WASHINGTON, D.C.
20005
Inspector
general
FOR tax
administration
October 14,
2011
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 2012
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 2011, 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.
Each year, TIGTA evaluates
IRS programs, operations, and management functions to identify the areas of
highest vulnerability to the Nation’s tax system. For Fiscal Year 2012, the top 10 management
and performance challenges in order of priority are:
1.
Security
for Taxpayer Data and Employees;
2.
Tax
Compliance Initiatives;
2.
Modernization;
4.
Implementing Major Tax Law Changes;
5.
Fraudulent Claims and Improper Payments;
6.
Providing Quality Taxpayer Service Operations;
7.
Human Capital;
8.
Globalization;
9.
Taxpayer Protection and Rights; and
10.
Achieving Program
Efficiencies and Cost Savings.
TIGTA’s
assessment of the major IRS management challenges for Fiscal Year 2012 has
changed from the prior fiscal year. Due
to the mission-critical nature of both modernization and tax compliance
initiatives, TIGTA considers tax compliance and modernization as serious enough
management challenges to jointly rank at number two, following security. However, the current status of the United
States economy and the watchful eye of the American public on the management of
our Nation’s Government are driving the need more than ever for the IRS to efficiently
and effectively collect taxes owed to the Federal Government. In addition, the IRS recently downgraded its
longstanding material weakness[2] status of the Modernization Program.
As such, tax compliance is listed before the ongoing major challenge of modernization. Also note that the prior Erroneous and Improper Payments and Credits challenge has expanded
to become Fraudulent Claims and Improper Payments and has moved from the
seventh to the fifth most significant challenge facing the IRS.
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. When the Internal Revenue Code is used as a
vehicle for implementation of policy changes, the IRS will continue to face the
challenge of responding quickly by shifting resources and altering established
plans.
The following information for each of
these management and performance challenges is being provided to promote
economy, efficiency, and effectiveness in the IRS’s administration of the Nation’s
tax laws.
As our Nation’s tax collector and
administrator of the Internal Revenue Code, the IRS received more than 230
million tax returns, of which 141 million were from individual taxpayers, and
collected more than $2.3 trillion in revenue in 2010. Information from these tax returns is
converted into electronic format, processed, and maintained in over 190
computer system applications for use by IRS employees. As computer use continues to be inextricably integrated
into the IRS’s core business processes, effective information systems security
becomes essential to ensure that data are protected against inadvertent or
deliberate misuse, improper disclosure, or destruction, and that computer
operations supporting tax administration are secured against disruption or
compromise.
The IRS faces the daunting task of securing
its computer systems against the growing threat of cyberattack. According to the Department of Homeland
Security’s U.S. Computer Emergency Readiness Team, cyberattacks against Federal
websites and networks increased almost 40 percent in 2010. More recently, in July 2011, the Pentagon acknowledged a
serious data breach when a Department of Defense contractor suffered one of its
largest cyberattacks ever and more than 24,000 files containing sensitive data
were stolen by a foreign government.
Computer security has been problematical for
the IRS since 1997, when the IRS initially reported computer security as a
material weakness during its annual evaluation of internal accounting and
administrative controls under the Federal
Managers Financial Integrity Act of 1982.[3] The IRS further divided this material weakness
into nine areas: (1) network access controls; (2) key
computer applications and system access controls; (3) software configuration;
(4) functional business, operating, and program unit security roles and
responsibilities; (5) segregation of duties between system and security
administrators; (6) contingency planning and disaster recovery; (7) monitoring
of key networks and systems; (8) security training; and (9) certification
and accreditation.
As of April 2011, the IRS had officially closed three of
the nine areas: segregation of duties
between system and security administrators (closed in September 2005), security
training (June 2008), and certification and accreditation (December 2008). In addition, the IRS completed all corrective
actions on two other areas: network
access controls (completed in July 2010) and functional business, operating,
and program unit security roles and responsibilities (March 2009). The other four material weakness areas remain
open and are actively being resolved.
While the IRS has made progress in the area of computer security, it
needs to continue to place a high priority on its improvement.
In
addition, identity theft continues to be a significant problem for taxpayers
and the IRS. Identity thieves are filing
fraudulent tax returns and obtaining refunds.
The IRS usually does not become aware of a problem until after the
legitimate taxpayer files a tax return. At
that time, the IRS often determines that two tax returns have been filed using
the same name and Social Security Number. The legitimate taxpayer’s refund is then delayed
while the IRS attempts to determine who the legitimate taxpayer is. Meanwhile, the identity thief has obtained a
fraudulent tax refund, which the IRS is unlikely to recover. As such, effectively authenticating
legitimate taxpayers is a pressing challenge for the IRS as it develops and
implements updates to its mission-critical systems and processes.
