Executive Summary

Objective and Scope

Background

Results

Other Audit Reports Have Identified Issues with the

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Memorandum #1: The Internal Revenue Service Has Not Effectively Implemented Failure to Deposit Penalty Provisions of the Internal Revenue Service Restructuring and Reform Act of 1998

Appendix V – Management’s Response to Memorandum #1

Appendix VI – Inaccurate or Missing Action Items on the Provision Report

Appendix VII – Additional Treasury Inspector General for Tax Administration Reports Related to the Internal Revenue Service’s Implementation of the Internal Revenue Service Restructuring and Reform Act of 1998

Appendix VIII – Management’s Response to the Draft Report

Executive Summary

On July 22, 1998, the President signed into law the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98). The purpose of RRA 98 was to amend the Internal Revenue Code of 1986 and to restructure and reform the IRS. Many of the specific sections (also called provisions) of RRA 98 are complex and affect a broad range of taxpayers in a variety of significant ways. Implementation will result in the most extensive restructuring of the IRS and its governing laws in the last 40 years.

This audit is part of coverage scheduled in the Treasury Inspector General for Tax Administration (TIGTA) Fiscal Year 1999 Audit Plan. Our overall objective was to evaluate the IRS’ planning and implementation of RRA 98. We reviewed the process for identifying, coordinating, and monitoring necessary actions and evaluated the effectiveness of the IRS’ implementation of selected provisions of RRA 98.

The IRS’ implementation team for RRA 98 used an aggressive, proactive approach, giving appropriate consideration to the level of executive involvement needed to implement this complex legislation. The Chief Operations Officer established a network of accountability by assigning executive owners for the individual sections of RRA 98. However, to effectively implement RRA 98, the IRS needs to develop accurate action plans, conduct additional validation of completed action items, and increase oversight by officials responsible for legislative provisions.

IRS executives were assigned as provision owners with responsibility for implementation of RRA 98 provisions. These executives developed implementation plans and tracked the overall implementation effort on-line with an IRS internal computer system. The National Resource Center was established to provide consistent coordination required by RRA 98. Field coordinators were appointed as local points of contact for IRS employees.

Inaccurately recorded or missing action items resulted in misleading or incomplete information on action plans, which were combined into the Provision Report. In response to our concerns, the Deputy Chief Operations Officer required all provision owners to review the Provision Report for accuracy and prepare files of documentation to support the status of each action. Additionally, the RRA 98 implementation team performed a 100 percent review of Request for Information Services (RIS) requirements that resulted in several additional RIS actions being identified as needing submission to Information Systems or addition to the action plan.

Necessary actions were not taken to ensure effective implementation of RRA 98 § 3304, Mitigation of Failure to Deposit Penalty. Penalty notices to taxpayers were not revised, revisions to publications did not provide important information on new taxpayer rights, and the Provision Report used by management to track implementation actions was not accurate. The provision owner did not provide necessary oversight and validation over implementation actions. Consequently, numerous incomplete penalty notices were issued, and business taxpayers may have paid penalties that they are entitled to have abated. We reported these issues to management, and corrective actions have been initiated to partially address them.

Effective employee training is critical to the successful implementation of RRA 98. Provision owners realized that training would be required for many of the provisions. Numerous training methods were used to provide employees with critical information as quickly as possible. However, provision owners did not identify or track the employees who should be or were trained on provisions of RRA 98 and have not adequately evaluated the effectiveness of their training efforts.

TIGTA’s Office of Audit has conducted several annual audits that are required by RRA 98. Separate reports have been issued for each of these audits, and these reports identified additional issues related to implementation of RRA 98. In addition to these reports, audit work is currently being conducted covering various other specific provisions of RRA 98, such as the Innocent Spouse provision.

We recommend that the Deputy Chief Operations Officer’s staff periodically review documentation that supports the implementation of critical actions to ensure they effectively meet the requirements of the legislation.

In order to ensure that RRA 98 § 3304, Mitigation of Failure to Deposit Penalty, is effectively implemented, we recommend several actions for the Assistant Commissioner (Examination). We recommend he ensure that clear procedures are provided to Service Centers regarding use of the stuffer form, identify taxpayers who still need information on their penalty abatement rights, and provide additional oversight until full implementation of this provision is completed.

In order for RRA 98 training to be effectively provided, we recommend procedures be established to require that provision owners take control over the training effort for their provisions.

Management’s Response: IRS management agreed to the recommendations made in this report and has already begun taking corrective action to address these issues. A five-point plan was developed by the RRA 98 Executive Steering Committee to strengthen the implementation process.

Service Centers were contacted to ensure that they understood the requirements for use of the stuffer form, and taxpayers who required notification of their potential abatement rights were identified and contacted. Periodic coordination meetings are now being held between Masterfile programmers and the Office of Interest and Penalty Administration to ensure that the final phase of implementation for the RRA 98 § 3304 is addressed effectively.

Lastly, all future initiatives of the nature of RRA 98 will have centralized end-to-end accountability for training by provision owners. To ensure that senior management is aware of the tools available to centrally manage this type of training, the Chief Human Resource Officer will communicate the tracking capabilities of the Administrative Corporate Education System to them as part of the transition to the new IRS structure.

Management’s complete response to the draft report is included in Appendix VIII.

Objective and Scope

The overall objective of this audit was to evaluate the Internal Revenue Service’s (IRS) planning and implementation of the IRS Restructuring and Reform Act of 1998 (RRA 98). To accomplish our objective, we reviewed the process for identifying, coordinating, and monitoring actions taken to implement RRA 98 and evaluated the effectiveness of the IRS’ implementation of selected sections (also called provisions) of RRA 98.

