Financial Audit
IRS's Fiscal Years 2003 and 2002 Financial Statements Gao ID: GAO-04-126 November 13, 2003Because of the significance of Internal Revenue Service (IRS) 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 of 1996 (FFMIA).
In GAO's opinion, IRS's fiscal year 2003 financial statements were fairly presented in all material respects. Because of serious deficiencies in financial systems and internal control weaknesses, however, IRS again had to rely extensively on resource-intensive compensating processes to prepare its financial statements. In fiscal year 2003, IRS continued to make great strides in a number of areas. IRS improved the accuracy and reliability of its property and equipment (P&E) inventory records and implemented a system to ensure that software and software licenses were properly controlled and used in accordance with license agreements. These and prior years' improvements allowed GAO to conclude that the remaining issues related to P&E no longer constitute a material internal control weakness. Because of other improvements by IRS, such as timely recording obligations and expenditures in its accounting system, GAO no longer considers the remaining control issues related to recording certain budgetary activity to be a reportable condition. However, IRS continues to be challenged by control weaknesses and system deficiencies affecting (1) financial reporting, (2) unpaid tax assessments, (3) tax revenue and refunds, and (4) computer security. IRS was also not always in compliance with laws concerning the structure of installment agreements it enters into with taxpayers and the timely release of federal tax liens. Lack of a financial management system that can produce timely, accurate, and useful information needed for day-to-day decisions continues to be one of the largest obstacles facing IRS management. Through compensating processes, extraordinary efforts, and continued improvements to its financial processes and operations, IRS was able for the second consecutive year to issue its financial statements 6 weeks after the end of the fiscal year. Nevertheless, largely because its financial management systems do not comply with FFMIA, IRS remains unable to produce reliable, timely financial and cost-based performance information for decision making or to fully address the financial management and operational issues that affect its ability to fulfill its responsibilities as the nation's tax collector.
GAO-04-126, Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements
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Report to the Secretary of the Treasury:
November 2003:
FINANCIAL AUDIT:
IRS's Fiscal Years 2003 and 2002 Financial Statements:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-126] GAO-04-126:
GAO Highlights:
Highlights of GAO-04-126, a report to the Secretary of the Treasury
Why GAO Did This Study:
Because of the significance of Internal Revenue Service (IRS)
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 of 1996 (FFMIA).
What GAO Found:
In GAO‘s opinion, IRS‘s fiscal year 2003 financial statements were
fairly presented in all material respects. Because of serious
deficiencies in financial systems and internal control weaknesses,
however, IRS again had to rely extensively on resource-intensive
compensating processes to prepare its financial statements.
In fiscal year 2003, IRS continued to make great strides in a number
of areas. IRS improved the accuracy and reliability of its property
and equipment (P&E) inventory records and implemented a system to
ensure that software and software licenses were properly controlled
and used in accordance with license agreements. These and prior years‘
improvements allowed GAO to conclude that the remaining issues related
to P&E no longer constitute a material internal control weakness.
Because of other improvements by IRS, such as timely recording
obligations and expenditures in its accounting system, GAO no longer
considers the remaining control issues related to recording certain
budgetary activity to be a reportable condition. However, IRS
continues to be challenged by control weaknesses and system
deficiencies affecting (1) financial reporting, (2) unpaid tax
assessments, (3) tax revenue and refunds, and (4) computer security.
IRS was also not always in compliance with laws concerning the
structure of installment agreements it enters into with taxpayers and
the timely release of federal tax liens.
Lack of a financial management system that can produce timely,
accurate, and useful information needed for day-to-day decisions
continues to be one of the largest obstacles facing IRS management.
Through compensating processes, extraordinary efforts, and continued
improvements to its financial processes and operations, IRS was able
for the second consecutive year to issue its financial statements 6
weeks after the end of the fiscal year. Nevertheless, largely because
its financial management systems do not comply with FFMIA, IRS remains
unable to produce reliable, timely financial and cost-based
performance information for decision making or to fully address the
financial management and operational issues that affect its ability to
fulfill its responsibilities as the nation‘s tax collector.
What GAO Recommends:
In prior audits, GAO made numerous recommendations to IRS to address
issues raised in this audit. GAO will continue to monitor IRS‘s
progress in implementing the nearly 80 recommendations that remain open as of the date of this report.
IRS agreed with the report's findings and noted that the report fairly
presented IRS's progress and its remaining challenges. IRS cited a
number of planned improvements and initiatives to address the matters
raised in the report. IRS also recognizes that only by implementing
its new integrated financial management systems will it be able to
overcome the majority of the material weaknesses cited in the report.
www.gao.gov/cgi-bin/getrpt?GAO-04-126.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Steven J. Sebastian
at (202) 512-3406 or sebastians@gao.gov.
[End of section]
Contents:
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:
Statements of Net Cost:
Statements of Changes in Net Position:
Statements of Budgetary Resources:
Statements of Financing:
Statements of Custodial Activity:
Notes to the Financial Statements:
Supplemental and Other Accompanying Information:
Appendixes:
Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Material Weaknesses:
Reportable Conditions:
Compliance Issues:
Appendix II: Details on Audit Methodology:
Appendix III: Comments from the Internal Revenue Service:
Abbreviations:
CADE: Customer Account Data Engine:
CAP: Custodial Accounting Project:
CFO Act: Chief Financial Officers Act of 1990:
EITC: earned income tax credit:
FERS: Federal Employees Retirement System:
FFMIA: Federal Financial Management Improvement Act of 1996:
FFMSR: Federal Financial Management Systems Requirements:
FIA: Federal Managers' Financial Integrity Act of 1982:
FMS: Financial Management Service:
IFS: Integrated Financial System:
IRS: Internal Revenue Service:
IT: information technology:
JFMIP: Joint Financial Management Improvement Program:
NFC: National Finance Center:
OMB: Office of Management and Budget:
P&E: property and equipment:
SGL: U.S. Government Standard General Ledger:
TSP: Thrift Savings Plan:
Letter November 13, 2003:
The Honorable John W. Snow:
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, 2003 and 2002. 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, 2003, 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 2003 and 2002 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. Continuing to
meet significantly accelerated reporting dates for issuance of the
financial statements was also a major accomplishment. In 2001, the
Office of Management and Budget (OMB) announced the executive branch's
intention to require that agencies accelerate their timeline for
issuing audited financial statements. For fiscal year 2003, OMB
requires that agencies issue their audited financial statements by
January 30, 2004, and for fiscal year 2004 and thereafter, OMB requires
that agencies issue their audited financial statements by November 15,
or 6 weeks after the end of the fiscal year. Last year, the Department
of the Treasury went a step further by establishing, and then
successfully achieving, a goal of having the audit of its financial
statements, including those of its component entities such as IRS,
completed and its departmentwide accountability report issued by
November 15. IRS continued to successfully meet this challenge in
fiscal year 2003.
In fiscal year 2003, IRS continued to make great strides in addressing
its financial management challenges, particularly with respect to its
administrative accounting operations. For example, IRS implemented
procedures to improve the accuracy and reliability of its property and
equipment (P&E) inventory records and implemented an inventory record
system that captured information essential to ensure that software and
software licenses were properly controlled and used in accordance with
license agreements. These improvements, combined with the progress we
reported last year, enabled us to conclude that the remaining issues
related to P&E no longer constitute a material internal control
weakness. Other improvements by IRS, such as more timely recording of
obligations in its accounting system and implementation of procedures
to address delays we reported in prior years in IRS's posting of
expenditures in its accounting system, enabled us to conclude that
issues related to controls over budgetary activity no longer constitute
a reportable condition. IRS's actions, coupled with the continued use
of resource-intensive processes to compensate for the remaining serious
weaknesses in systems and controls, enabled IRS to again achieve
Treasury's timeline.
We commend IRS for the improvements it has continued to make in its
financial processes and operations. Nonetheless, IRS management and
staff will continue to be challenged 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. As we previously reported, 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 6
years. It is important that these financial management initiatives
continue to receive the needed support of the IRS Commissioner 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 Transportation, Treasury, and
General Government, Senate Committee on Appropriations; Subcommittee on
Taxation and IRS Oversight, Senate Committee on Finance; Subcommittee
on Oversight of Government Management, the Federal Workforce, 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 and Financial Management, 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 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 is available at no charge
on GAO's Web site at [Hyperlink, http://www.gao.gov] 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:
Auditor's Report To the 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 2003 and 2002. 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.[Footnote 1]
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 2003 and
2002, IRS collected about $2 trillion in tax payments, processed
hundreds of millions of tax and information returns, and paid about
$300 billion and $281 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 IRS managers need to
assist in making day-to-day decisions. IRS continued 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 2] though it also continued to make significant strides
in addressing its financial management challenges. In fiscal year 2003,
for the fourth 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, for the
second consecutive year, IRS was able to
produce its financial statements only a month and a half after the end
of the fiscal year.[Footnote 3]
IRS's success in meeting its accelerated reporting date for the second
consecutive year was a major accomplishment and represents continued
improvement over previous years. Nevertheless, 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. Until
the underlying systemic problems that give rise to this condition are
resolved, IRS will need to continue making refinements in the way it
processes transactions, maintains its records, and reports financial
information.
Strong commitment, hard work, and a continued reassessment of certain
basic business processes by both IRS senior leadership and staff were
the key to IRS's success in obtaining an unqualified audit opinion on
its fiscal year 2003 financial statements. IRS continued to make
notable progress in a number of areas, particularly with respect to its
administrative accounting operations. For example, IRS implemented
procedures to improve the accuracy and reliability of its property and
equipment (P&E) inventory records, and implemented an inventory record
system that captured information essential to ensure that software and
software licenses were properly controlled and used in accordance with
license agreements. These improvements, combined with improvements made
in prior years, allowed us to conclude that the remaining issues
related to P&E no longer constitute a material internal control
weakness. Also, IRS significantly enhanced its accountability over
budgetary activity by instituting more timely recording of obligations
in its accounting system
and by implementing procedures to address delays in posting
expenditures in its accounting system. IRS's actions enabled us to
conclude that issues related to controls over budgetary activity no
longer constitute a reportable condition. However, despite these
improvements, we continue to consider issues related to controls over
financial reporting, management of unpaid assessments, collection of
revenue and issuance of tax refunds, and computer security to be
material weaknesses.[Footnote 4]
Producing financial statements within a month and a half after the end
of the fiscal year while sustaining an unqualified opinion for the
second year in a row was a significant accomplishment for IRS. At the
same time, the effort it took continued to place a considerable strain
on IRS resources and required substantial contractor support. IRS has
clearly made progress in improving its financial management, and the
process changes IRS has instituted in the last 2 fiscal years represent
good financial management practices. Nevertheless, IRS personnel will
continue to be challenged to sustain the level of effort needed to
produce reliable financial statements timely until IRS successfully
addresses the underlying systems and internal control problems that
cause this process to be time consuming and difficult. 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.
IRS is currently installing a new financial management system intended
to resolve many of the issues discussed in this report. However, IRS
has encountered problems that have led to delays in the implementation
of key elements of its new financial management system. For example,
IRS had planned to begin implementation of the first release of the
Integrated Financial System (IFS), its new core accounting system, in
October 2003, but testing delays during pre-implementation caused IRS
to defer implementation until the middle of fiscal year 2004. IRS also
encountered delays in the implementation of the first phase of the
Customer Account Data Engine (CADE), the new system being designed to
modernize IRS's taxpayer master files, which caused IRS to defer
implementation of CADE for about 1 year. Once fully implemented, CADE
is to provide tax information to IFS for reporting purposes through the
Custodial Accounting Project (CAP). CAP is a system designed to support
management needs for information related to tax operations for purposes
of day-to-day decision making, performance management, and reporting.
CAP, which has also experienced some delays due to unanticipated data
volume and data quality problems, is to be integrated with IFS and is
being designed to support financial management of revenue transactions,
including reporting of individual receipt and refund activity. IRS does
not expect that its new financial management systems will be fully
implemented until at least 2007.
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, changes in net position, budgetary resources,
reconciliation of net costs to budgetary activity, and custodial
activity as of and for the fiscal years ended September 30, 2003, and
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.
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 the Office of Management and Budget
(OMB) Circular A-123, revised June 21, 1995, 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 2003 and 2002. 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 and (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 lost revenue to the federal government and
potentially billions of dollars in improper payments; 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
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 hard-copy tax receipts and
taxpayer data, which increase the government's and taxpayers' risk of
loss or inappropriate disclosure of taxpayer data, and (2) controls
over P&E, which hamper IRS's ability to have reliable and timely
information on its balance of P&E throughout the year. We reported
controls over P&E as a material weakness in our prior audits, but based
on improvements we found during our fiscal year 2003 audit, we have
reassessed it as a reportable condition. Similarly, we previously
reported controls over budgetary activity as a reportable condition,
but based on improvements we found during our fiscal year 2003 audit,
we no longer consider the remaining issues related to controls over the
recording of certain budgetary activity to constitute a reportable
condition.
We have reported on these material weaknesses and reportable conditions
in prior audits and have provided IRS recommendations to address these
issues. Nearly 80 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 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 their outstanding tax
liabilities.
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.
We also found that IRS's financial management systems did not
substantially comply with the requirements of the Federal Financial
Management Improvement Act of 1996 (FFMIA).[Footnote 5] In addition,
another matter came to our attention, involving some IRS contributions
to the Thrift Savings Plan that exceed statutory requirements due to an
automated system-related problem at the National Finance Center.
For more details on these issues, see appendix I.
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 consistent 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 and the laws and regulations we tested, 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 years ended
September 30, 2003, and 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
it had, for the fourth consecutive year, achieved an unqualified audit
opinion on its financial statements and, for the second consecutive
year, achieved this under a significantly accelerated reporting
timetable, issuing the audited financial statements 6 weeks after the
end of the fiscal year. Additionally, IRS cited a number of financial
management reforms and improvements during the fiscal year. For
example, IRS noted that it had implemented improved interim reporting
processes, implemented a software inventory system to improve
accountability over software licenses, improved controls to ensure
better accountability over P&E, implemented a process for developing
interim accruals for certain specific administrative expenses such as
rent, and strengthened its oversight of obligating practices. IRS noted
that these improvements enabled the agency to make progress in
resolving material weaknesses identified under its annual FIA
assessment process, including accountability over P&E,
telecommunications, and administrative financial reporting.
In its response, IRS recognized that it is only through its
implementation of its new integrated financial management systems that
it will be able to overcome the majority of the material weaknesses
cited in the report. IRS noted that, as it continues to work to
implement its new systems, it will also continue efforts to improve its
business practices in support of these systems, including implementing
the core accounting functionality of IFS, streamlining and improving
business processes for travel, purchase card, and obligations and
commitments reviews, and implementing policies to more effectively
collect and report costs associated with trust fund activities. IRS
noted that the agency was committed to continuous improvement in
financial management, and 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.
The complete text of IRS's response is included in appendix III.
Signed by:
David M. Walker:
Comptroller General of the United States:
October 31, 2003:
Management Discussion and Analysis:
INTERNAL REVENUE SERVICE:
Management Discussion and Analysis For The Fiscal Year Ended
September 30, 2003:
I. Introduction:
The first Commissioner of Internal Revenue, George
Boutwell, made an astute observation of the 1862 revenue law, which
President Lincoln signed to establish our first income tax. He wrote,
"It was a remarkable exhibition of legislative wisdom under the
circumstances, but it was incomplete in part rather than imperfect in
plan." Even today, that summarizes our progressive system of taxation.
Certainly, there have been vigorous and difficult debates about
taxation and tariffs that go back to the creation of the republic. They
continue to this day at kitchen tables across America and in the halls
of Congress. But once the dust settles and the law is written, it falls
to the Internal Revenue Service to fairly and impartially administer
that law; no matter how complex or controversial it may be.:
Over the last 50 years, the volume and complexity of IRS operations has
expanded tremendously. Since 1952, the number of returns filed has more
than doubled, and the number of pages in the tax code has expanded from
812 to approximately 3,500. The rate of change in the tax
administration system and in the economy is remarkable. We continue to
deal directly with more Americans than any other institution, private
or public.
The IRS has made steady gains in better serving America's taxpayers.
For the Tax Year (TY) 2002 filing season, the Service processed over
128.7 million individual returns, and issued over 99.5 million refunds
totaling $191.2 billion. Web site usage for the same period smashed all
records with 2.7 billion hits and 336 million files downloaded. IRS
representatives also answered 25.9 million telephone calls during TY
2002; the automated telephone system handled about 62.4 million calls.
The big news is assistor level of service. It is up 20 percent over
last year. This can be attributed to the implementation of new
telephone lines, less complicated scripts and lower demand. Time spent
waiting improved substantially. Average wait time is down 26% from the
previous year. For TY 2002, more than 46.7 million taxpayers (36
percent) filed electronically - a 16.4% rise from last year. Much of
this surge can be attributed to the Free File program that will help
the IRS to reach the Restructuring & Reform Act of 1998 RRA 98)
mandated goal of 80% of individual returns filed electronically by
2007.:
The credibility of the Service's internal financial condition has again
been validated by the:
* "unqualified" audit opinion from the General Accounting Office's
(GAO) recently completed audit of our 2002-03 financial statements.
This is the sixth consecutive year that the IRS has produced combined
financial statements and the third consecutive year they have been
issued by November 15th. Taxpayers can be confident that the IRS is
held to formal accounting standards and is audited in a manner similar
to those performed in the private sector.:
Mission:
It is a new era for the IRS. The IRS Restructuring and Reform Act of
1998 (RRA 98) gave us a clear mandate - do a better job in meeting the
needs of taxpayers and in collecting the taxes. Our mission statement
expresses that sentiment: Provide America's taxpayers top-quality
service by helping them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to all.:
This mission statement describes our role, as well as the public's
expectation regarding how we should perform that role. In the United
States, the Congress passes tax laws and requires taxpayers to comply
with them. The taxpayers' role is to understand and meet their tax
obligations and the majority does, since roughly 98% of the taxes
collected are paid without active intervention by the IRS. Our role is
to help the taxpayers who are willing to comply with the tax law, while
assuring that the minority who are unwilling to voluntarily comply will
not burden their fellow taxpayers. We recognize that we must meet the
highest standards in performing this role. All of our services should
be viewed by the people who receive them as comparable to the best
service they receive elsewhere. Although we recently marked the fifth
anniversary of RRA 98, the IRS has not realized all of the benefits of
this landmark legislation. To fully realize its benefits, the Agency
must continue its focus on three key areas: (1) The reorganization
already underway to improve customer service, (2) the information
technology modernization program, and (3) strengthening the integrity
of our Nation's tax system through enhanced enforcement activities. To
this end, we will continue to pursue:
* Top-quality Service to Each Taxpayer in Every Transaction:
* Top-quality Service to All Taxpayers through Fair and Uniform
Application of the Tax Law:
* Productivity through a Quality Work Environment:
As progress continues to be made on these three fronts, we move closer
toward achieving our mission and meeting the public's expectations. We
have developed specific objectives that represent what we are striving
to achieve and how we will judge our success, both qualitatively and
quantitatively.:
We succeed only if we achieve a high level of performance on all three
fronts. We cannot be successful if we collect taxes but do not provide
top-quality service to each taxpayer or neglect taxpayer rights.
Equally, we cannot be successful if we provide good service but allow
compliance to decline and, thereby, fail to collect taxes. Finally, we
can only achieve these service goals by increasing productivity and
effectively utilizing the skills of our workforce. Since resources are
limited, we must use them wisely to productively accomplish our
mission.:
Organization:
In conformance with the provisions of RRA 98, we designed and made
substantial progress in implementing a new modernized organizational
structure. It closely resembles the private sector model of organizing
around customers with similar needs. The IRS created four customer-
focused operating divisions (ODs) to best serve taxpayers: Wage and
Investment; Small Business and Self-Employed; Large and Mid-Sized
Business; and Tax Exempt and Government Entities. There are also a
number of functional units, including Appeals, the Taxpayer Advocate
Service, Chief Financial Office, Criminal Investigation, Equal
Employment Opportunity and Diversity, and Communications and Liaison.
In addition, Chief Counsel established a senior attorney as the
Division Counsel for each of the operating divisions.:
Internally, the Modernization and Information Technology Services
organization and the Agency-Wide Shared Services units provide
information technology and administrative support, respectively, to all
divisions.:
The modernized organization focuses on providing services to each set
of taxpayers in three key program areas: pre-filing, filing and post-
filing. To succeed individually and collectively, all programs and
organizational units must deliver top-quality services to taxpayers
through these programs.:
In concert with the provisions of RRA 98, Commissioner Everson, in his
first message to all employees of the Internal Revenue Service upon
taking his oath of office, emphasized the need to continue the
reorganization of the IRS in order to continue to improve customer
service and increase enforcement. As part of this endeavor, he created
two new Deputy Commissioner positions. Each Deputy focuses on the needs
of his respective functions and ultimately their customers. The four
primary operating divisions and Criminal Investigation report to the
Deputy Commissioner for Services and Enforcement. The Deputy
Commissioner for Operations and Support supervises the Chief Financial
Officer, the Chief Information Officer, the Chief, Mission Assurance,
the Chief Human Capital Officer and the Chief, Agency-Wide Services.:
IRS Organization Chart:
[See PDF for image]
[End of figure]
The following functional units report directly to the IRS Commissioner:
National Headquarters (NHQ) includes the Office of the Commissioner,
Deputy Commissioners, Chief Counsel, Chief Appeals, National Taxpayer
Advocate, Counselor to the Commissioner, Chief, EEO and Diversity,
Director, Research & Analysis and Chief, Communications and Liaison.
