WASHINGTON, D.C.
20005
Inspector general
FOR tax
administration
October 15,
2010
MEMORANDUM FOR SECRETARY
GEITHNER
FROM: J.
Russell George /s/ J. Russell George
Inspector
General
SUBJECT: Management
and Performance Challenges Facing the Internal Revenue Service for Fiscal Year
2011
The Reports Consolidation Act of 2000[1]
requires that the Treasury Inspector General for Tax Administration (TIGTA)
summarize, for inclusion in the Department
of the Treasury Accountability Report for Fiscal Year 2010, its perspective
on the most serious management and performance challenges confronting the
Internal Revenue Service (IRS). The
issues described in this document are derived from a variety of activities
conducted and reviewed by TIGTA. In
addition to external factors, such as those that will be discussed that relate
to recent attacks and threats to the IRS, each year TIGTA strategically
evaluates IRS programs, activities, and functions to identify the areas of
highest vulnerability to the Nation’s tax system. For Fiscal Year 2011, the top 10 challenges
in order of priority are:
While
TIGTA’s assessment of the major IRS management challenge areas for Fiscal Year
2011 has remained relatively unchanged from the prior fiscal year, one
significant change did occur. Due to
recent events at IRS facilities and the potentially expanding role of the IRS,
Security has replaced Modernization as the top challenge facing the IRS. Notwithstanding this change, Modernization
remains a major challenge for the IRS. For
Fiscal Year 2011, we have also expanded the Implementing Tax Law Changes
challenge to include the tax-related health care provisions of the Patient Protection and Affordable Care Act.[2]
Although not listed, complexity of the
tax law remains a serious, underlying issue that has wide-ranging implications
for both the IRS and taxpayers. This
complexity, including frequent revisions to the Internal Revenue Code, makes it
increasingly difficult for the IRS to explain and enforce the tax laws and more
costly and time consuming for taxpayers who want to comply. As elected officials continue to effect broad
policy changes using the Internal Revenue Code, the IRS will continue to face
the challenge of responding quickly by shifting resources and altering established
plans.
The following is a discussion of each
of the most serious management and performance challenges facing the IRS during
Fiscal Year 2011.
In addition to safeguarding a vast
amount of sensitive financial and personal data, the IRS must also protect
approximately 100,000 employees and more than 700 facilities throughout the
country. Attacks and threats against IRS
employees and facilities have risen steadily in recent years. The February 2010 attack on an IRS facility
in Austin, Texas, is a stark reminder of the dangers that IRS employees face
every day in trying to perform their jobs.
Animosity towards the tax collection process
is nothing new, but the Austin incident and other recent events point to a
surge of hostility towards the Federal Government. According to
the Anti-Defamation League, the militia movement has almost quadrupled in size
in the past two years, growing to more than 200 groups across the country.[3] The Southern Poverty Law Center has reported
that anti-government and hate groups have grown from 149 groups in 2008 to 512
groups in 2009, a 244 percent increase.[4] The ongoing public debate regarding the
recently enacted health care legislation may also lead to increased threats
against IRS employees and facilities, underscoring the need for continuing
vigilance in the area of physical security.
As a result
of these and other threats, the IRS is developing the Threat Information and
Critical Incident Response Center (TIRC), which will be supported by TIGTA and
other law enforcement agencies. The TIRC
will encourage effective review and dissemination of threat information to IRS
stakeholders in support of the critical employee-safety mission, an
unprecedented effort to marshal resources and potentially lifesaving information
in real time. The TIRC will also serve
as a focal point for the timely and efficient sharing of threat information,
including cyber- and Internet-based threats, to maximize the IRS’s ability to
engage in appropriate threat mitigation.
Concurrent
with the IRS’s monitoring of threats against its employees and facilities, the
IRS must also remain vigilant with regard to computer security, particularly as
it relates to safeguarding the privacy of confidential taxpayer information. As computer usage continues to be
inextricably integrated into core business processes, the need for effective
information system security becomes essential to ensure the confidentiality,
integrity, and availability of data. The
IRS relies extensively on its computer systems to carry out the demanding
responsibilities of administering the Nation’s tax laws, including processing
Federal tax returns and collecting Federal taxes. IRS computer systems process hundreds of
millions of tax returns and contain confidential tax information for over 100
million taxpayers. From a security
standpoint, the IRS is responsible for maintaining effective information
security controls to protect confidential taxpayer information from inadvertent
or deliberate misuse, improper disclosure, or destruction.
The
IRS is specifically required by Federal law to keep taxpayer data confidential
and prevent unauthorized disclosure or browsing of taxpayer records.
