Executive Summary

Objective and Scope

Background

Results

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response to the Draft Report

Executive Summary

As part of the Internal Revenue Service’s (IRS) Fiscal Year (FY) 1998 Revenue Protection Strategy, two service centers conducted correspondence examinations of 140,000 taxpayers involving 350,000 tax periods. These taxpayers all filed income tax returns (1995 and/or 1996) claiming the Earned Income Tax Credit (EITC). The EITC qualifying child’s Social Security Number (SSN) was also used by another taxpayer to claim the EITC. Taxpayers selected for the Duplicate SSN EITC Repeater Project were subjected to the normal notice and examination processes. The only exception was that their Tax Year 1997 refunds were systemically frozen from refunding.

The objective of this review was to determine the effectiveness of the Duplicate SSN EITC Repeater Project in reducing the abusive use of dependent SSNs by multiple taxpayers claiming the EITC.

The IRS made significant strides in preventing erroneous refunds and claims for the EITC from going to non-qualified taxpayers. By September 1998, approximately 89,000 Duplicate SSN EITC Repeater cases were examined, resulting in an estimated $71 million in potential assessments. Over 35,900 taxpayers that were not entitled to use the abused SSN for EITC purposes did not claim the SSN again on their 1997 returns.

However, the service centers experienced difficulty managing the huge amount of taxpayer correspondence generated by this Project. During the early stages of our review, we advised Customer Service management to release the current year (1997) refunds of taxpayers who responded to Initial Contact Letters and/or filed 1997 returns without claiming the abused SSNs again. The IRS released current year refunds to both groups of taxpayers.

As of September 1998, there were still over 24,000 taxpayers waiting for their correspondence to be reviewed by tax examiners, and approximately 17,000 cases in Initial Contact Letter Status at one service center. The IRS needed to address the following areas to improve the operation of this Project, reduce taxpayer burden, and improve customer service:

Due to the large inventory selected for the Project, tax examiners could not keep up with the volume of taxpayer correspondence. Inventories at both service centers soon became unmanageable.

Since the general inventory of cases was not being worked timely, the number of cases meeting Problem Resolution Program (PRP) and Applications for Taxpayer Assistance Orders criteria grew rapidly. As of March 24, 1998, 1,354 taxpayers required PRP assistance, which was 93 percent above the norm for the number of taxpayers examined.

The two service centers did not work the cases in a consistent manner. Some taxpayers received more time and opportunities to produce sufficient documentation. This inconsistent treatment potentially increased the burden placed on taxpayers handled at one service center, while putting program completion goals in jeopardy at the other service center.

One service center did not always close non-examined 1997 returns off the Audit Information Management System properly. This resulted in distorted reports, duplication of effort, and impaired management’s ability to determine required resources.

The Project guidelines directed tax examiners to put a case into a specific holding status when additional information was requested from a taxpayer. However, there was no provision to distinguish between a case in which the taxpayer had already been issued a report of proposed tax changes and a case with merely a request for additional information. This increased the risk of missed assessments and loss of case control at one service center.

We advised the National Director, Customer Service, Compliance, Accounts and Quality Division, that insufficient resources were allocated to handle the magnitude of taxpayer correspondence generated by the Duplicate SSN EITC Repeater Project. We recommended that adequate PRP resources be allocated to handle the fallout of cases from the Project. We also recommended that Project guidelines be revised to ensure that cases were worked consistently and the risk of missed assessments was reduced. In addition, we recommended that tax examiners close non-examined returns off the control system properly when refunds were released.

Management’s Response: Management responded that for the FY 1999 initiative they decreased the level of inventory selected, changed monitoring procedures, and developed contingency plans for shifting inventory if levels became unmanageable. A task force consisting of representatives from PRP, Counsel, the EITC Program Office, and the National Office Service Center Examination Branch revised all EITC letters.

In addition, changes were made to the Project guidelines. Management also agreed that it would be more efficient for tax examiners to close non-examined returns off the control system properly. Management directed that cases with reports of proposed tax changes be placed into a different status on the control system to reduce the risk of missed assessments.

