Financial Audit
IRS's Fiscal Years 2002 and 2001 Financial Statements
Gao ID: GAO-03-243 November 15, 2002
Because of the significance of IRS revenue collections to federal receipts and, in turn, to the consolidated financial statements of the U.S. government, which GAO is required to audit, and Congress's interest in financial management at IRS, GAO audits IRS's financial statements annually to determine whether (1) the financial statements IRS prepares are reliable, (2) IRS management maintained effective internal controls, and (3) IRS complies with selected provisions of significant laws and regulations and its financial systems comply with the Federal Financial Management Improvement Act (FFMIA).
In GAO's opinion, IRS's fiscal year 2002 financial statements were fairly presented in all material respects. Because of serious financial systems and control weaknesses, however, IRS again had to rely extensively on various costly and resource-intensive processes to prepare its financial statements. IRS made notable progress in a number of areas in fiscal year 2002, including addressing issues related to budgetary activity, accountability over property and equipment, and computer security. The agency also laid the groundwork for improvement in several other areas. Nevertheless, IRS continues to be challenged by many of the same issues reported each year since fiscal year 1992, when GAO began auditing IRS's financial statements. Serious problems continued to exist in the following five areas: (1) financial reporting, (2) unpaid tax assessments, (3) tax revenue and refunds, (4) property and equipment, and (5) computer security. Additionally, IRS was not always in compliance with laws concerning the structure of installment agreements IRS enters into with taxpayers and the timing of the release of federal tax liens. One of the largest obstacles facing IRS management is the agency's lack of a financial management system capable of producing information needed for day-to-day decisions. Through compensating processes, extraordinary efforts, and some fundamental changes in how it processed transactions, maintained its records, and reported its financial results, IRS was able to issue its financial statements 6 weeks after the end of the fiscal year. Despite this, IRS's compensating processes and approaches cannot produce reliable, timely financial and cost-based performance information useful for ongoing decision making or fully address the financial management and operational issues that affect IRS's ability to fulfill its responsibilities as the nation's tax collector, largely because IRS's financial management systems do not comply with FFMIA.
GAO-03-243, Financial Audit: IRS's Fiscal Years 2002 and 2001 Financial Statements
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Report to the Secretary of the Treasury:
November 2002:
FINANCIAL AUDIT:
IRS‘s Fiscal Years 2002 and 2001 Financial Statements:
GAO-03-243:
Letter:
Auditor‘s Report:
Opinion on IRS‘s Financial Statements:
Opinion on Internal Controls:
Compliance with Laws and Regulations and FFMIA Requirements:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments and Our Evaluation:
Management Discussion and Analysis:
Financial Statements:
Balance Sheets:
Statement of Net Cost:
Statement of Changes in Net Position:
Statement of Budgetary Resources:
Statement of Financing:
Statement of Custodial Activity:
Notes to the Financial Statements:
Supplemental and Other Accompanying Information:
Appendixes:
Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Appendix II: Details on Audit Methodology:
Appendix III: Comments from the Internal Revenue Service:
Abbreviations:
EITC: Earned Income Tax Credit:
FFMIA: Federal Financial Management Improvement Act of 1996:
FFMSR: Federal Financial Management Systems Requirements:
FIA: Federal Managers‘ Financial Integrity Act of 1982:
IRS: Internal Revenue Service:
JFMIP: Joint Financial Management Improvement Program:
OMB: Office of Management and Budget:
P&E: property and equipment:
SGL: U.S. Government Standard General Ledger:
TIGTA: Treasury Inspector General for Tax Administration:
Letter November 15, 2002:
The Honorable Paul H. O‘Neill
The Secretary of the Treasury:
Dear Mr. Secretary:
The accompanying report presents the results of our audits of the
financial statements of the Internal Revenue Service (IRS) as of and
for the fiscal years ending September 30, 2002 and 2001. We performed
our audits in accordance with the Chief Financial Officers (CFO) Act of
1990, as expanded by the Government Management Reform Act of 1994. This
report contains our (1) unqualified opinions on IRS‘s financial
statements, (2) opinion that IRS‘s internal controls were not effective
as of September 30, 2002, and (3) conclusion regarding IRS‘s
noncompliance
with two provisions of laws and regulations that we tested and IRS‘s
financial management systems‘ lack of substantial compliance with the
requirements of the Federal Financial Management Improvement Act of
1996.
Our unqualified opinions on IRS‘s fiscal years 2002 and 2001 financial
statements were made possible by the continued extraordinary efforts of
IRS senior management and staff to compensate for serious internal
control and financial management systems deficiencies. Meeting a
significantly accelerated reporting date for the issuance of the
financial statements for fiscal year 2002 was also a major
accomplishment. The Office of Management and Budget (OMB) required that
agencies accelerate their timeline for issuing audited financial
statements. For fiscal year 2002, OMB requires that agencies issue
their audited financial statements by February 1, 2003, and for fiscal
year 2004, OMB requires that agencies issue their audited financial
statements by November 15, 2004, or 6 weeks after the end of the fiscal
year. The Department of the Treasury went a step further and
established a goal of completing its fiscal year 2002 audit, including
those of its component entities such as IRS, and issuing its
departmentwide accountability report by November 15, 2002.
In our report on the results of our audits of IRS‘s fiscal year 2001
and 2000 financial statements,[Footnote 1] we discussed obstacles to
IRS‘s ability to achieve the department‘s goal. At that time, we noted
that if IRS was to meet this deadline and sustain an unqualified
opinion on its financial statements, the tremendous amount of hard work
and commitment IRS demonstrated in recent years alone would not be
sufficient unless accompanied by systemic changes in how IRS processed
its transactions, maintained its financial records, and reported its
financial results. IRS took this message seriously and made great
strides in each of these areas. For example, IRS made a significant
investment in improving its approach to analyzing, processing, and
recording certain transactions throughout the year; previously, such
analyses were not performed until the end of the fiscal year, an
approach that limited our ability to test significant transactions and
balances at interim periods. Other business process changes, such as
better ongoing reviews of obligation levels and activity, enabled us to
reduce the classification of control issues related to budgetary
activity from a material weakness to a reportable condition. IRS‘s
actions, coupled with the continued use of costly, resource-intensive
processes to compensate for the continued serious weaknesses in systems
and controls, enabled IRS to achieve Treasury‘s goal.
Nonetheless, it will remain a challenge for IRS management and staff to
sustain the level of effort needed to produce reliable financial
statements until the agency is able to fully address the underlying
systems and internal control issues that have made this process so time
consuming and resource intensive. Presently, IRS continues to lack
timely, accurate, and useful financial information and sound controls
with which to make fully informed decisions and to ensure ongoing
accountability, which is the end goal of the CFO Act. IRS has made
significant progress in addressing its serious control and systems
deficiencies and improving financial management during the past 5 years
under the strong leadership of former Commissioner Charles Rossotti and
Acting Commissioner Robert Wenzel. It is important that these financial
management initiatives continue to receive the needed support to
achieve comprehensive and lasting financial management reform.
The accompanying report also discusses other significant issues that we
considered in performing our audit and in forming our conclusions that
we believe should be brought to the attention of IRS management and
users of IRS‘s financial statements.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Appropriations; Senate
Committee on Finance; Senate Committee on Governmental Affairs; Senate
Committee on the Budget; Subcommittee on Treasury, General Government,
and Civil Service, Senate Committee on Appropriations; Subcommittee on
Taxation and IRS Oversight, Senate Committee on Finance; Subcommittee
on Oversight of Government Management, Restructuring, and the District
of Columbia, Senate Committee on Governmental Affairs; House Committee
on Appropriations; House Committee on Ways and Means; House Committee
on Government Reform; House Committee on the Budget; Subcommittee on
Government Efficiency, Financial Management, and Intergovernmental
Relations, House Committee on Government Reform; and Subcommittee on
Oversight, House Committee on Ways and Means. In addition, we are
sending copies of this report to the Chairman and Vice-Chairman of the
Joint Committee on Taxation, the Acting Commissioner of Internal
Revenue, the Director of the Office of Management and Budget, the
Chairman of the IRS Oversight Board, and other interested parties.
Copies will be made available to others upon request. In addition, the
report will be made available at no charge on GAO‘s Web site at http:/
/www.gao.gov.
This report was prepared under the direction of Steven J. Sebastian,
Director, Financial Management and Assurance, who can be reached at
(202) 512-3406. If I can be of further assistance, please call me at
(202) 512-5500.
Sincerely yours,
David M. Walker
Comptroller General of the United States:
Signed by David M. Walker
[End of Section]
Auditor‘s Report To the Acting Commissioner of Internal Revenue:
In accordance with the Chief Financial Officers (CFO) Act of 1990, as
expanded by the Government Management Reform Act of 1994, this report
presents the results of our audits of the financial statements of the
Internal Revenue Service (IRS) for fiscal years 2002 and 2001.[Footnote
2] The financial statements report the assets, liabilities, net
position, net costs, changes in net position, budgetary resources,
reconciliation of net costs to budgetary obligations, and custodial
activity related to IRS‘s administration of its responsibilities for
implementing federal tax legislation. The financial statements do not
include an estimate of the amount of taxes owed the federal government
but which have not been identified by IRS, often referred to as the tax
gap.
In its role as the nation‘s tax collector, IRS has a demanding
responsibility in collecting taxes, processing tax returns, and
enforcing the nation‘s tax laws. The size and complexity of IRS‘s
operations present additional challenges to management. IRS is a large,
complex organization with tens of thousands of people in 10 service
center campuses, three computing centers, and numerous other field
offices throughout the United States. In each of fiscal years 2002 and
2001, IRS collected more than $2 trillion in tax payments, processed
more than 200 million tax returns, and paid about $281 billion and $251
billion, respectively, in refunds to taxpayers.
One of the largest obstacles facing IRS management today continues to
be the agency‘s lack of a financial management system capable of
producing the reliable and timely information its managers need to
assist in making day-to-day decisions. Because of this systems issue
and other factors, IRS continues to face many of the pervasive internal
control weaknesses that we have reported each year since we began
auditing its financial statements in fiscal year 1992.[Footnote 3]
Nevertheless, in fiscal year 2002, for the third consecutive year, IRS
was able to produce financial statements covering its tax custodial and
administrative activities that are fairly stated in all material
respects. Moreover, IRS was able to produce these statements by
November 15, 2002, only a month and a half after the end of the fiscal
year.[Footnote 4]
The significant acceleration of IRS‘s reporting date was a major
accomplishment and represents a significant improvement over previous
years. In our report on the results of our audit of IRS‘s fiscal years
2001 and 2000 financial statements, we noted that for IRS to be able to
achieve this ambitious goal for fiscal year 2002, it would need to make
fundamental changes in the way it processed transactions, maintained
its records, and reported financial information. IRS made great strides
in each of these areas in fiscal year 2002. However, these improvements
alone were not enough to make this outcome possible. Many of IRS‘s
longstanding systems and internal control weaknesses continued to
exist, necessitating continued reliance on costly compensating
processes, statistical projections, external contractors, substantial
adjustments, and monumental human efforts to prepare a set of reliable
financial statements. These costly efforts would not have been
necessary if IRS‘s systems and controls had operated effectively.
Strong commitment, hard work, and a reassessment of certain basic
business processes by both IRS senior leadership and staff were the key
to IRS‘s ability to meet Treasury‘s goal of both receiving an
unqualified audit opinion on its financial statements and issuing the
statements by November 15, 2002. Part of the reason IRS was able to
meet this accelerated reporting goal was that it made further
refinements to its compensating procedures. Another essential element
was IRS‘s significant investment in improving its approach to
processing and recording certain types of transactions throughout the
year, rather than undertaking end-of-year analyses of transactions and
activity to produce financial statement balances--a process that in
prior years took several months to complete. During the latter half of
fiscal year 2002, for example, IRS was able to produce quarterly
financial information on property and equipment acquisitions within a
few weeks after the end of each quarter. Previously, such information
for the entire fiscal year was not available until several months after
the fiscal year end. IRS also significantly enhanced its accountability
over budgetary activity by increasing the frequency of its analyses of
outstanding obligations and other budgetary accounts. As a result of
these and other improvements, IRS management had earlier access to
information and we were able to test financial data on an interim basis
during the year rather than almost exclusively at year end.
IRS made notable progress in a number of areas in fiscal year 2002 and
has laid the groundwork for sustainable improvements in several others.
IRS‘s continued progress in addressing deficiencies in its controls
over budgetary activity, for example, allowed us to conclude that the
remaining issues related to budgetary activity no longer constitute a
material weakness. At the same time, despite improvements in controls
over property and equipment, financial reporting, and computer
security, further actions are needed, and we continue to consider these
issues as well as management of unpaid assessments and collection of
revenue and issuance of tax refunds to be material weaknesses.[Footnote
5]
Producing financial statements within a month and a half after the end
of the fiscal year while sustaining an unqualified opinion was a
significant accomplishment for IRS. At the same time, however, the
effort it took placed a considerable strain on IRS resources and
required substantial contractor support. IRS has clearly made progress
in improving its financial management, and several of the process
changes IRS made in fiscal year 2002 represent good financial
management practices. Nevertheless, it will be difficult for IRS
personnel to sustain the level of effort needed to produce reliable
financial statements timely without addressing the underlying systems
and internal control problems that cause this process to be so
unnecessarily time consuming and expensive. Additionally, this process
does not produce the reliable, useful, and timely financial and
performance information IRS needs for decision making on an ongoing
basis, which is a goal of the CFO Act, nor can it fully address the
underlying financial management and operational issues that adversely
affect IRS‘s ability to effectively fulfill its responsibilities as the
nation‘s tax collector.
The challenge for IRS will be to continue the improvements made in
recent years and to develop and implement the fundamental long-term
solutions that are needed to address the internal control weaknesses we
have identified. As we have seen, some of these solutions can be
addressed in the near term through the continued efforts and commitment
of IRS senior management and staff. Others, which involve modernizing
IRS‘s financial and operational systems, will take years to fully
achieve.
Opinion on IRS‘s Financial Statements:
IRS‘s financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, IRS‘s assets, liabilities, net
position, net costs, and custodial activity, as of and for the fiscal
years ended September 30, 2002, and September 30, 2001, and IRS‘s
changes in net position, budgetary resources, and reconciliation of net
costs to budgetary obligations for the fiscal year ended September 30,
2002.
However, misstatements may nevertheless occur in other financial
information reported by IRS as a result of the internal control
weaknesses described in this report.
IRS‘s financial statements include tax revenues collected during the
fiscal year as well as the total unpaid taxes for which IRS, the
taxpayer, or courts agree on the amounts owed. Cumulative unpaid tax
assessments for which there is no future collection potential or for
which there is no agreement on the amounts owed are not reported in the
financial statements. Rather, they are reported as write-offs and
compliance assessments, respectively, in supplemental information to
IRS‘s financial statements. Also, in accordance with U.S. generally
accepted accounting principles, to the extent that taxes owed in
accordance with the nation‘s tax laws are not reported by taxpayers and
are not identified through IRS‘s various enforcement programs, they are
not reported in the financial statements nor in supplemental
information to the financial statements. As IRS discusses in the
accompanying information to the financial statements, its current
estimate of the magnitude of these unidentified and unpaid taxes--
referred to as the tax gap--is between $250 billion and $300 billion.
Opinion on Internal Controls:
Because of the material weaknesses in internal controls discussed
below, IRS did not maintain effective internal controls over financial
reporting (including safeguarding of assets) or compliance with laws
and regulations, and thus did not provide reasonable assurance that
losses, misstatements, and noncompliance with laws material in relation
to the financial statements would be prevented or detected on a timely
basis. Our opinion is based on criteria established under 31 U.S.C.
3512 (c), (d), commonly referred to as the Federal Managers‘ Financial
Integrity Act of 1982 (FIA), and OMB‘s Circular A-123, Management
Accountability and Control.
Despite its material weaknesses in internal controls and its system
deficiencies, IRS was able to prepare, primarily through compensating
processes and approaches, financial statements that were fairly stated
in all material respects for fiscal years 2002 and 2001. Nonetheless,
IRS continues to face the following key issues that represent material
weaknesses in internal controls:
* weaknesses in controls over the financial reporting process,
resulting in IRS not (1) being able to prepare reliable financial
statements without extensive compensating procedures or (2) having
current and reliable ongoing information to support management decision
making and to prepare cost-based performance measures;
* weaknesses in controls over unpaid tax assessments, resulting in
IRS‘s inability to properly manage unpaid assessments and leading to
increased taxpayer burden;
* weaknesses in controls over the identification and collection of tax
revenues due the federal government and over the issuance of tax
refunds, resulting in potentially billions of dollars in improper
payments and lost revenue to the federal government;
* weaknesses in controls over property and equipment, resulting in
IRS‘s inability to have reliable and timely information on its balance
of property and equipment throughout the year and to reasonably ensure
that its property and equipment are safeguarded and used only in
accordance with management policy; and:
* weaknesses in computer security controls, resulting in increased risk
of unauthorized individuals being allowed to access, alter, or abuse
proprietary IRS programs and electronic data and taxpayer information.
The material weaknesses in internal controls noted above may adversely
affect any decision by IRS‘s management that is based, in whole or in
part, on information that is inaccurate because of these weaknesses. In
addition, unaudited financial information reported by IRS, including
budget and performance information, may also contain misstatements
resulting from these weaknesses.
In addition to the material weaknesses discussed above, we identified
two reportable conditions which, although not material weaknesses,
represent significant deficiencies in the design or operation of
internal controls that could adversely affect IRS‘s ability to meet the
internal control objectives described in this report. These conditions
concern deficiencies in (1) controls over budgetary activity, which
affect IRS‘s ability to routinely ensure that its budgetary resources
are being properly accounted for, reported, and controlled and (2)
controls over hard-copy tax receipts and taxpayer data, which increase
the government‘s and taxpayers‘ risk of loss or inappropriate
disclosure
of taxpayer data. We reported controls over budgetary activity as a
material weakness in our prior audits, but based on improvements we
found
during our fiscal year 2002 audit, we have reassessed it as a
reportable
condition.
We have reported on these material weaknesses and reportable conditions
in prior audits and have provided IRS numerous recommendations to
address these issues. More than 60 of these recommendations were still
open as of the date of this report. IRS has made marked strides in
resolving these matters. We will follow up in future audits to monitor
IRS‘s progress in implementing these recommendations. For more details
on these issues, see appendix I.
Compliance with Laws and Regulations and FFMIA Requirements:
Our tests of compliance with selected provisions of laws and
regulations disclosed two instances of noncompliance with laws and
regulations that were reportable under U.S. generally accepted
government auditing standards. These related to IRS‘s (1) lack of
timely release of tax liens on taxpayers‘ property and (2) failure to
ensure that installment agreements were structured to require that
taxpayers fully satisfy their tax liability within the statutory
collection period.[Footnote 6] Also, IRS‘s financial management systems
did not substantially comply with the requirements of the Federal
Financial Management Improvement Act of 1996 (FFMIA): (1) Federal
Financial Management Systems Requirements, (2) applicable federal
accounting standards (U.S. generally accepted accounting principles),
and (3) the U.S. Government Standard General Ledger (SGL) at the
transaction level. IRS has readily acknowledged that its financial
management systems do not comply with FFMIA and that it needs to
overhaul these systems as part of its broader systems modernization
efforts. For more details on these issues, see appendix I.
Except as noted above, our tests for compliance with laws and
regulations disclosed no other instances of noncompliance that would be
reportable under U.S. generally accepted government auditing standards
or OMB audit guidance. However, the objective of our audit was not to
provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.
Consistency of Other Information:
IRS‘s Management Discussion and Analysis, required supplemental
information, and other accompanying information contain a wide range of
data, some of which are not directly related to the financial
statements. We did not audit and do not express an opinion on this
information. However, we compared this information for consistency with
the financial statements and discussed the methods of measurement and
presentation with IRS officials. Based on this limited work, we found
no material inconsistencies with the financial statements or
nonconformance with OMB guidance. Under OMB guidance for the financial
statements of federal agencies, agencies are asked to strive to develop
and report objective measures that, to the extent possible, provide
information about the cost-effectiveness of their programs. We found,
however, that because of the noted internal control and systems
limitations, IRS cannot report reliable cost-based performance measures
relating to its various programs in accordance with the Government
Performance and Results Act of 1993.
Objectives, Scope, and Methodology:
Management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles, (2) establishing, maintaining, and assessing internal
control to provide reasonable assurance that the broad control
objectives of 31 U.S.C. 3512, (c), (d), FIA are met, (3) ensuring that
IRS‘s financial management systems substantially comply with the
requirements of FFMIA, and (4) complying with applicable laws and
regulations.
We are responsible for obtaining reasonable assurance about whether
(1) the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles and (2) management maintained effective internal controls,
the objectives of which are the following:
* Financial reporting--transactions are properly recorded, processed,
and summarized to permit the preparation of financial statements in
conformity with U.S. generally accepted accounting principles and
assets are safeguarded against loss from unauthorized acquisition, use,
and disposition.
* Compliance with laws and regulations--transactions are executed in
accordance with laws governing the use of budget authority and with
other laws and regulations that could have a direct and material effect
on the financial statements and any other laws, regulations, and
governmentwide policies identified by OMB audit guidance.
We are also responsible for (1) testing whether IRS‘s financial
management systems substantially comply with the three FFMIA
requirements, (2) testing compliance with selected provisions of laws
and regulations that have a direct and material effect on the financial
statements and laws for which OMB audit guidance requires testing, and
(3) performing limited procedures with respect to certain other
information appearing in these annual financial statements. For more
details on our methodology, see appendix II.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FIA, such as controls relevant to
preparing statistical reports and ensuring efficient operations. We
limited our internal control testing to testing controls over financial
reporting and compliance with laws and regulations.
We did not test compliance with all laws and regulations applicable to
IRS. We limited our tests of compliance to those laws and regulations
that had a direct and material effect on the financial statements or
that were required to be tested by OMB audit guidance that we deemed
applicable to the financial statements for the fiscal year ended
September 30, 2002. We caution that noncompliance may occur and not be
detected by these tests and that such testing may not be sufficient for
other purposes.
We performed our work in accordance with U.S. generally accepted
government auditing standards and OMB audit guidance.
Agency Comments and Our Evaluation:
In responding to this report, IRS noted that the report fairly
presented IRS‘s progress and its remaining challenges. IRS noted that,
in addition to maintaining its unqualified audit opinion, it also met
the significant challenge set by the Secretary of the Treasury of
completing the fiscal year 2002 audit by November 15, 2002, 6 weeks
after the end of the fiscal year and 3 and a half months earlier than
last year. IRS noted that this was accomplished by making significant
improvements in its financial management by reassessing and
systematically changing how it processes transactions, maintains
financial records, and reports financial results. IRS cited a number of
financial management reforms and improvements, which contributed to its
ability to retain the clean opinion and to meet the accelerated
reporting date. For example, IRS noted that it implemented procedures
to improve the timeliness and accuracy of recording property and
equipment transactions in its accounting records, enhanced its
accountability over budgetary activity by increasing the frequency of
its analyses of outstanding obligations and other budgetary accounts,
conducted a comprehensive assessment of its strategic initiatives to
prioritize the programs relative to its mission and available
resources, revised its information technology security policy and
guidance, and began conducting periodic security reviews of receipt
processing areas. In addition, IRS noted that it took specific actions
in fiscal year 2002 to expedite the resolution of material weaknesses
identified under its annual FIA assessment process, revised its
remediation plans for custodial and administrative financial management
systems to align the remediation plans with its material weakness plans
and business system modernization plans, and included more intermediate
target dates to help ensure that it stays on schedule for bringing its
systems into FFMIA compliance.
In its response, IRS recognized that it is only through implementation
of the new integrated financial management system that IRS will be able
to overcome many of the material weaknesses cited in the report. IRS
noted that it would focus on ensuring that its financial management
practices are institutionalized and that its new integrated financial
system is implemented. IRS added that it would continue the
improvements made in the last few years as it develops and implements
the fundamental long-term solutions needed to address the internal
control weaknesses cited in the report.
In its response, IRS agreed with the issues presented in the report.
However, in commenting on the report‘s discussion of IRS‘s controls
over budgetary activity, IRS disagreed with the report‘s statement that
IRS management and staff might enter into obligations that exceed the
budgetary authority made available by Congress. IRS indicated that it
clearly does have the capability to prevent this from happening, and,
according to IRS, its obligations have never exceeded its budget
authority. However, the weaknesses we identified in IRS‘s controls over
its budgetary activity, particularly with respect to delays in
recording obligations, increase the risk that IRS could incur
obligations in excess of its budget authority and not timely detect
this occurrence. As discussed in our report, until the obligation of
funds is recorded in IRS‘s accounting system, obligations reflected in
the system will understated. This understatement could lead IRS
management to believe the agency has more funding than is actually
available. Our intent is to point out a potential impact of the
internal control weakness we identified.
