Financial Audit
IRS's Fiscal Years 2004 and 2003 Financial Statements Gao ID: GAO-05-103 November 10, 2004Because 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 2004 financial statements were fairly presented in all material respects. Because of continuing 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. Due to these serious deficiencies and internal control weaknesses, in GAO's opinion, 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. For the third consecutive year, IRS was able to meet an accelerated financial reporting date, an accomplishment all the more notable because IRS was simultaneously working to implement new financial management systems. IRS also continued to make progress in its efforts to address its weakness in controls over property and equipment and hard-copy taxpayer receipts and data. However, GAO continues to consider issues related to IRS's controls over financial reporting, management of unpaid assessments, and collection of revenue and issuance of tax refunds to be material weaknesses. GAO also continues to consider issues related to information security to be a material weakness. In addition, IRS was not always in compliance with laws concerning the timely release of tax liens and the structure of installment agreements it enters into with taxpayers. Recently enacted legislation modifying the legal requirements regarding the structuring of installment agreements will resolve this compliance issue for future audits. The lack of a sound financial management system that can produce timely, accurate, and useful information needed for day-to-day decisions continues to present a serious challenge to IRS management. IRS's present financial management systems, which do not substantially comply with FFMIA, inhibit IRS's ability to address the financial management and operational issues that affect its ability to fulfill its responsibilities as the nation's tax collector. IRS is installing a new financial management system intended to resolve many of these problems and is presently implementing the first phase of a major component of the system--the Integrated Financial System (IFS). IRS's effort to bring IFS online has experienced significant problems and delays, however, and if IRS should encounter difficulties with the first phase of IFS, the integrity of IRS's financial records could be affected. Additionally, the continued and serious weaknesses in information security have significant implications for the reliability of financial management information produced by the new financial management systems being implemented.
GAO-05-103, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements
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Report to the Secretary of the Treasury:
November 2004:
FINANCIAL AUDIT:
IRS's Fiscal Years 2004 and 2003 Financial Statements:
GAO-05-103:
GAO Highlights:
Highlights of GAO-05-103, 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 2004 financial statements were
fairly presented in all material respects. Because of continuing
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.
Due to these serious deficiencies and internal control weaknesses, in
GAO‘s opinion, 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.
For the third consecutive year, IRS was able to meet an accelerated
financial reporting date, an accomplishment all the more notable
because IRS was simultaneously working to implement new financial
management systems. IRS also continued to make progress in its efforts
to address its weakness in controls over property and equipment and
hard-copy taxpayer receipts and data. However, GAO continues to
consider issues related to IRS‘s controls over financial reporting,
management of unpaid assessments, and collection of revenue and
issuance of tax refunds to be material weaknesses. GAO also continues
to consider issues related to information security to be a material
weakness. In addition, IRS was not always in compliance with laws
concerning the timely release of tax liens and the structure of
installment agreements it enters into with taxpayers. Recently enacted
legislation modifying the legal requirements regarding the structuring
of installment agreements will resolve this compliance issue for future
audits.
The lack of a sound financial management system that can produce
timely, accurate, and useful information needed for day-to-day
decisions continues to present a serious challenge to IRS management.
IRS‘s present financial management systems, which do not substantially
comply with FFMIA, inhibit IRS‘s ability to address the financial
management and operational issues that affect its ability to fulfill
its responsibilities as the nation‘s tax collector. IRS is installing
a new financial management system intended to resolve many of these
problems and is presently implementing the first phase of a major
component of the system”the Integrated Financial System (IFS). IRS‘s
effort to bring IFS online has experienced significant problems and
delays, however, and if IRS should encounter difficulties with the
first phase of IFS, the integrity of IRS‘s financial records could be
affected. Additionally, the continued and serious weaknesses in
information security have significant implications for the reliability
of financial management information produced by the new financial
management systems being implemented.
What GAO Recommends:
In prior audits, GAO made numerous recommendations to IRS to address
issues that continued to persist during this year‘s financial audit.
GAO will continue to monitor IRS‘s progress in implementing the 76
recommendations that remain open as of the date of this report.
www.gao.gov/cgi-bin/getrpt?GAO-05-103.
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:
Statement 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:
Letter November 10, 2004:
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, 2004 and 2003. 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, 2004, 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 2004 and 2003 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. IRS is currently
in the midst of a major business systems modernization effort that is
ultimately intended to resolve its most serious problems. However, this
effort is not scheduled to be completed for several years. Until the
modernization is accomplished, preparing reliable financial statements
will continue to be a difficult challenge for IRS, requiring continued
use of extraordinary compensating measures. Fiscal year 2004 is the
first year in which the Office of Management and Budget requires that
federal agencies issue their audited financial statements by November
15. The Department of the Treasury, however, established and achieved
its own goal of meeting this accelerated timeline 2 years early. For
the third consecutive year, the audits of IRS's financial statements,
the largest Treasury component, were completed and issued by November
15.
Over the last several years, IRS has made great strides in addressing
its financial management challenges and has resolved or substantially
mitigated several material weaknesses in its internal controls,
including those affecting Treasury fund balance, budgetary activities,
and property and equipment. However, IRS's most serious financial
management weaknesses are rooted in its continued reliance on outdated
automated systems, whose numerous limitations render IRS unable to
develop cost-based performance or other information to support informed
decision making throughout the year. Solving these problems depends
largely on the ultimate success of IRS's ongoing systems modernization
effort. In 1995, we designated financial management and systems
modernization at IRS as high-risk areas.[Footnote 1] As of the date of
this report, IRS was in the process of implementing the first phase, or
release, of its new Integrated Financial System (IFS), which is
intended to replace its outdated financial management systems. However,
full operational capacity of IFS is several years away, and its success
is far from assured. IRS's previous attempts to modernize its financial
management systems have faltered, and the current effort has
experienced problems and delays.
Among the most serious financial management issues still remaining to
be addressed are the continued significant weaknesses in IRS's
information security. Consequently, as IFS and other systems projects
that will ultimately send financial information into IFS are
implemented, it is critical that IRS take actions to establish and
maintain more effective information security controls on a continuing
basis, through an ongoing cycle of risk management activities, to
protect the processing, storage, and transmission of financial and
sensitive data. Until IRS successfully manages its information security
risks, management will not have assurance over the integrity and
reliability of the information that will be generated from the new
financial management system, and IRS's opportunities for further
improvements in financial management will be limited.
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 accurate,
useful, and timely 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 7 years. It is important
that these financial management initiatives continue in order to
achieve comprehensive and lasting financial management reform.
The agency also faces a significant challenge in strengthening its
enforcement of the nation's tax laws. In recent years, the resources
IRS has been able to dedicate to enforcing the tax laws have declined,
while IRS's enforcement workload has increased. This has resulted in
declining trends in the agency's enforcement statistics, though some
have recently begun to increase. At the same time, IRS faces
significant compliance-related issues, including combating abusive tax
shelters and tax schemes, on which it is placing a high priority.
Critical to IRS's efforts in improving enforcement and, ultimately,
taxpayer compliance, is the need to have current information on the
rate of compliance, both overall and by type of taxpayer. IRS's most
recent estimate of the tax gap is largely based on extrapolations of
data from the late 1980s. Without current information on noncompliance,
the challenge of targeting IRS enforcement resources to areas where
they would prove most effective is problematic. IRS is currently
developing new estimates of the compliance rate for individuals and
some small business taxpayers, and is exploring approaches to
developing compliance estimates for other groups of taxpayers.
The accompanying report also discusses other significant issues that we
considered in performing our audit and in forming our conclusions,
which 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, Restructuring, and the District
of Columbia, Senate Committee on Governmental Affairs; House Committee
on Appropriations; House Committee on Ways and Means; House Committee
on Government Reform; House Committee on the Budget; Subcommittee on
Government Efficiency 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].
This report was prepared under the direction of Steven J. Sebastian,
Director, Financial Management and Assurance, who can be reached at
(202) 512-3406 or [Hyperlink, sebastians@gao.gov]. If I can be of
further assistance, please call me at (202) 512-5500.
