April 1, 2001 through September 30, 2001
Treasury Inspector General for Tax Administration
We are a respected member of the government community:
• Independent, objective and professional in the conduct of our mission.
• Dedicated and innovative professionals who take pride in promoting fair tax administration and good government.
• Proud of our past and focused on our future.
OF THE TREASURY
WASHINGTON, D.C. 20220
INSPECTOR GENERAL for TAX ADMINISTRATION
October 30, 2001
Paul H. O’Neill
Secretary of the Treasury
Washington, D.C. 20220
Dear Mr. Secretary:
I am pleased to submit to you the Treasury Inspector General for Tax Administration’s (TIGTA) Semiannual Report to Congress for the reporting period April 1, 2001 through September 30, 2001.
TIGTA would like to express its sympathy to those affected by the tragic events of September 11, 2001. While these are trying times for all of us, I am especially proud of the TIGTA staff who on, the day of the attacks, immediately went into action to provide assistance to those in need. I would like to commend their dedication and hard work. We were also very thankful that all of our TIGTA employees who worked at the World Trade Center got home safely and without serious injury.
TIGTA’s Office of Investigations is providing assistance to the law enforcement community in investigating the attacks at the World Trade Center and the Pentagon. Our efforts in this area include:
• Providing full-time coverage to both the Federal Bureau of Investigation’s (FBI) central command post, and the FBI’s Joint Terrorism Task Force.
• Providing various types of information available through Internal Revenue Services’ (IRS) records. This information has been extremely useful in identifying hijackers and their associates, as well as tracking financial information related to the attacks.
• Supporting the Federal Aviation Administration’s Federal Air Marshal Program.
Also, in conjunction with the Department of Housing and Urban Development, the Office of Investigations is actively coordinating a joint effort by the President’s Council on Integrity and Efficiency and Executive Council on Integrity and Efficiency to provide long-term support to this investigation.
We are proud to be participating in these efforts while continuing our work overseeing the nation’s tax administration. Our audit and investigative accomplishments for this six-month period are highlighted in the Executive Summary.
I look forward to continuing to work together with you, Congress and IRS officials to help the Agency address the challenges it faces in Fiscal Year 2002.
Facing the Internal Revenue Service ......................................................................
Appendix I Office of A udit’ s Statistical Repor ts
Audit Reports with Questioned Costs ......................................................................31
Recommendations That Funds Be Put to Better Use
Additional Quantifiable Impact on Tax Administration .........................33
Appendix II Office of In v estigation’ s
Statistical Repor ts
In v estigativ e Results Apr il 1, 2002 - Septem ber 30, 2001 ....................................... 35
Opened and Closed .....................................................................35
Status of Closed
Criminal Investigations ............................................................36
Status and Disposition on Closed Treasury Inspector
General for Tax Administration (TIGTA) Investigations .................................37
Received by TIGTA .......................................................38
Complaints/Allegations Received by TIGTA
Misconduct Against IRS Emplo y ees
Employee Misconduct Investigated
by IRS Management .....................................................................................39
Employee Misconduct Cases Investigated
by IRS Management .....................................................................................40
IRS Summary of
Substantiated §1203 Allegation ..............................................41
Table of Contents 1
Table of Contents (Continued)
Reports - Others
Audit Reports With Significant Unimplemented Corrective Actions .........................43
Reports - Others (Access to Information; Audit Reports
Issued in Prior Reporting Period with No Management
Response; Revised Management Decisions; Disputed Audit
Recommendations; Review of Legislation and Regulations) .............................59
Appendix IV Audit Report Listing (April 1, 2001 -
September 30, 2001) ......................................
Appendix V Section 1203 Standards ...........................................................................................
Appendix VI Statutory TIGTA Reporting Requirements ................................................................
Appendix VII Government Performance and Results Act
Appendix IX Acronyms ..................................................................................................................
Appendix X Organizational Chart ................................................................................................
2 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
The Office of the Treasury Inspector General for Tax Administration (TIGTA) provides independent oversight of Internal Revenue Service (IRS) activities, the IRS Oversight Board, and the IRS Office of Chief Counsel. TIGTA is organizationally placed within the Department of Treasury (Treasury), but is independent of the Department and all other Treasury offices. TIGTA’s focus is devoted to all aspects of work related to tax administration.
TIGTA’s audit and investigative activities are designed to:
• Promote economy, efficiency, and effectiveness in administering the Nation’s tax system.
• Detect and deter fraud and abuse in IRS programs and operations.
• Protect IRS against external attempts to corrupt or threaten its employees.
Other responsibilities include:
• Investigating allegations of misconduct by IRS employees.
• Reviewing and making recommendations about existing and proposed legislation and regulations related to IRS and TIGTA programs and operations.
• Recommending actions to resolve fraud, abuses, and deficiencies in IRS programs and operations.
• Informing the Secretary of the Treasury and Congress of problems and progress made to resolve them.
The Offices of Audit (OA) and Investigations (OI) carry out these duties and are supported in their efforts by the Offices of Chief Counsel, Information Technology, and Management Services.
TIGTA has all the authorities granted under
the Inspector General Act of 1978. TIGTA also has access to tax information in the performance of its responsibilities and has the obligation to report potential criminal violations directly to the Department of Justice. The Inspector General (IG) and the Commissioner of IRS have established policies and procedures delineating responsibilities to investigate potential criminal offenses under the internal revenue laws.
In addition, the IRS Restructuring and Reform Act of 19982 (RRA 98)amended the Inspector General Act of 1978 to give TIGTA statutory authority to carry firearms and execute the provisions of the Internal Revenue Code (I.R.C.) Section 7608(b)(2). These provisions include law enforcement authority to execute and serve search warrants, serve subpoenas, and make arrests.
TIGTA was highly productive during this six-month reporting period. Some of the highlights include:
• Issuing 126 audit reports with cost savings or funds put to better use totaling over $13 billion,3 with an additional $13.3 billion in increased revenue and protected
1 Pub. L. No. 95-452 Stat. 1101, as amended, at 5 U.S.C. App. 3 (1994 & Supp. II 1996).
2 Pub. L. No. 105-206, 112 Stat. 685.
3 Audit report, Reference No. 2001-30-148, contains an estimated five-year benefit of $13 billion that represents the amount of interest that could be avoided if all overpayments are timely refunded by IRS within 45 days. The actual interest savings would be reduced by an indeterminable amount for any refunds that are not timely processed (see Appendix I, page 31).
Executive Summary 3
revenue.4 Audit recommendations improved
tax administration for almost 14.5 million
taxpaying entities. These issues primarily
involved taxpayer rights and entitlements,
burden and privacy, and security.
• Receiving 3,902 complaints of alleged criminal wrongdoing and/or administrative misconduct, of which 1,600 warranted further investigation. In addition, 2,322 investigations were closed. The investigations included assault, bribery, theft, and fraud. Investigative recoveries totaled approximately $8.1 million.
• Conducting integrity awareness presentations for over 23,000 individuals. IRS employees comprised 89 percent of these individuals. These presentations heighten integrity awareness and have a potential deterrent effect on fraud and misconduct.
In response to the tragic events of September 11, 2001, TIGTA’s Office of Investigations in New York responded immediately, providing assistance to those injured in the aftermath of the destruction and chaos at the World Trade Center. Within a day, TIGTA had established equipment and supplies needed to reestablish our displaced New York office, which was one of the buildings that collapsed that day (see picture). TIGTA also established “linked communication” for the U.S. Secret Service and U.S. Customs Service, whose communication had been completely severed by the events. TIGTA subsequently provided other law enforcement equipment to those affected agencies.
OI continues to provide communications and direct investigative assistance in support of the World Trade Center terrorist investigation. For instance, in conjunction with the Department of Housing and Urban Development (HUD), OI is actively
4 See Appendix I, page 34.
Photograph of the collapsed 6 World Trade Center building that TIGTA had occupied in New York City before the terrorist attack on September 11, 2001.
coordinating a joint President’s Council on Integrity and Efficiency/ Executive Council on Integrity and Efficiency effort to provide long-term investigative support to this investigation. TIGTA and HUD will oversee up to 80 special agents from multiple IG offices to augment investigative personnel currently supporting the investigation.
OI also continues with its primary mission of detecting and deterring fraud and other misconduct within IRS programs. Highlights of the most significant investigations during this six-month reporting period include:
• An individual engaged in the theft of mail, stalking, trespassing, and Internet searches for the purpose of identifying the addresses and vehicles belonging to Federal law enforcement agents who were involved in the individual’s prosecution for previous Federal crimes.