Beyond safeguarding a vast amount of
sensitive financial and personal data, the IRS must also protect approximately
100,000 employees and contractors working in over 700 facilities
throughout the country. The February
2010 attack on an IRS facility in Austin, Texas, was a stark reminder of the
dangers that IRS employees face each day in trying to perform their jobs. Animosity towards
the tax collection process is nothing new, but the Austin incident highlights a
surge in hostility towards the Federal Government. Also, the ongoing public debate
regarding the new health care law and continued concerns over the country’s
economy could fuel threats against the Federal Government, including IRS
employees and facilities. These are
challenging operating conditions for the IRS that underscore the need for
continued vigilance in the area of physical and personnel security.
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.
The IRS’s challenge
related to tax-exempt and government entities is providing assistance to those entities
that provide a valued societal benefit while ensuring that these entities
remain in compliance with the tax laws associated with their tax-exempt
status. The various types of tax-exempt
entities include exempt organizations, sponsors of retirement plans, Indian
tribal governments, issuers of tax-exempt and other tax-advantaged bonds, and
Federal, State, and local governments.
Increasing
voluntary taxpayer compliance and reducing the Tax Gap[4] are 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
2012 budget submission, the IRS requested a 2.9 percent increase in
enforcement funds over its Fiscal Year 2011 request.
Businesses
and Individuals
The IRS estimated the gross Tax Gap for Tax
Year 2001 (the most current figures available) to be approximately $345
billion. Underreporting of taxes, which comprises
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 (over 80 percent) of the Tax Gap. In fact, the underreporting of individual income
tax and employment tax combined constitutes over 70 percent of the gross
Tax Gap.
The absence of laws to prevent Federal
agencies, including the IRS, from awarding contracts to businesses that have
delinquent tax liabilities is contributing to the Tax Gap. During Fiscal Year 2010, President Obama
directed the Department of the Treasury and the Office of Management and Budget
to evaluate agencies’ contract award processes and make recommendations to
ensure that Federal contractors with serious tax delinquencies do not receive
new work from Federal agencies. In a
Fiscal Year 2011 report,[5] we
determined that the IRS has opportunities to improve the use of the Federal
Payment Levy Program[6] to collect
delinquent tax liabilities from IRS contractors. Our audit identified that the IRS blocked 11 contractors
with delinquent liabilities totaling approximately $4.3 million from
inclusion in the Program. These
contractors received more than $356 million in payments from the IRS and
approximately $3.7 billion in payments from other Federal agencies. For eight of these contractors, the amount of
delinquent taxes that could have been collected if the tax accounts had not
been blocked from inclusion totaled $3.8 million.
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 their exempt status. Legislative changes and judicial decisions
contribute to a constantly changing environment affecting today’s nonprofit and
tax-exempt organizations. For example,
the Patient Protection and Affordable
Care Act (Affordable Care Act)[7] added
several new requirements for tax-exempt hospitals to maintain their exempt
status.
Since more
than $15 trillion in U.S. assets are currently controlled by tax-exempt
organizations or held in exempt retirement programs and financial instruments,
the IRS recognized in its most recent strategic plan that careful oversight of the
nonprofit and exempt sector is more important than ever before. In its Fiscal Year 2012
budget submission, the IRS stated that it must continue focused oversight of
the tax-exempt sector.
In
a report issued in Fiscal Year 2011,[8]
we reviewed the IRS process that allows public employers who determine they are
not in compliance with various employment and income tax laws to step forward
and be accountable by entering into an agreement with the IRS to become
compliant. While this assists the IRS in
improving compliance in the government sector without using scarce resources to
uncover noncompliance, the IRS did not always properly control, process, and
monitor all requests for agreements received from its customers. As a result, TIGTA found inconsistencies, inaccuracies, potential taxpayer rights violations, and weak
internal controls that increased the risk of error, fraud, or abuse. In addition, TIGTA identified changes that could
lead to an increase in the number of agreements being requested, heightening
the need to begin building a more defined agreement program.
Tax Return
Preparers
Greater numbers of taxpayers are turning to
tax return preparers for assistance. In
Calendar Year 2010, the IRS processed approximately 81.5 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 (including reviews
conducted by TIGTA, the U.S. Government Accountability Office, and other
agencies) strongly suggested a need to regulate those who prepare Federal tax
returns and 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 IRS began implementing the new preparer
requirements in Fiscal Year 2011, but we reported in September 2010 that it
will take years for the IRS to implement the Return Preparer Program and to
realize its impact.[9] When the decision was made to register
preparers in September 2010, the IRS had only begun to implement the Return
Preparer Program and had not established all of its requirements. The IRS also had not established the
organizational structure of the Program, determined how it will test to ensure
all preparers met the requirements, determined how it will enforce Program requirements,
or developed the system(s) and processes necessary to administer and oversee the
Program. It will not be until Calendar
Year 2014 that all preparers will be subjected to all suitability and
competency tests. In the meantime, the
IRS will develop and implement an enforcement strategy. Currently, the IRS does not have a sufficient
management information system to gather data on preparers. Further, the IRS will need to ensure that taxpayers
understand the new requirements and the importance of using only registered
preparers to prepare their tax returns.
