Executive Summary

Objectives and Scope

Background

Results

Conclusion

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response

Executive Summary

A photocopy user fee is the fee that is paid to the Internal Revenue Service (IRS) for providing a taxpayer with a copy of their tax return. Taxpayers prepay the fee of $23 for each tax return photocopy requested when submitting a Request for Copy or Transcript of Tax Form (Form 4506). The fee is refunded to the taxpayer if the IRS later determines that it cannot provide a photocopy of the requested tax return.

This review was conducted at the Kansas City Service Center (KCSC) in part because of concerns that photocopy user fee payments could result in fraudulent refunds. We evaluated controls over photocopy user fee refunds and determined whether material fraud had occurred. This included evaluating whether photocopy user fee refunds had been properly recorded and accounted for, whether refunds were adequately supported and properly approved, and whether cancelled refund checks were properly resolved. We also evaluated various inventory controls, and determined whether appropriate actions had been taken to timely provide taxpayers with photocopies of tax returns.

The KCSC did not always properly record and account for photocopy user fee refunds. Although we did not find any indications of employee fraud, controls were not effective to help prevent opportunities for improper activity. In addition, we found that taxpayers did not always receive timely and complete responses to their requests. Specifically, we found the following.

• Kansas City Service Center did not have adequate preprocessing, case processing, and cancelled refund check resolution controls. Inadequate preprocessing of requests resulted in delays in notifying taxpayers of rejected requests, and the deposit of remittances before preprocessing caused unnecessary refunds. Also, employees did not always make adequate attempts to locate tax returns, resulting in some taxpayers inappropriately receiving refunds instead of the requested photocopies. Lastly, the KCSC did not take appropriate action to research and resolve cancelled refund checks for possible re-issuance to the taxpayers.
• Kansas City Service Center did not have adequate managerial, quality, and certification reviews. Authorizing officials and the Accounting Branch did not sufficiently review refund transactions prior to approval. Also, the Quality Assurance Program did not track error trends to provide any needed additional training on the processing of photocopy user fee requests and refunds.
• Kansas City Service Center did not have adequate security and accountability over photocopy database transactions. Final Photocopy Refund Listings did not always match the photocopy refund database transactions. Also, documentation of closed case files was not always appropriately maintained. Lastly, unauthorized users could access the automated photocopy database due to security inadequacies.

Management’s Response: During this review, we issued a memorandum to IRS management addressing each of the conditions included in this report. IRS management agreed with all of the findings we identified in our review. Management’s complete response is included as Appendix IV in this report.

Objectives and Scope

This review was conducted because of concerns that photocopy user fee payments could result in fraudulent refunds. To address this concern, we evaluated controls over photocopy user fee refunds and determined whether material fraud had occurred. This included evaluating whether photocopy user fee refunds had been properly recorded and accounted for, whether refunds were adequately supported and properly approved, and whether cancelled refund checks were properly resolved. We also evaluated various inventory controls, and determined whether appropriate actions had been taken to timely provide taxpayers with photocopies of tax returns.

The review was conducted from September 1998 through February 1999. Details of our objectives, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

Taxpayers submit Requests for Copy or Transcript of Tax Form (Form 4506) to request copies of tax returns from the Internal Revenue Service (IRS). The photocopy user fee is $23 for each tax return (tax period) requested. Returns and Income Verification Services (RAIVS) function controls the Forms 4506 and initiates refunds if copies of the tax returns cannot be provided to taxpayers. Manual refunds are usually issued weekly using a photocopy refund program.

For Fiscal Year 1998, the KCSC refunded 52 percent of the photocopy user fees deposited. There are legitimate reasons why fees are refunded, including not being able to locate the requested tax returns and taxpayer overpayment of the fees; however, our review showed that the KCSC can make several improvements to reduce this percentage and improve customer service.

Results

The KCSC did not always properly record and account for photocopy user fee refunds. Although we did not find any indications of employee fraud, controls were not effective to help prevent opportunities for improper activity. In addition, we found that taxpayers did not always receive timely and complete responses to their requests. Specifically, we found the following.

• Kansas City Service Center did not have adequate preprocessing, case processing, and cancelled refund check resolution controls.
• Kansas City Service Center did not have adequate managerial, quality, and certification reviews.
• Kansas City Service Center did not have adequate security and accountability over photocopy database transactions.

Kansas City Service Center Did Not Have Adequate Preprocessing, Case Processing, and Cancelled Refund Check Resolution Controls

The Internal Revenue Manual (IRM) requires Forms 4506 be reviewed for completeness and correct payment amounts prior to depositing the related remittances. The IRM also specifies that this preprocessing should be performed in the Cashiers Section. When requests are rejected, the incomplete forms, remittances, and any necessary correspondence should be promptly mailed back to the taxpayer.

