Letter Report: Reliability Issues with the Coordinated Examination Management Information System
Reference Number: 2000-30-135
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
September 28, 2000
MEMORANDUM FOR COMMISSIONER ROSSOTTI
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Letter Report Ė Reliability Issues with the Coordinated Examination Management Information System
This report presents the results of our review of the Coordinated Examination Management Information System (CEMIS). Our objective was to determine whether the CEMIS provided reliable information to its users.
In summary, we identified a few significantly misstated items in the CEMIS. The misstatements reduced the reliability of some information used to help manage the Coordinated Examination Program (CEP). In Fiscal Year 1999, the CEP cost approximately $355 million to operate while recommending that the largest and most complex corporations in the nation pay approximately $11.1 billion in additional taxes.
We recommended that management of the Large and Mid-Size Business Division increase team managersí and coordinatorsí knowledge and understanding of the CEMIS. Internal Revenue Service (IRS) management agreed with the recommendation presented in this report. Managementís comments have been incorporated into the report where appropriate, and the full text of their comments is included as an appendix.
Copies of this report are also being sent to the IRS managers who are affected by the report recommendation. Please contact me at (202) 622-6510 if you have questions, or your staff may call Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
Objective and Scope
Our objective was to determine if the Coordinated Examination Management Information System (CEMIS) provided users with reliable information to help manage the Coordinated Examination Program (CEP). The audit was performed from November 1999 through May 2000 in accordance with Government Auditing Standards. To accomplish our objective, we conducted the following tests in the Internal Revenue Serviceís (IRS) National Headquarters and the Georgia, North Texas, and Southwest District Offices:
Major contributors to this report are listed in Appendix I. Appendix II contains the Report Distribution List.
The IRS examines approximately 1,700 of the nationís largest and most complex corporations and partnerships under the CEP. In FY 1999, the CEP cost approximately $355 million to operate while recommending that the largest and most complex corporations in the nation pay approximately $11.1 billion in additional taxes. Corporations selected for the CEP generally report assets that exceed $250 million and are examined by a team of IRS examiners that can include engineers, computer specialists, economists, and specialists in international taxation.
To help manage the approximately $355 million of FY 1999 resources associated with the CEP, the IRS relied heavily on the CEMIS. The CEMIS is a computer-based management information system that provides all levels of management with information about the status and results of examinations. Among its capabilities, the CEMIS can help managers (1) measure the success of examination efforts and initiatives, (2) identify emerging tax administration issues, and (3) develop plans for deploying resources.
Overall, most of the items in the CEMIS were accurately stated. However, there are some reliability issues in the CEMIS due to a few significantly misstated items that could affect managerial decision-making.
Misstated Items in the Coordinated Examination Management Information System Could Affect Managerial Decisions
The recently established Large and Mid-Size Business (LMSB) Division is responsible for the CEP and has divided the program into five industry segments based on their product or predominant activity. Since the industries are geographically dispersed across the nation, several managers at the middle and upper levels have responsibilities for the CEP examination teams located in various cities and states.
Unlike the past, when the highest ranking official in the CEP did not have direct line authority over the budget and resources for the CEP examinations, the LMSB Divisionís top executives and managers are linked to front-line CEP examination teams. The LMSB Division structure is designed to allow executives and managers to more directly plan and control the CEP examinations. For effective decision-making, LMSB Division executives and managers need an effective internal control system that provides reasonable assurance that information used to help manage operations is reliable.
To validate the reliability of the CEMIS, we traced source information from 19 CEP cases (37 returns) to the corresponding data items in the CEMIS. In 11 of 19 cases, there were 1 or more misstatements. We categorized the problems into the following three areas.
Total adjusted revenue (TAR) from examinations was significantly misstated
Our 19 cases involved over $1.3 billion of TAR, of which approximately $384 million (29 percent) was misstated on 9 cases. TAR was developed and used to measure the success of the CEP examination efforts and initiatives. It quantifies the additional monies coming into the Treasury as well as revenue protection efforts. For example, TAR takes into account efforts to disallow unwarranted claims and Net Operating Losses claimed by corporations that either generate refunds or reduce tax liabilities in other years.