• An individual was convicted of two counts of interstate stalking related to the stalking of a TIGTA special agent. This individual is the admitted author of Assassination Politics, an essay advocating the assassination of government employees.
• A joint investigation conducted by TIGTA, the U.S. Secret Service, and the Federal Bureau of Investigation (FBI) successfully
4 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
identified the source of Internet threats directed at the President, a TIGTA special agent, and other law enforcement officials.
• A 30-year IRS employee was arrested by TIGTA and charged with receiving bribes totaling nearly $19,000 from an individual on behalf of the individual’s business entity in return for not collecting over one-half million dollars in delinquent tax. The case was initiated as a result of a FBI investigation during which evidence alleged the business individual had paid bribes to an unnamed IRS employee.
• An individual was sentenced to 46 months imprisonment, 3 years probation, ordered to pay nearly $4 million in restitution and $400 in special assessments for participation in an identity theft fraud ring. The individual provided identification documents, including Social Security numbers (SSN), to the ring that had established bank accounts to deposit stolen checks. The deposits included IRS refund checks and individuals’ tax remittances.
Synopses of these and other significant
investigative activities conducted during
this reporting period can be located on
pages 23 through 30.
OA’s work addresses both major management issues facing IRS, as well as areas of concern for Congress, the IRS Commissioner, and the IRS Oversight Board. Emphasis is also placed on the statutory coverage imposed by RRA 98. During this six-month reporting period, OA results focused on the following areas:
• Providing Security Over Information Systems- Highlights in this area include IRS making strides toward improving security over information systems, although, the level of security over these systems is not yet adequate.
• Business Systems Modernization- IRS has made notable progress in modernizing its technology systems. However, IRS is still struggling with developing and integrating the discipline and repeatable processes needed to effectively and efficiently modernize its technology.
• Addressing the Impact of the Global Economy on Tax Administration- As taxpayers’ international transactions and operations increase, IRS is concerned about identifying and examining the issues presenting the greatest risks. OA conducted three reviews that addressed these issues and concluded that, overall, IRS needs to increase its focus on international compliance programs.
• Criminal Investigation (CI) - OA reported that the CI function was not making a shift to investigate tax crimes as envisioned by the June 2001 Webster Report(an independent review of the Criminal Investigation function).5
Details of these areas are included in the next section, Major Issues Facing the IRS, see pages 7 through 10. Synopses of additional significant audit activities conducted during this period can be found on pages 11 through 21.
Assistance to Foreign Tax Administrations
On several occasions, TIGTA supported IRS in assisting foreign tax administrations. This assistance included detailing an individual to the Port of Spain, Trinidad and Tobago Ministry of Finance, making presentations to government officials for El Salvador, providing high-level technical support to Bulgaria’s tax collection agency, and conducting a review for the Inspector General of the Tax Revenue Ministry in the country of Georgia.
5 Review of the Internal Revenue Service’s Criminal Investigation Division, also known as the Webster Report (Reference No. 2001-10-100).
Executive Summary 5
Issues Facing IRS
During this six-month reporting period, TIGTA continued to focus its efforts on conducting audit work to address IRS’ major management challenges. The following sections highlight TIGTA’s activities in some of these areas. Additional details of other significant audit and other investigative activities can be found on pages 11 through 30, and in the Appendices starting on page 31. Information on statutory requirements can be found on page 69.
Providing Security Over Information Systems
IRS is a highly visible target for hackers and disgruntled employees, considering the amount and sensitivity of the data IRS is charged with protecting, and the amount of revenue it collects. Access to the Internet and the linking of internal computer systems have greatly increased the risk of loss or theft.
IRS has made strides toward improving security over information systems. The overall security environment of the large processing centers has improved. Mainframe computer operating system controls are generally adequate and significant progress has been made in preparing adequate disaster recovery plans. IRS has also taken actions to protect its critical information systems. During the last year, IRS has identified the critical assets, assessed the vulnerability of those assets, and requested funds to improve the physical security of the assets.
Despite IRS’ significant efforts and accomplishments over the past few years, OA found that the overall level of security over IRS’ information systems is not yet adequate. Several audits have focused on the adequacy of controls to prevent hackers from intruding into IRS systems or networks, and on controls to detect those who try. Other audits have focused on controls inside IRS.
At the Internet gateways, which control external access into the IRS network, firewalls and routers were not upgraded to protect against commonly known weaknesses; configurations were weak; changes to configurations were not documented; activity logs were not generated and reviewed; and sufficient and capable staffing was not assigned to administer the firewalls. IRS still does not have the capability to detect intrusions at all entry points from the Internet.
Internally, OA noted weaknesses with network operating system controls, physical security, and access privileges. Due to the interconnectivity of systems within IRS, these weaknesses are significant. Unauthorized persons gaining access to a computer in even the smallest post-of-duty can potentially access data in any of the computing centers. IRS still does not routinely run or review activity logs on network servers to detect potential internal security breaches.
Over the years, IRS has not routinely considered security when designing new systems. In an audit of the security certification process in June 2000,6 OA noted that only 10 percent of IRS’ sensitive systems had been certified and all but one of those had been certified after they had been implemented. IRS is addressing this issue, but progress has been slow. As of May 2001, only 15 percent of IRS’ sensitive systems had been certified.
6 Certifying the Security of Internal Revenue Service Computer Systems Is Still a Material Weakness, (Reference No. 2000-20-092).
Major Issues Facing the Internal Revenue Service 7
OA attributes many of the conditions identified to:
• A lack of clear accountability for security throughout IRS.
• Insufficient knowledge and skills.
• Insufficient security awareness among managers and employees.
In addition, OA has made recommendations to correct for the weaknesses identified and IRS has taken or planned actions to implement them. A list of issued reports is listed in Appendix VI, page 71.
Business Systems Modernization
IRS has made notable progress in modernizing its technology systems. It installed an upgraded telephone communications system that improves its ability to receive, route and respond to the more than 150 million taxpayer telephone calls it receives each year. The improvements include voice-activated programs that recognize English or Spanish-speaking callers, and capabilities that more accurately route taxpayer calls to the most appropriate IRS resource. IRS also began installation of, and training for, a new software application that assists revenue agents in accurately computing some of the most complex corporate tax transactions.
However, IRS is still struggling with developing and integrating the discipline and repeatable processes needed to effectively and efficiently modernize its technology. OA continues to monitor and report on the following areas that, at this stage, pose potential barriers to the success of Business Systems Modernization:
• Delays and cost overruns in delivering tangible benefits to taxpayers. All of the modernization projects have taken longer and cost more to develop than originally estimated. To date, IRS has spent or obligated over $500 million in modernization funds. IRS plans to deliver several projects with direct taxpayer benefits in 2002; however, some of these projects will be installed later than planned. Other projects have been scaled back in order to install them.
• Potential funding problems. Because the projects have cost more than estimated, all modernization funds provided by Congress have been spent or obligated. While IRS expects Congress to provide additional funds in 2002, some ongoing or planned projects may need to be postponed or scaled back depending on the level of funding required.
• Inconsistencies in implementing key systems development processes.
Project teams are having problems implementing and following key processes, such as risk, configuration and contract management.
• Business needs not always being well defined. Changing requirements during the development of projects have contributed to the delays and cost overruns.
• Lack of clarity as to which systems development projects should be classified as modernization projects.
The intent of Congress is to closely oversee and control funding for systems modernization because IRS’ previous attempts to modernize are viewed as having failed. However, IRS has not developed authoritative guidelines to determine which of its many systems development projects should be classified, managed, and separately funded as modernization projects. This could result in certain projects not receiving the oversight intended or funds being used for purposes not intended or approved by Congress.
8 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
OA recommended corrective actions to strengthen the controls over these identified conditions. IRS management generally agreed with the recommendations and has taken or planned actions to implement the recommendations.
