the
Director, Enterprise Collection Strategy, Small Business/ Self-Employed
Division: 1) determine the causes of increases
or decreases in closure types and make selection code adjustments; 2) monitor
all higher priority selection code cases to ensure they are not also designated
as Primary Code B; 3) determine whether cases that have been suspended
from further collection activity need further evaluation or collection actions;
and 4) formalize clear and consistent selection code criteria.
In their response to the report, IRS officials agreed
with Recommendations 1, 2, and 4, and plan to take appropriate corrective and
monitoring actions. IRS officials
stated they do not agree with Recommendation 3 due to current resource
constraints and believe that the resource cost would outweigh the benefits of
this recommendation. As resource constraints change, they plan to
consider whether actions in this area are appropriate.
TIGTA continues to believe that identification and
analysis of the cases suspended from
further collection activity is
important. Because
the BMF CCNIP
has already scored these cases as higher priority, there is a greater
likelihood of taxpayers filing a return and paying taxes.
February 17, 2012
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Improvements Are Needed to Ensure the Business Master File Case Creation Nonfiler Identification Process Is Working Effectively (Audit # 201030019)
This report presents
the results of our review to determine whether the Business Master File Case
Creation Nonfiler Identification Process implementation
was effective in targeting business nonfilers who may be delinquent in filing
their required tax returns by improving workload selection and casework
quality. This audit was conducted as part of our Fiscal Year 2011 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 VI.
Copies of this report are also being sent
to the Internal Revenue Service 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.
Initial Results
Did Not Meet All Baseline Business Case Goals
Conflicting
Primary Codes May Delay Collection Actions
Selection Code Criteria Was
Inconsistent and Not Formally Documented
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Return Delinquency Transaction Codes
Appendix
V – Glossary of Terms
Appendix
VI – Management’s Response to the Draft Report
Abbreviations
|
BMF CCNIP |
Business Master File Case Creation
Nonfiler Identification Process |
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
|
PC-B |
Primary Code B |
|
TC |
Transaction Code |
Nonfilers[1] are individuals and businesses that are
legally required to file tax returns but have failed to file the tax returns
when they are due. The Internal Revenue
Service (IRS) considers nonfiling to be an egregious problem because it creates
an unfair burden on compliant taxpayers and can cause them to lose faith in the
fairness of the tax system. Taxpayers
who timely file and pay their taxes want to be confident that other taxpayers
are doing the same.
The IRS defines the gross Tax Gap as the
difference between the estimated amount taxpayers owe and the amount they
voluntarily and timely pay in a tax year.
In February 2006, based upon the best information available, the IRS
estimated the gross Tax Gap at $345 billion for Tax Year 2001. The IRS has also reported that
individual nonfilers accounted for an estimated $30 billion of the
total Tax Gap for Tax Year 2001. The IRS
does not have an estimate of the business nonfiler Tax Gap. However, each year the IRS identifies
more potential business nonfiler cases than it has the capacity to work. Many of these cases will not be resolved, and
many cases that are worked will be closed because the
business was not required to file a tax return.
In general, this situation results in an unproductive use of IRS
enforcement resources and is burdensome for taxpayers. As a
result, IRS nonfiler strategies
have included refining the processes for selection and modeling of nonfiler
cases each year through risk-based compliance approaches. The intention is to identify and select the
most productive nonfiler inventory and then apply appropriate compliance
treatments to high-priority cases.
The Individual Master File Case Creation
Nonfiler Identification Program is a tool used to identify individual
nonfilers. This Program identifies
taxpayers who have filed an individual
income tax return in the prior year but failed to file in the current year and
for whom the IRS has received third-party reporting information, e.g., wages and other income. Based on characteristics such as reported
income and withholding data, this information is then used
to assign a selection code to nonfiler cases, which will prioritize inventory
and allow selection of the most productive individual nonfiler cases.
In the past, the IRS did not have a similar tool for business taxpayers. Instead, the IRS relied exclusively on the Business Master File to identify business nonfilers solely from missing returns. Filing requirements for business taxpayers include specific conditions or situations, e.g., number of employees; type of organization entity; or amount of wages paid that, when present, requires the submission of a Federal tax return. The only criteria for sending a delinquency notification to a business taxpayer was an open filing requirement and the absence of a filed tax return. The system used no external data, such as third-party reporting information, to identify and create the delinquent return investigation cases that could be potentially worked by IRS employees. Responses to delinquency notifications sent to taxpayers often revealed that the taxpayers were no longer in business.
In Fiscal Year (FY) 2002, the Treasury Inspector General for Tax Administration recommended the IRS match third-party reporting information with Business Master File information to identify business nonfilers.[2] In April 2009, the IRS implemented a new tool that expanded the use of third-party information and research tools to enhance identification, selection, and resolution of business nonfiler cases. This initiative, aimed at addressing longstanding business nonfiler issues, is referred to as the Business Master File Case Creation Nonfiler Identification Process (BMF CCNIP). Similar to the Individual Master File Case Creation Nonfiler Identification Program for individual nonfilers, the BMF CCNIP uses third-party return information and other IRS account data to select potential business nonfiler cases based on the likelihood of securing returns and revenue. Although the IRS Small Business/Self-Employed Division is the primary stakeholder, the BMF CCNIP also affects Large Business and International Division and Tax Exempt and Government Entities Division taxpayers.