Prior to this review, the Treasury Inspector General for Tax Administration’s (TIGTA) Office of Audit conducted a risk analysis of RRA 98 provisions. Risk was defined as the IRS’ inability to protect taxpayer rights, reduce taxpayer burden, protect revenue, develop economical processes, and/or implement changes to Information Technology.

In selecting the provisions to include in this audit, we used the results of the risk analysis and intentionally avoided selection of provisions that were included in other TIGTA audits. The provisions selected are detailed in Appendix VI.

Our audit was performed in Atlanta, Andover, Cincinnati, Dallas, and Washington, D.C. between April and October 1999. This audit was performed in accordance with Government Auditing Standards.

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

Background

On July 22, 1998, the President signed RRA 98 into law. The purpose of RRA 98 was to amend the Internal Revenue Code of 1986 and to restructure and reform the IRS. Implementation will result in the most extensive restructuring of the IRS and its governing laws in the last 40 years.

The Chief Operations Officer was assigned overall responsibility for providing oversight for the implementation of RRA 98. As of July 1, 1998, the Chief Operations Officer assigned functional executives to be owners of the various provisions of RRA 98 and gave them oversight responsibilities for these provisions. On July 6, 1998, the National Resource Center (NRC) was established to provide consistent coordination of policy and program questions or issues that may arise from the implementation of RRA 98. As of March 15, 1999, more than 1,100 inquiries had been submitted and more than 66 guidance memoranda had been posted to the NRC website.

On August 18, 1998, the Taxpayer Treatment and Service Improvements Program Office established an Intranet website to control and monitor implementation of RRA 98. This website identifies all significant provisions of RRA 98 on a webpage titled Provision Report. The Provision Report is a primary control used by IRS management in the planning and implementation of RRA 98. This on-line report identifies the effective date of each provision, the owner function, the overall implementation status, and all of the actions needed to fully implement each provision. Many of our audit tests were designed to determine the accuracy and effectiveness of this management control.

Results

The IRS’ implementation team for RRA 98 used a proactive approach, giving appropriate consideration to the level of executive involvement needed to implement this complex legislation. However, to effectively implement RRA 98, the IRS needs to develop accurate action plans, conduct additional validation of completed action items, and increase oversight by officials responsible for legislative provisions.

An Extensive Accountability Network Was Established to Manage the Implementation Effort

Before the final version of RRA 98 was signed into law, the Chief Operations Officer assigned individual implementation ownership of the provisions of RRA 98 to IRS Assistant Commissioners. These executives designated individuals on their staffs to act as their representatives in ensuring that these provisions were implemented. This was a unique approach because many actions necessary to implement each provision would cross functional lines. Regardless of whether some or many actions on their action plans would be completed by other functions, provision owners were assigned responsibility for the complete implementation of their provisions.

These executives worked in conjunction with the RRA 98 team to develop implementation plans for the provisions. An Executive Steering Committee (ESC) was established to track the implementation effort. A tracking program was established on the IRS’ internal computer system, so provision owners could easily update provision status and to allow on-line monitoring of the implementation effort.

In addition, the NRC was established to provide consistent coordination of policy and program questions or issues that may arise from the implementation of RRA 98. The IRS identified and trained approximately 185 RRA 98 field coordinators to be the local points of contact for coordination and questions in each district, region, and service center.

The IRS Office of the Chief Counsel worked actively to help the IRS implement RRA 98 by providing advice, drafting or assisting in drafting necessary guidance for both taxpayers and IRS employees, and developing training materials. The Office of the Chief Counsel also provided significant support to the NRC.

However, establishing the executive network is just an initial step in the implementation process. The executives must provide consistent monitoring and oversight to ensure critical actions are taken to implement the legislation. Weaknesses in this oversight have resulted in various implementation problems. Most of the remainder of this report details these issues and makes recommendations to address them.

The Provision Report Used to Manage the Conversion Effort Was Not Always Accurate and Complete

As stated earlier, the Provision Report was a primary control used by IRS management in the planning and implementation of RRA 98. This on-line report identifies the effective date of each provision, the owner function, the overall implementation status, and all of the necessary actions needed to fully implement each provision.

Provision owner representatives did not consistently maintain and update the Provision Report. Some essential actions were inaccurately recorded or missing from the Provision Report. Consequently, provision owners relied upon misleading or incomplete information to monitor the major developments and progress of the implementation. Examples of inaccuracies or missing items in the Provision Report can be found in Appendix VI.

The Deputy Chief Operations Officer emphasized the importance of having accurate and complete descriptions on action plans at several ESC meetings. Even with this emphasis, the Report was not properly maintained by the various provision owner representatives. Several of these representatives explained that the magnitude of this legislation was so overwhelming that it was hard to keep everything up-to-date. Another mentioned that the cross-functional implementation concepts were new, and it was hard to get the individual action owners to grasp their responsibilities. Another representative relied heavily on the individual action owners to keep their actions accurately recorded and did not conduct much oversight.

In response to our initial memorandum dated June 22, 1999 (see Appendices IV and V), the Deputy Chief Operations Officer required all provision owners to review the Provision Report for accuracy and prepare documentation files to support the status of each action. In addition, she initiated a 100 percent review of Requests for Information Services (RIS), which usually require computer programming changes, to ensure that all required system changes related to RRA 98 were made.

The RIS review resulted in several additional RIS actions being identified as needing submission to Information Systems or added to the action plan. These actions included the following:

• Section 3304, Mitigation of Failure to Deposit Penalty - Two additional RISs have been submitted and one additional RIS will be submitted at a later date.
• Section 3401, Due Process in IRS Collection Actions - One additional RIS was added to the action plan.
• Section 3506, Statements Regarding Installment Agreements - One additional RIS was prepared.