Addressing the Impact of the Global Economy on Tax Administration
One of the major strategies of IRS’ Large and Mid-Size Business (LMSB) Division is to build a tax administration to effectively deal with globalization. As taxpayers’ international transactions and operations increase, IRS is concerned about identifying and examining the issues presenting the greatest risks. OA conducted three reviews that addressed several of these issues and concluded, overall, that IRS needs to increase its focus on international compliance programs. In addition, data quality problems were identified in the system that processes returns showing foreign persons’ income information. The problems can potentially result in providing inaccurate information to foreign treaty partners and/or for use in examinations. Some of the issues identified by OA include:
• Between 1995 and 1998, the estimated number of United States (U.S.) partnerships with foreign partners increased by over 63 percent. OA reported that IRS could more effectively monitor foreign partnerships that are required to withhold taxes for taxable income connected with the conduct of a trade or business in the United States.7 Also, IRS management could better use the information from partners’ tax returns and withholding information documents to identify their non-compliance. Over 50 percent of a small sample of
7 Stronger Actions Are Needed to Ensure Partnerships Withhold and Pay Millions of Dollars in Taxes on Foreign Partners’ Income (Reference No. 2001-30-084).
reviewed partnerships did not withhold about $758 million that may have been required on approximately $2.2 billion of effectively connected income.
• Foreign Controlled Corporations (FCC) comprise about 3 percent of the approximately 2.2 million corporation returns that were filed in the U.S. for Tax Year (TY) 1997. FCCs are incorporated in the U.S., but controlled by a foreign entity or entities, directly or indirectly.
OA reported that controls over the
identification and selection of FCCs for
examination need improvement.8 The
LMSB Division’s referral control needs
to ensure that all FCC returns selected
for examination are timely referred by
domestic revenue agents to the
International Examination so significant
issues involving hundreds of millions of
dollars are not excluded from
• Foreign persons are subject to a U.S. tax of 30 percent on U.S. source income unless an income tax treaty establishes a lower rate. This type of income has grown from $79 billion in TY 1990 to over $124 billion in TY 1998. OA reported that IRS could improve the quality and use of information received on income of foreign persons and better ensure their reporting compliance.9
OA recommended corrective actions to strengthen the controls over the conditions identified. IRS management generally agreed with all but one of the recommendations reported. IRS management did not agree to extract the data from partnership returns and match withholding information as an interim measure. IRS management requested further time to assess whether a
8 Controls Over the Identification and Selection of Foreign Controlled Corporations for Examination Need Improvement (Reference No. 2001-30-119).
9 Significant Efforts Have Been Made to Improve Information Reporting for Foreign Persons, But Substantial Work Remains (Reference No. 2001-30-181).
Major Issues Facing the Internal Revenue Service 9
systemic crosscheck of withholding credits could be established.
In July 1998, the IRS Commissioner appointed Judge William Webster to direct an independent review of the CI function. Judge Webster assembled a task force to assess CI’s effectiveness in accomplishing its mission as IRS’ criminal law enforcement arm. The task force determined that CI had drifted from its primary mission of investigating tax crimes affecting tax compliance and emphasized the need to refocus CI resources to investigate tax-related crimes.
OA reported that CI was not making the shift to investigate tax crimes as envisioned by the June 2001 Webster Reportand was not operating within the framework of a current functional compliance strategy.10 In addition, CI’s practices did not provide an effective means for measuring the success of shifting resources to legal source tax violations. Also, OA reported that the indicators used by CI management did not show conclusive evidence that resources were shifted to investigate more legal source tax violations. OA further concluded that CI did not conduct a workload analysis to determine the optimal number, placement, and size of field groups.
OA recommended that CI develop and communicate a detailed compliance strategy that will ensure resources are being allocated to investigate more legal source tax violations; establish an effective process to assess the progress of program initiatives; and develop a methodology to determine where resources should be allocated. IRS management agreed with the recommendations and is taking appropriate corrective action.
10 Review of the Effectiveness of Criminal Investigation’s Strategic Planning Process (Reference No. 2001-10-098).
Government Performance and Results Act of 199311 (GPRA)
During Fiscal Year (FY) 2000, OA conducted eight GPRA-related reviews that included evaluations of IRS’ implementation of GPRA; 6 of the 11 IRS customer satisfaction surveys; and IRS’ Annual Program Performance Report (APPR). In a consolidated report, OA found that IRS did not have a centralized process to ensure that all of the requirements of GPRA were achieved and maintained.12
Additionally, the individual operating units did not adequately administer the Customer Satisfaction Survey process, and the process for completing IRS’ APPR did not provide management adequate time to assess performance. OA recommended that IRS management consider centralizing GPRA oversight; better administer the Customer Satisfaction Surveysand qualify the data as needed; and improve the APPR process.
IRS management generally agreed with the recommendations contained in the eight reports and has taken several steps to address these concerns. The IRS Commissioner designated the Deputy Commissioner and the Chief Financial Officer as responsible for the macro-level GPRA processes and the operating unit executives as responsible for implementing GPRA in their respective areas. IRS is planning to qualify some data and has made changes to its performance management process to help better define and report on measures.
11 Pub. L. No. 103-62, 107 Stat . 285.
12 Management Advisory Report: The Internal Revenue Service’s Implementation of the GPRA During Fiscal Year 2000 (Reference No. 2001-10-085).
10 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
OA identifies opportunities to improve administration of the Nation’s tax laws by conducting comprehensive, independent performance and financial audits of IRS programs and operations to:
• Assess efficiency, economy, effectiveness, and program accomplishments.
• Ensure compliance with applicable laws and regulations.
• Prevent, detect, and deter fraud, waste, and abuse.
The Audit Program
OA developed a comprehensive audit program to assist IRS in meeting its challenges faced in FY 2001. It helped IRS assure tax administration programs were efficient and effective, and minimized fraud, waste, and abuse. Major management issues, as well as specific areas of concern to Congress and the IRS Commissioner, were also addressed.
OA’s audit work was organized around IRS’ core business activities: Headquarters Operations and Exempt Organizations; Small Business and Corporate Programs; Wage and Investment Income; and Information Systems. Emphasis was also placed on the statutory coverage imposed by RRA 98, as well as on other statutory authorities and standards involving computer systems and financial management.
Significant Audit Results
OA issued 126 audit reports during this reporting period (see Appendix IV, pages 61 - 68). Results of the most significant reviews are discussed in the following sections.
Headquarters Operations and Exempt Organizations
The Headquarters Operations and Exempt Organizations Programs Unit has primary responsibility for the performance of statutory audits imposed by RRA 98. The Unit also covers the following IRS program areas: Tax Exempt and Government Entities (TE/GE), Criminal Investigations, Headquarters Operations, and Agency-Wide Shared Services. Audit highlights in this area include:
Improvements Can Be Made to the Internal Revenue Service’s Federal Financial Management Improvement Act Remediation Plan Process
(Reference No. 2001-10-093)
IRS has made significant improvements with its remediation plan required by the Federal Financial Management Improvement Act of 1996 (FFMIA).13 An OA follow-up of previously reported findings showed that all weaknesses identified by the General Accounting Office during its financial statement audits through FY 2000 were included in IRS’ remediation plan, including intermediate target dates for all remedial actions.
13 31 U.S.C. §§ 1105-1106, 1113 and 3512 (1994).
TIGTA’s Office of Audit 11
However, IRS’ remediation plan through September 30, 2000 continued to not fully comply with FFMIA requirements since resource commitments were not identified for all remedial actions. Also, IRS was not performing independent verifications of implemented remedial actions, and was not providing sufficient explanations for why there were revised remedial action intermediate target dates.
OA recommended that the Chief Financial Officer, in consultation with responsible IRS organizational officials, should take an active role in identifying resource needs for all remediation plan actions; independently verifying and testing completed remedial actions; and verifying the reasonableness of revised remedial action intermediate target dates, including accomplishment dates for remedial actions that have intermediate target dates in subsequent fiscal years.
IRS management agreed with the recommendations and is taking appropriate corrective action.
The Exempt Organizations Function’s Examination Workplan Can Be Improved to Increase Its Effectiveness
(Reference No. 2001-10-177)
The Exempt Organizations (EO) Function’s field examination program identifies and corrects noncompliance among the 1.5 million exempt organizations that control assets of over $2 trillion. OA reported that EO Examination management had not considered examination results, such as no change rates, when developing and monitoring the workplan. Additionally, the EO Examination’s work planning practices did not ensure that the Casework category of examinations focused on areas with a known potential for noncompliance. IRS management noted that the report concerned a transition period during with EO was being reorganized and examination practice were atypical.
OA recommended that IRS management establish procedures to routinely extract and compile prior examination results to identify patterns of noncompliance and to use this data to develop and monitor the workplan. In addition, the staff should establish procedures to ensure coverage in Casework project codes where there is a higher potential for noncompliance.