MODERNIZATION
The Business
Systems Modernization Program (Modernization 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 going on its 14th year and has received
approximately $3.46 billion for contractor services, plus an additional $554 million
for internal IRS costs.
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 IRS’s
modernization efforts continue to focus on core tax administration systems
designed to provide more sophisticated tools to taxpayers and to IRS
employees. The
Modernization Program provides new information technology capabilities and the
related benefits. Since January 2011,
the IRS has implemented new versions of the current Customer Account Data Engine,[10]
the Modernized e-File system,[11]
and the Account Management Services system.[12] Additionally, the IRS has continued making
progress in preparing for the deployment of the Customer Account Data Engine 2
system.[13]
The
Modernization Program has continued to help improve IRS operations and has
demonstrated successes in improving business practices by implementing new
information technology solutions. Management
of project costs and schedules has shown dramatic improvement since the
previous year, but some systems development disciplines continue to need
attention.
Since 1995, the IRS had identified and
reported the Modernization Program as a material weakness. In June 2011, the IRS Commissioner certified,
in a memorandum to the Department of the Treasury’s Assistant Secretary for
Management and Chief Financial Officer, that the previously identified internal
and management control issues had been fully addressed and the Modernization
Program no longer warranted being identified as a material weakness. While we support the IRS’s decision, we
believe the Program remains a risk for the IRS, and we suggest that it continue
to stress improvements in its overall processes and performance.
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 the annual January through April period and, if needed, it
is usually during this same time period that they 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. Pertinent examples of major tax law changes
that contribute to this management and performance challenge are provided
below.
Health Care
The recently enacted health care reform statute
known as the Affordable Care Act contains an extensive array of tax law changes
that will present a continuing source of challenges 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 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:
·
Providing tax
credits to businesses and individuals to assist in covering the cost of health
coverage;
·
Administering the
mandate for individuals to purchase health coverage or be subject to a penalty
on their individual Federal tax returns; and
·
Administering
multiple tax provisions designed to raise revenues to offset the cost of health
care reform.
For Fiscal
Years 2011 and 2012, TIGTA identified a critical need to initiate 16 audits
related to the Affordable Care Act to
oversee the implementation of such significant provisions as:
·
Small
Business Health Care Tax Credit;
·
Qualified
Therapeutic Discovery Project Credit;
·
Annual
Fees Assessed on Branded Prescription Pharmaceutical Manufacturers and
Importers;
·
Expansion
of the Adoption Credit;
·
Indoor
Tanning Excise Tax;
·
Tax-Exempt
Hospital Provisions; and
·
Reporting
Requirements Included in the Affordable Care Act.
TIGTA’s audit
results to date illustrate the significant need for continued oversight of the
IRS’s administration of many of these tax-related provisions. For
example, taxpayers erroneously received millions in Adoption Credits; the IRS
did not require sufficient information to determine if taxpayers claiming Small
Business Health Care Tax Credits filed required employment taxes when these
taxpayers entered into a contractual relationship with professional employment organizations
to manage human resources; and the IRS did not take adequate steps to ensure
taxpayers potentially liable for the indoor tanning excise tax were aware of
the new law, particularly after the number of taxpayers filing tax returns reporting
the excise tax for tanning services was much lower than expected.
A provision in this
law increased the Adoption Credit from $12,150 to $13,170 and made the tax
credit refundable.[14] Although the IRS requires
taxpayers to attach documentation to their tax returns supporting Adoption
Credit claims, it does not have math error authority to deny the credits if
documentation is not provided. As a
result, tax returns without required documentation must be sent to the
Examination function, increasing costs for the IRS and burden for the
taxpayer. As of April 30, 2011, of the
72,330 Adoption Credit claims received, 41,591 (58 percent) either had no
required documentation or the documentation was invalid or insufficient. Furthermore,
as of April 30, 2011, 736 taxpayers had erroneously received
more than $4 million in Adoption Credits.
American Recovery and Reinvestment Act
The American
Recovery and Reinvestment Act of 2009 (Recovery Act)[15] was
enacted on February 17, 2009. The
Recovery Act presented significant challenges to all Federal agencies 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.
TIGTA has issued numerous reports related to the IRS’s efforts to
implement Recovery Act tax provisions.
Some examples include:
·
A review of the
Plug-in Electric and Alternative Motor Vehicle Credit identified 12,920
individuals who erroneously claimed $33 million in plug-in electric and
alternative motor vehicle credits on electronically filed (e-filed) tax returns.