Sincerely yours,
Signed by:
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,[Footnote 2]
this report presents the results of our audits of the financial
statements of the Internal Revenue Service (IRS) for fiscal years 2004
and 2003. 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 that are owed the federal
government but have not been reported by taxpayers or identified by
IRS, often referred to as the tax gap.[Footnote 3]
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. IRS is a large and complex
organization, creating unique operational challenges for management.
IRS employs 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 2004 and 2003, IRS collected
about $2 trillion in tax payments, processed hundreds of millions of
tax and information returns, and paid about $278 billion and $300
billion, respectively, in refunds to taxpayers.
One of the largest obstacles continuing to face IRS management is the
agency's lack of a financial management system capable of producing the
accurate, useful, and timely information IRS managers need to assist in
making day-to-day decisions. Consequently, IRS continued to confront
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 4] though it continued to make strides in
addressing its financial management challenges. In fiscal year 2004,
for the fifth 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
third consecutive year, IRS was able to issue its final audited
financial statements only a month and a half after the end of the
fiscal year.[Footnote 5]
IRS's continued success in meeting the accelerated reporting date is a
major accomplishment and, for fiscal year 2004, was all the more
notable because of IRS's ability to meet this date while simultaneously
working to implement new financial management systems that are
ultimately expected to resolve its most serious financial management
challenges. Nevertheless, many of IRS's long-standing systems and
internal control weaknesses continued to exist, necessitating continued
reliance on costly compensating processes, statistical estimates,
external contractors, substantial adjustments, and monumental human
efforts to prepare a set of reliable financial statements. These costly
efforts would not be necessary if IRS's systems and controls operated
effectively.
During fiscal year 2004, IRS continued to make progress in its efforts
to address its weakness in controls over property and equipment (P&E)
and hard-copy taxpayer receipts and data. Specifically, IRS (1)
increased the use of automated processes to record P&E in its inventory
records and improved the timeliness of recording P&E activity in its
accounting system and (2) implemented a new lockbox courier policy
requiring that more stringent background investigations of couriers be
satisfactorily completed before granting them access to taxpayer
receipts and data. However, control deficiencies in these areas
continued to represent reportable conditions,[Footnote 6] requiring
further attention by IRS management. Additionally, we continue to
consider issues related to controls over financial reporting,
management of unpaid assessments, and collection of revenue and
issuance of tax refunds to be material weaknesses.[Footnote 7] These
weaknesses are caused primarily by IRS's continued reliance on outdated
automated systems to provide the financial information that management
relies on to make decisions. In addition, we continue to consider
issues related to information security to be a material weakness. The
persistent, serious deficiencies in information security increase the
risk that confidential IRS and taxpayer information will be compromised
and have serious implications related to the reliability of financial
management information produced by the new financial management systems
IRS is implementing.
IRS has made progress in improving its financial management, and the
process changes IRS has instituted in the last several years represent
good financial management practices. However, IRS's most serious
remaining problems are caused by its inadequate automated systems, and
these problems will continue to exist until its systems are replaced.
In the interim, opportunities for further improvement will be limited.
Until its systems are replaced, IRS will continue to be challenged to
sustain the level of effort needed to produce reliable financial
statements timely. Perhaps more important, IRS will continue to rely on
processes that cannot produce the accurate, useful, and timely
financial and performance information IRS needs for decision making on
an ongoing basis, which is a goal of the CFO Act. This process also
cannot 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. In October
2004, IRS began implementing a major component of this system--the
first release of the Integrated Financial System (IFS). IFS is intended
to replace the outdated financial management system IRS has used in
recent years to process and report administrative transactions and to
provide IRS with a general ledger system that complies with the U.S.
Government Standard General Ledger. IRS is in the process of converting
financial data from its previous financial system to IFS, verifying
that the information is converted properly, and closely monitoring the
conversion in an effort to ensure a successful transition to this phase
of IFS, which is scheduled to achieve full operational capability by
January 31, 2005. Replacing a financial system of this magnitude is an
inherently difficult and complex effort that entails significant risks.
While IRS recognizes this and is devoting significant resources to
mitigate those risks, success is far from assured. IRS's effort to
bring IFS online has experienced significant problems and delays in the
past, which have led to a decision to indefinitely defer future
releases of IFS. If IRS should encounter significant difficulties with
the first release of IFS, both the integrity of IRS's financial records
and, consequently, our future audits of IRS's financial statements
could be affected.
IRS has also begun processing some of the least complex individual tax
returns through the first phase, or release, of the Customer Account
Data Engine (CADE), which is the system being designed to replace IRS's
master files.[Footnote 8] 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. Ultimately, CAP is to be
integrated with IFS to support financial management of revenue
transactions, including reporting of individual receipt and refund
activity. The first release of CAP is scheduled for completion in
November 2005. However, as is the case with IFS, significant delays and
problems have resulted in the indefinite deferral of future releases of
CAP, and it is unclear when IRS's new financial management systems will
be fully implemented. Additionally, continuing and newly identified
weaknesses in IRS's information security raise serious concerns about
the integrity of information that will be generated from these
modernized systems, as well as about future modernization efforts that
support the preparation of IRS's financial statements.
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, 2004, and
September 30, 2003.
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 conformity 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 Office of Management and Budget (OMB)
Circular No. A-123, Management Accountability and Control (revised June
21, 1995).
Despite its material weaknesses in internal controls and its systems
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 2004 and 2003. 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 information 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 have reported on these material weaknesses and reportable conditions
in prior audits and have provided IRS recommendations to address these
issues. Seventy-six of these recommendations were still open as of the
date of this report. IRS has made strides in resolving these
matters.[Footnote 9] 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 10]
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.[Footnote 11]
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 IRS's financial statements for the fiscal years ended
September 30, 2004, and September 30, 2003. 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 the agency's financial management progress and remaining
management and systems challenges. IRS noted that the agency's
dedication to improvement enabled it to achieve, for the fifth
consecutive year, an unqualified opinion on its financial statements
and, for the third consecutive year, to achieve this goal under a
significantly accelerated reporting date. Additionally, IRS cited a
number of financial management improvements it had undertaken during
fiscal year 2004. For example, IRS noted that it had deployed IFS in
September 2004, and that this system is currently scheduled to be
operational during the first quarter of fiscal year 2005. Additionally,
IRS noted that it had completed its certification and accreditation of
both IFS and CAP, developed a business plan for earned income tax
credit (EITC) based on the recommendations of its EITC Task Force and
the IRS Commissioner's five-point initiative, improved automation and
controls over accountability for its property and equipment, and
strengthened and streamlined its review process for unliquidated
obligations.
In its response, IRS noted the significance of the successful
implementation of IFS as a key component to resolving its long-standing
material weakness in financial reporting. IRS noted that this system is
compliant with the U.S. Government Standard General Ledger and that it
lays the groundwork for a cost accounting system that will facilitate
management decision-making throughout the agency. IRS also acknowledged
the report's findings related to information security and noted that
the agency had begun to develop plans to address the issues raised in
the report as quickly as possible. Finally, IRS noted that the agency
had established a deep and continuing commitment to improving financial
management and that this commitment would be further enhanced through
the implementation of its modernized internal financial systems.
The complete text of IRS's response is included in appendix III.
Signed by:
David M. Walker:
Comptroller General of the United States:
November 1, 2004:
[End of section]
Management Discussion and Analysis:
INTERNAL REVENUE SERVICE:
Management Discussion and Analysis For the Fiscal Year Ended September
30, 2004:
I. Introduction:
The Internal Revenue Service (IRS) administers America's tax laws and
collects the revenues that fund most government operations and public
services. Each year, IRS employees make millions of contacts with
American taxpayers and businesses. It is through these contacts that
the IRS provides essential services to taxpayers, encouraging self-
sufficiency in meeting tax obligations. The IRS is dedicated to helping
people understand their tax obligations and making it easier for them
to participate in the tax system. This year, President Bush in his
April 15, 2004 remarks about tax relief on Tax Day, said that "the tax
code has got to be fair and .. we need to make sure the system is fair
for those of us who do pay taxes. We want everybody paying their fair
share."