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

Objective and Scope

The overall objective of this review was to determine the effectiveness of the Internal Revenue Service’s (IRS) Duplicate Social Security Number (SSN) Earned Income Tax Credit (EITC) Repeater Project in reducing the abusive use of dependent SSNs by multiple taxpayers claiming the EITC.

This review was conducted at the Brookhaven and Ogden Service Centers with on-line reporting to the National Director, Customer Service, Compliance, Accounts and Quality Division, and the National Office Project Coordinator. This audit was conducted in accordance with Government Auditing Standards from October 1997 to September 1998.

As of the discontinuance of the audit fieldwork, there were over 255,000 cases still open in various stages of the examination process. Therefore, it was not possible to calculate final Project accomplishments for the purposes of this report.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

The Duplicate SSN EITC Repeater Project was used as part of the Fiscal Year (FY) 1998 Revenue Protection Strategy to address the abusive use of dependent SSNs to claim the EITC. The Brookhaven and Ogden Service Centers were chosen to conduct correspondence examinations of 140,000 taxpayers involving 350,000 tax periods. These taxpayers all filed an income tax return (Tax Years (TY) 1995 and/or 1996) reporting a valid SSN of an EITC qualifying child claimed on another taxpayer’s return. All the current year (1997) refunds of the selected taxpayers were systemically frozen from refunding.

Results

The IRS made significant strides in preventing erroneous refunds and claims for the EITC from going to non-qualified taxpayers. By September 1998, approximately 89,000 Duplicate SSN EITC Repeater cases were examined, resulting in an estimated $71 million in potential assessments. Over 35,900 taxpayers that were not entitled to use the abused SSN for EITC purposes did not claim the SSN again on their 1997 returns.

However, the service centers experienced difficulty managing the huge amount of taxpayer correspondence generated by this Project. During the early stages of our review, we advised Customer Service management to release the current year (1997) refunds of taxpayers who responded to Initial Contact Letters and/or filed 1997 returns without claiming the abused SSNs again. The IRS released current year refunds to both groups of taxpayers. Thus, taxpayers that tried to resolve their situation were not penalized.

The IRS needed to address the following areas to improve the operation of this Project, reduce taxpayer burden, and improve customer service:

Adequate Resources Were Not Allocated to Work Inventory Timely

For the Duplicate SSN EITC Repeater Project, Initial Contact Letters had been mailed to taxpayers from October through December 1997. Taxpayers began responding to the letters and the number of tax examiners assigned to work the cases simply could not keep up with the volume of taxpayer correspondence. Inventories at both service centers soon became unmanageable.

By March 1998, over 86,000 letters from taxpayers who responded to their Initial Contact Letters were awaiting technical review of their documentation. As of September 1998, there were still over 24,000 taxpayers waiting for their correspondence to be reviewed by tax examiners and approximately 17,000 cases in Initial Contact Letter Status (unworked and unassigned) at one service center.

Management’s Response: Customer Service management reduced the size of the selected inventory for the FY 1999 initiative, improved their case monitoring process, and developed contingency plans for shifting inventories based on correspondence receipts.

Adequate Resources Were Not Allocated to Handle the Volume of Problem Resolution Program Cases Generated

Since the general inventory of Duplicate SSN EITC Repeater cases was not being worked timely, the number of cases meeting Problem Resolution Program (PRP) criteria grew rapidly.

The IRS expects about one half of one percent of taxpayers affected by a project to require PRP intervention. Considering that the Duplicate SSN EITC Repeater Project impacted 140,000 taxpayers, an estimated 700 PRP cases would be the expected normal result for such an undertaking. As of March 24, 1998, 1,354 taxpayers required PRP assistance, which was 93 percent above the norm.

This figure included 432 Applications for Taxpayer Assistance Orders (ATAO). Such a case is referred to the Taxpayer Advocate to handle because a taxpayer claims that a significant hardship would result from an IRS action. PRP and ATAO cases are subject to limited time frames for case resolution and resources were stretched to the maximum.

