The Internal Revenue Service (IRS) uses a computer system known as the Automated Non-Masterfile (ANMF) to process those tax returns and transactions that cannot be processed on its primary computer system known as the Masterfile. Each of the 10 IRS service centers has a separate ANMF database that is not connected with any other service center’s ANMF or other IRS computer system. These separate databases, as well as other limitations of the ANMF, have resulted in inaccurate balances in taxpayers’ accounts and the IRS not being compliant with the Taxpayer Bill of Rights 2, Pub. L. No. 104-168, Stat. 1452 (1996). (All future references to this law will be to the law in general and will be noted as "TBOR2.")

Many of the 101,216 accounts on the ANMF as of September 30, 1997, are old, including 220 accounts totaling over $234 million that are over 20 years old. Processing inefficiencies and errors have also resulted in undue taxpayer burden, increased operating costs, and lost revenue. The problems identified in this report are primarily the result of the ANMF being a system that requires manual input and processing actions. Until the IRS makes changes to allow the processing of ANMF accounts on the Masterfile and consolidates the 10 existing ANMF systems, additional efforts are needed to more efficiently process Non-Masterfile (NMF) transactions and maintain taxpayer accounts.

IRS employees accurately input the original documents received in the NMF units to the ANMF and to the accounting system. However, because of inherent processing and account maintenance problems:

The ANMF contains inaccurate data on taxpayer accounts and maintains old accounts. Our analysis of the ANMF showed that 6,700 balance due accounts exceeding $750 million with tax, interest, penalties, and accruals are over 10 years old. The IRS also needs to correct inaccuracies in interest and penalty computations that were caused either by errors in the design of the program used to calculate the failure to pay assessed tax amounts or errors in the original processing of interest and penalty assessments.

The Internal Revenue Service Has Not Issued Reminder Notices to Taxpayers With Delinquent Automated Non-Masterfile Accounts in Violation of Taxpayer Bill of Rights 2

The congress passed TBOR2 in July 1996 to provide increased protection for taxpayers. Two years later, the IRS still has not issued required annual reminder notices to taxpayers with delinquent accounts on the ANMF. The IRS previously canceled the issuance of notices because of concerns that both taxpayer addresses and account information were not correct. The IRS initially planned to issue notices only to taxpayers whose balance due accounts were determined to be currently Not collectible (cNc), but collection activity had been suspended. However, the Forms and Submission Processing and collection Division management agreed with our interpretation of TBOR2 that, in addition to cNc accounts, notices should also be sent to taxpayers with certain other types of balance due accounts.

Freeze codes were not always input to taxpayer accounts to prevent the automatic issuance of incorrect refunds on related Masterfile accounts. Additionally, the IRS has not always complied with the legal requirement to issue information returns (Form 1099-INT) to taxpayers that the IRS paid more than $10 in interest.

Recently, the IRS began to address some of the ANMF issues. A study completed in February 1998 made 13 recommendations to improve customer service and processing efficiency. Many of these recommendations were scheduled to be implemented in January 1999. However, because of limited computer resources and other priorities, some of the recommendations, such as consolidating the ANMFs, putting ANMF accounts on other computer systems, and modifying computer programs, will be delayed or may not be as effective as originally intended.

The commissioner’s modernization concept includes the goal to provide service to all taxpayers. This goal cannot be effectively accomplished for those taxpayers with accounts on the ANMF until the IRS corrects the limitations leading to the inaccuracies and inefficiencies associated with the ANMF.

The IRS should expedite changes to allow the processing of ANMF accounts on the Masterfile and to consolidate the existing NMFs. Until those actions are completed, the IRS should take the following actions to improve accounts maintenance:

• Establish a working group to validate the accuracy of interest and penalty programming on the ANMF, make necessary programming changes, and program the ANMF to accrue penalty and interest on credit balance cases.
• Identify short-term and long-term solutions to ensure the timely and accurate issuance of TBOR2 notices. This should include reviewing and correcting existing accounts on the ANMF to ensure taxpayers receive accurate and appropriate notices, as required by TBOR2.
• Establish more effective procedures to ensure credit balance cases are timely worked, transaction codes are input to prevent incorrect refunds on related Masterfile accounts, and Forms 1099-INT are issued when taxpayers receive interest of more than $10 from the IRS.

Management’s Response: The chief Operations Officer concurred with the findings and recommendations. The IRS prepared six requests for new computer programs to correct errors in penalty and interest computations, identify and update ANMF address changes, and freeze the refund on Masterfile accounts where there is a related ANMF liability. The IRS also plans to review and correct old ANMF accounts in order to issue TBOR2 notices.

Office of Audit comment: These corrective actions are a short-term solution to the problems facing the ANMF. The limitations of the ANMF will continue to have an impact on the IRS’ ability to provide effective and efficient service to taxpayers with accounts on the ANMF. In addition, we are concerned that some of the proposed corrective actions may not be adequate. For example:

• The corrections in the IRS’ computer program were designed to correct the penalty and interest errors identified by this audit and by the NMF task force. Our audit was not designed to identify all situations where calculations may be incorrect. We remain concerned that there are other situations of incorrect interest and penalty calculations that have not been identified.

The IRS elected not to implement a computer program to correct the refund freeze code problems for business accounts on the Masterfile, citing programming difficulties and a low volume of cases. Instead they replied that the initiator continues to have the responsibility to direct the input of the freeze code. It is because of the multiple number of initiators and functional responsibilities that the freeze codes were not input. We continue to believe this process should be centralized, or review procedures should be implemented, to ensure the freeze code is input if required at the time the ANMF account is established.