In July 2004, the IRS published an updated strategic plan for 2005
through 2009. This Plan focuses the agency's efforts on achieving three
key goals: improving taxpayer service, enhancing enforcement of the tax
law, and modernizing the IRS through its people, processes and
technology. It underscores the IRS' commitment to provide excellent
service to taxpayers and enforce America's tax laws in a balanced
manner. To this end, the Commissioner of Internal Revenue, Mark W.
Everson, remarked in Congressional Testimony in April 2004 that "at the
IRS our working equation is that service plus enforcement equals
compliance. Not service or enforcement; we have to do both."
The IRS performance results confirm that we are making progress, as the
IRS achieved or exceeded performance targets in thirty of forty-five
performance measures; data for two earned income tax credit measures
will not be available until the close of calendar year 2004. Continued
improvements in service resulted in another very successful filing
season, with over 61 million electronically filed returns, an increase
of approximately 16 percent. Eighty-seven percent of taxpayers seeking
telephone assistance are able to get through to the IRS and obtain
assistance, as the level of service continues to trend up. At the same
time, the IRS' enforcement efforts are increasing, particularly for
high-income individuals and corporations. The Internal Revenue Service
has stepped up efforts to identify, investigate and punish tax cheats.
Of particular note are efforts to enhance criminal enforcement, use
civil injunctions to stop abusive tax schemes, and investigate
promoters and users of tax shelters. In the international arena, the
commissioners of the tax administrations of Australia, Canada, the
United Kingdom and the United States established a joint task force to
increase collaboration and coordinate information about abusive tax
transactions.
Business systems modernization continues to be a high priority for the
IRS. This year, the IRS Customer Account Data Engine (CADE) started
processing an initial set of 1040 EZ tax returns in July 2004. When
fully operational, CADE will be a modern database that will house tax
information for more than 200 million individual and business
taxpayers. The IRS also deployed Modernized E-File, which provides
electronic filing for the first time to large corporations and tax-
exempt organizations. Additional online e-Services functionality was
provided for tax practitioners and other third parties, such as banks
and brokerage firms that file Form 1099s. Several e-Services projects
continue to expand usage, as almost 9,700 tax professionals registered
on-line to create electronic accounts.
The credibility of the Service's internal financial condition has again
been validated by the "unqualified" audit opinion from the Government
Accountability Office's (GAO) recently completed audit of our 2004 -
2003 financial statements. This is the fifth consecutive year that the
IRS has produced "unqualified" combined financial statements and the
third consecutive year they have been issued by November 15th.
Taxpayers can be confident that the IRS adheres to formal accounting
standards.
Looking to the future, the IRS will fully integrate its performance
measures into the budget and closely tie the budget to the IRS
Strategic Plan. This integration sets the stage for programs to be
fully costed for the first time and will allow IRS to demonstrate
incremental increases in an initiative's effectiveness based on the
level of funding it receives.
With a highly-skilled workforce dedicated to balancing service and
enforcement, the IRS will continue to make progress on achieving its
goals, accomplishing its mission and meeting the public's expectations.
Mission and Goals:
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 continues to reflect IRS' priorities of
supporting taxpayers in fulfilling their tax obligations; providing
high quality services and information; and applying and enforcing the
tax laws with the highest standards of fairness and integrity.
In fulfilling its mission, the IRS focuses on achieving three
overarching strategic goals:
* Improve Taxpayer Service;
* Enhance Enforcement of the Tax Law;
* Modernize the IRS through Its People, Processes and Technology:
The IRS has developed specific operational objectives and performance
measures for each of these strategic goals. The operational objectives
reflect the agency's business priorities; the performance measures
reflect the agency plans to evaluate its ongoing success in meeting its
stated objectives.
Organization:
The transformation of the IRS remains a work in progress. As part of
the IRS reorganization in 2000, the agency divided its primary
operations into four business units centered around unique groups of
taxpayers. The realignment of the Commissioner's office further ensured
accountability and clarified responsibilities. The IRS Commissioner and
two Deputy Commissioners have oversight for all agency operations, as
described below.
Direct Reports to the Commissioner:
A number of business units and functions report directly to the IRS
Commissioner. They set policies and goals, provide leadership and
direction for the Internal Revenue Service, and provide support for
strategic decision-making activities needed to fulfill the IRS's
mission in administering the nation's tax laws.
* The Office of Appeals resolves tax controversies between taxpayers
and the IRS 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 wish to dispute a recommended enforcement
action.
* Taxpayer Advocate Service (TAS) helps taxpayers resolve problems that
have not been resolved through normal IRS channels. TAS is an
independent function headed by the National Taxpayer Advocate. Each
state and IRS Service Center has at least one local Taxpayer Advocate
who operates independently and reports directly to the National
Taxpayer Advocate. Local Taxpayer Advocates work directly with
operating divisions to identify and recommend solutions to systemic
problems.
* Communication and Liaison (C&L) oversees and manages IRS's external
communications activities with the news media, members of Congress and
their staffs, tax professionals and practitioners and internal
communications with employees. C&L also coordinates marketing and
advertising activities on behalf of the agency and establishes policies
and guidelines governing communications throughout the IRS.
* The Office of Chief Counsel provides correct and impartial
interpretation of the internal revenue laws and the highest quality
legal advice and representation for the Internal Revenue Service. The
Chief Counsel's principal customers are the IRS Commissioner, the
Operating Divisions, the Functional Units and the Department of
Treasury. The Division Counsel participate fully in the plans and
activities of their respective Operating Divisions. Litigation and
legal advice continue to be the largest programs involving Chief
Counsel field office attorneys and support staff. Published Guidance,
Advance Case Resolution and legal advice continue to be the largest
programs involving attorneys and support staff in the National Office.
* Research, Analysis, and Statistics (RAS) supports IRS' senior
management, operating divisions, various internal research
organizations, the Department of Treasury and the general public by
producing studies, program evaluations, and statistical analyses of
taxpayer trends and data, and by providing research and reference tools
for front line IRS employees.
* Equal Employment Opportunity and Diversity (EEO&D) helps IRS
employees understand diversity, their EEO rights and responsibilities,
and ensures the agency applies civil rights laws with integrity and
fairness to all.
Deputy Commissioner for Services and Enforcement:
IRS tax operations are aligned into four operating divisions and two
compliance units, each focusing on specific taxpayer constituencies and
business issues. They report to the Deputy Commissioner for Services
and Enforcement.
* Wage and Investment Division (W&I) serves individual and joint filers
with wage and investment income only, almost all of whom have their tax
information reported by third parties. Most of these taxpayers deal
with the IRS only once a year when filing their personal returns and
many receive refunds. Compliance issues tend to focus on dependent
exemptions, credits, filing status and personal deductions. Employees
at five W&I campuses perform tax processing, account management and
compliance services. Employees in W&I's field operations provide
information, support and assistance to taxpayers in fulfilling their
tax obligations.
* Small Business and Self Employed Division (SB/SE) serves partially or
fully self-employed individuals, individual filers with income from
rents, royalties, pensions, annuities, partnerships, estates, and
trusts and small businesses with assets up to $10 million. Because tax
laws and filing requirements for small business and self-employed
taxpayers tend to be more complex than for individual wage earners, SB/
SE maintains a much stronger focus on compliance functions than W&I.
Employees at five SB/SE campuses provide tax processing, account
management, compliance services, education and outreach. Employees in
SB/SE's field compliance perform examination and collection functions.
* 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 practices and
regulation, many with international dimensions, frequently arise. LMSB
is predominantly a field organization 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.
* 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. TE/GE
administers and enforces a variety of complex laws governing tax-exempt
organizations and entities. TE/GE employees ensure that these tax-
exempt entities properly adhere to applicable statutes.
* Criminal Investigation (CI) 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.
* Office of Professional Responsibility (OPR) fosters excellence in tax
professional services to taxpayers by setting, communicating, and
enforcing standards of competence, integrity, and conduct.
Deputy Commissioner for Operations Support:
IRS support functions are aligned into six support divisions. Each
provides specific tools, systems and processes to help keep tax
operations running smoothly. Support units also help facilitate
efficiency improvements and implementation of best practices throughout
the IRS. Support divisions report to the Deputy Commissioner for
Operations Support.