IRS provided a number of technical comments, not included in its
written response, which we considered in finalizing the report. The
complete text of IRS‘s response is included in appendix III.
David M. Walker
Comptroller General
of the United States:
Signed by David M. Walker
November 1, 2002:
[End of section]
Management Discussion and Analysis:
Internal Revenue Service:
Fiscal Year Ended
September 30, 2002:
I. Introduction:
The mission of the Internal Revenue Service (IRS) is to provide
America‘s taxpayers top quality service by helping them understand and
meet their responsibilities and by applying the tax law with integrity
and fairness to all. The IRS is responsible for the collection of about
$2 trillion in Federal tax payments. At the IRS, the mission statement
serves as the central theme and guiding business philosophy for
management actions and organizational decision making.
The IRS is executing its mission with increasing effectiveness and
efficiency. We have identified three strategic goals and critical
performance measures to track our progress against those goals. We use
a balanced measures approach for each performance measure addressing
business results, customer satisfaction, and employee satisfaction.
Over the past year, our measures show we made great progress in a
number of high priority areas, such as efiling, telephone and in-person
taxpayer service, protection of taxpayer rights and burden reduction.
We stabilized and refocused our key compliance activities and are
identifying and attacking systematic areas of non-compliance, such as
the promotion and use of abusive tax devices. Internal morale has
improved, and perhaps most importantly, we are regaining the confidence
of the public and other stakeholders.
Mission, Strategic Goals, and Guiding Principles:
The IRS mission statement accurately describes our role, as well as the
public‘s expectation as to how we should perform that role. In the
United States, the Congress passes tax laws and requires taxpayers to
comply with them. The taxpayer‘s role is to understand and meet their
tax obligations - and most do, since roughly 98% of the taxes collected
are paid without active intervention by the IRS. The IRS‘ role is to
help the majority of taxpayers who are willing to comply with the tax
law, while seeing to it that the minority who are unwilling to comply
are not allowed to burden their fellow taxpayers. The IRS recognizes
that it must meet the highest standards in performing this role.
The IRS has formulated three strategic goals needed to achieve our
mission. If progress is made on all three of these goals, we can be
confident that we are moving toward achieving our mission and meeting
the public‘s expectations. The strategic goals and a brief description
of each follows:
*Top-quality service to each taxpayer in every interaction -Whenever
the IRS deals with a taxpayer, we should give first-quality service and
treatment that is helpful. We should provide better guidance to
taxpayers, reducing the chances of error and the time and effort
required. We should give accurate, timely and convenient assistance to
taxpayers, and should inform them promptly and treat them
professionally if we intervene in the form of an examination, a
collection action, or a notification.
*Top-quality service to all taxpayers through fair and uniform
application of the law - Our tax system depends on each person who is
voluntarily meeting his or her tax obligations having confidence that
his or her neighbor or competitor is also complying. Therefore, when
taxpayers do not voluntarily meet their tax obligations, the IRS must
use its enforcement powers to collect the taxes that are due.
*Productivity through a quality work environment-By ensuring our
employees are satisfied, we are able to provide services more
efficiently, getting the greatest value for every dollar we
spend. Good productivity requires employee satisfaction. This means our
employees must have the management support, tools and equipment they
need to provide good service to our customers, and there must be
effective communication vertically and laterally throughout the
organization.
Guiding principles are a link between our strategic goals and the
actions we take to achieve them. All IRS executives, managers and
employees are expected to manage and operate through these guiding
principles.
The following guiding principles describe how we will operate in
achieving our strategic goals.
*Understand and solve problems from the customer‘s point of view.
*Enable managers to be accountable, with the requisite knowledge,
responsibility, and authority to take action.
*Align measures of performance at all organizational levels. Foster
open, honest communication.
*Insist on total integrity.
*Demonstrate effective stewardship of assets and information entrusted
to the IRS.
Organization:
IRS‘ structure closely resembles the private sector model of organizing
around customers with similar needs. The IRS created four customer-
focused operating divisions to best serve taxpayers: Wage and
Investment, Small Business and Self-Employed, Large and Mid-Size
Business, and Tax Exempt and Government Entities. There are also a
number of functional units, including Appeals, the Taxpayer Advocate
Service, and Criminal Investigation.
Internally, the Modernization and Information Technology Services
organization, which includes the Business Systems Modernization Office,
and the Agency-Wide Shared Services unit provide information technology
and administrative support, respectively, to all divisions.
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Within the four divisions, operations are structured principally along
three program areas: prefiling, filing, and compliance. Pre-filing
services are provided before returns are filed to assist taxpayers in
preparing correct returns. Filing and account services are those
provided to a taxpayer in the process of filing a return and paying
taxes, including electronic filing and payment. Compliance services are
provided to a taxpayer after a return is filed to identify under-
reporting, non-filing and nonpayment.
The Wage and Investment Division (W&I) serves individual and joint
filers with wage and investment income only, almost all of which is
reported by third parties. Most of these taxpayers deal with the IRS
only once a year, when filing their returns, and most receive refunds.
Compliance issues are limited, concentrated on dependent exemptions,
credits, filing status, and deductions. Through its field organization,
W&I provides information, support and assistance taxpayers need to
fulfill their tax obligations. It also conducts processing, account
management, and compliance services through eight campus locations.
The Small Business and Self-Employed Division (SB/SE) serves fully or
partially selfemployed individuals and small businesses. Since business
income and a range of taxes are involved, compliance issues can be
complex. The possibility for errors in collection and compliance are
greatest in this group and consequently, this group has considerably
more frequent dealings with IRS compliance functions. SB/SE has a
compliance field organization that includes both examination and
collection. Processing, account management, compliance services, and
education and outreach are provided at two campuses.
The Large and Mid-Size Business Division (LMSB) serves corporations
with assets of more than $10 million. While collection issues are rare,
many complex issues such as tax law interpretation, accounting, and
regulation, many with international dimensions, frequently arise. LMSB
is predominantly a field organization that is structured into five
industry groups: Communications, Technology and Media; Financial
Services; Heavy Manufacturing and Transportation; Natural Resources and
Construction; and Retailers, Food, Pharmaceuticals and Healthcare.
The Tax Exempt and Government Entities Division (TE/GE) serves a wide
range of customers including small local community organizations,
municipalities, major universities, pension funds, state governments,
Indian tribal governments and tax exempt bond issuers. TEGE is charged
with administering detailed and complex provisions of law. Its efforts
are generally not intended to raise money, but rather to ensure that
these entities stay within the policy guidelines that enable them to
maintain their tax-exempt status.
The Appeals organization resolves tax controversies without litigation
on a basis that is fair and impartial to both the Government and the
taxpayer. Appeals provides an independent channel for taxpayers who
have a dispute over a recommended enforcement action.
The Chief Counsel‘s principal customer base consists of the IRS
Commissioner, the Operating Divisions, and the functional units of the
IRS, as well as the General Counsel and Tax Legislative Counsel at
Treasury. Chief Counsel provides impartial interpretation of the
internal revenue laws and legal advice and representation for the IRS.
The Chief Counsel has established a senior legal executive as the
Division Counsel for each operating division to participate fully in
the plans and activities of the operating division‘s management and to
provide legal advice and representation.
Communication and Liaison (C&L) is a functional business unit with five
offices, each of which partners with the operating and functional
divisions to support IRS business objectives and communications goals
and ensures cross-divisional coordination. The offices also partner
with their external customers to ensure that two-way communications
exist between IRS, its employees and various stakeholder groups. C&L
manages relationships with the media, Congress, state and local
governments, and other external stakeholders.
The Criminal Investigation (CI) unit enforces the criminal provisions
of the Internal Revenue Code. CI operates through a structure of 35
field offices under the supervision of Special Agents in Charge (SACs).
The SACs report to Headquarters through six Directors of Field
Operations located in key cities across the country. CI supports the
strategies of the four operating divisions to enhance tax
administration and foster voluntary compliance.
National Headquarters (NHQ) includes the Office of the Commissioner,
Deputy Commissioner, Assistant Deputy Commissioner, Chief Financial
Officer, Senior Counselor to the Commissioner, Competitive Sourcing
Program, National Headquarters Management and Finance, Servicewide EEO/
Diversity, Office of Tax Administration Coordination, Commissioner‘s
Complaint Processing & Analysis Group, Strategic Human Resources, and
Research, Analysis and Statistics of Income. NHQ focuses on strategic
direction, capital allocations, and building partnerships with key
stakeholders, e.g., Congress, Office of Management and Budget.
The Taxpayer Advocate Service (TAS) exists to help taxpayers resolve
problems that have not been resolved through normal IRS channels. TAS
is an independent program headed by the National Taxpayer Advocate.
Each state and IRS Service Center has at least one local Taxpayer
Advocate who is independent of the local IRS office and reports
directly to the National Taxpayer Advocate. Operating Division Taxpayer
Advocates work directly with operating divisions to identify and
recommend solutions to systemic problems.
The Modernization, Information Technology and Security Services (MITS)
organization provides information technology solutions that anticipate
and meet enterprise-wide needs.
The Agency-Wide Shared Services organization (AWSS) provides efficient
and standardized common services to all organizational components of
the IRS, such as, personnel, security, and facilities management.
INTERNAL REVENUE SERVICE
II: Performance Goals and Results:
When all things are considered, the IRS performed well in 2002. This
was in the face of unanticipated funding dilemmas (e.g., unfunded
increased pay raise and postage), changing program priorities (e.g.,
greater focus on more complicated and time consuming high-risk cases)
and the impact of 9/11 (e.g., suspension of notices in targeted
geographic areas). In addition, any discussion or review of IRS
performance must consider the context in which performance goals are
set. FY 2002 marks the second year in which the IRS has set corporate
goals for its balanced measures under the agency‘s new program and
organizational structure. Thus,
FY 2002 goals were set with one year‘s experience in the new IRS. The
learning process for goal development continues. To drive the agency to
high levels of performance, the IRS set aggressive goals with the
knowledge that it is best to push for greater performance than settle
for marginal progress.
The IRS uses performance measures to determine its effectiveness in
meeting the three IRS strategic goals. The FY 2002 performance
information that follows is organized by the main objectives within
each strategic goal.
Strategic Goal 1: Top-quality service to each taxpayer in every
interaction.
Main Objectives:
*Make filing easier:
*Provide top-quality service to taxpayers needing help with their
returns or accounts:
*Provide prompt, professional, helpful treatment to taxpayers in cases
where additional taxes may be due:
Whenever the IRS deals with a taxpayer, we strive to give quality
service. The measures of our success in this goal are whether or not
taxpayers believe we are meeting their expectations and how well we
help them understand and meet their tax obligations.
Major Results and Accomplishments:
Make Filing Easier:
a. Results Summary:
Increased the number of e-filed individual returns by 17% over FY 2001
resulting in 36% of all returns being filed electronically.
Increased number of Federal Tax Payment Transactions Paid
Electronically by 3% over FY 2001.
Introduced a newly designed and more accessible web site. Increased the
number of web site hits to 3.4 billion and downloaded files to 436
million projected through the end of FY 2002. This represents increases
of 31 % and 38% respectively over FY 2001.
The number of taxpayers e-filing from their home computers is up 38%
over last year. Increased the number of private letter rulings
completed by 19% over FY 2001.
b. Improved Electronic Filing:
Added 29 electronic forms and schedules for individual and business
filers.
INTERNAL REVENUE SERVICE
Opened up e-file eligibility to over 99% of all individual taxpayers,
adding 38 million potential new e-filers.
Virtually all 1040 forms and schedules could be filed electronically
this year and no paper signature document was required.
c. Reducing Burden:
Expanded the check-the-box initiative to allow taxpayers to designate a
friend, family member or tax professional to talk to the IRS to correct
errors during processing of returns. For tax years beginning with 2002,
will exempt 2.6 million corporations from filing Schedules L, M1 and M2
at a burden reduction of 61 million hours.
Allowing more businesses to use the cash method of accounting.
Indefinitely suspended the requirement for taxpayers filing Schedule F
of Form 5500. Simplified forms, such as the Schedule D for reporting
capital gains.
Rewrote and simplified procedures, such as those for distributions from
qualified retirement plans.
Created the Office of Taxpayer Burden Reduction.
Working to develop a methodology for calculating the number of taxpayer
hours that will be saved through burden reduction efforts.
d. Simplifying Forms and Notices:
Reduced lines on forms, such as the Schedule D to report capital gains.
Eliminated 11 lines on Form 6251 for the Alternative Minimum Tax and
working with a contractor to redesign Form 941, Employers Quarterly
Federal Tax Return. Simplified determination letters for the nearly one
million employee plans.
Began sending out six redesigned notices, including those dealing with
math errors, balance due, overpayments and offsets.
Redesigning 24 additional notices; released eleven and remaining 13
will be released in January 2003.:
Provide top-quality service to taxpayers needing help with their
returns or accounts.
a. Results Summary:
On the American Customer Satisfaction Index (ACSI) Survey, taxpayers
gave the IRS an overall score of 62, an 11 % increase in satisfaction
among individual tax filers over 2000, and a 22% increase over 1999.
This was the largest favorable gain of the 30 federal agencies surveyed
by the ACSI.
The 2002 annual rating for IRS in the Roper Starch customer
satisfaction survey was 44% - a 12 point increase over our result of
32% in 1998. It does, however, reflect a small decrease from the 2001
score of 46%.
By the end of the 2002 filing season, taxpayers were receiving correct
responses to 84% of their telephone tax law questions and 90% of their
telephone account questions compared to the overall rates for FY 2001
of 79% and 88% respectively.
Access to telephone service and time spent waiting, while still below
private sector standards, improved substantially. Average wait time is
down 26% from last year. Assistor access rose from 56% only two years
ago to nearly 70% this year.
b. Improvements in Telephone Service:
Increased toll-free phone assistance with regard to: level of service,
quality of tax law responses, and quality of responses to account
inquiries.
Organized telephone Customer Service Representatives by specialization
on a division-wide basis to utilize call routing more effectively.
Trained assistors in one or more technical and account topics, enabling
them to be more proficient in assisting customers quickly and
accurately.
Implemented toll-free script changes to better address the needs of
Business Master File (BMF) callers and to address the significant
number of inquiries regarding the tax rebate. Implemented an automated
voice recognition service to provide taxpayers the amount of the
advanced credit, reducing burden on the telephone system.
Increased staffing for Spanish language Customer Service
Representatives.
c. Expanded Face-to-Face Services:
Offered walk-in service during the filing season at more than 400
locations nationwide for face-to-face meetings to resolve account or
case problems.
At many sites, walk-in service was offered on 12 Saturdays between
January 27 and April 14.
d. Special Assistance in Response to 9/11:
Issued guidance to resolve tax-related issues, including setting up
appropriate tax relief and postponement of certain filing deadlines.
Established a dedicated toll-free line for impacted victims and
families in response to the September 11 tragedy.
Provide prompt professional helpful treatment to taxpayers in cases
where additional taxes may_ be due:
a. Results Summary:
Field Collection customer satisfaction and quality stayed at FY 2001
levels. Field Exam customer satisfaction and quality increased slightly
above FY 2001. Service Center Exam customer satisfaction declined
slightly and quality stayed the same. Automated Collection System level
of service and customer satisfaction declined below FY 2001 as volume
was greater than expected from new levy programs.
b. Enhanced Customer Service:
Throughout the year, and at a variety of locations, held Problem
Solving Days at 46 Taxpayer Assistance Centers to resolve long-standing
taxpayer issues for those who cannot take advantage of weekday problem
solving services.
Created the Tax Resolution Representative position. These IRS employees
will receive the training and authority to provide ’one-stop-service“
for a broad range of issues.
c. Special Assistance in Response to 9/11:
Developed computer programs to suppress assessments of penalties and
interest, allowing individuals impacted by the September 11 tragedy
additional time to meet their federal tax obligations.
Froze the accounts of taxpayers who lived in the Federal Disaster and
Emergency Areas of New York, New Jersey, Virginia, and 11 other
counties in Connecticut and New York. The freeze indicator alerted IRS
employees of a taxpayer‘s disaster status.
Advised affected taxpayers who lived outside of the federal disaster
and emergency areas to contact the IRS to obtain tax relief.
Balanced Measures:
A. Employee Plans and Exempt Organization (EP/EO) Determination
Letters:
Description: Cases established and closed on the Tax Exempt/Government
Entities Determination System. This measure is an indication of the
volume of activity in Employee Plans and Exempt Organizations.
Determinations are taxpayer-initiated requests for specific rulings or
approvals with respect to an Employee Plan or Exempt Organization
issue.
FY 2002 Performance: Exempt Organizations (EO) closures were at the
planned level, but Employee Plans (EP) determinations were
substantially below plan. With the closure of the remedial plan
amendment period scheduled for December 2001, EP expected to receive
120,000 determination requests in FY2002. However, due to a two-month
extension of the deadline (granted in response to 9/11) and overall
consolidation in the pension plan market, IRS received slightly more
than half that number of applications. As a result, EP issued fewer
than half of the planned 106,000 determination letters. There was a
positive trend among the receipts toward more pre-approved plans.
Reduced determination workload freed up resources to support other
critical program goals such as the examination program.
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Future Plans: IRS plans to stabilize resources and improve performance
in Exempt Organization determinations. Dedicated groups reporting to
Determination Management will improve consistency and efficiency to
keep up with steadily increasing customer demand. To further improve
productivity, IRS began a pilot of a new method of reviewing
applications in FY2002 and is designing a new form for determination
applicants to use beginning in FY2004. Not only should customers find
this new form easier to use, but it should also reduce the resources
necessary to review each application.
The existing system for processing determination letter requests has
severe shortcomings. The redesign and replacement of this system with
the new Tax Exempt Determination System (TEDS) will provide critical
business capabilities required by customers, while improving overall
system performance and reliability. Release 1 will be piloted in FY
2003.
B. Private Letter Rulings Completed:
Description: Total number of Private Letter Rulings (PLRs) completed by
the Office of the Chief Counsel. PLRs are written statements that
address specific, tax-related issues pertaining to the taxpayer and the
IRS about the tax treatment of particular matters before a taxpayer‘s
return is filed. These techniques reduce taxpayer burden, eliminate
controversy, and enhance voluntary compliance, even before the taxpayer
is involved.
FY 2002 Performance: Private Letter Rulings have been a very popular
and high growth program for Chief Counsel because of their positive
impact on the taxpayer of reducing burden and resolving questions about
tax code interpretation up front.
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Future Plans: IRS‘ Chief Counsel Division will move toward greater use
of Revenue Rulings, a key Published Guidance product, and reduce use of
Private Letter Rulings, an Advance Case Resolution product, as a means
of providing guidance to taxpayers. Consistent with its major strategy
and operational plans, Chief Counsel Division will work with IRS
Operating Divisions and Treasury to identify and address emerging
issues through Published Guidance, and integrate efforts directed to
the Published Guidance program with the IRS Operating Divisions.
C. Taxpayer‘ Advocacy Projects:
Description: An Advocacy Project is an Operating Division Taxpayer
Advocate project to address an identified operational issue that
adversely affects a group of taxpayers.
FY 2002 Performance: Taxpayer Advocate Services (TAS) originally
planned to open 88 projects in FY 2002. However, TAS only opened 67
because they focused on the quality and impact of their projects
instead of the raw number opened.
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Future Plans: This measure is slated for deletion from the Critical
Measures list for FY 2003.
D: Percent Individual Returns Filed Electronically:
Description: The number of electronically filed individual tax returns
divided by the total number of individual returns filed. Includes all
returns where electronic filing is permitted (Practitioner e-file,
TeleFile, VITA [Volunteer Income Tax Assistance], On - Line Filing,
Federal/State returns, etc.):
FY 2002 Performance: The IRS can provide the customer service taxpayers
deserve only with the efficiencies of modernization, especially
electronic filing and processing. Each year, Electronic Tax
Administration (ETA) works with Modernization, Information Technology
and Security Services (MITS) to allow more submissions to be filed
electronically. As a result, in FY 2002 over 46 million individual
returns were filed electronically. Focused advertising and marketing as
well as expansion of electronic signature and payment options
contributed to success in this area in FY 2002. Continued growth is
expected as we increase the number of forms and schedules available for
use in electronic filing.
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Future Plans: To continue a solid e-file marketing campaign, IRS will
use its research strategies to identify and educate targeted EROS
(Electronic Return Originators), self-preparers and filers who use
paper instead of electronic media. IRS will focus on those non-EROs who
currently file a significant volume of paper returns and current EROS
who file high volumes of computer prepared returns as paper tax
returns.
In addition, IRS will continue to develop key messages to display on
the IRS Digital Daily web site, the Servicewide Electronic Research
Program web site, and QuickAlerts to encourage e-filing by tax
professionals and taxpayers. IRS territory offices will expand
distribution of the e-file marketing toolkit and related publications
through local outreach efforts and promote e-filing through partnering
opportunities which may include seminars, training, presentations at
Nationwide Tax Forums, advertising, public service announcements and
coordination with Stakeholder Partnership, Education and
Communications (SPEC). If we are successful in this marketing, IRS may
more rapidly approach the 80% Congressional mandate for e-filing and
concurrently reduce return error rates.
E. Electronic Federal Tax Payments System:
Description: All individual and business tax type payments made
directly through the Electronic Federal Tax Payment System (EFTPS),
through IRS e-file, directly through payroll service providers, or
through credit card processors.
FY 2002 Performance: Fiscal years 2000 and 2001 saw a 2% increase over
the prior year. Based on the IRS‘ marketing and anticipated growth, an
expected 5% increase established the original planned target of 67.4
million. The actual performance, however, stayed at the 2% growth level
in line with historical growth rates.
Offering convenient, easy to use electronic payment options, such as
credit card payments, encourages taxpayer compliance, reduces internal
paper processing burdens, and promotes the use of electronic commerce
when transacting with the Service. Taxpayers may now use any of the
four major credit cards - VISA, Mastercard, American Express or
Discover - for federal tax payments. The current year Form 1040 balance
due, Form 1040ES and Form 4868 payments can be made with a credit card.
Taxpayers can also charge installment agreement payments for tax year
1998 or later. The acceptance of installment agreement payments by way
of
credit card furthers the Service‘s goals of expanding electronic
payment
options. The acceptance of credit cards reduces the number of
misapplied
payments, minimizes insufficient funds conditions, and reduces lockbox
volumes and related fees.
In 2002, the IRS extended PIN authority to selected tax practitioners.
As a result, nearly 15 million PIN‘s were used, saving the IRS about $4
million in direct labor costs alone.
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Future Plans: IRS continues to improve and expand the use of Personal
Identification Number (PIN) programs to allow taxpayers nationwide to
file electronically using a selfselected PIN and a ’shared secret“
known only to the taxpayer and the IRS. This will reduce the need for
the paper signature jurat and produce savings.
F. Toll-Free Customer Satisfaction:
Description: Represents the customers‘ overall level of satisfaction
with the services provided by the IRS Toll-Free program. Survey
recipients are asked to rate IRS performance on a four-point scale,
where 1 indicates Very Dissatisfied and 4 indicates Very Satisfied.
Limitations on the survey data not affecting the statistical validity
include: only customers calling one of the IRS toll-free telephone
numbers are included in the sample. Calls are selected based on a
sampling pattern that includes variables for the hour of day, day of
week, and time of year. Customers calling when IRS monitors are not
available (Saturday, Sunday and some evening hours) are excluded from
the survey.
FY 2002 Performance: The IRS barely missed meeting the plan because of
customer dissatisfaction with getting connected to the appropriate live
assistor or automated application to address their issue. While we
missed the plan, 55% of customers did rate service as a 4 out of 4 and
only 2% rated service as a 1.
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Future Plans: The two areas for top-priority improvement efforts are
the automated answering system and ease of getting through by phone. To
reduce the demand for phone access, IRS implemented Internet Refund/
Fact of Filing to provide on-line ability to check refund status
through the IRS.gov web site.
To increase accessibility to assistors, IRS is making changes in the
routing of calls and scripting of telephone systems. IRS will implement
recommendations from the Customer Contact Engineering Study group‘s
plan to optimize the use of outward facing Toll-Free numbers by
configuring these numbers to relate directly to taxpayers‘ inquiries.
Rather than using one or two general numbers for all inquiries,
customers will call a telephone number relative to the inquiry at hand.
This plan will enable taxpayers to reach assistors with fewer levels of
prompting and will decrease the number of customers who hang up due to
the complexity of the menu system.
Telephone numbers on notices, letters, and bills will direct customers
to prompts related to their circumstance, and not to tax lawrelated
prompts. A team is being formed to identify and implement the technical
aspects of the changes. IRS expects these changes to have a positive
impact on customer satisfaction, which should be reflected in survey
data available in 2003.
INTERNAL REVENUE SERVICE
G. Toll-Free Customer Service Representative (CSR) Level of Service:
Description: Reported as the percentage of taxpayers that call IRS
toll-free services and want to talk to an assistor, and get to speak to
one. Factors used to arrive at the level of service provided by
assistors and taken into consideration in the calculation are callers
selecting an automated application, receiving a busy signal or
abandoning while in queue waiting for an assistor.