[5] Each tax return contains Personally
Identifiable Information, such as the filer’s name, address, Social Security Number,
and other personal information. Because
of the volume and type of data it maintains, the IRS is an attractive target
for criminals with the intent to commit identity theft by stealing and using
someone’s personal information for their own financial gain. In February 2010, the Federal Trade
Commission reported that, for the 10th year in a row, identity theft
was the number one consumer complaint nationwide.[6]
From a law
enforcement perspective, the migration of Federal tax administration
operations into the Internet and electronic environment increases internal and
external vulnerabilities that can be exploited by criminals. For example, we have seen attacks on the
integrity of the system launched from around the world, and we have also
seen the amount of exposure and damage that can be done by a single individual
employee whether intentional or accidental.[7]
Hackers and foreign governments increasingly
attempt sophisticated intrusions into computer networks. If an intrusion is successful, it could
result in substantial economic disruption.
The
Federal Information Security Management
Act (FISMA)[8] requires
each Federal Government agency to report annually to the Office of Management
and Budget and to the Congress on the effectiveness of its security programs
and to perform an annual independent evaluation of its information security
program and practices. The IRS has made
steady progress in complying with FISMA requirements since the law’s enactment
in 2002 and continues to place a high priority on efforts to improve its
security program. However, the IRS still
needs to take additional actions in the areas of certification and accreditation
and configuration management to better secure its systems and data. Additionally, we have reported that the IRS
prematurely closed the security roles and responsibilities component of its
computer-security material weakness.[9] As a result, the IRS cannot ensure all IRS
and contract employees will carry out their responsibilities to protect the
confidentiality, integrity and availability of taxpayer data
MODERNIZATION
The Business Systems Modernization
Program (Modernization Program or Program) is a complex effort to modernize IRS
technology and related business processes.
It involves integrating thousands of hardware and software components
while replacing outdated technology and maintaining the current tax
system. The IRS originally estimated
that the Modernization Program would last up to 15 years and incur contractor
costs of approximately $8 billion. The
Program is now in its 12th year and has received approximately $3.24 billion
for contractor services, plus an additional $474 million for internal IRS
costs.[10] These amounts represent increases of
approximately $540 million (20 percent) in contractor services and
approximately $121 million (34 percent) in internal IRS costs from Fiscal Year
2009. The total amount
for contractor services and for internal IRS costs increased by approximately
$661 million (22 percent) from Fiscal Year 2009.
Factors that characterize the IRS’s
complex information technology environment include widely varying inputs from
taxpayers (from simple concise records to complex voluminous documents),
seasonal processing with extreme variations in processing loads, transaction
rates on the order of billions per year, and data storage measured in trillions
of bytes. The Modernization Program is
working toward providing improved benefits to taxpayers that include:
The Modernization Program has
continued to help improve IRS operations and is refocusing its efforts to
improve business practices with new information technology solutions. However, project development activities have
not always effectively implemented planned processes or delivered all planned
system capabilities to achieve the Program’s expectations. Management of the Program’s cost and schedule
has improved since the previous year, but more attention must be paid to the
development and management of Program requirements.
Further, resolution has not yet been
completely achieved for security vulnerabilities affecting two significant
systems. The IRS revised its
Modernization Program and is currently testing a prototype[11] database
concept for all taxpayer data. The new
approach will require the IRS to increase its employees’ information technology-related
skills, tools, and operations to effectively deliver the revised program.
Since November 2001, TIGTA has
reported nine assessments on annual accomplishments and activities of the
Modernization Program. In developing the
assessments, TIGTA formulated four primary challenges the IRS must overcome to
be successful:
Notwithstanding recent progress made
by the IRS, TIGTA continues to take the position that these four challenges
still need to be met to achieve program success. We are encouraged by the actions the IRS has
planned and taken to refocus the Program; however, we believe the IRS should
consider the overall Modernization Program a material weakness at this time.
Another serious challenge confronting
the IRS is tax compliance. Despite an
estimated voluntary compliance rate of 84 percent and IRS enforcement efforts,
a significant amount of income remains unreported and unpaid. Tax compliance initiatives include the administration of tax regulations,
collection of the correct amount of tax from businesses and individuals, and
the oversight of tax-exempt and government entities. Increasing voluntary taxpayer compliance
and reducing the Tax Gap[12] continue to
be the focus of many IRS initiatives.
The IRS continues to face significant challenges in obtaining complete
and timely compliance data, and in developing methods necessary to interpret
the data. Even with improved data
collection, however, the IRS needs broader strategies and more research to determine
what actions are most effective in addressing taxpayer noncompliance. The IRS’s strategy for reducing the Tax Gap
is largely dependent on funding for additional compliance resources and
legislative changes. In its Fiscal Year
2011 budget submission, the IRS has requested a 5.3 percent increase in
enforcement funds over its Fiscal Year 2010 request.
Businesses and Individuals
The
IRS estimated the gross Tax Gap for Tax Year 2001 – the most current figures to
date – to be approximately $345 billion.