* Chief Information Officer (CIO) leads the Modernization and
Information Technology Services (MITS) organization, which delivers
information technology solutions that anticipate and meet enterprise-
wide needs by empowering employees to deliver customer-centered, value-
creating systems, products, services, and support. M ITS 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.
* Agency-Wide Shared Services (AWSS) delivers shared services
throughout the IRS, including space acquisition and management,
acquisition planning and the employee resource center.
* Human Capital Officer (HCO) ensures the agency's success in
attracting, motivating, and retaining quality employees to meet the
needs of America's taxpayers and the tax administration system. HCO
also oversees labor relations programs and various human resources
functions, including pre-complaint processing and prevention, and
alternative dispute resolution services.
* Chief Financial Officer (CFO) is responsible for overseeing financial
management, financial systems, strategic planning, performance
measurement, budget and internal controls for the entire IRS and
accounting for over $2 trillion in taxpayer receipts and the IRS' $10
billion annual operating budget.
* Mission Assurance (MA) is responsible for the continuity of tax
administration, protection of taxpayer data and information systems,
and the continuing safety of IRS personnel and facilities.
* Office of the Privacy Advocate ensures that IRS policies and programs
incorporate taxpayer and employee privacy concerns and that the public
is aware of IRS privacy business practices.
The organizational chart below shows these reporting relationships:
[See PDF for image]
[End of figure]
II. Performance Goals and Results:
The IRS uses performance measures to determine its effectiveness in
meeting the three IRS strategic goals. The FY 2004 performance
information that follows is organized by the main objectives within
each strategic goal.
Strategic Goal 1: Improve Taxpayer Service:
Objectives:
* Improve service options for the tax-paying public;
* Facilitate participation in the tax system by all sectors of the
public;
* Simplify the tax process:
Major Results and Accomplishments:
Improve service options for the tax-paving public:
Filing season 2004 (January through April 15) was a banner year for the
IRS as electronic filing set a record and reached over 61 million
returns. This represents an increase of approximately 16 percent from
last year.
* Home computer usage by individuals to prepare and e-file tax returns
soared to over 14 million returns;
* Tax professional use of e-file jumped over 15 percent, with 42.8
million filing electronically;
* In its second year, "Free File," the public-private partnership
between the IRS and a consortium of tax software companies, saw 3.5
million taxpayers use the free on-line filing service, a 26 percent
increase from last year;
* IRS continues to expand electronic tax products for business,
implementing electronic filing of corporate 1120/1120S returns and the
tax-exempt 990 returns in February (as of October 2004, 48,501 and 775
of the above returns were filed, respectively):
These trends will help IRS move towards its goal of 80 percent of
individual returns filed electronically by 2007.
For the FY 2004 Filing Season, the IRS processed over 131 million
individual returns, and issued approximately 100 million refunds
totaling $207.9 billion. IRS representatives also answered 35.5 million
telephone calls, while the automated telephone system handled nearly
33.7 million calls.
* The assistor level of service continued to trend upward, and is at 87
percent; this can be attributed to the implementation of new telephone
lines and less complicated scripts;
* Time spent waiting, while still below private sector standards,
improved substantially; the average wait time is 158 seconds, which is
down 21 percent from FY 2003 to FY 2004;
* For the 2004 filing season, taxpayers received correct responses to
80 percent of tax law questions and 89 percent of account questions:
More taxpayers used the IRS Web site, including the "Where's My
Refund?" feature, which allows taxpayers to inquire if the IRS received
their return and whether their refund was issued to them. There were
almost 24 million inquiries to the on-line service to check on refunds
and 739 million IRS Internet downloads, another record. This year,
IRS.gov was cited as the nation's most reliable e-government Web site
according to Keynote Systems, a leading private sector company that
measures Web site performance. It is encouraging that 49 million
taxpayers chose direct deposit of refunds this year, an increase of
just under 11 percent from the 2003 record.
With record numbers of Americans e-filing their tax returns, and
recently announced e-filing options for corporations and tax exempt
organizations, this year the Internal Revenue Service launched a new
online form that gives tax professionals a faster, easier method of
applying to become an authorized e-filer.
* Tax professionals now have an online application form that cuts
processing time and reduces errors associated with using the paper Form
8633, Application to Participate in IRS e-file;
* Once the application is approved by the IRS, tax professionals can e-
file returns for their clients:
The online application is the latest segment of a suite of Internet-
based business tools called "e-Services" that give tax professionals
and financial institutions new choices for working electronically with
the IRS and easier access to client information.
The Internal Revenue Service launched a new program, Express Enrollment
for New Businesses, designed to boost electronic payment of taxes. This
development offers some taxpayers new, quicker access to an electronic
payment system. This initiative is available using the Electronic
Federal Tax Payment System (EFTPS), a service offered free by two
bureaus of the U.S. Department of the Treasury, IRS and the Financial
Management Service (FMS).
* Treasury collects more than $2.3 trillion annually in electronic tax
payments through a network of more than 10,000 financial institutions;
* EFTPS enables taxpayers and tax professionals to make federal tax
payments electronically online, by phone, or with batch provider
software for professionals;
* Business taxpayers with a federal tax obligation will be
automatically pre-enrolled in EFTPS to make all their Federal Tax
Deposits:
The Internal Revenue Service also released three new electronic e-
services tools for tax professionals. Disclosure Authorization,
Electronic Account Resolution and the Transcript Delivery System give
tax professionals online options for working with the IRS. The
Disclosure Authorization tool gives eligible tax practitioners an
online option for submitting Power of Attorney or Taxpayer Information
Authorization forms. Electronic Account Resolution allows tax
practitioners to electronically correspond with the IRS. Using the
Transcript Delivery System, tax practitioners can request transcripts
of their client's tax records and receive them within minutes instead
of days or weeks. The Internal Revenue Service also launched a new
service through the IRS GuideWire list server to make technical
guidance available via e-mail to tax professionals when the documents
are issued.
Facilitate participation in the tax system by all sectors of the
public:
This year, the IRS conducted a public education campaign for low-income
workers who are eligible for and claim the Earned Income Tax Credit. An
IRS online EITC preparer toolkit was developed and e-mail messages were
sent to over 220,000 tax preparers promoting it. The IRS also unveiled
the EITC Assistant, a new tool to help tax professionals determine
whether their clients are eligible for the Earned Income Tax Credit.
The new application is available in English and Spanish. The EITC
Assistant is another in a series of steps being taken by the IRS to
maximize taxpayer participation while minimizing EITC errors. The EITC
Assistant will help determine eligibility for the credit, filing status
of the taxpayers and if the taxpayers' children meet the definition of
"qualifying children" for EITC purposes.
The Internal Revenue Service also made numerous free resources
available on the small business section of the IRS.gov Web site to help
small business taxpayers comply with their tax responsibilities.
* Taxpayers can learn how the tax code treats different business
structures, apply for an Employer Identification Number or make tax
payments;
* With more account and tax law inquiries moving to the Internet for
resolution, the toll-free level of service improved to 87 percent.
In FY 2004, the Internal Revenue Service awarded $7.5 million in
matching grants to Low Income Taxpayer Clinics (LITCs) and awarded
these grants to 135 clinics representing 49 states, the District of
Columbia and Puerto Rico. LITCs are qualifying organizations that
represent low-income taxpayers involved in tax disputes with the IRS or
that inform taxpayers for whom English is a second language or who have
limited English proficiency of their tax rights and responsibilities.
The IRS matching grant program, which is in its sixth year, encourages
the creation and growth of Low Income Taxpayer Clinics across the
nation. These clinics provide an important resource to taxpayers who
may not be able to afford a tax professional.
The Taxpayer Advocacy Panel (TAP) is an advisory body that provides
taxpayer perspective on ways to improve IRS service. In March 2004,
Treasury renewed the TAP charter for two years. During FY 2004, there
was a recruitment effort for new panel members. TAP received 967
applications for 52 vacancies. Members will be serving for three-year
terms that will establish a 33 percent turnover rate on a yearly basis.
The TAP issued its 2003 annual report that is available on the website:
www.improveirs.org.
