This review was conducted as part of Internal Audit’s Fiscal Year 1997 Business Taxpayer Audit Strategy. Under the strategy, Internal Audit initiated a series of national reviews which were designed to identify opportunities to improve customer service and reduce burden for the business taxpayer. This review focused on the Service’s processes designed to assign Employer Identification Numbers (EIN) and filing requirements. Specifically, the objective of this audit was to determine if procedures for establishing business entities and related filing requirements on the Business Master File (BMF) could be improved to reduce taxpayer burden, decrease costs and improve customer service.

Overall the Service has efficient and effective processes for assigning EINs. Taxpayers have a variety of customer-friendly means to obtain EINs and the Service correctly processes Forms SS-4 (Application for Employer Identification Number) to establish accurate filing requirements for new business entities. An automated system for satisfying Form 941 filing requirements could be an additional means to improve customer service for business taxpayers. Such a system could reduce the burden of filing a tax return and decrease Service processing costs. In addition to those benefits, the Service could improve compliance efforts and focus Service resources on more productive cases by implementing corrective actions from a prior Internal Audit report.

Specifically we determined the following:

• The Service has efficient and effective processes for assigning EINs and establishing filing requirements.
• An automated system for satisfying filing requirements for $0 Form 941 filers could benefit the Service and reduce taxpayer burden.
• Implementation of prior Internal Audit recommendations could improve compliance efforts.

The Service has efficient and effective processes for assigning EINs and establishing filing requirements. Taxpayers have a variety of customer-friendly means to obtain EINs. At least two of the available methods, Tele-TIN and the pilot Federal Employer Identification Number (FEIN) program, provide taxpayers with the requested EINs immediately. The Service also establishes accurate filing requirements when assigning EINs. Filing requirements are established based on information taxpayers provide, including a planned business start date and a date the business plans to start paying wages. Taxpayers are not bound to inform the Service of changes to these planned dates. However, the Service expects taxpayers to file tax returns based on the planned dates provided by them.

An automated system for satisfying filing requirements for $0 Form 941 filers would benefit the Service and reduce taxpayer burden. In 1995 and 1996 the Service received and processed about 4.2 million Forms 941, Employer’s Quarterly Federal Tax Return, without a tax liability. We estimate that Forms 941 filed without a tax liability in 1995 and 1996 may have cost the Service up to $18 million to process. In addition, the Service spends thousands of hours resolving delinquency inquiries and satisfying filing requirements for taxpayers without tax liabilities. The Service could change this process by creating an interactive telephone system for use by BMF taxpayers who do not have a liability in a particular quarter.

Implementation of prior Internal Audit recommendations could improve compliance efforts. In a prior report, Internal Audit recommended that management modify computer programming to select more productive delinquency investigations and that the Service make better use of available information to establish filing requirements and ensure compliance. During this review we followed up on management’s implementation of corrective actions arising from those recommendations. One recommendation was not correctly implemented and timely implementation of the other recommendations is at risk. When advised of the incorrect implementation, management took immediate corrective action. For the remaining recommendations, the Service needs to take measures to ensure that they are timely implemented.

We recommend that the Service:

• Establish a system that allows taxpayers to telephonically satisfy their filing requirements, and revise EIN assignment and delinquency notices to reflect this procedural change.
• Include information in Form 941 instructions advising taxpayers to use the newly created telephone voice response system if they have a $0 tax liability.
• Modify delinquency checks ****2b,2e****.
• Establish a cross-reference between reporting agents and client accounts as recommended by the Andover Service center Natural Work Group in order to timely implement previous Internal Audit recommendations.

2b = Law Enforcement Guideline(s)
2e = Law Enforcement Procedure(s)