A primary objective of the BMF CCNIP is to prioritize business nonfiler cases by using third-party and other account data to help identify indications of recent business activity. Indications of recent business activity allow the IRS to identify potential business nonfiler cases that are most likely to be active businesses. Based on analysis of these data, the BMF CCNIP assigns the case a selection code (ranging from 01 to 99) which helps quantify its priority for assignment. Cases assigned lower numbered selection codes have a higher priority. For example, the three highest priority selection codes are as follows:
The selection codes assigned to potential business nonfiler
cases are updated automatically every week as new
taxpayer information is received.
In a recent review of the IRS’s business nonfiler program, the Government Accountability Office reported[3] that, while the IRS has made good progress in implementing the BMF CCNIP, it has not calculated the BMF CCNIP’s performance measures or planned the evaluations it would need to assess success. The IRS responded that a planned report will show information on resolution type for each case, selection code, and return type; whether the return was secured; and revenue collected with the return. The IRS plans to use this report to assess the effectiveness of the selection codes and track the volume of cases closed as not liable to file a return. IRS officials did not know when the report would be available.
This review was performed at the
IRS Small Business/Self-Employed Division Headquarters in New Carrollton,
Maryland, and the Philadelphia Campus in Philadelphia, Pennsylvania, during the
period July 2010 through July 2011. Our
review was delayed because the IRS was unable to
timely provide us with the necessary data to conduct our testing of the BMF
CCNIP selection code assignments. 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.
The Business Master File Case Creation Nonfiler Identification Process Is Providing a More Balanced Workload
One of the goals of the BMF CCNIP is to enable more efficient targeting of business nonfilers who may be delinquent in filing their required tax returns. Additionally, IRS officials informed us that an objective of the BMF CCNIP was to identify and select more productive cases to work and to improve workload management by improving workload selection.
According to IRS officials, before the BMF CCNIP was implemented, there was no way to control inventory workload or perform inventory analysis. The IRS would generally select potential nonfiler cases to be worked by the type of return, e.g., corporate returns, employment tax returns, or partnership returns. This approach was not very effective at controlling the volume of cases selected. For example, when a specific type of return was selected from nonfiler inventory, all taxpayers with returns of that type would then be sent a delinquency notification. The number of returns of a specific type could be large or small. As a result, the number of delinquency notices generated and assigned to be worked varied widely from week to week.
The BMF CCNIP prioritizes nonfiler inventory with the introduction and use of selection codes. In addition to type of return, the selection codes further categorize nonfiler cases by type of third-party reporting information and various other account data. This process results in the creation of more manageable groups of inventory and assigns each group a workload priority. Consequently, there is better control and more consistency in the number of weekly delinquency notices assigned to be worked by IRS employees. Business nonfiler cases are now moved into the collection stream in a more consistent, balanced manner.
Figure 1 compares the moving average of the inventory (delinquency notifications) assigned during each weekly cycle before and after implementation of the BMF CCNIP.
Figure 1: Moving Average of Delinquency Notices Issued Per
Weekly Cycle
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.
In Calendar Year 2008, before implementation of the BMF CCNIP, the number of delinquency cases assigned to work varied considerably, as evidenced by the repeated spikes in the graph in Figure 1. The variance in the moving average of weekly notices issued in Calendar Year 2010 (after implementation of the BMF CCNIP) shows less fluctuation and greater consistency, which is an indication of a more balanced workload.
Initial Results Did Not Meet
All Baseline Business Case Goals
The Government Performance and Results Act of 1993[4]
establishes that Federal Government agencies are
expected to identify performance measures and have clear time periods and
targets.
In their Baseline Business Case, which introduced the benefits of implementing the BMF CCNIP, IRS officials included goals for reducing the number of nonliable (Transaction Codes (TC) 590–591)[5] closures and increasing the number of returns secured (TC 599). Figure 2 shows the stated performance measures and target dates as shown in the Baseline Business Case.
Figure 2:
Baseline Business Case Current and Future
Strategic and Operational Performance Measures
|
Performance Measures |
Current Value |
Future Value |
Target Date |
|
Number of Nonliable Closures |
815,073 |
407,537 |
1st Quarter, FY 09 |
|
Number of Returns Secured |
1,461,021 |
1,583,282 |
1st Quarter, FY 09 |
|
Net Taxpayer Delinquent Investigation Dollars
Assessed |
$10,352,341,889 |
$11,218,657,100 |
1st Quarter, FY 09 |
|
Taxpayer Delinquent Investigation
Dollars Collected |
$2,637,142,905 |
$2,710,703,243 |
1st Quarter, FY 09 |
Source: BMF CCNIP Baseline Business Case Table 3.
The goals were based on FY 2005 Collection Activity Report case closure results (shown as “Current Value” in Figure 2). According to the Baseline Business Case, “there [was to] be one release in April 2009 that will include [all] capability.” However, the target date set to achieve the goals was the first quarter of FY 2009, which was prior to implementation of the BMF CCNIP. In addition, the expected annual goal for nonliable closures and returns secured for FYs 2008 through 2016 was not clearly explained. Figure 3 shows the specific performance goals that were included in Table 9 of the IRS’s Baseline Business Case.
Figure 3:
Baseline Business Case Nonmonetary Quantitative
Benefits/Strategic and Operational Performance Measures
|
Performance Measures |
FY 08 |
FY 09 |
FY 10 |
FY 11 |
FYs 12–16 |
|
Reduction in |
407,537 |
407,537 |
407,537 |
407,537 |
2,037,685 |
|
Higher Number |
1,583,282 |
1,583,282 |
1,583,282 |
1,583,282 |
7,916,410 |
Source: BMF CCNIP Baseline Business Case Table 9.