The Internal Revenue Service hosted a series of six Tax Forums to help
educate and serve the tax practitioner community. The three-day Forums
were offered in July, August and September. Attendance at the Forums,
now in their 14th year, has grown steadily. Over 16,000 tax
professionals attended the Forums in 2003; this year, 17,500 attended,
a nine percent increase. The agenda for the 2004 Forums included forty-
six seminars on the new IRS e-Services program, retirement plans for
small businesses, abusive tax avoidance transactions, the proposed
revisions to IRS guidance on ethics and professional responsibility,
privacy, faster account resolution, tax law changes, and compliance
initiatives, among other seminars.
Simplify the tax process:
A new IRS tax form, Form 8802, "Application for United States Residency
Certification," makes it easier for U.S. individuals and businesses to
establish that they are entitled to lower foreign tax rates provided by
U.S. income tax treaties. The new Form 8802 streamlines the process and
replaces the current procedure, which requires the requestor to write a
letter to the IRS. The IRS issued more than 1.5 million residency
certifications in 2003 and is expecting to issue nearly 3 million for
2004, largely because of the increase in investment overseas.
The IRS issued nearly 144,000 determination letters, which are
taxpayer-initiated requests for rulings or approvals with respect to
Employee Plans and Exempt Organization matters. Determination receipts
significantly exceeded expectations due to a much higher number of
applications from adopters of pre-approved plans than anticipated and a
delay in the date for plan sponsors to submit their applications. In FY
2004, over 160,000 determination requests were received, compared to
expected receipts of 137,000. The IRS issued a new schedule to make it
easier for taxpayers to provide the IRS with information about
employment tax discrepancies created by an acquisition, statutory
merger or consolidation. If an acquisition, statutory merger or
consolidation creates a discrepancy between what was reported to the
Social Security Administration on Form W-2, Wage and Tax Statement, and
what was reported to the IRS on Form 941, Employer's Quarterly Federal
Tax Return, the employer can use the new Schedule D (Form 941), Report
of Discrepancies Caused by Acquisitions, Statutory Mergers, or
Consolidations, to explain the discrepancy, even if they e-filed their
employment tax returns.
The IRS introduced two new tools to help small businesses keep their
employee retirement plans compliant with federal tax law. These tools -
a suite of retirement plan "Check-Ups" and an employer newsletter-help
employers better understand their retirement plans and stay up-to-date
with new developments. The IRS published a new periodic newsletter,
Retirement News for Employers, to help small business owners ensure
that their retirement plans stay compliant.
The Taxpayer Advocate Service (TAS) automated its process to request
assistance from the IRS operating and functional divisions (O/FDs) in
resolving taxpayers' problems. The new procedure provides data to TAS
and the O/FDs for tracking and analyzing such requests. This is part of
IRS efforts to improve its systemic processes and reduce the number of
times taxpayers must contact the IRS for assistance.
Following are the categories for measuring success in improving
taxpayer service from the IRS Strategic Plan for 2005 through 2009.
Timeliness of Responding to Customer Inquiries:
This includes measurements of the time taxpayers wait on the telephone
when calling IRS about their accounts or inquiring about tax laws when
preparing tax returns; the time from account creation to disposition
for taxpayers needing account resolution assistance; and, the response
time for those taxpayers who communicate electronically with the IRS.
The assistor level of service continues to trend upward, and is at 87
percent. This can be attributed to the implementation of new telephone
lines and less complicated scripts.
Time spent waiting, while still below private sector standards,
improved substantially; the average wait time is 158 seconds, which is
down 21 percent from FY 2003.
Customer Satisfaction Data:
The IRS determines its customers' overall level of satisfaction with
key services through telephone and mail surveys. Data is also captured
for IRS by the University of Michigan Business School's National
Quality Research Center for the American Customer Satisfaction Index
and by NOP World, formerly Roper Starch Worldwide, a public opinion
polling firm.
On the 2003 American Customer Satisfaction Index Survey (ACSI), the IRS
received an overall score of 63 out of a possible 100 for All
Individual Tax Filers, a 24 percent increase over the 1999 score of 51.
This survey reports satisfaction with IRS variables, such as
timeliness, accessibility, courtesy and professionalism. Individual
taxpayers are significantly more satisfied with the e-file return
process than with paper filing. The 2004 annual rating for IRS in the
NOP World favorability survey was 52 percent, up from 49 percent in
2003 and a substantial increase over its lowest point of 32 percent in
1998. This is the percentage of the public that has a favorable opinion
of the IRS as compared with most federal agencies.
IRS measures included in the Treasury Performance Reporting System are
discussed below.
1. Toll-Free Customer Satisfaction:
Description: Represents the customers' overall level of satisfaction
with the services provided by the IRS Toll-Free program. Satisfaction
is measured as the percentage of survey respondents who rate toll-free
performance a "4" or "5" on a 5-point scale. The survey is ongoing with
results reported quarterly. Limitations on the survey data not
affecting the statistical validity include: only customers calling one
of the IRS Toll-Free telephone numbers are included in the sample; and
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 2004 Performance: Target Achieved. Toll-Free Customer Satisfaction
during FY 2004 is one percent above Plan. One factor that remains a
source of customer dissatisfaction is automated menus on the phone
system. In FY 2002, a four-point scale was used, which limits the IRS'
ability to make comparisons.
Toll-Free Customer Satisfaction:
FY 2001: 59%;
FY 2002: 56%;
FY 2003: 95%;
FY 2004 Plan: 93%;
FY 2004 Actual: 94%.
[End of table]
Future Plans: Results since the implementation of the survey show a
high level of satisfaction, and IRS expects only incremental
improvement in FY 2005 and FY 2006, with 95 percent the optimal target.
2. Field Assistance Walk-In Customer Satisfaction:
Description: Customer Satisfaction 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.
FY 2004 Performance: Target Achieved. Customers gave Field Assistance
an overall satisfaction rating of 89 percent for the most recent period
(January-April 2004). Customers are most satisfied with the attitude,
skill, knowledge, and attentiveness of the IRS employees. All of these
areas rated 91 percent in satisfaction for this period.
Field Assistance Walk-In Customer Satisfaction:
FY 2001: 90%;
FY 2002: 86%;
FY 2003: 87%;
FY 2004 Plan: 89%;
FY 2004 Actual: 89%.
[End of table]
Future Plans: Field Assistance will continue to respond to feedback
from customers using the Customer Satisfaction Survey by addressing
drivers identified for improving customer satisfaction. The Embedded
Quality process, which rolled out in April 2004, will further improve
customer satisfaction by addressing all of the areas identified on the
Customer Satisfaction Survey results as needing improvement, such as:
resolution of question/issue, listening to concerns, employee skill and
knowledge, and employee attitude. Resolution of question/issue and
employee skill and knowledge are also being addressed through continued
emphasis on the use of the Publication Method Guide and zero tolerance
for referrals to publications.
Rate of Accuracy:
The Rate of Accuracy is the percentage of customers receiving accurate
responses to their tax law inquiries and account inquiries. IRS uses
the data to evaluate the regulatory accuracy of IRS services. IRS
intends to add the measure of accuracy for its Tax Assistance Centers
to this calculation.
1. Customer Accuracy-Customer Accounts Resolved (Adjustments):
Description: Customer accuracy is defined as giving the correct answer
with the correct resolution. It measures how often the customer
received the correct answer to their inquiry and/or had their case
resolved correctly based upon all available information and Internal
Revenue Service Manual required actions.
FY 2004 Performance: Target Not Achieved. The workload mix in FY 2004
changed to a higher average complexity than in FY 2003 because the Rate
Reduction Credit (RRC) cases, which are of lower complexity, were
completed in FY 2003 and thus not present. The IRS was not able to
overcome a slow start at the beginning of FY 2004 because of the
increased complexity of the cases received, resulting in performance
slightly below the target.
Customer Accuracy-Customer Accounts Resolved Adjustments:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: 87%;
FY 2004 Plan: 89%;
FY 2004 Actual: 87%.
