Executive Summary

Objective and Scope

Background

Results

conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Prior Recommendations Not Fully Implemented

Appendix V – Management's Response to the Draft Report

Executive Summary

The General Accounting Office (GAO) and the Internal Revenue Service (IRS) Inspection Service (now the Treasury Inspector General for Tax Administration (TIGTA)) have repeatedly reported on the high number of fraudulent refunds claimed on electronically filed returns. In October 1994, the Department of the Treasury’s Under Secretary (Enforcement) testified before the congress that up to "$5 billion in problematic refunds [was being] paid out annually." One way the IRS acts to deter the filing of fraudulent tax returns is by controlling access to the Electronic Filing (e-file) program. Under this control procedure, Electronic Return Originators (EROs, also referred to as electronic return preparers and/or transmitters) are screened against established criteria prior to being accepted for the next year’s Electronic Filing Program. This screening process is commonly referred to as determining the "suitability" of EROs to participate in e-file.

In response to a material weakness initially identified during a 1992 Federal Managers’ Financial Integrity Act (FMFIA) review, the IRS centralized the national screening of the ERO suitability from 33 sites into a consolidated site. During the first centralization phase, effective for processing 1997 tax returns, the consolidated site undertook the screening of new applications for becoming EROs. The suitability screening for the remaining EROs continued to be decentralized, with the decisions on suitability being made by personnel in the 33 IRS districts.

For the 1998 filing season, the IRS determined the suitability of 19,285 new applicants to participate in e-file as EROs. The IRS concluded that 18,780 (97 percent) of the new applicants were suitable to participate.

Our audit objective was to determine if the IRS’ suitability screening process was effective in assuring that only appropriate EROs participated in the e-file program.

For the 1998 filing season, the IRS implemented significant improvements to the suitability screening process, particularly the implementation of the consolidated site for processing new applications. To further enhance this improvement, the IRS should consider more stringent enforcement of existing criteria and improved automated suitability screening. This would help ensure that only EROs meeting minimum tax compliance and background qualification requirements participate in the Electronic Filing Program in the future. This should further help limit the IRS’ susceptibility to filing fraud. The results of our three primary test areas showed that:

The Office of Electronic Tax Administration (ETA) actions to consolidate the processing of new applications into one location resulted in reasonably accurate and consistent initial suitability decisions. Our analysis showed that consolidated site tax examiners made an accurate suitability decision on 92 of the 96 cases tested.

The 1998 suitability screening process could have been more effective in preventing inappropriate EROs from participating in the Electronic Filing Program. An analysis of the overall universe of EROs (new applicants and current participants) accepted to participate in e-file showed that 1,733 EROs had one or more inappropriate characteristics, yet were allowed to participate in the 1998 e-file program. A detailed analysis of 90 of these EROs showed that they transmitted 13,392 e-file returns, an average of 149 per ERO.

During the first phase of the appeals process, 85 percent (401 of 470) of the EROs that failed suitability had the decision reversed and were admitted into the e-file program.

ETA management had not fully implemented 16 of 62 suitability-related recommendations made in relation to FMFIA, GAO, TIGTA, and e-file Task Force activities. For example, after repeated recommendations, management has been unable to update computer programming so that tax examiners making ERO admission decisions could be made aware immediately of ERO tax compliance information that could affect continued participation.

The risk of allowing inappropriate preparers/transmitters to participate in the IRS’ e-file program as EROs could be reduced by ensuring that application processing procedures are followed and that more aggressive and consistent procedures are developed to check and remove questionable preparers/transmitters from the program. IRS management should also develop procedures to ensure a separation of duties between employees responsible for the initial failed suitability decision and the employees responsible for the initial appeal decision.

ETA management also should improve suitability computer programming so participants that were identified during annual suitability as having incomplete filing data are automatically rechecked prior to the start of the filing season. Improvements should also be made to the IRS’ computer systems to identify EROs and generate a report when specific transactions appear on an ERO's tax account that would affect suitability. In addition, the IRS should utilize the criminal Investigation Management Information System (cIMIS) to more efficiently and effectively identify EROs who have a criminal history.