FY 2002 Performance: Assistor level of service shows the percentage of
taxpayers who want to talk to an assistor who actually reach an
assistor. Level of service was negatively impacted by problems with the
call routing system and several weeks with higher than anticipated call
demand made up of residual rebate issues.
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Future Plans: IRS will implement recommendations from the Customer
Contact Center Optimization study, including a call router to build a
pyramid of specialization that will enable us to route each customer to
an employee having the appropriate skill level to successfully address
the customer‘s issue. Once implemented, we will also utilize CSR call
recording technology for purposes of quality review, training and
evaluation. This will optimize employee commitment to quality customer
service, enhance performance feedback systems and improve the value of
training modules.
IRS will make modifications to the scripting, routing and handling of
taxpayer calls in order to improve access levels and customer
satisfaction. We plan to test a skill-based routing concept, which
involves rules-based routing to agent groups of similarly skilled
employees, as opposed to the current system of routing to applications,
based upon menu selection chosen. This will allow us to more easily use
one group of employees to staff 2 or 3 similar applications. This
concept will be tested early FY 2003, and if successful, we will fully
deploy skill-based routing at the end of the FY 2003 filing season.
H. Toll-Free Tax Law Quality:
Description: The percentage of customers receiving accurate responses
to their tax law inquiries. This evaluates the customer (external),
administrative (internal) and regulatory accuracy of this service.
FY 2002 Performance: The FY2002 goal was met because of a strong
accuracy score for responses to taxpayer questions. Continued focus on
the individual factors that contribute to the overall score including
the standards associated with case documentation was also a contributor
to improvement.
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Future Plans: IRS plans to implement the Embedded Quality Review
System. The new quality attributes place more focus on the customer
experience and will provide us with a better indication of our
accuracy, professionalism and timeliness. Evaluating quality within our
product lines focusing on the customer‘s experience will build
commitment and capability among employees and managers, thus providing
opportunities to improve our performance in all areas of our balanced
measures. Improved accuracy will increase customer satisfaction and
reduce repeat calls, aiding achievement of the level of service plan.
I. Toll-Free Account Quality:
Description: The percentage of customers receiving accurate responses
to their account inquiries. This evaluates the customer (external),
administrative (internal) and regulatory accuracy of this service.
FY 2002 Performance: The FY2002 goal was met because of a very high
accuracy score for responses to taxpayer inquiries about their
accounts. Increased management attention and focused training to
improve knowledge of the Customer Service Representatives contributed
to the increase in this area. The significant improvement in the scores
in FY 2001 continued into FY 2002 with additional progress made in
focusing on both quality and quantity on account cases.
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Future Plans: The IRS will continue to align toll-free sites according
to specialty areas. We will enable front-line employees to access
accurate, up-to-date information about taxpayers‘ accounts and to
adjust accounts immediately. We will continue to increase taxpayer
access and customer satisfaction through the intelligent call routing
system by routing calls to sites dedicated to specific types of work.
Intelligent call routing will also be used to route calls to Customer
Service Representatives (CSRs) who will specialize in specific areas of
expertise.
Customer Satisfaction Walk-in:
Description: Represents the customers‘ overall level of satisfaction
with the services provided by the IRS at its Taxpayer Assistance
Centers. The scores represent the average overall level of customer
satisfaction (’Keystone“ question) from the Customer Satisfaction
transactional surveys. Survey recipients are asked to rate IRS
performance on a seven-point scale, where 1 indicates Very Dissatisfied
and 7 indicates Very Satisfied. A Limitation that may affect the
validity of the data is the method in which the survey is conducted.
This is a ’comment card“ hand out survey. The taxpayer receives a
survey card after being served. A very small number of cards are
returned. This ’non-response“ bias leads to a small sample size that
may not represent the whole population.
FY 2002 Performance: Based on our analysis of the data, IRS did not
meet the plan because even those customers who were satisfied overall
were still not completely satisfied with our promptness of service, and
dissatisfied customers were not satisfied with our resolution of their
question or issue. While the target was missed, 86% of customers rated
service performance as a 4 or 5 on a five-point scale, and only 8% of
customers rated service performance at a 1 or 2.
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Future Plans: Field Assistance will continue to concentrate on
identifying ways to address customer expectations and perceptions of
the ’promptness of service“ including explaining the automated
numbering system at sites and advising taxpayers of the approximate
wait time.
K. EP/EO‘ Customer Satisfaction:
Description: Customers‘ overall level of satisfaction with the way
their cases were handled by the IRS Employee Plans and Exempt
Organizations Examination programs. Scores represent the average
overall level of customer satisfaction (’Keystone“ Question) from the
Customer Satisfaction Transactional Surveys. Survey recipients are
asked to rate IRS performance on a seven-point scale, where 1 indicates
Very Dissatisfied and 7 indicates Very Satisfied.
FY 2002 Performance: Customer satisfaction has improved as Area
managers promote effective case management practices to reduce cycle
time and address the highest improvement opportunity, Time Spent on
Audit.
In addition, employee and stakeholder input has been solicited to
identify
actions to further improve service to the EP/EO customers.
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Future Plans: The IRS Tax-Exempt and Government Entities Division (TE/
GE) is expanding customer satisfaction measurement efforts.
L. Employee Plans (EP) / Exempt Organizations (EO) Examination Quality:
Description: Level of quality in the EP & EO examination program is
measured by the Tax Exempt Quality Measurement System.
FY 2002 Performance: IRS established aggressive goals to improve the
quality of examinations over FY2001 results. Though still short of its
goal, EP made significant improvements in quality through site visits
by Quality Review staff to address quality concerns and distribution of
Frequently Asked Questions to all employees. EO, on the other hand,
continued to have problems with targeted elements of Examination
Planning, Examination Scope and Workpapers, despite actions to share
best practices and incorporate quality goals into Area managers‘
performance plans.
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Future Plans: For FY2003, IRS has formed a task team to review the
quality standards to ensure that measurement reflects actual technical
and procedural quality. Removing determination work from the
responsibilities of both Examination agents and managers will promote
efficiency, consistency and quality in Examination.
M. Telephone Customer Satisfaction - Automated Collection System (ACS):
Description: Represents the customer‘s perception of IRS service
received through contact with employees in the Automated Collection
System call centers. Limitations on survey respondents not affecting
the statistical validity are as follows: ACS outgoing calls are not
included in the survey due to technological limitations, and customers
calling when IRS monitors are not available (Saturday, Sunday and some
evening hours) are excluded from the survey. Customer satisfaction is
measured on a 4-point scale. 1 indicates Unsatisfied and 4 indicates
Very Satisfied.
FY 2002 Performance: Telephone Customer Satisfaction was impacted
significantly in the factor, ’difficulty in getting through to
representatives by phone“ because of higher than planned incoming call
demand, which also negatively affected ACS Level of Service (LOS).
Customers report high degrees of satisfaction in the areas of courtesy,
attitude and professionalism.
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Future Plans: In FY2003, IRS will better align workload to staffing to
improve the ease of reaching a representative. IRS will identify and
implement process and infrastructure requirements to move the Automated
Collection System (ACS) from 9 stand-alone sites to an enterprise-
operating environment that better balances telephone operations with
management of notice issuances and case closures. By the end of FY
2003, ACS will complete consolidation of inventory.
N. Automated Collection System - Telephone Level of Service:
Description: The percentage of calls attempted by taxpayers compared to
the number of calls answered (calls which abandon after having been
answered but while in queue for the next available assistor are not
included in the count of calls answered) in the Automated Collection
System (ACS).
FY 2002 Performance: The start-up of the State Income Tax Levy Program
and the Federal Payment Levy Program increased call demand,
significantly affecting the workplan. Although resources were
redirected, IRS was unable to meet the incoming volume. IRS is
assessing the increased volume of calls and evaluating the methods used
to forecast calls to better align workload to staffing. The reduced
level of service also negatively impacted Customer Satisfaction.
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Future Plans: In addition to consolidating ACS inventory, IRS has
developed call recording capability for use in training ACS assistors.
Implementation is contingent upon funding.
O. Customer Satisfaction-Collection Field:
Description: Customers‘ overall level of satisfaction with the way
their cases were handled by the IRS Field Collection program. The
following limitations are placed on the Collection sample: only those
customers who owe money to the IRS and have been referred to Collection
are sampled. Samples drawn from the Collection Quality Measurement
System (CAMS) database only include three types of closures; Currently
Not Collectible/Hardship, Installment Agreements, and Full Pays. The
sample does not include: cases with no case history, cases for
customers the IRS cannot locate, cases where the statute has expired,
bankruptcy cases, deceased taxpayers, and defunct or insolvent
corporations. For cases involving an Offer in Compromise, only those
offers that are accepted by the IRS are currently included. Customer
satisfaction is measured on a 7-point scale. 1 indicates Very
Unsatisfied and 7 indicates Very Satisfied.
FY 2002 Performance: Field Collection‘s FY2002 actual was only 3
hundredths below their FY2002 plan. While they missed the goal, this
difference is not statistically significant. They are in the process of
analyzing their results to continue the drive for improvement in
FY2003.
In FY2002, satisfaction was highest among taxpayers who had a case time
of 120 days or less, were self represented, or were in a delinquency
investigation. Targeted training, procedural improvements, a
reexamination
of the documentation standards were all factors examined by the re-
engineering
team put in place as a result of the FY 2001 results.
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Future Plans: IRS will continue reengineering initiatives in Collection
operations. The Collection Quality Measurement System will also be
reengineered, as we incorporate features from the joint Small Business
and Self-Employed and Wage and Investment Divisions embedded quality
effort. IRS will examine and refine data gathering and reporting
systems, making available quality review information to improve
training and training management for front-line employees.
P. Field Collection Quality:
Description: Score awarded to a reviewed Collection case by a third-
party reviewer using the Collection Quality Measurement System
standards. Each standard if met, has a value. Values are totaled to
arrive at the score with deductions in the overall composite score for
failure to meet a standard designated as critical.
FY 2002 Performance: The score was slightly below the plan target of
85%. Defects occurred primarily in Clear Action Dates and Case
Documentation.
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Future Plans: IRS will continue to incorporate features of the embedded
quality effort to Collection operations. Among these features will be
an assessment indicating whether or not we are measuring the right
program aspects as well as where we stand in assigning top to bottom
accountability for case quality.
Q. Automated Underreporter Quality:
Description: Quality of all Automated Underreporter (AUR) account
actions as a result of taxpayer inquiries or internal requests. Quality
of casework in the underreporter area is measured on paper closed cases
only.
FY 2002 Performance: While still 94%, quality defects have increased in
comparison to the prior year. Defects are primarily attributable to
Inventory Management/Case Controls, Transaction Code (Account Action),
and Correspondence (IRS Procedure). The AUR sites have implemented
various steps to decrease errors associated with the defects. Flyers/
alerts and Job Aids addressing the errors were issued, and weekly
meetings at which top errors were discussed were held with managers.
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Future Plans: IRS expects the AUR paper quality score to drop slightly
from FY 2002 levels due to the increase in complexity of work resulting
from more Schedule K-1 s. Using analyses of error trends arising from
this more complex work, IRS will ensure training efforts and new job
aides target problem areas.IRS will also develop business requirements
to record phone calls to improve case quality, managerial oversight,
and employee accountability.
R. Service Center Exam-Customer Satisfaction:
Description: Customer‘s overall level of satisfaction with the IRS
Service Center Examination process. The following limitations are
placed on the service center examination sample: sole proprietors and
self-employed individuals and farmers, as well as individual
shareholders and partners examined as a result of a corporate audit are
included in the sample; the sample excludes businesses that file
corporate and partnership returns, individuals who did not respond to
correspondence and audit appointment letters, individuals IRS cannot
locate and individuals with an international address. Customer
satisfaction is measured on a 7-point scale. 1 indicates Very
Unsatisfied and 7 indicates Very Satisfied.
FY 2002 Performance: The target was missed because of low scores on
discussing length of process, explanation of adjustments, perception of
fairness of treatment and listening to concerns. Aspects of attitude,
professionalism and staff courtesy rank the highest. Significant
increases have been noted in aspects of explanation of rights,
explanation of process and records required.
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Future Plans:
IRS will embed quality into our Service Center Compliance programs,
providing a higher-quality experience for taxpayers and engaging
managers in the delivery of our services. Identifying customer service
trends and issues earlier will allow us to react to our customer needs
more rapidly, increasing customer satisfaction.
S. Service Center Examination Quality:
Description: Quality of actions taken while working service center
examination cases. Each site‘s quality reviewer reviews a sample of
cases and writes a review record for each case.
FY 2002 Performance: The target was missed in FY2002 because of the
large number of overage cases that were closed. Long cycle times
negatively impacted the quality score. Since the overage cases were
closed in FY2002, average cycle time should drop in FY2003 and the
quality score rise accordingly.
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Future Plans: IRS will continue efforts to embed quality into Service
Center Compliance operations. Compliance will process cases more
efficiently with less systemic work disruptions by implementing the
Correspondence Examination Automation Support system as a replacement
to Report Generation System Batch Processing. The Inventory Management
Tool, which predicts the receipt of taxpayer correspondence and phone
calls, will be used to ensure started cases can be handled timely.
Audit issues initiated through improved system processes will produce
resource savings.
T. Examination -Customer Satisfaction:
Description: Represents the level of satisfaction customers receive
from interactions with IRS Field Examination employees. Scores
represent the average overall level of customer satisfaction
(’Keystone“ Question) from the Customer Satisfaction Transactional
Surveys. Survey recipients are asked to rate IRS performance on a
seven-point scale, where 1 indicates Very Dissatisfied and 7 indicates
Very Satisfied. A limitation on survey data not affecting the
statistical validity in the survey population is based solely on the
audit closures of individual taxpayers. Audit closures involving
estate, corporate, excise and gift tax returns are not included in the
survey population. The results also do not include contacts the
Examination division had with individuals that did not result in an
audit closure.
FY 2002 Performance: The highest satisfaction was by taxpayers whose
cases were handled by a tax professional and/or whose examinations had
a
relatively short cycle time. Further reducing cycle time offers the
largest
improvement opportunity. The hiring of additional resources in FY 2001
and
resultant productivity gains, particularly in working through the case
backlog
(reducing overall cycle time), was a significant contribution to the
improvement in the score over the FY 2001 level and achievement of the
FY
2002 target.
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Future Plans: IRS will continue to fulfill the vision of the
Examination Re-engineering project, to make the Examination process
easier and faster for taxpayers, minimizing the accrual of interest on
additional assessments, while ensuring consistency and fairness.
U. Examination-Case Quality Score:
Description: The score awarded to a reviewed Field Examination case by
a Quality Reviewer using the Examination Quality Measurement System
quality standards.
FY 2002 Performance: Continued focus on targeted improvement areas
coupled with the reduction in cycle time (a quality standard) were
major contributions to continued achievement of the target.
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Future Plans: We will improve the Examination process by combining
database systems to provide faster results. We will enhance our
examination inventory selection processes by incorporating more data
from additional sources. We will also improve our ability to identify
noncompliance electronically and automate routine examination
processes to optimize our resources.
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[End of Table]
V. Taxpayer Advocate Casework Quality Index:
Description: Measure of effectiveness in meeting customer expectations
based on a random sample of cases reviewed and scored against customer
service standards of timeliness, accuracy, and communication.
Taxpayer Advocate Casework Quality Index:
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FY 2002 Performance: Taxpayer Advocate Service met this goal and
greatly exceeded FY2001 performance by having each office set a goal
and make an improvement plan around the three standards listed above to
achieve that goal.
Future Plans: Taxpayer Advocate Service field offices will continue to
focus on improving case quality through locally developed action plans.
IRS will study those offices making the greatest improvement to see
what ’best practices“ may be applicable elsewhere.
Strategic Goal 2: Top-quality service to all taxpayers through fair and
uniform application of the law.
Main Objectives:
*Increase overall compliance:
*Increase fairness of compliance:
Our tax system depends on each person who is voluntarily meeting his or
her tax obligations having confidence that his or her neighbor or
competitor is also complying. We cannot allow those taxpayers who do
not comply to place a burden on those who do.
Major Results and Accomplishments:
Increase overall compliance:
a. Results Summary:
Field Collection Taxpayer Delinquent Account closures decreased 4% and
Taxpayer Delinquent Investigation closures increased 18% over FY 2001.
Automated Underreporter case closures are up 16% over FY 2001.
Increased the number of examinations for Coordinated Industry Cases by
27% over FY 2001.
Automated Collection System Closures declined noticeably below FY 2001
levels because of the suppression of notices as a result of the 9/11
crisis, which delayed the issuance of liens and levies on ACS
inventories. Also, the need to address increased incoming call volume
pulled resources from the time available to close assigned cases.
b. Improved Communications and Service:
Placed significant media attention on Abusive Tax Schemes in order to
alert Taxpayers to the schemes and prevent potential tax problems.
Piloted an accelerated determination processing program to ascertain
types of applications suitable for accelerated processing and to track
time savings and trends in issues developed.
As part of a national strategy to combat abusive schemes, placed
emphasis on crossfunctional training and multi-function coordination in
the identification of fraudulent trust promotions and the use of civil
and criminal enforcement actions. Engaged in outreach activities to
educate people to recognize and avoid fraudulent trust promotions.
c. New Initiatives and Program Improvements:
Identified five serious compliance problem areas: promoters of tax
schemes; misuse of devices such as trusts and passthroughs to hide or
improperly reduce income; use of complex and abusive corporate tax
shelters to reduce taxes improperly; failure to file and pay large
accumulations of employment taxes; and erroneous refund claims.
Revamped compliance programs to refocus resources and to use a full
scope of tools and techniques ranging from educating the public to
systematically identifying promoters and participants, to
reinvigorating enforcement actions such as summons enforcement,
injunctions and criminal investigation of promoters.
Began matching information reported on Schedule K-1 with income and
losses reported on Form 1040 and other schedules.
Reinvigorated the use of long dormant enforcement tools that deal with
serious cases of non-compliance and tax schemes, e.g., aggressively
identifying promoters and schemes through summonses of records,
including John Doe summonses on credit card accounts in offshore tax
havens and vendor summonses to refine that data.
Initiated 43 contacts of promoters to uncover lists of taxpayers
participating in shelters. Launched a tax shelter disclosure
initiative. As of August 2002, processed 1,664 disclosures from 1,206
taxpayers who came forward. These disclosures cover 2,264 tax returns
and involved more than $30 billion in claimed losses or deductions.
Commenced a test to gauge the effectiveness of the Automated Substitute
for Return Program (ASFR).
Initiated summons procedures on all major credit card companies and
commenced initial examinations from credit card leads (off shore credit
card data & charges).
Intercepted Slavery Reparation scheme credit cases and stopped
erroneous payments from approximately 17,000 erroneous claims this
fiscal year.
Published the Tax Shelter Disclosure Initiative, providing taxpayers
with a 120-day opportunity period to voluntarily disclose their
participation in tax shelters and other questionable items that may
have resulted in an underpayment of tax. For taxpayers who voluntarily
disclosed, the IRS promised to waive certain accuracy-related
penalties.
Announced a voluntary compliance program to help Section 527 political
organizations comply with their new reporting requirements. Sent
letters to organizations that appeared to have some confusion with
their reporting requirements.
d. Special Assistance in Response to 9/11:
Established a special program to expedite processing of applications
from organizations created to assist in relief efforts.
Provided compliance guidance and a single point of contact to new
disaster relief organizations.
Posted a draft publication, Disaster Relief: Providing Assistance
through Charitable Organizations, to the IRS website within days of the
September 11 attacks (subsequently revised and published as Publication
3833).
Provided extensions and other relief in response to the attacks.
Increase fairness of compliance:
a. Results Summary:
Increased number of examinations for individual returns greater than
$100,000 by 20% over FY 2001. Decreased number of examinations for
individual returns less than $100,000 by 4% over FY 2001. These data
reflect success in shifting focus to high-income taxpayers.
b. Reengineering:
Revisiting the examination workload model and planning processes to
include more data on other return types and to incorporate non-filer
and non-payment data.
Placed all innocent spouse claim processing at the Cincinnati
Centralized Innocent Spouse Operation and provided increased and
specialized skills for examiners working claims.
Implemented an automated decision-making tool to lead examiners through
the complex decision-making process and to assist them in making timely
and accurate decisions.
c. Focus on Higher Risk Areas:
Improving the methodology of examination workload planning for higher
income individuals. Implementing new systematic way to identify returns
with a high probability of omitting income. Previously, these returns
were only identified by indirect examination techniques. Shifting audit
and enforcement forces to focus more resources on tracking down
highincome taxpayers who fail to report income or hide it offshore.
Reorienting agents so that most of their activities are focused toward
the highest-risk areas. Increased focus on promoters of abusive tax
schemes by: identifying flow-through entities used to mask questionable
structured transactions; addressing abusive schemes through
enforcement; implementing the Schedule K-1 matching program; directing
research efforts to profile promoters and build our understanding of
trust filing reporting issues; developing skilled employees; and
targeting educational products and outreach to influence tax compliance
behaviors.
d. Improved Communications:
Improved service to taxpayers by reducing the time it takes to notify
them of innocent spouse claim decisions.
Provided innocent spouse literature to Low Income Tax Clinics and
Volunteer Income Tax Assistance tax return preparation sites.
Balanced Measures:
A. Automated Collection System Closures -Taxpayer Delinquent Accounts
(TDA):
Description: Number of entity delinquent account closures produced in
the Automated Collection System. Entities closed using codes related to
systemic reduction of inventory are not included in the actual count.
FY 2002 Performance: TDA closures were impacted by 1) the suppression
of notices as a result of the 9/11 crisis which delayed the issuance of
liens and levies on ACS inventories, 2) holiday moratorium on notices
was instituted a week earlier this year compared to last year, and 3)
increase in incoming calls and time spent on calls detracted from the
time available to close assigned cases.
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Future Plans: IRS will shift the mix of cases for Automated Collection
System work in FY 2003. TDA entities are traditionally high priority
inventory and the emphasis on high priority cases will increase the
number of TDA closures. Additional factors that will contribute to
increased TDA dispositions include: an overall refocus on ACS mission
of collecting delinquent accounts and securing delinquent returns, ACS
employees hired in FY 2002 should become more productive in FY 2003 as
they continue to gain experience, and the percent of direct time to
total time should increase due to reduced training.
B. Automated Collection System Closures - Taxpayer Delinquent
Investigations (TDI):
Description: Number of entity delinquent investigation closures
produced in the Automated Collection System. Entities closed using
codes related to systemic reduction of inventory are not included in
the actual count.
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FY 2002 Performance: The number of TDI closures did not meet the FY
2002 plan because of a management decision in February 2002 to shift
inventory priorities that resulted in a change in the mix of closures
of TDAs and TDIs.
Future Plans: To better identify TDI cases, certain TDI select codes
will be worked thoroughly, and the results used to improve TDI case
creation. Additionally, productivity is planned to recover to FY 2001
levels.
C. Field Collection - Number of Cases Closed Taxpayer Delinquent
Account (TDA):
Description: A count of the number of actual TDA dispositions completed
by Revenue Officers. A TDA disposition occurs on the Integrated Data
Retrieval System (IDRS) when the status of an account changes from an
open status to any closed status as defined in Section 8 (Document 6209
- Automated Data Processing (ADP)/IDRS Information.) Data is reported
as modules.
FY 2002 Performance: TDA closures were adversely impacted by a variety
of factors including the suppression of notices and enforcement actions
due to September 11 th attacks; concentration on working higher risk
cases; computer reprogramming to segment cases between Area and
Territory
Offices; and Service Center Workload Realignment.
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Future Plans: The shift toward higherpriority TDA entities will
increase the number of cases closed. IRS will continue re-engineering
initiatives to increase productivity.
D. Field Collection - Number of Cases Closed Taxpayer Delinquent
Investigation (TDI):
Description: Count of the number of actual TDI dispositions completed
by Revenue Officers. A TDI disposition occurs on Integrated Data
Retrieval System (IDRS) when the status of an investigation changes
from an open status to a closed status as defined in Section 8 of
Document 6209 (Automated Data Processing (ADP)/IDRS Information.) Data
is reported as entities.
FY 2002 Performance: The target was exceeded as a result of efforts to
re-balance inventories and increasing the percentage of time applied to
TDI cases.
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[End of Table]
Future Plans: Re-engineering initiatives will increase productivity.
However, due to an emphasis on priority TDA work, we expect a decrease
in the number of TDI closures. Process improvements will reduce the
amount of direct time spent resolving a TDI.
E. Automated Underreporter Closures:
Description: Total number of closures of Automated Underreporter Cases.
FY 2002 Performance: We surpassed our plan through the implementation
of improved workload selection systems and management practices
resulting from partnering efforts between Headquarters and Field
Management on the use of Management Information Systems data.