[End of table]
Future Plans: IRS has engaged the sites in an ongoing dialog regarding
accuracy trends and improvement actions. The following are initiatives
to improve quality and timeliness in the Customer Account
Correspondence product line:
* Standardize managerial employee performance review requirements;
* Provide uniform and consistent program guidance in the form of a
Program Letter;
* Conduct operational performance reviews at each campus and remote
site;
* Establish best practices and standardize the Servicewide Electronic
Research Program;
* Conduct ongoing research and analysis of Embedded Quality data to
identify improvement opportunities and initiatives:
2. Customer Accuracy-Toll Free Tax Law:
Description: Toll-Free Tax Law Customer Accuracy measures how often the
customer received the correct answer to a tax law inquiry and/or had a
case resolved correctly based upon all available information and
Internal Revenue Manual (IRM) requirements. This is a new measure as of
FY 2003.
FY 2004 Performance: Target Not Achieved. Customer Service
Representatives (CSRs) were slow to adapt to the 2003 redesign of the
response guide and the most common customer accuracy errors relate to
use of the guide. By enabling CSRs to respond to a wider range of
topics within a category, taxpayers with more than a single question
received responses without being transferred to another CSR for
assistance. As toll-free telephone site specialization efforts
continued, the tax law designated sites were increasingly required to
train and certify more of their CSRs to respond to tax law issues.
Customer Accuracy-Toll Free Tax Law:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: 82%;
FY 2004 Plan: 85%;
FY 2004 Actual: 80%.
[End of table]
Future Plans: IRS will focus efforts to improve in the following areas:
* Reformat Probe & Response Guide to enhance usability for assistors;
* Deliver application-specific training and conduct proficiency
certification;
* Expand the completion of employee performance reviews to the second
line managers as a part of the operational review process;
* Conduct operational performance reviews at each campus and remote
site;
* Continue with front-line and department level ownership of various
application topics;
* Conduct ongoing research and analysis of quality data to identify
improvement opportunities and initiatives;
* Utilize Contact Recording to enhance the ability of management to
gauge and improve individual performance:
3. Customer Accuracy-Toll Free Accounts:
Description: The percentage of customers receiving accurate responses
to their account inquiries. This is a new measure as of FY 2003.
FY 2004 Performance: Target Achieved. IRS management continues to
remain focused on efforts to continually improve performance. FY 2004
performance has equaled the percent Customer Accuracy target for Toll-
Free Accounts, and it surpassed the percent achieved in FY 2003.
Customer Accuracy-Toll Free Accounts:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: 88%;
FY 2004 Plan: 89%;
FY 2004 Actual: 89%.
[End of table]
Future Plans: IRS will take the same actions for Toll-Free Accounts
Accuracy as Tax Law Accuracy, below. In addition, IRS has enhanced the
Electronic Account Resolution Guide (e-ARG) as a tool for assistors.
4. Field Assistance Accuracy of Tax Law Contacts.
Description: Accuracy of Tax Law Contacts is the measure of the quality
of service provided to Taxpayer Assistance Center (TAC) customers. This
is a measure of the accuracy of responses concerning issues involving
tax law. In FY 2004 and prior years, accuracy of tax law contacts was
based on the results of reviews conducted by Treasury Inspector General
for Tax Administration (TIGTA) reviewers anonymously visiting selected
TACs. TIGTA concluded reviews in April for FY 2004 and will resume
reviews in January 2005 for the filing season. Beginning in April 2004,
Field Assistance implemented Embedded Quality, a standardized process
that links employee performance to organizational goals. Emphasis on
quality shifted from a review environment to an environment of analysis
and improvement.
FY 2004 Performance: Target Not Achieved. During Fiscal Year 2004,
TIGTA made anonymous visits to several TACs asking tax law questions to
determine the accuracy of responses. Topics emphasized were retirement,
filing status, child support, dependents and Social Security. The goal
was not achieved because employees reviewed did not routinely ask all
the necessary probes when responding to a tax law inquiry. As a result,
incorrect responses were given to a number of questions. Using TIGTA's
findings, employees in areas visited by reviewers concentrated their
efforts on directed learning of specified topics and the importance of
asking all probes. These corrective actions resulted in improved
performance throughout the year. In April 2004, subsequent to the
filing season, IRS implemented Embedded Quality (EQ) to measure Tax Law
Accuracy. Preliminary analysis of IRS performance using EQ indicates
that the Tax Law Accuracy rate is 94 percent.
Field Assistance Accuracy of Tax Law Contacts.
FY 2001: N/A;
FY 2002: 79%;
FY 2003: 75%;
FY 2004 Plan: 80%;
FY 2004 Actual: 75%.
[End of table]
Future Plans: In FY 2005, Field Assistance will change the method used
to report the Accuracy of Tax Law Contacts. Group managers will use a
uniform data collection instrument to conduct objective, consistent
reviews of their employees' performance to assess quality and accuracy
of customer contacts. Data analysis will also be used to identify
training needs and areas for improvement, which will lead to increased
efficiency and quality. Although the review process will change,
initiatives to improve responses to tax law questions, such as
mandatory use of the Publication Method Guide, will continue as
planned.
Burden Reduction:
Burden reduction is measurements of time and out-of-pocket expense
taxpayers incur in meeting their tax responsibilities.
1. Total Published Guidance Items Published:
Description: Published Guidance consists of the regulations and other
guidance issued by the IRS and Treasury to interpret and explain the
Internal Revenue Code. Published Guidance provides taxpayers and IRS
agents assistance in resolving difficult technical questions. Examples
of Published Guidance items include Actions on Decisions, Notices,
Announcements, Technical Advice Memoranda, Regulations, Revenue
Rulings and Revenue Procedures. Some of these items are also included
on the "Priority Guidance Plan" issued annually by Treasury and the
IRS.
FY 2004 Performance: Target Not Achieved. In FY 2004, 320 Published
Guidance items were published, as compared to 350 projected or
approximately 14 percent fewer items. Reduced staffing combined with
increased demand in the Audit Advice and Assistance and Advanced Case
Resolution programs contributed to the decrease in this program. In
addition, significant program time was consumed by extensive, complex
regulation projects of great importance to the Operating Divisions,
LMSB in particular. These projects will be published in FY 2005.
Total Published Guidance Items Published:
FY 2001: 225;
FY 2002: 242;
FY 2003: 332;
FY 2004 Plan: 350;
FY 2004 Actual: 320.
[End of table]
Future Plans: Counsel will continue to emphasize increased Published
Guidance in FY 2005. As 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. In July
2004, the Department of Treasury 2004-2005 Priority Guidance Plan was
issued, which listed 276 projects. This plan represents a joint
agreement among Treasury, IRS and Chief Counsel. The plan will be
updated and republished on a quarterly basis. Counsel will continue to
assess it to ensure efficiency, productivity and responsiveness to both
its clients and taxpayers.
2. Timeliness of Tax Products to the Public:
Description: Measures the percentage of tax products (forms, schedules,
instructions and publications) that meet the planned start-to-ship date
in order to be available to the public in a timely manner.
FY 2004 Performance: Target Achieved. While the planned start-to-ship
dates for several products were delayed during the fiscal year, the
remaining products met the schedule and were shipped timely.
Timeliness of Tax Products to the Public:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: 75%;
FY 2004 Actual: 76%.
[End of table]
Future Plans: For FY 2005 and beyond, Timeliness of Tax Products to the
Public has been divided into four separate measures to provide a clear
and more accurate reflection of performance. The four Outcome measures
are Timeliness of Critical Filing Season Tax Products to the Public,
Timeliness of Critical Other Tax Products to the Public, Timeliness of
Tax Products to the Public, and Accuracy Rate of Distributed Tax
Products - External.
3. Appeals Closure to Receipt Ratio:
Description: The Appeals outcome measure is the ratio of disposals to
receipts.
FY 2004 Performance: Target Achieved. Significant improvements in
productivity allowed Appeals to close more cases than received for the
first time in four years.
Appeals Closure to Receipt Ratio:
FY 2001: 80%;
FY 2002: 89%;
FY 2003: 86%;
FY 2004 Plan: 81%;
FY 2004 Actual: 105%.