We may conduct follow-up reviews to determine the impact of the delays in implementing the system changes associated with these RIS actions.

In addition to actions management has already taken in response to our memorandum, we recommend that:

1. The Deputy Chief Operations Officer’s staff conduct periodic reviews of documentation maintained in the Provision Report files to support key implementation actions to ensure that actions were taken timely and that they met the requirements of RRA 98.

Management’s Response: The IRS was proactive in formulating an implementation strategy. Executive accountability was established for each provision before enactment of the legislation. The implementation team worked diligently to scrutinize provision action plans and identify potential issues. These issues were discussed at an ESC established to track implementation progress and resolve issues.

During June 1999, the ESC discussed steps that could be taken to strengthen the implementation process. Based on this discussion, the ESC agreed to a five-point plan. First, a comprehensive review of all RISs, which seek computer programming changes, would be made to determine RIS accuracy and to identify additional RIS requirements. Second, all forms and publications revisions were reviewed for content accuracy. Third, provision owners were required to establish files for each provision that contain the documentation for each completed action. Fourth, provision owners were asked to review implementation actions for provisions yet to become effective at ESC meetings. Fifth, an independent review of action plans for accuracy, completeness, and timeliness was conducted.

The documentation files have been extensively reviewed at ESC meetings and the implementation team will continue this review, as appropriate.

Critical Actions Necessary to Implement Failure to Deposit Penalty Provisions Were Not Implemented Timely

The IRS did not take necessary actions to ensure it effectively implemented RRA 98 § 3304 provisions. Penalty notices to taxpayers were not revised, revisions to publications did not provide important information on new taxpayer rights, and the Provision Report used by management to track implementation actions was not accurate. The provision owner did not provide adequate oversight and validation to ensure the necessary actions were taken to implement this section of the law. Consequently, numerous incomplete penalty notices were issued, and business taxpayers may have paid penalties that they are entitled to have abated.

We notified IRS management in a memorandum dated June 22, 1999 (see Appendices IV and V), that actions were needed to address the above issues. IRS management took several corrective actions in response to our memorandum, including issuing an apology letter to all taxpayers who received a Failure to Deposit penalty notice to advise them of their new rights and creating a stuffer form for future notices. We found that the IRS assessed $678,613,247 in penalties to approximately 505,000 taxpayers. These taxpayers were sent apology letters on July 20, 1999.

However, our further review identified that the apology letters were not sent to all taxpayers who should have received them. Because several processing cycles were not included in the initial analysis, approximately 35,000 additional taxpayers should have received letters. After we notified them of the error, IRS management agreed to perform another analysis and issued the additional apology letters.

In addition, the stuffer forms created to explain the new taxpayer rights were not consistently issued. These stuffer forms were to be included with Business Masterfile penalty notices involving a Failure to Deposit penalty assessment. The required start date for issuance of the stuffer forms was August 2, 1999. We visited three IRS service centers to analyze the stuffer form issuance process and determine whether they were issued in accordance with requirements. None of the service centers began issuing the stuffer forms with the notices on the required start date.

We found that the guidance issued to the service centers on how to use this form was unclear and that the Office of Interest and Penalty Administration did not proactively address inconsistencies in the issuance process as they occurred. In addition, the process of including these stuffer forms was initially a manual process, requiring intervention from clerical support, rather than an automated process. Lastly, the computer program initiating the use of the stuffer form was not issued to the service centers until August 4, 1999, midway through the first week it was to be used. Consequently, service centers did not consistently or timely begin issuing stuffer forms.

For example, one service center was not clear on which notices required the form. Therefore, it included stuffer forms with many types of balance due notices to business taxpayers, even when these notices did not relate to Failure to Deposit penalties. It also began using the stuffer form one week later than was intended because of the delay in receiving the computer program. Another service center began issuing the stuffer form two weeks later than was intended. The third center’s inventory records indicated these stuffer forms were not included with penalty notices until six weeks after they were required. Thus, taxpayers who were issued notices during these periods of delay did not receive the stuffer form.

Therefore, some taxpayers did not receive the information related to their penalty abatement rights, while others may have been confused by information they received that did not relate to their tax situations.

Expeditious and consistent implementation of procedures to issue apology letters and stuffer forms to taxpayers would have protected taxpayers’ rights. In order to ensure that this occurred, the provision owner should have tracked and followed up on the progress of these significant action items to ensure the actions were properly completed.

Recommendation

We recommend that the Assistant Commissioner (Examination), the Executive Provision Owner:

2. Ensure that clear procedures are given to service centers on which notices require the stuffer form.
3. Identify those taxpayers who should have received a stuffer form and notify them of their potential abatement rights.
4. Provide additional oversight until full and appropriate implementation of this provision is completed.

Management’s Response: IRS management agreed that clear procedures should be provided to the service centers. After TIGTA notified IRS management that they believed some service centers were not correctly implementing the procedures, IRS management contacted the centers to ensure that they correctly understood the requirements for use of the stuffer.

The statement that was on the stuffer is now automatically generated on the Business Masterfile notice when a Federal Tax Deposit (FTD) penalty assessment is present. Therefore, the stuffer is no longer necessary, and no further instructions are needed.

IRS management identified all taxpayers who required notification of their potential abatement rights and may not have received such notification. An apology letter or a stuffer was sent to all of these taxpayers. Therefore, no further action is necessary.

The Office of Interest and Penalty Administration continues to meet with Masterfile FTD penalty programmers and analysts and the IRS Office of the Chief Counsel in developing the RIS and instructions for the final phase of implementation for § 3304 of the legislation.