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[End of Table]
Future Plans: IRS will refine selection criteria in our Automated
Underreporter (AUR) unit to coincide with our strategic priorities. As
a result, we anticipate closing more leads in the AUR unit. IRS will
develop, test and implement a centralized AUR workload selection model.
IRS will implement a research study of each AUR income category to
gather data for analysis of screen-outs, seldom worked categories,
minimally productive categories, and categories with potential for
productive Correspondence Examination cases. Differences across
categories and subcategories, operating divisions, and campuses will
also be analyzed in order to maximize workload selection.
F. Individual Return Examinations Greater Than $100K:
Description: Number of Individual (Form 1040) returns closed by Field
Examination with a total positive income or total gross receipts
greater than $100,000.
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[End of Table]
FY 2002 Performance: The goal was exceeded because productivity was
higher than planned in some case categories, and there were
improvements in direct examination time (DET) applied. The hiring of
additional resources in FY 2001 (565 Revenue Agents and 108 Tax
Compliance Officers) and completion of their initial training
significantly improved the productivity, closing the gap created in
past years. More management attention paid to case management and
maintaining optimal inventory levels were also primary contributors to
improvement in this area.
Future Plans: IRS will develop and implement a strategy for high income
taxpayers. Research of higher income taxpayers has revealed potential
pockets of non-compliance in income strata of $1 million Total Positive
Income (TPI) and above. We will use new national Unreported Income
Discriminate Index Function (UI DIF) formulas in conjunction with the
new TPI strata to surface potential non-compliant returns for audit.
Our most experienced field revenue agents will work these cases. We
will redirect our traditional audit program to include taxpayers with
incomes over $100,000. Since many higher income taxpayers invest in
various flowthrough entities to defer or hide potential taxable income,
we will continue to build our understanding of the filing, reporting
and payment attributes of Partnerships and Trusts.
IRS will assess examination coverage across 1040 non-EITC filers and
develop a strategy for addressing compliance issues in this area.
Workload identification business rules will be designed and tested to
identify non-compliant returns. Focus will be on expanded coverage of
the higher income Wage and Investment population.
G. Individual Return‘ Examinations Less Than $100K:
Description: Number of Individual (Form 1040) returns closed by Field
Examination with a total positive income or total gross receipts less
than $100,000.
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[End of Table]
FY 2002 Performance: See measure F. above.
Future Plans: See measure F. above.
H, Total Returns Examined:
Description: Combined count of the Number of Individual (Form 1040)
returns closed by Field Examination. This measure is the sum of
measures F and G.
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FY 2002 Performance: See measure F. above.
Future Plans: See measure F. above.
I. Number of Business Returns Examined:
Description: Includes all Large and MidSized Business returns closed
outside of coordinated industry, and Small Business/Self Employed
corporation and schedule C and F examinations.
FY 2002 Performance: Fiscal year to date closures are somewhat under
plan, but starts and inventories are in line to accomplish full year
targets. Accomplishments are also expected to increase with the
realignment of $5 million to $10 million cases from the Large and Mid
Size Business Division to Small Business/Self Employed.
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Future Plans: IRS will increase emphasis on shelters, establish a
strategy to address high-risk passthrough entities related to high
wealth individuals, continue the Compliance Initiative Project on
passthrough entities, and continue reduction in staff years applied to
Coordinated Industry Cases through the use of issue management
strategies.
J. Number of Cases Examined - Large Case:
Description: Number of regular Coordinated Industry cases (CIC) closed
during the period (’R1“ cases; i.e., not including claim cases, cases
returned from Appeals, or non-examined closures). A Coordinated
Industry case consists of one or more tax years of the primary taxpayer
(usually a large corporate return) plus all related returns examined in
conjunction with the primary taxpayer.
FY 2002 Performance: The FY 2002 Performance was 528 Cases or 93% of
the 566 planned. There is no single barrier to explain this
performance, although the increased focus upon abusive shelters
frequently increases cycle time. While short of the target, this level
of performance demonstrates a significant improvement from the Large &
Mid-Size Business Division Stand-up year (FY 2000) when 328 were
closed, and FY 2001 when 417 were closed. In fact, FY 2002 performance
for CIC closures reflects a 43% increase from FY 2000 and the number of
CIC closures for FY 2002 exceeds the performance in each of the last 5
years.
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[End of Table]
Future Plans: IRS‘ highest priority for resources will be to address
abusive shelters, especially at the promoter level. For non-shelter
coordinated industry workload, we will use an issue driven approach,
based on risk analysis results, and smartly employ issue management
strategies to reduce examination time and to determine scope. We will
apply resources to pre-filing activities with the goal of reducing the
issues that are resolved in a post-filing, contentious environment. We
will develop procedures and policies to engage all employees in the use
of productivity improvement tools such as prefiling products, risk
analysis, improved planning, and other issue management strategies.
These activities should directly improve cycle time, currency, and
quality.
K. Number of Returns Closed - Large Case:
Description: Coordinated Industry Corporate returns (F1120 and
associated Partnership and Employment Tax forms) closed with designated
activity codes.
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[End of Table]
FY 2002 Performance: IRS surpassed the plan because of a greater than
expected number of Employment Tax Returns associated with Coordinated
Industry Cases.
Future Plans: CIC returns are a function of a work product (CIC Cases)
rather than a planned output. In contrast to Industry returns, where
goals and targets are established, these returns are a result of
examination of a key taxpayer. For Coordinated Industry we plan an
examination for a key taxpayer case, but the related returns (e.g.,
Partnership, Excise Tax, Employment Tax, etc.) are more a byproduct
than an intended outcome.
L. Employee Plans /Exempt Organizations Examinations Closed:
Description: Number of Employee Plans and Exempt Organizations return
examinations closed in all categories.
FY 2002 Performance: The FY 2002 goal was based on an assumption about
the number of determination letter receipts that would come in and how
many Full-Time Equivalents (FTEs) would need to be diverted from
examination casework to cover that workload. Since determinations were
lower than forecast, Examination FTEs were moved back to doing
examinations and the additional FTEs enabled surpassing the goal.
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Future Plans: By removing determination work from the responsibilities
of both Examination agents and managers, realignment of resources will
promote efficiency, consistency and quality in Examination. To improve
productivity in the face of declining resources in FY2003, IRS is
aggressively pursuing the use of limitedscope and correspondence
audits. Limitedscope audits were initiated in FY2002, and more are
planned in FY2003 and FY2004. Beginning in FY2003, IRS will also
implement recommendations from a study of time-per-case and related
returns now underway, as well as any findings regarding the
effectiveness of the limited-scope approach.
M. Criminal investigations Completed:
Description: Cumulative count of the number of all subject criminal
investigations completed by Criminal Investigation during the fiscal
year. This includes investigations that resulted in a criminal
prosecution recommendation to the Department of Justice as well as
investigations that were discontinued due to a lack of evidence or to a
finding that the original allegation was false.
FY 2002 Performance: IRS achieved approximately 98 percent of its year-
end plan for total investigations completed, a significant
accomplishment in light of redirection of resources to the war on
terrorism. IRS also shifted criminal investigation inventory mix,
reducing the time spent on narcotics related investigations, and
increasing the resources dedicated to income tax related
investigations.
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[End of Table]
Future Plans: IRS will increase emphasis on promoters of abusive
foreign and domestic trusts, and schemes based on frivolous legal
arguments. The Criminal Investigation Division will partner with the
Small Business and Self-Employed and Large and Mid-Size Business
Divisions in their efforts to identify abusive tax schemes, promoters,
and abusive tax shelter activities.
N. Appeals. Cases Closed:
Description: Total Cases Closed equals the total number of cases closed
in Appeals, including both non-docketed and docketed cases. (A docketed
case is one in which a taxpayer has filed a petition in the Tax Court.)
This measure is currently reported in workunits. A workunit represents
a single case or group of related cases, which are being considered by
Appeals as one unit for settlement of decision purposes.
FY 2002 Performance: Appeals exceeded its FY2002 plan by closing 68,015
cases. Improved resource allocations, case development practices,
better management and communications resulted in more efficiency and
greater productivity during FY 2002 making it possible for Appeals to
achieve its target.
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[End of Table]
Future Plans: One of our top priorities is to reduce the length of time
it takes for a case to go through Appeals (cycle time). We are taking a
multifaceted approach to achieve this goal. IRS plans to balance
inventory among teams, within areas, across Appeals Operating Units and
nationally. IRS will pursue workload prioritization to ensure
appropriate resources are spent on the right cases, and process cases
more efficiently based on particular characteristics of certain case
segments. IRS also plans to test the use of Fast Track Mediation for
new types of casework and permanently implement and actively promote
the Fast Track Settlement program.
0. Taxpayer Advocate Service (TAS) Closed Cases:
Description: Number of cases worked in TAS and closed on the Taxpayer
Advocate Management Information System.
FY 2002 Performance: The closure target was missed because receipts
were significantly lower than forecast. The original plan number was
based on the assumption that case receipts would decrease approximately
1.5% from the prior year, however, TAS receipts decreased at a much
higher rate.
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[End of Table]
Future Plans: Additional training, crosstraining and experience by
Taxpayer Advocate Service case advocates, along with National Customer
Service Agreements with IRS Operating Divisions, should continue the
Advocate‘s efficiency in closing cases. Since receipts, and
consequently closures, are decreasing, TAS is changing this measure to
focus on the efficiency of processing cases instead of just the raw
number. In FY2003, TAS is replacing this critical measure with the Case
Closure to Receipt Ratio.
Strategic Goal 3: Productivity Through a Quality Work Environment:
Main Objectives:
*Increase employee job satisfaction:
*Increase productivity and staffing to levels necessary to adequately
close the tax gap and manage workload growth and expansion in scope:
Employee satisfaction is one measure of management effectiveness and,
as such, is viewed as an early indicator of the ability to succeed in
meeting the mission and providing quality products and services to the
public. By ensuring our employees are satisfied, we are able to provide
services more efficiently, getting the greatest value for every dollar
we spend. Good productivity requires employee satisfaction. This means
our employees must have the management support, tools and equipment
they need to provide good service to our customers, and there must be
effective communication vertically and laterally throughout the
organization.
Major Results and Accomplishments:
a. Major Results:
The overall level of IRS employee satisfaction reached 55% in FY 2002,
exceeding FY 2001 by 4% and the FY 2002 target by 1 %.
This year a record 82,027 (69%) employees responded to our annual
census survey.
In an effort to reduce errors inherent in a paper survey and to provide
workgroup reports much quicker, IRS piloted a totally paperless survey
in two of its campus locations. Moving to a paperless process in the
campuses will provide employees with the same flexible survey
application available in locations other than the campuses.
Improvement in the area of training and career development continued to
increase as evidenced by higher employee satisfaction scores in these
areas.
Began greater focus on Employee Health and Safety and established
related measures. The addition of the employee scholarship program
targeted at key staffing needs reinforced our commitment to employee
development.
The Human Resources Investment Fund, established in response to earlier
employee feedback about training needs, continued as a complement to
the scholarship program.
An electronic data base of Employee Satisfaction meetings, issues
arising from these meetings and actions taken as a result of the
meetings will expand our ability to identify cross-cutting issues and
best practices. The database will also facilitate our ability to hold
managers accountable for actions taken in response to Employee
Satisfaction data.
IRS has addressed employee health and safety by replacing old desks and
chairs with ergonomically correct models.
Balanced Measures:
A. Agency Wide Employee Satisfaction:
Description: Measure of employee‘s satisfaction with their job at the
IRS. At the Service-wide level the results of Survey Item CO 1
(Considering everything, how satisfied are you with your job?) are used
as the sole determining factor in the externally reported results.
Additionally, survey questions regarding the employees perception of
management practices, organizational barriers, and overall work
environment that impacts an employees‘ efforts to do a good job are
used in the internally reported results.
FY 2002 Performance: Improvement was most notable in the areas of
overall job satisfaction, recent recognition or praise for doing a good
job, and increased feelings of job importance. IRS‘ strongest
performance was in the areas of ensuring employees know what is
expected of them, creating a caring environment, and engendering a
commitment to quality work. IRS provided results of SURVEY2002 to
employees for discussions in workgroups this summer, with subsequent
action plans developed to ensure continued improved working conditions.
In an effort to reduce errors inherent in a paper survey and provide
workgroup reports much quicker, IRS piloted a totally paperless survey
in two campus locations. Moving to a paperless process in the campuses
will provide employees with the same flexible survey application
available in locations other than the campuses.
Responses to questions about training and development continue to
improve. The addition of the employee scholarship program targeted at
key staffing needs will reinforce our commitment to employee
development. The Human Resources Investment Fund, established in
response to earlier employee feedback about training needs, is
continuing
as a complement to the scholarship program.
[See PDF for image]
[End of Table]
Future Plans: IRS has conducted an analysis of the top and bottom 10%
of workgroups to determine what drives scores. Survey questions that
deal with employee recognition, development, opinions and progress have
the greatest impact for groups falling in this category. In FY 2003,
IRS will more actively involve the second line manager in evaluation of
those work groups most in need of improvement and development of plans
to improve both manager skills and workgroup scores.
IRS also plans to improve readability of the survey and will expand the
use of electronic (telephone and web-based) survey tools to make it
easier for employees to participate.
Several current activities will be continued in the future to sustain
progress in this area. An electronic database of Employee Satisfaction
meetings, issues arising from these meetings, and actions taken as a
result of the meetings, will expand our ability to identify cross-
cutting issues and best practices, and will facilitate our ability to
hold managers accountable for actions taken in response to Employee
Satisfaction data. Operating Divisions are providing managers with new
tools to improve their ability to take action in response to survey
results and workgroup meetings. For example, SBSE has a managers guide
to employee satisfaction on-line and W & I has a ’Managers‘ Tool for
Engaging the Workforce,“ on-line and has developed a training course
for managers on Employee Engagement.
B. Lost Work Day Case Rate:
Description: The Lost Work Day Case Rate is the number of Federal
Employee Compensation Act claim cases with lost time filed in the
current fiscal year per 100 full-time equivalent employees. Each
division is analyzing their specific data to determine the drivers of
new claim cases and will prepare action plans addressing them once
their analysis is complete.
FY 2002 Performance: IRS formed a new team this year to define the
national strategy for the Safety and Health Program. The team began
work toward developing the Concept of Operations that will result in a
Strategic Plan for the Safety and Health Program.
[See PDF for image]
[End of Table]
Future Plans: IRS will integrate the Safety and Health Program into our
Strategic Planning Process for the next cycle (FY 2005).
III. System Controls and Legal Compliance:
Federal Managers‘ Financial Integrity Act (FMFIA):
In accordance with the requirements of the Federal Managers‘ Financial
Integrity Act, the Service evaluated its systems of internal controls
for the fiscal year ending:
September 30, 2002. The Service provides qualified assurance that the
objectives of the FMFIA are being achieved with regard to Section 2
(procedures and records of the organization) and Section 4 (systems
that carry out financial management functions and accounting systems
that carry out unique programs). This qualified assurance is based on
our identification of material weaknesses and reportable conditions,
all of which are being addressed by corrective action plans.
This summer we thoroughly reassessed our material weaknesses. As
discussed below, we are proposing to close, downgrade or consolidate
several, reducing the number remaining open from 14 to 9. Top
executives reviewed each remaining material weakness to identify the
key issues and determine what types of actions could be taken to more
expeditiously resolve them. We identified procedural modifications that
could be implemented quickly wherever possible, instead of waiting for
the longer-term systemic solutions. All of these actions enabled us to
move up the planned closing dates of the following material weaknesses:
’Demonstrate Capability to Manage Replacement of Tax Processing and
Business Systems“ (from FY 2010 to several years earlier, specific date
to be determined):
’Financial Accounting of Revenue - Custodial“ (from FY 2009 to FY 2006)
’Financial Statements - Administrative“ (from FY 2005 to FY 2003):
Three other material weaknesses will close in the same fiscal years as
previously planned and one other had its planned closing date extended
by one year.
Federal Financial Management Improvement Act (FFMIA):
As of September 30, 2002, the Service‘s financial management systems
did not substantially comply with the FFMIA. Plans are in place to
resolve the material weaknesses causing this condition. The estimated
dates for bringing our financial management systems into substantial
compliance are 2006 for the custodial and 2004 for the administration
functions. The initiatives associated with these plans are in the IRS
Modernization Blueprint. Due to changes in the Business Systems
Modernization plan, the 2006 date for custodial accounting is under
evaluation.
Laws and Regulations:
As of September 30, 2002, the IRS did not always comply with section
6325 of the Internal Revenue Code regarding the release of federal tax
liens nor with section 6159 of the code regarding the structuring of
installment agreements.
Performance Measures:
The Service provides assurance that the IRS Critical Performance
Measures are reliable. During the year, IRS has enhanced the level of
detail required for its critical measures to ensure reliability and
validation and verification of data. Data owners are now required to
provide information on management controls in place for data submitted
and used in reports.
Continuity of Operations:
IRS is addressing continuity of operations planning in critical areas
and the planning is sufficient to reduce risk to reasonable levels.
Improper Payments:
Within current law and resources available, IRS will continue to focus
on assuring that controls are adequate to minimize erroneous EITC
payments. The most significant actions for program improvement include
implementation of the joint IRS-Treasury Task Force recommendations.
Reports Consolidation Act of 2000:
The IRS FY 2002 Performance and Accountability Report was prepared to
comply with the Reports Consolidation Act of 2000. This act authorizes
the consolidation of Federal financial and performance management
reports while also satisfying the requirements of the Government
Performance and Results Act.
Limitations of the Financial Statements:
The principal financial statements have been prepared to report the
financial position and results of operations of the entity, pursuant to
the requirements of 31 U.S.C. 3515(b). While the statements have been
prepared from the books and records of the entity in accordance with
generally accepted accounting principles (GAAP) for Federal entities
and the format prescribed by OMB, the statements are in addition to the
financial reports used to monitor and control budgetary resources which
are prepared from the same books and records. The statements should be
read with the realization that they are for a component of the U.S.
Government, a sovereign entity.
IV. Future Challenges:
This report discusses many of the IRS‘ major accomplishments in FY
2002. The improvements in service and widespread redirection of
compliance programs toward higher priorities reflect the benefits of a
more customer-focused and accountable organization. We remain committed
to reach even higher levels of performance in the coming years, but we
also must acknowledge the many challenges ahead.
Our strategic planning process is the major vehicle through which we
identify and assess challenges to our continuing success. We use this
systematic approach to inform our decision making as we allocate
resources and direct our management focus to achieve IRS goals. We are
also guided by the General Accounting Office (GAO) and the Treasury
Inspector General for Tax Administration (TIGTA) who have identified
Management Challenges and High-Risk Areas facing the IRS over the last
several years (discussed in the next sub-section). Together, these
sources of information reveal four key areas upon which we must focus
in the next few years - Modernizing Systems and Business Processes;
Compliance and Enforcement; Customer Service; and Employee
Satisfaction.
Modernizing Systems and Business Processes - The modernization of the
IRS‘ tax administration and internal management systems and processes
is the greatest long-term challenge we face. Successful implementation
of new systems and processes will increase: (1) customer satisfaction
through more timely and accurate handling of taxpayer returns, refunds
and accounts management; (2) employee satisfaction through a more
productive workforce that will, for example, reduce rework caused by
errors inherent in the current manual processes; and (3) business
results as greater accuracy will increase quality and greater
efficiencies will increase quantity. Systems modernization will take
approximately ten years to accomplish. In FY 2003, our plans project
the following accomplishments: (1) implementation of a new Integrated
Financial System, (2) an Enterprise Systems Management strategy to
provide network and systems management to improve information
technology infrastructure availability and performance, (3) the
deployment of Customer Account Data Engine Release 1, authoritative
computations and data stores for individual taxpayer account and return
data, (4) the deployment of Enterprise Data Warehouse / Custodial
Accounting Project Release 1, integrated, reliable tax operations and
internal management information, (5) the implementation of Security and
Technology Infrastructure Release, a technical infrastructure for
secure phone and electronic communication, and (6) the deployment of HR
Connect, which allows employees to manage their human resources
information online.
Compliance and Enforcement-The most current projection of our nation‘s
gross tax gap (i.e., Federal taxes owed but not paid voluntarily and
timely) is somewhere between $250 billion and $300 billion. Some of the
most serious and current compliance problem areas include: promoters of
tax schemes of all varieties; the misuse of devices such as trusts and
offshore accounts to hide or improperly reduce income; abusive
corporate tax shelters; underreporting of tax by higher-income
individuals; and the failure to file and pay large amounts of
employment taxes by some employers. Efforts in FY 2003 and beyond will
address these compliance areas through better education of the public;
systematically identifying promoters and participants; improving the
efficiency of exam and collection efforts through reengineering; and
reinvigorating enforcement actions such as summons enforcement,
injunctions and criminal investigation of promoters. We must continue
to make significant progress in collecting better compliance and
noncompliance data, as well as in quantifying our corporate level
strategic compliance measures. These two goals will be achieved in
large
part through our new National Research Program (NRP). The first
available
data on payment compliance and return filing compliance recently became
available. Initial data on reporting compliance will be available in
October 2003.
Customer Service - Over the past several years, the IRS has achieved an
increase in public perception scores on both American Customer
Satisfaction Index and the Roper Starch surveys. The most recent data
from Roper Starch, however, shows a slight decrease in 2002 below 2001.
Although the Roper Starch score remains above the levels recorded in
1998 through 1999, the drop must be taken seriously.
Employee Satisfaction - Results from our 2002 survey of all employees
showed an increase in employee satisfaction. This followed a drop in
2001 that we believe was attributable to the uncertainty and change
that naturally comes from a reorganization of significant magnitude.
Even though overall scores increased in 2002, the survey indicated
areas for improvement. For 2003 we must continue to increase engagement
of front-line managers so that they are full partners in the new IRS.
Our management team must also work to more actively engage our front-
line employees, so those employees know they are valued and
appreciated.
Management Challenges and High Risk Areas:
IRS has undertaken specific actions to address each of the Management
Challenges and HighRisk Areas identified by GAO and TIGTA. Measures
within our program activities show progress in addressing them. The
first twelve Management Challenges and High Risk Areas listed below are
those identified and prioritized by TIGTA in January 2002. The last two
areas discussed, Collect Unpaid Taxes and Revamp Business Practices to
Meet Taxpayer Needs are additional carry over items from GAO‘s list
published in January 2001.
Security of the IRS - Employees and Facilities -:
Recent terrorist activity in the United States demonstrated very
graphically that the physical security of IRS employees, equipment, and
structures should be of utmost concern to IRS management. Immediately
after the terrorist attacks, Facilities Management Officers were
directed to assess all IRS offices and take actions necessary to
safeguard personnel and assets in concert with the General Services
Administration (GSA) and local law enforcement.
In FY 2002, IRS addressed this challenge through the following
accomplishments:
Developed National Physical Standards that establish security
enhancements for areas such as guard services, blast mitigation, and
IRS infrastructure.
Conducted an assessment of all IRS buildings and facilities based upon
current and proposed security standards.
Developed contingency plans for all ten IRS campuses to address
hazardous materials threats for the upcoming filing season.
Purchased and distributed protective equipment, such as gloves, masks,
and lab coats, as a result of the anthrax threats.
Consolidated all mail-opening activities throughout IRS.
Participated in government-wide programs that plan for and minimize the
risk of catastrophic events on mission achievement.
Developed posters, tri-fold brochures, and a Director‘s briefing
package to provide information and instruction to managers and
employees regarding anthrax and other hazardous materials threats.
Developed a plan to upgrade communications systems such as public
address and closed circuit television for all ten IRS campuses.
Developed an action plan to address deficiencies in offices that do not
meet the National Physical Security Standards.
Completed Phase 1 and 2 initiatives to contain Service Center Automated
Mail Processing System and mail extraction units in all campuses to
isolate these areas from other units.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Continue to work with GSA and law enforcement agencies to safeguard
personnel and assets.
Closely monitor procedures regarding the inspection of incoming mail
and packages. Continue implementation of security enhancements.
Continue to participate in government-wide programs that plan for
disaster response. Take actions to improve and institutionalize changes
for campus mail operations. Complete security risk assessments of all
level 1, 2, and 3 buildings and implement all necessary corrective
measures and/or upgrades identified.
Security of the IRS - Information Systems:
Although computer security has measurably improved, computer security
control weaknesses continue to place automated systems and taxpayer
data at serious risks to both internal and external threats. As the
primary revenue collector for the United States, IRS is a target for
both terrorists and hackers. This threat has increased over the last
few years with more interconnectivity of systems. Until stronger
security controls are in place over its information systems, tax-
processing operations remain vulnerable to disruption. Furthermore, the
sensitive taxpayer data maintained by IRS is at risk of being disclosed
to unauthorized individuals, modified and improperly used, or
destroyed, thereby unnecessarily exposing taxpayers to financial crimes
such as identity fraud.