[End of table]
Future Plans: Appeals productivity will continue to increase as
initiatives for Collection Due Process, Offers-In-Compromise and Small
Docketed cases are implemented. The primary components of these
initiatives include centralizing work in campus locations, establishing
specialized teams in field operations, expanding the case screening
process, creating a new case assignment process and accelerated
scheduling of hearings. Appeals plans to expand the application of
these processes into joint projects with the Operating Divisions, and
is currently developing the framework for the joint teams.
4. 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 2004 Performance: Target Achieved. The Taxpayer Advocate Service
(TAS) automated its process to request assistance from the IRS
operating/functional divisions (O/FDs) in resolving taxpayers'
problems. The new procedure provides data to TAS and the O/FDs for
tracking and analyzing such requests.
Taxpayer Advocate Service Closure to Receipt Ratio:
FY 2001: 97.6%;
FY 2002: 108%;
FY 2003: 108%;
FY 2004 Plan: 100%;
FY 2004 Actual: 101%.
[End of table]
Future Plans: For FY 2005, TAS will continue to have a closure to
receipt ratio goal of 100%. To achieve this goal TAS will continue to
closely monitor receipts and closures and to review case processing
procedures. TAS plans to continue partnering with the Operating
Divisions and functional units to reduce the number of systemic
hardship cases received. TAS will also maintain and improve the 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.
Telephone Services:
This is the relative success rate of taxpayers calling for assistance
and seeking services from a Customer Service Representative. Part of
the calculation of results for this measure includes the percentage of
call attempts made by taxpayers compared to the number of calls
answered by IRS.
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. This is a new measure as of FY 2003.
FY 2004 Performance: Target Achieved.
An exceptional IRS filing season with increased productivity
performance, as well as a reduction in calls received, yielded a higher
assistor calls answered percentage.
Toll-Free Customer Service Representative (CSR) Level of Service.
FY 2001: 56.4%;
FY 2002: 68%;
FY 2003: 80%;
FY 2004 Plan: 83%;
FY 2004 Actual: 87%.
[End of table]
Future Plans: IRS expects that the CSR level of service will continue
its upward trend. Several upcoming key initiatives such as the Health
Tax Credit, Earned Income Tax Credit Federal Case Registry and the
Advanced Child Tax Credit are expected to result in an increased call
volume.
Rate of Electronic Interactions:
The rate of electronic interactions includes measurements of electronic
filing and payment participation rates.
Percent of Individual Returns Filed Electronically:
Description: The number of electronically filed individual tax returns
as a percentage of 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 2004 Performance: Target Achieved. The variance from projections is
primarily attributed to the impact of electronic filing from the State
of California on Federal filing. In FY 2004, the number of
electronically filed returns from California exceeded 7.4 million.
Also, a higher percentage of taxpayers in other parts of the country
have chosen to file electronically than the IRS had anticipated.
Percent Individual Returns Filed Electronically:
FY 2001: 31%;
FY 2002: 36%;
FY 2003: 40%;
FY 2004 Plan: 45%;
FY 2004 Actual: 47%.
[End of table]
Future Plans: E-file participation rates are expected to continue to
increase in FY 2005. The IRS will undertake the following initiatives:
Propose to extend the due date for electronically filed returns from
April 15th to April 30th (Pending Legislation);
* Continue to expand the use of electronic signatures:
Enhance IRS website services for both practitioners and taxpayers:
* Continue offering free on-line tax preparation and filing to a
significant portion of individual taxpayers:
Strategic Goal 2: Enhance Enforcement of the Tax Law:
Objectives:
* Discourage and deter non-Compliance with emphasis on corrosive
activity by corporations, high-income individual taxpayers and other
contributors to the Tax Gap.
* Ensure that attorneys, accountants and other tax practitioners adhere
to professional standards and follow the law.
* Detect and deter domestic and offshore-based tax and financial
criminal activity.
* Deter abuse within Tax-Exempt and Governmental Entities and misuse of
such entities by third parties for tax-avoidance or other unintended
purposes.
Major Results and Accomplishments:
Discourage and deter non-compliance with emphasis on corrosive activity
by corporations, high: income individual taxpayers and other
contributors to the tax gap.
The IRS has increased its enforcement efforts, particularly for high-
income individuals and corporations. While examinations of high-income
individuals increased 14 percent from FY 2002 to FY 2004, audits of
small and mid-size corporations in FY 2004 are lower than in FY 2003
because of the transition to the more complicated and labor-intensive
high-risk inventory associated with abusive tax avoidance transactions.
Closures of delinquent balance-due cases increased 37 percent from FY
2002 to FY 2004, up 41 percent in phone collection and 31 percent for
in-person collection. The other part of the collection workload,
identifying and securing delinquent returns from non-filers, increased
49 percent from FY 2002 to FY 2004, up 55 percent in phone collection
and 40 percent for in-person collection. The automated underreporter
program annually reviews three million returns matching Forms 1040
against third-party reported information such as Forms W-2 and 1099.
The IRS exceeded its year-end plan for criminal investigations by 29
percent. The IRS also stepped up efforts to identify, investigate and
seek prosecution of non-compliant individuals. Of particular note are
increased efforts to stop abusive tax schemes through the use of both
civil injunctions and criminal investigation of abusive tax scheme
promoters and users. Criminal Investigation is also focused on
corporate fraud, high income non-filers and other significant tax
administration cases.
The Internal Revenue Service announced a settlement initiative for
taxpayers who invested in an abusive tax shelter commonly known as "Son
of Boss," which evolved from a bond and option sales strategy shelter.
The shelter concerns arrangements that give taxpayers artificially high
basis in partnership interests, which thereby purport to give rise to
losses. More than 1,500 taxpayers filed Notices of Election by June 21,
2004 to accept an IRS settlement offer to resolve their tax issues. The
IRS is aware of several thousand transactions involving an
understatement of tax in excess of $6 billion, not including interest
and penalties.
In the international arena, the commissioners of the tax
administrations of Australia, Canada, the United Kingdom and the United
States established a joint task force to increase collaboration and
coordinate information about abusive tax transactions. Further, the IRS
has announced new settlement initiatives to encourage investors in tax
shelter transactions to resolve their tax issues.
This year, the Internal Revenue Service started sharing leads on
taxpayers engaged in abusive tax avoidance with tax agencies in 48
states, the District of Columbia, New York City and the Virgin Islands.
In FY 2004, the IRS has shared leads on approximately 35,000 taxpayers
engaged in abusive tax avoidance with these states and cities. Under
the terms of the partnership, IRS and the cities and states coordinate
efforts to address common compliance concerns in the area of Abusive
Tax Avoidance Transactions (ATAT) by working in tandem and avoid
repeating each other's efforts.
To increase the transparency of corporate tax return filings, the IRS
released a proposed Schedule M-3, Net Income (Loss) Reconciliation for
Corporations with Total Assets of $10 Million or More, for use by
certain corporate taxpayers filing Form 1120, U.S. Corporation Income
Tax Return. The Schedule M-3 expands the current Schedule M-1, which
has not been updated in decades, and helps agents improve monitoring of
corporate compliance and determine from the return whether the return
should be audited.
Ensure that attorneys, accountants and other tax practitioners adhere
to professional standards and follow the law.
The Office of Professional Responsibility investigates allegations of
misconduct or negligence against tax practitioners and enforces the
standards of practice for those who represent taxpayers before the IRS,
as detailed in Circular 230. The office also licenses "enrolled
agents," who are tax professionals meeting certain testing or
experience requirements.
The IRS issued four items of administrative guidance as part of its
ongoing effort to halt abusive tax avoidance transactions and maximize
effective use of IRS audit resources. The first of the items proposed
changes to Circular 230 to strengthen the tax system through heightened
standards for tax advisors. The other three are aimed at increasing
transparency and disclosure of information to the IRS.
Detect and deter domestic and offshore-based tax and financial criminal
activity.
In an effort to combat abusive tax avoidance, IRS implemented an
Offshore Voluntary Compliance Initiative (OVCI). As a result of this
initiative:
* OVCI yielded more than $170 million in taxes, interest and penalties
to the U.S. Treasury;
* More than 1,300 taxpayers applied and furnished the IRS with
information regarding the person who promoted the offshore arrangements
to them;
* The IRS obtained the names of 479 scheme and scam promoters;
* Nearly half of these promoters were previously unknown to IRS
investigators:
Criminal Investigation (CI), Small Business & Self Employed (SBSE) and
Large & Mid-Size Business (LMSB), have developed an extremely
successful partnership in attacking abusive tax schemes over the past
year.