IRS management agreed with the recommendations and is taking appropriate corrective action.
Compliance With Certain Taxpayer Rights Provisions Contained in the Internal Revenue Service Restructuring and Reform Act of 1998 Could Be Improved
(Reference No. 2001-10-147)
OA reviewed 18 of 71 provisions that protect taxpayer rights contained in RRA 98to determine IRS’ level of compliance with these provisions (see Table 1). IRS needed to improve its compliance with some of the RRA 98 provisions — notice of lien; innocent spouse relief; prohibition on Illegal Tax Protester designations; and restrictions on the use of enforcement statistics.
Table 1. Results of Audit Review of 18 RRA 98 Provisions
compliance ............................................ 3
actions taken to
compliance ................................ 7
Compliance could not be fully evaluated ........................................ 3
12 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
While IRS has made progress implementing the taxpayer rights provisions, there were certain factors that hindered the implementation efforts. The system used to track programming changes was not designed to track the changes through to completion. New procedures for complying with RRA 98 were not always made available timely. In addition, programming changes need to be completed on all applicable systems so that certain notices and statements required by RRA 98can be sent to taxpayers.
OA recommended that IRS develop procedures to track programming changes through to completion; issue procedural guidance at one centralized site; and complete the necessary programming to ensure that certain statements and notices are sent to approximately 14.4 million taxpayers by the dates required.
IRS management agreed with the recommendations and is taking appropriate corrective action.
Improvements Are Needed to Comply With Legal and Procedural Requirements for Collection Statute Extensions and Installment Agreements
(Reference No. 2001-10-103)
IRS generally must collect a balance due within 10 years of the date the tax was assessed. RRA 98 § 3461(a)prohibits extensions to the 10-year collection statute of limitations except if the extension is in connection with an installment agreement or levy release. RRA 98 § 3461(c)requires IRS to change all collection statute extension dates to December 31, 2002, if the collection statute extension was not secured with an installment agreement prior to December 31, 1999.
IRS was not fully complying with these requirements. Collection statute extensions were sometimes secured without also securing the related installment agreement or levy release. For those cases in which the case history was available, it appeared that IRS and the taxpayer intended to establish an installment agreement in most instances; however, the installment agreement was never processed or approved.
In cases where the extension was requested before January 1, 2000, IRS’ actions may not allow the necessary time to accurately update collection statute expiration dates and to collect over $289 million in tax liabilities. Also, IRS could not provide the signed documents needed to support some of the collection statute extensions recorded on its computer systems. Many of the reviewed collection statute extensions and installment agreements did not have a properly calculated payment date, thus causing a miscalculation of the collection statute date.
OA recommended that IRS:
• Clarify procedures to ensure that collection statute extensions are approved concurrently with a related installment agreement or levy release.
• Update procedures to reflect the new locations for storing signed collection statute forms per IRS’ reorganization.
• Have IRS management review the taxpayer accounts identified as inaccurate or that may not have complied with the law, and take appropriate action to correct the collection statute expiration dates.
• Develop a comprehensive plan for implementing the provisions of RRA 98 § 3461(c) and for taking actions to collect the remaining tax liabilities before the statutes expire.
IRS management agreed with the recommendations and is taking appropriate corrective action.
TIGTA’s Office of Audit 13
Small Business and Corporate Programs
The Small Business and Corporate Programs Unit assesses IRS’ efforts in keeping self-employed taxpayers, small businesses, and large and mid-size corporations compliant with tax laws and regulations. The Unit’s work focuses on compliance issues, IRS customer service efforts, returns processing issues, and other tax aspects that are unique to self-employed, small, mid-size and large business taxpayers.
Significant Tax Revenue May Be Lost Due to Inaccurate Reporting of Taxpayer Identification Numbers for Independent Contractors
(Reference No. 2001-30-132)
For TYs 1995 through 1998, IRS received about 9.6 million Statements for Recipients of Miscellaneous Income (Form 1099-MISC) that reported approximately $204 billion in non-employee compensation. These forms neither contained a Taxpayer Identification Number (TIN) for the payee nor matched IRS’ records of assigned TINs. As a consequence of the missing information, IRS could not use these documents in its computer-matching programs to determine whether the recipients of this compensation filed a tax return and/or reported all of the income.
OA reported that IRS’ ability to encourage the filing of accurate information returns for non-employee compensation through its administration of the existing backup withholding and penalty provisions is extremely limited and largely ineffective. Between TYs 1995 and 1998, the number of Forms 1099-MISCsubmitted to IRS with missing or incorrect TINs increased by 36 percent. The amount of potentially lost revenue may be significant since IRS’ data suggests that independent contractors who receive non-employee compensation are far less compliant in reporting their income than wage earners.
OA recommended that IRS seek legislation requiring mandatory tax withholding on all non-employee compensation payments to encourage accurate information reporting and to protect the Treasury from the potential loss of significant tax revenue. As an alternative, OA recommended that IRS seek legislative changes that will enable it to more aggressively impose backup withholding requirements and civil penalties on payers who submit Form 1099-MISC with missing or invalid TINs.
IRS management responded that they have previously submitted proposals to Treasury that would require mandatory withholding of income taxes on non-employee compensation payments. In the past, Treasury has chosen not to forward these proposals to Congress. IRS will decide by December 31, 2001 whether it is feasible to submit a proposed legislative change.
Tax Law Changes Are Needed to Improve Fairness in Paying Interest on Tax Refunds
(Reference No. 2001-30-148)
On six occasions since 1965, Congress has taken significant steps to address the issues of when, why, and how much interest should be paid to taxpayers. In taking these steps, Congress has attempted to provide strong incentives for IRS to minimize interest payments by issuing fast refunds. At the same time, Congress has sought to ensure all taxpayers are fairly compensated for IRS refund delays and to ensure taxpayers are not rewarded with often generous government interest for intentionally delaying the refund process.
By quickly issuing refunds requested on original returns, IRS can avoid paying
14 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
interest on the refunds. Interest was paid on only 2 percent of original return refunds in FY 1999. However, the interest laws provide IRS with little opportunity to avoid substantial interest payments on refunds resulting from amended returns or from IRS’ examinations of returns. Consequently, $3.2 billion of the $3.5 billion of interest paid by IRS in FY 1999 involved refunds resulting from amended returns or IRS’ examinations of returns. The current interest laws limit IRS’ ability to carry out its mission to provide top quality service and fairness to all taxpayers. In addition, the current interest laws create a government interest expense that obligations in regards to the estimated tax penalty. Individuals who file Underpayment of Estimated Tax by Individuals, Estates and Trusts (Form 2210), and use the short method option,14 are submitting paperwork that is a duplication of normal IRS return processing procedures. OA estimated that for TY 1998, over 1.84 million taxpayers submitted a Form 2210 and used the short method option to compute their penalty.
Table 2. Estimated Breakdown of TY 1998 Self-Assessed Estimated Tax Penalties
averages $2.6 billion annually, and prevents IRS from eliminating that expense through improved responsiveness to taxpayers.
Most of the interest paid by IRS is for time periods prior to IRS’ knowledge that refundable overpayments existed. OA recommended that IRS seek legislation ensuring that refunds issued within 45 days of a taxpayer request are issued interest-free. If a refund is not made within 45 days, interest should be paid from the date of the taxpayer’s request for refund to the date the overpayment is refunded. If such legislation were enacted, interest would only be paid on refunds that IRS has delayed.
IRS agreed to complete a review of the current interest rules by June 1, 2002. Treasury is responsible for the final determination of the need for legislation that stems from that review.
The Internal Revenue Service Has an Opportunity to Relieve Considerable Taxpayer Burden Involving the Estimated Tax Penalty
(Reference No. 2001-30-164)
Taxpayers are spending almost 1.87 million hours unnecessarily to satisfy their tax
Short Method .......
Long Method .......
Source: Analysis of the audit sample projected to the universe of self-assessed ES penalty returns.
This duplication of taxpayers’ efforts makes a significant contribution to taxpayers’ compliance burden through the loss of leisure time.
Using the Office of Management and Budget’s figure of $26.50 per burden hour for tax paperwork, OA estimated that the
1.87 million hours spent unnecessarily by taxpayers in 1999 had a projected monetary cost of almost $49.6 million.
In addition, some of these taxpayers may incur out-of-pocket expenses, such as the costs of employing the services of a return preparer. Form 2210has not been changed since 1986, and it does not
14 Only taxpayers who either made no ES payments or made four equal ES payments timely can use the short method to compute the penalty.