Codes used to track tax issues were frequently not accurate
In 6 of our 19 cases, Uniform Issue List (UIL) codes used for tracking tax adjustments were not properly input or were missing for 23 (30 percent) out of 76 issues. This involved approximately $239.3 million (5 percent) of the over $4.8 billion associated with these codes. Since UIL codes describe tax issues in terms of the Internal Revenue Code, they can be used as a tool in the CEP planning process. For example, accurate UIL codes can help identify emerging compliance problems so plans can be developed to address them. Accurate UIL codes can also help identify the need for specialists, such as international examiners, engineers, or economists, during examinations.
Adjustments to significant issues were often misstated
In 5 of our 19 cases, 12 (18 percent) of the 67 issue amounts that were listed in the CEMIS were misstated, involving approximately $114 million (2 percent) of the over $4.8 billion. Knowing adjustment amounts associated with specific issues can help managers compare the benefits likely to be gained from examining an issue to the resources needed to perform the examination. Accurate tax adjustment amounts also provide some perspective on whether an issue has potential national or industry-wide impact.
The misstatements in the CEMIS were caused by team managers and coordinators not accurately computing TAR, not considering all applicable UIL codes, and not revising initial estimates of tax adjustments to reflect the final recommended amount. Discussions with several managers and coordinators indicated that they had not received adequate training on the CEMIS. One case manager said:
Training on CEMIS was a self-study course and it is now obsolete. To generate informative reports, a better training program is needed.
The Commissioner, LMSB, should increase team managersí and coordinatorsí knowledge and understanding of the CEMIS. This could be accomplished by including, in a professional education session, a CEMIS training module which emphasizes the importance accurate CEMIS data can play in planning, managing, and reporting on the CEP.
Managementís response: IRS management agreed with our recommendation. They will conduct both classes and informal presentations to increase the CEP field personnelís knowledge and understanding of the CEMIS. Managementís complete response to the draft report is included as Appendix IV.
In FY 1999, the CEP spent approximately $355 million in examining the largest and most complex corporations and recommending that they pay some $11.1 billion in additional taxes. We identified significantly misstated items in the CEPís management information system, CEMIS, that reduced the reliability of some information used to help manage the CEP.
Major Contributors to This Report
Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs)
Philip Shropshire, Director
Frank Dunleavy, Audit Manager
Earl Charles Burney, Senior Auditor
Stanley Pinkston, Senior Auditor
Rose Ena Cantu, Auditor
Report Distribution List
Deputy Commissioner Operations C:DO
Commissioner, Large and Mid-Size Business Division LM
District Director, Georgia District D
District Director, North Texas District D
District Director, Southwest District D
Office of the Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis M:O
Office of Management Controls CFO:A:M
Commissioner, Large and Mid-Size Business Division LM
This appendix presents detailed information on the measurable impact that our recommended corrective action will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Finding and recommendation:
We identified significantly misstated items in the Coordinated Examination Management Information System (CEMIS) that reduced the reliability of some information used to manage the Coordinated Examination Program (CEP). The misstatements occurred because team managers and coordinators had not received adequate training on the CEMIS.
Type of Outcome Measure:
Protection of Resources and Reliability of Information Ė Actual
Value of the Benefit:
We believe our recommendation to address the inaccuracies in the CEMIS will provide Internal Revenue Service officials with an opportunity to enhance the reliability of the information with which to manage the CEP. In Fiscal Year (FY) 1999, the CEP spent approximately $355 million to examine and recommend that the largest and most complex corporations pay some $11.1 billion in additional taxes.
Methodology Used to Measure the Reported Benefit:
To estimate the amount of resources associated with CEP examinations, we contacted the Budget Liaison of the Examination Office of Management and Analysis. This office provided us with the total costs of operating the CEP for FY 1999, which included labor and non-labor costs.
To determine the amount of additional taxes recommended by CEP examinations annually, we used the FY 1999 Audit Information Management System (AIMS). The AIMS showed that CEP examinations resulted in $11.1 billion of additional recommended taxes.
Managementís Response to the Draft Report
The response has been removed due to its size. To see the complete response, please see the Adobe PDF version of the report on the TIGTA Public Web Page.