Furthermore, 1,719 of the 12,920
individuals erroneously reduced the amount of the Alternative Minimum Tax owed
by almost $5.3 million.[16]
·
A review of the
Residential Energy Credit identified that the IRS cannot verify whether
individuals claiming Residential Energy Credits were entitled to them at the
time their tax returns are processed. The
IRS does not require individuals to provide any third-party documentation to
verify eligibility.[17]
·
A review
of the IRS’s compliance with requirements over procurements funded by
the Recovery Act determined that the IRS did not always comply with the Recovery
Act and its implementing guidance in planning and awarding those procurements.[18]
·
A review of the
IRS’s use of compliance check questionnaires regarding Build America Bonds found
that the questionnaires issued by the Tax Exempt Bonds office were appropriate
for identifying indications of a high risk of potential noncompliance for Build
America Bonds. However, the office did
not have formal written procedures for developing and conducting compliance
checks that would aid in the development of compliance check programs and
provide added assurance the IRS does not exceed its authority when executing
such programs.[19]
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
Along with the usual required updates[20] for the
2011 Filing Season, the late passage of the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
(enacted December 17, 2010)[21] resulted in
a need for the IRS to reprogram its computer systems to accommodate provisions
extended by this law. As a result,
taxpayers who claimed one or more of the three affected deductions or who
itemized deductions were unable to file their tax returns until February 14,
2011. The IRS reported it had Electronic
Return Originators hold approximately 6.5 million e-filed tax returns for
transmission until February 14, 2011, and as of February 11, 2011, the IRS
itself had received and held for processing approximately 100,000 paper
tax returns.
In
addition, more than 1.5 million taxpayers who purchased a home between
April 9 and December 31, 2008, and claimed the First-Time Homebuyer Credit
(Homebuyer Credit) were required to begin repaying the credit on their Tax Year
2010 tax return. The credit is intended
to be repaid over 15 years, in equal annual installments. However, the IRS experienced difficulties in
implementing the repayment process. As
of April 30, 2011, we identified 26,649 taxpayers for whom the Homebuyer Credit
was inaccurately processed, which resulted in the IRS not assessing more than
$5.8 million in repayment amounts owed but not paid and erroneously assessing
$675,063 as a repayment amount in excess of what was owed by the taxpayer. These difficulties resulted in inaccurate
processing of repayments and significant delays in providing refunds to
taxpayers with repayment requirements.
The Improper Payments
Information Act of 2002[22]
defines an
improper payment as any payment that should not have
been made or that was made in an incorrect amount (both overpayments and
underpayments) under statutory, contractual, administrative, or other legally
applicable requirements. Improper
payments include any payment to an ineligible recipient or for an ineligible
service, any duplicate payment, any payment 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, and on November 20, 2009, the
President signed Executive Order 13520,[23] which
included a strategy to reduce improper payments by increasing transparency,
holding agencies accountable, and creating strong incentives for compliance. In addition, the Improper Payments Elimination and Recovery Act of 2010[24] placed
additional requirements on Federal agencies to reduce improper payments. Erroneous and improper payments issued by the
IRS generally involve improperly paid refunds, tax return filing fraud, or improper
payments to vendors or contractors.
Refundable
Credits
The
IRS administers numerous refundable tax credits. These refundable credits allow individual
taxpayers to reduce their tax liability to 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 temporary
refundable credits, examples of which include the Homebuyer Credit and the American
Opportunity Tax Credit.
Our
reviews have shown the need for appropriate controls to be established before
refundable credits are issued. This
includes requiring documentation to substantiate claims, implementing filters
timely to identify erroneous claims, and entering key information into IRS
computers so that it can be used to verify eligibility.[25]
The
EITC remains the largest refundable credit, based on the total claims paid, and
it continues to be vulnerable to a high rate of noncompliance, including
incorrect or erroneous claims caused by taxpayer error or resulting from fraud.
We recently assessed the IRS’s efforts
to implement Executive Order 13520, which requires the IRS to intensify its
efforts and set targets to reduce EITC improper payments. It also requires the IRS to provide TIGTA with
its plans and supporting analysis for meeting those targets. The IRS’s report to TIGTA did not include any
quantifiable targets to reduce EITC improper payments. Without targets to reduce EITC improper
payments as required by the Executive Order, there is a lack of accountability
for eliminating payment error, waste, fraud, and abuse.[26] As such, the risk remains high that the IRS
will continue to pay billions of dollars in EITC improper payments annually. The IRS continues to report that 23 to 28 percent
of EITC payments are issued improperly each year. In Fiscal Year 2009, this equated to $11 to $13 billion
in EITC improper payments.
The
Additional Child Tax Credit is the second largest refundable credit available to
individuals. Refunds for the credit processed
in Fiscal Year 2010 totaled $28.3 billion, and we have reported that the
IRS paid $4.2 billion for this credit in Processing Year 2010 to individuals
who were not authorized to work in the United States. Furthermore, the Examination function does
not effectively and efficiently work Additional Child Tax Credit cases of those
individuals filing with an Individual Taxpayer Identification Number. We have recommended that the IRS work with
the Department of the Treasury to seek clarification in the law as to whether this
and other refundable credits may be paid to individuals who are not authorized
to work in the United States.