TIGTA’s Office of Audit 15
provide clear instructions to taxpayers regarding their option to allow IRS to compute the penalty.
OA recommended that IRS management evaluate the design and clarity of Form 2210 and its instructions, and coordinate any redesign of Form 2210with both the practitioner and tax software communities.
IRS management agreed with the recommendation and is taking appropriate corrective action.
Letter Report: Additional Controls Are Necessary to Ensure that All Businesses Are Classified by Their Principal Business Activity
(Reference No. 2001-30-117)
The Statistics of Income programs have historically relied upon Principal Business Activity (PBA) codes to classify businesses by type of activity. As of 1999, the four-digit Standard Industrial Classification (SIC) Index number was changed to a six-digit number based on the North American Industry Classification System (NAICS). The new LMSB and Small Business/Self-Employed (SB/SE) Divisions rely on the PBA codes to profile taxpayers by industry or “market segment.”
IRS successfully converted from the SIC Index to the NAICS. The NAICS codes adopted for IRS use were sufficient to allow the taxpayers to accurately code their tax returns by principal business activity. However, IRS has not taken advantage of the opportunity to immediately identify taxpayers’ PBA codes when they request Employer Identification Numbers (EINs) and their accounts are first established on IRS’ Masterfile.15 Also,
15 The Masterfile is IRS’ main computer system containing taxpayer accounts. The Individual Masterfile is IRS’ database that maintains transactions or records of individual tax accounts.
IRS does not have sufficient controls to identify and correct all business-related tax returns filed with an invalid or missing PBA code.
As a result, IRS cannot identify business taxpayers by their principal business activity for approximately 2 million EINs issued annually. In addition, IRS could not identify approximately 2.8 million individuals with business interests and more than 700,000 corporations and partnerships by their principal business activity for tax returns filed in Calendar Year (CY) 2000.
OA recommended that management identify business taxpayers by their principal business activity from information provided by the taxpayer when an Application for Employer Identification Number (Form SS-4)is filed. IRS’ outreach and education efforts are impeded when business taxpayers are not identified by their PBA codes. In addition, management should implement processing controls to identify Individual Masterfile tax returns with invalid or missing PBA codes and Business Masterfile tax returns with invalid PBA codes for research and correction during processing.
IRS management agreed with the recommendations and is taking appropriate corrective action.
Management Advisory Report: The Internal Revenue Service Could Reduce the Number of Business Tax Returns Destroyed Because of Missing Information
(Reference No. 2001-30-099)
OA conducted a limited scope review of business income tax returns sent by taxpayers to lockbox banks that were reportedly lost by IRS before the returns could be processed even though the payments associated with the tax returns were processed. The returns involved
16 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
were the Employer’s Quarterly Federal Tax Returns (Form 941)as shown in Exhibit 1; and the Employer’s Annual Federal Unemployment Tax Returns (Forms 940 and 940-EZ)and their associated Payment Vouchers (Form 941-V)as shown in Exhibit 2.
Exhibit 1. Form 941
Exhibit 2. Form 941-V
OA reported that during IRS’ 2000 and 2001 returns processing seasons, it processed thousands of payments submitted with business tax returns for which the associated business tax returns were not processed. Many of these instances were the result of taxpayers omitting their names, addresses, and taxpayer identification numbers from their tax returns. Although this taxpayer identifying information was available on payment vouchers included with the tax returns, lockbox banks forwarded these tax returns to IRS centers for processing without first supplying the missing information. Without this information, IRS centers declared the returns unprocessable and destroyed them. Subsequently, IRS corresponded with taxpayers telling them their tax returns were lost or were never received and asking them to provide copies of their tax returns.
OA recommended that IRS:
• Redesign Form 941, Form 940, and Form 940-EZ.
• Ensure that lockbox banks identify when taxpayer identifying information is missing from tax returns and either enter the information from the payment voucher or copy the voucher and send it to IRS with the tax return.
• Have employees contact state tax agencies to obtain missing taxpayer identifying information.
IRS management agreed with the recommendations and is taking appropriate corrective action.
Some Individual Taxpayers are Inappropriately Receiving Tax Credits Intended for Businesses that Provide Access for Disabled Americans
(Reference No. 2001-30-158)
In CY 2000, IRS and TIGTA were made aware of taxpayers purchasing pay telephones with volume controls and claiming Disabled Access Credits on their individual income tax returns.
OA identified 391 U.S. Individual Income Tax Returns (Form 1040) for TY 1999 claiming $1.09 million in Disabled Access Credits even though the tax returns indicated no business reasons for taking the credits.
OA recommended that IRS management warn taxpayers who may be the victims of these fraudulent promotions that such
TIGTA’s Office of Audit 17
investments most likely do not qualify for the Disabled Access Credit. Also, IRS management should work with their respective Compliance functions and the Criminal Investigation function to develop a compliance approach for taxpayers taking the Disabled Access Credit without qualifying businesses.
IRS management agreed with OA’s overall finding, and agreed to analyze future tax data to identify potentially unallowable credits and take appropriate compliance actions when abusive schemes are identified. However, IRS management did not agree to issue a press release. IRS management stated that they would provide information on IRS’ web site targeted at individuals who may improperly promote schemes associated with the Disabled Access Credit rather than focusing on the taxpayers who may invest in those schemes and inappropriately claim the credit on their tax returns.
OA disagreed with IRS’ approach of narrowly focusing on the promoter while ignoring the victim. IRS subsequently agreed to take the approach that focuses on the taxpayers who may be the victims of these fraudulent promotions.
Wage and Investment Income
The Wage and Investment Income Programs Unit assesses IRS’ program for assisting and servicing approximately 90 million taxpayers filing simple tax returns. The Unit’s work primarily focuses on IRS’ efforts to help taxpayers comply with laws and regulations.
Millions of Dollars in Erroneous Education Credits Continue to Be Allowed
(Reference No. 2001-40-183)
During CY 2000, IRS did not have controls in place to effectively validate claim requirements before allowing $4.4 billion in Education Credits given to 6.1 million taxpayers. OA reported that if IRS automated the process to validate claims for the Education Credit, it may prevent approximately $20.56 million in potentially lost revenue each year.
In the 2 years since the inception of the Education Credit (TYs 1998 and 1999), IRS has been unable to provide a high degree of assurance that the $7.9 billion given to 10.9 million taxpayers was appropriate. Although taxpayers provided information needed to ensure they met basic qualifications, most of this information was not effectively used to validate the Education Credits. Instead, IRS relied on voluntary taxpayer compliance to ensure that the 6.1 million taxpayers were qualified to claim the credit.
OA recommended that IRS management automate its process to validate claims for the Education Credit.
IRS management’s response was not received prior to the issuance of the audit report.
The Internal Revenue Service Successfully Processed Individual Tax Returns During the 2001 Filing Season
(Reference No. 2001-40-192)
IRS successfully processed 109 million individual returns and issued $148.2 billion in refunds as of June 1, 2001. OA’s tests of selected returns showed that, in about 99 percent of the time, IRS achieved its
18 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
performance goal to issue refunds within 40 days. Also, IRS reported, as of June 1, 2001, that it had identified and resolved over 19 million taxpayer and IRS processing errors. This was an increase of about 9 percent from last year.
While significant progress was made in the implementation of tax law changes and related initiatives, IRS has the opportunity to continue to improve in the areas of clarity of taxpayer notices and consistency among processing procedures, taxpayer instructions, and legislative requirements. OA tests showed that, in some instances, IRS improperly denied the personal exemption and the earned income credit when the spouse’s name and Social Security number (SSN) were accurate. If the results of this test are representative of the 2001 filing season, IRS may have erroneously disallowed exemptions and credits totaling about $36.5 million for over 66,000 taxpayers. IRS was able to successfully process individual income tax returns while reacting to unexpected taxpayer filing patterns. However, additional steps can be taken to enhance its ability to plan for and react to those events as they occur during the filing season.
OA recommended that IRS management ensure that detailed, comprehensive plans are developed when implementing tax law changes and initiatives and that these plans include a process to ensure that action items are timely completed prior to the beginning of the filing season. IRS management also should timely analyze taxpayer filing patterns during the filing season as a tool to assist IRS in determining what additional actions should be taken as the current filing season progresses and to assist in planning for the following filing season. Finally, IRS management should enhance contingency planning tools to ensure that it will be able to timely react to unanticipated changes that occur during the filing season.