Underreporting of taxes, which is comprised of four major components
(individual income tax, employment tax, corporate income tax and estate and
excise taxes), is estimated at $285 billion and accounts for the largest
portion of the Tax Gap. Overall, the
underreporting of individual income tax and employment tax constitute over 70
percent of the gross Tax Gap. The
misclassification of millions of employees as independent contractors is a
nationwide problem that continues to grow and contribute to the Tax Gap. In a report issued in Fiscal Year 2010,[13] we
determined that the IRS has opportunities to enhance compliance in its
Employment Tax Program by 1) taking measures to ensure employment tax forms are
not misused to avoid paying taxes, and 2) regularly sharing the results of
worker classification examinations to ensure the greatest possible use of the
agency’s resources when addressing the underreporting Tax Gap. Our audit identified over 74,000 taxpayers
who may have avoided paying approximately $26 million in Social Security and
Medicare taxes.
Tax-Exempt
Entities
The IRS
continues to face challenges in administering programs focused on ensuring that
tax-exempt organizations comply with applicable laws and regulations to qualify for tax-exempt status. Legislative changes and judicial decisions
contribute to a constantly changing environment affecting today’s non-profit or
tax-exempt organizations. For example,
the January 2010 Supreme Court decision Citizens
United v. Federal Election Commission,[14] could lead
to additional expenditures by those tax-exempt organizations that advocate the
election or defeat of Federal candidates.
Since more
than $15 trillion in United States assets are currently controlled by tax-exempt
organizations or held in tax-exempt retirement programs and financial
instruments, the IRS recognized in its most recent strategic
plan that careful oversight over the non-profit and tax-exempt sector is more
important than ever before. In its Fiscal Year 2011 budget submission, the IRS reemphasized
the importance of maintaining a strong enforcement presence in the tax-exempt
sector to ensure that charitable organizations are compliant with the Internal
Revenue Code and not used for non-charitable or illegal purposes.
In
a report issued in Fiscal Year 2010,[15]
we determined that the IRS has taken significant actions to identify Section
527 political organizations[16]
that do not timely notify the IRS of their existence or timely submit reports
of their contributions and expenditures.
However, the IRS has not fully addressed noncompliance among political
organizations. For example, one out of
every four Political Organization Report of Contributions and Expenditures (IRS
Form 8872) that we reviewed had incomplete or missing contributor or recipient
information. While some of these filings
may later be deemed acceptable, we determined the IRS is not reviewing these
filings to determine if they are complete or if penalties should be
assessed. Also, the IRS is not always
timely issuing notices that include all information needed by political
organizations to become compliant.
Lastly, the IRS is not following up on information it has requested from
political organizations to verify compliance.
Tax Return
Preparers
An
increasing number of taxpayers are turning to tax return preparers for
assistance. In Calendar Year 2009, the
IRS processed approximately 83.1 million individual Federal income tax
returns prepared by paid preparers.
However, these preparers were not required to meet or comply with any
national standards before selling tax preparation services to the public.
A
series of reports strongly suggesting a need to regulate those who prepare
Federal tax returns, including reviews conducted by TIGTA, the Government
Accountability Office and other agencies, led the IRS to launch its Return
Preparer Review in June 2009. The
following December, after its own six-month study of the problem, the IRS
announced a suite of proposed reforms to improve oversight of the return
preparer community. The reforms proposed
by the IRS include the development of requirements for registration, competency
testing, continuing professional education, ethical standards, and enforcement. The new preparer requirements will take
several years to implement, and will be phased in through Calendar Year 2014,
at which time all preparers will be subjected to suitability and competency
tests. In the meantime, the IRS plans to
develop and implement a management information system to gather data on
preparers and establish a database to assist taxpayers in identifying qualified
preparers. Further, the IRS is planning
to ensure that taxpayers understand the new requirements and the importance of
using only registered preparers to prepare their tax returns.[17]
Each
filing season tests the IRS’s ability to implement tax law changes made by the
Congress. Most individual taxpayers file
their income tax returns during this annual January through April period and
contact the IRS with questions about specific tax laws or filing
procedures. Correctly implementing late
tax law changes remains a significant challenge because the IRS must often act
quickly to assess the changes and determine the necessary actions to ensure all
legislated requirements are satisfied. In
addition, the IRS must often create new or revise existing tax forms,
instructions and publications; revise internal operating procedures; and
reprogram major computer systems used for processing tax returns. For example, on November 6, 2009, the Worker, Homeownership, and Business
Assistance Act of 2009 (WHBAA)[18] was
enacted. The WHBAA, among other things, extended the
First-Time Homebuyer Credit to May 1, 2010.
In order to implement this legislation for the 2010 Filing Season, the
IRS organized an executive task group to oversee revisions to the Form 5405
(First-Time Homebuyer Credit), its related instructions, and the extensive
computer programming changes necessary to process the tax returns claiming the
credit. The IRS completed revisions and
released the Form 5405 and Instructions on January 15, 2010.