ETA management should review prior FMFIA, GAO, e-file Task Force, and TIGTA suitability-related recommendations and ensure that they are implemented.

Management's Response: ETA stated that they have taken or will take actions as a result of our recommendations. To improve the e-file program, ETA agreed to: (1) update procedures and/or hold meetings to ensure that consistent suitability procedures and instructions are used to check and remove questionable preparers; (2) update applicable suitability procedures to separate the appeal process from the original determination process; (3) start preliminary coordination to correct suitability programming; and (4) review prior suitability-related recommendations and determine if they should be implemented.

In addition, ETA management agreed that implementing the recommendation to develop a code on an IRS computer system, when specific transactions appear on an ERO’s tax account, would provide early notification of instances that potentially impact suitability. However, ETA stated that the implications to a computer system, and the extensive programming needed, prevented their ensuring its implementation.

ETA management disagreed with our recommendation that the IRS should compare the ERO automated database to the cIMIS database to identify accepted EROs who have a criminal investigation history. However, ETA officials stated that they would research the cIMIS computer database further to determine if it could be beneficial to the Electronic Filing Program.

Office of Audit comments: We encourage ETA management to reconsider its decision not to use available computer based tools to help identify accepted EROs who have a criminal investigation history. We strongly believe that the use of cIMIS would provide important background information with minimal expense and fewer delays than the primary source currently used. Our limited test of cIMIS matching identified three accepted EROs who had criminal histories or criminal investigation case information.

Regarding the lack of IRS programming capability, we suggest the IRS begin to look to external alternatives if internal IRS resources remain in short supply. In addition, we also suggest ETA management closely supervise and control the review and implementation of prior FMFIA, GAO, e-file Task Force, and TIGTA recommendations to ensure thorough completion.

Objective and Scope

We initiated this review as part of our overall strategy to provide coverage of the Internal Revenue Service's (IRS) revenue protection activities. For the 1998 filing season, the IRS centralized the processing of new applications for preparers and transmitters of electronic returns from 33 district offices to a consolidated site at the Andover Service center (ANSc).

These changes were made in response to a Federal Managers’ Financial Integrity Act (FMFIA) revenue protection-related material weakness that found applicants "shopping" for undemanding IRS districts in which to pass suitability. Improvements were necessary in order to help attack the continual problem of fraudulent and erroneous refund claims associated with electronically filed (e-file) returns. Since 1988, criminal Investigation has detected 113,642 questionable e-file returns, involving possible fraudulent refunds totaling over $250 million.

Audit work was performed at the ANSc and the National Office. The audit was conducted between January and August 1998, in accordance with Government Auditing Standards.

Our overall objective was to determine if the IRS’ suitability screening process was effective in assuring that only appropriate Electronic Return Originators (EROs) participated in e-file. Specifically, we determined if:

• The consolidated site was effective in screening new e-file applicants.
• The IRS’ overall suitability screening process was effective in assuring only appropriate preparers and transmitters participated in e-file.
• Prior suitability-related recommendations were implemented.

To accomplish our objectives we:

• Identified 12,487 applications processed at the consolidated site, as of December 18, 1997, and analyzed 96 randomly selected cases to verify the accuracy of the suitability determinations.
• conducted a computer analysis of ERO tax accounts to identify any tax compliance conditions that could affect suitability. To verify the results of this analysis, we randomly selected cases to sample from the various categories identified.
• conducted an in-depth analysis of 34 randomly selected appeal cases to determine the appropriateness of the appeal decisions.
• Analyzed the status of 62 prior Treasury Inspector General for Tax Administration (TIGTA), General Accounting Office (GAO), FMFIA, and e-file Task Force recommendations related to the suitability process.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

The GAO and the IRS Inspection Service (now the Treasury Inspector General for Tax Administration (TIGTA)) have repeatedly reported on the high number of fraudulent refunds claimed on e-file returns. In October 1994, the Department of the Treasury’s Under Secretary (Enforcement) testified before the congress that up to "$5 billion in problematic refunds [was being] paid out annually." One way the IRS acts to deter the filing of fraudulent tax returns is by controlling access to the e-file program. Under this control procedure, EROs (also referred to as electronic return preparers and/or transmitters) are screened against established criteria prior to being accepted for the next year’s Electronic Filing Program. This screening process is commonly referred to as determining the "suitability" of EROs to participate in e-file.