IRS management’s response was not received prior to the issuance of the audit report.
Management Advisory Report: The Notice Review Program Should Be Improved to Prevent Erroneous Notices From Being Sent to Taxpayers
(Reference No: 2001-40-078)
OA reported that IRS did not review all potentially erroneous notices; the Submission Processing Centers did not place priority on notices with the highest potential for error; and the national oversight of the Notice Review Program could be improved.
From January through September 2000, IRS reported that it did not review 539,852 (13 percent) of the 4.1 million notices identified as having a high potential for error. If the error rate for these notices is consistent with that found on notices that were reviewed, IRS may have incorrectly notified 80,702 taxpayers about an additional tax liability, an error on their return, or an adjustment to their account.
IRS guidelines required that all of the notices selected for review be reviewed. IRS executives advised that they did not have enough staff to work the entire inventory of potentially erroneous notices. Not reviewing the entire weekly notice inventory increased the probability that erroneous notices and refunds were mailed to taxpayers.
IRS procedures did not ensure that notices with the highest potential for error were worked first. From January through September 2000, IRS reviewed approximately 1.5 million notices with error rates of 10 percent or less, while it did not review approximately 77,000 notices with anticipated error rates of 30 percent or higher. Not establishing a priority to
TIGTA’s Office of Audit 19
review notices with the highest potential for error increased the risk that taxpayers received erroneous notices and refunds.
OA identified issues that indicated the national oversight of the Program could have been more effective. For example, the data compiled to monitor and evaluate the program were not reviewed.
Because IRS is in the process of moving the current Notice Review Program into its new business organization, OA did not make recommendations for program improvements and did not require a formal response.
Spanish-Speaking Taxpayers Receive Expanded Access to Telephone Assistance
(Reference No. 2001-40-163)
In RRA 98, Congress recognized the need to provide a growing Spanish-speaking population with improved access to income tax assistance and instructed IRS to provide the option for taxpayers to receive answers in Spanish to their questions over IRS telephone helplines. IRS began offering General Inquiry toll-free telephone assistance to Spanish-speaking taxpayers in 2000 by significantly expanding its toll-free service in 2001. It offers a Spanish language option on all three of IRS’ major toll-free help lines. IRS has also established a new call site in Puerto Rico.
IRS has expanded service to Spanish-speaking taxpayers, but improvement is needed in the quality of responses being provided. OA determined in test calls that assistors provided appropriate responses for only 123 of 174 test calls conducted.
The primary reason for low quality performance was, as reported by IRS’ Centralized Quality Review Staff, the nonuse or incomplete use of the reference guide used to answer tax law questions during Spanish language calls. To determine possible reasons why bilingual telephone assistors are not always using the guide, OA interviewed several newly hired bilingual assistors for their perspective on why the guide was not always being used. Concerns included having to translate the text from English to Spanish while on the telephone with taxpayers and needing supplemental information not readily available in some sections of the guide.
OA recommended that IRS evaluate the guide and consider changes to help improve the quality of responses provided to Spanish-speaking taxpayers. IRS management agreed with the recommendations and is taking appropriate corrective action.
The Information Systems Programs Unit conducts reviews to address RRA 98 requirements that TIGTA annually report on the adequacy and security of IRS technology. OA’s overall assessment is provided on pages 7 and 8. The individual reports are listed on page 71 in Appendix VI.
20 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
The Internal Revenue Service Is Making Progress, But Is Not Yet in Full Compliance With the Requirements of the Clinger-Cohen Act
(Reference No. 2001-20-146)
The Clinger-Cohen Act16 requires Federal agencies to make sound investment decisions before purchasing information technology systems. Because of changes to IRS’ structure and modernization strategy that began in 1998, IRS is still developing and implementing the information technology investment processes envisioned in the Clinger-Cohen Act.
OA reported that IRS still needs to implement repeatable processes in order to be in full compliance with five key requirements of the Clinger-Cohen Act. These requirements include the selection, control, and evaluation of information technology investments; performance and results-based management; accountability and information technology asset management; the Chief Information Officer’s role in the development of the IRS’ information technology architecture and information resources management capability; and information systems security policies, procedures, and practices.
IRS has recently introduced a new strategic planning process and other related processes, e.g., the Investment Decision Management process, to better manage its information technology investments, but the use of these processes is still evolving. Therefore, IRS cannot yet fully assure that it is getting maximum value for its $1.6 million annual Modernization and Information Technology Services budget.
OA recommended that the Deputy Commissioner for Modernization and the Chief Financial Officer prepare an overall strategy, a plan and a schedule to bring IRS into full compliance with the Clinger-Cohen Act requirements.
IRS management agreed with the audit recommendation and has initiated corrective actions.
16 Clinger-Cohen Act, Pub. L. No. 104-106, Division E (1996), codified at 40 U.S.C. Chapter 25.
TIGTA’s Office of Audit 21
OI administers investigative programs that protect the integrity of IRS and detect and prevent fraud and other misconduct within IRS programs. This includes investigating allegations of criminal violations and administrative misconduct by IRS employees, as well as protecting IRS against external attempts to corrupt or threaten its employees.
Specifically, these areas of responsibility include:
• Administering programs to investigate and prevent threats and/or acts of violence against IRS.
• Operating a national complaint center, including a hotline and web-site, to receive and process allegations of fraud, waste, or abuse.
• Providing forensic examination of documentary evidence.
• Providing technical and investigative assistance, equipment, training, and other specialized services to enhance investigative operations.
• Administering a proactive program to detect and deter fraud and corruption in IRS programs and operations.
Protection of Taxpayers and IRS Employees
TIGTA is dedicated to ensuring individuals and IRS employees the highest degree of integrity, fairness, and trust in the Nation’s tax administration system. To heighten awareness and provide a deterrent effect against fraud and misconduct, TIGTA special agents routinely conduct integrity awareness presentations for IRS employees and various professional organizations, including local law enforcement agencies, tax practitioners, and community groups. During this reporting period, OI conducted 639 presentations for 23,432 individuals. Approximately 89 percent of these individuals were IRS employees.
OI conducts investigations that protect individuals from IRS employees who commit criminal violations and administrative misconduct. These investigations may involve allegations of unauthorized access to and disclosure of confidential taxpayer information, bribery, financial fraud, false statements, and abuse of taxpayer rights. During this six-month reporting period, OI closed 1,260 IRS employee investigations.
OI is also committed to protecting and supporting IRS employees as they carry out the mission of IRS. TIGTA investigates individuals who attempt to interfere with or corrupt the administration of the Federal income tax system, to include investigations of bribery, assault, threat, theft, and embezzlements. During this reporting period, OI closed 1,045 investigations involving these and other types of allegations.
TIGTA’s Office of Investigations 23
Complaint Management Division
The Complaint Management Division (CMD) is a centralized clearinghouse for processing and tracking allegations of fraud, waste and abuse and other forms of wrongdoing. CMD operates a toll-free telephone number, which is advertised both inside and outside IRS. CMD also receives complaints through an e-mail address and a central post office box. CMD’s complaint tracking system provides a centralized accounting of all complaints received by TIGTA and the status and final dispositions of those complaints. The system also has the capability to document and track complaints involving multiple subjects. To ensure that all complaints received by TIGTA are acknowledged, complainants are provided with a complaint number and a telephone number to contact TIGTA if they want to provide additional information regarding their complaint.
During the reporting period, TIGTA received 3,902 complaints. The status of these complaints is shown in Appendix II, page 38.
Strategic Enforcement Division
The Strategic Enforcement Division (SED) is responsible for executing a proactive program to detect fraud in IRS operations, unauthorized accesses (UNAX) to IRS computer systems by internal users, and attempts to interfere with the security of IRS computers by external sources.
SED combines the expertise of auditors, special agents, and computer programmers to form a successful investigative team to accomplish its mission. Specifically, SED:
• Conducts proactive security testing to ensure that adequate safeguards are in place to defend against newly identified network vulnerabilities, as well as newly disseminated hacker tools found throughout the Internet.
• Makes recommendations to improve system security weaknesses identified during the course of analyses related to internal fraud, and UNAX violations are forwarded to IRS.
• Performs extensive investigative and forensic data analyses for field special agents, assists in seizing computers, analyzes computer-related evidence, and conducts searches on the Internet.