The
Recovery Act amended the Hope Scholarship Credit to provide for a refundable
tax credit called the American Opportunity Tax Credit to help taxpayers offset
the costs of higher education. TIGTA
identified 2.1 million taxpayers who appear to have received $3.2 billion
in erroneous education credits. This
includes 1.7 million taxpayers who received $2.6 billion in education
credits for students for whom there was no supporting documentation in IRS
files establishing that they attended an educational institution. This is further indication that the IRS needs
to have processes in place to verify eligibility for refundable credits at the
time a tax return is processed.
Contract and
Other Payments
Federal
contract spending has nearly doubled since 2002. In Fiscal Year 2010, the Federal Government
spent approximately $538 billion to acquire goods and services. Similarly, contract spending by the IRS
represents a significant outlay of funds.
As of May 2011, the IRS administered more than 1,000 procurements,
including 807 contracts of varying types and 201 Blanket Purchase
Agreements and Interagency Contracts and Agreements. These 1,008 active contracts have a reported
systems life value of approximately $39.2 billion. Numerous past TIGTA investigations and audits
have identified millions of dollars in questioned costs and several instances
of contractor fraud.
During Fiscal
Years 2010 and 2011, court-ordered civil settlements directed $156 million
and $113 million, respectively, to be paid back to the U.S. Treasury as a
result of TIGTA criminal investigative efforts. During these investigations, two recurring
trends emerged. Contracting Officer’s
Technical Representatives were frequently overwhelmed by their workloads, and
current business practices have not enhanced the IRS’s ability to identify
anomalies warranting additional review.
Further,
in a recent review of the IRS Purchase Card Program, TIGTA determined that, while
some purchase card controls were working as intended, overall management
controls were inadequate to ensure the appropriate use of IRS purchase
cards. TIGTA found violations of
applicable laws and regulations that included purchases made without necessary
approvals and verification of funding, purchases that were potentially split
into two or more transactions to circumvent micro-purchase limits, and
purchases made from improper sources.[27]
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
in correctly preparing 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 Federal Government resources.
In a review of the taxpayer experience during the 2011 Filing Season,[28] the overall experiences of TIGTA auditors who posed as taxpayers to obtain answers to tax law questions from the toll-free telephone assistance lines, IRS.gov, and Taxpayer Assistance Centers were generally positive. However, taxpayers were experiencing long wait times at Taxpayer Assistance Centers and on telephones. At Taxpayer Assistance Centers, our auditors waited an average of one hour to receive assistance and, in some cases, were turned away and told to return another day to obtain services. In addition, Taxpayer Assistance Centers do not always allow qualified taxpayers to schedule appointments and do not consistently apply new taxpayer screening guidelines and procedures.
Our
recent review of the Taxpayer Advocate Service’s process for selecting systems
advocacy projects[29] determined
it can improve the process used for identifying these projects. Specifically, we found that Taxpayer Advocate
Service management
primarily relies on IRS employees and external stakeholders to submit issues
for consideration as potential projects.
However, we found that Taxpayer Advocate Service could improve the research
it performed during the screening process to better identify systemic problems
affecting multiple taxpayers. Such improvements will assist management in
identifying and resolving broad-based taxpayer problems, thereby preventing or
reducing similar problems in the future.
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 new challenges as the
implementation of health care reform, the recruitment of new employees and
retention of existing employees is critical to 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. This challenge is especially evident in the
IRS’s leadership ranks, where about one-third of all executives and almost 20
percent of managers are already retirement eligible. Within five years, nearly 70 percent of all
IRS executives and almost 50 percent of managers are projected to be eligible
for retirement.
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 Federal, State, and local governmental agencies and the private sector
for the same human resources, an effort that 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.
The IRS is improving in its human
capital management practices and has developed a comprehensive agency-wide
recruitment strategy. However, there is
still much work left to be done. For example,
we recently determined that the IRS, like other Government agencies, was
struggling to accomplish the basic tasks in acquisition workforce planning,
including identifying its acquisition workforce, determining the number of
acquisition workforce personnel it needs to accomplish its mission, and
determining the skills its employees have compared to the skills it requires. If the IRS does not take action to improve
its acquisition workforce planning, it: (1)
may not be able to easily determine whether its acquisition workforce has
enough people with the right skills to perform acquisition duties, (2) may be
understaffed to handle the anticipated acquisition workload, and (3) may not
have all the prerequisite skills to oversee procurements.[30]
The IRS also faces challenges to
maintain the number of Revenue Officers needed, due to attrition and an
increasing inventory. The IRS’s Revenue
Officer hiring initiative added 1,515 new Revenue Officers throughout the
country between June 2009 and February 2010.