However, due to the extensive programming changes required to
process tax returns claiming the credit,
the
IRS had to postpone processing these returns until February 15, 2010. Refunds for these returns were subsequently
delayed until mid-March 2010.
The Congress frequently changes the
tax laws, so some level of change has become a normal part of the IRS’s
operating environment. Although the IRS
has generally been able to adapt and react to tax law changes, the new laws do
have a major effect on how the IRS conducts its activities, determines resource
requirements, and progresses toward meeting its strategic goals. While the IRS has recognized the increasing
complexity of tax administration in formulating its strategic plan, it has also
acknowledged the impossibility of predicting with 100 percent accuracy the
timing and extent of the impact of changes in the tax laws. As such, the IRS will continue to face
significant challenges in its efforts to respond quickly, accurately, and
effectively to tax law changes.
Health Care
The recently enacted health care reform legislation[19] contains an extensive array of tax law changes that will be a continuing
source of challenge for the IRS in the coming years. While the Department of Health and Human
Services will have the lead role in the policy provisions of the Patient Protection and Affordable Care Act,
the IRS will administer the law’s numerous tax provisions. The IRS estimates that at least 42 provisions
will either add to or amend the tax code and at least eight will require the
IRS to build new processes that do not exist within the current tax
administration system. Examples of new
IRS responsibilities resulting from this law include:
American
Recovery and Reinvestment Act
The
American Recovery and Reinvestment Act of
2009 (Recovery Act)[20] was enacted on February 17, 2009. The Recovery Act presents significant
challenges to all Federal agencies as they move to implement provisions quickly
while attempting to minimize risk and meet increased standards for transparency
and accountability. With its 56 tax
provisions (20 related to individual taxpayers and 36 related to business
taxpayers), the Recovery Act poses significant challenges to the IRS as the Nation’s
tax collection agency and administrator of the tax laws. These provisions will continue to challenge
the IRS as it implements the required changes over multiple filing seasons.
TIGTA
has issued numerous reports related to the IRS’s efforts to implement Recovery
Act tax provisions. Some examples
include:
TIGTA
continues to support the Recovery Accountability and Transparency Board
(Recovery Board) in fulfilling its responsibilities for providing transparency
for Recovery Act-related funds and for preventing and detecting fraud, waste
and mismanagement. We also continue to
evaluate the IRS’s compliance with Recovery Act and Office of Management and
Budget guidance. Additionally, we have
evaluated multiple Recovery Board leads that contain allegations of misuse of
Recovery Act funds.
Other Tax
Law Changes
Implementing
legislation for the 2010 Filing Season required the IRS to update many tax
products and perform extensive programming in an effort to ensure that tax
returns would be processed accurately.
We identified 71 tax products (33 tax forms, 12 instructions, and 26
publications) requiring updates due to new legislation. Although tax law changes challenged the IRS
during the 2010 Filing Season, the IRS still completed the processing of tax
returns on schedule and issued taxpayer refunds within 45 calendar days of the
April 15, 2010, due date. However,
implementation of some new tax law provisions did cause problems resulting in increases
in error inventories from taxpayer errors, payment of erroneous claims, and the
inability to identify and prevent erroneous claims at the time tax returns were
processed.[26]
In July 2005, the Congress requested
that the IRS develop a five-year plan, including an outline of how the IRS will
improve the service it provides to taxpayers and a detailed list of which
services the IRS should provide. The IRS
developed the plan – the Taxpayer Assistance Blueprint – which focuses
primarily on services that support the needs of taxpayers who file or should
file the Form 1040 series tax returns.[27] The Blueprint includes performance measures,
service improvement initiatives and an implementation strategy for improving
future service investment decisions. The
IRS has begun implementing the Blueprint, but much of its implementation
depends on the availability of future funding.
The
Department of the Treasury and the IRS recognize that the delivery of effective
taxpayer service has a significant impact on voluntary tax compliance. Answering taxpayers’ questions to assist them
to correctly prepare their returns reduces the need to send notices and
correspondence when taxpayers make errors.
Taxpayer service also reduces unintentional noncompliance and shrinks
the need for future collection activity.
The IRS continues to focus on the importance of improving service by
emphasizing it as a main goal in its strategic plan, including seeking
innovative ways to simplify or eliminate processes that unnecessarily burden
taxpayers or government resources.