Training Efforts Need to Be Strengthened to Ensure All Employees Are Effectively Trained on the Internal Revenue Service Restructuring and Reform Act of 1998 Provisions

To effectively implement RRA 98, the IRS was required to initiate a significant number of immediate actions and coordination efforts. Provision owners knew from the beginning that training would be required for many of the provisions. Technical modifications made by the Congress after the date of enactment added further complexities to the implementation process.

Training was critical to ensure that front-line employees were aware of the many changes that affect their day-to-day interaction with taxpayers. Since many provisions were effective upon the date of enactment, it was not possible for the IRS to deliver immediate, up-to-date manuals or technical guidance to front-line employees. Training methods used to provide employees with critical information as quickly as possible included:

• Management awareness memoranda
• Interactive video training
• Website questions and answers
• Self-study reference guides
• Training conducted at Continuing Professional Education sessions
• Limited formal training

The IRS performed an initial analysis of RRA 98 provisions to identify functions and types of employees who should receive training in the various provisions. This analysis was used in preparing individual RRA 98 training plans for each employee.

On July 22, 1999, the Commissioner testified before the House Ways and Means Subcommittee on Oversight. He stressed that increased training of employees is essential for delivering on the mandates that the Congress gave and the service taxpayers expect. Additionally, he stated that money in the Fiscal Year (FY) 2000 budget request is essential and will only begin to rectify the RRA 98 training deficit. On May 25, 1999, the Commissioner testified that $17 million in the FY 2000 budget was to train employees on RRA 98.

However, our review of the training effort indicated that provision owners did not identify or track the employees who should be or were trained on their assigned provisions of RRA 98. Provision owner representatives informed us that district managers maintained training records for their employees. The records were not centralized or forwarded to the provision owners for their management of the training program.

Furthermore, the provision owners have not adequately evaluated the effectiveness of their training efforts. At the time of our review, the only evaluations on the effectiveness of RRA 98 training that we found in our sample of provisions were in the Collection function, and those evaluations covered only Collection function employees.

The primary reason for the lack of management control over RRA 98 training is that provision owners do not see themselves as responsible for ensuring all required employees receive the necessary training. They believe this is the responsibility of local district management. In addition, although the Chief Operations Officer assigned the overall implementation responsibility to provision owners, they believe each function is responsible for training its own employees on the provisions of RRA 98.

Since provision owners do not maintain and monitor training records and evaluate the effectiveness of training, we were unable to determine whether all required employees were adequately trained on the provisions of RRA 98.

Audit work performed by another TIGTA audit team identified that one service center temporarily suspended tax lien filing due to lack of training on RRA 98 provisions. This occurred from January 19 through March 22, 1999. During this period, Automated Collection System (ACS) management directed that no Notice of Federal Tax Liens (NFTL) be filed by the ACS until employees received proper training on RRA 98. When a NFTL is not filed, the government’s interest in the delinquent taxpayer’s assets is not protected, and the taxpayer’s other creditors are not notified of their delinquent federal tax liabilities.

The Deputy Chief Operations Officer should establish procedures to ensure:

1. Provision owners take control over the training effort for their provisions. Procedures should require records of employees who need training, employees receiving training, and how effectively the training met objectives.

Management’s Response: IRS management agreed that provision owners could have exercised more control over who attended training and made use of systems already in place, such as the Administrative Corporate Education System (ACES), to accurately track who received the training and its effectiveness. IRS management decided that all future initiatives of this nature will have centralized end-to-end accountability for training by provision owners.

In preparation for Phase 3 training for RRA 98 provisions, Learning and Education Institutes met with provision owners to determine the best approach to embedding all pertinent provisions into the occupational curricula for their functional areas. Each Institute then reached agreement with the provision owners as to the course update schedule where embedding would occur. This effort negates the need to have further, separate training on RRA 98 provisions.

To ensure that senior management is aware of the tools available to centrally manage legislative implementation training, the Chief Human Resource Officer will communicate the capabilities of the ACES to track the delivery and effectiveness of training programs to senior IRS management as part of the transition to the new IRS structure.

Other Audit Reports Have Identified Issues with the Implementation of Various Provisions of the Internal Revenue Service Restructuring and Reform Act of 1998

TIGTA’s Office of Audit has conducted several audits this year related to implementation of additional provisions of RRA 98. These audits were conducted to meet the requirements of RRA 98. Separate reports have been issued for each of these audits, and this section (and the corresponding appendix) is intended to provide a summary of work performed by TIGTA related to RRA 98.

The following audits are among those that have been conducted related to the IRS’ implementation of RRA 98. Appendix VII summarizes the results, associated recommendations, and IRS management’s response for each of these reports:

• The Internal Revenue Service Should Improve Its Federal Tax Lien Procedures (Reference Number 199910074, dated September 1999)
• The Internal Revenue Service Has Not Fully Implemented Procedures to Notify Taxpayers Before Taking Their Funds For Payment of Tax (Reference Number 199910071, dated September 1999)
• The Internal Revenue Service Can Further Improve Its Complaint Processing Procedures and Systems (Reference Number 199910070, dated September 1999)
• The Internal Revenue Service Needs to Improve Compliance with Legal and Internal Guidelines When Taking Taxpayers’ Property for Unpaid Taxes (Reference Number 199910072, dated September 1999)
• The Internal Revenue Service Is Addressing the Use of the Illegal Tax Protestor and Nonfiler Designations (Reference Number 199910080, dated September 1999)
• The Internal Revenue Service Should Continue Its Efforts to Achieve Full Compliance with Restrictions on the Use of Enforcement Statistics (Reference Number 199910073, dated September 1999)
• The Internal Revenue Service’s Procedures for Responding to Written Requests for Collection Activity From Joint Return Filers Vary From Statutory Requirements (Reference Number 199910077, dated September 1999)
• The Internal Revenue Service Needs to Enhance Guidance on and Monitoring of Compliance with Procedures for Directly Contacting Taxpayers and Their Representatives (Reference Number 199910076, dated September 1999)
• The Internal Revenue Service Is Now Tracking Potential Fair Debt Collection Practices Act Violations, But May Not Always Be Properly Reporting Violations (Reference Number 2000-10-014, dated December 1999)
• The Internal Revenue Service Needs to Improve Its Compliance with Procedures When Processing Requests for Information Under the Freedom of Information Act (Reference Number 2000-10-058, dated March 2000)