However, there was an informal agreement between the Cashiers Section and the RAIVS function to forward all the cases to the RAIVS function after preprocessing. This included Forms 4506, which the Cashiers Section determined should be rejected, with the remittances still attached. At this point, these remittances were being taken out of the Receipt and Control Branch without meeting two important security requirements: (1) they were not being controlled on document transmittals; and (2) once in the RAIVS function, they were not stored in locked containers meeting security standards.

The procedure to send all cases to the RAIVS function after preprocessing resulted in not timely alerting the taxpayers that the KCSC needed additional information to process their requests (for those Forms 4506 that were rejected). This resulted in the deposit of those checks, causing a refund to be necessary when the Forms 4506 were later rejected. This was the cause for refunds in 20 percent of the refund cases we reviewed.

As previously mentioned, the Cashiers Section sent rejected Forms 4506 with remittances to the RAIVS function. However, RAIVS did not immediately identify that these Forms 4506 should have been rejected and instead routed the checks back to the Cashiers Section as "discovered remittances."

In addition to the problems mentioned above, preprocessing edit marks resulted in many refunds erroneously being issued to third parties. Taxpayers must check the box on line 6 of Form 4506 to indicate that the photocopy user fee remittance should be refunded to a third party, such as a return preparer or financial institution, if the IRS cannot find a record of the tax return. A local agreement required clerks to enter a green "X" by the third party line on Form 4506 when a check or correspondence was received from a third party. This resulted in RAIVS employees sending refunds to third parties, irrespective of whether or not the taxpayers had requested this on their Forms 4506. We determined that 20 percent of the Forms 4506 reviewed had refunds erroneously issued to third parties.

Management’s Response: The inconsistency in the Cashier and RAIVS IRMs was addressed at the yearly RAIVS meeting held during the week of March 2, 1999. The National Office RAIVS Analyst agreed to issue an IRM revision that will address the preprocessing requirements and the need to perform this prior to deposit. The burden of responsibility will be placed on the RAIVS function to ensure preprocessing procedures are followed.

RAIVS employees are required to take appropriate actions within 45 days to secure returns requested by taxpayers. If returns or charge-outs are not received within 2 weeks, follow-up actions should be taken to secure the returns. If returns are charged out to specific employees or specific functions, RAIVS employees should make contacts to secure the returns. RAIVS employees should use case history sheets to document actions taken to obtain returns.

We reviewed a sample of 50 Forms 4506, which included requests for copies of 154 returns. RAIVS employees were not able to locate 40 returns; however, we were able to locate 29 of the 40 returns. We identified inadequate case processing actions, including RAIVS employees not taking sufficient actions to locate returns, which caused unnecessary refunds. Specifically, we identified the following problems.

• Employees did not always contact other employees or functions to obtain tax returns.
• Employees did not follow up with an additional request for tax returns when the initial charge-out requests did not come back.
• Employees did not follow up when U.S. Individual Income Tax Declaration for Electronic Filing (Form 8453) was needed for an electronic return request.
• Employees did not always control cases or request tax returns timely.
• History sheets did not adequately document actions taken.
• Employee errors resulted in cancelled refund checks. We reviewed 29 cancelled refund check cases and determined 15 were caused by RAIVS errors. The errors included not inputting an address on the refund database or putting an incorrect address on the database.

Management’s Response: All RAIVS employees were instructed to make contact with any unit that had a return that was needed to fill a taxpayer’s photocopy request. In addition, they were instructed to follow up on all "no replies" on the original request with a second request. Management will perform periodic reviews of history sheets to ensure that all follow-up procedures are being documented and followed. Also, employees were instructed on the importance of accuracy when inputting information in the refund application.

Our review showed cancelled refund checks had not been resolved since 1993. Photocopy user fee refund checks are returned to the Regional Finance Center (RFC) when they are undeliverable, have payee problems, or have other issues that prevented their distribution to the taxpayer. The RFC notifies the Accounting Branch, via the Schedule of Cancelled or Undeliverable Checks (SF 1098), that the refund checks have been returned and cancelled. Once the Accounting Branch has taken necessary general ledger actions on these checks, it then forwards the SF 1098s to the RAIVS function.

We determined the RAIVS function was not working the SF 1098 listings. We identified 87 photocopy user fee cancelled refund checks totaling about $4,000 for the period January 1998 to June 1998 that had not been researched for possible re-issuance to taxpayers. The IRM provides instructions on working the SF 1098 listings; however, RAIVS employees indicated they had not been trained on how to work those listings.

Management’s Response: The SF 1098 Cancelled Refund listings are now being assigned on the Integrated Data Retrieval System (IDRS) to individual employees to work on a regular basis. The manager of the unit will monitor the aged case listing to ensure that the cancelled refunds are being worked timely.