Figure 3 shows that in each year
between FY 2008 and FY 2016, the number of nonliable closures was expected to be reduced by 407,537. However, this chart is confusing because it
does not reference the baseline from which the reduction will
be realized. It is likely the
reduction was based on the number of nonliable closures in the baseline year
(FY 2005) and not intended to mean that each year would have 407,537 fewer
nonliable closures than the prior year (which would eventually be zero).
IRS management could not provide us with clarification about the anticipated benefits. Instead, management advised us that it would take years before any benefits could be measured. Despite management’s position, we believe accountability is important, and IRS management established these goals and benefits when justifying the resources needed to implement the BMF CCNIP. Further, the BMF CCNIP Baseline Business Case included a proactive risk mitigation strategy:
Risk management
for the BMF CCNIP project is an iterative process, performed continuously over
the project lifecycle. The process
includes activities to identify, quantify, respond to, and control project
risks. This process minimizes problems
by anticipating rather than reacting to events.
As noted earlier, the Government Accountability Office reported that the IRS did not establish performance measures or a tracking system that would allow it to determine if the BMF CCNIP was realizing the expected benefits identified in the Baseline Business Case. As a result, the IRS did not have information available to determine the effectiveness of the BMF CCNIP. However, we attempted to identify trends to assist research efforts and make potential improvements. We recognize these trends could be influenced by factors outside the control of the BMF CCNIP, but we do not believe it is proactive to ignore or dismiss either favorable trends or potential early warning signs. Such indicators could provide information to help the IRS make changes that will improve the effectiveness of the BMF CCNIP without waiting through years of potentially weak performance.
We compared[6]
the actual number of nonliable closures and returns secured that were reported by the IRS in its Collection Activity Reports
for FY 2010 and FY 2011 to the Baseline Business Case goals. Figure 4 shows that instead of reducing the
number of nonliable closures to 407,537 closures (which is 50 percent of the
FY 2005 nonliable closures) as expected, the number of nonliable closures
actually increased to 1,421,169 (174
percent of FY 2005 nonliable closures) in FY 2010 and 1,451,942 (178 percent of
FY 2005 nonliable closures) in FY 2011.
Figure 4: Comparison of Baseline Business Case
Nonliable Closure Goals
With Collection Activity Reports for FYs 2010 and 2011
Figure 4 was removed due to its size. To see Figure 4, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
However, Figure 5 shows that the number of returns secured exceeded the goal of 1,583,282 for both FYs 2010 and 2011. Specifically, returns secured increased to 1,766,001 in FY 2010 and 1,665,659 in FY 2011.
Figure 5:
Comparison of Baseline Business Case Returns Secured Goals
With Collection Activity Reports for FYs 2010 and 2011
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.
However, the Baseline Business Case goals were numeric, which did not consider the impact of increases or decreases in the total closed inventory. For example, if the total closed inventory increased significantly, it would be more difficult for the IRS to decrease the total number of nonliable closures because there are more cases that are worked. Similarly, a larger inventory may have contributed to the increase in the number of returns secured. Therefore, we compared the percentage of nonliable closures and returns secured with the total population of closed cases. Figure 6 shows that, while the number of returns secured increased, the percentage of cases closed as return secured actually decreased in FY 2010.
Figure 6:
Percentage of Returns Secured for FYs 2010 and 2011
Figure 6 was removed due to its size. To see Figure 6, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
The decrease in the percentage of returns secured suggests the increase in the number of returns secured (Figure 5) was influenced by the increase in the total inventory of closed cases. The number of total closures was much higher in FY 2010 (4,909,841) compared with FY 2005 (3,817,720). However, the percentage of cases closed as return secured did increase in FY 2011.
Figure 7 shows that the percentage of nonliable closures increased in both FY 2010 and FY 2011 from FY 2005, which is consistent with the increases in the number of nonliable closures shown in Figure 4 and contrary to the expected benefits that were cited in the BMF CCNIP Baseline Business Case.
Figure 7: Percentage of Nonliable Closures for FY 2010
and FY 2011
Figure 7 was removed due to its size. To see Figure 7, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
In summary, FYs 2010 and 2011 Baseline Business Case goals were not met for nonliable closures, either as a numeric goal or as a percentage of the total inventory. For returns secured, the numeric goals were met in both FYs 2010 and 2011. However, the results in FY 2010 may have been assisted by a significant increase in the total available inventory.
There were some limitations in these comparisons. IRS officials informed us that there were various changes to the way delinquency notices were sent and how cases were worked during these periods. For example, in FY 2008, the IRS changed the type of first delinquency notice used for Business Master File taxpayers. The IRS began sending delinquency notices to new associated delinquencies, which is when a taxpayer already had a delinquent return in Taxpayer Delinquent Investigation or Taxpayer Delinquent Account status. Prior to this change, delinquency notices were not sent on new delinquencies with existing associated delinquencies.
In addition, after BMF CCNIP was
implemented, Collection employees were required to consider all
potential delinquent returns when working on taxpayers’ responses to
delinquency notices. Prior to the
implementation, employees were required to consider only the specific
delinquent returns based on the taxpayer’s response. These changes may have caused an increase in
the number of nonliable closures and account for some of the increases shown in
our comparisons. However, the BMF CCNIP goals were not changed,
even though the IRS planned future iterations of the Baseline Business
Case.
Finally, IRS
officials informed us that BMF CCNIP cases closed within the first few years
after implementation were likely to be simpler cases or those closed as
nonliable, and more complicated cases would take much
longer to close. However, this risk would have been known at the time the Baseline Business Case
goals were established, but it was not reflected in the expected benefits. Instead, the nonliable closures goal was the
same in each year after implementation.
