TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

FOREIGN ACCOUNT TAX COMPLIANCE ACT PROGRAM WITHHOLDING AND REFUND RELEASE 2.0 PROJECT DEVELOPMENT AND TESTING

Final Report issued on August 31, 2016

Highlights of Reference Number: †2016-20-077 to the Internal Revenue Service Chief Information Officer and the Commissioner, Large Business and International Division.

IMPACT ON TAXPAYERS

The goal of implementing the Foreign Account Tax Compliance Act (FATCA) legislation is to enhance voluntary tax compliance and improve U.S. taxpayer transparency abroad.† Successful implementation of FATCA Release 3.0 (which includes Withholding and Refund Release 2.0) should significantly improve taxpayer compliance internationally and enhance tax administration.

WHY TIGTA DID THE AUDIT

The FATCA Program is an important development in the IRSís efforts to improve U.S. tax compliance involving foreign financial assets and offshore accounts.† The IRS has implemented FATCA functionality since December 2013.† The overall objective of this review was to determine whether the IRS properly developed and sufficiently tested the system for withholding and refund fraud detection.

WHAT TIGTA FOUND

The IRS made improvements, based on prior TIGTA reviews, to strengthen systems development requirements management controls for FATCA projects.† However, in an attempt to meet the project schedule and manage resources, Withholding and Refund Release 2.0 went forward despite critical data quality problems that resulted in unplanned work and a four-month implementation delay.† In addition, improvements are needed to ensure that high-risk issues are given priority.

While the IRS implemented Withholding and Refund Release 2.0 on the revised February 2016 deployment date and there is agreement that the system was built to requirements, the IRS spent $15 million delivering functionality that has not provided the intended business results.† The IRS first identified data matching issues in May 2015.† Although the initial data matching issues were resolved, the IRS identified new data matching issues as recently as February 2016.† The IRS does not have a timetable for when the latest data matching issues will be resolved and automated functionality will provide all of the expected business results.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Chief Information Officer ensure that future projects, and new releases of current projects, using forms for data matching for the first time are given sufficient time prior to the finalization of requirements to allow the business unit to completely understand the data to ensure that it will deliver the expected results, and ensure that corrective actions and timelines to address critical risks are given high priority and that disagreements as to the level of risk are promptly elevated.

The IRS agreed with the first recommendation and plans to provide guidance to projects that use forms for data matching for the first time.† Whenever possible and practicable, projects that use forms for matching for the first time will be implemented under the Agile Path Enterprise Life Cycle model.†

The IRS disagreed with the second recommendation.† The IRS Information Technology (IT) organization stated there was alignment between the IT organization and the business unit regarding the rating, evaluation, and escalation of risks.  However, the IRS did not provide evidence to support this alignment.† In addition, the IRSís lessons learned documentation stated that risk reporting was not consistent between the business unit and the IT organization and that the criticality of risks at a program level may not have been fully communicated.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treasury.gov/tigta/auditreports/2016reports/201620077fr.pdf.

 

Phone Number ††/† 202-622-6500

E-mail Address †/TIGTACommunications@tigta.treas.gov

Website†††††† ††††††/https://www.treasury.gov/tigta