The audit work covered by the above-mentioned reports is required annually. In addition, TIGTA’s Office of Audit is currently conducting reviews of the IRS’ implementation of the Innocent Spouse, Offer-in-Compromise (OIC), and Third-Party Summons provisions of RRA 98. These reports will be issued later in FY 2000. Additional audit work may be conducted covering various other provisions of RRA 98.

Conclusion

The IRS has established an extensive accountability network to manage the implementation of RRA 98. However, the IRS needs to increase oversight of legislative efforts by provision owners. Employee training needs to be enhanced and monitored to ensure front-line employees effectively implement provisions of RRA 98. Without additional oversight by provision owners, the IRS risks not effectively implementing legislative requirements and may deny taxpayers their rights.

Detailed Objective, Scope, and Methodology

Our overall objective was to evaluate the Internal Revenue Service’s (IRS) planning and implementation of the IRS Restructuring and Reform Act of 1998 (RRA 98). We evaluated the effectiveness of the IRS’ implementation of selected sections (also called provisions) of RRA 98 and the process for identifying, coordinating, and monitoring necessary actions.

We primarily focused on the overall planning and implementation of RRA 98. Our audit concentrated on internal controls, required actions, and issues associated with planning and implementation. To evaluate whether these controls were operating effectively, we tested some specific sections of the law to determine whether those sections had been appropriately implemented.

The Treasury Inspector General for Tax Administration’s (TIGTA) Office of Audit conducted a risk analysis of RRA 98 provisions. Risk was defined as the IRS’ inability to protect taxpayer rights, reduce taxpayer burden, protect revenue, develop economical processes, and/or implement changes to Information Technology. For our review, we selected a judgmental sample of RRA 98 provisions based on this assessment of risk (see Appendix VI). To accomplish our overall objective, we:

1. Determined whether the IRS identified all provisions of RRA 98 that need to be implemented.

1) Determined whether National Office management is using the Provision Report webpage on the RRA 98 website to monitor the implementation of all significant provisions of RRA 98.

2) Matched all of the provisions controlled on the Taxpayer Treatment and Service Improvements (TSI) RRA 98 website to the provisions published as part of RRA 98 and reconciled any differences.

2. Determined whether all IRS functions that are needed to implement RRA 98 had been identified.

1. Interviewed National Office management to determine who assigned the functional responsibilities for implementing the individual provisions of RRA 98 to determine:
1. Whether these persons were knowledgeable and acting within the scope of their authority.
2. Whether each individual provision was assigned to an IRS executive and whether the executive was responsible for the overall implementation of the provision.
3. Whether functional responsibilities were assigned in a manner that prevents duplication of efforts.
2. Evaluated the Provision Report webpage to determine whether these reports indicated involvement by necessary functions.

1. Determined whether all necessary actions needed to implement RRA 98 had been identified.

1. Interviewed National Office management to determine whether there was cross-functional representation in the process used to select the necessary actions.
1. Obtained and reviewed the minutes from the Executive Steering Committee, provision owner, and other pertinent meetings.
0. Identified implementation actions discussed in each of these meetings.
1. Determined whether the actions identified in these meetings were posted to the Provision Report webpage.
2. Determined whether the IRS had involved the IRS Office of the Chief Counsel and Legislative Affairs functions in the implementation.
0. Interviewed IRS Office of the Chief Counsel and Legislative Affairs executive management to determine to what extent they have been involved in this implementation.
1. Determined whether these two functions are providing technical guidance and, if so, in what form.

1. Determined whether these sources were used to derive additional actions and whether these actions were posted to the RRA 98 Provision Report.
2. Identified any other sources of implementation actions, through discussions with TSI personnel.

1. Determined whether effective monitoring processes had been established to ensure provision implementation is accurately tracked and reported to responsible officials.

1. Interviewed National Office management, using an internal control questionnaire, to obtain an understanding of the internal control system or plan they are using to implement RRA 98.
2. Interviewed provision owners in each function to obtain an understanding of their responsibilities to validate and verify reported implementation information.
3. Interviewed TSI personnel to determine their validation and reporting responsibilities.
4. Evaluated the current Provision Report to identify inconsistencies and questionable information. Discussed these issues with the responsible TSI analyst(s).
5. Selected nine provisions based on a risk assessment and evaluated several essential actions from each provision that were reported as complete to determine whether these actions were taken and whether they adequately address the associated provision.

1. Determined whether necessary actions had been completed or planned for our sample of provisions.

1. Obtained the most current Provision Report and action plans for our sample of nine selected provisions.

1. Contacted provision owners’ designated representatives responsible for report input to discuss implementation actions and to obtain and review training records, Requests for Information Services (RIS) submitted to the Information Systems function, revised notices, stuffer forms, and publications, and any other evidence used to support completed actions.
2. Reviewed notices, stuffer forms, publications, and RISs to determine whether they adequately reflect legislative requirements for the provision.
3. Determined whether actions listed adequately address the intent of the provision and whether additional actions are needed.

1. Determined whether policy and program guidance posted to the Intranet is available to front-line employees who need the information.

