Weak internal controls and poor management practices enabled an Internal Revenue Service (IRS) Delaware-Maryland District revenue officer (RO) to embezzle taxpayer payments of over $77,000 during a two-year period. In response to this report, the District has agreed to improve controls over the processing of adjustments to taxpayer accounts by Collection Division personnel (adjustments totaled over $10 million in Fiscal Year 1998).

We conducted this limited scope review in conjunction with a Treasury Inspector General for Tax Administration inquiry involving the embezzlement of delinquent taxes collected by an RO in the Baltimore, Maryland post-of-duty. Our overall objective was to assess the internal controls over the approval and processing of adjustments to taxpayers’ accounts in the Delaware-Maryland District. The audit was conducted in accordance with generally accepted government auditing standards, as they apply to the identification of illegal acts and abuse.

The internal control weaknesses in the processing of taxpayer account adjustments in the Delaware-Maryland District created an environment where fraud occurred and remained undetected. We identified approximately $77,000 in cashier's checks and money orders embezzled by the subject RO. The RO abated taxpayers’ tax liabilities to conceal the embezzlement. Our review of internal controls in this area determined that Forms 3870, Request for Adjustment, lacked adequate documentation of the required managerial approval. In addition, the national guidelines for abating tax liabilities for reasonable cause were not met in several cases.

During the review, we issued a memorandum to the District Director recommending that group managers thoroughly review reasonable cause abatement requests to reduce the risk of employee fraud. While management advised us that corrective actions have been taken to address the lack of documentation and reasonable cause issues, two areas continue to warrant management’s attention.

Forms 3870 Should Not Be Returned to Revenue Officers After Managerial Approval

District procedures instruct ROs to submit approval folders containing Requests for Adjustment to their manager. After approval or disapproval of the request(s), the folder is returned to the RO, who forwards the approved requests for input. Proper controls for separation of duties would ensure that the approved adjustment requests are forwarded directly from the approving authority to the employees who input the adjustments in the IRS computer system. Otherwise, an unscrupulous RO could alter the adjustment document to conceal the embezzlement of funds.

Collection Division management acknowledged that the subject RO could have personally delivered forged adjustment documents to the Special Procedures Branch and placed them with other adjustments awaiting computer input. These forged documents would then be input along with legitimate adjustments.

If weaknesses in these two specific internal control areas are not quickly and effectively addressed, there is an increased risk of additional fraudulent activity by IRS employees and further revenue loss to the Government. Voluntary compliance is threatened when the IRS cannot assure the public that its internal controls prevent fraud, waste and abuse in tax administration activities.

Management’s Response: District Collection management agreed that the current procedures lacked proper separation of duties in the two areas cited above. New procedures have been implemented to address these weaknesses. Management’s complete response is included in Appendix VI of this report.