The Regional Commissioner, Southeast Region, requested this review to evaluate complaints made by ****3d**** regarding the treatment of taxpayers during a Regional Compliance Program (RCP) project in the North Florida District. In RCP projects, the Internal Revenue Service (IRS) makes an effort to contact taxpayers about their tax compliance without reviewing books or records. These compliance checks should not question any particular tax liability. Allegedly, revenue officers used unauthorized techniques to work RCP project leads on employment tax issues in the construction trades industry.

The IRS Acting District Director, North Florida District, and the Assistant Commissioner (Examination), each responded to members of the Congress concerning these complaints, stating that revenue officers in the RCP group were all working in accordance with IRS policies and procedures, and that the revenue officers received training specific to their involvement in the project. According to Collection Division information, the RCP group closed 664 cases before the project was discontinued. These cases resulted in 1,554 returns filed with revenue officers and net assessments of approximately $6 million.

The overall objective of this audit was to determine if taxpayer rights were violated by the manner in which employment tax cases were worked during the period October 1993 through September 1995.

Our opinions and conclusions are different from the opinions and conclusions that Collection Division management communicated to the Congress. (See Appendices V through VII for responses to the Congress.)

During the time period of the RCP project in the North Florida District, two Collection Division groups were working employment tax leads using different procedures. The Employment Tax Examination Group followed the procedures established by the Collection Division for employment tax examinations while the RCP group used locally developed procedures. The local procedures allowed revenue officers to make employment tax determinations without requiring them to follow the procedures in the Internal Revenue Manual (IRM) 5(10) for investigating employment tax issues. This environment placed the taxpayers’ right to fair treatment at risk.

We were unable to determine whether the taxpayers’ right to pay only the correct amount of tax was violated without re-examining the taxpayers’ returns. In 43 percent of the cases reviewed, the case documentation and history sheets did not document the basis for decisions made by the revenue officers. As a result of this lack of documentation, an independent reviewer could not have determined from the case files whether the revenue officers properly developed the cases and correctly applied the laws and regulations related to employment taxes.

• Revenue officers did not notify the taxpayers orally or in writing when compliance checks were expanded into employment tax examinations. Also, revenue officers did not provide the taxpayers with an explanation of the audit process.
• Collection Division management did not control and monitor the RCP cases on the Audit Information Management System (AIMS) when the compliance checks were expanded into employment tax examinations. As a result, no indicators were present on IRS’ computer system that audits were conducted.
• Revenue officers in the RCP group did not prepare workpapers documenting the scope of the examinations, the procedures followed, or the conclusions reached.

As a result of management not ensuring that revenue officers working the RCP project followed IRM 5(10), locally developed procedures used during the project were inconsistent with the IRM and the following provisions were not consistently and properly applied:

• Section 530 of the Revenue Act of 1978 – Provides businesses with relief from employment tax obligations if certain requirements are met.
• Internal Revenue Code Section 3509 – Allows taxpayers reduced rates for computing employment taxes in worker reclassification cases.
• Internal Revenue Code Section 6020(b) – Provides authority for employment tax returns to be prepared by the IRS in cases of refusal to file.

The revenue officers that worked the RCP project cases received one day of training, while revenue officer examiners in the Employment Tax Examination Group received the standard 64-hour training course, Basic Employment Tax Training (Course 3142). A regional analyst and a District employment tax staff member informed us that the cases investigated during the RCP project would have been worked differently if they had been assigned to Collection Division employment tax examiners or the Examination Division.

We could not determine whether the Region identified any of the previously stated issues because its representatives did not prepare a written report of their visit. However, the Regional Chief Compliance Officer did ask Regional Counsel for an opinion regarding revenue officer authority on employment tax issues. In October 1996, Regional Counsel issued a memorandum to the Regional Chief Compliance Officer stating that revenue officers can reclassify workers pursuant to the authority given them in their position description.

We interviewed Regional Counsel and determined that Counsel was ruling only on the legality of the assessments. Counsel stated in their discussion with auditors that the assessments are legal based on the broad position description of the revenue officers. The opinion was not intended to imply that they thought the revenue officers were adequately trained, or that the correct procedures were followed.

Management’s Response: Collection Division management agreed that during the time period of the RCP project, there were two groups working employment tax leads using different procedures. They also agreed that sufficient training had not been provided to the revenue officers assigned to the RCP project. Since the project was terminated in September 1995, there are no required corrective actions for these three findings. However, management agreed to an independent review of project files by employment tax examiners to determine whether taxpayers were treated inconsistently. This review began in January 1999. When necessary, management will contact Counsel to determine any remedial actions that must take place for affected taxpayers.

Management’s complete response detailing corrective actions, responsible officials, and proposed completion dates is contained in Appendix VIII.

3d = Identifying information - Other Identifying Information of an Individual or Individuals