Management’s Response: Customer Service management reduced the number of cases selected for the 1999 initiative. A task force consisting of representatives from PRP, Counsel, the EITC Program Office, and the National Office Service Center Examination Branch revised all EITC letters. The National Office planned to monitor inventories weekly and reduce resources allocated to other programs as necessary.

Taxpayers Were Not Always Treated Consistently

The Brookhaven and Ogden Service Centers did not work the inventory selected for the Duplicate SSN EITC Repeater Project in a consistent manner. This inconsistent treatment increased the burden placed on taxpayers handled at one service center, while putting Program completion goals in jeopardy at the other service center.

According to the Project guidelines, tax examiners were:

• Mandated to put cases into a particular status on the Audit Information Management System (AIMS) when additional information was requested from taxpayers before issuance of a Notice of Deficiency to the taxpayer.
• Instructed to update cases to a different status if a revised report should be sent to the taxpayer.

Processing delays were created when cases remained in a holding status for extended periods of time, or were placed there several times. There was also no way to systemically identify which taxpayers had or had not been sent reports of proposed tax changes.

We tracked a random sample of cases from the Brookhaven and Ogden Service Center inventories. We found that one service center was processing cases as stated in the guidelines, while the other was not. As a result:

• Some taxpayers received three opportunities to produce sufficient documentation, while taxpayers handled by the other service center generally received only two opportunities.
• Some taxpayers were given more time to prepare and submit their documentation, while taxpayers handled by the other service center usually were not given the same amount of time.

When taxpayers were subjected to the shortened process, their burden was increased. The period of time when they could exercise their informal appeal rights was abbreviated.

This inconsistent treatment increased the burden placed on taxpayers handled at one service center. On the other hand, the increase in processing delays, caused when taxpayers were given more time and opportunities to produce sufficient documentation, put Program completion goals in jeopardy at the other service center.

Management’s Response: The National Office Service Center Examination Branch (SCEB) revised the Project guidelines and the respective Internal Revenue Manual to ensure that taxpayers received consistent treatment. They also planned field reviews to ensure that guidelines were followed.

Non-Examined Returns Were Not Always Closed Off the Control System Properly

When a taxpayer selected for the Duplicate SSN EITC Repeater Project filed his/her current year (1997) return, and the abused SSN was not present, that return was not always closed off the AIMS properly.

When a taxpayer under examination in the Duplicate SSN EITC Repeater Project filed a 1997 return without claiming the abused SSN, Project guidelines instructed the tax examiner to:

• Not examine the taxpayer’s 1997 tax return.
• Release any refund hold on the 1997 account.
• Close the 1997 return off the control system using the appropriate disposal code.

We found that when taxpayers had not responded to their Initial Contact Letters, but filed their 1997 returns without using the abused SSN, their refunds were issued to them. However, the cases were not always closed off the control system with the correct disposal code at one of the service centers. As a result:

• Program administration was not efficient or effective.
• AIMS reports were distorted because inventory figures were inflated, and cases that should have been closed were represented as workable inventory.
• Management was not able to accurately determine the resources needed to work the inventory.
• Duplication of effort occurred because tax examiners had to identify and re-screen returns with released refunds in order to input the appropriate disposal code.
• Ongoing measurement of program objectives, such as modifying taxpayer behavior, could not be readily accomplished.

Management’s Response: The National Office SCEB management advised the service centers to close non-examined cases with the proper disposal code when a case determination was made.

Project Guidelines Did Not Provide for Adequate Case Control and Increased the Risk of Missed Assessments

The AIMS controls Examination Branch cases, provides management reports, and monitors the progression of cases through the examination process. Each status on the AIMS has a specific definition as cases move through the system and alerts management as to whether or not a report of proposed tax changes has been issued to the taxpayer.

The Duplicate SSN EITC Repeater Project guidelines did not provide for a distinction between cases with or without reports. In some instances, it was difficult to determine if a taxpayer had ever been issued a report of proposed tax changes.

According to the Project guidelines, tax examiners were mandated to put cases into a specific status when additional information was requested from taxpayers before issuance of a Notice of Deficiency. The guidelines made no provision to distinguish between a case in which the taxpayer had already been issued a report of proposed tax changes and a case with merely a request for additional information.