The methodology to assign these new employees was effective in placing them
in the Collection areas with the greatest need. However, even though 1,515 Revenue Officers
were hired over a nine-month period, the net increase was only 580 Revenue
Officers. The IRS has also projected
that planned hiring for Fiscal Years 2011 and 2012 will barely cover
attrition losses. Meanwhile, the
percentage of delinquent accounts closed has steadily decreased because of
increasing inventory.
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 that conduct international business transactions, including individuals,
businesses, and tax-exempt organizations, continues to grow. The IRS is still 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 continues to realign and expand its
international efforts under its Large Business and International Division. The IRS expects that these efforts will
improve international tax compliance by allowing it to focus on high-risk
issues and cases with greater consistency and efficiency.
The IRS
continues to work with the U.S. Department of Justice on tax evasion cases
involving foreign countries with bank secrecy laws that prevent the United
States from obtaining information on taxpayer transactions. In addition, the 2009 and 2011 Offshore
Voluntary Disclosure Initiatives have encouraged taxpayers with hidden offshore
assets and income to come back into the tax system using the IRS’s Voluntary
Disclosure Program. The Initiatives offer
a uniform penalty structure for taxpayers who voluntarily disclose their hidden
offshore assets and income to the IRS and, in return, ensure that the taxpayers
receive consistent tax and penalty treatment.
They also provide the opportunity to calculate, with a reasonable degree
of certainty, the total cost of resolving all outstanding offshore tax issues
related to the undisclosed foreign bank and financial accounts and assets. Taxpayers with undisclosed foreign accounts
and assets who do not submit a voluntary disclosure run the risk of detection by
the IRS. If caught, these taxpayers face
the imposition of substantial penalties, including the fraud and foreign
information return penalties, as well as an increased risk of criminal
prosecution.
In addition,
one of the biggest challenges currently facing the IRS is the implementation of
the Foreign Account Tax Compliance Act
(FATCA).[31] As capital markets become increasingly
globalized, U.S. investors may be able to benefit from a corresponding increase
in international investment opportunities.
The FATCA was enacted to combat tax evasion by U.S. persons holding
investments in offshore accounts. Under this
Act, a U.S. taxpayer with financial assets outside the United States will be
required to report those assets to the IRS.
In addition, foreign financial institutions will be required to report
to the IRS certain information about financial accounts held by U.S. taxpayers
or by foreign entities in which U.S. taxpayers hold a substantial ownership
interest.
Foreign
financial institutions that do not enter into an agreement to report this
information to the IRS will be subject to withholding on certain types of
payments, including U.S. source interest and dividends, gross proceeds from the
disposition of U.S. securities, and pass-through payments. To avoid being withheld upon, foreign
financial institutions will have to enter into an agreement with the IRS to:
·
Identify U.S. accounts;
·
Report certain information to the IRS
regarding U.S. accounts; and
·
Withhold a 30-percent tax on certain payments
to nonparticipating foreign financial institutions and account holders who are
unwilling to provide the required information.
According to
the IRS Commissioner, “FATCA is an important development in U.S. efforts to
combat offshore noncompliance. At the
same time, the IRS recognizes that implementing FATCA is a major undertaking
for financial institutions.”[32] Based on the initial feedback from foreign
financial institutions as well as foreign governments, the IRS will continue to
face significant opposition from abroad in implementation of this Act.
TAXPAYER PROTECTION AND RIGHTS
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).[33] 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[35] and did not
always follow procedures for mailing notices to taxpayers or their
representatives in Federal tax lien cases.[36] IRS management
information systems do not track all cases that require mandatory annual audit
coverage.[37] Thus, neither TIGTA nor the IRS could
evaluate the IRS’s compliance with certain RRA 98 provisions.
In
addition, identity theft remains the single largest type
of complaint submitted to the Federal Trade Commission’s Consumer Sentinel
Network. The Federal Trade Commission
estimates that as many as 9 million Americans have their identities stolen each
year. Identity theft affects the IRS and tax administration in two ways – fraudulent tax returns and
misreporting of income. Both can
potentially harm taxpayers who are the victims of the identity theft. The IRS is seeing a significant growth in identity theft
cases. At a recent hearing[38] of the House Oversight and Government Reform
Subcommittee on Government Organization, Efficiency, and Financial Management, identity theft victims testified that other
individuals had filed fraudulent tax returns using their identities. The victims stated that the IRS withheld their
tax refunds, sometimes more than once, and further stated that they had been treated
unprofessionally by numerous IRS employees while they tried to resolve their
problems.