Other functions include the Competitive Sourcing Program, Office of Tax
Administration Coordination, and the Commissioner's Complaint
Processing and Analysis Group. This organizational unit sets policies
and goals, provides leadership and direction for the Internal Revenue
Service, provides Servicewide policy guidance for conducting analysis
of programs and investments to support strategic decision-making
required to fulfill the IRS' mission in administering the nation's tax
laws. The customer base for National Headquarters includes all
employees, all executives and managers, taxpayers, oversight and
regulating groups, and Congress and other Government agencies.:
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.:
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 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.
Communication and Liaison (C&L) is a functional business unit which
partners with the operating and functional divisions to support IRS
business objectives and communications goals and ensures cross-
divisional coordination. It also partners 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 following operational/functional units report to the Deputy
Commissioner for Services and Enforcement:
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 to taxpayers in fulfilling their tax obligations. It also
conducts processing, account management, and compliance services
through seven 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 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.
The Office of Professional Responsibility fosters excellence in tax
professional services to taxpayers by setting, communicating, and
enforcing standards of competence, integrity, and conduct.
The following functional units report to the Deputy Commissioner for
Operations Support: The Modernization, Information Technology and
Security Services (MITS) organization provides leadership in the
delivery of information technology solutions that anticipate and meet
enterprise-wide needs by empowering employees to deliver customer-
centered, value-creating systems, products, services, and support. MITS
is the principal source of advice to the Deputy Commissioner for
Operations Support on strategic technology planning, data
administration, technology standards and privacy assurance, and
telecommunications.
The Agency-Wide Shared Services (AWSS) organization provides the
expertise and advice necessary to deliver shared services throughout
the IRS. These services include: space management and acquisition,
acquisition planning services, labor relations, employee resource
center and various other aspects of personnel including pre-complaint
processing & prevention, and alternative dispute resolution.
The Human Capital organization ensures that the IRS workforce is up to
the challenges of the 21st Century by attracting, motivating, and
retaining the best possible workers to do the best job possible.
The Chief Financial Officer organization is responsible for the
acquisition, planning, control and management of all Service financial
resources, including administrative and revenue accounting.
Organizational effectiveness is also part of the Chief Financial
Officer organization.
The Mission Assurance organization is responsible for the continuity of
tax administration and the safety of IRS personnel in case of any
emergency.
II. Performance Goals and Results:
The IRS uses performance measures to determine its effectiveness in
meeting the three IRS strategic goals. The FY 2003 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 provide prompt
service. The measure of:
* our success in this goal is whether 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:
* The economic downturn caused the number of individual tax returns
filed for calendar year 2003 to drop from prior year levels. This is
only the third time in the past 30 years that the number of individual
tax returns dropped in consecutive years. As of August 31, 2003, total
tax return receipts exceeded 130 million, which is comparable to the
receipts last year at this time.
* The Electronic Tax Administration (ETA) employed various marketing
strategies, including the Free File initiative, to target taxpayer and
preparer segments in an effort to increase the number of electronically
filed returns. The results of these initiatives are impressive.
More than 400 million information returns were filed electronically.
Receipts of electronically filed (e-filed) returns for the current year
increased by 12.8% compared to levels received over the same period
last year. The IRS received nearly 53 million individual (e-filed)
returns through the end of August 2003.
Receipts of paper 1040 returns for the current year decreased 7.9%
compared to levels received over the same period last year.
As of September 30, 2003, over 2.79 million e-filed returns were
received through Free File Alliance members. This figure represents 23%
of all online returns and 5% of all e-file returns received by the IRS.
On-line filing increased 27% over last year's levels, from 9.4 million
in 2002 to 11.9 million this year.
Through September 2003, over 5.4 million business returns were filed
electronically. This represents an increase of 1.3 million for the same
period last year.
E-filed individual returns with Schedules C, E, F and Form 2106
increased 1.9 million over the same period last year.
b. Improved Electronic Payment/Filing Options:
* Electronic payments increased by 1.4 million with more than 270,000
new Electronic Federal Tax Payment System (EFTPS) enrollments.
* Through September 30, 2003, over 66 million Federal Tax:
Deposit payments were received electronically.
* Launched Extensible Markup Language (XML) version of Employment Tax
e-file.
* Electronic Return Originators (ERO) now have the ability to offer
employment tax filing for their clients.
* Credit card and debit card options were expanded to include the
payment of delinquent taxes (individual), installment agreements, and
extensions.
c. E-Submissions Marketing:
* Launched an e-file advertising campaign including electronic and
print media. E-file materials were sent to over 30,000 tax
professionals.
* Tax Specialists contacted the top 20% of tax practitioners (15,446)
with high volume paper filing to promote e-filing.
d. Pre-Filing Services:
* Created a Media and Publications (M&P) to provide enhanced customer
service to internal and external customers.
* Coordinated with the Armed Forces Tax Council and individual armed
service branches to deliver timely information regarding the impact of
the Earned Income Tax Credit (EITC) law change on military personnel
and their families. Approximately 400,000 additional enlisted military
personnel became potentially eligible for claiming EITC.:
* Developed several databases to tailor education and outreach programs
by identifying specific taxpayer issues, targeting local communities
for outreach, and measuring program impact at the local level. These
databases include Tax Years 2000 and 2001 tax return information and
Tax Years 2001 and 2002 EITC claimant data, including math error
information. All of these databases drill down to the zip code level.
* Used the U.S. Census data for 1990 - 2000 and the Limited English
Proficient Study to identify issues, markets, and potential outreach
areas for increased EITC penetration.
* Publication 15-T, Public Law 108-27, "Jobs Growth Tax Relief
Reconciliation Act of 2003", which contains reduced Federal tax
withholding rates, was signed into law on May 28, 2003. Notice 1036,
"Early Release Copies of New Income Tax Withholding Tables" and
Publication 15-T were disseminated on May 28th and June 7th, 2003
respectively, which coincided with the signing of the bill into law.
* Through July 2003, assisted approximately 56.9 million taxpayers with
filing for the Earned Income Tax Credit (EITC).
* More than 35 million taxpayers received assistance through non-media
outreach activities (e.g. tax workshops, seminars, assistance centers).
The number of taxpayers receiving assistance increases to over 140
million when including media outreach (e.g. newspaper, television,
etc.).
e. Burden Reduction:
* A "zero-based' accounting approach to forms redesign has been adopted
and now every line of a form is reviewed to determine its utility. Form
941 is undergoing a line-by-line analysis to delete unnecessary lines.
The Form K-1 vision draft and instructions have been revised to become
more taxpayer-friendly. These revisions also reduced data entry
keystrokes, resulting in fewer clerical errors and positioning the
organization for future bar coding.
* The Industry Issue Resolution Program proposal on the "Substantiation
of the Amount of Expenses for Meals Furnished by Child Care Providers"
was approved. Family day care providers may now elect to use a
standardized rate to claim the deductions for meals provided to
children instead of keeping detailed records and receipts of food
purchased for use in their business. This change will save day care
providers approximately 10 million hours a year.
* Media and Publication's Area Distribution Centers netted a 15%
savings as a result of partnering efforts between Flat Mail Vendors and
the United States Postal Service that streamlined processing. To date,
flat mail vendors processed a total of 4.3 million mail pieces for a
total savings over first class postage of $1.4 million.:
Provide top-quality service to taxpayers needing help with their
returns or accounts:
a. Results Summary:
* Toll free customer satisfaction was 95 percent.
* The toll free Customer Service Representative (CSR) Level of Service
(LOS) at 80% has exceeded plan by 8%. Reduced customer wait times and
handle times contributed to the increased LOS.
* Practitioner Priority Services (PPS) CSR LOS (at 86%) also exceeded
the fiscal plan through July 2003. Enhanced call routing to the next
available agent, versus geographic routing, contributed to this
improved LOS. PPS decreased the wait time to speak to a representative
by over 150 seconds per call, directly addressing a concern identified
through recent customer satisfaction surveys.
* Through September 2003, EIN (Employer Identification Number) LOS had
improved 23 percentage points from the same period last year.
* The cumulative "refund timeliness rate" through June 2003 was 98.8%.
A proactive approach to inventory management resulted in improvement
over the previous fiscal year's performance.
* The advanced payment of the child tax credit was successfully
implemented, which required the issuance of Advance Child Tax Credit
(ACTC) payments and associated notices to more than 26 million
taxpayers who claimed the Child Tax Credit on their 2002 income tax
return. Taxpayers were also provided with easy access on the status of
their checks through the Internet or by calling the IRS directly.
* Enhanced functionality of IRS Web Site:
As of July 27, 2003, IRS websites had 4.36 billion accesses and 560
million downloads, which was higher than FY 2002 levels by 40% and 28%,
respectively.
Through July 26, 2003, 16.8 million taxpayers accessed the new "Where's
My Refund?" application on the IRS web site. Seventy percent, or 11.8
million of these taxpayers, successfully completed and received refund
information.
The new Internet Refund or "Where's My Advance Child Tax Credit
(ACTC)", on the IRS web site was accessed 3.4 million times with 2.9
million successful completions for an 84% success rate.
In April 2003, Phase I of the Internet-EIN project (a web based front-
end application process) was implemented.
b. Improvements in Telephone Service:
* More callers got to properly-trained CSRs quicker, as evidenced by
lower transfer rates, lower Average Speed of Answer (ASA), and lower
abandon rates. Customers waiting less time to speak to assistors
resulted in fewer repeat calls, lower total call attempts, and reduced
demand. as evidenced by unique caller demand decreasing from 53.8
million for FY 2002 to 50.8 million for 2003.
* Access to toll-free telephone lines in FY 2003 improved over FY 2002
levels. As of September 30, 2003, the CSRs LOS was 80%, an 18-
percentage point increase over the same period last year. On average,
taxpayers waited 100 seconds less to speak to an assistor this fiscal
year as compared to last year. 10:
* Through September 30, 2003, telephone assistors answered nearly 33
million calls on the Customer Account Services (CAS) toll-free product
lines.
* Through September 2003, taxpayers made over 6 million call attempts
on the new Advance Child Tax Credit (ACTC) product line 800-829-0105.
* The "IRS Toll-Free Vision and Marketing Strategy" implemented six new
dialed numbers designed to improve customer experience and ensure
callers are directed to the appropriate resource through the use of
scripts tailored to each dialed number. Each of the new numbers is
designed for use by a specific segment of callers. These changes are
part of a new toll-free strategy to improve customer service by
targeting customer segments and creating more accountability.
* IRS implemented Customer Contact Center Optimization (CCCO), designed
to support increased site specialization and ensure callers reach an
assistor with the appropriate skill to assist them. This process
enhances customer service by readily responding to changing conditions
in telephone workload as well as improve quality and productivity.
* The "Screener Strategy," which sends tax law calls to a live screener
for issue identification and transfer to the appropriate application,
was implemented on October 1, 2002. This replaced screening for Tax Law
calls at the network level.
* In January 2003, SB/SE and W&I began offering separate division-
specific toll-free telephone lines, significantly reducing caller wait
time for the SB/SE Business and Specialty Tax, BMF Customer Response
and IMF Customer Response.
* SB/SE centralized EIN processing to three campus locations and
implemented EIN tollfree telephone operations.
Provide prompt, professional, helpful treatment to taxpayers in cases
where additional taxes may be due:
a. Results Summary:
* Through the end FY 2003, Field Collection, Field Examination and
Service Center Exam customer satisfaction scores exceeded the fiscal
year targets.
* Through September 2003, the Offer In Compromise (OIC) overage
indicator (percent of OIC cases disposed of in 6 months or less) has
improved by nearly 19 percentage points over the same period last year.
In addition, over 56% of these cases were closed in under 6 months.
* Automated Underreporter implemented additional systems capacity and
eliminated approximately one million busy and abandoned calls. Exam
expanded telephone services to more than 500,000 taxpayers through cold
call units and automated scripts.:
b. Enhanced Customer Service:
* Field and Office Reengineering implemented changes to improve pre-
audit planning, achieve a uniform, structured approach to audits, and
enhance taxpayer communication.
* Compliance delivered over 740,000 training hours and implemented the
"My Opinion Counts Council" in ACS, ACS Support, and CSCO.
* Compliance improved its responsiveness to taxpayer needs and timely
processed 756,000 pre-assessed installment agreements, a 40% increase
over FY 2002. The "Notice of Intent to Levy" was revised to clarify the
actions required by taxpayers in order to avoid enforcement actions.
* Revisions were made to simplify and clarify Exam's first notice.
Beginning January 1, 2003, on refund returns with Earned Income Tax
Credit EITC, refunds are frozen only to extent of EITC credit, not the
entire refund.
* Compliance implemented "Decision Installment Agreement" to improve
quality and completeness of information provided to taxpayers related
to installment agreements.
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. This measure reports a consolidated total of Employee Plan
Determination Letters combined with Exempt Organization Determination
Letters.
FY 2003 Performance: The goal was missed because fewer receipts were
received in IRS than expected, and were made up primarily of more
complex cases (individually designed retirement plans) that take longer
to process.
EP/EO Determination Letters:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to respond to inventory complexity
challenges through the following improvement projects: roll out Agent
Work Center/2002 to Examination agents; migrate the Returns Inventory &
Classification System (RICS) to a DB2 Platform; redesign the EP/EO
Determination Letter System; refine controls for Government Entity
cases; provide access to Form 5500 pension plan returns filed with
Department of Labor (DOL); and integrate stand-alone information
systems into the modernized Agent Work center.
B. Total Published Guidance Items Published:
Description: Published Guidance consists of regulations and other
guidance issued by the IRS and Treasury to interpret and explain the
Internal Revenue Code. Published Guidance provides taxpayers with
additional guidance and provides IRS agents guidance in resolving
difficult technical questions. These items include Actions on
Decisions; Notices/Announcements; Published Guidance Proposals and
Studies; Technical Advice Memoranda; Regulations; Revenue Rulings; and
Revenue Rulings published.
FY 2003 Performance: Counsel's emphasis on issuing Public Guidance over
private guidance is achieving the desired effect as evidenced by a 36%
performance increase over FY 2002. Counsel continues to work with IRS
Operating Divisions and Treasury to identify and address emerging
issues through published guidance. The number of qualified
professionals working on Published Guidance increased significantly
this year, allowing for the production of more published guidance and
ensuring timely completion of Business Plan projects.
Total Published Guidance Items Published:
[See PDF for image]
[End of table]
Future Plans: Internal resources will continue to be realigned to
accommodate increased demand from the IRS and the public for Published
Guidance in FY 2004. Counsel will continue to 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. The Published
Guidance process will continue to be assessed to ensure efficiency,
productivity and responsiveness to both clients and taxpayers.
C. 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 2003 Performance: The percentage comparison is a ratio of
electronically filed returns to total filed returns. Since total
volumes are lower for each category and since paper receipts are closer
to initial plan than electronically filed returns have been, the
percentage mathematically is lower than the initial plan.
Percent Individual Returns Filed Electronically:
[See PDF for image]
[End of table]
Future Plans: Electronic Tax Administration (ETA) has developed a
number of recommendations for the Free File Alliance to consider for
improving next year's release of the Free File Program. ETA is
researching the availability of Free File products in Spanish and also
reviewing opportunities to ensure Section 508 compliance issues
(accessibility) are met. Targeted marketing programs designed to
increase the percentage of IMF e-filed returns will continue in FY
2004, and will include a tiered marketing campaign of direct outreach
visits, phone calls, and direct mail.
d. Electronic Federal Tax Payments System:
Description: All individual and business tax type payments made
directly through the Electronic Federal Tax Payment System through IRS
e-file, directly through payroll service providers, or through credit
card processors.
FY 2003 Performance: Electronic payments increased by over 1.2 million
with more than 270,000 new enrollments. Through August 34% of all
Federal Tax Deposit payments were received electronically. The XML
version of Employment Tax e-file was launched enabling Electronic
Return Originators to have the ability to offer employment tax filing
for their clients. Credit card payment options are now extended to
payment of delinquent taxes, including installment agreements. A
nationwide virtual E-Submissions team was established, with
representatives from IRS headquarters and the field to develop and
implement a marketing strategy to increase electronic payments. This
included marketing the benefits of the Electronic Federal Tax Payment
System (EFTPS) during practitioner contacts. IRS also developed and
implemented a nationwide marketing strategy toward financial
institutions, which included cost effective methods to be used by these
financial institutions in marketing EFTPS to their customers.
IRS partnered with banking associations at the local and national
levels to educate their members on the benefits of EFTPS. Additional
guidance on the benefits of EFTPS was provided to employees who have
customer facing roles. These efforts have been successful, as payments
have increased by over 1.2 million over FY 2002.
Electronic Federal Tax Payments (000):
[See PDF for image]
[End of table]
Future Plans: Taxpayer Education and Communication (TEC) will continue
to influence behavior through practitioner and financial institutions
contacts throughout FY 2004. The IRS will increase its outreach to
include marketing EFTPS to individuals filing estimated tax payments
and continue outreach to practitioners through the nationwide tax
forums.
E. 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 fivepoint scale,
where a score of 1 or 2 indicates Dissatisfied and 4 or 5 indicates
Satisfied. Although not affecting the statistical validity of the
survey, the following are limitations of the survey: 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; and
customers calling when IRS monitors are not available (Saturday, Sunday
and some evening hours) are excluded from the survey.
FY 2003 Performance: Customer Satisfaction survey questions were
enhanced and the survey scale was adjusted from a 4-point to a 5-point
scale. Prior to FY 2003, satisfaction was defined as the percent of
customers providing a rating of "4" and dissatisfaction was defined as
the percent of customers rating a "1". Targets were set using these
definitions. In FY 2003, with the change to the 5 point scale, the
definition of satisfaction changed to the percent of 4's and 5's and
targets were revised to reflect this change. Thus, what appears to be a
big change in customer satisfaction is primarily a result of the scale
change and the definition change.
Through July 2003, the toll-free Customer Service Representative Level
of Service (LOS) at 84% combined with reduced customer wait times and
handle times contributed to the increased level of customer
satisfaction.
Toll-Free Customer Satisfaction Percentage Satisfied:
[See PDF for image]
Adjusted plan number for scale change: 93%:
[End of table]
:
Future Plans: The two areas for top-priority improvement efforts are
the automated answering system and ease of getting through by phone. 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.
F. Toll-Free Customer Service Representative (CSR) Level of Service:
Description: Reported as a percentage, the relative success rate of
taxpayers calling for assistance and seeking services from a Customer
Service Representative (CSR). Factors used to arrive at the level of
service include: callers selecting an automated application; callers
receiving a busy signal; or callers abandoning while in queue waiting
for an assistor.
FY 2003 Performance: The increase in level of service is due to a
variety of factors, including more callers getting to properly trained
CSRs quicker. Callers waiting less time to speak to assistors resulted
in fewer repeat callers, lower total call attempts, and reduced demand.
Many of these improvements can be attributed to Workload Realignment
and the Tax Law Screener Strategy initiatives focused on delivering the
call to the appropriate agent group for response. In January 2003, SB/
SE and W&I began offering separate division-specific toll-free
telephone lines, significantly reducing the menu size that callers
encounter. These new phone lines included the SB/SE Business &
Specialty, BMF, Customer Response and IMF Customer Response.
Toll-Free Customer Service Representative (CSR) Level of Service:
[See PDF for image]
[End of table]
Future Plans: The accuracy of the original screening of taxpayer-
initiated calls will be improved by more specific direction and
training of assistors who staff the phones. In addition, by revising
the routing structure, transfers to other applications based upon
secondary issues will be reduced. Anticipated targets for FY 2004 and
FY 2005 will remain constant at 83%. IRS will implement recommendations
from the Customer Contact Center Optimization study, including a call
router to build a pyramid of specialization that will enable routing
each customer to an employee having the appropriate skill level to
successfully address the customer's issue. Once implemented, IRS will
utilize CSR call recording technology quality review, training and
evaluation.
G. 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 2003 Performance: The goals for FY 2003 were set based on FY 2002
performance and anticipated score increases due to the implementation
of the new Embedded Quality (EQ) process. The expected improvement from
EQ was not realized, and IRS is conducting a rootcause analysis to
determine the reasons why the outcomes were not achieved.
Toll-Free Tax Law Quality:
[See PDF for image]
[End of table]
Future Plans: The following actions will be taken to improve the
accuracy percentage for FY 2004: delivery of application-specific
training and subsequent proficiency certification; ongoing research and
analysis of quality data to identify improvement opportunities and
initiatives; implementation of Contact Recording to enhance the ability
of management to gauge and improve individual performance.
H. Toll-Free Account Quality:
[See PDF for image]
[End of table]
Future Plans:
Description: The percentage of customers receiving accurate responses
to their account inquiries. This evaluates responses posed by internal
and external customers.
FY 2003 Performance: The goals for FY 2003 were set based on FY 2002
performance and an anticipated score increases due to the
implementation of the new Embedded Quality (EQ) process. The expected
improvements from EQ were not realized, and IRS is conducting a
rootcause analysis to determine the reasons why the outcomes were not
achieved.