As an interim BMF CCNIP performance measure, IRS officials use the delinquency notice response rate, which measures taxpayers’ responses to IRS delinquency notifications. IRS management advised us that the response rate to notices had doubled since the start of the BMF CCNIP, increasing from about 15 percent to nearly 30 percent, but added it was too early to identify any trends. In response to the 2010 Government Accountability Office report, the IRS indicated that many delinquencies must flow through the entire compliance stream before there is resolution and, therefore, data that measure the BMF CCNIP selection code effectiveness should not be studied until they are complete and available. Management also informed us that information management reports and data necessary to assess the BMF CCNIP performance, which was expected to be available at the end of FY 2011, will not be available until the end of FY 2012. In addition, further delays are possible if needed funding for the completion of the project is not provided. Given these delays and uncertainties, we believe it would be prudent for the IRS to evaluate and determine the causes of these early trends. This assessment will allow the IRS to make more timely adjustments and improvements to the BMF CCNIP selection codes, if needed.
Recommendation
Recommendation 1: The Director, Enterprise Collection Strategy, Small Business/Self-Employed Division, should conduct an evaluation to determine the causes of increases or decreases in closure types since implementation of the BMF CCNIP. The results should be used to make appropriate adjustments to the BMF CCNIP selection codes and performance measures, if needed.
Management’s Response: IRS officials agreed with this recommendation. Delinquent return cases are selected through schedules developed by analysts. The IRS will perform an analysis of the schedules and output pre- and post-BMF CCNIP implementation to determine how the selection of Master File Tax Account code, selection code, and primary code influenced results. Also, the IRS will perform an analysis to determine if the linked rule is unduly affecting results. The analysis will look for improvements in selection and primary code assignment. If improvements to selection and primary coding are needed, coordination with the Modernization and Information Technology Services organization will be initiated and a Unified Work Request will be submitted.
Conflicting Primary Codes May Delay Collection Actions
Although the number of potential business nonfiler cases available to be assigned and worked is increasing, many will remain unassigned due to IRS resource constraints. The IRS estimates as much as 50 percent of the available inventory will not be worked. IRS officials informed us they select about 120,000 cases each week to be assigned to be worked, which is approximately six million per year. This contrasts with more than 98 million potential business nonfiler cases that were available to be assigned (as of August 2011). Generally, cases available to be assigned will remain in business nonfiler inventory for six years. It is clear that identifying potential high-priority business nonfiler inventory is very important.
In addition to selection codes, cases are also assigned a primary code. Primary codes existed prior to the implementation of the BMF CCNIP and were the only way a potential return delinquency case was categorized by the Business Master File. Primary codes are used to determine the number of delinquency notices the case receives, what happens after notifications are sent, and which function is assigned to work the case. Business nonfiler cases generally receive a primary code A, B, or X designation. Primary code B (PC-B) cases are considered the lowest priority cases and receive only one IRS delinquency notification letter. Business nonfiler cases without the PC-B designation may receive up to two delinquent return notifications. For example, if the taxpayer does not respond to the first notification, a second delinquent return notification will be sent. Although the BMF CCNIP now includes third-party information to prioritize cases and assign selection codes, IRS management in the Automated Collection System and Collection Field functions elected to keep using primary codes to assign their own inventories. In addition, these functions chose not to program the Automated Collection System and Integrated Collection System to populate the selection codes from the BMF CCNIP. IRS management stated this decision was due to additional programming costs necessary for adding the selection codes to those systems. In addition, employees were already using primary codes and were familiar with them.
Our analysis shows that higher priority selection code cases can, and often do, carry the lower priority PC-B designation. These two designations contradict each other and are, therefore, counterproductive. Figure 9 shows more than one-half of all cases with PC-B designations that were processed through the BMF CCNIP between May 2009 and November 2010 also carried a high‑priority selection code (selection codes 01 through 10). Specifically, there were 1,123,877 cases with the 10 highest priority selection codes also designated as PC-B cases, indicating the lowest priority.
Figure 9: Selection Codes With
a PC-B Designation
|
Selection
Code |
PC-B Cases |
Percentage |
|
|
01
through 10 |
1,123,877 |
51% |
|
|
11
through 99 |
1,083,898 |
49% |
|
|
Total
|
2,207,775 |
100% |
|
Source: Our analysis of the BMF CCNIP closed case
results.
The 2,207,775 PC-B designated
cases represent approximately 69 percent of the overall closed BMF CCNIP cases
during this period. IRS officials informed us that the BMF CCNIP should not be
assigning most of the higher priority selection codes with a PC-B designation and
that a programming error was a possible cause. This condition had been
occurring since implementation of the BMF CCNIP in April 2009 but was not
discovered and corrected until April 2010. We believe this condition supports our
position that waiting years to analyze the data is not proactive. Further, the correction does not appear to
have fixed the problem. Figure 10 shows
our analysis of higher priority selection codes before the programming error was corrected compared with after the correction was made.
Figure 10: Selection Codes With PC-B
Designation
Before and After Programming Correction
Figure 10 was removed due to its
size. To see Figure 10, please go to the
Adobe PDF version of the report on the TIGTA Public Web Page.
Before
the programming correction, 46 percent of the higher priority selection codes (selection
codes 01 through 10) also carried a PC-B
designation. However, after the correction,
73 percent of the higher priority selection codes had a PC-B designation.