Human
capital is the Federal Government’s most critical asset. At a time when the Federal Government is
preparing for increased retirements and taking on such challenges as health
care reform, the recruitment of new employees and retention of existing
employees plays a key role in ensuring the maintenance of a quality workforce
capable of meeting the needs of the American public. Like many Federal agencies, the IRS is faced
with the major challenge of replacing existing talent because of a large number
of retirements expected over the next several years. Of the approximately 100,000 employees,
including 9,100 managers that the IRS employs, more than half have reached age
50 and can retire within 10 years. In
addition, 39 percent of IRS executives are already eligible for retirement. Replacing these employees represents a
significant challenge since many possess unique skills and institutional
knowledge that will be difficult to replace.
The
IRS has taken significant actions to improve its ability to recruit qualified
candidates. These improvements have
enabled the IRS to report that it is on target to meet its mission-critical
occupational,[28] geographic
and diversity hiring goals. However,
improving recruiting activities will require long-term commitment and focus, as
some improvements are still in process.
The IRS’s challenge of having the
right people in the right place at the right time is made more difficult by
many complex internal and external factors.
The work performed by IRS employees continually requires greater
expertise as tax laws become more complex, manual systems used to support tax
administration become computer-based, and attempts by taxpayers and tax
practitioners to evade compliance with the tax laws become more
sophisticated. The IRS must also compete
with other government agencies and private industry for the same human
resources, which becomes more complicated as younger generations of employees
move between jobs more frequently than employees in the past. Furthermore, budget constraints, legislative
changes and economic shifts can create unforeseen challenges for the IRS in
addressing its long-term human capital issues.
As defined by the Improper
Payments Information Act of 2002,[29]
an
improper payment is any payment that should not have
been made or that was made in an incorrect amount (including overpayments and
underpayments) under statutory, contractual, administrative or other legally
applicable requirements. Improper
payments include any payment to an ineligible recipient, any payment for an
ineligible service, any duplicate payment, payments for services not received
and any payment that does not account for credit for applicable discounts. The Administration has emphasized the
importance of reducing improper payments.
In November 2009, the President issued Executive Order 13520, which
included a strategy to reduce improper payments by increasing transparency,
holding agencies accountable and creating strong incentives for compliance.[30] Recently, the Improper Payments Elimination and Recovery Act of 2010[31] placed
additional requirements on Federal agencies to reduce improper payments. Erroneous and improper payments involving the
IRS generally involve improperly paid refunds, tax return filing fraud, or
overpayments to vendors or contractors.
Refundable
Credits
The
IRS administers numerous refundable tax credits. These refundable credits allow individual
taxpayers to reduce their tax liability below zero and, thus, receive a tax
refund even if no income tax was withheld or paid. Two significant refundable credits are the
Earned Income Tax Credit (EITC) and the Additional Child Tax Credit. The Recovery Act also authorized several new
refundable credits, examples of which include the First-Time Homebuyer Credit
and the Making Work Pay Credit.
The
EITC remains the main refundable credit and continues to be vulnerable to a
high rate of noncompliance, including incorrect or erroneous claims caused by
taxpayer error and resulting from fraud.
Each year a substantial number of taxpayers claim the EITC. For example, in a population of 154 million
Tax Year 2007 individual income tax returns, 24.5 million returns claimed
$48.5 billion in Earned Income Tax Credits. Although numerous changes have been made to
the EITC qualifications to reduce the amount of fraud associated with the
claims, recent estimates indicate an EITC improper payment rate between 23
percent and 28 percent, or roughly $11 billion to $13 billion each year.[32]
In
a recent review of the IRS’s EITC Paid Preparer Strategy,[33] we
determined that the IRS has made strides in its effort to increase EITC tax return
preparer compliance. However, the IRS
could further improve the effectiveness of identifying high-risk EITC tax
return preparers by expanding risk factors and using the computed probability
score. Although the IRS developed a
process that appropriately weighs the significance of risk factors used to
compute a probability score to identify potentially noncompliant tax return
preparers, the score was not used exclusively when identifying and selecting
preparers for a due diligence visit.[34]
Contract and
Other Payments
Federal
contract spending has more than doubled since 2002. In Fiscal Year 2008, the Federal Government
spent approximately $540 billion to acquire goods and services. Similarly, contract spending by the IRS
represents a significant outlay of funds.
As of March 2010, the IRS administered more than 839 contracts with a
value of approximately $48 billion over the life of the contracts. Numerous past TIGTA audits have identified
millions of dollars in questioned costs and several instances of contractor
fraud.
We
recently analyzed TIGTA audit findings related to the IRS’s acquisition process
from audit reports that were issued from January 1999 through June 2009. We identified several findings that continued
to exist throughout the 10-year period, and which, if not corrected, could
affect the IRS’s ability to effectively prevent erroneous and improper payments
and credits. Among TIGTA’s
findings: 1) the IRS did not have
sufficient monitoring controls or processes to ensure contractors were meeting
the contract terms and conditions; 2) contractors did not provide adequate
documentation to support invoice charges; and, 3) invoices included unallowable
labor and travel charges.[35]
The
scope, complexity, and magnitude of the international financial system present
significant enforcement challenges for the IRS. International business holdings and
investment in the United States have grown from nearly $188 billion in 1976 to
over $14.5 trillion in 2007, while U.S. business and investment grew from
nearly $368 billion to nearly $15 trillion over the same period. As technology continues to advance and
cross-border transactions rise, the IRS is increasingly challenged by economic
globalization. Technological advances
have provided opportunities for offshore investments that were once only
possible for large corporations and wealthy individuals.