One IRS revenue protection control is to screen for the suitability of all organizations and individuals that want to participate in the e-file program. This process verifies, among other things, that all required tax returns have been filed and tax liabilities have been satisfied. Suitability screening helps to ensure that e-file applicants and participants have and maintain a high degree of integrity and adhere to the highest professional and ethical standards, thus reducing the potential for fraudulent activities.

The computer-based Automated Suitability Analysis Program (ASAP) analyzes an IRS computer system for each applicant and participant for various suitability exception criteria. cases that meet suitability exception criteria, or for which no tax records are found, are researched further to determine their suitability status. New applicants are accepted or rejected based on the results of the ASAP analysis, plus any research that may be needed. All accepted participants are rechecked annually to ensure continued adherence to the suitability standards.

As of September 2, 1997, the ANSc became the consolidated site for receiving and processing new electronic filing applications. In processing year 1998, annual suitability determinations continued to be made in the district offices. Since July 1998, all suitability determinations have been made at the ANSc.

Results

For 1998, the Office of Electronic Tax Administration (ETA) implemented improvements to the suitability screening process, particularly the implementation of the consolidated site for processing new applications. To enhance this improvement further, the IRS should consider more stringent enforcement of existing criteria and improved automated suitability screening. This would help to ensure that only electronic preparers and transmitters meeting minimum tax compliance and background qualification requirements participate in the Electronic Filing Program in the future. Also, this should help to limit the IRS’ susceptibility to filing fraud. The results of our three primary test areas showed:

1. ETA’s actions to consolidate the processing of new applications into one location resulted in reasonably accurate and consistent initial suitability decisions. Our in-depth analysis of selected suitability criteria showed that consolidated site tax examiners made an accurate suitability decision on 92 of the 96 cases tested.
2. The 1998 suitability screening and appeal processes could have been more effective in preventing EROs who did not meet minimum tax compliance or background clearance criteria from participating in the e-file program. We identified 1,733 EROs which had been approved to continue to participate in e-file even though conditions existed on their tax accounts prior to the 1998 filing season that may have warranted rejection or suspension. Also, we determined that, during the first phase of the appeal process, 12 failed suitability determinations were inappropriately reversed, and one applicant was inappropriately denied acceptance into e-file.
3. ETA had not fully implemented 16 of 62 suitability-related recommendations made in relation to FMFIA, GAO, TIGTA, and e-file Task Force activities.

Suitability Decisions Made on New Electronic Filing Program Applicants Were Reasonably Accurate and consistent

Effective September 2, 1997, the IRS consolidated the processing of new applications to the centralized location at the ANSc. Handling of existing, annual suitability determinations was left with IRS district offices.

As of April 30, 1998, ANSc's tax examiners had determined the suitability of 19,285 new applications. The centralized staff concluded that 18,780 (97 percent) of the new applicants were suitable to participate in the e-file program.

Our in-depth analysis of selected suitability criteria, on 96 randomly selected applications processed by the centralized staff, showed that 92 (96 percent) of the suitability decisions were accurate and consistent based on the ASAP information available to the staff. Of the 96 cases reviewed, the consolidated site tax examiners had approved 92 for participation and failed 4.

In 4 of the 92 approved cases, examiners did not follow established administrative procedures. This increased the risk of unsuitable applicants being allowed to participate in the IRS’ e-file program.

On one of the applications, there was information that the applicant had been convicted of a criminal offense for willfully aiding and assisting in the preparation of a materially false federal income tax return. The information was apparently not forwarded to criminal Investigation (cI) as required, or noted by the tax examiner when conducting the suitability determination.

IRS procedures require that research of an applicant’s criminal history be part of the suitability check. However, the examiners did not consider this because their suitability guidelines did not require the tax examiner to consider any data on the application, even when the applicant admitted to a criminal conviction. We reviewed 19 applications with indications of a criminal history on the application. We found that two applicants with convictions of filing false tax returns had been accepted into the program, even though they enclosed court documentation of the conviction of filing false tax returns. One of the applicants was accepted into the program less than a year after conviction and was on probation for five years.