Kansas City Service Center Did Not Have Adequate Managerial, Quality, and Certification Reviews

The IRM requires the authorizing official to review and approve photocopy user fee refunds. At the KCSC, this requirement was delegated to the workleaders in the RAIVS function. Workleaders performed reviews to compare information on the Final Photocopy Refund Listing to the Form 4506. However, not all workleaders ensured cases had been closed properly and appropriate actions had been taken to locate the returns before inputting refunds. For example, some workleaders did not review the supporting documentation before closing the cases. This creates the opportunity for improper, unnecessary, or incorrect refunds.

Management’s Response: The workleaders have been instructed on how to perform a 100-percent review of the refund listing, including reviewing the supporting documentation. The workleaders are also annotating each entry on the refund listing to indicate the review was performed. This information is then forwarded to the manager for review and approval.

The manager and workleaders in the RAIVS function reviewed closed cases and provided feedback to their employees. However, the results of these reviews were not entered into the Quality Assurance Program. This program provides a process to consistently record errors for identification of problem trends and potential additional training needs. Trend identification and targeted training could have reduced the number of photocopy user fee refund problems at the KCSC.

The Accounting Branch Certification function should receive related Forms 4506 and backup documents from the RAIVS function for further review and certification of the refunds. However, based on a local agreement, the RAIVS function did not forward the refund source documents (Forms 4506) and the related case documentation to the Certification function for review. As a result, the Certification function's review process only consisted of comparing the signature on the Final Photocopy Refund Listing to the latest memorandum of authorized signatures and scanning the listing for obvious errors such as missing address information.

Management’s Response: Procedures are being developed for the RAIVS function to forward supporting documentation to the Certification function along with the refund listings. Management will also perform periodic reviews of the refund listing and the supporting documentation to ensure that they are being accurately reviewed.

Kansas City Service Center Did Not Have Adequate Security and Accountability Over Photocopy Database Transactions

The KCSC used an electronic database stored on a mid-range computer to manage refunds of photocopy user fees. At the time of our review, the database included refunds made from July 1996 to mid-September 1998.

The Memphis Service Center initially created the KCSC database. With IRS National Office guidance, enhancements were made with the goal of distributing the system nationwide. This plan never materialized, and the IRS National Office did not provide resources to maintain the system. The KCSC has maintained and modified the system with limited resources. Since it was implemented in 1994, the system has changed from a multi-functional system (which controlled all photocopy requests, generated requests for tax returns, and issued refunds) to a one-function system used to generate photocopy user fee refunds.

We found the following conditions where controls needed to be strengthened.

• Final Photocopy Refund Listings did not always match the photocopy refund database.
• Documentation of closed case files was not appropriately maintained.
• Unauthorized users could access the automated photocopy database.

To determine the accuracy of the refund database recorded transactions and the related Accounting Branch refund records, we compared the Automated Photocopy System (the photocopy refund database) records to the records reported on the Final Photocopy Refund Listing for 36 weeks. We determined that 11 weeks had inconsistent data for which we identified the following problems.

• Transactions did not always create a refund as expected. We found 10 cases that were not on the Final Photocopy Refund Listing but were on the refund database for a dollar amount. This indicated that the database transactions did not pass computer program validity checks to issue refunds. The RAIVS review and approval process did not detect the fact that the refunds were not on the Final Photocopy Refund Listings, and therefore not issued.
• A computer program problem created incorrect refunds for $9 when photocopy clerks left the refund amounts blank. A refund amount of $9 was on the Final Photocopy Refund Listing and did not agree with the database amounts in nine cases. The database transaction had a different amount, a blank amount, or had been deleted.
• Employees could modify and delete transaction information after refunds had been created. The transactions in seven cases were either modified or deleted after the refund was issued. System controls should prohibit modifying or deleting refund transactions after the refund has been issued.

Management’s Response: The KCSC has received the Fresno Service Center’s (FSC) Year 2000 compliant version of the Photocopy Refund Application. The FSC program is currently in the Best Practices process and is being considered for a National Standards Application.

Office of Audit Comment: The Directors should discuss with appropriate IRS National Office management whether the FSC program meets proper security requirements and corrects the problems identified in this report.

The closed case files were not appropriately retained in the RAIVS function. As a result, the RAIVS function could not locate 21 of the 94 closed Form 4506 cases required for our audit. Proper storage of closed case records is necessary to help ensure the accountability of the photocopy user fee refund transactions. Proper storage also facilitates responding to taxpayer inquiries regarding their return photocopies or refunds, and simplifies case destruction when retention deadlines expire. The ability to locate Forms 4506 might also be critical to resolving inadvertent or intentional disclosure of tax information.