The number
of taxpayers who conduct international business transactions – individuals,
businesses and tax-exempt organizations – continues to grow. The IRS is challenged by a lack of information
reporting on many cross-border transactions.
In addition, the varying legal requirements imposed by different
jurisdictions result in complex business structures that make it difficult to
determine the full scope and effect of cross-border transactions.
Over the
past few years, the Federal Government has taken actions to better coordinate
international tax compliance issues. The
IRS has developed a strategic plan specifically for international tax issues
with two major goals: 1) enforce the law
to ensure all taxpayers meet their obligation to pay taxes and 2) improve
service to make voluntary compliance less burdensome. The IRS has also worked with the U.S.
Department of Justice on tax evasion cases that involve foreign countries with
bank secrecy laws that prevent the U.S. from obtaining information on taxpayer
transactions. Additionally, the
President’s Fiscal Year 2010 budget contained several proposals to change
offshore tax strategies.[36] The proposals targeted both businesses and
individuals with a particular emphasis on increasing transparency. This year, the IRS announced that it would
realign and rename its Large and Mid-Size Business division to create a more
centralized organization dedicated to improving international tax
compliance. The IRS expects that the
realigned division, now referred to as the Large Business and International
division, will improve international tax compliance by allowing the IRS to
focus on high-risk issues and cases with greater consistency and efficiency.
As capital
markets become increasingly global, U.S. investors may be able to benefit from
a corresponding increase in international investment opportunities. In this environment, the Securities and
Exchange Commission (SEC) believes that U.S. investors would benefit from an
enhanced ability to compare financial information of U.S. companies with that
of non-U.S. companies. The SEC believes
the International Financial Reporting Standards (IFRS)[37] have the
potential to best provide the common platform on which companies can report and
investors can compare financial information.
In November 2008, the SEC proposed a “Roadmap” that would potentially
require U.S. domestic issuers of annual reports to the SEC to use the
IFRS. The “Roadmap” sets forth several
milestones that, if reached, could lead to the mandatory use of the IFRS by
U.S. issuers in their filings with the SEC in Calendar Year 2015 at the
earliest. In Fiscal Year 2010, we
assessed the IRS’s progress in preparing for the tax issues and implications of
potentially converting from United States Generally Accepted Accounting
Principles to the IFRS. Our report noted
the IRS’s progress in this area.[38]
In another
recent audit related to globalization, we reviewed the processing of U.S.
Nonresident Alien Income Tax Returns (Form 1040NR) to determine whether
controls were in place to ensure that taxpayers receiving refunds are entitled
to those refunds. Our audit revealed
significant control weaknesses in the processing of refunds claimed on Forms
1040NR. If the IRS does not take
immediate steps to address these control weaknesses, the problem could increase
significantly. We also found a lack of
consistency by the IRS when applying tax treaty provisions regarding the
taxability of gambling income and a need for clarification regarding the
designation of certain income earned through U.S.-based, multi-level marketing
companies as “U.S. Source Income.”
[39]
The IRS must ensure that tax
compliance activities are balanced against the rights of taxpayers to receive
fair and equitable treatment. The IRS
continues to dedicate significant resources and attention to implementing the
taxpayer rights provisions of the IRS
Restructuring and Reform Act of 1998 (RRA 98).[40] Annual audit reports are mandated for the
following taxpayer rights provisions:
In general, the IRS has
improved its compliance with these statutory taxpayer rights provisions. The IRS has shown improvement over prior
years when documenting that taxpayers were informed of their rights. However, the IRS did not fully comply with
requirements concerning the use of records of tax enforcement results to
evaluate employees,[41] and did not
always follow procedures for mailing notices to taxpayers or their
representatives in Federal tax lien cases.[42]
Some IRS management
information systems do not track cases that require mandatory annual audit
coverage.[43] Thus, neither TIGTA nor the IRS could
evaluate the IRS’s compliance with certain RRA 98 provisions.
LEVERAGING
DATA TO IMPROVE PROGRAM EFFECTIVENESS AND REDUCE COSTS
While the IRS has made progress in
using its data to improve program effectiveness and reduce costs, this area
continues to be a major challenge. The
IRS lacks a comprehensive, integrated system that provides accurate, relevant
and timely financial and operating data that can be used to evaluate
performance measures, productivity and the associated costs of IRS
programs. In addition, the IRS cannot
produce timely, accurate and useful information needed for day-to-day
decisions, hindering its ability to address financial management and
operational issues to fulfill its responsibilities.