In FY 2002, IRS addressed this challenge through the following
accomplishments:
Established Security Services organization to create corporate security
solutions.
Focused on evaluating and improving IRS security programs and
processes, and identifying how to implement security capabilities that
are balanced with operational requirements. Conducted reviews of IRS
facilities and programs to evaluate and test security controls, and
assisted IRS organizations to set up internal security review
processes.
Monitored IRS networks to prevent cyber attacks.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Conduct reviews to evaluate security performance in key business areas,
such as remittance processing, and work with IRS business units to
mitigate these weaknesses. Improve the adequacy of physical, logical,
communications, and personnel security, operating practices, software
quality assurance activities and business resumption plans to mitigate
the IRS‘ computer security material weaknesses.
Use a model facilities approach to improve the consistency of security
controls across IRS facilities.
Continue to improve the ability to prevent, identify and resolve cyber
attacks by completing build-out and improving operational readiness of
the Computer Security Incident Response Center.
Conduct regular assessments of the overall state of security in IRS;
use the security assessment framework as a guide to improve and better
measure IRS security capabilities.
Systems Modernization of the IRS:
The ability to balance the goals of helping taxpayers meet their tax
responsibility and improving overall compliance with tax laws depends
on the successful completion of the modernization effort. Modernization
of technology is crucial to implementing the new business vision of
providing world-class service to taxpayers. While the development of
new technology evolves, existing operations must continue, and
improvements must be made to meet the needs of tax administration and
demonstrate IRS‘ commitment to improved service to taxpayers.
In FY 2002, IRS addressed this challenge through the following
accomplishments:
Implemented repeatable management processes.
Ensured ongoing projects are aligned with the Enterprise Architecture
(EA) in accordance with the compliance certification process.
Fully implemented a risk management program.
Established a centralized Configuration Management repository.
Fully defined and institutionalized standard configuration management
procedures. Identified configuration items for current production
environment impacted by near-term modernization project releases.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Identify and implement efforts to slow projects to match management
capacity. Focus on better cost and schedule estimating and on building
reserves in plans. Continue strong governance and rigid adherence to
Enterprise Life Cycle.
Identify and address all potential funding problems by scaling back or
deferring some projects, improving estimates and releasing funds
annually to reduce administrative burden. Identify and correct
inconsistencies in implementing key systems, focusing on 14 key
management processes.
Provide special executive focus in acquisition and contracting areas.
Develop a detailed plan for maturing all management processes presented
to GAO/TIGTA and implement a monthly progress reporting process.
Integrating Performance and Financial Management - Performance
Management/ GPRA:
Balanced measures are being aligned with the employee performance
evaluation system to clearly link the work of individual managers and
employees to the mission and goals. Additionally, the effectiveness of
compliance improvement initiatives and current compliance levels can
not be accurately determined until a measure of taxpayers voluntary
compliance is developed.
In FY2002, IRS completed the following actions:
Almost all functions have approved balanced measures composed of
business results quantity and quality, customer satisfaction and
employee satisfaction.
Divisions used balanced measures to report to the Commissioner on
executing their workplans, and also as the cornerstones for building
their strategic plans.
Divisions are in the process of deploying and setting targets for their
balanced measures down to the Area office (or equivalent) level.
Began implementing Embedded Quality (EQ), which revamps the way quality
is measured, calculated, and reported in the sites. EQ will create
accountability by connecting employee evaluations directly to the
corporate balanced measures in a fair and meaningful way.
IRS replaced the manual process to collect, collate and report
performance data by automating these steps through the Data Mart and
Business Performance Management System (BPMS) for most of the IRS
critical measures.
IRS continues to develop its strategic measures, and included seven
strategic measures in the FY2004 OMB Budget Submission - four related
to tax administration and three on worker safety. Three of the tax
administration strategic measures in the budget had historical data:
Payment Compliance, Filing Compliance and Potentially Collectible
Inventory (PCI). Data for the fourth, Reporting Compliance, will be
available by December 31,2002. Expanded participation in American
Customer Satisfaction Index.
In FY2003, IRS will continue to respond to this challenge through the
following actions:
Continue to automate data collection and reporting through Data Mart
and BPMS.
Beginning with linking collection workplans to reducing PCI, divisions
are in the process of linking their operational critical measures to
relevant strategic measures to better align resource decisions to
achieving strategic outcomes.
Major operating divisions are developing their own strategic measures.
Integrating Performance and Financial Management - Financial
Management:
IRS‘ current financial systems alone cannot produce reliable
information necessary to prepare financial statements in accordance
with federal accounting standards. The data produced from the current
financial system has to be reconciled with other subsidiary systems to
produce reliable financial statements. Further, IRS does not fully
comply with the requirements of the Federal Financial Management
Improvement Act (FFMIA). IRS‘ remediation plans do not identify
resource commitments for all remedial actions, independent
verifications were not performed for all implemented remedial actions,
and sufficient explanations were not provided for the necessity of
revised remedial action intermediate target dates. In addition, the
financial systems cannot provide reliable cost accounting information.
To improve overall financial management, IRS is implementing two major
systems: the Custodial Accounting Project (CAP) and the Integrated
Financial System (IFS).
In FY2002, IRS completed the following actions:
*IRS has completed the Architecture Phase of the CAP.
In FY2003, IRS will continue to respond to this challenge through the
following actions:
The Systems Development Phase of the CAP is scheduled for completion in
December 2002.
Deployment of Build 1 of Taxpayer Accounts Sub Ledger (TASL) is
scheduled for March 2003.
The first release of IFS is scheduled for deployment on October 1, 2003
and will include the Core Financial System as defined by the Joint
Financial Management Improvement Program (General Ledger, Accounts
Payable, Accounts Receivable, Funds and Cost Management, and Financial
Reporting), as well as Budget Formulation.
Processing Returns & Implementing Tax Law Changes during the Filing
Season:
The filing season impacts every American taxpayer and is therefore
always a highly critical concern. Many programs, activities and
resources have to be planned and managed effectively for the filing
season to be successful. Critical programming changes for the filing
season must receive priority over other programming requests. This is
further complicated by the modernization efforts that are updating and
replacing the very core tax processing systems needed to deliver a
successful filing season. In addition, IRS must ensure systems capacity
and telecommunications will accommodate the new electronic filing
requirements and the accuracy and utility of information received and
processed.
In FY 2002, IRS completed the following actions:
Implemented a secure transaction-based web site.
Incorporated new procedures required by the Economic Growth and Tax
Relief Reconciliation Act of 2001.
Completed centralization of all employment tax processing, including
information returns, by consolidating operations in two Submission
Processing sites.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Continue to use workload forecasting to ensure the required number of
employees is available for each telephone product line and ensure tools
are updated and available timely. Continue to identify training needs
and develop training plans to improve performance. Conduct CPE training
to ensure assistors are knowledgeable of tax law changes.
Ensure the Corporate Filing Season Readiness Process is operational and
covers all aspects of the filing season, including the Annual Readiness
Certification.
Conduct pilot and roll out the Remittance Transaction Research (RTR)
system.
Implement registered user access to enable authorized third parties and
practitioners to request and receive transcripts electronically, submit
account inquiries, powers of attorney and disclosure authorizations
electronically.
Implement taxpayer identification number (TIN) matching with payers.
Expand e-filing options by adding and converting additional forms.
Complexity of the Tax-Law:
According to the FY 2000 Taxpayer Advocate‘s Annual Report to the
Congress, the highestranked problem individual and business taxpayers
had with IRS was tax law complexity. The problems that exist because of
this complexity range from individual to corporate and international
tax issues. Stakeholders from divergent constituencies have informed
decision-makers about the problems and recommended solutions. It is
unlikely that the Internal Revenue Code will be simplified at one time.
Therefore, IRS has the challenge to remove as much complexity as
possible as a service to taxpayers. The effect of tax law complexity is
compounded as IRS modernizes. Since complexity can be a major factor in
the cost of operations, IRS must devote resources to simplifying taxes
while at the same time modernizing its systems and processes.
In FY 2002, IRS completed the following actions:
Integrated Probe and Response methodology into IRS publications and
made their use the standard tool for Field Assistance technical
employees.
Trained Customer Service Representatives in one or more technical and
account topics, enabling them to be more proficient in assisting
customers quickly and accurately.
In FY 2003, IRS will continue to respond to this challenge through the
following actions:
The National Taxpayer Advocate‘s FY2001 Annual Report contains 28
legislative proposals, 19 of which are described in detail as key
recommendations. The legislative recommendations taken as a whole
represent proposals the NTA believes will reduce complexity of the
Code, reduce taxpayer burden in complying with requirements, and reduce
IRS‘ burden in administering the tax system.
The NTA has also identified potential legislative issues to be
developed for the 2002 Annual Report to Congress and continues to work
with members of Congress and their staffs to increase understanding and
support of the key legislative recommendations contained in the 2001
report. The NTA has addressed complex issues such as family status,
alternative minimum tax, installment agreements for less than full
payment, joint and several liability, penalty and interest, and
collection procedures.
Tax Compliance Initiatives:
The most current analysis estimates that our nation‘s gross tax gap
(i.e., Federal taxes and related payments owed but not paid) is
somewhere between $250 billion and $300 billion. Some of the most
serious and current compliance problem areas include: promoters of tax
schemes of all varieties; the misuse of devices such as trusts and
offshore accounts to hide or improperly reduce income; abusive
corporate tax shelters; underreporting of tax by higherincome
individuals; and the failure to file and pay large amounts of
employment taxes by some employers. Efforts in FY 2003 and beyond will
address these compliance areas through better education of the public;
systematically identifying promoters and participants; improving the
efficiency of exam and collection efforts through reengineering; and
reinvigorating enforcement actions such as summons enforcement,
injunctions and criminal investigation of promoters. We must continue
to make significant progress in collecting better compliance and non-
compliance data as well as quantifying our corporate level strategic
compliance measures. These two goals will be achieved in large part
through our new National Research Program (NRP). The first available
NRP data on payment compliance recently became available. Initial data
on reporting compliance will be available in October 2003.
In FY 2002, IRS completed the following actions:
* Analyzed Correspondence Examination programs to determine areas of
non-compliance that can be addressed through the use of soft notice and
math error treatments.
Developed improvement strategies to address escalating and aged Offers
in Compromise (OIC) inventory and to reduce open OIC inventory within
six to twelve months.
Enhanced and realigned the current Examination legacy systems to help
identify the most productive returns to examine. Information will be
made available to examiners to conduct more effective examinations.
Expanded the range of information documents and returns that may be
filed electronically for Corporate Taxpayers.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Deploy a range of initiatives using education and outreach to improve
the overall rate of voluntary compliance.
Increase efficiency and effectiveness by updating and re-engineering
work processes to make better use of resources.
Advance the use of Voluntary Compliance Agreements, reducing the need
for traditional enforcement actions.
Fully implement K-1 matching program and target enforcement efforts
towards promoters and participants of abusive tax schemes.
Implement improved processes to move to an issue-driven compliance
process that will result in productivity savings and redirect these
savings to the highest compliance work. Compliance, with the assistance
of SB/SE Research, is in the process of analyzing the Potentially
Collectible Inventory reports to identify the causes of growth and
develop a course of action to impact continued growth.
Explore the use of limited scope examination processes to improve case
resolution.
Apply alternative dispute resolution procedures and other issue
resolution programs to resolve tax shelter issues in timely and
consistent manner.
Providing Quality Customer Service Operations:
Providing top quality service to every taxpayer in every transaction is
an integral part of IRS‘ modernization plans. IRS provides customer
service in many ways, including toll-free telephone service, electronic
customer service, written communications to taxpayers, walk-in service,
and accurate and timely tax refunds. Each of these services affects
taxpayers‘ ability and desire to voluntarily comply with the tax laws.
In FY 2002, IRS completed the following actions:
Created a bar-coding system for adjustment notices and refund checks so
they can be mailed in the same envelope.
Developed a formal training plan and schedule to improve employee
knowledge of tax law, marketing, communication, and relationship
management skills.
Targeted and built quality relationships with internal and external
partners and intermediaries to educate and support taxpayer and
practitioner programs.
Provided employers with access to on-line employment tax and wage
information through the Simplified Tax and Wage Reporting System.
Reconfigured the Practitioner Hotline into a centralized system.
Trained Customer Service Representatives in one or more technical and
account topics, enabling them to be more proficient in assisting
customers quickly and accurately.
*Analyzed and trained the volunteer workforce to create subject matter
experts both internally and externally.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Add 7 new forms that can be electronically filed in 2003.
Implement and improve availability of on-line services such as Internet
Employer Identification Number (EIN), Centralized Authorization File
and Practitioner Priority Services. Improve e-services for
practitioners.
Enhance electronic interactions (such as e-filing and e-paying),
augment communication with taxpayers through the development of e-
government operations, and provide employers with access to on-line
employment tax and wage information.
Implement recommendations developed as part of the Service‘s
Multilingual Initiative. Review computer-generated notices and
correspondence to improve quality and clarity. Configure outward facing
Toll-Free numbers to relate directly to taxpayers‘ inquiries. Provide
new and expanded services through Internet Refund/Fact of Filing
(IRFOF) to reduce toll-free demand and offer customers alternative
methods of service.
Provide taxpayers a way to resolve tax problems every day at Taxpayer
Assistance Centers. Address issues associated with Globalization by
using Tax Attaches stationed overseas.
Erroneous-Payments; Noncompliance with EITC:
The President and the Congress have expressed concerns with the large
amount of erroneous payments made by Federal agencies each year. The
risk of improper payments increases in programs with complex criteria
for computing payments, a significant volume of transactions, or
emphasis on expediting payments. Although many IRS programs are
susceptible to erroneous payments, the Earned Income Tax Credit (EITC)
Program is particularly vulnerable. Subsequent to studies showing
billions of dollars of EITC noncompliance, Congress provided additional
funding and enforcement tools to improve compliance. In 1998, a five-
year compliance initiative directed at major sources of EITC
noncompliance was initiated. In addition, IRS received from Congress
and implemented additional statutory authority to deny questionable
claims during initial processing (math error processing).
Despite its compliance initiative, which has saved the Government over
$5 billion, the most recent compliance study, Compliance Estimates For
Earned Income Tax Credit Claimed on 1999 Returns, released in February
2002, estimates a 31-36% error rate and a 27-32% unrecovered overclaim
rate. EITC non-compliance results from three major error sources: (1)
taxpayers claiming EITC amounts based on children with whom they do not
have the required relationship and/or with whom they did not reside for
at least six months of the tax year; (2) taxpayers claiming EITC
amounts based on erroneously reporting their filing status and (3)
income misreporting. To address the systemic flaws in the current EITC
program, and to address the complexity of the EITC law, which was
highlighted in a then-recent Taxpayer Advocate Report to Congress,
Secretary O‘Neill convened an EITC task force. This mission of this
joint Treasury-IRS task force was to achieve the objectives of the EITC
program while reducing taxpayer confusion and increasing the accuracy
of the administration of benefits. The task force was convened in March
2002 and presented final recommendations in July 2002. In August 2002,
Secretary O‘Neill approved the recommendations and also approved the
formation of an IRS implementation team charged with development of an
implementation plan. This team began a study of the cost and business
process changes necessary for implementation, and is on-going at this
time.
In FY 2002, IRS completed the following actions:
Convened a Task Force to thoroughly examine complexity and compliance
issues of EITC and recommend fundamental program changes to reduce
complexity and improve compliance.
Expanded use of the Dependent Database (DDb) as an external data source
to identify noncompliant taxpayers.
Expanded examinations of the Duplicate TIN repeater population.
Began study of data supplied to DDb by the Federal Case Registry of
Child Support Orders. Created the EITC Executive Advisory Council.
Realigned EITC Project Office to enhance strategic program development
and execution. Participated in a government-wide task force on
erroneous payments.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Assess overall EITC compliance, identify knowledge gaps and plan
additional research. Assess marketing/awareness campaigns that target
eligible EITC non-claimant population. Analyze processing year 2002
audit results to refine existing DDb business rules. Identify,
investigate, and prosecute promoters of EITC-related refund schemes.
Finalize EITC preparer cases being actively investigated and prepared
for prosecution. Assess Federal Case Registry of Child Support Orders
study data to determine if using expanded math error authority to deny
EITC will improve compliance efforts.
Continue to address the EITC Task Force recommendations.
Continue our participation in a government-wide task force on erroneous
payments. Better integrate EITC Program Office into the IRS‘
established strategic planning process. Continue to expand and refine
tools used by campus examiners in EITC examinations.
Taxpayer Protection and Rights:
The legislative changes required by the Restructuring and Reform Act of
1998 (RRA 98) continue to have a profound impact. RRA 98 included
fundamental changes to tax law procedures, and required IRS to change
its organizational structure from one that was geographically
structured to one that was set up to serve particular groups of
taxpayers with similar needs. Most RRA 98 provisions, including massive
training programs for thousands of employees, have been modified or
implemented. Significant management attention will be required to
evaluate the effectiveness of the reforms. Additionally, IRS‘
reorganization focus on taxpayer groups presents both a risk of
treating groups of taxpayers differently and an opportunity to use
specialized knowledge to promote compliance among all taxpayers
equitably. IRS is committed to treat all taxpayers equitably, and
strategic plans indicate equitable treatment of taxpayers is included
in efforts to promote compliance among business taxpayers.
In FY 2002, IRS completed the following actions:
Implemented a secure transaction-based web site.
Ensured alternative signature initiatives comply with IRS
authentication policy.
Implemented the next phase of the Checkbox initiative to allow
taxpayers to designate an individual preparer to serve as their
designee to discuss tax matters and notices with IRS.
Combined the Centralized Authorization Files into a central repository
to eliminate the need for taxpayers to submit multiple third party
authorization requests for numerous issues. Evaluated performance by
deploying balanced measures to the appropriate levels.
Linked Critical Job Elements and performance expectations to
organizational quality goals. Redesigned examination work processes and
assessed legal requirements.
Redesigned internal Collection processes, policies and procedures, and
updated workload selection and inventory delivery systems.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Continue to administer the credit card contract to ensure protection of
taxpayer data and credit card numbers.
Reduce the volume of paper jurats, expand alternative methods of
signature. Evaluate computer security to ensure protection of taxpayer
information. Review and assess implementation of Title VI of the Civil
Rights Act of 1964 to certify that all tax preparation sites provide
equal access and non-discriminatory services.
Ensure documentation does not include specific labeling of taxpayers
raising frivolous tax arguments.
Reinforce the requirements to provide a statement to taxpayers at
initial meetings that advises them of the Taxpayer Advocate‘s
independence.
Develop a standard practice for IRC Section 7803 (c)(4)(iv), which
states that local taxpayer advocates may choose not to disclose contact
with or information provided by a taxpayer.
Human Capital:
GAO considers strategic human capital management as a high-risk area
for the government, and the President‘s FY 2001 budget has added human
capital to its list of Priority Management Objectives. Inadequate
attention to strategic human capital management has created a
government-wide risk of eroding the capacity of some agencies to
perform their missions. Like many other government agencies, IRS faces
a range of serious personnel management issues, ranging from
recruiting, training, and retaining employees to problems associated
with IRS‘ recent reorganization and modernization efforts. During FY
2001, IRS struggled with a continuing need to properly staff, train,
and provide adequate tools for employees.
In FY 2002, IRS completed the following actions:
Used the Senior Manager Pay Band system to more effectively allocate
salary resources to promote and encourage individual and organizational
excellence.
Expanded the pay band system to all front-line and mid-level managers.
Continued to offer an extensive array of web-and computer-based
training for employees via the Internet, Intranet, and by CD-ROM
covering subjects such as communications, customer service, project
management, finance, accounting, and leadership.
Continued to provide an extensive array of executive development
training activities that prepare our participants for top-level
leadership positions.
Continued to encourage executives to establish relationships with their
alma mater or with schools in their local areas.
Continued partnerships with employee organizations to help recruiters
establish relationships with community-based organizations.
Continued the state-of-the-art advertising campaign that was
established to promote IRS as an employer of choice.
IRS has established a strategic human capital strategy that consists of
four principal elements: Renewal, Training and Development,
Performance, and Transition.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Sustain recruitment efforts over the long term with continued entry-
level intake in key frontline occupations remaining a high priority.
Maintain a continued labor market presence through electronic and print
advertising. Continue to streamline and automate the hiring process.
Emphasize a management development pipeline. Implement a mid-career
recruiting strategy. Implement an IRS-wide learning strategy, including
additional investment in e-learning. Continue expansion of pay-for-
performance system to all remaining front-line managers. Increase bonus
and staffing flexibility to strengthen the linkage between executive
performance and compensation.
Capitalize future transition efforts on past experience; coordinate
efforts such as workload realignment to maximize placement of employees
while addressing business needs.
Collect Unpaid Taxes:
Reliable and timely financial, operational, and compliance data is not
available to help target efforts to collect billions of dollars in
unpaid taxes. As a result, the Federal government is exposed to
significant losses of tax revenue while compliant taxpayers bear an
undue burden of financing the government‘s activities. Certain key
collection actions, such as levies and seizures, have declined since
1997 during IRS modernization efforts and because of the IRS
Restructuring and Reform Act of 1998 (RRA98) impacts. These declines
may increase the incentives for taxpayers to either not report or
underreport their tax obligations. Attempts to identify taxpayers that
have not paid the taxes they owe are made through various enforcement
programs. IRS inability to fully pursue such cases is attributable to a
decrease in staff, reassignment of collection employees to support
customer service activities, and additional staff time needed to
implement certain taxpayer protections that were included in RRA98.
Additionally, inadequate financial and operational information has
hindered development of cost-based performance information for tax
collection and enforcement programs.
In FY 2002, IRS completed the following actions:
Developed a risk-based compliance strategy to use knowledge regarding
taxpayer behavior, history, and needs in the collection decision
process to ensure that the highest priority cases get worked first and
reduce the number of accounts closed as currently not collectible.
Centralized the processing of Offers in Compromise.
Used non-Compliance resources during the filing season to minimize
impact on Compliance casework.
Redesigned internal processes, policies, and procedures, and updated
the antiquated system of workload selection and inventory delivery.
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Provide credit card payment option for delinquent taxes (individuals),
installment agreement payments and extension-related payments and
expand credit card options to BMF returns. Develop and implement a
comprehensive nonfiler strategy.
Identify and target noncompliance with employment tax deposit and
payment requirements. Continue efforts to gain full participation in
the State Income Tax Levy Program.
Align Collection legacy systems. Implement a modernized collection
system. Tailor treatment streams and route cases to appropriate
functions and employees.
Develop educational products and a marketing plan to address abusive
flow-throughs, tax shelters, trust filers and their practitioners.
Develop and implement a strategy for High-Income Taxpayers.
Fully implement the K-1 matching program, reconciling partnership
income reporting documents to the beneficiaries of this income on
federal income tax returns.
Revamp Business Practices to Meet Taxpayer Needs:
The ability to balance the goals of improving customer service and
improving overall compliance depends in part on successful
modernization of business practices.
In FY 2002, IRS completed the following actions:
Completed centralization of all employment tax processing to two
Submission Processing sites.
Tested feasibility of correspondence imaging to allow immediate on-line
access to customer correspondence. Improved and enhanced employee
manuals and tools. Provided new tools and information such as the
Remittance Transaction System (RTR), Notice Viewing, and Correspondence
Imaging to employees.
Improved training to Toll-free/Adjustments workforce by determining
skill gaps.
Integrated business systems such as Automated Offer in Compromise,
Automated Lien System, Inventory Delivery System and Automated Trust
Fund Recovery System onto a single platform.
Provided a single-point for electronic filing and test prototype
solutions for the combined electronic transmission of federal and state
employer quarterly tax and wage reports. Prototyped an application to
provide employers a quicker method to securely access, apply for, and
receive a Federal EIN on-line.
Reconfigured the Practitioner Hotline to a centralized system.
Centralized the processing of Offers in Compromise (OIC).
Continued efforts to ensure that work is allocated to the proper
operating division by implementing standardized criteria to reassign
compliance cases.
Responded to taxpayer demand and implemented pre-filing agreement
program.
Customer Service Representatives:
In FY 2003, IRS will continue to respond to this challenge through the
following planned actions:
Establish customer liaisons for media and publications.
Continue to work with industry to enable online tax return entry and
submission at no cost. Expand electronic tax products for business.
Enhance customer experience by routing calls to appropriate assistors.
Improve and enhance employee manuals and tools.
Continue to deploy the Integrated Case Processing system.
Redesign business processes to provide service around an industry
rather than geographically to provide better service for each taxpayer.
Move to an issue-driven examination process for large and midsize
businesses. Re-engineer the Published Guidance process.
V.Financial Highlights:
Stewardship Information Analysis:
a. Overview of Revenue and Administrative Accounts:
The IRS‘ financial statements and footnotes received an unqualified
audit opinion for the third consecutive year for administrative
accounts and the sixth consecutive year for revenue accounts.