This lack of distinction between cases with and without reports created a loss of case control and increased the risk of missed assessments at one service center. By following the Project guidelines:

• On-line AIMS data at that service center no longer accurately disclosed where a particular case was in the examination process and the action taken.
• Management could not readily determine whether a taxpayer whose case was in the required status had ever been issued a report.
• Management could not predict the volume of cases going into Notice of Deficiency status.
• Without physically examining cases, there was no way to identify which cases still needed reports.
• Statute protection was impaired because TY 1995 cases without reports could not be systemically identified. This increased the potential risk of missed assessments.

Management’s Response: The guidelines were revised to clarify which AIMS status should be used and when to issue a report of proposed tax changes to the taxpayer.

Conclusion

The IRS must continually re-evaluate its approach to how work is processed and ensure that customers’ needs are met at every step of the process. Due to the emphasis now placed on customer service within the IRS, taxpayers need to be serviced quickly so that they do not reach the level of last resort for assistance (i.e., PRP).

Moreover, the IRS’ commitment to superior customer service dictates that programs be implemented uniformly so that all taxpayers are treated equitably. This must be accomplished within the confines of achievable program completion goals.

Detailed Objective, Scope, and Methodology

The overall objective of this review was to determine the effectiveness of the Internal Revenue Service’s (IRS) Duplicate Social Security Number (SSN) Earned Income Tax Credit (EITC) Repeater Project in reducing the abusive use of valid dependent SSNs by multiple taxpayers claiming the EITC.

To accomplish this objective, we:

1. Reviewed the inventory selection process used by the District Office Research and Analysis (DORA) site to determine if the most productive inventory was selected to be worked by the Examination Division in the Duplicate SSN EITC Repeater Project.
2. Obtained information on how tax returns were to be linked with related returns during the Duplicate SSN EITC Repeater Project.
3. Held interviews with National Office and service center management to obtain information regarding the planning efforts and procedures developed for the correspondence examination of returns selected for the Duplicate SSN EITC Repeater Project.
4. Obtained and evaluated the procedures and guidelines identified by management to determine if the examinations were worked in the most efficient manner with the least burden possible placed upon selected taxpayers.
5. Held meetings and obtained information about how the IRS planned to measure and track the accomplishments of the Duplicate SSN EITC Repeater Project to assess impact on revenue protection and taxpayer behavior.
6. Selected and tracked a random sample of cases from the Duplicate SSN EITC Repeater Project inventory at the two service centers chosen to work the Project to determine if cases were handled according to established policies and procedures.

To arrive at the selected sample size of approximately 404 returns per site, we used the Attribute Sampling Methodology with a Finite Population Correction Factor, a desired precision of + or – 3 percent, a desired confidence level of 95 percent, and an estimated error rate not to exceed 5 percent. We then used a database random query to select the actual cases at each site.

7. Determined if the appropriate transaction and freeze codes were input to taxpayer accounts, and if refunds/EITC were accurately and timely frozen and/or released upon case resolution for the sample of cases selected above.

Major Contributors to This Report

Walter Arrison, Associate Inspector General for Audit (Wage and Investment Income Programs)

Kerry Kilpatrick, Director

Philip Shropshire, Deputy Director

Robert K. Irish, Audit Manager

Kathleen A. McFadden, Senior Auditor

Douglas Barneck, Auditor

Margaret Filippelli, Auditor

Francis Kearney, Auditor

Francis Maletta, Auditor

Anne Piersa, Auditor

Gail Schuljan, Auditor

Report Distribution List

Deputy Commissioner Operations C:DO

Chief Operations Officer OP

Assistant Commissioner (Customer Service) OP:C

Assistant Commissioner (Examination) OP:EX

Assistant Commissioner (Office of Program Evaluation and Risk Analysis) M:OP

National Director, Customer Service, Compliance, Accounts and Quality OP:C:A

National Director for Legislative Affairs CL:LA

Office of the Chief Counsel CC

Office of Management Controls M:CFO:A:M

Audit Liaisons:

(Customer Service) OP:C

(EITC Project Office) OP

Management's Response to the Draft Report