ACHIEVING PROGRAM EFFICIENCIES AND
COST SAVINGS
Given the current economic environment
and the increased focus by the Administration, Congress, and the American people
on Federal Government accountability and efficient use of resources, the
American people must be able to trust that their Government is taking action to
stop wasteful practices and ensure that every tax dollar is spent wisely. On June 13, 2011, President Obama signed an
Executive Order[39] to cut
waste, streamline Government operations, and reinforce the performance and
management reform gains achieved by his Administration. In addition, the Government Accountability
Office is now statutorily required to identify and report to the Congress those
Federal programs, agencies, offices, and initiatives, either within departments
or Government‑wide, that have duplicative goals or activities.
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. In a
recent audit,[40] we reviewed
the IRS’s $88 million contract with a private vendor to provide support-service
functions, including storage and management, throughout IRS facilities. We determined that the IRS should take
additional steps to ensure support services are managed in a more
cost-effective manner. Specifically, the
IRS should evaluate whether it is cost effective to continue to move into
storage rather than dispose of furniture and equipment that has not been
clearly determined to be of future usefulness.
As a result, the IRS may be paying more for its support services than is
necessary.
The IRS is reducing publishing and
mail costs, but recent reductions have resulted from budget cuts and were not part
of a long-term strategy. In response to
the cost savings proposed in the Fiscal Year 2011 budget request, the IRS
formed task forces to identify ways to achieve cost savings.[41] A task force
proposed 25 actions to reduce publishing and mail costs and lay the foundation
for long-term implementation of cost reductions for Fiscal Year 2011 and
beyond. However, the task force
proposal did not include documentation to show the methodology used to make the
proposals, the method used to calculate or validate its estimates, or the
manner in which the IRS will measure the results or the cost savings of the
proposals. As the IRS moves forward with
the proposed cost savings or pursues other methods of saving publishing and
mail costs, it needs to implement sufficient controls and procedures to ensure
the methodology for the decisions are documented and that the data used are
accurate and complete.
In a prior audit,[42] we reviewed
the IRS’s methodology to reasonably and accurately calculate the cost of
Unemployment Trust Fund administrative expenses. This fund was established to provide a
portion of extended unemployment benefits during periods of high
unemployment. The IRS is reimbursed the
costs of collecting and processing the taxes that are deposited to the fund. However, we determined that there were
insufficient controls to ensure that expenses associated with the
administration of the Unemployment Trust Fund are accurately calculated. Specifically, we found that the IRS
overestimated the related expenses by $63 million during Fiscal Years 2005 through
2009. As a result, these funds were not
available during this period to fund the Federal Government’s share of
unemployment benefit payments to eligible taxpayers.
CONCLUSION
This correspondence is provided as our
annual summary of the most serious major management and performance challenges confronting
the IRS in Fiscal Year 2012. TIGTA’s Fiscal Year 2012 Annual Audit Plan contains
our proposed reviews, which are organized by these challenges. If you have questions or wish to discuss our 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. § 3516(d) (2006).
[2] In the event that an agency determines the existence of
shortcomings in operations or systems which severely impair or threaten its
ability to accomplish its mission or to prepare timely and accurate financial
statements, the Department of the Treasury directs its bureaus to declare a
material weakness on that particular area.
[3] 31
U.S.C. §§ 1105, 1106, 1108, 1113, 3512 (2006). The Federal Managers’
Financial Integrity Act
(FMFIA) requires that agency management
establish and maintain effective internal controls to achieve
the objectives of: 1)
effective and efficient operations, 2) reliable financial reporting, and 3)
compliance
with applicable laws and
regulations. The FMFIA also requires the head of each Executive agency to
report annually to
the President and Congress on the effectiveness of the internal controls and
any
identified material weaknesses
in those controls. Reporting material weaknesses under the FMFIA is not
limited to weaknesses over financial
reporting.
[4] 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.
[5]
TIGTA, Ref.
No. 2011-30-013, Existing Practices
Allowed IRS Contractors to Receive Payments While Owing Delinquent Taxes (2011).
[6]
The Federal Payment Levy Program
is an automated process that issues tax levies to collect delinquent Federal
taxes through the Financial Management Service from Social Security payments,
Federal agency salaries, retirement, and contract awards.
[7]
Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified as amended in scattered sections of 18
U.S.C., 20 U.S.C., 21 U.S.C., 25 U.S.C., 26 U.S.C., 28 U.S.C., 29 U.S.C.,
30 U.S.C., 31 U.S.C., 35 U.S.C., and 42 U.S.C.).
[8] TIGTA, Ref. No. 2011-10-042, Improvements Are Needed in the Voluntary
Closing Agreement Process for Public Employers (2011).
[9] TIGTA, Ref. No. 2010-40-127, It Will Take Years to Implement the Return Preparer Program and to Realize Its Impact (2010).
[10] The Customer Account Data Engine is the
foundation for managing taxpayer accounts in the IRS Modernization plan. When completed, its databases and related
applications will replace existing IRS Master File processing systems and will
include applications for daily posting, settlement, maintenance, refund
processing, and issue detection for taxpayer tax account and return data.