Toll-Free Account Quality:
[See PDF for image]
[End of table]
Future Plans: The following actions will be taken to improve the
accuracy percentage for FY 2004: delivery of application-specific
training and subsequent proficiency certification; ongoing research and
analysis of quality data to identify improvement opportunities and
initiatives; implementation of Contact Recording to enhance the ability
of management to gauge and improve individual performance.:
I. Customer Satisfaction Walk-In:
Description: Represents the customers' overall level of satisfaction
with the services provided by the IRS at its Taxpayer Assistance
Centers (TACs). 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 five-point scale, where a score of 1 or 2
indicates Dissatisfied and 4 or 5 indicates Satisfied. A limitation
that may affect the validity of the data is the method in which the
survey is conducted. The results are based on comment cards that are
voluntarily completed by customers who have visited a Field Assistance
office. Traditionally, comment cards are completed by customers who are
either very satisfied or very dissatisfied with the service received,
with the majority of comment cards being completed by customers who
tend to be more satisfied. Therefore, the results should be viewed in
more of a qualitative, rather than a quantitative, sense.
FY 2003 Performance: Customer satisfaction was below the target because
the service at the Field Assistance (FA) offices for this period
remains a key improvement factor in the taxpayer's eyes and survey
results continue to indicate that customer wait time is highly
correlated to their overall satisfaction. Survey results are obtained
through comment cards voluntarily completed by customers, generally
those who are either very satisfied or very dissatisfied with the
service received.
Customer Satisfaction Walk-In Percentage Satisfied:
[See PDF for image]
[End of table]
Future Plans: For 2004, IRS FA offices will continue to implement the
network of the Queuing Management System (Q-Matic) to screen and
categorize taxpayer needs.
:
J. 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 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 2003 Performance: Overall customer satisfaction in both EP and EO
continues to improve. In EO, the increased use of limited-scope audits,
which take less time to complete and are less burdensome for customers,
has had a positive effect on the two lowest areas of customer
satisfaction: Length of Process and Time Spent on Audit. EP has
experienced significant improvements in Fairness of Treatment and is
actively addressing high-priority customer satisfaction issues like
Explanation of Process and Time Spent on Audit.
EP/EO Customer Satisfaction:
[See PDF for image]
[End of table]
Future Plans: EO is identifying and addressing potential short-term
revisions to the Form 990 that can be made to coincide with the
implementation of electronic filing of this return in 2004. EP is
revising the initial appointment letter that explains why the taxpayer
was selected for audit. New enclosures will provide a simplified
explanation of what to expect from the examination process and of
taxpayer rights. Other improvements will also reduce the amount of time
taxpayers spend preparing for audits by eliminating unnecessary
requests for information.
K. Employee Plans (EP) / Exempt Organizations (EO) Examination Quality:
Description: Level of quality in the Employee Plans and Exempt
Organizations examination program as measured by the Tax Exempt Quality
Measurement System (TEQMS). The quality score is the average percentage
of quality standards rated met (number of standards passed divided by
the number of standards rated for the reviewed cases).
FY 2003 Performance: TE/GE achieved impressive gains in examination
quality this year, exceeding its aggressive improvement goals.
Improvements have been made by providing focused instruction and
guidance to employees regarding the particular quality standards with
the lowest pass rates, while maintaining managerial performance
commitments to TEQMS.
EP/EO Examination Quality:
[See PDF for image]
[End of table]
Future Plans: In FY 2004, the use of dedicated determination groups in
both EP and EO will promote consistency and quality by removing
determination work from the responsibilities of both Examination agents
and managers. In addition, EP and EO will continue to analyze standards
with lower scores to identify areas in need of further clarification or
training.
L. 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: 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 2003 Performance: ACS Customer Satisfaction Survey changed from a 4-
point scale to a 5-point scale in January FY 2003. Prior to FY 2003,
satisfaction was defined as the percent of customers providing a rating
of "4" and dissatisfaction was defined as percent of customers rating a
"1". Targets were set using these definitions. In FY 2003, with the
change to the 5 point scale, IRS also changed the definition of
satisfaction and dissatisfaction to the percent of 4's and 5's and the
percent of 1's and 2's and revised the targets to reflect this change.
Thus, what appears to be a big change in customer satisfaction is
primarily a result of the scale change and the definition change.
Through FY 2003, 91% of ACS customers were satisfied (a rating of 4 or
5 on the 5-point scale). Customers were most satisfied with the
following survey areas: "Friendliness of the Representative" ; the
"Representative's Willingness to Help You with Your Issue"; and the
"Fairness of Treatment." Telephone Customer Satisfaction was negatively
impacted 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.
Telephone Customer Satisfaction - ACS (5 pt. Scale):
[See PDF for image]
[End of table]
Future Plans: The ACS Reengineering Team will focus on analyzing the
high number of callbacks received in ACS, improving interactive
scripts, balancing staffing to work inventory/cases with telephone
operations. A new SB/SE Customer Satisfaction Strategy will focus on
data received from the SB/SE customer base with emphasis on customers'
prefiling/ filing experiences as well as those customers who have not
had specific interactions/transactions (i.e. audit or collection
activity). This information will be utilized to identify improvement
opportunities with SB/SE taxpayers.
M. 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 while in queue for
the next available assistor are not included in the count of calls
answered) in the Automated Collection System (ACS).
FY 2003 Performance: The target was missed due to an increasing number
of calls not related to a collection matter and therefore, not
belonging to this specialized area. In addition, during the filing
season, service was further impacted by the re-assignment of collection
specialized representatives to assist in the customer service areas of
tax law and accounts.
ACS - Telephone Level of Service:
[See PDF for image]
[End of table]
Future Plans: In FY 2004, a small increase in resources and
enhancements to the scheduling process should contribute to an improved
service level. In addition, a team has been established to look at what
drives telephone traffic and is expected to develop recommendations
related to call forecasting and suggest upgrades to the management
tools designed to match resources to call demand.
N. 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 (CQMS) 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, where 1 indicates Very
Unsatisfied and 7 indicates Very Satisfied.
FY 2003 Performance: Customer satisfaction continued to improve.
Results indicate that 60% of collection customers were satisfied with
the service they have received, exceeding the target. IRS improved
fairness in collection operations by modifying the Collection Due
Process program. Managerial involvement is now required before a case
goes to Appeals, which helps resolve more cases earlier and at lower
cost to both taxpayers and the IRS. Program reviews focused on
appropriate case actions and quality reviews included effective case
actions and protection of taxpayer rights.
Customer Satisfaction - Collection Field:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to evaluate the impact of Collection
Reengineering initiatives on customer satisfaction. Recommendations
from the Field Consultation Initiative pilot to improve case quality
and timeliness will be modified for potential nationwide
implementation. The new SB/SE Customer Satisfaction Strategy will focus
on data received from the SB/SE customer base with emphasis on
customers' pre-filing/filing experiences as well as those customers who
have not had specific interactions/transactions (i.e., audit or
collection activity).
O. Field Collection Quality:
Description: Score awarded to reviewed Collection cases 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 2003 Performance: Quality scores remained at levels below target
despite improved scores in the following areas: clear action dates, no
activity lapses over 75 days and timely follow-ups. In addition, FY
2003 scores improved (over FY 2002 levels) due to increased engagement
between managers and revenue officers to facilitate timeliness and
quality of case resolution.
Field Collection Quality:
[See PDF for image]
[End of table]
Future Plans: In FY 2004 and beyond, IRS will continue to develop and
implement recommendations to improve case quality. P. 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 2003 Performance: Deficiencies include timeliness in meeting interim
contact requirements and the format of correspondence sent to
taxpayers. The Embedded Quality initiative will capture new data and
plans are to replace this measure.
Automated Underreporter Quality:
[SEE PDF FOR IMAGE]
[END OF TABLE]
:
Future Plans: In FY 2004 IRS will continue to refine the process of
identifying and selecting workload using data analyses and additional
business rule development with the ultimate goal of removing the screen
out cases (cases closed without sending notice to the taxpayer.):
Q. 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, where 1 indicates Very
Unsatisfied and 7 indicates Very Satisfied.
FY 2003 Performance: Customers are most satisfied with courtesy of IRS
employees and employees showing the right attitude, which has resulted
in a 3 percentage point gain over the prior year. Results also indicate
that taxpayers are primarily dissatisfied with the length of the audit
process, length of time to get through by phone, and time spent on the
correspondence exam.
Service Center Exam - Customer Satisfaction Percentage Satisfied:
[SEE PDF FOR IMAGE]
[END OF TABLE]
Future Plans: IRS will coordinate with Wage and Investment on the types
of EITC audits that will be conducted in the SB/SE centers, improving
the workload selection, and reducing cycle time. Hiring is also planned
for FY 2004. The new SB/SE Customer Satisfaction Strategy will focus on
data received from the SB/SE customer base with emphasis on customers'
prefiling/ filing experiences as well as those customers who have not
had specific interactions/ transactions (i.e. audit or collection
activity). This information will be utilized to identify improvement
opportunities with SB/SE taxpayers. IRS will embed quality into Service
Center Compliance programs, providing a higher-quality experience for
taxpayers and engaging managers in the delivery of services.
Identifying customer service trends and issues earlier will allow IRS
to react to customer needs more rapidly, increasing customer
satisfaction.
R. Service Center Examination Quality:
Description: Correspondence Exam Case Quality measures the case
accuracy of correspondence exam paper closures. Each site's quality
reviewer reviews a sample of cases and writes a review record for each
case.
FY 2003 Performance: The quality score has met the planned target of
73%. During FY 2003, the Embedded Quality (EQ) initiative was
implemented in campus operations. The resulting data will be utilized
as a baseline to establish targets for future fiscal years. The primary
focus of early quality efforts this year was on implementing the new
quality review system and establishing consistency between sites and
managers for the new Data Collection Instrument (DCI). As the focus
shifted to resolving recurring error, the rates for both the customer
and the pass/fail measures trended up.
Service Center Examination Quality:
[See PDF for image]
[End of table]
Future Plans: For FY 2004 and beyond, EQ will be implemented in all
locations and the IRS will evaluate and monitor the results to identify
improvement opportunities.
S. 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 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 and does not include Examination contacts with individuals
that did not result in an audit closure.
FY 2003 Performance: The year ended with results showing that 63% of
Examination customers were satisfied and 23% were dissatisfied.
Customer satisfaction scores have steadily improved. Improvement
opportunities exist in 1) Fairness of Treatment, 2) Explanation of
Adjustments and Time Spent on the Examination. Field Examination
Reengineering initiative was piloted to test a uniformed, structured
approach to conducting audits. Facets of the initiative included a
revamped pre-audit process and standardized workpapers. Several
recommendations were made to implement the new audit processes
nationwide. 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
greatest 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
2002 level and exceeding the FY 2003 target.:
Examination Customer Satisfaction Percentage Satisfied:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to monitor and evaluate the impact of
Field Examination Reengineering initiatives on customer satisfaction.
Recommendations from the pilot are being modified and nationwide
implementation is scheduled for FY 2004. The new Small Business Self
Employed Division (SB/SE) Customer Satisfaction Strategy will focus on
data received from the SB/SE customer base with emphasis on customers'
pre-filing/filing experiences as well as those customers who have not
had specific interactions/transactions (i.e. audit or collection
activity). This information will be utilized to identify improvement
opportunities with SB/SE taxpayers. 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.
T. 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 2003 Performance: Despite continued improvements in examination
quality, year-end performance is slightly below the planned target.
Areas contributing to shortfall include a lack of embedded quality in
Field Examination Operations and the need to further monitor the impact
of Examination Reengineering Initiatives on case quality.
Examination Case Quality Score:
[See PDF for image]
[End of table]
Future Plans: In FY 2004 embedded quality will be implemented for field
exam, providing the IRS with better tools to manage errors in the
field.
U. 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.
FY 2003 Performance: Despite an improvement of 10 percentage points
over the FY 2001-2002 levels, and the goal was not met due to
inconsistency in addressing taxpayer issues and customer education.
:
Taxpayer Advocate Casework Quality Index:
[SEE PDF FOR IMAGE]
[END OF TABLE]
Future Plans: FY 2004 activities include validation of TAS' ability to
take consistent and appropriate efforts to address taxpayer related
issues and effectively educate its customers, and a re-evaluation of
quality standards to ensure they match customer service standards
developed using customer satisfaction survey data. 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.
America's 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. Taxpayers who do not comply cannot be
allowed to burden those who do.
Major Results and Accomplishments:
Increase Overall Compliance:
a. Results Summary:
* ACS closed more than 1.1 million Taxpayer Delinquent Accounts (TDAs),
a 22% increase over TDAs closed in FY 2002 and a 10.4% increase over
the FY 2003 target.:
* ACS closed 197,517 Taxpayer Delinquency Investigations (TDIs), this
is 4% lower than the previous year.
* ACS dollars collected reached almost $1 billion by September 30,
2003, a 28% increase over the same period last year.
* Through the use of the predictive dialer, ACS attempted over 1.7
million outbound calls.
* Automated Substitute For Return (ASFR) closed 67,000 TDIs (universal
access).
* ACS reduced its priority inventories to be one percent to five
percent current compared to 11% to 68% current at the end of FY 2002.
* W&I Compliance secured almost 560,000 delinquent returns in FY 2003,
a 21% increase over FY 2002.
* Compliance Service Collection Operation (CSCO) improved average days
to close to 18.9 days in FY 2003, a 33% improvement over FY 2002. 25:
* Automated Underreporter (AUR) closures for FY 2003 of 2.89 million is
slightly lower than the FY 2003 target, despite a prior year reduction
in Wage and Investment FTE which decreased the number of cases carried
over to FY 2003. AUR's improved case selection processes in FY 2003 are
reflected by an increase in the number of notices issued.
* AUR reduced overage correspondence by more than 16%.
* Exam reduced discretionary open cases that are more than 365 days old
by 79%.
* Compliance exceeded the FY 2003 discretionary exam closure target of
246,000. In addition this was a 48% increase over FY 2002 closures.
* EITC examination closures were 418,000, exceeding the FY 2003 target
by 20%, and EITC dollars recommended for proposed deficiencies amounted
to $541.6 million, almost 20% ahead of FY 2002.
* Field Examination closures exceeded the current year plan for both
individual and business returns.
* LMSB increased emphasis on abusive tax avoidance transactions by
examining more returns involving abusive corporate tax shelters, taking
action to examine and target the promoters of abusive tax avoidance
strategies, and reaching settlement with taxpayers on substantial tax
shelter cases.
* LMSB made permanent the Fast Track Settlement Program that reduces
burden to both the taxpayer and the government. This program increases
issue resolution at the lowest level, allows for the use of Appeals
tools during the examination in LMSB, and decreases the overall time
from the return filing to the ultimate resolution. The length of the
audit/appeals process is shortened by as much as two years.
* LMSB redirected enforcement resources to address the declining audit
coverage rates for mid-size corporations in an effort to ensure an
appropriate compliance presence in all taxpayer segments.
* Field Collection dispositions (Taxpayer Delinquent Accounts-TDA and
Taxpayer Delinquent Investigations-TDI) and productivity exceeded the
current year plan and prior year performance.
* OIC closures exceeded the plan levels in both the field and the
Centralized Offer-In-Compromise Unit. Through September 2003, 56% of
offers were closed within 6 months compared to 37% for the same period
in FY 2002.
* Appeals increased the total number of Appeals cases closed from
68,000 in FY 2002 to 83,000 in FY 2003. This increase in productivity
is attributable to additional management focus on workload priorities
(i.e. docketed cases, collection work), increased efficiencies in both
case management and processing and implementation of process
improvements, including specialization and segmentation.
* Collection Due Process (CDP) front-end inventory currency and back-
end inventory improved over FY 2002 levels by 25% and 21%,
respectively.
* CDP case processing productivity has improved with the percentage of
aged cases dropping from 16.2% in FY 2002 to 5.0% in FY 2003.
* Through September 2003, the Taxpayer Advocate Service (TAS) closed
196,774 cases.
b. Improved Communications and Service:
* ACS increased direct time delivered on phones by 20% over FY 2002
levels. ACS answered 1,468,786 calls, a 16% increase over FY 2002, and
reduced internal telephone transfers by 80% from FY 2002 levels with no
increase in FTE.
* AUR implemented additional systems capacity and eliminated
approximately one million busy and abandoned calls.
* Examination expanded telephone services to more than 500,000
taxpayers through cold call units and automated scripts.
* Field Assistance completed the networking of the Queuing Management
Project in Area 7, all sites in California.
* Compliance Services Collection Operation (CSCO) timely processed
756,000 preassessed installment agreements, a 40% increase over FY
2002.
* The "Notice of Intent to Levy" was revised to clarify the actions
required by taxpayers in order to avoid enforcement actions.
* Revisions were made to simplify and clarify Exam's first notice.
* Compliance developed and finalized system requirements so that
beginning January 1, 2003 EITC refunds are frozen only to the extent of
EITC credit, not the entire refund.
* Compliance implemented "Decision Installment Agreement" to improve
quality and completeness of information provided to taxpayers related
to installment agreements.
* Implementation of EQ throughout compliance services led to
improvements in the EXAM, (CSCO), and ACS service quality; and 20%
improvement in ACS productivity.
* FY 2003, Field Collection, Field Examination and Service Center Exam
customer satisfaction scores exceeded the fiscal year targets.
* Field Assistance's Customer Satisfaction Survey results for the
fiscal year indicated 87% of Field Assistance's customers were
satisfied, with only 8% being dissatisfied.
* The Appeals function increased the percentage of satisfied customers
from 44% to 48%. Vehicles used for customer outreach and feedback:
* Developed and implemented quarterly newsletters to disseminate
current, relevant information to Government Entities customers and
stakeholders.
* Taxpayer Education and Communication (TEC) in SB/SE utilized a
variety of distribution channels to reach taxpayers and influence their
filing and payment behaviors.
* Headliners were distributed to external stakeholders. Topics included
Money Laundering Schemes, S-Corporation Compensation, Employee
Leasing, and Electronic Filing for Small Businesses.
* Tax Talk Today, a live Internet program, featured broadcasts with
lively discussions, real time interaction and the opportunity for
viewer participation by telephone, e-mail or fax.
* Participation on radio station programs increased significantly and
the listener base for most segments exceeded 100,000. Presentations
included information on E-file/EFTPS, Home-Based Businesses, Abusive
Schemes, and the Offshore Voluntary Compliance Initiative.
* Electronic outreach was enhanced through leveraging stakeholder
relationships with America On Line (AOL) and Microsoft. Actions include
IRS links on their tax centers.
* Developed and piloted a customer satisfaction survey for certain
Government Entities outreach activities.
* Appeals moved to a completely paperless telephone customer survey,
making it possible to receive results quicker and to react more timely
to customer concerns.
* Four focus groups were conducted in an effort to obtain additional
customer feedback on improving face-to-face services on a daily basis.
Taxpayer Assistance Center (TAC) customers indicated that they visit
centers because they prefer face-to-face assistance versus telephone
communications and because they have tax needs that require inperson
interaction. Their overall satisfaction is dependent upon the
professionalism of the staff at the TAC locations and the wait time for
service.
* The SB/SE website was expanded to include information to assist
taxpayers in determining whether they should submit an offer. The
website includes explanations on the various types of offers,
processability criteria, hyperlinks to Form 656 and Collection
Financial Standards, and Frequently Asked Questions.
* Expanded outreach to small business about retirement plan options,
including expanding content on irs.gov and widely distributing Choosing
a Retirement Solution for your Small Business through various channels
including IRS events, stakeholder groups and online.
* Launched a website to make it easier for political organizations to
file electronically and greatly improve the public's access to
information about these organizations.
* LMSB continued to place significant media attention on Abusive Tax
Schemes to alert taxpayers to the schemes and prevent potential tax
problems.
* LMSB continued to provide the Tax Shelter Hotline for taxpayers as a
clearinghouse for information that comes to the attention of the
Service relating to potentially improper tax shelter activity by
corporate and non-corporate taxpayers. Publications for the use of
employees and customers:
* Twenty tax law, self-directed learning modules for use by employees
were developed and are being expanded to include all tax law topics and
all probes. These modules are being used for publication method
training in each tax law category.
* LMSB issued published guidance on four new issues as part of their
efforts through the Industry Issue Resolution program to resolve
frequently disputed or burdensome tax issues that affect a significant
number of business taxpayers.
* Published Revenue Procedures 2003-40 and 2003-41, making both LMSB/
Appeals Fast Track Settlement and SBSE/Appeals Fast Track Mediation
permanent programs within Appeals. Both programs expand the range of
dispute resolution options available to taxpayers, promote issue
resolution at earlier stages and decrease the overall time from return
filing to ultimate issue resolution.
* Appeals expanded and tailored a number of alternative dispute
resolution techniques to accommodate the settlements of tax shelters
and abusive schemes in a timely and consistent manner.:
c. New Initiatives and Program Improvements:
* W & I Compliance implemented the Electronic Levy System (ELS), an
automated levy review system that systematically verifies the accuracy
of the levy amounts and levy source addresses prior to mailing, thereby
reducing hours used on levy review. In FY 2003, ELS produced a 40%
productivity savings over FY 2002.
* As part of Field Assistance's efforts to improve tax law accuracy, a
tax law certification initiative was implemented which required that
each employee be certified to answer technical tax law topics.