With the help of cI, we checked a sample of 276 Social Security Numbers (SSNs) from active EROs against the computerized criminal Investigation Management Information System (cIMIS), to see if there were any formal criminal Investigation cases shown. cIMIS data files showed that 3 of the 276 (1 percent) had a criminal case investigation (including the two applicants noted above).

Prior to the implementation of a consolidated site, the IRS districts compared applicant data to the cIMIS. However, with the new centralized location, the districts are no longer involved in the new application process and the cIMIS was not routinely checked at the consolidated site.

The processing of fingerprint cards for new applicants was not effective in assuring that only appropriate participants are in the e-file program. When the fingerprint cards are received back from the Federal Bureau of Investigation and contain criminal history information, they should be sent to cI for further review. However, this did not occur until February 3, 1998, giving potential problem filers at least two weeks of filing before cI reviewed the data.

IRS procedures state that applicants should not be admitted into the program until the fingerprint results are received and analyzed. These procedures were not followed by the staff conducting the suitability screenings at the consolidated site.

Each participant is rechecked annually to ensure continued adherence to the suitability standards. For the 1998 filing season, the IRS districts performed this task.

As of July 1, 1998, the staff at the centralized site assumed responsibility for the annual suitability process. National Office officials believed this change will free-up time for the districts to work on other aspects of their job, such as marketing and monitoring. But more importantly, it should result in consistent suitability determinations and stop the perception that participants will "shop" around at various IRS districts for acceptance into the program.

We recommended that the Office of Electronic Tax Administration:

1. compare the ERO automated database to the cIMIS in order to identify accepted EROs who have a criminal history.

Management's Response: The Office of Electronic Tax Administration disagreed with this recommendation. They stated that they would need to do more extensive research to determine if routinely checking the cIMIS would be beneficial to the Electronic Filing Program.

Office of Audit comment: We encourage the Office of Electronic Tax Administration to reconsider its decision not to use available computer-based tools, such as cIMIS, to help identify accepted EROs who have a criminal investigation history. We strongly believe that the use of cIMIS would provide important background information with minimal expense, and fewer delays, than the primary source currently used.

2. Ensure that application processing procedures, especially those relating to background investigations, are followed.

Management's Response: The Office of Electronic Tax Administration stated that meetings were held to ensure instructions are consistent and that applicable suitability procedures were updated.

Annual Suitability Screening conditions Allowed Inappropriate Electronic Return Originators to Participate in Electronic Filing

Although improvements were made to the 1998 suitability screening process, the overall process was not completely successful in preventing inappropriate EROs from participating in the e-file program. Some of the weaknesses identified included:

• Suitability computer programming that did not identify some cases with incomplete filing data.
• An inability to identify conditions immediately that would adversely impact the ERO’s continued participation.
• Inconsistent enforcement of existing criteria.

An analysis of the overall universe of EROs (new applicants and current participants), accepted to participate in e-file, showed that 1,733 EROs had one or more of the following inappropriate characteristics, yet were allowed to participate in the 1998 program:

• 1,359 participants with untimely filed tax returns (many of these cases also had a history of filing late).
• 334 participants with unpaid tax liabilities as high as $143,801.
• 55 participants with cumulative miscellaneous penalties as high as $84,676.
• 6 participants with fraud penalties as high as $4,179.
• 2 participants convicted of filing false federal tax returns (as mentioned previously).

Many of the participants identified above had previously been subject to the annual suitability process conducted by the IRS district offices.

Suitability criteria state that one of the reasons an ERO may be suspended or rejected from the e-file program is the failure to file timely and accurate business and/or personal tax returns. Although improvements were made to suitability programming in 1998, a programming oversight prevented the ASAP from identifying all cases that had incomplete filing data.

E-file participants were not identified as EROs on the IRS’ computer systems, which house taxpayer account information. As a result, the IRS could not immediately "flag" participants who, after acceptance into the program, have problems that might adversely affect their suitability.

An analysis of 33 e-file participants, with unpaid federal tax liabilities, showed the liability condition occurred after the suitability determination, but prior to the start of the 1998 filing season for 19 (58 percent) of the 33 participants.