1. Interviewed TSI analysts to determine if the IRS initiated actions resulting from questions or input received by the NRC.

1. Determined what audit results the other TIGTA reviews identified relating to implementation of RRA 98.
1. Evaluated audit plans for RRA 98 audits currently being performed by other TIGTA offices to determine coverage that would relate to this review.
2. Periodically discussed audit results in these areas with Audit Managers and Senior Auditors for each of these reviews and incorporated these results into our overall audit report.
3. Maintained liaison and coordination with other audit teams conducting the current year filing season review and the Year 2000 Filing Season readiness review.

Major Contributors to This Report

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

Gary E. Lewis, Director

Tammy Whitcomb, Audit Manager

Michael Laird, Senior Auditor

James Popelarski, Senior Auditor

George Franklin, Auditor

Allen Gray, Auditor

Steven Holmes, Auditor

Susan Price, Auditor

Report Distribution List

Deputy Commissioner Operations C:DO

Chief Operations Officer OP

Deputy Chief Operations Officer OP

Executive Officer for Service Center Operations OP:SC

Assistant Commissioner (Collection) OP:CO

Assistant Commissioner (Customer Service) OP:CS

Assistant Commissioner (Employee Plans/Exempt Organizations) OP:E

Assistant Commissioner (Examination) OP:EX

Assistant Commissioner (Forms and Submission Processing) OP:FS

Director, Office of Program Evaluation and Risk Analysis M:O

National Director, Taxpayer Treatment and Service Improvements C:DO:TSI

National Director of Appeals C:AP

National Director for Legislative Affairs CL:LA

Office of the Chief Counsel CC

Office of Management Controls M:CFO:A:OMC

Memorandum #1: The Internal Revenue Service Has Not Effectively Implemented Failure to Deposit Penalty Provisions of the Internal Revenue Service Restructuring and Reform Act of 1998

Memorandum #1 has been removed due to its size. To see the complete memorandum, please go to the Adobe PDF version of this report on the TIGTA Public Web Page.

Management’s Response to Memorandum #1

The response to Memorandum #1 has been removed due to its size. To see the complete response, please go to the Adobe PDF version of this report on the TIGTA Public Web Page.

Inaccurate or Missing Action Items on the Provision Report

On August 18, 1998, the Taxpayer Treatment and Service Improvements Program Office (TSI) used an on-line Provision Report as a primary control in the planning and implementation of the various sections of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98). This on-line report is structured by sections, which are called provisions, and these terms are used interchangeably in this appendix. The Report identifies the effective date of each provision, the owner function, the overall implementation status, and all of the necessary actions needed to fully implement each provision. Our audit tests were designed to determine the accuracy and effectiveness of this management control. Examples of the inaccurate or missing actions on the Provision Report are included in this Appendix.

Following are the results of our review of the nine provisions selected in our sample:

RRA98 § 1203 defines 10 specific acts of willful misconduct for which an IRS employee must be terminated, including such things as providing false statements under oath and willful understatement of a tax liability. Section 1203 had IRS-wide implications, and implementation was a major undertaking that includes developing procedures, publishing and distributing guidance documents, revising computer programs, training employees and managers, etc.

• Action #3107 - Design process for case handling.

• Action #3114 - Conduct training.

• During the April 5, 1999, Executive Steering Committee Meeting, the Deputy Chief Operations Officer requested a test of front-line managers to ensure that they have what they need to discuss §1203 with their employees. Based on our inquiry, an update to Action #3614 was entered on July 21, 1999.
• A new Employee Orientation Package that includes § 1203 should have been ready by October 1999. Based on our inquiry, Action #3799 was added to record this new package.
• Corporate Education (Dallas) is working with the Communication Division to provide a Manager’s Toolkit for Provision 1203. The actions required to complete this task were not on the Provision Report.

Provision 3301 equalizes the interest rate for overpayments and underpayments for any period of mutual indebtedness between a taxpayer and the IRS. No interest will be imposed to the extent that underpayment and overpayment interest run simultaneously on equal amounts. This equalization of interest rates is available for any type of tax imposed by the Internal Revenue Code.

• Action #0246 - Coordinate on multi-functional Request for Information Services (RIS) to ensure uniform procedural and computational changes to programs and procedures involving return processing and compliance adjustments on interest.

• Action #0728 - Make programming change to IRS computer systems to identify modules that were netted.

• Action #0894 - Revise the Internal Revenue Manual (IRM), Chapter 21, regarding interest netting.

• Action #0722 - Work with Customer Service, Appeals, and other affected functions to develop and issue a case processing procedure.

• Action #2028 - Reply to RIS to identify modules that were netted.

Provision 3303 limits the penalty amount for failure to pay tax to half the usual rate (0.25 percent rather than 0.50 percent) for any month that an installment payment agreement with the IRS is in effect.

• Action #0912 - Issue Taxpayer Education Bulletin Board Release regarding elimination of Individual Masterfile (IMF) failure to pay penalty during Installment Agreement.

Provision 3304 allows business taxpayers to avoid failure to deposit penalties by designating application of a tax deposit after a penalty notice is received. This provision also establishes that after 2001, the IRS will automatically apply deposits to the most recent period. Lastly, the provision expands the penalty waiver to cover depositors whose deposit frequency requirements have changed.

Provision 3305 suspends the accrual of interest and penalties after 18 months unless the IRS sends the taxpayer a notice within 18 months following the latter of:

1. The original due date of the return (without regard to extensions) or
2. The date on which a timely return is filed.

We found the following inaccurately recorded action item on the Provision Report:

• Action #0249 - Coordinate on multi-functional RIS.