* W&I's Tax Forms and Publications made significant progress in
developing the framework for a state-of-the-art Virtual Translation
Office (VTO) that will enable the IRS to serve significant segments of
the Limited English Proficiency population at a minimum cost by
leveraging existing language resources.
* Embedded Quality was implemented throughout all of Compliance
Services. Exam improved quality to 65% from 60% in FY 2002. CSCO
improved quality to 95.3% from 75.9% in FY 2002. ACS sustained quality
at 90% while improving productivity by 20%.
* The Electronic ACS-Guide (e-ACS G), an interactive research tool for
ACS Collection Representatives (CRs), was piloted in the Seattle and
Brookhaven ACS call sites. Through "e-ACS", CRs have user-friendly
access to key Internal Revenue Manual procedures, the Decision IA took.
The Collection Statue Expiration Date, W-4 calculators, and other
research tools.
* Compliance proactively responded to taxpayer issues related to the
war in Iraq and other designated Combat Zones (CZs). Relief guidelines
were provided for active duty, reserve duty, and support personnel in
designated combat zones. The CZ email address was reactivated for
impacted military taxpayers. Compliance partnered with the Department
of Defense (DoD) and MITS to implement a systemic identification and
treatment to protect designated personnel. In addition, Compliance
delayed the implementation of the DoD Federal Payment Levy Program
(FPLP) until systemic protections for combat zone personnel could be
implemented.
* Compliance delivered over 740,000 training hours and implemented "My
Opinion Counts Council" in ACS, ACS Support, and CSCO.
* TE/GE initiated market-segment based studies to assess levels of
compliance and identify compliance risks among TE/GE customers.
* TE/GE collaborated with Department of Labor to identify Form 5500
pension plan non-filers.
* TE/GE worked with IRS Criminal Investigation and Department of
Treasury to address the diversion of charitable assets to terrorism
funding.
* TE/GE expanded the use of limited-scope audits and other contacts to
improve EO's compliance presence within limited resources.
* Appeals continued to play an integral part in the Service's efforts
to combat tax shelters and abusive tax schemes, bringing its
independent settlement authority to bear on tax shelter cases as early
in the process as possible.
* Revised Form 1023, Application for Recognition of Exemption, to be
implemented for customers next year.
* The Taxpayer Advocate Service (TAS) implemented the TAMIS (Taxpayer
Advocate Management Information System) Redesign that provides many
enhancements to improve documentation, timeliness and accuracy of
casework and to provide significant data to determine reasons why IRS
did not resolve taxpayers' problems the "first time around.":
* LMSB implemented the Limited Focused Issue Examination (LIFE) process
to increase the efficient use of examination resources and reduce the
length of the examination cycle for the taxpayer and the IRS.
LMSB completed the first phase of Form K-1 transcription to support the
identification of aggressive and abusive transactions at the enterprise
level.
Increase Fairness of Compliance:
a. Results Summary:
* LMSB increased emphasis on appropriate application of enforcement
tools such as summons enforcement, penalty administration, and
coordination with Department of Justice, Counsel, and Criminal
Investigation.
* Conducted examinations under the National Research Project (NRP) to
improve workload identification and resource allocation processes, and
reduce burden on compliant taxpayers.
* Revenue Procedure 2003-11 was issued in January 2003 to announce the
Offshore Voluntary Compliance Initiative (OVCI), which provided
taxpayers the opportunity to voluntarily disclose participation in
unlawful offshore schemes. OVCI was offered until April 15 and received
approximately 1,300 applications that identified over 400 promoters.
Applicants reported over $75 million dollars in taxes and approximately
$55 million has been collected. In June 2003, last chance letters to
elect OVCI procedures were sent to over 600 taxpayers and verbal offers
made to over 200 taxpayers with identified offshore issues.
* Several legislative recommendations from the 2001 and 2002 Taxpayer
Advocate's Annual Reports to Congress ARCs were included in H.R. 1528
(The Taxpayer Protection and Accountability Act of 2003), passed by the
House of Representatives on June 19, 2003.:
b. Reengineering:
* Field and Office Examination Reengineering identified ways to improve
pre-audit planning, achieved a uniform, structured approach to audits,
and enhance taxpayer communication.
* LMSB used enhanced methodologies for identifying risks in LMSB
customer base to target returns most deserving of enforcement action.
* LMSB developed and implemented a strategy to identify and address
compliance issues in the area of executive compensation. These issues
historically have been addressed through normal guidance and
examination processes, but increased attention was warranted in light
of recent significant corporate accounting revelations.
* For appropriate corporate taxpayers, LMSB offered Limited Issue Focus
Examination (LIFE) procedures to reduce taxpayer burden and to improve
use of resources.
* Collection Reengineering completed the pilot for the Field
Consultation Initiative in March 2003 and the results indicated that
consultations positively impacted business results by moving cases more
quickly to resolution. A modified process is scheduled for
implementation in FY 2004.
* Reengineering efforts continue to focus resources on the most
productive and collectible, high risk cases. Case prioritization using
the TDA Model began in January 2003 and is having a significant impact.
The model is continuously monitored and updated.
* Recommendations implemented from the ACS Modeling Team on Risk Based
criteria are also enabling the right cases to be delivered to ACS at
the right time.
* Roll out of the Electronic Levy System is allowing ACS to perfect
levies, initiated by the call site, via a computerized system
alleviating the paper process. 30:
* SB/SE engaged the Office of Program Evaluation and Risk Analysis in a
comprehensive study of the Offer-in-Compromise (OIC) program.
Preliminary results indicate that the processability noncompliance
screen is effective. A recent Treasury Inspector General for Tax
Administration audit indicated that we are reaching appropriate case
decisions in the vast majority of cases. We are pursuing legislative
proposals that would address frivolous OIC filers as well as remove the
barriers to granting installment agreements for less than full
payment.:
c. Focus on Higher Risk Areas:
* LMSB increased its 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.
* LMSB is improving its ability to evaluate book-to-tax differences in
financial reporting with an eye to discovering compliance risk areas.
* SB/SE Field Examination continued its transition from a traditional
Discriminate Index Function (DIF) based plan to address the following
strategic priorities: Promoter Investigations, Offshore Credit Card
Program, Abusive Schemes, High-Income Taxpayers, High-Income
Nonfilers, Unreported Income Function, and the National Research
Program.
* A multi-Operating Division executive steering committee was formed
with the purpose of developing a coordinated approach for combating
Abusive Tax-Avoidance Transactions (ATAT). Approximately 900 employees
were trained to work both domestic and offshore ATATs.
* The Lead Development Center (LDC) was established to centralize the
receipt and development of leads on promoters of abusive tax schemes.
The LDC authorizes and monitors IRC Section 6700, 6701 and 7408
investigations assigned to the field for the entire nation and
coordinates promoter investigations with the operating divisions.
* Counter-marketing toolkits were developed for selected schemes, as
well as a Tactical Response Toolkit for ATATs in general.:
d. Improved Communications:
* LMSB is continuing to place significant media attention on actions
taken to identify and resolve Abusive Corporate Tax Shelters so
taxpayers are aware the IRS is ensuring fairness of compliance across
all taxpayer segments.
The ATAT Partnership of IRS and State officials drafted a Memorandum of
Understanding, providing a framework for individual agreement with
States allowing joint enforcement, sharing of leads, joint outreach and
education.
Balanced Measures:
A. Automated Collection System Closures - Taxpayer Delinquent Accounts
(TDA):
Description: The number of ACS TDA taxpayer closures minus any TDA
taxpayer cases systemically removed from inventory. Closures include
full paid accounts, installment agreements, currently not collectible
accounts, etc.
FY 2003 Performance: The goal was exceeded due to management emphasis
on training, processing of high priority inventories, case resolution
activities, levy and lien issuance, and process improvements have
resulted in increased productivity.
ACS - Taxpayer Delinquent Accounts:
[See PDF for image]
[End of table]
Future Plans: To improve productivity, improvements in scheduling of
incoming calls staffing and limiting internal programs that cause call
volume are planned. Additional hires are planned to increase staffing
available to work inventory and increase productivity. IRS will shift
the mix of cases for Automated Collection System work. 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 2004 should become more
productive in FY 2005 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.
FY 2003 Performance: There has been a decrease in planned time spent on
the program, due to primary emphasis being placed on resolving Balance
Due accounts. Representatives were reassigned to answer telephones
which decreased their availability to work inventory. The ACS
Reengineering Team is currently identifying ways to improve performance
and productivity.
ACS - Taxpayer Delinquent Investigations:
[See PDF for image]
[End of table]
Future Plans: In FY 2004 more emphasis will be placed on working TDIs
which will be among our high priorities. 32:
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.
FY 2003 Performance: As of September 30, 2003, Field Collection closed
880,939 TDA modules, which exceeds the closures for the same period in
FY 2002 and the current fiscal year target of 714,256. TDA Productivity
was 12% above plan. Productivity increased due to a variety of factors
which included Phase 1 Collection Reengineering efforts that enabled
more current work to be issued to the Collection Field function. Case
filters were implemented to help identify cases that are more likely to
be full paid, and also to identify cases likely to be currently not
collectible so that they can be removed and permit more productive
cases to be worked. Full pay and installment agreement disposition
rates have risen considerably through June of this fiscal year compared
to a year ago. These dispositions tend to require less direct hours
than other closing actions. Due to our initiative to centralize and
consolidate a large portion of OIC inventory, OIC Revenue Officers were
re-deployed back into the general collection program. These highly
experienced and skilled Revenue Officers helped increase field
productivity.
Field Collection # Cases Closed TDA:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to monitor and evaluate the impact of
Collection Reengineering Initiatives on productivity and focus on
priority cases (Abusive Schemes, offer in compromise cases, FTD Alerts,
Trust Fund TDA/TDI, High-Risk TDA/TDI and High Dollar TDAs > $5
million).:
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.
FY 2003 Performance: The target was exceeded as a result of efforts to
re-balance inventories and increasing the percentage of time applied to
TDI cases.
Field Collection # Cases Closed TDI:
[See PDF for image]
[End of table]
Future Plans: Re-engineering initiatives will increase productivity.
However, due to an emphasis on priority TDA work. IRS expects 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 2003 Performance: The number of AUR cases closed is above target
even though it falls below the number of cases closed for FY 2002.:
Automated Underreporter Closures:
[See PDF for image]
[End of table]
Future Plans: In FY 2004 IRS plans to further refine the AUR selection
criteria to close more leads and develop, test and implement a
centralized AUR case selection model to be available in calendar year
2005.:
f. Individual Return Examinations Greater Than $100K:
Description: Number of Individual (Form 1040) returns closed by Field
Examination with a total positive income greater than $100,000.
FY 2003 Performance: The goal was exceeded due to increased focus on
high-income taxpayers and an increase in Direct Compliance Time. 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. Increased attention to case management and maintaining
optimal inventory levels contributed to this improvement.
Individual Return Examinations > $100K:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to evaluate the impact of reengineering
initiatives on productivity. In FY 2004, closures in this category will
be reduced slightly to focus on examining more business returns. The
strategy associated with high income taxpayers will be refined and IRS
will continue to focus on cases associated with the strategic
priorities which include Abusive Schemes/Promoters, Offshore
Activities Credit Cards, High Income Taxpayers, High Income Nonfilers,
Unreported Income Discriminate Index Function (DIF) and the National
Research Program. 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. IRS will use new national (UI
DIF) formulas in conjunction with the new TPI strata to surface
potential non-compliant returns for audit.
The most experienced field revenue agents will work these cases. IRS
will redirect to traditional audit program to include taxpayers with
incomes over $100,000. Since many higher income taxpayers invest in
various flow-through entities to defer or hide potential taxable
income, IRS will continue to build its 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 less than $100,000.
FY 2003 Performance: The goal was exceeded due to an increase in Direct
Compliance Time. 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. Increased attention to case management and
maintaining optimal inventory levels contributed to this improvement.:
Individual Return Examinations < $100K:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to evaluate the impact of reengineering
initiatives on productivity. In FY 2004, closures in this category will
be reduced slightly to focus on examining more business returns. 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.:
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.
FY 2003 Performance: The goal was exceeded due to increased focus on
high-income taxpayers and an increase in Direct Compliance Time. 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. Increased attention to case management and maintaining
optimal inventory levels contributed to this improvement.:
Total Returns Examined:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to evaluate the impact of reengineering
initiatives on productivity. In FY 2004, closures in this category will
be reduced slightly to focus on examining more business returns. The
strategy associated with high income taxpayers will be refined and IRS
will continue to focus on cases associated with the strategic
priorities which include Abusive Schemes/Promoters, Offshore
Activities Credit Cards, High Income Taxpayers, High Income Nonfilers,
Unreported Income Discriminate Index Function (DIF) and the National
Research Program. 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. IRS will use new national (UI
DIF) formulas in conjunction with the new TPI strata to surface
potential non-compliant returns for audit. The most experienced field
revenue agents will work these cases. IRS will redirect to traditional
audit program to include taxpayers with incomes over $100,000. Since
many higher income taxpayers invest in various flow-through entities to
defer or hide potential taxable income, IRS will continue to build its
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.:
i. Number of Business Returns Examined:
Description: Includes LMSB business returns closed outside of the
coordinated industry program, and SB/SE corporate examinations.
FY 2003 Performance: Initially, the small corporate plan for FY 2003
was reduced to focus on the Compliance strategic priorities: Abusive
Schemes/Promoters, Offshore Activities Credit Cards, High Income
Taxpayers, High Income Nonfilers, Unreported Income DIF and the
National Research Program. Field Examination made a big push to close
out open lower priority work prior to assignment of the targeted cases.
This effort enabled them to beat the planned output goal.
Number of Business Returns Examined:
[See PDF for image]
[End of table]
Future Plans: IRS will continue to focus on cases associated with the
strategic priorities which include Abusive Schemes/Promoters, Offshore
Activities Credit Cards, High Income Taxpayers, High Income Nonfilers,
Unreported Income DIF and the National Research Program. There will
also be an increased emphasis on shelters. As part of the strategy to
address high-income taxpayers, IRS will address flow-through entities.
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 2003 Performance: The achievement against target rate was 97%
despite case closure delays resulting from the increased complexity of
issues being worked. The inventory of large cases is made up of
significant numbers of Tax Shelter and Joint Committee cases that have
complex issues that take longer for the agent to research and address.
Cases Examined - Large Case:
[See PDF for image]
[End of table]
Future Plans: In FY 2004 plans are to decrease cycle times using new
recommendations that establish strict guidelines on the actions to be
taken on cases of this type. K. Number of Returns Closed - Large Case:
Description: Coordinated Industry Corporate (CIC) returns (F1120 and
associated Partnership and Employment Tax forms) closed with designated
activity codes.
FY 2003 Performance: LMSB met its target goal. These types of cases are
very complex and take longer to close, as a result, a large number of
closures occur in the final months of the fiscal year.
Number of Returns Closed - Large Case:
[See PDF for image]
[End of table]
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, IRS plans 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 plus Exempt Organizations return
examinations closed in all categories.
FY 2003 Performance: The target was missed in the Employee Plan
component with the redirection of large numbers of employees to work
incoming determination receipts instead of their planned examinations,
necessary due to an unanticipated number of receipts.
EP/EO Examinations Closed:
[See PDF for image]
[End of table]
Future Plans: In FY2004 IRS will continue to address examination
challenges with improvements in the Exempt Organization determination
process and implementation of electronic filing of Form 990 returns. M.
Criminal Investigations Completed:
Description: Cumulative count of the number of all subject criminal
investigations completed by IRS Criminal Investigation Division (CI)
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 2003 Performance: IRS achieved approximately 16 percent above its
year-end plan for total investigations completed. The increase is due
to the natural workflow continuation brought on by the rise in
investigations initiated in FY 2002. The CI workforce, spurred on by
management's oversight to prevent an excessive amount of overage items
as well as efforts to continue to apply more direct investigative time,
is currently in the process of working through that increased level of
investigative inventory brought on by the higher than normal FY 2002
initiations. 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
and to other areas such as anti-terrorism.
Criminal Investigations Completed:
[See PDF for image]
[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
SB/SE and LMSB Divisions in their efforts to identify abusive tax
schemes, promoters, and abusive tax shelter activities.
N. Appeals Cases Closed:
Description: Total Appeals Cases Closed equals the total number of
cases closed by Appeals during the fiscal year, including both non-
docketed and docketed cases. A docketed case is one in which a taxpayer
has filed a petition in the Tax Court. While this measure is expressed
in terms of "cases," a case generally includes multiple tax periods.
FY 2003 Performance: Appeals closed a total of 84,677 cases through
September 2003, exceeding our original plan to close 77,265 cases by
about 10%. Increased managerial focus on workload priorities,
maintaining optimal inventory levels, process improvements (including
specialization and segmentation) and increased case processing
efficiencies contributed to our success in exceeding the target.
Appeals Cases Closed:
[See PDF for image]
[End of table]
Future Plans: Appeals is committed to providing premier dispute
resolution services that meet customer needs and expectations. Fast
Track Settlement, Fast Track Mediation, and other Alternative Dispute
Resolution programs will continue to be an integral part of the Appeals
process, geared toward timely, high quality resolution of disputes.
Appeals will also continue to play a pivotal role in the Service's
efforts to effectively deal with current tax shelter promotions by
independently establishing settlement guidelines to facilitate the
early resolution of these cases. Other plans include implementing
campus operations which will help mitigate the significant impact on
workload shifts and the ability to manage them. By centralizing and
reengineering certain workstream segments at campus locations, Appeals
will reduce inventories and facilitate a more efficient processing of
work and improve inventory currency.
O. Taxpayer Advocate Service (TAS) Closure to Receipt Ratio:
Description: Measure of effectiveness in resolving at least the number
of cases received in order to decrease TAS' open inventory. The result
is a division of the number of closed cases by the number of receipts.
FY 2003 Performance: TAS has maintained a closure to receipt ratio at
or above its FY 2003 goal. TAS has accomplished this by monitoring
receipts and closures by issue, criteria, and office on a weekly basis.
By doing this, TAS is able to balance inventories and address training
needs at the earliest time possible. TAS continues to review case
processing procedures to identify areas where it may improve timeliness
of case resolution and closure.
TAS Closure to Receipt Ratio:
[See PDF for image]
[End of table]
Future Plans: TAS will continue to work toward the closure to receipt
ratio of 100%. To achieve this goal, TAS will continue to closely
monitor receipts and closures and to review case processing procedures.
TAS plans to partner with the operating divisions and functional units
to reduce the number of systemic hardship cases received. TAS will also
maintain and improve service level agreements in anticipation of
increases in receipts due to economic fluctuations, changes in tax
laws, and the expected increases in compliance and enforcement
activities.
Strategic Goal 3: Productivity Through a Quality Work Environment:
Main Objectives:
*Increase employee satisfaction.:
Increase productivity by effectively addressing human resource and work
environment issues.:
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 striving to maximize employee satisfaction, IRS is able to
provide services more efficiently and get the greatest value for every
dollar spent. There is a linkage between productivity and employee
satisfaction and engagement. This means employees must have the
management support, tools and equipment they need to provide effective
service to customers. The Employee Satisfaction Survey meeting process
serves to help break down barriers and facilitate effective
communication among all levels of the organization.
Major Results and Accomplishments:
Increase employee satisfaction:
Results Summary:
* The IRS continued its steady improvement in employee satisfaction,
with overall "job satisfaction" for IRS as a whole rising to 60% (% of
4 and 5 responses combined). This compares to 55% in 2002 and 51% in
2001. (Job Satisfaction is measured by Survey Item Q 17, "Considering
everything, how satisfied are you with your job?"):
* A record 83,674 employees, or 72.5% of the workforce, responded to
the annual census survey.
* Several individual IRS organizations made noteworthy gains or
undertook new employee satisfaction initiatives. For example, Appeals
employees reached 58% satisfaction in FY 2003, exceeding FY 2002 by 15%
and the FY 2002 target by 11%. Appeals had the greatest gain in
employee satisfaction of any IRS business unit since the inception of
the survey process.
* Employee Satisfaction (ES) Tracker has now been mandated for use by
all IRS organizations in the post survey 2003 process to ensure that
survey results and issues raised by the workgroups are addressed in a
timely manner. 40:
* In W&I, employee participation in the Gallup Survey 2003 increased
dramatically, from 68% last year to 80% this year---a 17% improvement.
The W&I Campus response rate increased from 71% in 2002 to 79% in 2003.
W&I Field and HQ response rate increased from 56% in 2002 to 82% in
2003.
* In W&I, employee job satisfaction (Q17) improved from 52% in 2001, to
55% in 2002, and to 60% in 2003. At the same time, dissatisfaction
(%1's & 2's) decreased from 18% in 2001 to 14% in 2003. Most
importantly, employee satisfaction did not decrease in any function and
increased dramatically in most functions.
* The SB/SE results of the annual employee satisfaction survey reports
overall satisfaction at 56.11%, which exceeds the FY 2002 census score
by more than 4 percentage points.
* SB/SE response rates (% of employees who chose to take the voluntary
survey) increased significantly for field and Headquarters from 59% in
FY 2002 to 65% in FY 2003. Campus response rates remained slightly
above the national average at 73%. Overall, SB/SE's response rate
increased from 67% in FY 2002 to 69% in FY 2003.
* SB/SE has begun the process of analyzing specific SB/SE employee
satisfaction data and employee verbatim (narrative) comments to
identify the factors that have the most influence on overall
satisfaction. The top issues identified from the ES Tracker workgroup
data will be used to identify national trends for future preemptive
actions.