Since 1991, an IRS Task Force, GAO, and TIGTA have recommended that action be taken so e-file participants can be identified on the IRS’ computer systems. This would allow tax examiners to be made aware of information that could affect continued participation. Although initially agreed to, action on this recommendation has not been implemented.

conditions that should have led to suspension or rejection from e-file participation were readily identifiable on participants’ tax accounts at the time of the suitability decision. For example, five of the six EROs cited in the table below had been assessed penalties for tax fraud prior to the suitability determination. IRS procedures require that individuals assessed penalties for fraud should be denied participation in the e-file program. However, these EROs were allowed to participate in e-file.

As a group, EROs with fraud penalties had a higher reject rate for electronic returns submitted. We analyzed e-file data for 90 participating EROs, selected from the 1,733 EROs with inappropriate characteristics. The analysis showed that the 6 participants with a fraud penalty assessment in their record had an overall reject rate of 23 percent, which is about 9 percent higher than the national average for all EROs. The reject rate for the other conditions we sampled was similar to the national reject rate of 14 percent. Specifically, the analysis showed the following:

Within each of these categories there was at least one ERO with a very high reject rate. For example, an ERO with a fraud penalty assessment had a reject rate of 34 percent (664 returns transmitted and 229 rejections).

In filing season 1998, the IRS received 17.5 million e-file tax returns. The IRS estimates that 24.2 million e-file returns will be received in the year 2001. As shown above, we made a detailed analysis of 90 EROs with inappropriate characteristics that were allowed to participate. These EROs had transmitted an average of 149 returns each. This indicates that if the 1,733 inappropriate EROs identified were suspended from e-file, the impact to the overall volume of e-file returns would not be significant.

We recommended that the Office of Electronic Tax Administration:

3. Develop more aggressive and consistent procedures for checking and removing questionable preparers from the e-file program.

Management's Response: The Office of Electronic Tax Administration stated that meetings were held to ensure instructions are consistent and that applicable suitability procedures were updated.

4. Develop suitability computer programming and procedures to recheck participants, prior to the start of a processing year, that had incomplete data at the time of the annual suitability process.

Management's Response: The Office of Electronic Tax Administration stated that they started preliminary coordination to correct suitability programming.

5. Develop an identification code on an IRS computer system that will identify EROs and generate a report when specific transactions appear on the ERO’s tax account that would impact suitability.

Management's Response: The Office of Electronic Tax Administration stated they agreed that implementing the recommendation to develop an entity code on an IRS computer system, when specific transactions appear on a tax account, would provide early notification of instances that potentially impact suitability. However, they stated that they believe that the implications to the IRS computer system prevent their ensuring its implementation.

Office of Audit comment: Regarding the lack of IRS programming capability, we suggest the IRS consider external alternatives if internal IRS resources remain unavailable.

Appeal Procedures for Applicants That Failed Suitability Should Be Strengthened

An applicant who has been denied participation in the IRS’ e-file program has the right to appeal the failed suitability determination. The appeal letter, which is sent to the Director, ANSc, must contain a detailed explanation, with supporting documentation, of why the denial should be reversed. If the Director, ANSc, issues a final letter of denial, the applicant can submit another appeal, this time to the Director of Practice.

During the first phase of the appeal process, under the consolidated staff review, 85 percent (401 of 470) of appealed suitability determinations were reversed.

The accuracy of the appeal process could be improved. We found that 12 (35 percent) of the 34 appeal cases we tested had the appealed determination inappropriately reversed. In addition, one appellant, whose disqualification should have been reversed, was not admitted.

comparable appeal statistics for prior years were not available because the data was not specifically reported for new applications.

Four of the inappropriate reversals involved the assessment of civil/miscellaneous penalties. One of these cases had a prior suspension from the e-file program that was subsequently reversed. In another case, the taxpayer resigned and stated that he would not work on electronic tax returns but would remain at the business as a consultant.

ETA and ANSc officials decided to waive certain admission criteria. However, this decision was never put in writing and applied only to certain applicants. They believed that large volume filers would be more susceptible for failing suitability because of this type of penalty. We did not agree with this decision because: (1) the policy change was not put in writing, and (2) the same policy was not made available to EROs subject to the annual suitability process.