Management’s Response: Management is performing a review of the filing system used for closed case files. After the completion of the review, a recommendation will be made to improve the filing system and the subsequent retrieval of closed case files.

Guidelines for an automated information system require managers to notify Information Systems when users no longer need access to a system. In addition, the system is to have an additional control to detect when users have not accessed the system for specified periods. The system should cancel the user's password after 45 days of inactivity and delete the entire account (login) after 90 days of inactivity. Furthermore, since System Administrators have unlimited access to any area of the system they manage, the separation of duties principle and IRS requirements prohibit System Administrators from modifying or deleting transactions.

During our review, we identified 15 individuals who had permission to access the automated photocopy database system but no longer had a business purpose to access it. We also found that System Administrators had access which allowed them to modify transactions, and were doing so to assist in the timely completion of the weekly refund transactions. Our review showed the following created the unauthorized access problem.

• RAIVS management did not prepare Automated Information System User Registration/Change Requests (Form 5081) to notify Information Systems to delete necessary employees' access privileges to the mid-range computer or to the Automated Photocopy System (APS).
• The KCSC mid-range computer, where the APS resides, did not prevent access to nonusers on a timely basis. Because of the high number of seasonal employees and limited resources in the Information Systems Division, management decided to cancel the users’ passwords after 90 days of inactivity and delete the login after 180 days.
• The KCSC had not received funding for a Functional Database Administrator, which is the position that should be resolving problems affecting operations of the APS.

Management’s Response: Management has reviewed the user listing for the RAIVS function and removed all employees who no longer have a need for access. In addition, Information Systems Division has initiated a lockout for system users who are not on the system during any 45-day time frame. Also, management will perform a review of the user listing on a monthly basis or whenever an employee leaves the unit.

Conclusion

The KCSC did not always properly record and account for photocopy user fee refunds. Although we did not find any indications of employee fraud, controls were not effective to help prevent opportunities for improper activity. Additionally, managerial and quality review controls could be improved to help ensure taxpayers timely receive photocopies of tax returns.

Detailed Objectives, Scope, and Methodology

Our review was in part conducted because of concerns that photocopy user fee payments could result in fraudulent refunds. Our objectives were to determine if the service center properly recorded and accounted for photocopy user fee refunds on the general ledger, if material fraud had occurred regarding photocopy user fee refunds, if photocopy user fee refunds were adequately supported and properly approved, and whether cancelled photocopy refund checks were resolved. We also determined whether the IRS maintained adequate safeguards over remittances and timely mailed rejected Requests for Copy or Transcript of Tax Form (Form 4506). We conducted the review during the period September 1998 to February 1999.

We held discussions with IRS personnel to evaluate controls, traced refund transactions through the Accounting Branch function, queried refund records to identify potential fraud, reviewed closed refund cases, and reviewed cancelled photocopy user fee refund check cases.

To meet our audit objectives, we:

1. Evaluated controls over the input, approval, and certification process for photocopy user fee refunds. These included controls over the Automated Photocopy System (APS) database access privileges, controls within the Returns and Income Verification Services (RAIVS) function, and subsequent controls within the Accounting Branch.
2. Traced refund transactions to the monthly Revenue Accounting Control System (RACS) general ledgers for the period January through June 1998.
3. Queried the KCSC APS database records created from October 1, 1997, through September 4, 1998, to look for potential patterns of fraud.
4. Reviewed 50 refund cases closed from July to September 1998 to see if employees took appropriate actions to secure tax returns. Using these 50 cases, we evaluated inventory controls to determine whether employees timely controlled cases and timely requested tax returns.
5. Reviewed 29 cancelled refund check cases identified from Schedule of Cancelled or Undeliverable Checks (SF 1098) listings dated from January to June 1998 to evaluate controls and resolution actions over cancelled photocopy user fee refund checks.

Major Contributors to This Report

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

Susan Boehmer, Director

Steve Mullins, Director

John L. Hawkins, Acting Audit Manager

Linda L. Bryant, Senior Auditor

Carola Gaylord, Senior Auditor

Adrienne D. Byers, Auditor

Kathleen A. Hughes, Auditor

Sharla Robinson, Auditor

Report Distribution List

Executive Officer for Service Center Operations OP:SC

Assistant Commissioner (Customer Service) OP:C

Assistant Commissioner (Forms and Submission Processing) OP:FS

Director, Kansas City Customer Service Center

Director, Kansas City Submission Processing Center

National Director for Legislative Affairs CL:LA

Office of Chief Counsel CC

Chief, Office of Management Controls M:CFO:A:M

Audit Liaison, Assistant Commissioner (Customer Service)

Audit Liaison, Assistant Commissioner (Forms and Submission Processing)

Management's Response