Because primary codes are used to determine the number of return delinquency
notifications to send to taxpayers, it is possible that cases with a high-priority
selection code, but also a low-priority PC-B designation, would not receive
additional collection actions beyond the first delinquency notification. For example, PC-B designation cases would:
As a result, there is a higher risk that collection actions may be delayed and revenue will remain uncollected on delinquent return cases with high-priority selection codes that carry PC-B designations.
Recommendations
The Director, Enterprise
Collection Strategy, Small Business/Self-Employed Division, should:
Recommendation 2: Monitor all higher priority selection code cases to ensure they are not also assigned a PC-B designation.
Management’s Response: IRS management agreed with this recommendation. They will monitor the assignment of both selection and primary codes by reviewing delinquencies through the BMF CCNIP Quality Assurance screens. The Quality Assurance screen allows analysts to select segments of delinquent return cases for review post-creation. Any identified systemic issues with regard to business rules will be coordinated with the Modernization and Information Technology Services organization.
Recommendation 3: Determine whether cases that have been suspended from further collection activity
(suppressed) and have both high selection codes and PC-B designations need
further evaluation or require additional collection actions.
Management’s Response: IRS management did not agree with this
recommendation due to current resource constraints. Identification and the re-creation of
suppressed delinquencies would require coordination with the Modernization and
Information Technology Services organization and the expenditure of significant
Small Business/ Self-Employed Division campus resources. Given the large volume of available current
inventory, the IRS believes that the resource cost would outweigh the benefits
of this recommendation. As resource
constraints change, it will consider whether actions in this area are
appropriate.
Office
of Audit Comment:
The Treasury
Inspector General for Tax Administration continues to believe that
identification and analysis of the cases suspended from further collection
activity is important. Because the BMF
CCNIP has already scored these cases as higher priority, there is a greater
likelihood of taxpayers filing a return and paying taxes.
Selection
Code Criteria Was Inconsistent and Not Formally Documented
Sound management principles support that organizational
rules, policies, and procedures be clear, consistent, and updated in
writing. Such consistent, written
documentation provides clear guidance and identifies specific steps to follow
when carrying out organizational tasks and responsibilities. It also provides reference points for
employee responsibilities and troubleshooting and serves as a current standard
or benchmark when updating adjustments or making changes.
The BMF CCNIP has numerous selection codes that include the
Last Return Amount as a component in the criteria. This designation helps prioritize business nonfiler
inventory by identifying tax liabilities of recently filed returns from
taxpayers who may be noncompliant. We
reviewed 210 judgmentally selected BMF CCNIP cases and identified eight (4
percent) cases that were assigned incorrect selection codes due to the
inconsistent application of the Last Return Amount criteria. Three of the eight cases were
assigned selection code “07” and five were assigned selection code “08.” According to IRS officials, these codes
require a search for filed tax returns having tax liabilities within certain
dollar ranges. These tax returns are further identified by searching for any tax periods
within the same tax year of the potential return delinquency as well as prior tax periods. However, some of the cases we reviewed
identified tax periods within the same tax year and subsequent tax periods in an attempt to satisfy this
condition. As a result, these eight
cases did not identify the correct tax periods, which resulted in an incorrect selection
code.
We attempted to identify the criteria for BMF CCNIP
selection codes using Document 6209, IRS
Processing Codes and Information (2011 edition), which lists the Business
Master File criteria for selection codes.
However, this document does not specifically define all the terms used
in the criteria or identify how or when the criteria are to be
applied. IRS officials provided
us with interpretations of the criteria through a series of discussions and e-mails
and advised us that the BMF CCNIP
Selection Code Rules Document (October 2009) included the relevant
information. It was also noted that this documentation was jointly developed by Small Business/ Self-Employed Division
officials and IRS computer programmers.
However, these documents and the information provided were not only
confusing but contained conflicting and incomplete information. IRS officials later advised us that the BMF CCNIP Selection Code Rules Document had not been updated properly and the problem occurred due
to a programming error. However, the unclear
and inconsistent documentation of selection code criteria and terms may have
contributed to the conflicting application of some of the BMF CCNIP criteria,
such as the Last Return Amount.
The incorrect use of selection codes can result in the
assignment of cases that do not meet the criteria for assignment to employees
and a failure to assign cases with a higher likelihood of collecting a
liability.
Recommendation
Recommendation
4: The
Director, Enterprise Collection Strategy, Small Business/ Self‑Employed
Division, should develop clear and consistent documentation for
BMF CCNIP business rules (criteria) and
formalize the standard.
Management’s Response: IRS management agreed with this recommendation. BMF CCNIP documentation exists and is stored on DocIT.[7] All documentation will be reviewed and updated to ensure consistency with regard to business rules and programming implementation. This will be a joint effort between the Enterprise Collection Strategy function and the Modernization and Information Technology Services organization Application Development for BMF CCNIP function.
Appendix I
Detailed Objective, Scope, and Methodology
Our overall objective was to determine whether the BMF CCNIP implementation was effective in targeting business nonfilers[8] who may be delinquent in filing their required tax returns by improving workload selection and casework quality. To accomplish this objective, we:
I. Determined whether business nonfiler cases were properly selected and prioritized for inclusion in potential case workload inventory.
A. Interviewed Headquarters analysts to determine how the overall selection process works, their role in the process, and when/where the BMF CCNIP is used.
B. Determined the methods and appropriateness for categorizing and prioritizing cases, e.g., Inventory Delivery System and Consolidated Decision Analytics, and when this occurs.
C. Identified the selection codes and the selection code criteria.
D. Determined the appropriateness of the criteria applied in the selection process and the process used to select case inventory when requested by the campuses for collection work.