Administrative accounts reflect resources used and expenses incurred in
administering the tax laws. Revenue accounts reflect net taxes
receivable and taxes collected to support the federal government.
The Balance Sheet reflects total assets of $24.71 billion. Of these
assets, almost 81 percent are Federal Taxes Receivable. These
receivables are the amounts expected to be collected from past due
accounts. The decrease in assets of $0.53 billion is mainly
attributable to a decrease in the IRS‘ fund balance with Treasury. The
majority of the liabilities, a little over 86 percent, consist of
Federal Taxes Receivable due to Treasury.
The Statement of Custodial Activity shows that IRS programs resulted in
$2.016 trillion in Federal receipts. IRS collections constitute 95
percent of the Federal Government receipts, as shown in the following
chart.
Total Federal Receipts:
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[End of figure]
b. Financing Sources:
The IRS receives the majority of its funding through annual, multiyear,
no-year and trust fund appropriations which are available for use
within certain specified statutory limits. There are three major and
several minor operating appropriations. The Processing, Assistance and
Management appropriation funds the processing of tax returns and
related documents, assistance for taxpayers in the filing of their
returns and paying taxes due,
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matching information with returns, conducting internal audit reviews
and security investigations, and managing financial resources. The Tax
Law Enforcement appropriation provides funds for the examination of tax
returns and the administrative and judicial settlement of taxpayer
appeals of examination findings. The Information Services appropriation
funds costs for data processing and information and telecommunications
support for the Service‘s activities. The Business Systems
Modernization Account and the Earned Income Tax Credit appropriations
are the most significant of the minor operating appropriations. The
former funds capital asset acquisitions of information technology
systems. The latter provides resources for expanded customer service
and outreach, strengthened enforcement, and enhanced research to reduce
claims and erroneous filings associated with the Earned Income Tax
Credit.
Besides appropriations, the Service utilizes other financing sources.
These include net transfers from other federal agencies, and imputed
financing (subsidies from other federal funds that cover specific
expenses such as retirement benefits).
c. Use of Resources:
The Statement of Net Cost reflects the use of resources in carrying out
the agency‘s major programs. The major programs are:
Pre-filing, Filing and Account Services, Compliance, and Administration
of the Earned Income Tax Credit (EITC). Pre-filing activities include
taxpayer education and outreach, pre-filing agreements, and tax
publication issuance and distribution. Filing and account services
activities include the filing of tax returns, current account status,
and processing of taxpayer information.Compliance activities include
document matching, audits, and criminal investigation activities.
Administration of the EITC activities includes pre-filing, filing and
account services, and compliance activities.
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Revenue and Refund Trend Information:
Federal tax revenues are collected through six major classifications:
individual income, corporate income, excise taxes, estate and gift
taxes, railroad retirement, and Federal unemployment taxes. Overall
revenue receipts (approximately $2.016 trillion) for FY 2002 decreased
by approximately 5 percent. Individual income taxes, which include both
FICA and SECA taxes, decreased by 7 percent. Corporate income taxes
increased by 13 percent. Collections from all other tax sources were
relatively stable from 2001 to 2002.
The decline in receipts is predominately due to the 2001 recession, the
decline in the stock market, and the September 11, 2001 terrorist
attacks. These occurrences resulted in reductions in relatively highly-
taxed forms of income, especially wages and salaries, and indicates
that much of the decline in these forms of income is attributable to
the recession. At the same time, the decline in the stock market
reduced capital gain receipts and further reduced taxes on wage and
salary income. The entire amount of Federal revenue received in 2002
was distributed to Treasury.
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Federal tax refund activity, which includes tax, interest, the special
tax rebate authorization, payments for Earned Income Tax Credits, and
Child Tax Credits in excess of the tax liability was $281 billion. This
increase from FY 2001 activity is attributable to the Job Creation and
Worker Assistance Act (the Economic Stimulus Bill) that affects both
individuals and corporations by reducing the tax rate for individuals,
extending the corporation carry-back period for net operating losses
from two to five years, and temporarily extending a number of tax
reductions that had expired December 31, 2001.
Overall refund disbursements increased by 12 percent. The table below
shows that the largest dollar volume tax classes, Individual, FICA/
SECA, and the other refunds appear to remain relatively consistent;
however, in FY 2001 approximately $36 billion was disbursed for the
special tax rebate, which means the remaining disbursements were
approximately $175 billion. When FY 2001 and 2002 are normalized to
exclude the special tax rebate refunds for these same tax classes in FY
2002 ($212 billion) increased by approximately 21 percent. Corporate
Income refunds increased by 76 percent, which offset increased
corporate tax receipts. Other tax class refunds remained relatively
consistent.
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[End of figure]
Analysis of Unpaid Assessments:
Figure 1: Components of IRS‘ $249 Billion of Unpaid Assessments as of
September 30, 2002:
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As reflected in the supplemental information to IRS‘ fiscal year 2002
Financial Statements, the unpaid assessment balance was about $249
billion as of September 30, 2002. This unpaid assessment balance
represents assessments resulting from taxpayers filing returns without
sufficient payment; as well as from the Service‘s enforcement programs
such as Examination, Underreporter, Substitute for Return, and Combined
Annual Wage Reporting. The majority of this balance is not considered a
receivable. In addition, a substantial portion of the amounts
considered receivables is largelyuncollectible.
Under federal accounting standards, unpaid assessments require taxpayer
or court agreement to be considered federal taxes receivable.
Assessments not agreed to by taxpayers or the courts are considered
compliance assessments and are not considered federal receivable.
Assessments with little or no future collection potential are called
write-offs.
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Of the $249 billion balance of unpaid assessments, $137 billion
represents writeoffs. Write-offs principally consist of amounts owed by
defunct corporations and include many failed financial institutions
resolved by the Federal Deposit Insurance Corporation (FDIC) and the
former Resolution Trust Corporation (RTC). Taxpayers with extreme
economic and/or financial hardships, deceased taxpayers, and taxpayers
who are insolvent due to bankruptcy owe the remaining amounts.
In addition, $25 billion of unpaid assessments represent amounts that
have not been agreed to by either the taxpayer or a court. These
assessments result primarily from various Service enforcement programs
to promote voluntary compliance. Due to the lack of agreement, these
compliance assessments have less potential for future collection than
the unpaid assessments that are considered federal taxes receivable.
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[End of figure]
The remaining $87 Billion of unpaid assessments represent federal taxes
receivable. About $67 billion (77%) of this balance is estimated to be
uncollectible due primarily to the taxpayer‘s economic situation,
including
individual taxpayers who are unemployed, are currently in bankruptcy,
or
have other financial problems. However, under certain conditions, IRS
may
continue collection action for 10 years after the assessment. Thus,
these accounts may still ultimately have some collection potential if
the taxpayer‘s economic condition improves.
About $20 billion, or about 23%, of federal taxes receivable is
estimated to be collectible. Components of the collectible balance
include installment agreements with estates and individuals; confirmed
payment plans through bankruptcy; and some newer amounts due from
individuals and businesses with a history of compliance. The taxes
receivable amount from September 30, 2001, to September 30, 2002,
increased $7 billion from $80 billion to $87 billion. The percent
estimated to be collectible at September 30, 2002 (23%), decreased from
September 30, 2001 (25%).
Figure 4: Unpaid Taxes and Interest and Penalty Components of $249
Billion in Unpaid Assessments as of September 30, 2002:
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It is also important to note that the unpaid assessment balance
contains unpaid assessed tax, penalty, and interest; and accrued
penalty and interest computed through September 30, 2002. About $160
billion (64%) of the unpaid assessment balance as of September 30,
2002, contains interest and penalties, as depicted in Figure 4, and are
largely uncollectible.
Interest and penalties are such a high percentage of the balance
because IRS must continue to accrue them through the 10-year statutory
collection date, regardless of whether an account meets the criteria
for financial statement recognition or has any collection potential.
For example, interest and penalties continue to accrue on write-offs,
such as FDIC and RTC cases, and on exam assessments where taxpayers
have not agreed to the amount assessed. The overall growth in unpaid
assessments during fiscal year 2002 was mostly attributable to the
accrual of interest and penalties.
ADDENDUM: President‘s Management Agenda:
The IRS made steady progress on the President‘s Management Agenda this
year and we still have room for improvement. The table below summarizes
the status and progress ratings for IRS in the second, third and fourth
quarters of FY 2002. In ’Progress“ ratings, the area where we can have
the most short-term impact, we received two greens and three yellows.
In ’Status“ ratings, we received one green, two yellows and two reds.
The IRS was not rated in the first quarter for any agenda item, and
received ratings in the area of Budget & Performance Integration in the
third and fourth quarters only.
IRS Overall Ratings as of; September 30, 2002.
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Green = meets OMB Scorecard criteria for factor being rated Yellow =
partially meets scorecard criteria:
Red = does not meet criteria:
Major Accomplishments and Future Plans:
IRS has developed a rigorous, quantitatively-driven succession planning
and management system that assesses current and projected candidate
supply/demand at each management level of the organization.
IRS implemented a pay-for-performance system for its executives and
managers that links salary adjustments directly to performance
evaluations.
IRS was awarded two prestigious Creative Excellence Awards, sponsored
by the Society for Human Resources Management, for its interactive
professional recruitment efforts.
Competitive Sourcing.
*Established a program for FY 2002 and FY 2003 to review approximately
4500 FTE for competitive sourcing.
*Completed feasibility studies in five additional functional areas.
*A-76 Project Development - Began Performance Work Statements (PWS) for
500 FTE; began streamlined competition for 30 FTE; convened most
efficient organization team for 500 FTE; and convened PWS teams for 560
FTE.
*Completed direct conversion of 93 FTE.
Budget & Performance‘ Integration:
Developed and used for first time ever, data on program performance
gaps to develop strategic plans and prioritize budget initiatives.
Developed integrated financial and performance plans that tie budget to
performance for each program. Plans were certified by Division
Commissioners to assure accountability. Enhanced the use of performance
data and program evaluations in the budget decisionmaking process to
create stronger linkage between current performance and future-year
performance goals.
Will continue development and reporting of corporate strategic measures
and will use data to begin discussion and development of servicewide
outcome goals.
Will realign IRS budget structure to help link costs to program
results.
Will develop the Integrated Financial System and deploy a cost module
that is interfaced with program area data systems to provide both
direct and indirect cost data to support budget requests and execution.
E-Government:
Increased the number of e-filed individual returns by 17% over FY 2001
resulting in 36% of all returns being filed electronically.
The number of taxpayers e-filing from their home computers is up 38%
over last year. Implemented electronic payment via the internet for the
2002 filing season.
Increased the number of Federal Tax Payment Transactions Paid
Electronically by 3°% over FY:
Implemented internet based taxpayer access to answers for their
inquiries regarding refunds and fact of filing.
Introduced a newly designed and more accessible web site. Increased the
number of web site hits to 3.4 billion and downloaded files to 436
million projected through the end of FY 2002. This represents increases
of 31 % and 38% respectively over FY 2001.
Will continue efforts with industry partners to develop the free
internet filing web page, to be hosted on IRS.gov.
Will continue initiatives on EZ Tax Filing and Expanding Electronic Tax
Products for Businesses.
Financial Performance:
Achieved clean audit opinion by November 15 through significant
improvements in the timing and accuracy of financial data throughout
the fiscal year.
Administrative and Revenue Accounting Divisions achieved the Treasury
June target for 3day close for both timeliness and quality.
Revising the Remediation Plan to reflect a comprehensive set of actions
to improve IRS‘ financial management systems and ensure they meet
federal requirements and standards. Addressed components of material
weaknesses in internal controls, e.g., controls over material balances
in the general ledger and recording of transactions; quarterly
reporting of capital items; timely recording of adjustments; and
consistent implementation of existing computer security policies and
procedures.
Formed an implementation team to develop procedures, processes, and
costs associated with recommendations of joint Treasury and IRS task
force to address erroneous payments.
Actions are on schedule for long-term solutions to address six material
weaknesses in internal controls.
Integrated Financial System is on schedule for implementation on 10/1/
03.
Custodial Accounting Project (CAP) Build 1 will be deployed November
2003. All future dates and builds of CAP/EDW (Enterprise Data
Warehouse) are under review due to changes in the Business Systems
Modernization Plans (dependent on Modernized Data Access Projects).
Financial Statements:
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Balance Sheets:
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Statement of Net Cost:
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Statement of Changes in Net Position:
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Statement of Budgetary Resources:
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Statement of Financing:
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[End of table]
Statement of Custodial Activity:
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[End of table]
Notes to the Financial Statements:
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[End of section]
Supplemental and Other Accompanying Information:
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[End of section]
Appendixes:
[End of section]
Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Material Weaknesses:
During our audits of the Internal Revenue Service‘s (IRS) fiscal year
2002 and 2001 financial statements, we identified five material
weaknesses in internal controls. These material weaknesses have given
rise to significant management challenges that have (1) impaired
management‘s ability to prepare financial statements and other
financial information without extensive compensating procedures, (2)
limited the availability of reliable information to assist management
in effectively managing operations on an ongoing basis, (3) reduced
IRS‘s effectiveness in enforcing the Internal Revenue Code, (4)
resulted in errors in taxpayer accounts, and (5) increased taxpayer
burden. The issues that we have identified and discuss in this report
relate to IRS‘s controls over (1) financial reporting, (2) unpaid
assessments,
(3) federal tax revenue and refunds, (4) property and equipment, and
(5)
computer security. We reported on each of these issues last
year.[Footnote 7]
We also reported a material weakness in controls over IRS‘s budgetary
activity in prior years. However, as a result of improvements in IRS‘s
controls over its budgetary transactions, we have reassessed this as a
reportable condition. We highlight these issues in the following
sections.
Less significant matters involving IRS‘s system of internal controls
and
its operations will be reported to IRS separately.
Financial Reporting:
In fiscal year 2002, as in prior years, IRS did not have financial
management systems adequate to enable it to timely, routinely, and
reliably generate and report the information needed to prepare
financial statements and manage operations on an ongoing basis. To
overcome these systemic deficiencies, IRS was compelled to rely on
extensive compensating procedures that were costly, labor intensive,
and not always effective. During fiscal year 2002, IRS (1) did not have
an adequate general ledger system for financial reporting and
management purposes, (2) did not always timely recognize material
transactions in its general ledger system, (3) could not determine and
report on the specific amount of revenue collected for each of several
of the federal government‘s largest revenue sources, and (4) did not
have a cost accounting system capable of providing timely and reliable
cost information related to IRS‘s activities and programs. In fiscal
year 2002, IRS enhanced its procedures to more timely record certain
types of transactions and thereby improved the ongoing reliability of
its financial information. However, primarily because it continues to
rely on the same inadequate financial management systems as in prior
years, material financial reporting control weaknesses remain. To
compensate for these weaknesses, IRS continued to depend extensively on
labor-intensive compensating procedures to enable it to generate
reliable information for the annual financial statements. Although this
approach culminated in financial statements that were fairly stated as
of September 30, 2002 and 2001, it has not produced the current data
needed to assist in managing operations on an ongoing basis, such as
cost-based performance information to assist in making resource
allocation decisions.
As in previous years,[Footnote 8] during fiscal year 2002, IRS‘s
general ledger system (1) comprised two independent general ledgers
that were not integrated with each other or with their supporting
records for material balances, and (2) was not supported by adequate
audit trails for federal tax revenue, federal tax refunds, taxes
receivable, or property and equipment. IRS‘s use of two separate
general ledgers to account for its tax collection activities and the
costs of conducting those activities, respectively, greatly complicates
efforts to measure the cost of IRS‘s tax collection efforts. In
addition, IRS‘s general ledger for its custodial activities does not
use the standard federal accounting classification structure. Because
of these deficiencies, IRS‘s general ledger system does not conform to
the U.S. Government Standard General Ledger (SGL) as required by the
Core Financial System Requirements of the Joint Financial Management
Improvement Program (JFMIP)[Footnote 9] or the requirements of the
Federal Financial Management Improvement Act of 1996 (FFMIA). In its
Management Discussion and Analysis, IRS discusses its plans to
implement a single, integrated general ledger that will be fully
compliant with FFMIA.[Footnote 10] However, it is unclear when this
will be accomplished, and thus when IRS will have a functional general
ledger that is fully compliant with FFMIA, including being supported by
detailed subsidiary records for its administrative and custodial
accounts.
Also, during fiscal year 2002, IRS did not always timely record
material transactions in its general ledger. As a result, affected
balances were not always current and accurate on an ongoing basis. In
fiscal year 2002, IRS implemented procedures to more timely record
material activity, such as quarterly recording of property and
equipment acquisitions and related depreciation and monthly recognition
of imputed financing costs, which have significantly improved the
reliability of related balances during the year. However, IRS did not
record accruals to recognize nonpayroll-related expenses, such as rent
and utilities, during the year. As a result, transactions totaling more
than $156 million and more than $95 million remained in IRS‘s suspense
account as of March 31 and June 30, respectively.[Footnote 11] Thus,
affected accounts in IRS‘s general ledger continued to be materially
misstated during the year. At interim periods, these problems also
resulted in the understatement of the cost of IRS‘s operations and
outlays in the Statements of Net Cost and Budgetary Resources,
respectively. Additionally, as discussed in the material weakness over
unpaid assessments, IRS requires months of effort and compensating
procedures to produce a balance for taxes receivable, the single
largest item on its balance sheet. This number is only derived on an
annual basis.
During fiscal year 2002, IRS continued to be unable to determine the
specific amount of revenue it actually collects for three of the
federal government‘s four largest revenue sources--Social Security,
hospital insurance, and individual income taxes. In addition, IRS
continued to be unable to determine, at the time payments are received,
collections for the Highway Trust Fund or other trust funds that
receive excise tax receipts. This is primarily because the accounting
information needed to validate the taxpayer‘s liability and record the
payment to the proper trust fund is provided on the tax return, which
is received months after the payment is submitted. Further, the
information on the tax return pertains only to the amount of the tax
liability, not to how to distribute the amount previously collected
among the appropriate trust funds. IRS does not require taxpayers to
submit information identifying the type of tax at the time of payment
because it believes that imposing such a requirement would create an
additional burden to taxpayers. In addition, IRS‘s systems cannot
presently capture and report such information routinely. IRS is working
on systems improvements to accommodate this type of information. IRS
will continue to be unable to timely report the specific amount of
revenue it actually collects for these large revenue sources until it
has the systems capability to record, and requires taxpayers to
provide, this information. This condition also makes the federal
government rely on a complex, multistep process to distribute excise
taxes to the recipient trust funds that continues to be susceptible to
error.
During fiscal year 2002, IRS continued to lack a cost accounting system
(1) capable of accurately and timely tracking and reporting the costs
of IRS‘s programs and projects to assist it in managing its costs and
(2) meeting the JFMIP Systems Requirements for Managerial Cost
Accounting.[Footnote 12] This condition also renders IRS unable to
produce reliable cost-based performance information. IRS officials have
indicated that IRS‘s records contain information necessary to enable
them to determine the cost of various activities, such as conducting
investigations. However, this information is widely distributed among a
variety of information systems, which are not linked and therefore
cannot share data. This makes the accumulation of cost information time
consuming, labor intensive, and not readily available as a tool to
manage costs. For example, IRS has a variety of workload management
systems that staff in different units use to track how their time is
spent on specific tasks. However, these systems are not integrated with
IRS‘s general ledger or each other to allow IRS to readily identify and
accumulate the total costs for time spent by all units involved in any
specific activity. In addition, IRS‘s workload management systems are
not designed to track certain material forms of nonpersonnel costs by
project and subproject, such as equipment depreciation, rent, and
utilities.
Without a cost accounting system to centrally accumulate, organize, and
timely report cost data in a format that meets management‘s current
needs, such information is not readily available for use by managers to
aid in routinely managing costs and in decision making. Instead, IRS
often finds it necessary to conduct special research efforts tailored
to determine the cost of a specific task or project. In its Management
Discussion and Analysis, IRS stated that the new cost management
system, which includes a cost accounting module, is scheduled for
deployment on October 1, 2003. IRS expects this system to provide and
reliably report cost information that it can use to manage its
operations.
As a result of these pervasive financial reporting weaknesses, IRS was
compelled to expend far more time and effort to maintain its accounting
records and generate financial management information than would
otherwise have been necessary, and despite these monumental efforts,
continued to lack current, reliable financial information available to
assist in managing operations throughout fiscal year 2002. During
fiscal year 2002, as part of its strategic planning process, IRS
conducted a comprehensive assessment of its strategic priorities. A
major goal of this exercise was to prioritize IRS‘s programs relative
to its mission in light of its available resources. IRS is using the
outcome of this process as a basis for resource allocation decisions
intended to reduce the difference between the aggregate amount of taxes
assessed by federal tax laws in any given year and the amount that is
paid voluntarily and timely (known as the tax gap). This initiative
represents a major step forward in IRS‘s efforts to ensure that it is
utilizing its resources as efficiently and effectively as possible.
Addressing the financial reporting deficiencies discussed above would
enhance this process by providing sound, reliable, and timely
information to assist in evaluating the impact of these decisions in
terms of both the costs incurred and the benefits derived.
Unpaid Tax Assessments:
During fiscal year 2002, we continued to find serious internal control
issues that affected IRS‘s management of unpaid assessments.
Specifically, we found (1) IRS continued to lack a subsidiary ledger
for unpaid assessments that would allow it to produce timely and useful
information with which to manage and report externallyand (2) errors
and delays in recording taxpayer information, payments, and other
activities that continued to hinder IRS‘s ability to effectively manage
its unpaid assessments.[Footnote 13]
IRS‘s management of unpaid assessments is hindered by a lack of
effective supporting systems. IRS lacks a detailed listing, or
subsidiary ledger, that tracks and accumulates unpaid assessments and
their status on an ongoing basis. As a result, IRS must rely on a
costly, labor-intensive manual compensating process for external
reporting. Specifically, to report balances for taxes receivable and
other unpaid assessments in its financial statements and supplemental
information, IRS must apply statistical sampling and projection
techniques to data in its master files[Footnote 14] to estimate the
balances at year end. While refinements were made to this process
during fiscal year 2002, it continued to take several months to
complete, required adjustments totaling tens of billions of dollars,
and produced amounts that were only reliable as of the last day of the
fiscal year. Consequently, this information is not useful for ongoing
management decisions. In addition, the lack of a subsidiary ledger
renders IRS unable to timely develop reliable financial and management
reports and promptly identify and focus collection efforts on accounts
most likely to prove collectible.
IRS‘s management of unpaid assessments also continued to be hindered by
inaccurate tax records. We continued to find errors and omissions in
taxpayer records resulting from IRS‘s failure to accurately and timely
record information. As in prior years, the most prevalent errors we
found involved IRS‘s failure to record payments to all related
taxpayers associated with unpaid payroll taxes.[Footnote 15] IRS‘s
current systems continued to be unable to automatically link each of
the multiple assessments made for the one tax liability. Consequently,
if the business or an officer pays some or all of the outstanding
taxes, IRS‘s systems are unable to automatically reflect the payment as
a reduction in the related account or accounts. In reviewing unpaid
payroll tax cases where one or more individuals were assessed a trust
fund recovery penalty, we found 23 cases in which payments were not
recorded in all related taxpayer accounts. We are 95 percent confident
that the error rate in the population could be as high as 20 percent.
IRS has recognized the seriousness of this issue and has attempted to
compensate for the lack of an automated link between related accounts
by manually inputting a code in each account that cross-references it
to other related accounts. However, our work in fiscal year 2002
indicates that this compensating control has not been fully effective:
of the 23 cases with unrecorded payments, 21 had the manual cross-
references and in 9 of those cases, the unposted payments were made
after the cross-references had been added to the accounts.
We found other errors in taxpayer accounts that were caused by IRS
input errors. For example, in two different cases involving the estates
of deceased taxpayers, IRS erroneously input the deceased taxpayer‘s
date of birth as the date of death. This input error caused the IRS
system to automatically generate interest and penalties of almost $50
million in one case and $1.8 million in another. IRS sent out tax
notifications to both estates and, at the time of our testing, these
amounts were recorded as valid unpaid tax assessments. Delays and
errors in recording activity in taxpayer accounts complicate IRS‘s
efforts to derive a reliable balance for taxes receivable and other
unpaid assessments for its financial statements and other accompanying
information. Additionally, failure to record payments and other
activity timely could result in a burden on taxpayers, including having
enforcement actions taken against them for taxes they do not owe or
that have already been paid.
We have reported on these issues in previous audits.[Footnote 16] IRS
has acknowledged the seriousness of these issues and continues to take
remedial steps to address their impact. For example, IRS has convened a
task group to design an automated trust fund recovery penalty system
that can properly cross-reference payments received and thus eliminate
the opportunity for errors that plague the current manual process.
However, the ultimate solution to many of these issues continues to be
the successful modernization of IRS‘s systems, which IRS acknowledges
will take several years to complete.
