TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
THE INTERNAL REVENUE SERVICE SHOULD CONTINUE
ITS EFFORTS TO ACHIEVE FULL COMPLIANCE WITH
RESTRICTIONS ON THE USE OF ENFORCEMENT STATISTICS
Reference No. 199910073
The Internal Revenue Service (IRS) is prohibited from evaluating individual work performance in a way that may violate or encourage employees to violate taxpayer rights. For example, IRS employees cannot be evaluated on the amount of money they collect or assess, or the number of tax returns they audit. This might cause employees to concentrate more on collecting or assessing money rather than on deciding the correct amount of tax, which could lead to unfair or inequitable treatment of taxpayers.
The amount of dollars collected, the number of returns closed, or the dollar amount of assessments made are all records of tax enforcement results. The IRS has defined records of tax enforcement results as any statistic that measures quantity, time per return, talk time per call, type of disposition, or dollar value.
Records of tax enforcement results cannot be used to evaluate IRS employees or to impose or suggest production quotas or goals. Each quarter, supervisors are required to certify, in writing, that records of tax enforcement results are not being used to evaluate employees or to impose or suggest production quotas or goals.
On July 22, 1998, the President signed into law the IRS Restructuring and Reform Act, Pub. L. No. 105-206, 112 Stat. 685 (1998) (referred to as RRA 98). RRA 98 § 1204, Basis for Evaluation of Internal Revenue Service Employees, established these restrictions on the use of enforcement statistics and requires the IRS to use the fair and equitable treatment of taxpayers as a performance standard.
RRA 98 added 26 U.S.C. § 7803(d)(1)(A)(i) (1986) requiring the Treasury Inspector General for Tax Administration (TIGTA) to annually evaluate the IRS’ compliance with the law. Accordingly, the objective of our review was to evaluate the IRS’ compliance with RRA 98 § 1204.
The IRS is currently not in full compliance with RRA 98 § 1204. The results of our independent testing in 28 IRS offices show that there are still instances when records of tax enforcement results are being used to evaluate employees or to impose or suggest production quotas or goals.
Three audit reports issued in 1997 and 1998 by the former IRS Internal Audit Division (now TIGTA) reported that IRS performance measures focused largely on enforcement goals and productivity, mainly dollars assessed or collected. In addition, corporate measures for the Collection and Examination functions focused on dollars collected or dollars recommended for assessment. IRS offices were ranked from 1 through 33, and employees were evaluated on the achievement of these goals.
The IRS has discontinued comparative ranking and distribution of any goals related to revenue production. The IRS has proposed a new balanced system of business measures that shifts the focus from enforcement statistics to customer service, employee satisfaction, and business results, including both quality and quantity measures.
In addition, the IRS has significantly improved management controls to identify and report RRA 98 § 1204 violations. The IRS has expanded the certification process to all supervisors of RRA 98 § 1204 employees. Supervisors are required to certify, in writing, that records of tax enforcement results were not used to evaluate employees or to impose or suggest production quotas or goals. The IRS implemented an independent review process to oversee the certification process and ensure IRS is following guidelines and complying with the law.
There Are Instances Where Records of Tax Enforcement Results Were Used to Evaluate Employees or to Impose or Suggest Production Quotas or Goals
We conducted independent testing in 28 IRS offices and reviewed over 4,900 documents. Ninety-eight percent of the documents contained no RRA 98 § 1204 violations. We identified 96 documents containing RRA 98 § 1204 violations. These documents were created on or after July 22, 1998, when RRA 98 was signed into law. We identified these RRA 98 § 1204 violations in the following:
In contrast, we believe self-assessments containing records of tax enforcement results do violate RRA 98 § 1204. Self-assessments are a fundamental part of the evaluation process for managers and executives. Managers and executives complete self-assessments and provide them to their managers for consideration when preparing their annual appraisals. In our experience, the self-assessments are usually associated with the annual appraisals. Quite often, self-assessments are attached and, in effect, become part of the annual appraisal.
We also identified 34 documents where we believe cycle time was overemphasized. Cycle time is the number of days a case remains unresolved. Although cycle time is not considered a record of tax enforcement results, the IRS’ Managing Statistics Handbook, Internal Revenue Manual 105.4, states overemphasizing cycle time could lead employees to focus on closing cases as quickly as possible instead of focusing on appropriate case resolution.