A factor that may have contributed to the high percentage of reversed determinations was that the centralized suitability process did not have an independent group reviewing the appeal information provided by the taxpayer. Instead, at least one centralized site official, who was involved in the initial suitability determination, was also involved in the appeal decision. We believe that an independent group should be established within the ANSc to review the appeal information and determine if the taxpayer provided reasonable cause for the specific condition that caused the failed determination.

We recommended that the Office of Electronic Tax Administration:

6. Develop procedures to ensure that officials involved in the first phase of the appeal process are independent from the officials that made the failed suitability determination.

Management's Response: The Office of Electronic Tax Administration stated that changes have been made to separate the appeal process from the original determination process and that program procedures have been updated to include these changes.

7. Ensure consistent suitability determinations are made on cases with civil/miscellaneous penalties.

Management's Response: The Office of Electronic Tax Administration stated that instructions have been clarified and that updated procedures would be published.

Prior Suitability-Related Recommendations Had Not Been Implemented

We reviewed selected TIGTA, GAO, FMFIA, and e-file Task Force reports, issued from 1990 to 1997, for recommendations designed to ensure only appropriate applicants participated in the e-file program. We identified 62 applicable recommendations. At the time of our follow-up, 16 pertinent recommendations were open or only partially implemented, including some from a report issued in November 1990. Two had been canceled.

Examples of open recommendations included:

• One recommendation that stated e-file participants should be identified on the IRS’ computer systems. These two sources of account information would allow tax examiners to be made aware of information that could affect continued participation. Since 1991, an IRS e-file Task Force, GAO, and the IRS Inspection Service (now TIGTA) have raised this concern. Although initially agreed to, this recommendation has not been implemented due to the IRS' reluctance to add additional identification codes to its computer systems.
• One of the open recommendations, made in an IRS Inspection Service (now TIGTA) report titled, "Review of the Electronic Filing System" (Reference Number 01115, Dated November 29, 1990), dealt with the acceptance of applicants that owed taxes which the IRS determined to be uncollectable. The recommendation was still under discussion during a suitability meeting in December 1997.
• A recommendation was made to create and make available a list of participants who have been rejected, expelled, or suspended from the e-file program.
• A recommendation was made to establish a target percentage for monitoring visits.
• A recommendation was made to establish error rate standards.
• A recommendation was made to clarify the conditions for issuing warning and suspension letters.

Most of the 16 open recommendations are valid and would help assure that only appropriate applicants are accepted to participate in the e-file program. Please see Appendix V for a complete list of recommendations that need follow-up review.

We recommended that the Office of Electronic Tax Administration:

8. Review prior FMFIA, GAO, e-file Task Force, and TIGTA suitability-related recommendations and ensure that they are implemented.

Management's Response: The Office of Electronic Tax Administration stated that they would review prior recommendations and determine if they should be implemented.

Office of Audit comment: We suggest the Office of Electronic Tax Administration closely supervise and control the review and implementation of prior FMFIA, GAO, e-file Task Force, and TIGTA recommendations to ensure thorough completion.

conclusion

The ETA implemented significant improvements to the suitability screening process, particularly the implementation of the consolidated site for processing new applications. To enhance this improvement further, the ETA should consider more stringent enforcement of existing criteria and improved automated suitability screening. This would help to ensure that only electronic preparers and transmitters, meeting minimum tax compliance and background qualification requirements, participate in the Electronic Filing Program in the future. Also, this should help to limit the IRS' susceptibility to filing fraud.