SED provided assistance in a number of cases. For example:
As a result of the September 11, 2001 terrorist attacks against the United States, SED diverted most of its resources to assist the FBI in the investigation of international and domestic terrorism. In compliance with 26 U.S.C.§ 6103, Confidentiality and Disclosure of Return and Return Information, SED continues to secure Federal tax information and other electronic data from various computer systems, analyzing the data, and providing vital information to the FBI.
SED’s Systems Intrusion Network Attack Response Team was informed that a contractor, who had been dismissed, had the opportunity to expose IRS’ network to various sorts of exploitation. SED agents, with the assistance of IRS contractors and administrators, identified a destructive code that was installed by this individual. SED agents were able to contain the damage and ensure a total recovery of the system. In July 2001, the former contractor pled guilty to intentionally causing damage to a protected IRS computer system.
A joint investigation conducted by TIGTA, the U.S. Secret Service, and the FBI successfully identified the source of Internet threats directed at the President, a TIGTA special agent, and other law enforcement officials. TIGTA’s SED assisted in the investigation by providing investigative computer information and support that ultimately led to the issuance of a Federal court order and the
24 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
identification of an Australian national who
was responsible for the threats.
National Investigative Initiatives
A principal component of SED’s operation involves National Investigative Initiatives, which are established from information developed during successful investigations. The methodology of a crime is used to develop computer database applications that will identify other individuals who may be perpetrating the same crime. Computer matching is used nationwide in proactive initiatives. These initiatives are included in the Computer Matching Act17 agreements approved by Treasury’s Data Integrity Board and published in the Federal Register. During this reporting period, there were 7 ongoing initiatives and 34 criminal referrals to field special agents for investigation.
UNAX Detection Program
UNAX detection is SED’s most aggressive national investigative initiative. The Audit Trail Lead Analysis System identifies employees who have made potential unauthorized accesses to electronic taxpayer information on IRS computer systems. During this reporting period, SED:
• Identified and analyzed 293 leads of potential unauthorized accesses to tax information by IRS employees.
• Referred 139 leads to field special agents for investigation of violations of the Taxpayer Browsing Protection Act of
17 Pub. L. No. 101-56,103 Stat. 149 (1989).
18 A provision of the Taxpayer Browsing Protection Act of 1997, I.R.C. § 7431 (e) provides for notification to taxpayers of the unlawful inspection of disclosure of their returns and return information in cases where an IRS employee is charged criminally for violations of unauthorized access or disclosure of returns or return information.
During this reporting period, there has been one criminal prosecution and 63 adverse administrative actions against IRS employees involved in unauthorized access to taxpayer information.
Technical and Forensic Support Division
The Technical and Forensic Support Division is responsible for implementing programs concerning Technical Services and the Forensic Science Laboratory (FSL). Each of these programs provides technical expertise throughout the development and the adjudication process of investigations.
Technical Services is responsible for providing technical and investigative assistance, equipment, training, and other specialized services to enhance TIGTA’s investigative activities. Technical Services provides crucial support in the collection, preservation, and enhancement of evidence through the use of sophisticated electronic surveillance equipment. Examples of such investigative support include:
During the investigation of an interstate telemarketing fraud scheme, Technical Services installed numerous court-ordered intercepts on phone lines at two locations. These intercepts assisted in establishing probable cause for subsequent search warrants of the telemarketing businesses. Real-time data from one intercept established that an individual was actually on the telephone to a victim as agents entered to execute the search warrant. Six individuals were ultimately arrested as the result of the investigation.
An individual who had previously been convicted of Federal crimes engaged in the theft of mail, stalking, trespassing, and
TIGTA’s Office of Investigations 25
Internet searches for the purpose of identifying the addresses and vehicles belonging to Federal law enforcement agents who were involved in the individual’s previous prosecution. During a joint TIGTA and Bureau of Alcohol, Tobacco and Firearms investigation, specialized tracking equipment was placed on the individual’s vehicle as authorized by a sealed court order. This technology alerted special agents to the movement of the individual’s vehicle toward the rural address of another Federal agent. Local sheriffs’ deputies and TIGTA agents were successful in locating the individual in close proximity to the agent’s home. The individual was tried and convicted on charges of interstate stalking.
Forensic Science Laboratory
Criminal investigations often rely upon the forensic analysis of evidence. The TIGTA Forensic Science Laboratory (FSL) supports field investigations through timely processing of physical evidence using various techniques and best practices to identify investigative subjects, including chemical processing and comparison for latent prints, handwriting identification, and digital image enhancement.
During this six-month reporting period, FSL had 110 case submissions and issued 115 reports of laboratory examination. FSL examined evidence from a number of cases including:
A Federal grand jury charged an individual with 34 felony counts including violations for impersonating an IRS special agent, identity theft, false possession of identification documents, possession of an altered SSN, mail fraud on a financial institution, wire fraud, credit card fraud and money laundering. A senior FSL document examiner identified the individual’s handwriting and signatures on numerous fraudulent documents. The individual pled guilty to one charge of bank fraud and one charge of interrupting interstate commerce in exchange for a plea agreement with Federal prosecutors. The individual was
sentenced to 78 months in prison and
required to pay $240,000 in restitution.
FSL’s senior latent finger print specialist conducted analyses of various items of evidence, identified a defendant’s prints on numerous documents and provided expert testimony in April 2001. As a result, the individual was sentenced in August 2001 to 10 years imprisonment, followed by 3 years probation and a $10,000 fine.
Special Inquiries and Inspection Division
The Special Inquiries and Inspection Division (SIID) is a Headquarters function under the Deputy Inspector General for Investigations. SIID is responsible for:
• Maintaining the TIGTA Domestic Terrorism Program, which develops and facilitates pertinent information regarding potential threats to TIGTA and IRS employees and operations. This program includes national participation in the FBI sponsored Joint Terrorism Task Force.
• Investigating allegations of misconduct and breaches of integrity by TIGTA employees, IRS Senior Executives (Grades 15 and above) and international employees located in Washington, DC and U.S. embassies.
• Investigating fraud, waste and abuse involving IRS procurements and promoting fraud awareness.
• Inspecting TIGTA Divisional Investigative Offices and related Headquarters functions. The inspection process ensures that investigations and operations are conducted in compliance with applicable
26 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
laws, rules, regulations and the TIGTA Operations Manual. It also ensures that OI’s resources are being effectively and efficiently managed.
Threat, Assault and Harassment Investigations
IRS employees face a difficult and challenging mission in serving taxpayers. OI considers responding to and investigating threats and assaults against IRS employees one of its highest priorities. It also investigates incidents of harassment by individuals who attempt to undermine IRS employees as they carry out their duties. OI also investigates alleged misconduct by IRS employees involving sexual battery and inappropriate behavior. During this six-month period, OI closed 443 threat, assault or harassment investigations.
“Assassination Politics” Author Sentenced to 10 Years in Prison
In August 2001, a Federal judge sentenced an individual to 10 years imprisonment, three years probation, and a $10,000 fine in the conviction of two counts of interstate stalking of a TIGTA special agent. The individual is the acknowledged author of Assassination Politics, an essay published on the Internet that advocates the assassination or elimination of government employees.
Threatening IRS Employees
In August 2001, a Federal magistrate sentenced an individual to seven months in prison and a $500 fine for one count of forcible interference with tax administration. The individual entered an IRS Customer Service office, expressed dissatisfaction with the level of service received, and threatened to return to the office with a machine gun. The threat forced the closure of the IRS Taxpayer Services office for several hours.
TIGTA Provided Assistance in a Church Bombing Case
In April 2001, a U.S. Attorney requested TIGTA assistance in the trial of an individual charged with the 1963 bombing of a church, which resulted in the deaths of four young girls. A TIGTA employee, known for expertise in transcribing recorded conversations, worked with the U.S. Attorney and FBI to review tape recordings made in the individual’s home by the FBI during the original investigation. While reviewing the tape, the TIGTA employee was able to identify incriminating phrases not previously known to the prosecution. The individual was convicted in May 2001.
IRS employees can be targets for bribery due to their frequent contacts with taxpayers. Their positions also provide unscrupulous employees with opportunities to extort and solicit bribes from individuals and to conspire with individuals to threaten the integrity of the tax administration process.
Bribery is often a focus of TIGTA’s integrity awareness presentations. These presentations are used as a deterrent to dissuade employees from taking inappropriate advantage of their positions. During the presentations, employees are shown how to recognize bribe overtures and their responsibilities in reporting bribe attempts.
TIGTA’s Office of Investigations 27
During this reporting period, OI closed 61 bribery investigations.