In the past, the IRS has emphasized and relied upon tax enforcement results to establish budgets and to measure accomplishments. As a result, employees focused on tax enforcement results, such as dollars assessed or dollars collected, to achieve perceived enforcement goals. The IRS has improved its management controls used to identify and report RRA 98 § 1204 violations; however, the pattern of our findings suggests that established practices are difficult to change and every function still has some remnant of the prior process.
Some Employees Still Perceive That Records of Tax Enforcement Results Are Being Used to Evaluate Employees or to Impose or Suggest Production Quotas or Goals
Twenty-seven percent (124 of 456) of managers and employees responding to questionnaires on the use of enforcement statistics perceived that records of tax enforcement results were considered when their last performance evaluation was prepared and communicated to them, or they were used as performance goals. However, when asked to give examples of the records of tax enforcement results used, only 63 managers and employees could provide examples of improper use of records of tax enforcement results.
For managers and employees who provided examples or comments regarding the uses of enforcement statistics, the number of cases closed and hours spent working with a return were most often given as examples. These statistics were most often used to evaluate past performance rather than to impose or suggest production quotas or goals.
The First Required Quarterly Certifications of Records of Tax Enforcement Results Reported Violations, But Were Inconsistent in How Violations Were Counted and Reported
The IRS identified approximately 525 documents containing RRA 98 § 1204 violations for the 3-month period of October 1 to December 31, 1998. These violations were identified in IRS functions with over 30,000 RRA 98 § 1204 employees.
Each quarter, supervisors of employees covered by RRA 98 § 1204 are required to certify, in writing, that records of tax enforcement results are not being used to evaluate employees or to impose or suggest production quotas or goals. In addition, the IRS has an independent review process to ensure it is complying with guidelines.
Our analysis of the IRS’ certification and independent review results identified inconsistencies in how individual offices counted and reported the number of RRA 98 § 1204 violations. However, we believe that the IRS’ results are representative of its use of records of tax enforcement results.
There is no one IRS official responsible for the certification process to ensure consistent and complete compliance with RRA 98 § 1204. The process is new and development is ongoing. Current guidelines used to identify, certify, and report RRA 98 § 1204 violations are being revised to include more examples of potential violations and more specific procedures. In addition, the IRS Commissioner has submitted proposed regulations on business performance measures that will affect future guidelines.
Employees Will Be Evaluated on Whether They Provide Fair and Equitable Treatment to Taxpayers
The IRS has proposed regulations that provide guidance and direction for establishing a balanced measurement system for the IRS. The proposal provides guidance for:
The proposed regulations would establish a new balanced system for the IRS. The three elements of this balanced system are (1) Customer Satisfaction Measures, (2) Employee Satisfaction Measures, and (3) Business Results Measures. These measures will be based on quantifiable and measurable data.
This report has no recommendations for action beyond the IRS initiatives now being taken. Subsequent Office of Audit reviews will test the effectiveness of the new balanced system of business measures in addressing the appropriate use of tax enforcement statistics.
Management’s Response: IRS management generally agreed to the issues addressed in this report and stated that they will take whatever steps are necessary to eliminate violations. In some cases, the IRS believes there is a need to involve IRS Counsel to clarify differences in interpretation, such as the inclusion of records of tax enforcement results in employees' self-assessments. In addition, IRS management plans to review documents where violations occurred and cycle time was overemphasized to resolve any interpretive difference that may exist regarding legal or procedural issues.
The IRS handbook has been revised to reflect the IRS' new Balanced System for Measuring Organizational and Employee Performance Within the Internal Revenue Service. Also, the IRS agreed that there was no one office responsible for the certification process and recently assigned this responsibility to the Deputy Commissioner Operations.
Management's complete response to the draft report is included in Appendix VII.
Office of Audit Comment: As part of our FY 2000 Audit Plan, we will assess the effectiveness of the progress and implementation of the balanced system of business measures as it relates to the use of enforcement statistics. During that audit, we will address, if necessary, the results of the IRS’ review of the violations identified in this report.