Tax Revenue and Refunds:
During fiscal year 2002, we continued to find that IRS‘s controls were
not fully effective in maximizing the government‘s ability to collect
what is owed and in minimizing the risk of payment of improper refunds.
IRS recognized this in its fiscal year 2002 Federal Managers‘ Financial
Integrity Act (FIA) assurance statement to the Treasury, in which it
reported a material weakness in Earned Income Tax Credit (EITC)
noncompliance. IRS‘s taxpayer compliance programs identify billions of
dollars of potentially underreported taxes and invalid EITCs each year.
However, due in large part to perceived resource constraints, IRS
selects only a portion of the questionable cases it identifies for
follow-up investigation and action. In addition, IRS often does not
initiate follow-up on the cases it selects until months after the
related tax returns have been filed and any related refunds disbursed,
affecting its chances of collecting amounts due on these cases.
Consequently, the federal government is exposed to potentially
significant losses from reduced revenue and disbursements of improper
refunds.
The options available to IRS in its efforts to identify and pursue the
correct amount of taxes owed and to ensure that only valid refunds are
disbursed continue to be limited. For example, third-party information
such as form 1099s[Footnote 17] that can corroborate the amount of
income reported by taxpayers are not required to be filed until after
the start of the tax filing season.[Footnote 18] Consequently,
comparison of such information with tax return data is problematic
because IRS does not have time to prepare the third-party data for
matching prior to the receipt of individual tax returns. Additionally,
while it processes hundreds of millions of tax returns each filing
season, IRS must issue refunds within statutory time constraints or be
subject to interest charges.[Footnote 19]
IRS has some preventive controls that help to reduce the magnitude of
underreported taxes owed and improper refunds issued. For example,
IRS‘s Examination Branch is responsible for performing examinations on
tax returns with potentially invalid EITC claims[Footnote 20] to
determine the validity of the claim. When performed before refunds are
disbursed, these examinations are an important control to prevent
disbursement of improper refunds. However, these examinations are often
performed after any related refunds are disbursed, which reduces their
effectiveness as a preventive control. In February 2002, IRS estimated
that of about
$31.3 billion in EITC claims filed by taxpayers for tax year 1999, at
least $8.5 billion (27 percent) should not have been paid.[Footnote 21]
Of this amount, only $1.2 billion (14 percent) was either recovered or
expected to be recovered through compliance efforts. The dollar amount
of improper refunds disbursed related to these invalid EITCs is
unknown. However, based on the fiscal year 2000 refund rate, which was
about 84 percent,[Footnote 22] IRS may have disbursed about $7.1
billion in EITC-related improper refunds in tax year 1999, of which
about $6.1 billion (86 percent) may never be recovered. The full
magnitude of improper refunds disbursed annually due to invalid EITCs
is unknown.
Due to time and other constraints, IRS relies extensively on detective
controls, such as automated matching of returns with third-party data
such as W-2s (wage and tax statements) to identify for collection
underreported taxes and improper refunds. However, these programs are
not run until months after the returns have been filed. As a result,
they are used too late to prevent improper refunds from being
disbursed. In addition, although IRS‘s matching program for individual
tax returns identifies billions of dollars of potentially underreported
taxes each year, IRS only follows up on a portion of these cases to
determine how much tax is actually due and to pursue collection of
those amounts. For example, for tax year 2000,[Footnote 23] IRS‘s
matching program for individuals identified 16.2 million individual tax
returns with potential underreported taxes totaling $19.2 billion. IRS
investigated 3 million (18.5 percent) of these returns accounting for
about $9 billion (47 percent) of the total potential underreported
taxes. There are factors that affect IRS‘s ability to accelerate the
timing of its automated matches, such as the limitations of its current
automated systems and the timing of filing requirements for preparers
of third-party documents, which are beyond IRS‘s control. Nonetheless,
the information from IRS‘s automated matching program suggests that a
substantial amount of additional revenue might be realized if
additional resources were devoted to follow-up efforts. At present,
billions of dollars in underreported taxes could remain uncollected and
improper refunds could be disbursed. This, in turn, could further erode
taxpayer confidence in the equity of the tax system and reduce
compliance with the tax laws.
Property and Equipment:
In fiscal year 2001, we reported that material weaknesses in IRS‘s
property and equipment (P&E) systems and controls prevented it from
having (1) current, reliable P&E information available on an ongoing
basis and (2) reasonable assurance that its assets were properly
safeguarded and used only in accordance with management
policy.[Footnote 24] During fiscal year 2002, IRS continued efforts to
compensate for these longstanding deficiencies in systems and controls
over its P&E. Specifically, IRS implemented procedures to improve the
(1) timeliness of recording P&E transactions in accounting records and
(2) accuracy and reliability of its P&E inventory records. Nonetheless,
fundamental deficiencies in IRS‘s financial management system continued
to exist, which precluded IRS from having ongoing information on its
balance of P&E and assurance that its assets were properly safeguarded.
However, through the use of compensating procedures, IRS was able to
report a balance for P&E on its financial statements at September 30,
2002, that was fairly stated in all material respects. IRS has reported
a material weakness in its controls over P&E in its FIA assurance
statement to Treasury every year since 1983.
As we previously reported, IRS does not have an integrated property
management system that appropriately records P&E additions and
disposals as they occur and links costs on the accounting records to
property records. Instead, IRS expenses property purchases as they
occur, and then later extracts the costs of property acquisitions from
operating expenses and records adjustments to remove property purchases
from expenses and capitalize them as P&E. Consequently, IRS does not
have reliable P&E data available on an ongoing basis that it can use to
make operational decisions related to the acquisition and use of P&E,
and its property management system does not provide timely and reliable
information to facilitate the preparation of financial statements.
In fiscal year 2002, IRS improved the timeliness of extracting and
recording P&E financial information. Beginning in mid-fiscal year 2002,
IRS was able to produce, with contractor assistance, P&E information
within a few weeks after the end of the quarter. This is a significant
improvement over fiscal year 2001, when reliable P&E information was
not available until 3 months after the end of the fiscal year. Although
IRS was able to produce P&E financial information on a more timely
basis in fiscal year 2002, the fundamental deficiencies in its property
management system remain. IRS did not properly record P&E transactions
in P&E accounts as they occurred, and it was necessary for IRS to hire
a contractor to extract, analyze, and compile the data needed to report
a reliable P&E balance. In addition, IRS could not always link the
property acquisitions eventually recorded on IRS‘s accounting records
to assets recorded on IRS‘s property records. In transactions selected
from IRS‘s accounting records that we tested, some or all of the assets
acquired could not be linked to inventory records.[Footnote 25] For
example, one of the transactions we tested was for the purchase of 39
desktop computers. IRS had recorded this transaction in the accounting
records in November 2001 but had not recorded 38 of the 39 computers on
the inventory records as of September 2002.
Accurate records are essential for maintaining control over P&E to
ensure that assets are properly accounted for and safeguarded. In prior
years, we reported that IRS‘s procedures for recording P&E transactions
in its inventory records were not effective in ensuring that
acquisitions, disposals, and transfers were promptly and accurately
recorded in its P&E inventory records. In fiscal year 2002, IRS made a
concerted effort to improve procedures and practices used to account
for its assets. Our testing indicates that IRS continued to make
significant progress on this issue, but that nonetheless, transactions
were not always promptly and accurately recorded. Specifically, we
found that 22 of 220 P&E items, including computers and printers,
selected at 22 sites could not be located at the time of our
review.[Footnote 26] Based on our work, we estimate that 10 percent of
the items in IRS‘s P&E inventory records were erroneously included as
assets.[Footnote 27] This year, however, we found that the majority of
the errors we identified in our sample were attributable to a system
limitation. Specifically, 16 of the 22 assets we could not locate had
been disposed of, but the inventory records had not been updated to
reflect these disposals due to a system problem that prevented
personnel responsible for updating the inventory records for disposals
from having access to the records. At the time of our testing, IRS was
aware of the system problem and had identified 13 of the 16 disposed
item records for review but had not yet corrected its inventory
records. Despite these findings, we believe IRS is making clear
progress in improving accountability over P&E. For example, in our
fiscal year 2001 audit, we estimated that 12 percent of the items in
IRS‘s P&E inventory records were erroneously included as
assets,[Footnote 28] and the reasons for the errors we identified last
year were not primarily attributable to a single cause. Additionally,
individual sites we tested showed significant improvement over previous
years: at one location where we found that 5 of 10 assets we tested in
fiscal year 2001 could not be located, all 10 assets we tested were
accounted for in fiscal year 2002. While further improvements are
needed, there has been notable progress made on this issue.
During our fiscal year 2001 audit, we found that IRS‘s property
management system did not capture information, such as licenser,
contract period, and number of authorized users, essential to ensure
that software and software licenses were controlled and utilized only
in accordance with software license contracts. In fiscal year 2002, IRS
initiated a process to identify and record software licenses and began
developing an action plan that will set policies and procedures for
review of and compliance with the terms of the licenses. However, as of
the completion of our fieldwork, IRS had not completed this effort, and
as a result continued to lack an inventory record system that captured
information essential to ensure that software and software licenses
were properly controlled and used only in accordance with license
agreements.
Although we determined through detailed tests of transactions and
analyses that IRS‘s reported September 30, 2002, P&E balance was fairly
stated, longstanding weaknesses in IRS‘s property and accounting
systems continue to affect IRS‘s ability to account for its property
and report a reliable P&E balance on an ongoing basis. These weaknesses
will continue to exist until IRS has an integrated accounting and
property system. In March 2005, IRS plans to acquire and install an
asset management module to the integrated financial system. According
to IRS, the system will be capable of recording P&E as assets when
purchased and generating detailed records for P&E that reconcile to the
financial records.
Computer Security:
IRS relies extensively on computer information systems to perform basic
functions, such as processing tax returns and payments, maintaining
sensitive taxpayer data, calculating interest and penalties, and
generating refunds. Although IRS has corrected or mitigated many of the
computer security weaknesses identified in our previous reports, much
remains to be done to resolve the significant control weaknesses that
continue to exist within IRS‘s computing environment and to be able to
promptly address new security threats and risks as they emerge. Such
weaknesses can impair the agency‘s ability to perform vital functions,
and can increase the risk of unauthorized disclosure, modification, or
destruction of taxpayer data.
IRS has continued to make progress improving computer security
controls. For example, IRS has revised its information technology
security policy and guidance, updated security standards for several of
its computing systems and devices, and improved certain physical
security controls at its data processing facilities. IRS is also
consolidating several of its geographically dispersed Unix computer
systems and centralizing responsibility for their operation and
management, performing periodic internal control reviews of its
computer-processing environments, and implementing an intrusion
detection capability.
However, IRS continued to have serious weaknesses in fiscal year 2002
with computer controls designed to protect computing resources such as
networks, computer equipment, software programs, data, and facilities
from unauthorized use, modification, loss, and disclosure. For example,
IRS did not always effectively configure and implement computer systems
in accordance with its computer security policies, monitor system
configuration and implementation, and provide sufficient technical
security-related training to key personnel. In addition, IRS has not
taken sufficient steps to ensure that internal control deficiencies
identified at one facility are considered and addressed at other
facilities. The following examples illustrate the types of computer
control weaknesses that affect IRS‘s financial and tax processing
systems.
* IRS did not adequately restrict electronic access rights and
permissions on its servers, network devices, and mainframe computers.
Inappropriate access to sensitive files and directories can enable an
intruder or user to gain unauthorized access to computing resources.
* IRS did not sufficiently segregate system administration functions on
its servers from those related to security administration and system
backup operations, thereby increasing the risk that system
administrators could perform unauthorized system activities without
detection.
* IRS did not securely control network services or configure system
software to minimize the risk of unauthorized access to and ensure the
integrity of system programs, files, and data. At one location, for
example, IRS did not secure its network against known vulnerabilities
or minimize the operational impact of a potential failure in a critical
network device.
* IRS did not sufficiently plan or test the activities required to
restore certain critical business systems when unexpected events occur.
Disaster recovery plans for some systems lacked essential information
to facilitate recovery operations and were not fully tested.
* IRS did not effectively monitor key systems and network devices to
identify unauthorized activities. Computer logs often did not record
key security-related events and pertinent data. Security specialists
also did not routinely or fully examine logs for unauthorized activity
or usage trends.
Collectively, these problems indicate material weaknesses in IRS‘s
internal controls over information systems and data. These weaknesses
decreased the reliability and increased the vulnerability of data
processed by the systems. Until IRS can adequately mitigate these
weaknesses, unauthorized individuals could gain access to critical
hardware and software, and intentionally or inadvertently access,
alter, or delete sensitive data or computer programs. Such individuals
could also obtain personal taxpayer information and use it to commit
financial crimes in the taxpayers‘ names (identity fraud), such as
establishing credit and incurring debt.
Reportable Conditions:
In addition to the material weaknesses discussed above, we identified
two reportable conditions. These concern weaknesses in IRS‘s internal
controls over budgetary activity, which we have reported as a material
weakness in prior years, and weaknesses in internal controls over tax
receipts and taxpayer information, which we have reported as a
reportable condition in prior years.[Footnote 29]
Budgetary Activity:
In prior years, we identified serious internal control deficiencies
that prevented IRS from ensuring that its budgetary authority[Footnote
30] was routinely accounted for, reported, and controlled. Over the
past several years, IRS has made considerable progress in addressing
internal control deficiencies related to budgetary activity. In fiscal
year 2002, we noted further improvements in IRS‘s controls and
procedures that enhanced its ability to account for and report on the
status of its budgetary resources. Specifically, IRS (1) improved its
reviews of outstanding obligations and (2) performed more frequent
analyses of certain general ledger accounts containing transactions
incorrectly recorded as adjustments to prior years‘
obligations.[Footnote 31] These further improvements allowed us to
conclude that the remaining issues related to budgetary activity no
longer constitute a material internal control weakness. However, IRS
did not implement these improvements until after the first quarter of
fiscal year 2002. Additionally, we continued to find that IRS recorded
invalid transactions in its general ledger and instances in which IRS
did not timely record obligations and expenditures.
Over the past several years, IRS has issued numerous policy memorandums
and implemented procedures to deobligate funds[Footnote 32] no longer
required for a specific purpose. IRS‘s business units were required to
review outstanding obligation reports on a quarterly basis and identify
all obligations that were no longer active and thus would need to be
deobligated. Beginning in the second quarter of fiscal year 2002, IRS
improved its reviews of outstanding obligations by (1) providing
specific guidelines to the business units that performed the reviews,
(2) requiring the business units to perform monthly reviews, and (3)
providing more relevant and timely information on the outstanding
obligation reports to assist the business units in their reviews. IRS‘s
improvements to its reviews of outstanding obligations enabled it to
identify on a more timely basis obligated funds that could be
deobligated and made available for future or existing obligations, thus
improving its management of budgetary resources.
IRS‘s accounting system records all adjustments that affect a prior
year‘s appropriation, including those that do not affect the obligated
amount, as adjustments to prior years‘ obligations. Many of the
activities recorded as adjustments to prior years‘ obligations are
related to changes in accounting codes, travel, and adjustments to
doubtful accounts and are thus not valid adjustments to prior years‘
obligations. For example, IRS records a change in an internal
accounting code as a new obligation and erroneously adjusts the
original obligation downward, thereby misstating its reported level of
adjustments to obligations.
To identify valid adjustments to prior years‘ obligations, IRS manually
analyzes the adjustment activity recorded in its accounting system. IRS
then uses the results of this analysis to record adjusting entries to
the applicable general ledger accounts. For fiscal year 2002, this
analysis resulted in IRS making correcting entries to remove $1.2
billion of invalid transactions from the $1.4 billion balance of
adjustments to prior year obligations in its general ledger. In prior
years, IRS only performed this analysis at fiscal year end to prevent
its financial statements from being misstated. This enabled the year-
end financial statements to be correct, but did not address the impact
of these errors on interim internal and external reporting. Beginning
in mid-fiscal year 2002, however, IRS began performing these procedures
on a quarterly basis.
By increasing the frequency of its analysis of adjustment activity, IRS
improved the reliability of budgetary information it submits to OMB on
a quarterly basis through its SF133 Report on Budget Execution and
Budgetary Resources.[Footnote 33] However, IRS‘s compensating
procedures only produce reliable adjustment balances for the specific
date covered by the analysis. Thus, the existing deficiency in IRS‘s
accounting system with respect to recording adjustments to prior years‘
obligations prevents IRS from having accurate and reliable information
on budgetary resources and obligations on an ongoing basis. IRS plans
to acquire and install, in fiscal year 2004, an integrated financial
system with the capability to differentiate between activities that are
and are not valid adjustments to prior years‘ obligations.
In prior audits, we found instances in which IRS received goods and
services during one fiscal year but did not record the applicable
expenditure to reduce the undelivered orders balance in its accounting
system until the following fiscal year. This resulted in IRS
overstating its balance of undelivered orders and understating its
accrued expenses. During fiscal year 2001, IRS developed a methodology
to more reasonably accrue expenditures at year end and thus recognize
the associated reduction in the balance of undelivered orders. By
applying this methodology, IRS was able to report reliable amounts for
undelivered orders and accrued expenses on its fiscal-year-end
financial statements. However, IRS‘s balances of undelivered orders,
expenses, and capital expenditures were not accurate throughout fiscal
year 2002 because of delays in recording expenditures. Specifically, in
our testing of undelivered orders, we identified instances in which IRS
took more than 30 days from the date it accepted the goods or services
to record the applicable expenditure in its accounting system. For
example, in one instance, IRS received telecommunication services that
covered the month of November 2001, at a cost of $1.4 million. However,
IRS did not record the associated expenditure in its accounting system
until June 7, 2002--more than 6 months after the services were
provided. Untimely recording of expenditures affects IRS‘s ability to
efficiently manage its budgetary resources by delaying the
identification of obligated funds that (1) are insufficient to cover
the expenditure or (2) exceed amounts owed and thus can be deobligated
and made available for future or other existing obligations.
We also found that IRS continued to experience delays in recording
obligations in its accounting system during fiscal year 2002. In our
testing of undelivered orders, we found instances in which IRS took
more than 30 days from the date the obligation document was established
to record the obligated amount in its accounting system and instances
in which IRS incurred costs prior to recording the obligation in its
accounting system. For example, in one instance, IRS established an
obligation on October 1, 2001, for armed security guard services
totaling $366,000. However, IRS did not record the obligation in its
accounting system until April 22, 2002--more than 6 months after the
obligation was established. In another instance, IRS received office
equipment on October 9, 2001, at a cost of $154,000. However, IRS did
not generate the initial obligating document to establish the
obligation of funds until March 18, 2002, and recorded the obligation
in its accounting system on March 28, 2002--more than 5 months after
the equipment was received.
Delays in recording obligations affect the reliability of IRS‘s
financial records used to track the status of its budgetary resources
for day-to-day decision making. Until the obligation of funds is
recorded, obligations reflected in IRS‘s accounting system will be
understated. Understatement of obligations could lead IRS management to
believe that the agency has more funding than is actually available.
Consequently, IRS management and staff might enter into obligations
that exceed the budgetary authority made available by Congress.
Hard-Copy Tax Receipts and Taxpayer Information:
IRS manually processes tax receipts and taxpayer information at its
service center campuses and field offices. In addition, commercial
lockbox banks, operating under contract with Treasury‘s Financial
Management Service, process tax receipts and taxpayer information on
behalf of IRS. During fiscal year 2002, IRS‘s controls over cash,
checks, and related hard-copy taxpayer data it received from taxpayers
continued to be inadequate to sufficiently limit the risk of theft,
loss, or misuse of such funds and data. Recognizing its responsibility
to protect taxpayer information and receipts, IRS has taken action in
the past several years to address a number of its internal control
deficiencies. For example, to improve the safeguarding of taxpayer
receipts and data, IRS began conducting periodic security reviews of
receipt processing areas, implemented many of its new hiring and
courier standards, and updated policies and procedures. In fiscal year
2002, IRS issued the Lockbox Processing Guidelines to improve the
safeguarding of taxpayer receipts and data at lockbox facilities.
Nonetheless, internal control deficiencies remain, primarily because of
inconsistencies in the establishment and implementation of, and
compliance with, these policies at IRS service center campuses, field
offices, and commercial lockbox banks.
We previously reported that IRS was hiring individuals and allowing
them access to cash, checks, and other taxpayer data before it had
received satisfactory results of their fingerprint checks.[Footnote 34]
Since establishing a policy prohibiting new hires from entering on duty
in any IRS offices until their fingerprint checks are completed, IRS
has worked aggressively to enforce this policy and continued to make
substantial progress in this area in fiscal year 2002. As a result, IRS
has significantly reduced its exposure related to this issue.
We previously reported on weaknesses in internal controls to deter
unauthorized access to receipt processing areas.[Footnote 35] In fiscal
year 2002, we continued to find significant security access issues at
field offices and lockbox banks, as well as at one of the two service
center campuses we visited. For example, IRS policy requires that all
perimeter doors be equipped with locks and alarms and that the doors
must be locked and alarms set. At lockbox sites, we found one perimeter
door unlocked, one without an alarm, and one where the alarm was not
sufficiently audible. Guards also failed to respond when we activated
the perimeter door alarms in two instances at a lockbox site and in one
instance each at a field office and a service center campus. The
building perimeter is the first line of defense in the effort to
prevent unauthorized access to receipt processing areas. We also found
other weaknesses in physical security at the service center campus,
such as a door to a receipts-processing area with a broken lock that
could be opened by an unauthorized individual, and a door with a cipher
lock that we were able to open because it had not been properly closed.
At field offices, we found that taxpayers visiting the taxpayer
assistance centers to make tax payments or obtain assistance with tax
questions could gain access to areas of the centers that are restricted
to authorized IRS personnel handling tax receipts and taxpayer
information. We further found that employees at IRS field offices had,
or could have, access to certain areas where tax receipts and taxpayer
information are handled, regardless of their need for access.
We continued to find other weaknesses and inconsistencies in controls
over taxpayer receipts and taxpayer data at service center campuses,
field offices, and lockboxes that have not been adequately addressed.
For example, we continued to find receipts stored in open, unlocked
containers, contrary to IRS policy. Another IRS policy limits personal
belongings that each worker can bring into receipt processing areas to
small items that can fit into a clear plastic bag, and specifically
prohibits large items such as purses and backpacks in which taxpayer
receipts could be concealed. However, we found that at one service
center campus personal items were allowed in clear plastic bags of
various sizes, with many of the bags containing so many items that not
all of the items could be identified through the bag. In addition, at
the same service center campus, we found that employees carried CD
cases, newspapers, and magazines in the clear plastic bags--all objects
in which taxpayer receipts could be easily concealed. At another
service center campus, we noticed an employee leaving the processing
area with a plastic bag that was not clear. At a field office, we found
that employees were allowed to store personal belongings with taxpayer
receipts and official receipt certificate vouchers in desk drawers or
cabinets. Additionally, at four lockbox sites we visited, we were able
to bring purses and fanny packs into processing areas, and at several
lockbox sites we saw employees wearing bulky clothing or bring in
personal belongings, such as gift bags and purses.
We previously reported that checks made payable to ’IRS“ could easily
be altered and cashed and that returned refund checks were highly
susceptible to theft.[Footnote 36] At field offices we visited during
fiscal year 2002, we continued to find that checks were not overstamped
with ’United States Treasury,“ and we continued to find instances at
service center campuses, field offices, and lockbox sites where
returned refund checks were not restrictively endorsed at the point of
extraction.
We previously recommended that IRS develop policies and procedures to
reconcile logs of payments found during final candling to the related
receipts and documents.[Footnote 37] During fiscal year 2002, we
continued to find that discovered items were not reconciled at both of
the service center campuses we visited and at two lockbox sites. At
service center campuses, we also found that discovered items were not
immediately recorded and that personnel who had overlooked items during
candling were not always identified.
IRS procedures require that emptied envelopes be candled twice, and the
lockbox processing guidelines have this same requirement. Yet during
fiscal year 2002, we found instances at both service center campuses
and at lockbox sites where candling that should have been performed
twice was performed only once. Furthermore, at one service center
campus, we found that a single employee was performing final candling
in a closed room, thereby increasing the possibility of theft or
destruction of discovered remittances.[Footnote 38] Standards for
Internal Control in the Federal Government requires agencies to
establish physical controls to secure and safeguard vulnerable
assets.[Footnote 39]
IRS has made an effort to address courier security weaknesses by
adopting more stringent security standards for couriers who transport
IRS‘s daily deposits to depository institutions. However, IRS did not
have effective controls in place to ensure that the contract
requirements were enforced. In fiscal year 2002, we found that at one
of the two IRS service center campuses we visited, IRS failed to assure
itself that the courier service had met the insurance coverage
requirements or that the courier service employees had passed the
required limited background investigation. In fact, the courier service
had failed to meet the insurance coverage requirements, and IRS had
performed no limited background investigation of courier service
employees. At a lockbox site, management of the site had authorized
three couriers to start transporting daily deposits prior to receipt of
their fingerprint check results.
