TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
THE INTERNAL REVENUE SERVICE NEEDS TO IMPROVE CONTROL OF ITS COMPLIANCE RESEARCH PROGRAM
Reference No. 2000-40-068
As the Internal Revenue Service (IRS) migrates to four operating divisions, its traditional approach to tax administration is changing to incorporate the needs of a diverse taxpayer population. Within this new approach, it is important for the IRS to effectively develop and use compliance research data to guide its programs. The primary objective of this review was to determine if the IRSí system of controls provides reasonable assurance that compliance research activities are meeting program objectives and customer needs in a cost-effective manner.
The IRS does not have effective controls over its research activities. From the beginning of Fiscal Year (FY) 1996 to the end of FY 2000, the IRS will have expended over $226 million conducting compliance research. With its current monitoring processes, the IRS cannot accurately quantify its return on investment. Although the IRS has recently implemented some new procedures to better manage its compliance research program, it cannot accurately measure the cost-effectiveness or the impact of the information provided to its functional programs.
The Internal Revenue Service Needs to Measure the Cost-Effectiveness of Its Compliance Research Program
The IRS does not have an effective process to measure the costs and impact of its research activities. It does not track recommendations or validate their resulting outcomes. The system used by the IRS tracks costs over the life of a project but does not allow for an effective comparison to yearly budget figures. The IRS cannot effectively and efficiently manage its research program if benefits and costs cannot be accurately identified.
The Internal Revenue Service Needs to Improve Communication Between the Research Organization and Its Customers
The IRSí research organization does not adequately address concerns expressed by its functional customers. It also does not always communicate its research results timely and does not document discussions with its customers. In FY 1999, the research organization implemented a survey process to obtain feedback from its functional customers. Even though the results of this survey showed that respondents from four of seven key customers were dissatisfied with the research process, the research organization has done very little to address their specific concerns.
In addition, research results are not reported timely to functional customers because the report approval process is not efficient. As a result, significant information may not be available when managerial decisions are made on key functional processes. The research organization also does not effectively document discussions with its customers. Since research projects often take years to complete, a historical record of customer discussions is critical to ensure research continues to meet customer needs.
The Internal Revenue Serviceís Research Organization Needs to Improve Project Documentation
The IRS does not maintain enough information to effectively manage its compliance research program at a national level. It has not ensured that key project documentation to support customer involvement and project status is complete and timely stored in electronic project folders. Also, the IRS does not maintain and analyze information on closed research projects. As a result, the IRS may not have the necessary research project information to make effective business decisions.
Summary of Recommendations
To ensure that research activities support its mission and provide value to its programs, the IRS needs to improve control over its compliance research program. To do this, the IRS must develop a process to identify and measure actual research outcomes and their related costs. To ensure that research activities provide value to its customers, the IRS should report research results timely to functional customers and involve them more in the research process. The IRS should also maintain adequate project documentation to facilitate effective business decisions.
Managementís Response: IRS management agreed that they must ensure research is being effectively developed and efficiently used to guide management decisions. Since there are many decisions yet to be made as to how the research organization will function in the new operating divisions, the proposed corrective actions are short-term remedies within the current organization structure. Many policies and procedures may change after research organizations begin functioning in the new operating divisions, and embedding a research function in each operating division should substantially eliminate customer concerns. Management has already taken steps to improve controls over annual project costs and essential project documentation. They have planned processes to readdress customer concerns in future customer satisfaction surveys and program reviews. Management is choosing to rely on the new Strategic Planning and Budget process in each operating division to link research activities to strategic measures. They did not agree to document customer discussions, choosing instead to rely on project prospectuses approved yearly by customers to ensure their involvement. Also, management believes current processes to ensure timeliness of reporting and communicating interim results to customers are effective.
Office of Audit Comment: IRS management must ensure that effective controls over research activities continue once research functions are placed in the operating divisions. Management should consider our recommendations when making decisions on how the research organization will function in the new operating structure. If the IRS follows through and links research results to strategic measures, it should be able to quantify the effect of research outcomes on tax administration. Management should also continue reviewing customer satisfaction surveys and conducting program reviews after migrating to the operating divisions. This action will validate whether the embedding of research activities in each operating division substantially eliminates customersí concerns. Although management has set guidelines and procedures to ensure timely reporting of results to customers, they must provide oversight to ensure that these policies are being followed. In addition, management should ensure that their policies do not discourage the sharing of research results with customers and that significant customer discussions and resulting decisions are effectively documented.