TIGTA and GAO have continued to report
that various IRS management information systems are insufficient to enable IRS
management to measure costs, determine if performance goals have been achieved,
or monitor progress in achieving program goals.
In its most recent financial statement audit,[44] GAO
reported that the IRS’s financial management systems do not comply with Federal Financial Management Improvement Act
of 1996 (FFMIA)[45]
requirements. In addition, GAO noted
that the IRS continues to have material weaknesses in internal controls over
information security and unpaid assessments.
While the IRS has made measurable
progress in addressing the issues causing its noncompliance with the FFMIA, our
review of the IRS’s September 30, 2009, FFMIA remediation plan identified that
the IRS continues to experience difficulties in developing resource estimates
for remediation actions related to information security. In addition, the IRS informed us that it does
not expect to become compliant with the FFMIA and address the material weakness
relating to unpaid assessments until approximately November 2014.[46]
CONCLUSION
These are the 10 major management and
performance challenges for the IRS in Fiscal Year 2011. TIGTA’s Fiscal Year 2011 Annual Audit Plan and Inspections and Evaluations Plan contain
our proposed reviews and are organized by these challenges. If you have questions or wish to discuss
TIGTA’s views on the challenges in greater detail, please contact me at (202)
622-6500.
cc: Deputy
Secretary
Assistant Secretary for Management and Chief Financial Officer
Commissioner of Internal Revenue
[1] 31 U.S.C. Section 3516(d).
[2] Pub. L.
111-148, 124 Stat. 119 (2010), as amended by the Health Care and Education
Reconciliation Act of 2010 (Pub. L. 111-152, 124 Stat. 1029).
[3] Anti-Defamation League, The Militia Movement in 2010: A Snapshot, http://www.adl.org/main_Extremism/Hutaree_Militia_Facts.htm?Multi_page_sections=sHeading_2 (posted March 29, 2010).
[4] Mark Potok, Rage on the Right: The Year in Hate and Extremism, Southern
[5] 26 U.S.C. Sections
6103, 7213, 7213A, 7431 (2006).
[6] Consumer
Sentinel Network Data Book for January – December 2009, Federal Trade
Commission, dated February 2010.
[7] Recently, in a case worked jointly with the IRS Criminal Investigation Division, individuals were arrested for their participation in an online international phishing scheme to steal income tax refunds intended for U.S. taxpayers. After taxpayers uploaded their tax information seeking refunds for Federal and State taxes, co-conspirators in Belarus collected the data and altered the returns so that legitimate tax refund payments would be redirected to U.S. bank accounts under their control.
[8] 107 Pub. L.
347, 116 Stat. 2899 (2002), codified as amended in 44 U.S.C. Sections 3541 –
3549.
[9] Treasury Inspector General for Tax
Administration, Ref. No. 2010-20-084, More
Actions Are Needed to Correct the Security Roles and Responsibilities Portion
of the Computer Security Material Weakness (2010).
[10] Treasury Inspector
General for Tax Administration, Ref. No. 2010-20-094, Annual Assessment of the Business Systems Modernization Program
(2010).
[11] This prototype is an approach to system development using an iterative process of discovering requirements, designing, and building a trial model, examining the results, and repeating the process until the desired solution is attained.
[12] The IRS defines the Tax Gap as the
difference between the estimated amount taxpayers owe and the amount they
voluntarily and timely paid for a tax year.
[13] Treasury Inspector General for Tax
Administration, Ref. No. 2010-30-025, Employment Tax
Compliance Could Be Improved With Better Coordination and Information Sharing (2010).
[14] 130 S.Ct. 876 (2010).
[15] Treasury Inspector General for Tax
Administration, Ref. No. 2010-10-018, Improvements
Have Been Made, but Additional Actions Could Ensure That Section 527 Political
Organizations More Fully Disclose Financial Information (2010).
[16] Political organizations include
political parties; campaign committees for candidates for Federal, State, or
local office; and political action committees. 26 U.S.C.
Section 527 (2006).
[17] Treasury Inspector General for Tax
Administration, Ref. No. 2010-40-127, It
Will Take Years to Implement the Return Preparer Program and to Realize Its
Impact (2010).
[18] Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, 123 Stat. 2984.
[19] Patient
Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (2010),
as amended by the Health Care and
Education Reconciliation Act of 2010, Pub. L. 111-152, 124 Stat. 1029.
[20] American
Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5,
123 Stat. 115).
[21] Treasury Inspector General for Tax
Administration, Ref. No. 2010-21-057, Recovery
Act Provisions for the Health Coverage Tax Credit Were Implemented, but
Development Processes Could Be Improved (2010).