A 30-Year IRS Employee Charged with Bribery
In September 2001, a 30-year employee of IRS was arrested on charges of bribery. The FBI furnished TIGTA with documents seized during the execution of a search warrant, indicating that a company owner had allegedly bribed an unnamed IRS employee.
An IRS employee was identified who was assigned to collect delinquent taxes owed by the company. During the time the employee was assigned the collection case, the company owner provided the IRS employee with a $14,900 check, which was subsequently used by the IRS employee to purchase a vehicle. The IRS employee also negotiated an additional $3,800 check from the company.
During the timeframe that the IRS employee was assigned to the company’s tax case, the company’s tax delinquency increased from $450,000 to over $600,000. The IRS employee admitted to receiving the aforementioned items of value from the company owner in exchange for not pursuing the company’s outstanding delinquent tax liabilities.
Certified Public Accountant Sentenced in Bribery Investigation
In June 2001, a Federal judge sentenced a Certified Public Accountant (CPA) to three months imprisonment in connection with the attempted bribery of an IRS employee. According to the criminal complaint, the CPA allegedly offered bribes to an IRS employee in exchange for filing false audit reports to reduce the tax liability of clients of the CPA. The CPA pled guilty to one count of bribery of public officials, and was sentenced to three months imprisonment, followed by two years of supervised release and a $10,000 fine.
Three Individuals Pled Guilty to Bribery Charges
In June and July 2001, three individuals pled guilty to one count each of bribery. The three were charged with offering a cooperating employee $1,000 in jewelry and a total of $85,000 in cash to eliminate Federal tax liabilities.
Theft, Embezzlement and Fraud Investigations
TIGTA investigates incidents of theft, embezzlement and fraud committed by both internal and external sources. TIGTA also investigates incidents of impersonation and where individuals attempt to defraud taxpayers, as well as incidents of identify theft. Identity theft occurs when a victim’s SSN and/or other identifying documents (e.g., driver’s license, passport, etc.) are stolen.
Fifteen Indicted for Conspiracy to Defraud Government
A Federal grand jury indicted 15 people on charges of conspiracy to defraud the U.S. Government; offering fictitious obligations; and making or counseling false declarations to IRS. According to the 79-count indictment, the individuals allegedly manufactured more than 3,000 “sight drafts” or financial instruments falsely purporting to be U.S. financial instruments. The sight drafts were used as checks totaling in excess of $550 million payable to government agencies, creditors, and others, knowing that the drafts were worthless.
28 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
The indictment also alleged that the individuals knowingly sent IRS Reports of Cash Payments Over $10,000 Received in a Trade or Business (Form 8300), totaling more than $490 million dollars. The forms were purportedly used to report to IRS cash transactions with judges, law enforcement officers, public officials, creditors and others in an effort to harass, intimidate, and create legal and financial problems for these individuals. Form 8300 requires any person engaged in a trade or business to report to IRS any cash transactions in excess of $10,000.
CPA Pled Guilty to Conspiring with Two IRS Employees in a Small Business Administration Loan Fraud
In May 2001, a CPA pled guilty to two counts of a 26-count indictment that addressed a Small Business Administration (SBA) loan fraud conspiracy among the CPA, two IRS employees and dozens of clients. TIGTA determined that the scheme involved the submission of SBA loan packages that contained false tax returns, IRS tax return verifications and other records. The two IRS employees used the IRS computer system to create the tax verifications. This case identified technical flaws in controls over the IRS’ computer system, which allows employees to produce fraudulent documents. TIGTA reported these findings to IRS.
Forty-Two Count Indictment in Fraud Investigation
In June 2001, a grand jury indicted an individual on 42 counts of false statements, mail fraud, wire fraud and tampering with a witness in connection with an alleged scheme to defraud a couple out of money intended for the IRS. According to the indictment, the individual claimed to be a licensed CPA, even though the individual’s license to practice had been suspended since 1991.
Allegedly, the individual falsely represented to the couple that IRS had accepted their offer in compromise (OIC) and told the couple that the individual needed a check from IRS for partial payment of the OIC. The individual then deposited checks received from the couple into a personal account and did not pay IRS the money. The indictment further alleged that this individual created and sent to the couple a number of letters purporting to be from IRS, which falsely indicated that IRS was in the process of releasing the tax lien against the couple.
Individual Sentenced for Bank Fraud Involving Stolen Treasury Checks
In July 2001, an individual was sentenced to 15 months imprisonment after pleading guilty to one count of bank fraud involving the depositing of a stolen U.S. Treasury check. In the guilty plea, the individual stipulated that, along with others, they negotiated more than 60 stolen U.S. Treasury checks worth approximately $500,000 through deposits in various bank accounts. The indictment alleged that the individual and others stole U.S. Treasury checks made payable to various corporations.
Individual Pled Guilty to Conspiracy and Mail Fraud
In July 2001, an individual pled guilty to one count of conspiracy to defraud IRS and one count of mail fraud. The individual attempted to pay off tax debts and to obtain money in refunds by presenting more than $2.5 million in worthless checks to IRS. According to the indictment, the individual had income tax debts and conspired with another individual to obtain the bogus documents.
TIGTA’s Office of Investigations 29
Individual Indicted for Identity Fraud
In August 2000, a TIGTA special agent received information from an individual (victim) alleging that someone was using the victim’s SSN to earn income. The victim claimed that IRS withheld the two most recent income tax refunds, and that the victim’s son’s disability benefits were discontinued due to the extra income associated with the victim’s SSN. The investigation disclosed that another individual located thousands of miles away was using the SSN for employment purposes.
The subject entered the U.S. illegally from Mexico during 1993 and purchased an identity package for $2000 in the name of the victim. The subject earned approximately $57,222 by using the name and SSN of the name and SSN of the victim. The subject also applied for and received a total of $18,847 in fraudulent Aid to Family with Dependant Children benefits on behalf of the subject’s daughter. In September 2001, the subject was indicted by a grand jury for misuse of a SSN. The referenced tax refunds were subsequently given to the victim as a result of TIGTA’s involvement.
Former IRS Employee Devised Fraudulent Investment Scheme
In April 2001, an IRS employee pled guilty to mail fraud after embezzling $74,000 from friends by promising to invest money in a non-existent investment plan. The IRS employee used the U.S. mail to send altered IRS documents and to receive money in furtherance of the scheme.
In August 2001, the IRS employee was sentenced to four months confinement in a halfway house, four months home confinement and three years probation. The IRS employee subsequently made full restitution. Prior to sentencing, the IRS employee resigned from IRS in lieu of termination.
Individual Sentenced for Role in Identity Theft Fraud Ring
In September 2001, an individual was sentenced to 46 months imprisonment, 3 years probation, and ordered to pay $3,852,086 in restitution and $400 in special assessments for participation in an identity theft fraud ring. The individual provided identity information of individuals and false identification documents, including SSNs, to the theft fraud ring. The theft fraud ring used this information to activate stolen credit cards and establish bank accounts used to deposit stolen checks. Among these checks were IRS refund checks and tax remittances.
During the investigation, TIGTA Computer Investigative Specialists discovered computer evidence and images of false identifications used in the frauds. The individual obtained the biographical information under false pretenses from three Internet companies. Audit trails from the Internet companies indicated that over a four-year period, the subject accessed information concerning over 10,000 different individuals.
30 TIGTA’s FY 2001 Semiannual Report to Congress - September 30, 2001
IX — Acronyms
Automated Labor and Employee Relations
Automated Lien System
Annual Program Performance Report
Bank Secrecy Act
Code of Federal Regulation
IRS Criminal Investigation
Chief Infrastructure Assurance Officer
Chief Information Officer
Complaint Management Division
Certified Public Accountant
Collection Statue Expiration Date
Executive Correspondence Management System
Electronic Fraud Detection System
Employer Identification Number
IRS Exempt Organization
Electronic Tax Law Assistance Program
Federal Bureau of Investigation
Fair Debt Collection Practices Act
Foreign Controlled Corporations
Federal Financial Management Improvement Act of 1996
Forensic Science Laboratory
Government Performance and Results Act of 1993
Department of Housing and Urban Development
International Field Assistance Specialization Program
Integrated Complaint Tracking and Reporting System
Internal Revenue Code
Appendix IX -Acronyms 81
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Office of the Inspector General for Tax Administration 1125 15th Street, NW, Room 700A Washington, D.C. 20005