E. Conducted a case review of a judgmental sample of 210 cases from the BMF CCNIP available inventory database and evaluated whether they met the selection code criteria. A judgmental sample was used because the population was unknown. The available inventory is updated and changes on a weekly basis in the BMF CCNIP database.
1. Completed a Unified Work Request and submitted it to the IRS Small Business/Self-Employed Division for approval and submission to the IRS Modernization and Information Technology Services organization to obtain the data. We requested the first 10 cases from each available BMF CCNIP selection code. We reviewed the first three cases of each of 44 different selection codes and, if we found errors in any one of those cases, we reviewed the remaining seven cases.
2. Established the reliability of these data by verifying various data fields to the Integrated Data Retrieval System for the 210 cases.
3. Reviewed the cases by verifying the selection codes assigned with the appropriate selection code criteria.
II. Determined the overall performance results of the BMF CCNIP.
A. Determined whether the BMF CCNIP has specific application goals and objectives.
B. Determined how the IRS is assessing the performance of the BMF CCNIP in attaining its goals and objectives as identified in Step II.A.
1. Obtained performance results documentation.
2. Determined whether the BMF CCNIP is achieving its goals and objectives.
C. Determined the BMF CCNIP performance results.
1.
Obtained the open and closed delinquent return investigation cases
on the Business Master File that had been through the BMF CCNIP process from
May 2009 through November 2010.
a. Established the reliability of these data by verifying various data fields to the Integrated Data Retrieval System. We also obtained the data sets and job logs for both open and closed cases.
b. Identified the population of open and closed cases by eliminating the records that did not meet our criteria.
2. Determined the number of nonliable closures (TC 590 and TC 591) and returns secured (TC 599) from the IRS’s Collection Activity Reports for the prior 19-month period (October 2007–April 2009) before the BMF CCNIP was implemented and compared it to the data for the 19-month period after the implementation of the BMF CCNIP (May 2009–November 2010).
3. Compared FY 2005 data (obtained from the BMF CCNIP Baseline Business Case) against FYs 2010 and 2011 data (obtained from the Collection Activity Reports) to determine whether there was a decrease in nonliable closures and an increase in returns secured.
4.
Interviewed employees within
the Collection Field function, Campus Compliance Service Operations, and
Automated Collection System, at the Philadelphia Campus to determine if
workload inventory and casework quality had improved.
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 policies, procedures, and practices for prioritizing
and selecting business nonfilers as well as measuring the overall performance
of the BMF CCNIP. We evaluated these
controls by reviewing source materials, interviewing management, reviewing
delinquent return case files, and researching taxpayer accounts.
Appendix II
Major Contributors to This Report
Margaret E. Begg, Assistant Inspector General for Audit (Compliance and
Enforcement Operations)
Carl L. Aley, Director
Phyllis Heald London, Audit Manager
Julian E. O’Neal, Lead Auditor
Richard J. Viscusi, Senior Auditor
Rebecca A. Arendosh, Auditor
Appendix III
Commissioner
C
Office
of the Commissioner – Attn: Chief of Staff C
Deputy
Commissioner for Services and Enforcement SE
Deputy
Commissioner, Small Business/Self-Employed Division SE:S
Director,
Campus Compliance Services, Small Business/Self-Employed Division SE:S:CCS
Director,
Communications, Liaison, and Disclosure, Small Business/Self-Employed Division SE:S:CLD
Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division SE:S:ESC
Director, Research, Small Business/Self-Employed Division SE:S:R
Director,
Collection Policy, Small Business/Self-Employed Division SE:S:ESC:CP
Chief
Counsel CC
National
Taxpayer Advocate TA
Director,
Office of Legislative Affairs
CL:LA
Director,
Office of Program Evaluation and Risk Analysis RAS:O
Office
of Internal Control
OS:CFO:CPIC:IC
Audit
Liaison: Commissioner, Small
Business/Self-Employed Division SE:COM
Appendix IV
Return Delinquency Transaction Codes[9]
|
Transaction Code |
Definition |
|
TC 590 |
Not liable this tax period. Satisfies this module only. |
|
TC 591 |
No longer liable for tax. Satisfies this module and all subsequent modules for same Master File Tax Account Codes if not already delinquent. |
|
TC 593 |
Unable to locate taxpayer. Satisfies this module and all subsequent modules for same Master File Tax Account. |
|
TC 594 |
Return previously filed. Satisfies this module only. |
|
TC 595 |
Referred to Examination. Satisfies this module and all subsequent modules for same Master File Tax Account. |
|
TC 596 |
Referred to Criminal Investigation. Satisfies this module and all subsequent modules for same Master File Tax Account. |
|
TC 597 |
Surveyed. Satisfies this module only. |
|
TC 598 |
Shelved. Satisfies this module only. |
|
TC 599 |
Return secured. Satisfies this module only. |
Source:
Document 6209, IRS Processing Codes and Information, Chapter 11.8.3.