The most significant increases in survey results for SB/SE were shown
in Item 2 (Materials), Item 4 (Recognition) and Item 11 (Progress).
Increase productivity by effectively addressing human resource and work
environment issues. Results Summary:
* SB/SE developed the Employee Satisfaction Strategy/Framework to bring
focus to key areas affecting employee satisfaction. In December 2002,
each Operating Unit (OU) Director in SB/SE received an ES scorecard
that contained OU specific results detailed analysis of ES data. Each
OU established teams to address ES issues on a corporate/operating unit
level.
* SB/SE developed a Non-Monetary Recognition System (NMRS) to recognize
employees who contribute to improving performance and help to achieve
the goals of the SB/SE operating division and the Internal Revenue
Service. Implementation in SB/SE of NMRS is scheduled for FY 2004.
* Developed a Recruitment Information Tracking System (RITS) to assist
with collecting measurable results of recruitment efforts.
* Began the administration of an Exit Survey to capture data that
impacts employee retention (December 2002). The employee clearance
process was automated in July 2003.
* Revamped training program to a technologically enabled learning
environment (on-line, selfstudy, blended learning and "just in time"
training).
* Revised basic Revenue Agent training to maximize efficiencies and
minimize costs. The new competency based curriculum reduces training
time (classroom and on the job) by 10 weeks.
* Established a Workforce Planning Council and began development of a
Workforce Plan for SB/SE. Components of the Workforce Plan include
succession planning and the development of improved processes for
hiring, selecting and retaining employees.
* Approximately one in four W&I workgroups (26%) have been deemed "best
practice" workgroups as defined by Gallup's Grand Mean score >= 3.96--
-a marked improvement over 12% in 2001. 41:
* Appeals refined its structure by removing internal barriers between
its operations, providing greater flexibility in moving resources and
enhancing promotional opportunities at all grade levels.
* Appeals formed several working groups of managers and employees to
address specific employee concerns and resolve elevated issues.
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 17
(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 employees' perception of
management practices, organizational barriers, and overall work
environment that impact an employee's efforts to do a good job are used
in the internally reported results.
FY 2003 Performance: Improvement from the past two years continued in
2003. IRS' greatest improvement was on the survey items addressing:
receiving recognition (Q4); receiving feedback on progress (Q11); and
having necessary materials and equipment (Q2). IRS provided results of
"SURVEY2003" to employees for discussions in workgroups this summer,
with subsequent action plans developed to ensure continued improved
working conditions.:
IRS expanded the paperless survey administration Servicewide, based on
the success of the paperless pilot conducted in the FY 2002. This
allowed IRS to maximize the cost benefits, time savings, and user-
friendliness of an electronic mode of survey administration. Both web-
based and telephone-based administration modes were available in 2003.
In FY 2002, 20% of all surveys were received on paper; that number
dropped to 7% in 2003.
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.
Agency Wide Employee Satisfaction:
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Future Plans: Each IRS Business Unit will be encouraged to identify one
or two specific areas of the survey that will be the focus of
concentrated improvement actions. In the past year, this approach
proved to be very beneficial for the Wage and Investment organization.
IRS also plans to expand the use of Employee Satisfaction Tracker, an
automated system that will facilitate its ability to monitor and hold
managers accountable for actions taken in response to Employee
Satisfaction survey data.
The most notable changes to the survey itself will involve further
expansion of the paperless survey and the addition of new questions. In
FY 2004, IRS plans to receive all surveys on the web or by phone. New
survey questions will be added to provide information on the topic of
safety and security.:
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 the
analysis is complete.
FY 2003 Performance: Resource constraints prevented IRS from meeting
the target despite the 20% improvement over 2002 levels. The
improvements can be tracked to increased employee awareness of safety
and health issues, improved employee training, and enhanced data
capture of accidents and workplace hazards.
Lost Work Day Case Rate:
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[End of table]
Future Plans: In FY2004 IRS will enhance the data available from the
Safety and Health Information Management System (SHIMS) to better
detect safety hazards, reduce the impact of employee injuries and
provide greater reporting capability.
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, 2003. Our systems of management controls are
designed to ensure that:
* Programs achieve their intended results:
* Resources are used consistent with the overall mission:
* Programs and resources are free from waste, fraud, and mismanagement:
* Law and regulations are followed:
* Controls are sufficient to minimize any improper or erroneous
payments. The Service provides qualified assurance that the objectives
of the FMFIA are being achieved. This qualified assurance is based on
the existence of remaining material weaknesses and reportable
conditions, all of which are being addressed by corrective action
plans. The Service recommends closing the Financial Statements -
Administrative material weakness and downgrading the material
weaknesses, Internal Controls over Telecommunications Costs and
Property Management to reportable conditions. With these
recommendations the number of open material weaknesses for IRS is
reduced from nine to six. The remaining weaknesses would be:
* Collection of Unpaid Taxes (scheduled to close April 2007):
* Demonstrate Capability to Manage Replacement of Tax Processing &
Business Systems (Plan pending final approval):
* Financial Accounting of Revenue (May 2007 scheduled closing date
under review):
* Earned Income Tax Credit Non Compliance (scheduled to close September
2006):
* Computer Security (scheduled to close March 2004):
Measuring Taxpayer Compliance (scheduled to close March 2005) Federal
Financial Management Improvement Act (FFMIA) As of September 30, 2003,
the Service's financial management systems did not substantially comply
with the FFMIA. Remediation Plans for Custodial and Administrative
Financial Systems are in place to resolve this condition. Due to
unanticipated data volumes and data quality problems related to the
Custodial Accounting Project, the current February 2007 due date for
the Remediation Plan for Custodial Financial Systems is under review
and subject to change. The January 2006 proposed implementation date
for Remediation Plan for Administrative Financial Systems is also under
review due design and configuration issues and their impact on the
testing process for the Integrated Financial System. These Plans are
reviewed quarterly by the Office of Management and Budget as a
stipulation for a waiver of the three year requirement for
implementation of a FFMIA Remediation Plan.
Laws and Regulations:
As of September 30, 2003, the IRS did not always comply with section
6325 of the Internal Revenue Code regarding the release of federal tax
liens or with section 6159 of the code regarding the structuring of
installment agreements. Reports Consolidation Act of 2000 The IRS FY
2003 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:
IRS is influenced by two groups of external auditors (the General
Accounting Office and the Treasury Inspector General for Tax
Administration) who, through their reviews, identify Management
Challenges and High Risk Areas that the IRS will face over the next
several years (discussed in the next sub-section). As the IRS begins
FY2004, it is faced with challenges, both from within and outside of
its organization. The following discussion will identify some of the
challenges, briefly discuss their nature, as well as the activities
surrounding them.
Abusive Tax Shelters - By their nature, abusive tax shelters are
varied, complex, and difficult to detect and measure. Abusive shelters
may manipulate parts of the tax code or regulations and may involve
steps to hide the transaction within a tax return. For example,
preliminary profiling efforts by the IRS using data to determine
characteristics of noncompliant taxpayer populations have identified
over 227,000 business entities with almost $64 billion in income for
tax year 2000 that potentially did not file tax returns. The IRS is
using a broad-based strategy for addressing abusive tax shelters
including: targeting promoters to head off the proliferation of
shelters; making efforts to deter, detect, and resolve abuse; and
offering inducements to individuals and businesses to disclose their
use of questionable tax practices.
Technology Modernization Projects - After careful consideration and
expert input from such prestigious groups as Carnegie Mellon,
Acquisition Solutions, Bain & Co., and the Gardner Group, the IRS has
determined the need to realign its priorities - that is, to select the
key projects it must implement and focus on getting those up and
running. To this end, the IRS is expected to announce before the end of
2003 that it will reorganize the structure for managing its massive $8
billion modernization effort.:
Private Collection Agencies - The IRS faces a significant and growing
backlog of cases involving individual taxpayers who are aware of their
tax liabilities but have not paid them. The IRS believes that many of
these taxpayers have simply chosen not to pay, even though they have
the means to do so. The Administration's FY 2004 budget proposes to
support the IRS collection efforts with private collection agencies
(PCAs) that will engage in carefully defined and limited collection
activities.
PCAs can be an effective supplement to the IRS's collection efforts but
cannot totally replace IRS collection resources. IRS employees have
expanded knowledge and possess a number of enforcement powers and
tools, such as the ability to levy and file liens on property, which
could not properly be given to a PCA.
Taxpayer Attitudes - The IRS Oversight Board annually commissions an
independent survey (Roper) to assess taxpayers' attitudes. The results
of this latest survey show overall tax compliance levels are still high
but have declined slightly, taxpayers are showing some softening in
attitudinal support for compliance, fewer taxpayers agree that it is
everyone's duty to pay their fair share of taxes, and feel that
everyone who cheats should be held accountable. Other results from the
Roper Survey disclosed that taxpayers continue to want the IRS to focus
on America's rich when going after tax evaders, but compliance is
increasingly expected of all. Personal integrity remains the strongest
deterrent to noncompliance; however, fear of being audited is on the
rise. Taxpayers also feel that most IRS customer service offerings are
important, but receptivity to these offerings varies. And finally, the
majority of the public is satisfied with their interaction with the
IRS.
Major Management Challenges and High-Risk Areas:
Over the last several years the General Accounting Office (GAO) and the
Treasury Inspector General for Tax Administration (TIGTA) have
identified several Management Challenges and High-Risk Areas facing
IRS. IRS has identified specific steps and actions to address these
issues through its existing program activities. Measures of these
program activities serve to show progress in addressing the management
challenges and high-risk areas. A crosswalk showing the relationship
between management challenges and IRS program activities is shown
below.
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[End of table]
The following pages summarize each Management Challenge and High-Risk
issue, FY 2003 accomplishments, and actions identified for completion
in FY 2004 and beyond 47:
Systems Modernization of the IRS:
Successful completion of the modernization efforts will enable the IRS
to balance the goals of helping taxpayers meet their tax responsibility
and improving overall compliance with tax laws. 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 improve service to taxpayers. The IRS
continues to make significant progress in improving its systems
modernization and have demonstrated capability to manage replacement of
Tax Processing and Business Systems but work remains before expected
results are achieved.
FY 2003 Accomplishments:
* IRS continued to improve efforts in Business System and Tax
Processing by modifying the Internet Refund/Fact of Filing (IRFoF)
application to include the Advance Child Tax Credit,
* Initiated application for Internet Employer Identification Number
(IEIN) which permits a new small business to apply for and receive an
Employer Identification Number over the Internet.
* Conducted a study to benchmark IRS application development efforts
allowing comparison of IRS performance to private industry systems
modernization efforts. Achieved Software Acquisition Capability
Maturity Model (SACMM) Level 2 for Business System Modernization Office
(BSMO) --the first civilian agency of the U.S. Federal Government and
the first multiproject organization to achieve that rating.
* Our prime support contractor consortium achieved SACMM Level 3, the
first organization in the world to achieve that rating (The prime
contractor's role is to design, build, and implement the program's
information technology systems).
* Deployed Human Resources (HR) Connect.
* Established a new Deputy Commissioner for Operations to give
attention to human capital practices, continued strong governance and
rigid adherence to Enterprise Life Cycle (incorporates aspects of
realizing a new business vision, from strategy development through
system deployment and operation). FY 2004 Planned Actions:
* IRS will continue to respond to this challenge through
institutionalizing configuration management procedures for BSMO,
delivering electronic account resolution transcript delivery, secure e-
mail, disclosure authorization, and bulk Tax ID Number matching
functionality via the e-Services project.
* Releasing the first segment of the Customer Account Data Engine
(CADE) by providing key information supporting individual taxpayer
account and return data.
* Deploying the first release of the Integrated Financial System to
replace multiple IRS "Core" financial systems (including expenditure
controls, accounts payable, accounts receivable, general ledger, budget
formulation, and purchasing controls) with a single comprehensive
modernized system.
* Implementing the first release of the Custodial Accounting Project
that will provide detailed tracking information on tax receipts from
individual filers.
Deploying the Modernized e-File system.
* Implementing effective procedures for validating contractor-
developed cost and schedule estimates by working with the prime
contractor to develop and deploy best practice estimating capabilities
consistent with Carnegie Mellon University's Software Engineering
Institute (SEI).
* Initiating a review of the CADE project by SEI to improve project
management and delivery.
* Continuing benchmarking efforts allowing comparison of IRS
performance to that of similar efforts in private industry and:
Implementing analysis of program management by an independent
contractor.
Processing Returns & Implementing Tax Law Changes during the Filing
Season:
The filing season impacts every American taxpayer. 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. Although the FY 2003 filing season was a great success, the
IRS still needs to address some problems in processing tax returns,
specifically in the areas of the Rate Reduction Credit, Additional
Child Tax Credit, undelivered refund checks and processing of small
business corporate returns.
FY 2003 Accomplishments:
IRS continued the transition of its Campus locations into specialized
processing sites for Business Master File (BMF) and Individual Master
File (IMF) returns. This transition allows the IRS to focus BMF and IMF
processing expertise and will result in greater consistency in taxpayer
treatment. With the growth in electronic filing, Submission Processing
sites are being reduced and efforts to place the impacted employees are
being coordinated among the remaining operations at the site. Efforts
were made to ensure that the required number of employees are available
for each telephone tax law and account area based on forecasted
workload Emphasis was also placed on continuing to improve the IRS web
site usability and managing the web site throughout the filing season.
Actions Planned or Underway:
* Expand e-filing options by adding additional business forms 1120,
1120s, 943, and 945, converting existing business forms to Extensible
Markup Language and eliminating other barriers to BMF e-file.
* Implement initiatives to revise BMF forms including simplifying the
Form 941 to reduce taxpayer burden and bar-coding Forms 1065 and 1120
to improve processing accuracy and quality.
* Continue to enhance the functionality of the web site by providing
new features such as enhanced search capabilities and presentation of
results, tax applications and/or calculators of various types, and
enhanced globalization to present web content in various languages.
* Develop secure access for taxpayers who file electronically to enable
them to review their account electronically as required by the IRS
Restructuring and Reform Act of 1998 (RRA98).
* Identify the appropriate configuration of states to Submission
Processing sites for future IMF paper processing. (Multi-Year
Initiative):
* Conduct a pilot of the Remittance Transaction Research system to
enhance payment processing and provide payment information on-line.
* Ensure specialized procedures related to Disaster Relief,
i.e. Killed In Terrorist Action are used in processing identified
returns. (Ongoing) Providing Quality Customer Service Operations:
Improving Taxpayer Service 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 communication
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.
FY 2003 Accomplishments:
The EZ Tax Filing initiative was implemented to meet the e-government
objective of enabling on-line tax return entry and submission at no
cost to the taxpayer. In addition, IRS provides multilingual services
to Limited English Proficient taxpayers through increased bilingual
employees and continued use of Over-the-Phone Interpreter service that
provides interpreter services in over 150 languages. IRS has expanded
pre-filing efforts for corporate taxpayers to assist taxpayers in
filing correct, complete and compliant returns through pre-filing
agreements and Industry Issue Resolutions. IRS has emphasized increased
use of published guidance through the Published Guidance Program and is
moving away from the more limited Private Letter Ruling program. An
expedited clearance process, recently agreed to by IRS and Treasury,
has increased the timeliness of published guidance. In addition, an
Abusive Tax Shelter Hot Line is being used to provide interactive
outreach for taxpayers who have pre-filing concerns regarding tax
shelter promotions. IRS continued to improve the availability of on-
line services such as Internet Employer Identification Number,
Centralized Authorization File, and Practitioner Priority Services as
well as e-services for practitioners. Electronic interactions such as
e-filing and e-paying were enhanced, communication with taxpayers was
augmented through the development of e-government operations and
employers were provided with access to online employment tax and wage
information.
Actions Planned or Underway:
* IRS will continue redesigning and simplifying notices, forms and
publications. Expansion of electronic payment options will continue
with the development of a TeleFile/Internet electronic funds withdrawal
application for notice payments and an electronic funds withdrawal
(Direct Debit) application for installment agreements.
* IRS will continue working with private industry to expand low-cost
Internet filing options.
* IRS will expand the work done on e-Services to include additional
customer access to electronic transcript delivery, disclosure
authorization, and electronic account resolution. 50:
Complexity of the Tax Law According to the FY 2002 National Taxpayer
Advocate's (NTA) Annual Report to the Congress, the biggest problem
that individual and business taxpayers had with IRS was tax law
complexity. The problems caused by this complexity range from
individual to corporate and international tax issues. 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.
FY 2003 Accomplishments:
h.R 1528, the Taxpayer Protection and IRS Accountability Act of 2003
passed by the House of representatives on June 19, 2003 contained
several legislative recommendations from the 2001/02 National Taxpayer
Advocate Annual Report to Congress. Highlights of this Act include the
reform of penalty and interest provisions; improvement to the fairness
of IRS collection procedures; improvement to the efficiency of tax
administration; a temporary adjustment to The Trade Adjustment Act
Health Insurance Tax Credit; enhancements to taxpayer information
confidentiality; and authorization of low-income taxpayer clinics. The
National Taxpayer Advocate will also continue to work with members of
Congress and their staff to increase understanding and support of
future legislative recommendations. April 15, 2002, Senator Jeff
Bingamen (New Mexico) introduced three bills that have been referred to
the Senate Finance Committee:
* S. 2129 - a bill to amend the Internal Revenue Code (IRC) to clarify
that any home-based service worker is an employee of the administrator
of home-based service worker program funding (one of the NTA's key
legislative proposals):
* S. 2130 - a bill to amend the IRC to allow self-employed individuals
to deduct health insurance costs in computing self-employment taxes:
* S. 2131 - a bill to amend the IRC to adjust the dollar amounts used
to calculate the credit for the elderly and the permanently disabled.
April 18, 2002, the House of Representatives passed HR 586, the Tax
Relief Guarantee Act of 2002. This act contains provisions that were
discussed in the 2001 annual report: interest abatement on erroneous
refunds; Federal tax avoidance penalty; first-time penalty waiver;
partial pay installment agreements; disclosure provisions regarding
suicide threats; and return of levy or sales proceeds. In addition, the
bill contains other provisions the NTA has discussed with members of
Congress. They are:
* Individuals held harmless on wrongful levy, etc., on individual
retirement plans;
* Seven-day threshold on tolling of statute of limitations during tax
review; and:
* Authorization of appropriations for low-income taxpayer clinics. 51:
Actions Planned or Underway:
The following actions will enhance IRS' ability to reduce the
complexity of the tax law: The NTA has identified potential legislative
issues to be developed for the 2003 Annual Report to Congress and
continues to work with members of Congress and their staff to increase
understanding and support of the key legislative recommendations
contained in the 2002 report. These legislative recommendations taken
as a whole represent proposals that the NTA believes will either reduce
complexity of the Code, reduce taxpayer burden in complying with the
tax requirements, and protect taxpayer rights.
Tax Compliance Initiatives:
IRS' goal of providing world-class service to taxpayers hinges on the
theory that if IRS provides the right mix of education, support, and
up-front problem solving to taxpayers, the overall rate of voluntary
compliance with the tax laws will increase. The compliance program
(examining tax returns and collecting tax liabilities) addresses
taxpayers who do not voluntarily comply. During the last decade, the
number of tax returns selected for examination by IRS has decreased
while the number of tax returns filed has increased. The challenge to
IRS management is to establish a tax compliance program that identifies
those citizens who do not meet their tax obligation, either by not
paying the correct amount of tax or not filing proper tax returns, and
effectively bring them into compliance.
FY 2003 Accomplishments:
Efforts in FY 2003 addressed compliance areas through better education
of the public; systematic identification of promoters of Tax Shelters
and participants; improvement in the efficiency of exam and collection
efforts through reengineering; and reinvigoration of enforcement
actions such as summons enforcement, injunctions and criminal
investigation of promoters. IRS developed a comprehensive strategy that
includes the Offshore Credit Card Project and Offshore Voluntary
Compliance Initiative, which allows the IRS to identify and refocus our
resources on the areas that offer the greatest compliance risk to the
tax system. IRS continued to make significant progress in collecting
better compliance and non-compliance data.
Actions Planned or Underway:
The following activities will allow IRS to implement a balanced
compliance program:
* Continue to develop and refine methodologies to identify, prioritize
and monitor Reporting Compliance Risks, specifically addressing key
areas of noncompliance with the tax laws including the promotion of
abusive tax schemes, the misuse of devices such as offshore accounts to
hide or improperly reduce income, Special Purpose Entities, the use of
abusive corporate tax avoidance transactions, the non-filing and
underreporting of income by higherincome individuals, flow-through
entities and other strategies used to mask questionable structured
transactions by high-income taxpayers. Address those engaging in
abusive tax practices through enforcement, full implementation of K-1
matching, education and research.
* Enhance Published Guidance regarding Abusive Tax Transactions (ATAT)
by developing and implementing a process for early identification of
ATAT transactions. 52:
* Expand the use of limited issue focused examination processes;
explore remote audit alternatives and audit team composition /placement
practices.
* Improve issue management process including resolution and settlement
strategies by applying alternative dispute resolution procedures and
other issue resolution programs such as Pre-filing Agreements, Industry
Issue Resolutions and Fast Track to resolve tax shelter issues in
timely and consistent manner.