Furthermore, we noted differing requirements for couriers depending on
whether the couriers are operating at IRS‘s own service center campuses
or at contractor-operated lockbox banks, even though all couriers are
entrusted with daily deposits. For example, at lockbox banks, pursuant
to the Lockbox Processing Guidelines, couriers are only required to
have a fingerprint check. Requirements also differed among the service
center campuses: at the five service center campuses where couriers are
under IRS-negotiated contracts, they are required to have a background
investigation and a fingerprint check; at the other five service center
campuses, the couriers operate under FMS-negotiated contracts and are
not required to have either a background investigation or a fingerprint
check.
These weaknesses increase IRS‘s vulnerability to theft or loss and
expose taxpayers to increased risk of losses from financial crimes
committed by individuals who inappropriately gain access to
confidential information entrusted to IRS. Thus, it is important that
IRS continue to work to effectively address these matters because they
are critical to IRS successfully meeting its customer service goals.
Compliance Issues:
Our tests of compliance with selected provisions of laws and
regulations disclosed two areas of noncompliance that are reportable
under U.S. generally accepted government auditing standards and OMB
guidance. These relate to the release of federal tax liens against
taxpayers‘ property and the structure of installment agreements IRS
enters into with taxpayers to satisfy the taxpayer‘s outstanding tax
liability. We also found that IRS‘s financial management systems do not
substantially comply with the requirements of FFMIA.
Release of Federal Tax Liens:
The Internal Revenue Code grants IRS the power to file a lien against
the property of any taxpayer who neglects or refuses to pay all
assessed federal taxes. The lien becomes effective when it is filed
with a designated office, such as a courthouse in the county where the
taxpayer‘s property is located. The lien serves to protect the interest
of the federal government and serves as a public notice to current and
potential creditors of the government‘s interest in the taxpayer‘s
property. For example, federal tax liens are disclosed in credit
reports of individuals. Under section 6325 of the Internal Revenue
Code, IRS is required to release a federal tax lien within 30 days
after the date the tax liability is satisfied or has become legally
unenforceable or the Secretary of the Treasury has accepted a bond for
the assessed tax.
In previous audits, we found that IRS did not always release the
applicable federal tax lien within 30 days of the tax liability being
either paid off or abated as required by the Internal Revenue
Code.[Footnote 40] We found that this condition continued to exist in
fiscal year 2002. Specifically, in our testing of 59 tax cases with
liens in which the taxpayers‘ total outstanding tax liabilities were
either paid off or abated during fiscal year 2002, we found 20
instances in which IRS did not release the applicable federal tax lien
within the 30-day statutory requirement. The time between satisfaction
of the liability and release of the lien ranged from 46 to 1,263 days.
For example, in one case we found that although the taxpayer satisfied
the outstanding tax liability in April 2000, IRS did not formally
release the lien against the taxpayer‘s property until November of the
following year--578 days later. Based on the results of our work, we
estimate that for 34 percent of unpaid tax assessment cases where IRS
had filed a tax lien that were resolved in fiscal year 2002, IRS did
not release the lien within the 30-day requirement.[Footnote 41] The
failure to promptly release tax liens could cause undue hardship and
burden to taxpayers who are attempting to sell property or apply for
commercial credit.
Structuring of Installment Agreements:
Section 6159 of the Internal Revenue Code authorizes IRS to enter into
installment agreements with taxpayers to fully satisfy the taxpayer‘s
tax liability. While our fiscal year 2001 audit did not identify
instances of material noncompliance in a statistical sample of
installment agreements,[Footnote 42] audits for prior years showed that
IRS had not always structured installment agreements to ensure that
they would satisfy the taxpayer‘s outstanding tax liability, including
future interest accruals, before the statutory collection period for
the tax liability expired.[Footnote 43]
During our fiscal year 2002 financial audit, we again found that
installment agreements were not always structured to provide for full
payment of the tax liability. Specifically, in our testing of 59
installment agreements, we found 4 instances in which the terms of the
installment agreements did not require full satisfaction of the tax
liability. Based on the results of our work, we estimate that nearly 7
percent of new installment agreements entered into during fiscal year
2002 had payment terms that would not fully satisfy the tax liability
within the statutory collection period.[Footnote 44] The presence of
such cases in fiscal year 2002 indicates that IRS was not in compliance
with section 6159 of the Internal Revenue Code.
Financial Management Systems‘ Noncompliance with FFMIA:
In fiscal year 2002, we continued to find that IRS‘s financial
management systems did not substantially comply with the requirements
of FFMIA. Specifically, IRS‘s systems did not comply with Federal
Financial Management Systems Requirements (FFMSR), federal accounting
standards (U.S. generally accepted accounting principles), and the U.S.
Government Standard General Ledger (SGL) at the transaction level. We
found that IRS (1) cannot rely on information from its general ledger
to prepare its financial statements, (2) does not have a general ledger
that conforms to the SGL, (3) lacks a subsidiary ledger for its unpaid
assessments, (4) lacks a reliable subsidiary ledger for its P&E, and
(5) lacks an effective audit trail from its general ledger back to
subsidiary detailed records and transaction source documents for
material balances. Other material weaknesses we discussed earlier--
controls over unpaid assessments, federal tax revenue and refunds, P&E,
and computer security--are also conditions indicating that IRS‘s
systems do not substantially comply with the requirements of FFMIA.
As a result, IRS‘s financial management systems cannot produce
auditable financial statements and related disclosures that conform
with U.S. generally accepted accounting principles without substantial
compensating processes and significant adjustments. These weaknesses
also indicate that IRS‘s systems cannot routinely accumulate and report
the full cost of its activities. Since IRS‘s systems do not comply with
FFMSR, U.S. generally accepted accounting principles, and the SGL, they
also do not comply with OMB Circular A-127, Financial Management
Systems. In its FIA assurance statement to Treasury, IRS reported that
its financial management systems did not substantially comply with the
requirements of FFMIA in fiscal year 2002.
IRS has established a remediation plan to address the conditions
affecting its systems‘ ability to comply with the requirements of
FFMIA. This plan outlines the actions to be taken to resolve these
issues, designates resources to be devoted to implementing those
actions, and specifies time frames for their completion. Due to the
long-term nature of IRS‘s systems modernization efforts, which IRS
expects will resolve many of the most serious issues, many of the
planned time frames exceed the 3-year resolution period specified in
FFMIA. However, for these instances IRS has received a waiver from this
requirement from OMB, as authorized by FFMIA.
[End of section]
Appendix II: Details on Audit Methodology:
To fulfill our responsibilities as the auditor of IRS‘s financial
statements, we did the following:
* Examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. This included testing selected
statistical samples of unpaid assessment, revenue, refund, accounts
payable, accrued expenses, payroll, nonpayroll, P&E, and undelivered
order transactions. These statistical samples were selected primarily
to substantiate balances and activities reported in IRS‘s financial
statements. Consequently, dollar errors or amounts can and have been
statistically projected to the population of transactions from which
they were selected. In testing these samples, certain attributes were
identified that indicated either significant deficiencies in the design
or operation of internal control or compliance with provisions of laws
and regulations. These attributes, where applicable, can be and have
been statistically projected to the appropriate populations.
* Assessed the accounting principles used and significant estimates
made by management.
* Evaluated the overall presentation of the financial statements.
* Obtained an understanding of internal controls related to financial
reporting (including safeguarding assets), compliance with laws and
regulations (including the execution of transactions in accordance with
budget authority), and performance measures reported in the
Management‘s Discussion and Analysis.
* Tested relevant internal controls over financial reporting (including
safeguarding assets) and compliance, and evaluated the design and
operating effectiveness of internal controls.
* Considered the process for evaluating and reporting on internal
controls and financial management systems under FIA.
* Tested compliance with selected provisions of the following laws and
regulations: Anti-Deficiency Act, as amended (31 U.S.C. §1341(a)(1) and
31 U.S.C. §1517(a)); Agreements for payment of tax liability in
installments (26 U.S.C. §6159); Purpose Statute (31 U.S.C. §1301);
Release of lien or discharge of property (26 U.S.C. §6325); Interest on
underpayment, nonpayment, or extensions of time for payment of tax (26
U.S.C. §6601); Interest on overpayments (26 U.S.C. §6611);
Determination of rate of interest (26 U.S.C. §6621); Failure to file
tax return or to pay tax (26 U.S.C. §6651); Failure by individual to
pay estimated income tax (26 U.S.C. §6654); Failure by corporation to
pay estimated income tax (26 U.S.C. §6655); Prompt Payment Act (31
U.S.C. §3902 (a), (b), and (f), and 31 U.S.C. §3904); Fair Labor
Standards Act of 1938, as amended (29 U.S.C. §206); Civil Service
Retirement Act of 1930, as amended (5 U.S.C. §§5332, 5343); Federal
Employees‘ Retirement System Act of 1986, as amended (5 U.S.C. §§8422
and 8423); Social Security Act, as amended (26 U.S.C. §§3101 and 3121,
and 42 U.S.C. §430); and Federal Employees Health Benefits Act of 1959,
as amended (5 U.S.C. §§8905, 8906, and 8909).
* Tested whether IRS‘s financial management systems substantially
comply with the three FFMIA requirements.
[End of section]
Appendix III: Comments from the Internal Revenue
Service:
DEPARTMENT OF THE TREASURY:
INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224:
COMMISSIONER:
November 7, 2002:
Mr. David M. Walker, Comptroller General, U.S. General Accounting
Office
441 G Street, NW Washington, D.C. 20548:
Dear Mr. Walker:
Fiscal Year 2002 was a landmark year for Federal financial management
at the IRS. We are pleased that your draft report titled, Financial
Audit. IRS‘ Fiscal Years 2002 and 2001 Financial Statements, so fairly
presents both our progress and our remaining challenges. For the third
consecutive year, we achieved an unqualified audit opinion for the
annual financial statements. Doing so demonstrates to the public that
we can properly and consistently account for approximately $2 trillion
in revenue receipts, $281 billion in refunds, and $10 billion in
appropriated funds.
We wish to recognize the GAO‘s dedication and cooperation throughout
this audit process. We appreciate the excellent counsel and support the
auditors provided to us. As you noted in your report, in addition to
maintaining our unqualified audit opinion, we met the significant
challenge set by the Secretary of the Treasury of completing the FY
2002 audit by November 15, 2002, six weeks after the end of the fiscal
year and three and one half months earlier than last year. This was
accomplished by making significant improvements in our financial
management by reassessing and systematically changing how we process
transactions, maintain financial records, and report financial results.
Our success was also dependent upon the GAO‘s agreement to test
transactions and balances at interim periods rather than conducting all
testing at year-end. We appreciate your acknowledgement of the great
strides we made in FY 2002 and your willingness to work with us to
adapt the audit process to the accelerated schedule.
During the fiscal year, we instituted a number of financial management
reforms and improvements, which contributed to our ability to retain
the clean opinion and meet the accelerated reporting dates.
Specifically, we:
*Implemented procedures to improve the timeliness and accuracy of
recording Property and Equipment (P&E) transactions in our accounting
records *Capitalized property and equipment acquisitions at the end of
each quarter:
*Recorded imputed financing costs regularly:
*Enhanced our accountability over budgetary activity by increasing the
frequency of our analyses of outstanding obligations and other
budgetary accounts:
*Improved our review of outstanding obligations and performed more
frequent analyses of certain general ledger accounts:
*Established formal organizations within the revenue and administrative
activities to develop and update financial management policies and
procedures:
*Conducted a comprehensive assessment of our strategic initiatives to
prioritize the programs relative to our mission and available
resources:
*Began the design of an automated Trust Fund Recovery Penalty system
that can properly cross-reference payments and eliminate the
opportunity for errors *Revised our information technology security
policy and guidance, updated security standards for several of our
computing systems and devices, and improved certain physical security
controls at our data processing facilities:
*Began conducting periodic security reviews of receipt processing
areas, implemented many of our new hiring and courier standards, and
updated relevant policies and procedures to safeguard taxpayer receipts
and data:
*Issued Lockbox Processing Guidelines to improve the safeguarding of
taxpayer receipts and data at lockbox facilities:
*Established a Peer Review Program to ensure adequacy and compliance
with internal access control guidelines:
*Published guidance to all field offices to assure that a ’controlled
access environment“ is implemented in every Taxpayer Assistance Center
to the maximum extent possible within space and funding constraints:
To further improve financial management, we took specific actions in FY
2002 to expedite the resolution of all IRS material weaknesses. The
existing material weaknesses were reviewed by senior executives to
identify the key issues requiring resolution. We determined and
documented the actions necessary to resolve the issues. Where initial
review indicated that long-term systems improvements were required, we
reassessed to identify possible interim process solutions that would
allow us to alleviate the materiality of the weakness while we waited
for the long-term system fix. Expedited action plans were developed to
resolve key issues for some material weaknesses and are being developed
for three others. As a result, we reduced the number of material
weaknesses from 14 to 9 and we plan to close at least three
significantly earlier than previously planned. Work continues to
expedite resolution of the others.
We also revised our Remediation Plans for Custodial and Administrative
Financial Management Systems. We changed the format and content of the
plans to better meet the requirements of the Federal Financial
Management Improvement Act (FFMIA) of 1996. The Remediation Plans are
now aligned with our Material Weakness Plans and our Business System
Modernization Plans. We included more intermediate target dates to help
ensure we stay on schedule for bringing our systems into FFMIA
compliance.
As a result, these Remediation Plans are a better tool for effectively
managing the remedial action process.
We must now focus on ensuring financial management practices are
institutionalized and our new Integrated Financial System (IFS) is
implemented. As we pursue these two primary initiatives, it is worth
noting that system modernization efforts will address almost one-third
of the currently open audit recommendations. We are also aggressively
planning other short-term actions that will further improve the
accuracy and timeliness of our financial management information. As
examples, we plan to:
*Evaluate and determine ways to provide more precise revenue data and
streamline the audit approach for unpaid assessments:
*Improve the timeliness of obligation transactions:
*Develop and implement a methodology to accrue non-payroll expenditures
at least quarterly:
*Conduct reviews to assist offices in correctly implementing policies
and procedures *Participate in each Treasury Financial Management
Service review of commercial lockbox banks to assess compliance with
Lockbox Processing Guidelines:
*Improve accountability over software licenses:
*Continue the automation of the Trust Fund Recovery Penalty process:
Though we are pleased with the balanced presentation of the progress,
we continue to disagree with the GAO‘s assertion that ’IRS management
and staff might enter into obligations that exceed the budgetary
authority made available by Congress.“ As we stated in our response to
last year‘s report, we clearly have the capability to prevent this from
happening and have never exceeded our budget authority. Once again, we
ask the GAO to consider modifying this specific conclusion.
We concur with GAO‘s statement that fundamental deficiencies continue
to exist in our property management system. We will reiterate our
policy that all purchases of computer equipment must go through the
Single Point Inventory Function first to be entered into the inventory
database. During FY 2003, an interim process is being established to
implement an electronic means of detecting computer equipment not in
the inventory database. This should preclude the occurrence of
situations similar to the one noted in your report concerning the 38
desktop computers not recorded in IRS‘ inventory records. Additionally,
the GAO correctly identified disposal problems in this audit. We
corrected the system problem identified in the report prior to the
audit. However, there was not sufficient time after the certification
activity ended and before the audit samples were extracted to correct
the data. We provided the GAO with an exception report that listed the
specific items. We will continue to refine the disposal process by
providing Servicewide guidance on proper disposal procedures, ensuring
that the property disposal database is properly updated, establishing a
link to the procurement and financial systems, and tracking the
deployment and usage of the site license via our automated processes.
Full implementation and deployment of IFS will enable us to remedy all
property-related issues.
In closing, I would like to restate the IRS‘ commitment to continual
improvement in financial management. That commitment permeates
throughout the Service. We will continue the improvements made in the
last few years as we develop and implement the fundamental long-term
solutions needed to address the internal control weaknesses cited in
your report. Both the GAO and the IRS recognize that it is only through
implementation of the new integrated financial management system that
we will be able to overcome the majority of the material weaknesses
cited in your report. Our Chief Financial Officer will provide
technical comments to Steve Sebastian under separate cover.
Sincerely,
Bob Wenzel
Acting Commissioner:
Signed by Bob Wenzel
[End of Section]
FOOTNOTES
[1] U.S. General Accounting Office, Financial Audit: IRS‘s Fiscal Years
2001 and 2000 Financial Statements, GAO-02-414 (Washington, D.C.: Feb.
27, 2002).
[2] In accordance with OMB Bulletin 01-09, Form and Content of Agency
Financial Statements, IRS prepared comparative Balance Sheets,
Statements of Net Cost, and Statements of Custodial Activity as of and
for the fiscal years ended September 30, 2002 and 2001. IRS prepared
the Statements of Changes in Net Position, Budgetary Resources, and
Financing for the fiscal year ended September 30, 2002, only.
[3] U.S. General Accounting Office, Financial Audit: Examination of
IRS‘ Fiscal Year 1992 Financial Statements, GAO/AIMD-93-2 (Washington,
D.C.: June 30, 1993).
[4] In 2001, the Office of Management and Budget announced the
executive branch‘s intention to significantly accelerate agencies‘
financial reporting timeline, requiring that by fiscal year 2004 they
issue their financial statements by November 15. The Department of the
Treasury established its own goal of issuing its fiscal year 2002
audited financial statements by November 15, 2002. As a component
entity of Treasury, IRS is subject to Treasury‘s financial-reporting
timeline.
[5] A material weakness is a condition that precludes the entity‘s
internal controls from providing reasonable assurance that material
misstatements in the financial statements would be prevented or
detected on a timely basis. Reportable conditions are matters coming to
our attention that, in our judgment, should be communicated because
they represent significant deficiencies in the design or operation of
internal controls that could adversely affect IRS‘s ability to meet the
objectives described in this report.
[6] Prior to fiscal year 2001, we reported that IRS was not in
compliance with section 6159 of the Internal Revenue Code, which
authorizes IRS to enter into installment agreements with taxpayers to
fully satisfy the taxpayer‘s liability (see GAO-01-394). We did not
identify any instances of material noncompliance with section 6159
during fiscal year 2001 and therefore did not report it as an area of
noncompliance, but we found instances of noncompliance with the section
again in fiscal year 2002.
[7] U.S. General Accounting Office, Financial Audit: IRS‘s Fiscal Year
2001 and 2000 Financial Statements, GAO-02-414 (Washington, D.C.: Feb.
27, 2002).
[8] GAO-02-414.
[9] The Joint Financial Management Improvement Program (JFMIP) is a
cooperative undertaking of the Office of Management and Budget, the
Department of the Treasury, the Office of Personnel Management, and GAO
working in cooperation with each other and with operating agencies to
improve financial management practices.
[10] IRS‘s integrated financial system is planned to include the core
financial system defined by JFMIP, including an SGL-compliant general
ledger, accounts payable, accounts receivable, fund and cost
management, budget formulation, and financial reporting.
[11] Suspense accounts are used to temporarily recognize certain
transactions until sufficient information is available to determine
their appropriate permanent account classification. As of September 30,
2002, IRS recorded estimated nonpayroll expenses and in the process,
reduced the suspense balance to an immaterial amount by analyzing its
content and reclassifying most of it to the appropriate permanent
accounts. However, IRS did not perform this process during the year.
[12] Joint Financial Management Improvement Program, Systems
Requirements for Managerial Cost Accounting (Washington, D.C.: Feb.
1998).
[13] Unpaid assessments consist of (1) taxes due from taxpayers for
which IRS can support the existence of a receivable through taxpayer
agreement or a favorable court ruling (federal taxes receivable), (2)
compliance assessments where neither the taxpayer nor the court has
affirmed that the amounts are owed, and (3) write-offs, which represent
unpaid assessments for which IRS does not expect further collections
due to factors such as the taxpayer‘s death, bankruptcy, or insolvency.
Of these three classifications of unpaid assessments, only federal
taxes receivable are reported on the principal financial statements. As
of September 30, 2002, IRS reported $20 billion (net of an allowance
for doubtful accounts of $67 billion), $25 billion, and $137 billion in
these three categories, respectively.
[14] IRS‘s master file contains detailed records of taxpayer accounts.
However, the master files do not contain all the details necessary to
properly classify or estimate collectibility for unpaid assessment
accounts.
[15] When a company does not pay the taxes it withholds from employees‘
wages, such as Social Security or individual income tax withholdings,
IRS has the authority to assess all responsible officers individually
for the taxes withheld from employees. Although assessed to multiple
parties, the liability need only be paid once. Thus, IRS may record
assessments against each of several individuals for the employee-
withholding component of the payroll tax liability of a given business
in an effort to collect the total tax liability of the business. The
assessments made against business officers are known as trust fund
recovery penalties.
[16] GAO-02-414.
[17] IRS 1099 forms are used by third parties, such as financial
institutions, to report taxpayers‘ interest income, dividend
distributions, and other miscellaneous income.
[18] The peak tax filing season primarily occurs from January 1 to
April 15 of each year.
[19] By statute, IRS must pay interest on refunds not paid within 45
days of receipt or due date, whichever is later (26 U.S.C. §6611).
[20] Because it is a tax credit, an EITC claim always results in a
reduction of the taxpayer‘s calculated tax liability. However,
depending on the taxpayer‘s amount of taxes withheld, it may or may not
result in a refund for a particular tax year.
[21] Internal Revenue Service, Compliance Estimates for Earned Income
Tax Credit Claimed on 1999 Returns (Washington, D.C.: Feb. 28, 2002).
[22] We used the fiscal year 2000 refund rate because most of the tax
year 1999 refunds were paid in fiscal year 2000.
[23] Individual tax returns are not due until April 15 of the following
year (up to October 15 if extensions are filed), and the underreporter
screening programs cannot be run until after the returns are filed.
Consequently, tax year 2000 is the most recently completed tax year for
which the cited data are available.
[24] GAO-02-414.
[25] Each transaction can involve multiple assets.
[26] For our book-to-floor sample, we obtained a sample of P&E items
with a two-stage cluster sample. In the first stage, we selected a
sample of 22 buildings. In the second stage, we selected a sample of 10
assets located at each of the 22 buildings from IRS‘s asset records.
[27] We are 95 percent confident that the error rate does not exceed 18
percent.
[28] In our fiscal year 2001 audit, we were 95 percent confident that
the error rate did not exceed 20 percent.
[29] GAO-02-414.
[30] Budgetary authority is the authority provided by law to enter into
financial obligations that will result in immediate or future outlays
involving federal government funds.
[31] An adjustment to a prior year‘s obligation is recorded when the
dollar amount previously recorded is affected by a subsequent event,
such as a change in the price of goods or services.
[32] Deobligations are downward adjustments of previously recorded
obligations. Deobligations can occur for a variety of reasons, such as
if the actual expense was less than the amount obligated, a project or
contract was cancelled, an initial obligation was determined to be
invalid, or previously recorded estimates were reduced.
[33] OMB requires that each agency submit SF133s on a quarterly basis
to report on each agency‘s budget execution as well as the status of
its budgetary resources.
[34] GAO-02-414.
[35] U.S. General Accounting Office, Internal Revenue Service: Progress
Made, but Further Actions Needed to Improve Financial Management, GAO-
02-35 (Washington, D.C.: Oct. 19, 2001).
[36] U.S. General Accounting Office, Internal Revenue Service:
Recommendations to Improve Financial and Operational Management, GAO-
01-42 (Washington, D.C.: Nov. 17, 2000).
[37] U.S. General Accounting Office, Internal Revenue Service: Status
of Recommendations from Financial Audits and Related Financial
Management Reports, GAO-02-848 (Washington, D.C.: July 30, 2002).
Candling is a process that uses a light source to determine if any
contents remain in the open envelopes before their destruction.
[38] Discovered remittances are cash or checks that were erroneously
overlooked during the extraction process.
[39] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov.
1999).
[40] GAO-02-414.
[41] We are 95 percent confident that the error rate could be as high
as 44 percent. In our fiscal year 2001 audit, we found five instances
of noncompliance. At that time, we estimated that for 8 percent of
unpaid tax assessment cases where IRS had filed a tax lien that were
resolved in that fiscal year, IRS did not release the lien within the
30-day requirement. We were 95 percent confident that the error rate
could be as high as 19 percent.
[42] In last year‘s audit, we found that based on a statistical sample
of 59 installment agreements IRS entered into with taxpayers during
fiscal year 2001, we were 95 percent confident that the rate of
occurrence of installment agreements entered into during fiscal year
2001 whose terms did not require full satisfaction of the tax liability
did not exceed 5 percent. However, we also pointed out that this did
not mean that all installment agreements IRS had entered into with
taxpayers were structured to provide for full satisfaction of the tax
liability.
[43] The statutory collection period for taxes is generally 10 years
from the date of the tax assessment. However, this period can be
extended by agreement between IRS and the taxpayer.
[44] We are 95 percent confident that the error rate could be as high
as 15 percent.
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