Provision 3465 requires that the IRS:

1. Develop procedures under which any taxpayer may request early referral of issues from the Examination or Collection function to the Office of Appeals.
2. Develop procedures for a taxpayer or the Office of Appeals to request non-binding mediation of any unresolved issue at the conclusion of the appeals procedure or an unsuccessful attempt to enter a closing agreement or an offer-in-compromise.
3. Develop a pilot program under which the Office of Appeals and the taxpayer may jointly request binding arbitration. These procedures are to be extended to all taxpayers.
4. Ensure an appeals officer is regularly available within each state.
5. Consider using videoconferencing techniques for conferences between appeals officers and taxpayers from rural areas seeking appeals.

• Action #0838 - Revise IRM 21 allowing early appeals of examinations and collections, non-binding mediation, or binding arbitration.

• Provision 3465 stipulates that the IRS must also consider using videoconferencing techniques for conferences between appeals officers and taxpayers from rural areas seeking appeals. Documentation was provided showing that action on this requirement had been taken. Although documentation shows work had been performed on this requirement, no action item was listed on the Provision Report at the time of our review. Videoconferencing Action #3691 was subsequently added to the Provision Report.

Provision 3705(a) requires the IRS to:

1. Include in all manually-generated correspondence the name, telephone number, and unique identifying number of the IRS employee the taxpayer may contact regarding the correspondence.
2. Include in other correspondence a telephone number that the taxpayer may call.
3. Provide a taxpayer, during a telephone or personal contact, the employee’s name and unique identifying number. The name and identifying number must be prominently disclosed.

• Action #3469 - Communicate decision to use identification (ID) badge to all functions and disseminate servicewide procedures for providing ID number on tax-related contacts.

• Action #1571 - Revise Publications 542 and 553 to reflect waiver of estimated tax penalty for underpayments created or increased by RRA 98.

Provision 3706 requires that an employee may use a pseudonym only if:

1. The employee provides adequate justification for the use, such as personal safety.
2. Use of the pseudonym is approved by the employee’s supervisor prior to such use.

The effective date is July 22, 1998.

Provision 3710 authorizes the IRS to approve alternatives to social security numbers for use as identifying numbers by tax return preparers.

The effective date is July 22, 1998.

We found no significant inaccurately recorded or missing action items related to this provision.

Additional Treasury Inspector General for Tax Administration Reports Related to the Internal Revenue Service’s Implementation of the Internal Revenue Service Restructuring and Reform Act of 1998

During the initial implementation period, the Internal Revenue Service (IRS) was not consistently implementing federal tax lien (FTL) sections (also called provisions) of RRA 98. Therefore, the IRS was not always informing taxpayers and their representatives of the taxpayers’ right to a hearing once a FTL is filed.

Since the IRS was not consistently implementing RRA 98 FTL provisions, we recommended that the IRS improve FTL procedures, make system changes, and revise existing management information systems to ensure that RRA 98 FTL requirements are met and associated IRS procedures are followed.

IRS management agreed with the findings and recommendations in the report and agreed to take corrective action.

We found the IRS’ efforts to fully implement changes in 26 U.S.C. § 6330 (1986) related to taxpayer levies were not effective in the offices we tested. The IRS did not consistently notify taxpayers of their appeal rights and of the intent to levy, as required by 26 U.S.C. § 6330 (1986) and its own guidelines. Consequently, taxpayers’ rights were potentially violated in some instances.

We recommended implementing additional safeguards to ensure the applicable legal and IRS procedures are followed when issuing levies. We also recommended that Collection and Customer Service management request an opinion from the IRS Office of the Chief Counsel on those levy cases where money may have been taken improperly, to determine if restitution to the taxpayers is warranted.

IRS management agreed with the majority of our observations and findings and concurred with all recommendations in this report.

We found that the IRS currently does not have an integrated complaint processing system for identifying and reporting taxpayer complaints and allegations of employee misconduct. Instead, it uses various existing systems and procedures that were implemented prior to enactment of RRA 98. However, the IRS is taking significant actions to improve its complaint processing procedures and systems. While significant actions are being taken, further improvements are needed to ensure that employees are knowledgeable of the complaint processing procedures and are willing to report complaints and allegations of misconduct.

We made recommendations to improve the reliability of the IRS’ information concerning taxpayer complaints and allegations of employee misconduct that are provided to Treasury Inspector General for Tax Administration for inclusion in our Semiannual Report to the Congress. We recommended that, as part of the development of its centralized and integrated complaint information system, the IRS ensure appropriate interfaces exist among the multiple complaint processing systems to facilitate accurate reporting. In addition, we recommended that the IRS ensure that taxpayer complaints be distinguished from taxpayer inquires, problems, and issues not of a complaint nature.

We also recommended that after assessing the results of RRA 98 § 1203 training, the IRS should identify and provide any additional training needed on the complaint processing procedures (e.g., non-RRA 98 § 1203) and re-emphasize the employees’ responsibility for reporting taxpayer complaints and allegations of employee misconduct. In addition, we recommended that the IRS periodically survey its employees to determine the effectiveness of the training and the employees’ willingness to report taxpayer complaints and allegations of employee misconduct.

The response to our draft report indicated agreement with our conclusion that the IRS’ complaint processing needs further improvement and noted that a specific action plan will be developed within 60 days of the September 17, 1999, response. The response also noted that the IRS initiated a project to integrate complaint data from its current information systems and will form a Steering Committee to coordinate and oversee this initiative.

We found that while the IRS followed legal and internal guidelines in 64 percent of the seizures conducted, improved compliance is needed to ensure that all guidelines are consistently followed.