* Focus pre-filing efforts on abusive trusts, e-commerce, flow-through
entities, voluntary agreements and burden reduction.
* Implement the Curb Egregious Noncompliance initiative to balance
compliance efforts, support tax law enforcement, and provide the
necessary increase in resources across all major compliance programs
while leveraging new workload selection systems and case building
approaches developed through re-engineering.
* Develop Potentially Collectible Inventory performance measures that
give insight into new causes of growth in accounts receivable.
* Focus on reducing pyramiding of trust fund taxes among in-business
taxpayers to address employment tax noncompliance to decrease the
accounts receivable inventory.
Develop and implement a multifunctional non-filer strategy that will
target outreach and compliance efforts. Based upon research results,
develop alternative treatments to influence non-filing taxpayer
behavior and promote compliance.
Erroneous Payments; Earned Income Credit Noncompliance:
Both 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. Each year the IRS spends over $100
million to help ensure that eligible taxpayers claim the EITC and to
reduce over-claims and fraud, waste and abuse. However, IRS does not
have a process to identify and stop refunds on many tax returns using
tax processing identification numbers, such as Individual Tax
Identification numbers (ITIN) and erroneously claiming the EITC. IRS
also faces erroneous payment issues in other program areas such as
vendor over payments and specious tax claims.
IRS will use compliance study data and risk analysis to determine which
EITC filers claiming children are most likely to meet the residency
requirements. We are addressing potentially erroneous claims before
they are accepted for processing and before any EITC benefits are paid.
FY 2003 Accomplishments:
IRS closed more than 262,000 examinations, exceeding the FY 2003 target
by 3.3%, and as a result, EITC dollars recovered were almost 20% ahead
of FY 2002. Processing year 2002 audit results were analyzed to refine
existing Dependent Data base (DDb) business rules.
Actions Planned or Underway:
IRS will continue to respond to this challenge through the following
planned actions:
* Commence EITC research efforts to identify ways to reduce EITC
erroneous payments as well as identify trends in the diverse EITC
taxpayer population. Use the results of these studies for strategic
planning of the EITC program.
* Continue participation in a government-wide task force on erroneous
payments.
* Finalize work on the EITC preparer cases already being actively
investigated and prepared for prosecution.
* Develop a procedure that will allow IRS to obtain the National
Directory of New Hires from Health and Human Services to provide
quarterly employee wage information by employer and information on
newly hired employees.
* Pilot a qualifying child residency certification program.
* Develop cross-divisional examination strategies that quickly react to
changing EITC compliance trends.
* Establish a specific EITC threshold in the Underreporter Program.
* Explore new data sources to enhance Dependent Database usability.
* Evaluate public comments from Announcement 2003-40 regarding EITC
pre-certification activities and determine follow-up actions for Tax
Year 2004.
* Identify states with EITC Programs and explore partnership
opportunities. Collect Unpaid Taxes Collecting taxes due the government
has always been a challenge for IRS, but in recent years the challenge
has grown. Between 1996 and 2001, the compliance and collection
programs experienced larger workloads, less staffing, and fewer numbers
of cases closed per employee. By the end of fiscal year 2001, IRS was
deferring collection action on about one out of every three tax
delinquencies assigned to the collection program. To counter this
trend, the IRS intends to improve the productivity of IRS's existing
compliance and collections staff and better target noncompliance. IRS'
new effort to review compliance, the National Research Program (NRP),
will provide IRS with information on compliance rates and sources of
noncompliance.
FY 2003 Accomplishments:
IRS developed a comprehensive strategy and approach to modernize
technology and collection processes. Included are efforts to develop
and analyze payment and compliance data for both strategic and
operational purposes, establish baseline measures for payment
compliance, facilitate better decision making and gauge program
effectiveness, and to develop support tools that allow IRS to improve
its resource allocation processes. The NRP is currently implementing a
reporting compliance study for individual income tax filers. In
addition, a Strategic Compliance Planning Model (SCPM) has been
developed to study the effect of optimizing the Service's expected
budgets for compliance activities across Operating Divisions, programs,
activities, and geographic locations. This model is intended for use as
part of the strategic planning process to perform "what-if" analyses of
different budget allocations and other key assumptions.
Actions Planned or Underway:
IRS will continue to respond to this challenge through the following
planned actions:
* Provide ACS Collection Representatives with better tools to improve
efficiency, effectiveness, and quality and case resolution.
* Pursue using Private Collection Agencies (PCAs) to support IRS
collection efforts and allow IRS to focus limited resources on more
complex cases and issues.
* Implement Collection Tax Delinquent Account (TDA) Reengineering to
better identify cases with a high or low propensity to pay or to be
unproductive in order to optimize efforts.
* Develop and analyze payment and compliance data to set baselines,
targets and develop strategies annually.
* Develop and implement the filing and payment compliance modernization
project.
* Develop risk-based compliance approaches for both collection and
examination activities, including Installment Agreements with
taxpayers. Ensure that proposed long term-solutions are aligned and
technically compatible. Develop and implement multiple treatment
alternatives with the tone, treatment and timing of interaction
proportional to the risk of the taxpayer.
* Analyze results of the National Research Program to identify pockets
of noncompliance and to develop pre-filing, filing and post-filing
strategies to address the findings.
* Develop a TeleFile/Internet electronic funds withdrawal application
for notice payments and Direct Debit application for Installment
Agreements to facilitate payments:
* Develop a comprehensive strategy to address the growing inventory of
accounts receivable and maximize the effectiveness of resources
targeted to identifying and collecting unpaid tax liabilities.
* Develop a legislative proposal and initiative for collection contract
support.
Develop proof-of-concept applications using advanced technologies to
improve workload selection processes, including tax shelter activity,
high-income taxpayer noncompliance, and detection of tax shelters using
relational data mining techniques. Integrating Performance and
Financial Management - Financial Management; Compliance with Federal
Financial Management Improvement Act (FFMIA) of 1996:
The IRS' financial management systems remain a challenge to the IRS
management, despite producing, for the third consecutive year, combined
financial statements covering the IRS' tax custodial and administrative
activities, and achieving an unqualified audit opinion from the General
Accounting Office (GAO). 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. The IRS lacks the
timely, accurate, and useful information needed to make informed
management decisions on an ongoing basis.
FY 2003 Accomplishments:
To improve overall financial management, IRS is implementing two major
systems: the Custodial Accounting Project (CAP) and the Integrated
Financial System (IFS). The CAP project will improve IRS' compliance
with FFMIA and other financial management laws and standard, as well as
support GAO financial audits. 55:
CAP will be built in a series of incremental releases with release 1
including Individual Master File data, Financial Management Service
goals, General Ledger Data and an interface with IFS. The Systems
Development phase was completed and development of the project began
with progress being made towards achieving a February 2004,
implementation date of Release 1. The IFS project will deploy a new
management system to the IRS that will give the IRS timely and easier
access to accurate and consistent financial data resulting in improved
decisionmaking and management of the organization. Significant progress
was made on IFS in FY 2003, including identifying key process flows,
systems configuration, system functionality testing, performance and
technical testing, data conversion from current financial system
historical data, coordination and creation of interfaces and user
training.
Actions Planned or Underway:
IRS will continue to respond to this challenge through the following
actions:
* CAP Release 1 will provide detailed tracking information on tax
receipts from individual filers based on IMF data, FMS goals, General
Ledger Data and IFS Interfaces.
The first release of IFS is scheduled for deployment and will include
the Core Financial System as defined by the Joint Financial Management
Improvement Program including, General Ledger, Accounts Payable,
Accounts Receivable, Funds and Cost Management, and Financial
Reporting.
Integrating Performance and Financial Management - Performance
Management; Performance Measures and Cost-Based Performance
Information:
The IRS Strategic Planning and Budget process, which includes the
Annual Performance Plan and Annual Performance Report, satisfies a
major requirement of the GPRA. However, IRS' critical performance
measures do not address all of the strategies listed in the IRS
Strategic Plan and do not support a significant portion of the IRS'
budget request. The General Accounting Office (GAO) cited that IRS
could do a better job of designing and implementing performance
measures and program evaluations practices that support its on-going
business operations, modernization efforts and budget requests.
Further, IRS could make additional progress in linking its budget
request to intended results so that Congress could make more informed
budget decisions and better assess IRS' use of resources. GAO also
noted that IRS still lacks a centralized and integrated cost accounting
system capable of providing timely and reliable cost information
related to its activities and programs. Without such a system, managers
may lack ready information to manage costs and make decisions.
FY 2003 Accomplishments:
All business units 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 still in the process
of deploying and setting targets for their balanced measures down to
the Area office (or equivalent) level. IRS is continuing to implement
Embedded Quality (EQ), which revamps the way quality is measured,
calculated, and reported in the sites. EQ creates accountability by
connecting employee evaluations directly to the corporate balanced
measures in a fair and meaningful way.
IRS began updating its strategic plan for FY 2003-2008. The new plan
will link the strategic goals and objectives to the performance goals
in the Annual Performance Plan and to the Budget. Performance data is
collected, collated and reported through the Data, Mart and Business
Performance Management System (BPMS) for most of the IRS critical
measures. IRS is also continuing to expand use of OMB's Program
Assessment Rating Tool (PART). A five year-PART plan has been developed
with new programs being added each year to reach the goal of 100% of
IRS programs being reviewed in five years.
Actions Planned or Underway:
IRS will continue to respond to this challenge through the following
actions:
* Review current performance measures to transition from a largely
output based system, to one focusing on evaluating the outcomes for all
major processes.
* Complete update and publish IRS strategic Plan for FY 2003-2008,
linking strategic goals and objectives to performance goals in the
Annual Performance Plan and the Budget.
* Continue to automate data collection and reporting through Data Mart
and BPMS.
* Develop the linkage between IRS' operational critical measures and
its relevant strategic measures to better align resource decisions to
achieving strategic outcomes.
* Develop strategic measures for all major operating divisions.
* Deploy the Integrated Financial System (IFS) provide the IRS timely
and easier access to accurate and consistent financial data resulting
in improved decision-making and management of the organization. IFS is
being designed to be compliant with JFMIP, with a goal of eventually
being FFMIA compliant. Once the Integrated Financial System (IFS) is
implemented in 2004, IRS will continue to respond to this challenge
through the following actions:
* Begin capturing the full cost of IRS's resources in FY 2004.:
* Allocate overhead costs based on proven business methodologies, that
are consistently applied, easy to maintain and will support internal
and external audits.:
* Track the receipt and distribution status of funds by appropriation
in compliance with federal appropriation laws through the IFS Funds
Management module.:
* Track and control resources to a specific organizational unit and
level of responsibility.:
* Provide both direct and indirect cost data, this will help the move
the Service forward in transitioning to a Performanced-Based
Organization through the Cost module.:
Produce integrated and reliable financial statements and reports with
minimal reliance on data from legacy systems.
Security of the IRS - Information Security:
IRS has made considerable progress toward improving computer security
controls. Despite this progress, more work remains to achieve an
acceptable level of assurance that automated systems and taxpayer data
are not placed at risk from 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 as a result of both internal factors (such as increased
connectivity of systems) and external factors (such as the volatile
threat environment resulting from increased terrorist activity). While
many steps have been taken to limit risk, IRS systems and taxpayer
information remain vulnerable to threats impacting the confidentiality,
integrity, and availability of data and information systems. 57:
FY 2003 Accomplishments:
In FY 2003, development and documentation of improved IRS wide security
policies, guidelines, standards and procedures for access controls,
configuration management, and audit trails was completed.
Implementation, assessment and analysis of security controls was
completed for border, domain and other routers and switches. Day-to-day
guidelines, rollout schedules, and training programs relating to the
implementation of access controls, configuration management, and audit
trails controls throughout the IRS computing environment were
developed. Rollout schedules and training program relating to security
roles and responsibilities were deployed, including implementing
Federal Information Security Management Act (FISMA) related training.
Development, implementation, and monitoring of the security curriculum
for key IT security personnel was completed. substantial progress was
made toward certification of IRS sensitive systems. Improved disaster
recovery capability was implemented for IRS critical information
systems. Continuity exercises were expanded to include larger
enterprise functions and all response capabilities. Incident Command
System training was provided to key personnel. Annual security control
reviews of IRS systems were conducted in compliance with the Federal
Information Security Management Act of 2002, using NIST Special
Publication 800-26. IRS intrusion detection and response capability was
refined and further integrated with emergency preparedness plans and
procedures. Backup capability for IRS Computer Systems Incident
Response Center was initiated, providing improved assurance for IRS
networks. Final phase of physical security upgrades was started to
increase the control level of critical IRS information processing
facilities to Department of Justice Level V.
Actions Planned or Underway:
IRS will continue to respond to this challenge through the following
planned actions:
* Conduct independent compliance assessments to verify and validate
that security policies, procedures, guidelines and change control
processes implemented during FY 2003 operate as planned, and are
consistently meeting compliance requirements throughout the computing
environment. (09/2004):
* Work with GAO and TIGTA to verify that IRS' disaster recovery
capability for Masterfile is in place and in compliance with all
requirements for that capability. (09/2004):
* Complete full certification of IRS sensitive information systems.
(09/2004):
* Further expand training, testing and exercise activities for business
continuity. (09/2004):
* Complete Level V physical security enhancements at critical
information processing facilities. (09/2004):
* Implement a more robust day-to-day execution and monitoring of
security controls to ensure that key security controls are consistently
implemented and in place. (09/2004):
* Conduct annual security control reviews of information and
information systems in compliance with the Federal Information Security
Management Act of 2002, using NIST Special Publication 800-26. (09/
2004):
* Implement more robust compliance and oversight methodologies to
ensure that taxpayer information and IRS information and information
system assets are safeguarded. (09/2004):
* Conduct annual security reviews of information and information
systems as required by the Federal Information Security Management Act,
supplementing these reviews with in-depth assessments of security
controls over critical information assets. (09/2005):
Continue to track and mitigate identified security weaknesses,
identifying and implementing adjustments to policies procedures and
guidelines as necessary to maintain consistent controls throughout the
computing environment. (09/2005):
* Update business continuity plans and programs in response to changes
in threat conditions. (09/2005):
* Complete backup capability and processes for IRS Computer Systems
Incident Response Center. (09/2005):
Maintain currency of intrusion detection technologies and practices in
order to maintain a low level of risk of damage from hacker and
terrorist activities targeting IRS networks. (09/2005):
Security of the IRS - Employees and Facilities Recent terrorist attacks
highlighted vulnerabilities in many businesses and government agencies.
This terrorist activity within the United States demonstrated very
graphically that the physical security of IRS employees, equipment, and
structures should be of utmost concern to IRS management. The IRS must
remain vigilant to all opportunities to enhance the safety of
employees.
FY 2003 Accomplishments:
National Physical Security Standards were developed to establish
security enhancements for areas such as guard services, blast
mitigation, and the infrastructure of all IRS offices. IRS conducted an
assessment of all IRS buildings and facilities based upon current and
proposed security standards and began a security risk assessments of
all Level 1, 2, and 3 buildings. IRS participated in government-wide
programs that plan for and minimize the risk of catastrophic events on
mission achievement. Headquarters' continuity of operations (COOP)
capabilities and enterprise situation awareness management
capabilities (SAMC) were enhanced.
Actions Planned or Underway:
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.
* Continue to enhance and maintain COOP and SAMC initiatives.
* Complete security risk assessments of Level 1, 2, and 3 buildings.
Implement appropriate corrective measures and/or upgrades, subject to
funds availability and consistent with comparable GSA scheduling for
Level 4 buildings.
* Develop and incident command structure, using the Senior Commissioner
Representatives as the Command Manager.
* Identify appropriate protective measures for all IRS facilities in
accordance with the National Physical Security Standards. 59:
Human Capital:
Like many other government agencies, IRS continues to face a range of
serious personnel management issues, ranging from recruiting, training,
and retaining employees to problems associated with IRS' recent
reorganization and modernization efforts. Although IRS initiated
actions to incorporate a workforce planning process into its strategic
planning process, IRS management has not established a project plan
that assigns responsibilities and includes milestones for each step in
the process.
FY 2003 Accomplishments:
The IRS is implementing a comprehensive Human Capital Strategy that is
based upon six human capital standards for success: strategic
alignment, workforce planning and deployment, leadership and knowledge
management, performance culture, talent, accountability. IRS developed
a phased retirement program for potential use as incentives for
employees in critical job series to extend their association with the
IRS. IRS also received the authority for waivers to annuity offsets in
order to benefit from the vast experience of annuitants. A robust
succession planning model was developed and the use of executive search
assistance in filling critical executive positions has been
implemented. A new, competency-based, transformational leadership
development program was introduced to equip current and future leaders
for increased service to both IRS employees and taxpayers. All 70,000
front-line employees were trained on customer satisfaction strategies,
to reinforce IRS' mission and improve performance. Balanced measures
training was provided for all managers to reinforce the importance of
individual accountability for organizational performance. Training has
been decentralized to give the operating divisions responsibility for
technical training so it can be tailored to meet the needs of their
specific taxpayers.
Actions Planned or Underway:
IRS will continue to respond to this challenge through the following
planned actions:
* Evaluate each human capital initiative for workforce impact and
determine effective and appropriate mitigation strategies to address
the results.
* Determine and approve bargaining strategies for each human capital
initiative to reach agreement with NTEU.
* Build managerial capacity to implement complex organizational change
with minimal productivity loss during the transition to the new and
more efficient structure.
* Implement a multi-year recruitment/marketing strategy that includes
the expansion of the internet employment website, a complete print
media advertising campaign, market research, and an extensive internet
media advertising campaign.
* Develop a Competency Models/Occupational Analysis for all positions
within the IRS to identify competencies necessary for successful
performance in all of our frontline occupations, target recruitment
based on skill gaps, and to target individual/employee training
opportunities based on skill gaps.
* Develop a Career-Pathing process that focuses on training,
application, assessment and feedback to provide opportunities to
develop technical expertise needed for senior professional (SP)
positions.
* Extend partnerships with key colleges and universities. 60:
* Improve recruiting performance through such initiatives as expansion
of category ratings and the increased use of simulations in assessing
job applicants--particularly in the areas of Customer Service
Representatives and Revenue Agents.
* Expand use of the internet for recruiting.
* Implement QuickHire, an Internet-based tool that automates the hiring
process and allows for web-based submission of job applications.
* Use the personnel flexibilities granted under Restructuring and
Reform Act of 1998:
* (RRA '98) and will push for new flexibilities that help with
workforce renewal.
* Ensure that the IT infrastructure is robust enough to handle
comprehensive e-learning systems.
Design refresher training for managers to use tailored case studies and
simulations in training, providing hands on experience to realize the
"stepping stone" approach.
Taxpayer Protection and Rights IRS effected an independent review to
determine its compliance with the Restructuring and Reform Act of 1998
(RRA 98) Section 1204, which prohibits the use of enforcement
statistics to evaluate IRS employees or to impose or suggest production
quotas or goals. In addition, all IRS Appropriate Supervisors certify
each quarter that they have not improperly used enforcement statistics
in evaluating employees. Separately, the National Taxpayer Advocate
began several national initiatives to identify areas for improving
Taxpayer Advocate Services processes and procedures to improve
performance in offices with low scores. A study was also performed of
the Federal Case Registry of Child Support Orders (FCR) to evaluate the
accuracy and timeliness of the data contained in the FCR/Dependent
Database. Correspondence audits were conducted for the sample of Earned
Income Tax Credit taxpayers selected in the study.
Actions Planned or Underway:
In FY 2004, IRS will focus on taxpayer groups that are at higher risk
of non-compliance to maintain confidence in the integrity of our tax
administration program; fully implement the K-1 matching program,
reconciling partnership income reporting documents to the beneficiaries
of this income on federal income tax returns; partner with state taxing
agencies to implement programs that compare state tax information with
federal income and/or employment tax return information; and, refine
procedures to certify compliance with the requirements of Title VI of
the Civil Rights Act of 1964 to provide equal access and non-
discriminatory services to all eligible taxpayers.:
V. Financial Highlights Stewardship Information Analysis:
Overview of Revenue and Administrative Accounts The IRS' financial
statements and footnotes received an unqualified audit opinion for the
fourth consecutive year for administrative accounts and the seventh
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 $ 24.80 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 increase in assets of $ 0.09
billion is primarily attributable to increased capital investment in
software. The majority of the liabilities, almost 87 percent, consist
of amounts due to Treasury related to Federal Taxes Receivable. The
Statement of Custodial Activity shows that IRS programs resulted in $
1.952 trillion in Federal receipts. IRS collections constitute 96
percent of the Federal Government receipts, as shown in the following
chart.
Total Federal Receipts - (Percent):
[See PDF for image]
[End of figure]
b. Financing Sources The IRS receives the majority of its funding
through annual, multiyear 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, matching information with returns,
Budget Fiscal Year 2003 Appropriations - (Percent):
[See PDF for image]
[End of figure]
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 tax credit program 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, customer education, and enhanced research to
reduce valid claims and erroneous filings associated with Earned Income
Tax (EITC) and Child Care Tax (CCTC) Credits and to administer the
Health Care Tax Credit (HCTC). Besides appropriations, the Service
utilizes other financing sources. These include net transfers from
other federal agencies, receipts of penalty and interest payments
related to assessed taxes, User Fees for direct services provided to
customers (for example, installment fees, photo copy fees, and letter
rulings and determinations fees), 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 Tax Credit Programs (EITC and CCTC and HCTC). 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 tax credit programs
includes EITC and CCTC pre-filing, filing and account services, and
compliance activities, and HCTC health insurance tax credit program
activities.