[22] Treasury Inspector General for Tax
Administration, Ref. No. 2010-41-069, Additional
Steps Are Needed to Prevent and Recover Erroneous Claims for the First-Time
Homebuyer Credit (2010).
[23] Treasury Inspector General for Tax
Administration, Ref. No. 2010-41-128, Verifying
Eligibility for Certain New Tax Benefits Was a Challenge for the 2010 Filing
Season (2010).
[24] Treasury Inspector General for Tax
Administration, Ref. No. 2010-11-071, Additional
Actions Are Needed to Ensure Readiness to Comply With the American Recovery and
Reinvestment Act of 2009 Procurement Requirements (2010).
[25] Treasury Inspector General for Tax
Administration, Ref. No. 2010-11-083, Initial
Build
[26] Treasury Inspector General for Tax
Administration, Ref. No. 2010-41-128, Verifying
Eligibility for Certain New Tax Benefits Was a Challenge for the 2010 Filing
Season (2010).
[27] The
Form 1040 series tax returns include any IRS tax forms that begin with “1040”
such as the
U.S. Individual Income Tax Return (Form 1040), U.S. Individual Income Tax
Return (Form 1040-A), and Income Tax Return for Single and Joint Filers With No
Dependents (Form 1040EZ).
[28] Mission-critical occupations are
those positions critical to front-line enforcement and direct support to
front-line operations needed to meet the stated IRS goals.
[29] Pub. L. No.
107-300, 116 Stat. 2350.
[30] Executive Order
13520, 74 Fed. Reg. 62201 (Nov. 25, 2009). TIGTA has an ongoing audit related to
assessing the IRS’s efforts to implement this Executive Order. We initiated this audit to comply with the
requirement under the Executive Order to evaluate the IRS's methodology for
quantifying, preventing and recovering Earned Income Tax Credit improper
payments. This audit is included in our
Fiscal Year 2011 Annual Audit Plan.
[31] Pub. L. No.
111-204, 124 Stat. 2224.
[32] http://www.paymentaccuracy.usaspending.gov/content/programs-not-reported (last visited October 14, 2010).
[33] Treasury Inspector General for Tax
Administration, Ref. No. 2010-40-116, Actions Can Be Taken
to Improve the Identification of Tax Return Preparers Who Submit Improper
Earned Income Tax Credit Claims (2010).
[34] A due diligence visit is an
examination to determine whether a paid preparer is in compliance with all four
due diligence requirements. 26 U.S.C. Section
6695.
[35] Treasury Inspector General for Tax
Administration, Ref. No. 2010-10-088, Procurement
Audit Results Indicate Problems Continue to Exist After Corrective Actions Were
Implemented (2010).
[36] General
Explanations of the Administration’s 2010 Budget Proposal. Department of the Treasury
(Issued May 2009).
[37] The IFRS, issued by the International
Accounting Standards Board, are a set of accounting standards that serve as a
framework for financial reporting. The
IFRS are rapidly gaining worldwide acceptance and are now used for public
reporting purposes in more than 100 countries.
[38] Treasury Inspector General for Tax
Administration, Ref. No. 2010-30-112, Actions
Are Being Taken to Address the Impact That International Financial Reporting
Standards Will Have on Tax Administration (2010).
[39] Treasury Inspector General for Tax
Administration, Ref. No. 2010-40-121, Improvements
Are Needed to Verify Refunds to Nonresident Aliens Before the Refunds Are Sent
Out of the
[40] Pub.
L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2
U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C.,
31 U.S.C., 38 U.S.C., and 49 U.S.C.).
[41] Treasury Inspector General for Tax
Administration, Ref. No. 2010-30-076, Fiscal
Year 2010 Statutory Audit of Compliance With Legal
Guidelines Restricting the Use of Records of Tax Enforcement Results (2010).
[42] Treasury Inspector General for Tax
Administration, Ref. No. 2010-30-072, Actions
Are Needed to Protect Taxpayers’ Rights During the Lien Due Process (2010).
[43] Treasury Inspector General for Tax
Administration, Ref. No. 2010-30-026, Fiscal
Year 2010 Statutory Review of Disclosure of Collection Activity With Respect to
Joint Returns (2010) and Treasury Inspector General for Tax Administration,
Ref. No. 2010-30-060, Fiscal Year 2010
Statutory Review of Restrictions on Directly Contacting Taxpayers (2010).
[44] U.S.
Government Accountability Office, GAO-10-176, Financial Audit: IRS’s Fiscal
Years 2009 and 2008 Financial Statements (2009).
[45] Pub. L. No.
104-208, 110 Stat. 3009.
[46] Treasury Inspector General for Tax
Administration, Ref. No. 2010-10-065, Measurable
Progress Has Been Made in Addressing Federal Financial Management Improvement
Act Noncompliance; However, Significant Challenges Remain (2010).