Appendix V
|
Term |
Definition |
|
Automated Collection System |
A
telephone contact system through which telephone assistors collect unpaid
taxes and secure tax returns from delinquent taxpayers who have not complied
with previous notices. |
|
Baseline Business Case |
Presents
an analysis of the qualitative and quantitative benefits expected to accrue
from the BMF CCNIP. |
|
Business Master File |
The
IRS database that consists of Federal tax-related transactions and accounts
for businesses, including employment taxes, income taxes on businesses, and
excise taxes. |
|
Calendar Year |
A 12-consecutive-month period beginning on the first
day of January and ending on the last day of December. |
|
Campus |
The data processing arm of the IRS. The campuses process paper and electronic
submissions, correct errors, and forward data to the Computing Centers for
analysis and posting to taxpayer accounts.
|
|
Collection Activity Report |
A
report that provides Collection function activity information from the
beginning of the fiscal year through the end of the current reporting month. |
|
Collection Field Function |
The unit in the Area Offices
consisting of revenue officers who handle personal contacts with taxpayers to
collect delinquent accounts or secure unfiled returns. |
|
Consolidated Decision Analytics |
Decision analytics uses advanced modeling
techniques that identify and prioritize the most productive cases for IRS
employees to work. |
|
Credit Balance |
Occurs on a
taxpayer’s delinquent return when tax payments have been
made prior to the return being filed. |
|
Cycle |
The year and week in which the IRS posts account
transactions or notices are issued to taxpayers. |
|
Fiscal Year |
A 12-consecutive-month period ending on the last
day of any month, except December. The Federal Government’s fiscal year begins
on October 1 and ends on September 30. |
|
Government Accountability Office |
The
investigative arm of Congress charged with examining matters relating to the
receipt and payment of public funds. |
|
Integrated Collection System |
An information management system designed to improve
revenue collections by providing revenue officers in the field access to the
most current taxpayer information using laptop computers for quicker case
resolution and improved customer service.
|
|
Integrated Data Retrieval System |
An IRS computer system capable of retrieving or
updating stored information. It works
in conjunction with a taxpayer’s account records. |
|
Inventory Delivery System |
The
inventory delivery system for collection cases that uses decision analytics,
risk-based collection criteria, and established business rules to route cases
to the Automated Collection System, the Queue, or directly to field
assignment. |
|
Large Business and International Division |
The
IRS organization that serves corporations, subchapter S corporations, and
partnerships with assets greater than $10 million. |
|
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. |
|
Master File Tax Account Codes |
The two-digit number codes that
identify the type of return filed by the taxpayer. |
|
Modernization and Information Technology
Services |
The IRS organization designed to
deliver information technology services and solutions that drive tax
administration to help ensure public confidence. |
|
Moving Average |
An average of data points for a
certain number of time periods used to indicate
trends. |
Nonfilers |
Individual
and business taxpayers who have been identified as liable to file a tax
return but have not filed a tax return by the return due date or extended due
date. |
|
Queue |
An automated
holding file for unassigned inventory of delinquent cases for which the
Collection function does not have enough resources to
immediately assign for contact.
|
|
Return Delinquency |
An IRS program
designed to work responses to notices issued to taxpayers identified as
liable to file a tax return but have not filed. |
|
Servicewide
Notice Information Program |
A program that allows IRS
employees to report possible erroneous taxpayer correspondence to the Notice
Gatekeeper; view examples of IRS notices; link to Servicewide Notice
Information Program Alerts, Internal Revenue Manual references, and other
technical reference information pertaining to each notice; and determine the
number of notices issued in a particular cycle. |
|
Small
Business/Self-Employed Division |
The IRS organization that services
self-employed taxpayers and small businesses by educating and informing them
of their tax obligations, developing educational products and services, and
helping them understand and comply with applicable tax laws. |
|
Tax Exempt and Government Entities Division |
The IRS organization
established to improve the IRS’s ability to meet the special needs of pension
plans, exempt organizations, and government entities in complying with the
tax laws. |
|
Tax
Year |
The 12-month period
for which tax is calculated. For most individual
taxpayers, the tax year is synonymous with the calendar year. |
|
Taxpayer
Delinquent Investigation |
An unfiled tax return for a taxpayer.
One Taxpayer
Delinquent Investigation
exists for all tax periods. |
|
Unified
Work Request |
Gives the detailed
business requirements for data requests so that the IRS can properly review,
assign, analyze, and respond (approve/deny) to the request and can also cost and schedule the request for the implementation
and delivery of any agreed upon information technology products or services. |
Appendix
VI
Management’s Response to the Draft Report
DEPARTMENT OF
THE TREASURY
INTERNAL
REVENUE SERVICE
WASHINGTON,
D.C. 20224
COMMISSIONER
SMALL
BUSINESS/SELF·EMPLOYED DIVISION
February 1, 2012
MEMORANDUM
FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Faris R. Fink /s/
Faris R. Fink
Commissioner, Small Business/Self-Employed
Division
SUBJECT: Draft Audit Report -
Improvements Are Needed to Ensure the Business
Master File Case Creation Nonfiler Identification Process
Is Working Effectively (Audit # 201030019)
Thank you for
the opportunity to review your draft report, "Improvements Are Needed to
Ensure the Business Master File Case Creation Nonfiler
Identification Process Is Working Effectively." Through the successful
implementation of the Business Master File Case Creation Nonfiler
Identification Process (BMF CCNIP), the IRS can now select delinquent taxpayer
accounts for the Collection work stream based on the existence of third-party
information. Third-party information is known to
indicate a high likelihood a return is
due. However, we continue to address the challenge of reengineering business
processes and practices within existing legacy systems and processes and agree
that review and analysis is required in order to realize fully the benefits
of BMF CCNIP.
We agree identification of the causes of increases or decreases in
non-liable closures and secured
returns is essential to measure the effectiveness of BMF CCNIP. However, while assignment of selection and
primary codes is systemic, manual analysis of the actual accounts selected is
necessary to properly determine the impact of the
systemic codes on case selection. For instance, created delinquency inventory is worked within various
collection functions and systems. The rules that govern which collection
treatment stream is utilized needs to be considered when BMF CCNIP selections are made to fully understand the
impact of selections on closure type and volumes.