How the Service Used Its Resources - (Percent):
[See PDF for image]
[End of figure]
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 $1.952 trillion) for FY 2003 decreased
by approximately 3 percent. Individual income taxes, which include both
FICA and SECA taxes, decreased by more than 2 percent. Corporate income
taxes decreased by 8 percent. Collections from all other tax sources
decreased 4 percent from 2002 to 2003. The decline in receipts reflects
lower marginal tax rates enacted as part of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA) which impacted withholding
tables in January 2002. Decreases in equity valuations during 2002, as
evidenced by a decrease in the S&P 500 Index, are believed to have led
to a significant decrease in capital gains realizations and income from
the exercising of stock options, contributing to the decrease in net
individual income tax collections. The decrease in net corporate tax
receipts can be attributed to two onetime deposit rule provisions:
EGTRRA allowed corporate taxpayers to shift the estimated payment
normally due on September 17, 2001 (FY01) to October 1, 2001 (FY02) and
IRS relief for those affected by the events of September 11th allowed
taxpayers to further shift these payments to January 2002. FY02
receipts were inflated by these one-time shifts allowed for FY01 which
did not occur in FY03. The entire amount of Federal revenue received in
2003 was distributed to Treasury.
Collections of Federal Tax Revenue:
[See PDF for image]
[End of figure]
Federal tax refund activity, which includes tax, interest, the special
tax rebate authorization, payments for Earned Income Tax Credits, and
Child Care Tax Credits in excess of the tax liability was $300 billion.
In fiscal year 2003, the Service issued $14 billion in advance payments
of the child care tax credit in accordance with the Jobs and Growth Tax
Relief Reconciliation Act of 2003 (Public Law 108-27). Overall refund
disbursements increased by 7 percent. The table below shows that all
tax class refunds remained consistent year to year with the exception
of the Individual income, FICA/SECA and other refunds class, which
reflects the advanced child care tax credit payments made pursuant to
Public Law 108-27.
Federal Tax Refund Activity:
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[End of figure]
Analysis of Unpaid Assessments:
Most Unpaid Assessments Are Not Receivables and Are Largely
Uncollectible As reflected in the supplemental information to IRS'
fiscal year 2003 Financial Statements, the unpaid assessment balance
was about $246 billion as of September 30, 2003. 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. A significant portion of this balance
is not considered a receivable. In addition, a substantial portion of
the amounts considered receivables is largely uncollectible. 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 taxes receivable.
Assessments with unlikely future collection potential are called
writeoffs. Figure 1 depicts the components of the unpaid assessments
balance as of September 30, 2003.
Figure 1: Components of IRS' $246 Billion of Unpaid Assessments:
[See PDF for image]
[End of figure]
Of the $246 billion balance of unpaid assessments, $126 billion
represents write-offs. Writeoffs principally consist of amounts owed by
defunct taxpayer's and include many failed financial institutions
resolved by the Federal Deposit Insurance Corporation (FDIC) and the
former Resolution Trust Corporation (RTC). The remaining amounts are
owed by taxpayers with extreme economic and/or financial hardships,
deceased taxpayers, and taxpayers who are insolvent due to bankruptcy.
:
Figure 2 depicts the components of the write off balance as of
September 30, 2003.
Figure 2: Components of IRS' $126 Billion of Write offs:
[See PDF for image]
[End of figure]
In addition, $31 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.
The remaining $89 billion of unpaid assessments represent federal taxes
receivable. About $69 billion (78%) 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, 2002, to September 30, 2003,
increased from $87 billion to $89 billion. The percent estimated to be
collectible at September 30, 2003 (22%), decreased slightly from
September 30, 2002 (23%). Figure 3 depicts the taxes receivable balance
that is considered collectible and uncollectible as of September 30,
2003.
Figure 3: Components of IRS' $89 Billion of Taxes Receivable:
[See PDF for image]
[End of figure]
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, 2003.
About $154 billion (63%) of the unpaid assessment balance as of
September 30, 2003, contains interest and penalties, as depicted in
figure 4, and are largely uncollectible. Figure 4 depicts the Unpaid
Taxes and Interest and Penalty Components as of September 30, 2003.
Figure 4: Unpaid Taxes and Interest and Penalty Components of $246
Billion in Unpaid Assessments:
[See PDF for image]
[End of figure]
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 2003 was mostly attributable to the
accrual of interest and penalties.
ADDENDUM: President's Management Agenda:
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. IRS adjusted its "Getting
to green plans" to reflect the new "Proud to be" criteria and refined
its milestones to achieve these goals by July 2004. The table below
summarizes the Department of the Treasury's self-score of IRS' status
and progress for all four quarters of FY 2003.
IRS Overall Ratings as of September 30, 2003:
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[End of figure]
* Implemented an Integrated Workforce Planning System that forecasts
multi-year hiring requirements:
* Developed a 5-Year Staffing Plan for critical occupations:
* Implemented a Succession Planning Management System as a key source
for filling executive positions:
* Implemented a MS/MBA Pilot Program in accounting and taxation:
* Established an E-Training Partnership with OPM to join their Go-Learn
effort with our new elearning system:
* Introduced a new Department Manager Leadership Curriculum:
* Extended Pay-for-Performance System to Department Managers:
* Enhanced Performance Management System for employees:
* Implemented a new National Performance Awards Agreement:
* Expanded Category Rating usage for determining job applicants'
qualifications:
* Received OPM's preliminary approval to implement the Senior
Leadership Demonstration Project that fundamentally changes executive
human capital management in the IRS:
* Began the roll-out of HR Connect to replace the existing IRS
automated human resources information management system Planned:
* Introduce new Web-Based Technology (Quick-Hire/Career Connector) to
reduce hiring time:
* Expand Category Rating and Applicant Simulation Assessments used in
hiring process:
* Leverage Electronic and Print Advertising for recruiting job
applicants to include the Internet:
* Develop new performance support tools and training delivery
technologies to enhance workforce learning and development in a more
cost-effective manner:
Continue to streamline and innovate hiring and staffing processes:
Competitive Sourcing:
Accomplished:
Appointed Competitive Sourcing Director:
Completed contract negotiations with National Industries for Severely
Handicapped (NISH) for IRS Mailroom (70 FTE):
Completed studies involving 157 FTE; - Architect/Engineering
Streamlined (16 FTE) - Retained In-house - Tax Law ADC Telephone Direct
Conversion (141) - Outsourced:
Scheduled to issue the solicitation during the 9/15-9/19/03 for Campus
Operations Information Technology (350 FTE):
Planned:
Complete 3 standard competitions (1200 FTE): Building Maintenance (100
FTE); Area Distribution Centers (500 FTE); Campus Operations (350 FTE):
Complete Files Activities (1250 FTE):
Publication of the 2nd draft of the PWS (Performance Work statement)
Q2, 2004:
Warehousing and Transportation (160 FTE); Publication of the 2nd draft
of the PWS (Performance Workstation) Q2, 2004:
Budget & Performance Integration:
Accomplished:
Proposed outcome and output performance measures in the OMB budget
submission:
Conducted Quarterly Business Performance Reviews and issued monthly
performance reports to address significant business performance issues:
Proposed new EITC outcome goals; developed and began implementing a
plan to improve EITC:
Linked 100% of performance appraisal plans to the IRS mission:
Application Qualification Testing (AQT) completed on IFS Cost Module;
Systems Integration Testing (SIT) begun; Development of implementation
plan begun:
Planned:
Realign IRS budget structure in FY 2006:
Implement IRS Cost Module:
Issue PART components for FY 2006 budget cycle, and integrate PART
results in the assessment phase of strategic planning and budget
process:
Update strategic assessment documents with new/revised budget and
performance information:
E-Government:
Accomplished:
Submitted all Exhibit 300s to Treasury:
Established IT Governance Board to prioritize, select, and monitor
major IT projects:
Security Certification:
Certified 72% of the IRS Systems in the Sensitive Systems Database
(SSDB).
Total number of systems certified in FY 2003 is 100 systems, an
increase of 15 from FY 2002:
Certification Program Office (CPO) has certified critical systems that
include EServices, Health Coverage Tax Credit, Detroit Internet
Gateway, IDRS and STIR 70:
Electronic Tax Products for Business:
Launched E-Services (Registration, on-line Preparer Tax ID number; SSN
and Name matching feature) Release 1.1 in August on-time and within
budget:
Reached agreement with OMB and SBA to replace SBA's stand alone FEIN
application; agreed to link to IRS internet EIN application system:
Began development needed to deliver an integrated state registration
number/federal Employer Identification Number (EIN) application.
Free File:
Affected over 2,700,000 citizens during FY 03:
Started activities to receive proposals from existing and prospective
Free File Alliance members for 2004 filing season:
Provided guidance and input to SPEC for final stages of feasibility
study to include Free File at its volunteer partner sites:
Finalized the 2004 Free File monitoring plan - a plan that will provide
direction to effectively review online tax software programs offered by
Free File Alliance members.
Coordinated internally to promote Free File within various
publications/services available to the public in 2004 (e.g., 1040
Series Instruction Booklets; tax publications (e.g., Pubs 910 and 17);
E-file marketing brochures, E-file marketing campaign; TeleTax, etc.
Planned:
Lead effort to involve states in pursuing an integrated state
registration/FEIN process:
Make the corporate family of forms (IRS-1120) and 990 family (Return of
Organization Exempt from Income Tax) available electronically - Q2, FY
2004.
Financial Performance:
Accomplished:
Achieved a clean audit opinion by November 14, 2003:
Completed all corrective actions and have closure pending on 1 material
weakness - Financial Statements-Admin.
Downgraded two material weaknesses to reportable condition -
Telecommunications costs and Property Management.
Progressed in developing definitive corrective action plans for
remaining material weaknesses.
Planned:
Launch an EITC certification pilot for Tax Year 2003 returns in January
2004.
Qualifying Child Residency Certification Pilot changed from 8/03 and
45,000 taxpayers to January 2004 and 25,000 taxpayers;
Filing status initiative will be in January 2004; increase in cases
from 5,000 to 40,000:
Begin income misreporting initiative in October 2003; cases increased
from 175,000 to 300,000:
Close additional material weaknesses:
Implement the Integrated Financial System in FY 2004.
[End of section]
Financial Statements:
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[End of figure]
[End of section]
Balance Sheets:
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Statements of Net Cost:
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Statements of Changes in Net Position:
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Statements of Budgetary Resources:
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Statements of Financing:
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Statements of Custodial Activity:
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Notes to the Financial Statements:
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Supplemental and Other Accompanying Information:
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Appendixes :
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Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Material Weaknesses:
During our audits of the Internal Revenue Service's (IRS) fiscal years
2003 and 2002 financial statements, we identified four 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, and (4) computer
security. We reported on each of these issues last year.[Footnote 6] 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.
We also reported a material weakness in controls over IRS's property
and equipment (P&E) in prior years. However, as a result of continued
improvements in IRS's controls over its P&E, we have reassessed this as
a reportable condition that no longer rises to the level of a material
weakness.
Financial Reporting:
In fiscal year 2003, 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 both 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 2003, IRS (1) did not have
an adequate general ledger system for financial reporting purposes, (2)
did not recognize transactions affecting taxes receivable at interim
periods or record the balance 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 2003, IRS enhanced its
procedures to more timely record certain types of administrative
transactions and thereby improved the ongoing reliability of its
financial information. Nonetheless, significant deficiencies remain.
To compensate for its weaknesses in the financial reporting process,
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, 2003 and 2002,
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 or justifying resource allocation
decisions.
As in previous years,[Footnote 7] during fiscal year 2003, 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 P&E. 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 8] 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 the Integrated Financial System (IFS), which will incorporate
a single, integrated general ledger that is expected to be fully
compliant with FFMIA.[Footnote 9] The initial phase of IFS's
implementation, which was originally scheduled for October 1, 2003, has
been rescheduled for the spring of 2004 due to testing problems. IRS's
efforts to modernize its financial management system have been affected
by delays in the past, and given the substantial size and complexity of
this project, further delays are possible. However, even if there are
no further delays, IRS does not currently expect IFS to be fully
implemented with an SGL-compliant general ledger supported by detailed
subsidiary records and audit trails for all custodial and
administrative accounts until at least 2007.
In prior years, we reported that IRS did not always timely record
material transactions in its general ledger.[Footnote 10] During fiscal
year 2003, IRS implemented interim accruals to monthly record material
administrative activities, such as rent, postage, and telephone
expenses. This has significantly improved the reliability of related
balances during the year. However, for taxes receivable and the related
balances due to Treasury, the balances reported for interim periods are
not based on the routine recording of transactions. Instead, 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.
During fiscal year 2003, 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 reliant on a complex, multistep process to distribute excise
taxes to the recipient trust funds that continues to be susceptible to
error.
With the acceleration of the financial reporting deadline for all
federal agencies to November 15 beginning in fiscal year 2004, IRS's
inability to timely report specific amounts of excise tax revenue to
recipient trust funds becomes even more significant for these funds and
their administrators. Currently, the annual excise tax receipts
reported by recipient trust funds include 3 months of estimated
receipts. The trust funds report 3 months of estimated receipts because
IRS needs 5 and a half months to complete its certification of excise
tax receipts and therefore does not complete the certification for the
fourth quarter of the fiscal year until the following March. Under the
accelerated deadline of November 15 beginning in fiscal year 2004,
recipient trust funds will also have to report estimated receipts for
the third quarter of the fiscal year, since IRS does not complete its
certification of third-quarter receipts until mid-December. Therefore,
annual excise tax receipts reported by recipient trust funds will
include 6 months of estimated receipts beginning in 2004. To the extent
that these estimates differ from the certified amounts, significantly
inaccurate distributions to the trust funds could result and, in the
case of the Highway Trust Fund, incorrect allocations of revenues to
states.[Footnote 11]
During fiscal year 2003, 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 the 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 tailored to
determine the cost of a specific task or project. For example, IRS's
fiscal year 2003 appropriation required IRS to spend at least $60
million combating abusive tax shelters. However, because it does not
have a cost accounting system, IRS resorted to manually developing cost
information from a variety of automated systems to measure how much it
had spent on combating abusive tax shelters and thereby ensure that it
complied with this requirement. In its Management Discussion and
Analysis, IRS stated that the new cost management system, which
includes a cost accounting module, will be a component of IFS, now
scheduled for deployment during fiscal year 2004. Ultimately, IRS
expects this system to provide and reliably report cost information
that it can use to manage its operations. However, when IFS is
initially deployed in 2004, the cost accounting module will not include
the underlying cost information. To make the module fully operational,
IRS will first need to determine the full range of cost information it
needs to support decision making and develop means to capture and
accumulate those costs.
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 2003. During
fiscal year 2003, as part of its strategic planning process, IRS
conducted a comprehensive assessment of its strategic priorities to
prioritize IRS's programs relative to the agency's 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). 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 2003, 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 continues to lack a detailed listing,
or subsidiary ledger, that tracks and accumulates unpaid assessments
and their status on an ongoing basis. As a result, IRS must continue to
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 continue to be
made to this process, 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. Errors in IRS records can cause frustration to
taxpayers who either do not owe the debt or owe a significantly lower
amount. In addition, input errors can cost the government money. For
example, IRS entered a company's 2000 tax deposits into the 2001 tax
period. In January 2003, IRS issued the company a refund of more than
$100,000 because--as a result of the input error--IRS records indicated
that the company had overpaid its 2001 taxes. IRS corrected the error
in July 2003, but as of September 30, 2003, IRS had not recovered the
erroneous refund. In another example, when a taxpayer provided
additional supporting documentation for a credit that IRS had initially
disallowed, IRS inadvertently abated the entire tax debt rather than
just the amount of the credit. This error resulted in IRS's issuing a
refund of nearly $60,000, when only $44,000 should have been issued.
The refund occurred in December 2002, but IRS personnel did not
identify the error until they reviewed the case for our audit. As of
September 30, 2003, IRS had not recovered the amount erroneously
refunded.
As in prior years, the most prevalent errors we found during fiscal
year 2003 involved IRS's failure to record payments in all related
taxpayer accounts 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 24 cases in which
payments were not properly recorded in all related taxpayer
accounts.[Footnote 16] 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 manually cross-references it to other related accounts. However,
our work in fiscal year 2003 continues to show that this compensating
control has not been fully effective: Of the 24 cases with payments
that were not properly recorded, 17 had the manual cross-references.
We have reported on issues related to trust fund recovery penalties in
previous audits.[Footnote 17] IRS has acknowledged the seriousness of
the failure to post trust fund payments and continues to take remedial
steps to address the 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. As a
first step, the task group identified cases that needed to have a
cross-reference added and requested corrections in the records. IRS
officials stated that they hoped to complete this initial step in
addressing the overall trust fund recovery penalty issues by early in
fiscal year 2004. 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 2003, 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 2003 Federal Managers' Financial
Integrity Act (FIA) assurance statement to the Treasury, in which it
reported material weaknesses in the collection of unpaid taxes and 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 the data provided on IRS 1099 forms,[Footnote 18] that can
corroborate the amount of income reported by taxpayers is not required
to be filed until after the start of the tax filing season.[Footnote
19] 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 20]
As we previously reported, 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 21] 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,
in some cases these examinations are performed after any related
refunds are disbursed, which reduces their effectiveness as a
preventive control. In its most recent study of EITC compliance, 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 22] 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
EITC refund rate, which was about 84 percent,[Footnote 23] 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.
IRS's estimate of $8.5 billion in EITC claims that should not have been
paid is just one aspect of the larger challenge IRS faces in the area
of tax compliance. IRS's most current estimate of the annual tax gap is
between $250 billion and $300 billion.[Footnote 24] Compliance problems
that contribute to the tax gap include individual and corporate tax
schemes, misuse of trust and offshore accounts, abusive individual and
corporate tax shelters, businesses' failure to file and pay employment
tax, and underreporting of taxes. Another challenge is enforcing an
increasingly complex tax system that increases the risk of both
intentional and unintentional noncompliance, which could, in turn,
further erode taxpayers' confidence in the nation's tax system.
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 2001,[Footnote 25] IRS's
matching program for individuals identified 15.7 million individual tax
returns with potential underreported taxes totaling $17.2 billion.
Because the volume of cases IRS can follow up on depends on resource
availability, IRS conducts an analysis that identifies case
characteristics that have historically yielded greater assessments as a
result of follow-up efforts. For example, for tax year 2001, IRS
investigated 3 million (19 percent) of these returns, which accounted
for about $7.7 billion (45 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.
Computer Security:
IRS relies extensively on information technology (IT) 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 developed and is implementing an
enterprisewide plan of action and milestones that are to address
vulnerabilities in nine key control areas. Associated with this effort,
IRS has, among other things, updated security standards for certain
systems and devices, defined the security roles and responsibilities of
IT and non-IT personnel, deployed automated tools to assist personnel
in monitoring the compliance of certain systems with security
standards, developed system-specific corrective action plans for
resolving known instances of noncompliance, and installed current
antivirus software on certain servers reviewed.
However, IRS continued to have serious weaknesses in fiscal year 2003
with computer controls designed to protect computing resources such as
networks, computer equipment, software programs, and data from
unauthorized use, modification, and disclosure. For example, IRS did
not always effectively configure and implement computer systems and
network devices in accordance with its computer security guidelines and
adequately protect system resources from unauthorized access. The
following examples illustrate the types of computer weaknesses that
affect IRS's financial and tax processing systems.
* IRS did not consistently implement strong password controls or
adequately restrict electronic access rights and permissions on certain
servers and network devices. Inappropriate access to sensitive files
and directories can enable an intruder or user to gain unauthorized
access to computing resources.
* IRS did not consistently 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 two of three
locations visited, for example, we were able to compromise critical
network devices used to manage and monitor the network.
* IRS did not consistently examine audit logs of certain servers and
network devices for unauthorized activities. Key security-related
events and pertinent data were sometimes not recorded in audit logs,
and security specialists 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
one reportable condition, which concerns weaknesses in IRS's internal
controls over tax receipts and taxpayer information, which we have
reported as a reportable condition in prior years, and a second
reportable condition, which concerns weaknesses in internal controls
over P&E, which we have reported as a material weakness in prior
years.[Footnote 26]
In our previous report on the results of our audit of IRS's fiscal year
2002 financial statements, we discussed the presence of a reportable
condition with respect to weaknesses in IRS's internal controls over
budgetary activity. During fiscal year 2003, IRS improved the
timeliness of recording obligations in its accounting system and
implemented procedures to address delays in recording expenditures. IRS
continues to have difficulty recording routine transactions in the
adjustments to prior year obligations accounts.[Footnote 27] However,
we do not consider this remaining issue to constitute a reportable
condition with respect to IRS's controls over budgetary activity.
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 (FMS), process tax receipts and taxpayer information
on behalf of IRS. Recognizing its responsibility to protect taxpayer
information and receipts, IRS has taken action in the past several
years to address a number of internal control deficiencies we have
reported with respect to safeguarding of tax receipts and taxpayer
information. For example, to improve the safeguarding of taxpayer
receipts and data, IRS updated many of its policies and procedures,
began conducting periodic security reviews of receipt processing areas,
and implemented many of its new hiring and courier standards.