We recommended that the IRS use comprehensive seizure checklists that include legal and internal guidelines to help ensure employees follow the applicable procedures when conducting seizures. We also recommended that the IRS request an opinion from the IRS Office of the Chief Counsel on those seizures that did not follow legal guidelines to determine if the IRS should make restitution to those taxpayers.

IRS management is in agreement with the issues in this report and is implementing corrective actions.

We found that the IRS has taken actions and is substantially in compliance with RRA 98 as it relates to no longer designating taxpayers as Illegal Tax Protestors (ITP), removing the ITP designation from the Individual Masterfile, and disregarding the ITP designation made on or before July 22, 1998, on other IRS computer and paper files. In addition, the IRS has various nonfiler programs to determine if taxpayers are filing returns. However, we were advised by IRS programmers that none of these programs designate taxpayers permanently as nonfilers on IRS’ main computer files and, therefore, are not applicable to this RRA 98 provision.

We recommended the IRS continue to monitor the actions in process to fully comply with the provisions of RRA 98. Also, IRS management should monitor the planning and implementation of the newly proposed program of frivolous nonfiler designations to ensure it meets the intent of RRA 98, when implemented.

IRS management is in agreement with the issues included in this report and is planning to take corrective actions.

We found the IRS is currently not in full compliance with RRA 98 § 1204. Our independent testing in 28 IRS offices showed that the IRS has controls in place to identify and report violations; however, there are still instances when records of tax enforcement results are being used to evaluate employees or to impose or suggest production quotas or goals.

We did not make any recommendations for corrective action because the IRS’ proposed regulations for a balanced system of business measures appears to be the appropriate first step in resolving these problems. As part of our Fiscal Year 2000 Audit Plan, we will assess the effectiveness of the progress and implementation of the balanced system of business measures as it relates to the use of enforcement statistics.

IRS management generally agreed to the issues addressed in this report and stated that they will take whatever steps are necessary to eliminate violations. In some cases, the IRS believes there is a need to involve the IRS Office of the Chief Counsel to clarify differences in interpretation, such as the inclusion of records of tax enforcement results in employees’ self-assessments. In addition, IRS management plans to review documents where violations occurred and cycle time was overemphasized to resolve any interpretive differences that may exist regarding legal or procedural issues.

We found that the IRS procedures are different from the statutory requirements set out in 26 U.S.C. § 6103 (e) (8) (1986). This provision requires the IRS to send written responses to joint filer taxpayers or their representatives who request, in writing, collection information on their joint return liabilities, while the IRS’ procedures allow the information to be provided orally. In addition, the IRS does not have a method to identify joint filer requests and responses. Therefore, the IRS cannot determine if it complies with the provision and cannot determine if IRS employees are protecting the taxpayers’ right to receive written responses to their written requests for joint return collection information.

We recommended that the IRS ensure that its practice of allowing oral responses to written joint filer requests complies with statutory requirements. In addition, we recommended the IRS conduct an analysis to determine the volume of written joint filer requests received and whether IRS employees are properly responding to taxpayers. This would enable the IRS to determine the type of management control process needed to track the requests and measure compliance with the joint filer provision.

IRS management agreed to the recommendations and is planning corrective actions.

We found that, while the IRS has procedures that should enable it to protect taxpayers’ rights during an interview with the taxpayer or when IRS employees appropriately bypass a representative and contact a taxpayer directly, we could not determine whether IRS employees complied with the procedures or protected taxpayers’ rights. Current IRS management information systems do not separately record or monitor cases where taxpayers requested representation during an interview so we could not identify or review cases. There is no requirement for the IRS to maintain separate records for these situations.

We recommended that the IRS complete its efforts to develop national guidance for employees and develop a process to determine whether employees are complying with the law when a taxpayer requests to consult with a representative or the employee bypasses a representative.

IRS management agreed with the issues addressed in the report and is planning corrective actions.

We did not identify any civil actions where money has been paid out to taxpayers as a result of Fair Debt Collection Practices Act (FDCPA) violations. We did identify two FDCPA violations that resulted in employee administrative action for the period July 22, 1998, through March 18, 1999. However, we cannot ensure that these were the only FDCPA violations resulting in administrative action for that period. We were unable to make these determinations for two reasons. First, the IRS’ management information systems did not reflect FDCPA violations at the time of our review. Second, IRS management may not have always properly reported potential FDCPA violations. IRS management has since updated its management information system to include FDCPA violation codes.

Because of our limited scope of review on the second condition, we did not make any recommendations in this report. We will review this issue again as part of our Fiscal Year 2000 audit effort and will make any warranted recommendations for corrective action at that time.

We found that, for 12.1 percent of the denied or partially denied Freedom of Information Act (FOIA) requests, the IRS improperly withheld information that should have been provided to the requester. In addition, we found that, for 7.6 percent of the denied or partially denied Privacy Act (PA) requests, the IRS improperly withheld information. While conducting the audit, we also identified instances where the IRS did not comply with its statutory or procedural obligations. As a result, we recommended that the IRS improve its management practices and oversight to ensure that FOIA requests are processed in accordance with the dictates of the statute as well as IRS procedures.

In addition, given the IRS’ emphasis on providing quality service to taxpayers, we have identified opportunities for the IRS to improve the service it provides to FOIA and PA requesters. While we recognize that our recommendations concerning customer service go beyond the IRS’ statutory obligations imposed by the FOIA and the PA, we included them to assist the IRS in reaching its goal of providing quality service to its customers.

A draft of this report was provided to the IRS for review and comment on February 16, 2000. We requested management’s written comments by March 17, 2000. However, although we received a draft version of their comments, we had not received a signed response by March 24, 2000.

Management’s Response to the Draft Report

Response has been removed due to its size. To see the complete response, please go to the Adobe PDF version of this report on the TIGTA Public Web Page.