[11] The Modernized e-File system is a replacement
of the current IRS tax return filing technology with a modernized,
Internet-based electronic filing platform.
[12] The Account Management Services
system provides IRS employees with the ability to view, access, update, and
manage taxpayer data.
[13] The Customer Account Data Engine 2
system creates a modernized processing and data-centric infrastructure that
will enable the IRS to improve the accuracy and speed of individual taxpayer
account processing, enhance the customer experience through improved access to
account information, and increase the effectiveness and efficiency of agency
operations.
[14] A refundable tax credit is a tax credit that is treated as a payment and can be refunded to the taxpayer. Refundable credits can create a Federal tax refund that is larger than the amount a person actually paid in taxes during the year.
[15] Pub. L. No. 111-5, 123 Stat. 115.
[16]
TIGTA, Ref. No. 2011-41-011, Individuals Received Millions of Dollars in
Erroneous Plug-in Electric and Alternative Motor Vehicle Credits (2011).
[17] TIGTA, Ref. No. 2011-41-038, Processes Were Not Established to Verify Eligibility for Residential Energy Credits (2011).
[18] TIGTA, Ref. No. 2011-11-132, Procurements Were Not Processed in Compliance With the American Recovery and Reinvestment Act of 2009 (2011).
[19] TIGTA, Ref. No. 2011-11-053, The Direct Pay Build America Bond Compliance Check Program Has Yet to Result in Wide-Scale Examinations (2011).
[20] Each year, tax products must be updated to reflect current tax rates, exemption amounts, and cost of living adjustments as shown in Revenue Procedures.
[21] Pub. L. No.
111-312, 124 Stat. 3296.
[22] Pub. L. No.
107-300, 116 Stat. 2350.
[23] Executive Order No. 13,520, 74 Fed. Reg. 62201 (Nov.
25, 2009), Reducing Improper Payments and
Eliminating Waste in Federal Programs.
[24] Pub. L. No.
111-204, 124 Stat. 2224.
[25] TIGTA, Ref. No.2011-41-035, Administration of the First-Time Homebuyer Credit Indicates a Need for Improved Controls Over Refundable Credits (2011).
[26] TIGTA, Ref. No. 2011-40-023, Reduction Targets and Strategies Have Not Been Established to Reduce the Billions of Dollars in Improper Earned Income Tax Credit Payments Each Year (2011).
[27] TIGTA, Ref. No. 2011-10-075, Controls Over the Purchase Card Program Were Not Effective in Ensuring Appropriate Use (2011).
[28] TIGTA, Ref. No. 2011-40-070, The Internal Revenue Service Provides Helpful and Accurate Tax Law Assistance, but Taxpayers Experience Lengthy Wait Times to Speak With Assistors (2011).
[29] TIGTA, Ref. No. 2011-10-062, The Identification and Evaluation of
Systemic Advocacy Projects Designed to Resolve Broad-Based Taxpayer Problems
Can Be Improved (2011).
[30]
TIGTA, Ref. No. 2011-10-072, Additional Actions and Data Are Needed to
Further Analyze the Size and Skills of the Acquisition Workforce (2011).
[31] Pub. L. No. 111-147, 124 Stat. 71 (2010) (codified in scattered sections of 26 U.S.C.).
[32] IRS News Release IR-2011-76, Treasury and IRS Issue Guidance Outlining Phased Implementation of
FATCA Beginning in 2013 (July 14, 2011).
[33] 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.).
[34] 15 U.S.C. §§ 1601 note, 1692-1692o (2006).
[35] TIGTA, 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).
[36] TIGTA, Ref. No. 2010-30-072, Actions Are Needed to Protect Taxpayers’
Rights During the Lien Due Process (2010).
[37] TIGTA, Ref. No. 2010-30-026, Fiscal Year 2010 Statutory Review of
Disclosure of Collection Activity With Respect to Joint Returns (2010) and TIGTA,
Ref. No. 2010-30-060, Fiscal Year 2010
Statutory Review of Restrictions on Directly Contacting Taxpayers (2010).
[38] IRS E-File and Identity Theft, Hearing Before the House Oversight and Government Reform Subcommittee on Government Organization, Efficiency, and Financial Management, 112th Cong. (2011).
[39] Executive Order No. 13,576, 76 Fed. Reg. 35297 (June 16, 2011), Delivering an Efficient, Effective, and Accountable Government.
[40]
TIGTA, Ref. No. 2011-10-086, Controls Over Costs and Building Security
Related to Outsourced Office Support Services Need to Be Improved (2011).
[41] TIGTA, Ref. No. 2011-40-025, Publishing and Mail Costs Need to Be More Effectively Managed to Reduce Future Cost (2011).
[42] TIGTA, Ref. No. 2010-10-039, Internal Accounting Errors Reduced the
Federal Funding Available for Unemployment Benefits by $63 Million During
Fiscal Years 2005 Through 2009 (2010).