Detailed Objective, Scope, and Methodology

The overall objective was to determine if the Internal Revenue Service's (IRS) suitability screening process was effective in assuring that only appropriate Electronic Return Originators (EROs) participated in the IRS Electronic Filing (e-file) program. To accomplish this objective, we:

1. Determined if the IRS effectively developed and implemented suitability goals, objectives, and procedures that assure only appropriate EROs participate in the IRS’ e-file program. To accomplish this, we:
1. Obtained pertinent Internal Revenue Manuals, job aids, local procedures, and other documents relating to ERO suitability.
2. Analyzed the Automated Suitability Analysis Program, job aids, and procedures, and determined if deficiencies existed that would allow inappropriate applicants to participate in e-file.
3. conducted a database extract on all accepted EROs, by selecting a random sample of 90 cases from the 1,756 problem cases identified, in order to verify the extent of any identified problem.
4. [Due to high costs and limited anticipated pay-back results, this audit step (I-D) was surveyed out with approval of the Deputy Regional Inspector General for Audit.] Determine if the IRS correctly and consistently processed appeals relating to suspensions based on missing signature documents (Form 8453).
1. Nationally, determine:

1. The number of EROs suspended due to missing taxpayer signature documents Forms 8453).
2. The number of these cases appealed.
3. The number of cases that were reinstated.
4. The reasons for the reinstatement.

1. Sample cases to determine the consistency and correctness of the appeal process.

1. Determined if the IRS’ new centralized site initiative for processing new ERO applications was effective in assuring that only appropriate EROs participate in e-file. To accomplish this, we:
1. closely monitored the new process and provided on-site feedback to management.
2. Analyzed new ERO applications processed at the consolidated site in order to determine if only appropriate applicants were allowed to participate in e-file. Specifically, we:
1. Selected a random sample of 96 new ERO applications and determined if the applications were correctly and consistently processed, thus preventing unscrupulous or high-risk preparers from participating in e-file. (The methodology used included analyzing ERO databases and identifying only new applicants processed at the consolidated site. Based on an identified universe of 12,487 cases, we used accepted formulas for attribute sampling and selected 96 cases for detailed review. No projections were made from this sampling.)
2. Determined if applicant information from the sample cases selected was correctly recorded on the Applicants Database.
3. Determined if the receipt and processing of fingerprint cards for new applications were effective in assuring that only appropriate EROs participate in e-file. Specifically, we determined:
1. How the receipt of fingerprint cards was controlled.
2. How many applicants were rejected from participation based on a fingerprint card analysis.
4. Determined if the IRS correctly and consistently processed appeals on new applications that were initially rejected due to compliance problems. (Sample drawn from the universe of 352 suitability decisions in inventory, as of April 3, 1998. We used accepted techniques for random sampling and selected 34 cases for detailed review. No projections were made from this sampling.) Specifically, we determined:
1. How many new applications were rejected.
2. How many cases were appealed.
3. How many were reinstated.
4. If appeals (for sampled cases) were reversed and why.
5. If the appeal process is consistent and correct by sampling 34 cases.

1. [Time did not permit the completion of audit step II-E.] Review correspondence from EROs, including memos of telephone calls, to determine the level of program satisfaction or dissatisfaction.
2. [Time did not permit the completion of audit step II-F.] Obtain comments from district office and National Office staff on the effectiveness (advantages and disadvantages) of the new centralized suitability site.

1. Determined if the prior Treasury Inspector General for Tax Administration, General Accounting Office, Federal Managers' Financial Integrity Act, and e-file Task Force recommendations that were made to ensure that only appropriate applicants participated in e-file were enacted. To accomplish this, we:
1. Identified viable prior ERO-related recommendations from the above sources.
2. Determined if the above recommendations were implemented through interviews and limited testing. If not implemented, we determined why.

Major contributors to This Report

Walter Arrison, Associate Inspector General for Audit (Wage and Investment Income Programs)

Kerry Kilpatrick, Director

Donald Butler, Audit Manager

Mark A. Nathan, Audit Manager

Kenneth Forbes, Senior Auditor

Thomas Seidell, Senior Auditor

Edith Lemire, Auditor

Michael McGovern, Auditor

Report Distribution List

Deputy commissioner Operations c:DO

chief Information Officer IS

chief Operations Officer OP

Assistant commissioner (Electronic Tax Administration) OP:ETA

Assistant commissioner (Program Evaluation and Risk Analysis) M:OP

Executive Officer for Service center Operations OP:Sc

Director, Andover Service center

National Director, Electronic Program Operations OP:ETA:O

National Director for Legislative Affairs cL:LA

Office of Management controls M:cFO:A:M

Prior Recommendations Not Fully Implemented

Management's Response to the Draft Report