TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
INCREASED ATTENTION IS NEEDED TO ENSURE TIMELY, ACCURATE DETERMINATIONS ON INNOCENT SPOUSE CLAIMS FOR RELIEF
Reference No. 2000-40-063
The Internal Revenue Service (IRS) considered the provisions for innocent spouse relief to be 1 of the 10 most significant areas of the IRS Restructuring and Reform Act of 1998 (RRA 98) that became law on July 22, 1998. RRA 98 ß 3201 liberalized the factors that the IRS considers when evaluating requests for relief from income taxes under the innocent spouse provisions. This liberalization of the law significantly increased the number of claims that the IRS received. Between July 22, 1998, and December 31, 1999, the IRS received approximately 64,000 innocent spouse claims for relief. During this period, the IRS reviewed almost 18,000 claims, of which approximately 9,000 claims were eliminated because they did not qualify for innocent spouse consideration. At the end of December 1999, the IRS still had approximately 46,000 claims open in inventory.
Our review had two objectives. First, we determined how effectively the IRS managed the increased receipt of innocent spouse claims for relief as a result of the RRA 98 ß 3201. Second, we determined how effectively the IRS set up a control structure to ensure the quality of determinations. Our review was conducted in two phases. The first phase was conducted between April and September 1999. It was during this time period that the IRS acknowledged there were significant problems with the Innocent Spouse Program. The second phase was conducted in February 2000 as a follow-up to identify and assess the actions taken by the IRS to correct problems identified during phase one.
The IRS was not prepared to effectively process the increased volume of innocent spouse claims for relief received after the RRA 98 was passed. IRS management was slow to react to predictions of increased innocent spouse claims and did not adequately staff the Program when the predictions materialized. This created significant inventory backlogs. Instead of setting up a fundamentally sound Program with long-term solutions, IRS management initiated short-term solutions designed to reduce the inventory backlog. However, these steps were not successful, and cases in open inventory increased to a Program high of 46,000 by December 31, 1999.
The IRS has taken several positive actions to address the problems of implementing the Innocent Spouse Program. These actions included changing the management structure, appointing a full-time national project manager with expanded authority, developing a decision tree job aid to assist in making determinations, redesigning the application for relief to help taxpayers better understand eligibility requirements, and establishing a centralized quality review of innocent spouse case decisions. However, IRS management needs to take additional actions to implement an effective Program to provide timely, accurate determinations on innocent spouse claims for relief.
The Internal Revenue Service Did Not Effectively Manage the Increased Number of Innocent Spouse Claims for Relief Received as a Result of the Restructuring and Reform Act of 1998
IRS management did not react to predictions of significant increases in the number of claims that would be filed and was slow to increase staffing to work the claims when the predicted number of receipts actually materialized. Also, management did not set goals for the Innocent Spouse Program and did not have a management information system to measure Program accomplishments. As a result, the IRS did not have accurate or complete information on the volume, status, or location of innocent spouse cases during the first year after passage of the RRA 98 and currently has only limited information on the status of cases in inventory.
We believe that the management structure of the Innocent Spouse Program and the absence of a reliable management information system impacted the IRSí decision to not react sooner. The IRS has taken steps to address both of these issues by changing the Programís management structure and increasing its staffing.
However, the IRS expects to reduce the number of open claims from 46,000 to 30,000 by the end of Calendar Year 2000. At that closure rate it will take approximately three years for the IRS to eliminate the inventory backlog. Staffing estimates are also only as reliable as the information used to make the projections. The information currently available is a snapshot of the inventory at a given point in time. Standards have not been established for the overall processing of cases, nor are cases aged to identify how long they have been open.
The Internal Revenue Service Has Not Established a Comprehensive System of Internal Controls to Ensure the Quality of Innocent Spouse Claims for Relief
IRS management did not set standards for the timely and accurate processing of innocent spouse claims and did not establish a comprehensive set of internal controls to measure the quantity, quality, cost, and timeliness of claim processing. As a result, the IRS experienced ongoing problems determining staff needs, making accurate determinations, maintaining accurate taxpayer accounts, effectively communicating with taxpayers, protecting the rights of non-petitioning spouses, and preventing enforced collection activity while claims were being evaluated.
Our findings are consistent with the unpublished results of a review conducted by a multi-functional IRS team. The IRS team included as its primary concerns for the Innocent Spouse Program the need for management controls and an effective management information system.
Summary of Recommendations
We recommend that the IRS design a fundamentally sound, long-term approach to making determinations on innocent spouse claims for relief that includes: setting goals and standards for the Innocent Spouse Program; designing a management information system that provides complete, accurate, and useful feedback; and installing a comprehensive system of internal controls that addresses the quantity, cost, and timeliness of making determinations.
Managementís Response: The IRS responded to only two of our three recommendations. It has agreed to formalize statistical goals and standards and to enhance the management information system. The IRS did not respond to our recommendation to design and implement a system of internal controls that addresses the quantity, cost, and timeliness of the Innocent Spouse Program. We continue to be concerned with the controls in place for this Program. We will follow up with the IRS to determine its position on this recommendation since it neither agreed nor disagreed with it. Managementís complete response to the draft report is included as Appendix VI.
Office of Audit Comments: In its response to our draft report, the IRS indicated that we did not address the principal challenge of implementing the innocent spouse provisions: learning to properly and accurately apply new and complex statutory provisions to very sensitive taxpayer situations. However, our report acknowledges that the IRS believes the complexity of the law contributed to problems in implementing the Program. The objectives of our review were to determine how effectively the IRS managed the increased number of claims and the quality of determinations, despite the obstacles.
Regarding the backlog, we were pleased to see in the response to our report that the IRS will reduce the inventory of claims in which the taxpayer has not received a determination letter to 14,000 by the end of the fiscal year. This statistic is considerably better than that in the testimony presented to the Congress less than 3 months ago, when the inventory of pending innocent spouse claims was expected to be less than 30,000 by the end of December 2000. We will continue to monitor the IRSí progress in this area.