Selection
codes are a new prioritization process that did not exist prior to BMF CCNIP implementation. Primary codes are an existing
business process used to determine collection treatment. Although BMF
CCNIP did not initially allow for selection by primary codes, it was upgraded in December 2010 to allow for selection by
Master File Tax (MFT) code, selection code, and primary code. That upgrade
enhanced the ability to target the most productive delinquencies; although, we recognize the need for further analysis to
determine the effectiveness of selection codes with specific primary codes and
whether rules for primary code assignment need to be updated.
Attached is a detailed response outlining our corrective actions. If you have any questions, please contact me, or a
member of your staff may contact Michael
Julianelle, Director, Enterprise Collection Strategy,
Small Business/Self-Employed Division at (202)
622-3480.
Attachment
Attachment
RECOMMENDATION 1:
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division, should conduct an evaluation to determine the
causes of increases or decreases in closure types since implementation
of the BMF CCNIP. The results should be used to make
appropriate adjustments to the BMF CCNIP selection codes and performance measures, if needed.
CORRECTIVE ACTION:
Created
delinquencies are selected through schedules developed
by analysts. We will perform an analysis of schedules and output pre and
post-BMF CCNIP implementation to determine how the selection of MFT code,
selection code, and primary code influenced
results. Also, we will perform an analysis to
determine if the linked rule is unduly impacting results. The linked
rule was implemented based on a recommendation in a previous TIGTA audit that
employment delinquencies should be entity and not module based and
created at the same time. The analysis will also look for improvements in selection and primary code assignment. If
improvements to selection and primary coding are
needed, coordination with MITS will be initiated and a Unified Work
Request will be submitted.
IMPLEMENTATION DATE:
April 15,
2013
RESPONSIBLE OFFICIAL(S):
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division (SB/SE)
CORRECTIVE ACTION MONITORING PLAN:
IRS will
monitor this corrective action as part of our internal management system of controls.
RECOMMENDATION 2:
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division, should monitor all higher priority
selection code cases to ensure they are not also assigned a PC-B
designation.
CORRECTIVE ACTION:
We will monitor the assignment of both selection and primary codes by
reviewing delinquencies through
the BMF CCNIP Quality Assurance (QA) screens. The QA screen allows analysts to select segments of created delinquencies for
review post-creation. Any identified systemic issues with regard to business
rules will be coordinated with the Modernization and Information
Technology Services (MITS) function.
IMPLEMENTATION DATE:
February 15,
2013
RESPONSIBLE OFFICIAL:
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division
CORRECTIVE ACTION MONITORING PLAN:
IRS will monitor this corrective action as part of our internal
management system of controls.
RECOMMENDATION 3:
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed should determine
whether cases that have been suspended from further collection activity
(suppressed) and have both high selection codes and PC-B designations need further evaluation or
require additional collection actions.
CORRECTIVE ACTION:
Given current resource constraints, we do not agree with this
recommendation. Identification and the re-creation of suppressed delinquencies
would require coordination with
MITS and the expenditure of significant SB/SE campus resources. Given the large
volume of available current inventory (as pointed out in the TIGTA report), we
believe that the resource cost would outweigh the benefits of this recommendation. As resource constraints
change, we will consider whether actions in this area are appropriate.
IMPLEMENTATION DATE:
N/A
RESPONSIBLE OFFICIAL(S):
N/A
CORRECTIVE ACTION MONITORING PLAN:
N/A
RECOMMENDATION 4:
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division, should
develop clear and consistent documentation for BMF CCNIP business rules
(criteria) and formalize the standard.
CORRECTIVE
ACTION:
BMF CCNIP
documentation exists and is stored on DOCIT. All documentation will be reviewed and
updated to ensure consistency with regard to business rules and programming
implementation. This will be a joint effort between the Enterprise
Collection Strategy and MITS Application Development for BMF CCNIP functions.
IMPLEMENTATION
DATE:
February 15,
2013
RESPONSIBLE
OFFICIAL(S):
The Director,
Enterprise Collection Strategy, Small Business/Self-Employed Division
CORRECTIVE
ACTION MONITORING PLAN:
IRS will
monitor this corrective action as part of our internal management system of controls.
[1] See Appendix V for a glossary of terms.
[2] Treasury Inspector General for Tax Administration,
Ref. No. 2002-30-185, The Internal
Revenue Service Should Evaluate the Feasibility of Using Available Documents to
Verify Information Reported on Business Tax Returns (Sept. 2002).
[3] Government Accountability Office, GAO-10-950, TAX GAP: IRS Has Modernized Its Business Nonfiler Program but Could Benefit from More Evaluation and Use of Third-Party Data (August 31, 2010).
[4] Pub. L. No. 103-62, 107 Stat. 285 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C., and 39 U.S.C.).
[5] See Appendix IV for a complete list of return delinquency transaction codes.
[6] For these comparisons, we assumed the goals were intended to be the difference between the current year and the baseline year of FY 2005, and not expected to decrease/increase relative to the preceding year. For example, we assumed FY 2010 goal of 407,537 fewer nonliable closures was based on the 815,073 nonliable closures reported in FY 2005, not 407,537 fewer closures than FY 2009.
[7] DocIT is a web-based electronic document management system powered by the enterprise standard tool Documentum. Documentum provides documentation control for information technology projects. DocIT manages more than half a million internal project documents within the IRS for more than 3,000 internal users.
[8] See Appendix V for a glossary of terms.
[9] See Appendix V for a glossary of terms.