Additionally, in fiscal year 2003, IRS issued new candling[Footnote 28]
procedures for lockbox banks and service center campuses, and courier
service agreements for four service center campuses were renegotiated
to include more stringent background investigation requirements for
courier service employees. Nonetheless, during fiscal year 2003, we
continued to find that IRS's controls over cash, checks, and related
hard-copy taxpayer data IRS received from taxpayers were inadequate to
sufficiently limit the risk of theft, loss, or misuse of such funds and
data, primarily because of inconsistencies in the establishment and
implementation of, and compliance with, policies at IRS service center
campuses, field offices, and lockbox banks.
We previously reported on weaknesses in internal controls to deter
unauthorized access to receipt processing areas.[Footnote 29] While we
found improvement at lockbox banks in fiscal year 2003, we continued to
find security access issues at two of the four service center campuses,
three of the four lockbox banks, and both field offices we visited.
Examples of issues we found include the following:
* At two service centers and at one lockbox bank, guards failed to
respond when we activated a perimeter door alarm.
* At one service center, unauthorized access was made possible by (1)
employees keeping a door to a mailroom processing area open and (2) a
door to the receipts processing area that repeatedly opened
automatically.
* At another service center, mail stored in an overflow area was not
adequately protected from unauthorized access.
* At both field offices, taxpayers delivered receipts and taxpayer data
to IRS personnel in unsecured areas.
* At one field office, the receipt processing areas were not adequately
secured, and IRS field office personnel had the ability to access areas
with tax receipts and taxpayer information, regardless of their need or
authorization for access.
* At one service center for the second successive year, personal items
were allowed into the receipt processing area in clear plastic bags of
various sizes, with many bags containing so many items that not all the
items could be identified through the bag. Additionally, at this
location, employees brought books, purses, and newspapers into the
processing area--all objects in which taxpayer receipts could easily be
concealed. At the same service center, a number of temporary employees
had not been issued lockers outside the processing area in which to
keep their personal belongings, increasing the likelihood that
unauthorized personal belongings would be brought into the processing
area.
* At a field office, employees were allowed to store personal
belongings, such as purses and briefcases, in areas where taxpayer
receipts were accepted.
We continued to find other weaknesses and inconsistencies in controls
over processing taxpayer receipts and taxpayer data at three of the
four service center campuses, all four lockbox banks, and both field
offices we visited. Examples of these weaknesses and inconsistencies
include the following:
* At one service center and at one field office, receipts were stored
in open, unlocked containers, contrary to IRS policy.
* At one service center, three lockbox banks, and two field offices,
some returned refund checks were not restrictively endorsed as required
or staff were unaware of the endorsement requirement. As we previously
reported, returned refund checks are highly susceptible to
theft.[Footnote 30]
* At two service centers and two lockbox banks, initial candling was
either not performed or was not performed according to procedure.
* At two service centers, items discovered in final candling had not
been properly logged.
* At three lockbox banks, candling logs had not been properly
maintained or there was no evidence that required candling reviews had
been performed according to procedure.
In previous years, IRS made an effort to address courier security
weaknesses we cited by adopting more stringent security standards for
couriers who transport IRS's daily deposits to depository institutions.
However, at three of the four service centers and all four lockbox
banks we visited, we found that IRS did not have controls in place to
ensure that the courier requirements were effectively enforced. For
example, at one service center campus, despite the requirement that two
couriers pick up and transport deposits, only one courier picked up the
deposits for more than 20 days during the fiscal year. Additionally, at
two service centers and one lockbox bank, immediate family members were
allowed to meet the two-courier requirement, increasing the risk of
collusion.
In addition, we learned through inquiry that two couriers at a service
center other than those we visited were allowed to continue to pick up
deposits, without being escorted, after their interim access[Footnote
31] had been denied.
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 taxpayer
receipts and 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's success in meeting its
customer service goals.
Property and Equipment:
In prior years, we identified serious internal control deficiencies
that prevented IRS 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 32] Over the past several years, IRS has
made substantial progress in addressing internal control deficiencies
related to its P&E. In fiscal year 2003, we noted further improvements
in IRS's controls and procedures that enhanced its ability to account
for P&E. Specifically, IRS implemented (1) procedures to improve the
accuracy and reliability of its P&E inventory records and (2) an
inventory record system that captured information essential to ensure
that software and software licenses were properly controlled and used
in accordance with license agreements. These further improvements
allowed us to conclude that the remaining issues related to P&E no
longer constitute a material internal control weakness. However,
fundamental deficiencies in IRS's financial management system continued
to exist, which precluded IRS from having ongoing information on its
balance of P&E. Through the use of compensating procedures, IRS was
able to report a balance for P&E on its financial statements at
September 30, 2003, that was fairly stated in all material respects.
In our fiscal years 2002 and 2001 audits, we reported that IRS had made
progress in its efforts to properly account for and control P&E,
including implementing a new inventory system, establishing units with
specific responsibility for maintaining the accuracy of the inventory
records, and implementing procedures to improve the accuracy and
reliability of its P&E inventory records. Our prior year inventory
testing results reflected the progress that IRS made. For example, the
number of errors we found in our testing declined from 35 out of 220
inventory records tested in fiscal year 2000 to 22 out of 220 records
tested in fiscal year 2002.
In fiscal year 2003, IRS further improved procedures and practices used
to maintain accurate and reliable inventory records. Specifically, IRS
(1) developed procedures to obtain and use electronic data from vendors
to create inventory records, which helped ensure that assets were
promptly and accurately recorded upon receipt of the assets, (2)
focused additional effort on ensuring that asset disposals were
recorded timely, (3) expanded use of network monitoring software to
track assets, (4) provided additional training to employees responsible
for maintaining inventory records, and (5) enhanced monitoring and
quality control over the annual inventory process. As a result of these
actions and actions taken in prior years, our testing during fiscal
year 2003 indicated significant improvement in the accuracy and
reliability of IRS's P&E inventory records. We found eight errors in
the 220 inventory records we tested during our fiscal year 2003 audit.
Based on our testing in fiscal year 2003, we estimated that 4 percent
of the items in IRS's P&E inventory records were erroneously included
as assets.[Footnote 33] This is a dramatic improvement over the error
rate in fiscal year 2000, when we estimated that 16 percent of the
items in IRS's P&E inventory were erroneously included as IRS
assets.[Footnote 34]
We reported previously 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 2003, IRS developed a database of
software licenses that captured the key information needed to ensure
that software licenses were controlled and used in accordance with
terms of the license agreements. For example, this database allows IRS
to track the number of software installations deployed against the
number of licenses purchased. In addition, IRS developed and
implemented policies and procedures to update inventory records to
reflect software acquisitions as they occur.
Although IRS has made significant progress in its efforts to maintain
accurate and reliable P&E inventory records, fundamental system
deficiencies continue to exist. IRS still 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 continues to record as 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.
We reported in our prior year audit that IRS improved the timeliness of
extracting and recording P&E financial information. As a result, IRS is
now able to analyze transactions monthly and update P&E accounting
records quarterly. In fiscal year 2003, IRS revised certain accounting
codes, which further enhanced its ability to analyze and extract the
cost of developing major software systems. However, IRS still 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.
Because IRS did not properly record P&E transactions in P&E accounts as
they occurred, it was again 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 must go through a labor-intensive and time-
consuming process to link the property acquisitions eventually recorded
on IRS's accounting records to assets recorded on IRS's property
records. These weaknesses in IRS's property and accounting systems will
continue to exist until IRS has an integrated accounting and property
system. IRS plans to install an asset management module to the
integrated financial system by August 2005. According to IRS, the
integrated system, when fully implemented, will be capable of recording
P&E as assets when purchased and generating detailed records for P&E
that reconcile to the financial records.
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 Office
of Management and Budget (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. In addition, our audit disclosed another matter,
involving IRS contributions to the Thrift Savings Plan (TSP) that
exceeded statutory requirements.
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 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 35] We found that this condition continued to exist in
fiscal year 2003. Specifically, in our testing of 59 statistically
selected tax cases with liens in which the taxpayers' total outstanding
tax liabilities were either paid off or abated during fiscal year 2003,
we found 12 instances in which IRS did not release the applicable
federal tax lien within the statutorily mandated 30 days. The time
between satisfaction of the liability and release of the lien ranged
from 35 to 249 days. Three of the 12 liens were not released timely
because the taxpayers' accounts contained inaccurate or outdated freeze
codes, which are codes that prevent certain types of updates and
closing actions to the taxpayers' accounts.[Footnote 36] The presence
of these freeze codes prevented IRS's system from automatically
identifying the liens for release. For example, a freeze code on one
taxpayer's account prevented the release of the lien for 249 days after
satisfaction of the debt. IRS identified that it had failed to release
the lien when reviewing the case after we selected it for testing as
part of our audit. In two other cases, inappropriate freeze codes
prevented the accounts from registering as having been paid in full,
which prevented IRS's systems from automatically releasing the liens.
These liens still had not been released as of the time of our review in
August 2003--in one case 7 months and the other case 2 months after the
tax liability had been satisfied. IRS officials could not explain why
the freeze codes were not reversed in the three cases with inaccurate
or erroneous freeze codes that we identified.
On the basis of the results of our work, we estimate that for 20
percent of unpaid tax assessment cases where IRS had filed a tax lien
that were resolved in fiscal year 2003, IRS did not release the lien
within 30 days.[Footnote 37] 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. 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 38]
During our fiscal year 2003 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
statistically selected installment agreements, we found 3 instances in
which the terms of the installment agreements did not require full
satisfaction of the tax liability. On the basis of the results of our
work, we estimate that about 5 percent of new installment agreements
entered into during fiscal year 2003 had payment terms that would not
fully satisfy the tax liability within the statutory collection
period.[Footnote 39] The presence of such cases in fiscal year 2003:
indicates that IRS was not in compliance with section 6159 of the
Internal Revenue Code. Legislation is currently pending that, if
enacted, would eliminate the requirement that installment agreements
provide for full payment of the tax debt.[Footnote 40]
Financial Management Systems' Noncompliance with FFMIA:
In fiscal year 2003, 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 SGL
at the transaction level. We found that IRS (1) cannot rely solely 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, and (4)
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, and
computer security--are also conditions indicating that IRS's systems do
not substantially comply with the requirements of FFMIA.
This ties in with our earlier discussions of material weaknesses
related to the inability of IRS's financial management systems to
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 2003.
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.
Thrift Savings Plan Contributions:
During the course of this year's audit, another matter came to our
attention, concerning excess contributions to certain employees' TSP
accounts. TSP was authorized by the Congress under the Federal
Employees' Retirement System Act of 1986.[Footnote 41] Title 5 U.S.C. §
8432 requires agencies to contribute to TSP 1 percent of the base pay
of all employees, regardless of whether the employees make their own
contributions.[Footnote 42] In testing this requirement as part of our
testing of IRS's fiscal year 2003 payroll transactions, we found that
IRS had made contributions to TSP for some FERS employees in excess of
the statutory 1 percent contribution rate applicable to noncontributing
employees. In response to our inquiry, IRS contacted the Department of
Agriculture's National Finance Center (NFC), which processes IRS's
payroll under a contractual agreement, and requested that it
investigate the matter. NFC, in turn, has preliminarily traced this
condition to a problem within its automated systems that caused
duplicate TSP records to be generated and duplicate mandatory TSP
contributions to be erroneously made when some IRS employees were
reassigned from one IRS organizational unit to another. Based on the
results of our audit work, we determined that the effect of this
problem on IRS is not material. However, the potential effect on other
agencies whose payrolls are processed by NFC is unknown. NFC is
currently conducting an internal investigation to try to determine,
among other things, the full scope and magnitude of the problem. We
will discuss this matter in more detail in a separate report.
[End of section]
Appendix II Details on Audit Methodology:
To fulfill our responsibilities as the auditor of the Internal Revenue
Service's (IRS) 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, accrued
expenses, payroll, nonpayroll, property and equipment, 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
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 the Federal Managers'
Financial Integrity Act of 1982.
* 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); Pay and
Allowance System for Civilian Employees (5 U.S.C. §§ 5332 and 5343, and
29 U.S.C. § 206); Federal Employees' Retirement System Act of 1986, as
amended (5 U.S.C. §§ 8422, 8423, and 8432); Social Security Act, as
amended (26 U.S.C. §§ 3101 and 3121, and 42 U.S.C. § 430); Federal
Employees Health Benefits Act of 1959, as amended (5 U.S.C. §§ 8905,
8906, and 8909); and Consolidated Appropriations Resolution, 2003 (Pub.
L. No. 108-7).
* Tested whether IRS's financial management systems substantially
comply with the three requirements of the Federal Financial Management
Improvement Act of 1996.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
DEPUTY COMMISSIONER:
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON. D.C.
20224:
November 6, 2003:
Mr. David M. Walker Comptroller General U.S. General Accounting Office
441 G Street, NW Washington, D.C. 20548:
Dear Mr. Walker:
We believe your draft report titled, Financial Audit. IRS' Fiscal Years
2003 and 2002 Financial Statements, fairly presents both our progress
and our remaining challenges. For the fourth consecutive year, we
achieved an unqualified audit opinion for the annual financial
statements. Additionally, we accomplished this milestone for a second
consecutive year under the accelerated reporting schedule, requiring
the issuance of our financial statement just six weeks after the end of
the fiscal year. This clearly demonstrates to the public that we can
properly and consistently account for approximately $2 trillion in
revenue receipts, $300 billion in refunds, and $11 billion in
appropriated funds.
We wish to recognize the GAO's dedication and professionalism
throughout this year's audit process. We appreciate the excellent
counsel and support the auditors provided to us. Your willingness to
work with us to further accelerate the audit schedule and increase
interim testing allowed us to achieve not only our audit related work
but also to provide needed staff resources to continue work on critical
financial systems modernization projects through the audit period.
We appreciate your acknowledgement of the great strides we made in FY
2003. During the fiscal year, we instituted a number of financial
management reforms and improvements. Specifically we:
* Implemented improved interim reporting processes to ensure quarterly
financial statements were both accurate and timely:
* Met or exceeded Treasury's three-day close goal for monthly financial
reporting:
* Implemented a software inventory system to improve
accountability over software licenses:
* Improved controls over Property and Equipment accountability,
including cleansing inventory accounts and performing interim
validations of those accounts:
* Implemented an interim accrual process
for specific administrative expenses such as rent, postage, and
telephone services and improved the accuracy of our year end major
contract accrual:
* Strengthened our oversight of obligating practices and performed a
mid-year self-assessment of the timeliness of obligations:
Piloted Phase II of the Automated Trust Fund Recovery Penalty
Compliance Center (ATFR-CC) application designed to cross-reference
payments and credits on related trust fund recovery penalty (TFRP)
accounts:
Implemented a new sampling methodology for estimating the balance of
taxes receivable and other unpaid assessments at year-end:
These improvements contributed significantly to our ability to address
three of nine outstanding Material Weaknesses during FY 2003. As noted
in your report, our actions to increase accountability over Property.
and Equipment, through the implementation of a software inventory
process and improved procedures, have allowed the Service to downgrade
this 21 year old Material Weakness to a reportable condition.
Additionally, we have requested Treasury approve a similar downgrade in
the Telecommunications Material Weakness and eliminate the Material
Weakness in Financial Statements Administrative.
The IRS remains committed to completing the FFMIA Remediation Plan to
implement modernized financial systems. Although these systems are
taking longer to come on-line than we had hoped, we appreciate your
understanding of the size and complexity of these projects. It is
critical that, when implemented, the systems meet our operational needs
as well as the requirements of the CFO Act. During the next year, as we
work to bring these systems on-line, we will also undertake actions to
continue to improve our business practices in support of those systems
implementations. As examples, we plan to:
* Implement the core accounting functionality of the Integrated
Financial System;
* Streamline and improve our business processes for
travel, purchase card, and reviews of unliquidated obligations and
commitments:
* Implement policies to more effectively collect and report costs for
trust fund activities:
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 new integrated financial management systems that we
will be able to overcome the majority of the material weaknesses cited
in your report.
Sincerely,
Signed by:
John M. Dalrymple:
Deputy Commissioner for Operations Support:
[End of section]
(196000):
FOOTNOTES
[1] IRS includes an estimate of the tax gap in the other accompanying
information.
[2] 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).
[3] In 2001, the Office of Management and Budget announced the
executive branch's intention to significantly accelerate agencies'
financial reporting timeline, requiring that for fiscal year 2004 and
thereafter they issue their financial statements by November 15, or 6
weeks after the end of the fiscal year. The Department of the Treasury
established and achieved its own goal of meeting this accelerated
timeline 2 years early. For fiscal year 2002, the audit of Treasury's
financial statements, including those of its component entities such as
IRS, was completed and was issued by November 15.
[4] A material weakness is a reportable 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.
[5] 31 U.S.C. § 3512 note (2000) (Federal Financial Management
Improvement).
[6] U.S. General Accounting Office, Financial Audit: IRS's Fiscal Years
2002 and 2001 Financial Statements, GAO-03-243 (Washington, D.C.: Nov.
15, 2002).
[7] GAO-03-243.
[8] The Joint Financial Management Improvement Program (JFMIP) is a
cooperative undertaking of the Office of Management and Budget (OMB),
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.
[9] 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.
[10] GAO-03-243.
[11] The Transportation Equity Act for the 21ST Century, Pub. L. No.
105-178, 112 Stat. 107 (1998) enhanced the link between the amount of
funds received by states and the amount of tax receipts credited to the
Highway Trust Fund by requiring that highway program funds be
distributed to states on the basis of annual highway account receipts.
[12] Joint Financial Management Improvement Program, Systems
Requirements for Managerial Cost Accounting (Washington, D.C.: February
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.
[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] Based on our testing, we estimate that 65 percent of unpaid
payroll tax cases where one or more individuals were assessed a trust
fund recovery penalty could contain inaccuracies in the posting of
payments. We are 95 percent confident that the percentage of such cases
is between 50 percent and 79 percent.
[17] GAO-03-243.
[18] IRS 1099 forms are used by third parties, such as financial
institutions, to report taxpayers' interest income, dividend
distributions, and other miscellaneous income.
[19] The peak tax filing season primarily occurs from January 1 to
April 15 of each year.
[20] 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).
[21] 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.
[22] Internal Revenue Service, Compliance Estimates for Earned Income
Tax Credit Claimed on 1999 Returns (Washington, D.C.: Feb. 28, 2002).
[23] We used the fiscal year 2000 refund rate because most of the tax
year 1999 refunds were paid in fiscal year 2000.
[24] As noted in the other accompanying information to the financial
statements, IRS based this estimate on compliance data from the 1980s.
Under IRS's National Research Program, its new effort to review
taxpayer compliance, IRS expects to obtain more accurate and up-to-date
information on compliance rates and sources of noncompliance.
[25] 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 2001 is the most recently completed tax year for
which the cited data are available.
[26] GAO-03-243.
[27] 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. See our audit
report for fiscal years 2002 and 2001 (GAO-03-243) for detailed
discussion regarding adjustments to prior year obligations.
[28] Candling is a process used to determine if any contents remain in
open envelopes. This is often achieved by passing the envelopes over a
light source.
[29] U.S. General Accounting Office, Internal Revenue Service: Status
of Recommendations from Financial Audits and Related Financial
Management Reports, GAO-03-665 (Washington, D.C.: May 29, 2003);
Management Report: Improvements Needed in IRS's Internal Controls, GAO-
03-562R (Washington, D.C.: May 20, 2003); IRS Lockbox Banks: More
Effective Oversight, Stronger Controls, and Further Study of Costs and
Benefits Are Needed, GAO-03-299 (Washington, D.C.: Jan. 15, 2003); GAO-
03-243; and Internal Revenue Service: Progress Made, but Further
Actions Needed to Improve Financial Management, GAO-02-35 (Washington,
D.C.: Oct. 19, 2001).
[30] U.S. General Accounting Office, Internal Revenue Service:
Recommendations to Improve Financial and Operational Management, GAO-
01-42 (Washington, D.C.: Nov. 17, 2000).
[31] Interim access allows a courier unescorted access pending
completion of a full background investigation. If interim access is
denied, the courier must be escorted.
[32] GAO-03-243.
[33] We are 95 percent confident that the error rate does not exceed 7
percent.
[34] We are 95 percent confident that the error rate did not exceed 23
percent in fiscal year 2000.
[35] GAO-03-243.
[36] Freeze codes indicate that certain types of updates and closing
actions will be prevented until the restriction is removed. A freeze
code places a taxpayer's account in a condition that requires
additional action before the account can be settled.
[37] We are 95 percent confident that the error rate does not exceed 31
percent.
[38] 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.
[39] We are 95 percent confident that the error rate does not exceed 14
percent.
[40] This measure is part of the Taxpayer Protection and IRS
Accountability Act of 2003, which passed the House of Representatives
and was referred to the Senate Finance Committee on June 20, 2003. The
measure, H.R. 1528 (108TH Congress, § 201), would amend section 6159 of
the Internal Revenue Code by striking the requirement that all
installment agreements fully satisfy the debtor's liability.
[41] Pub. L. No. 99-335, 100 Stat. 514 (1986) (codified as amended
largely at 5 U.S.C. § 8351 and §§ 8401-8479).
[42] Agencies also are required by § 8432 to make certain matching
contributions to TSP for those employees who make their own
contributions.
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General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
