Section 1204 of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98) prohibits the IRS from using records of tax enforcement results to evaluate employees or to impose or suggest production quotas or goals. Records of tax enforcement results include information such as dollars collected, number of liens filed or levies served, number of referrals for criminal investigation, dollar amount of assessments made, number of indictments, and number of property seizures made. The responsible supervisors must certify quarterly to the Commissioner as to whether or not they used enforcement statistics to evaluate employees or to impose or suggest production quotas or goals. RRA 98 § 1204 also requires the IRS to include the fair and equitable treatment of taxpayers as one of the standards used to evaluate employee performance.

The RRA 98 requires the Treasury Inspector General for Tax Administration to determine annually whether the IRS is in compliance with restrictions on the use of enforcement statistics. The overall audit objective was to determine if the IRS is complying with restrictions on the use of enforcement statistics to evaluate IRS employees or to impose or suggest production quotas or goals. This report presents the results of our second annual review of the IRS’ compliance with these restrictions. In our Fiscal Year (FY) 1999 review, we reported that there were instances when records of tax enforcement results were being used to evaluate employees or to impose or suggest production quotas or goals. We also reported that the IRS had controls in place to identify and report violations, namely the self-certification and independent review processes; however, we did not evaluate those controls.

In carrying out the FY 2000 audit, we reviewed documents in 11 IRS offices, including 6 district offices, 2 service centers, a regional office, the Executive Officer for Service Center Operations, and the Chief Operations Officer.

The IRS has initiated several measures to promote compliance with the restrictions of RRA 98 § 1204. The Office of Managing Statistics was created under the Deputy Commissioner Operations to provide oversight, guidance, and training on the appropriate use of data and statistics. In January 2000, the Office of Managing Statistics began training managers to better understand the restrictions on the use of tax enforcement results. In addition, the IRS has developed new performance measures and evaluation forms.

Nonetheless, the IRS could improve the processes it has implemented to report misuse of enforcement statistics. Most employee evaluations and management documents that we reviewed, and that the IRS also reviewed through its internal review processes, did not contain tax enforcement results and did not impose production quotas or goals. However, there were some instances when records of tax enforcement results were used to evaluate employees or to impose or suggest production quotas or goals. In addition, employees were not always provided with or evaluated on the performance standard requiring the fair and equitable treatment of taxpayers.

RRA 98 § 1204 requires appropriate IRS managers to certify quarterly as to whether they used enforcement statistics to evaluate employees or to suggest production quotas or goals. In the IRS offices we reviewed, most supervisors (99 percent) who had employees covered by RRA 98 § 1204 completed the self-certifications required by law. To ensure that self-certifications are properly reporting compliance with the law, the IRS implemented an annual independent review process in which teams review samples of employee files and management documents to determine compliance with the law and to correct problems.

Nationwide, for the 6-month period ending June 30, 1999, the self-certifications by IRS managers reported 85 violations of RRA 98 § 1204. The IRS independent review teams reported 133 additional violations that were not identified by the self-certifications. These violations should have also been reported in the self-certifications. The 133 violations may be only a portion of the potential violations existing nationally because they represent only the sample results, which have not been projected nationally. Because of concerns that managers were not always aware of what constituted an improper use of enforcement statistics, the IRS has since implemented training to more specifically define the uses of enforcement results that are prohibited by law.

While the self-certifications did not always report violations, the reliability of the independent review results was also limited. For example, the guidelines used to identify violations were later revised to no longer consider some uses of enforcement statistics as violations and the method of drawing the sample for this process did not always identify the appropriate population of supervisors or documents. Because of these factors, the independent review results could not be used to reliably estimate the number of violations nationwide not identified by the self-certification process.

We independently reviewed a random sample of 5,558 documents from 11 IRS offices for the same 6-month period. In these offices, managers’ self-certifications identified 21 violations and the IRS independent review teams identified 8 additional violations. In our sample, we identified another four violations. However, these four violations were based on the revised guidelines issued in September 1999, which are less restrictive because some records of tax enforcement results are no longer considered violations.

Overall, our review indicates that the number of violations is low. However, because the violations are based on only a sample of documents in certain offices, it also indicates there are some instances in which inappropriate uses of enforcement statistics have not been identified or corrected by either of the two IRS internal review processes. This could allow the continued use of these statistics by these managers. IRS management recognized that additional actions were needed to better identify RRA 98 § 1204 violations. They are developing guidance to more consistently count the number of RRA 98 § 1204 violations and are discussing methods to make the independent review process more statistically valid.

In addition to the restrictions on the use of enforcement statistics, RRA 98 § 1204 also requires the fair and equitable treatment of taxpayers to be incorporated as a performance standard for employee evaluations. In order to meet this standard, an IRS employee must administer the tax laws fairly and equitably, protect taxpayers’ rights, and treat each taxpayer ethically with honesty, integrity, and respect.

For a sample of 816 employee personnel files selected at 11 IRS offices, 51 employees (6 percent) had not signed for receipt of this standard. Personnel rules require that employees receive a performance standard at least 60 days before the end of a rating period in order to be evaluated on the standard. Without providing the standard, the IRS cannot evaluate these employees on the fair and equitable treatment of taxpayers, as required by the RRA 98. In addition, 22 of 202 employees (11 percent) who completed a rating period for which they had received this standard, did not have it included as part of their evaluations.

This standard was distributed as a separate document that some managers misplaced or forgot to include when providing employees their performance standards or evaluations. Subsequently, the IRS incorporated the fair and equitable treatment standard into managers’ performance agreements and evaluations. The IRS has not done this for employee appraisals because it would require additional union negotiation. As a result, the employee appraisal will continue to be distributed as a separate document.

The IRS developed procedures to implement a new Balanced Measurement System. The intent of this System is to shift the focus away from achieving specific targets or numbers to achieving the overall mission and strategic goals of the IRS. This System measures performance in three areas: business results (including quality, quantity, and outreach), customer satisfaction, and employee satisfaction. The IRS plans to begin collecting quality and quantity data in FY 2001. Quality and quantity measures will be used together to evaluate organizational performance. Quality measures include an evaluation of whether appropriate actions were taken to resolve cases. Quantity measures include the number of cases processed, as well as the time spent on outreach to taxpayers.

The business results measures will not be the only data that managers use to monitor their organizations. Tax enforcement results data will still be used to prioritize the use of resources and as a diagnostic tool to identify and correct problems. However, the balanced measurement plan requires supervisor evaluations based on actions taken to achieve desired organizational results and not on tax enforcement results data. Balanced measures were included within the manager evaluation process as of December 1999. In our opinion, the balanced measures developed to date, as well as the planned data collection and the planned distributions and use of the data, do not violate the restrictions on the use of enforcement statistics.

The Office of Managing Statistics (or equivalent in the new organization structure) should revise its guidelines for the independent review teams’ sampling and reporting process to help increase the reliability of the information it provides on RRA 98 § 1204 compliance. The independent review teams should maintain adequate documentation of their statistical sampling process so that the overall numbers and types of violations can be estimated and projected nationwide. The Director, Personnel Division (or equivalent in the new organization structure) should also work toward incorporating the standard requiring the fair and equitable treatment of taxpayers into the evaluation forms for all employees.

Management’s Response: IRS management agreed with our recommendations and is in the process of revising independent review guidelines to address our recommendations and plans to incorporate the standard requiring the fair and equitable treatment of taxpayers into the evaluation forms for all employees.

Management’s complete response to the draft report is included as Appendix VI