CI has focused its efforts through the structure of an abusive tax
schemes program which encompasses violations of the Internal Revenue
Code and related statutes where multiple flow-through entities are used
as an integral part of the taxpayer's scheme to evade taxes. These
schemes are characterized by the use of trusts, limited liability
companies (LLCs), limited liability partnerships (LLPs), international
business companies (IBCs), foreign financial accounts, offshore credit/
debit cards and other similar instruments. The schemes are usually
complex involving multi-layer transactions for the purpose of
concealing the true nature and ownership of the taxable income assets.
CI is currently pursuing a number of significant and complex abusive
tax scheme investigations in which they are collaborating in a parallel
fashion with SBSE and LMSB. With this type of internal synergy of
targeted civil and criminal resolution strategies, the IRS will
continue its current momentum in taking a tough stance on abusive tax
schemes, including the vigorous investigation of promoters, sub-
promoters and clients.
Deter abuse within Tax-Exempt and Governmental entities and misuse of
such entities by third parties for tax avoidance or other unintended
purposes.
Efforts to identify and prevent the proliferation of abusive schemes
are underway in every segment of IRS's Tax-Exempt and Governmental
Entities division (TE/GE). The Commissioner, TE/GE, has assigned the
Senior Technical Advisor responsibility for coordinating abusive tax
avoidance transaction (ATAT) activities within the Division and
established a TE/GE ATAT Executive Steering Committee chaired by the
Division Deputy Commissioner which coordinates and communicates the
Division's growing efforts to identify and combat abusive tax schemes.
Employees throughout the organization have received training to improve
their ability to identify and address potential abusive transactions.
TE/GE has identified and is pursuing a number of abusive transactions
involving entities in its customer base, including:
* IRC § 501(c)(15) producer-owned reinsurance companies;
* Donor-advised funds;
* IRC § 509(a)(3) supporting organizations;
* Housing and Urban Development (HUD) programs;
* Consumer credit counseling organizations;
* IRC § 412(1) insurance contract plans;
* S-Corporation employee stock ownership plans (ESOPs);
* Collectively bargained welfare benefit funds;
* Arbitrage-motivated bond transactions:
Using its detailed return data, the Employee Plans Office has been able
to preemptively identify potentially abusive transactions with
characteristics similar to known abusive transactions. This has enabled
the Division to provide guidance and get a head start on enforcement
activity while technical issues are being finalized. The creation of a
Data Analysis Unit in the Exempt Organizations Office this year will
aid in the identification of ATAT and other compliance issues, while a
planned Fraud and Financial Transactions Unit next year will address
complex fraud and ATAT referrals and also provide specialized expertise
to law enforcement agents. Government Entities Office has also
established an Abuse Detection and Prevention Team (ADAPT) that will
research emerging issues and investigate schemes involving Indian
Tribal entities.
Following are the categories for measuring success in enhancing
enforcement of the tax law from the IRS Strategic Plan for 2005 through
2009.
Percent of Priority Guidance List Items Published:
This is the percentage of tax issues that IRS will address through
regulations, rulings, notices and other forms of guidance during the
12-month period beginning July 1 and ending June 30. Please see the
discussion in Strategic Goal One on page 15.
Percent of Americans Who Think it is OK to Cheat on Taxes:
The IRS Oversight Board conducts an annual NOP World, formerly Roper
Starch Worldwide, survey to assess the public's perceptions about tax
compliance. The survey was conducted in 1999, 2001, 2002, and 2003.
Results from the 2004 survey are expected in January 2005.
In 2003, 81 percent of taxpayers (down five points from 2002),
continued to believe that it is "not at all" acceptable to cheat on
income taxes. Fewer taxpayers (68 percent, down 4 points from 2002 and
down 13 points from 1999) agreed that it is everyone's civic duty to
pay their fair share of taxes and that everyone who cheats should be
held accountable (60 percent, down 5 points from 2002).
Average Cycle Time:
This is a measure of the length of time from receipt of a case for
audit until the audit is completed. The average will be computed from
the results of audits on individuals, small and large business entities
and tax-exempt entities.
Reducing the months-in-group cycle time is a key focus of the LMSB
Currency and Cycle Time Initiative. Since September 2003, LMSB has
realized a 16 percent improvement in Industry Months-In-Group Cycle
Time and a 12 percent improvement in Coordinated Industry Months-In-
Group Cycle Time. Case analysis worksheets and risk analysis were
performed and older, un-started cases were surveyed. Efforts and steps
have also been taken by agents and managers to minimize delays in
closing cases.
LMSB is examining and closing a growing percentage of "complex" returns
for both Industry Cases (IC) and Coordinated Industry cases (CIC).
"Complex" returns include Tax Shelters, Joint Committee, Tax Equity &
Fiscal Responsibility Act, and other formal claims. For IC only,
"complex" also includes returns with assets of $250 million and over.
The cycle time on closed "complex" returns has decreased substantially
when compared to the prior year. Although significant progress has been
made in reducing cycle time for these returns, the cycle time for
complex returns and shelters continues to be much higher when compared
to other IC returns. Accordingly, the continuing increase in complex
returns will have a negative impact of overall cycle times.
Rate of Reporting Compliance:
Reporting Compliance is defined as the percentage of individual income
tax liability that is reported on timely-filed returns for a given tax
year. The IRS expects to provide new estimates of individual reporting
compliance rates early in calendar year 2005, as a result of the
National Research Program's individual reporting compliance study (for
tax year 2001). IRS Measures included in the Treasury Performance
Reporting System include the following discussed below.
IRS measures included in the Treasury Performance Reporting System are
discussed below.
A. Returns Examined:
1. Individual Returns Examined:
Individual Return Examinations Greater Than $100K:
Description: The number of Individual (Form 1040) returns closed by
Field Examination with a total positive income greater than $100,000.
Individual Return Examinations Less than $100K:
Description: The number of Individual (Form 1040) returns closed by
Field Examination with a total positive income less than $100,000.
Individual Returns Examined:
Individual Return Examinations Greater Than $100K:
FY 2001: 55,761;
FY 2002: 64,911;
FY 2003: 67,459;
FY 2004 Plan: 68,611;
FY 2004 Actual: 70,497.
Individual Return Examinations Less Than $100K:
FY 2001: 146,790;
FY 2002: 140,350;
FY 2003: 138,933;
FY 2004 Plan: 139,033;
FY 2004 Actual: 127,058.
[End of table]
FY 2004 Performance-Greater Than $100K: Target Achieved. IRS' emphasis
on case currency and cycle time has resulted in a higher percentage of
direct examination time being applied and an increase in return
closures.
Future Plans: Greater Than $100K. IRS plans to continue its emphasis
upon returns with a higher compliance risk and abusive tax avoidance
transactions, especially promoter activity. Resources will also be
applied to an on-going Compliance Initiative Project (CIP) on flow-
through entities and a joint strategy between LMSB and SBSE to address
high-risk flow-through entities related to high-wealth individuals.
FY 2004 Performance-Less Than $100K: Target Not Achieved. The increased
emphasis on strategic priorities, e.g., returns with a higher
compliance risk and higher income, shifted emphasis to individual
returns with greater than $100K of income.
Future Plans: Less Than $100K. During FY 2005, IRS will continue its
focus upon returns with a higher compliance risk and income, reducing
the number of closures in the less than $100K category. To minimize
program impact, several efforts are ongoing to address program
efficiencies. The focus will be on better preparing both the examiners
and the taxpayers for an examination and is expected to lead to
improved efficiencies. In addition, improvements in inventory
management, as a result of the "Art and Science of Inventory
Management" training given to territory and group managers during FY
2004, are expected to continue. Further, the Small Business Compliance
organization realignments within functional lines will aid in
maximizing program effectiveness and efficiencies.
2. Number of Business Returns Examined:
Description: Includes LMSB business returns closed outside of the
coordinated industry program, and SBSE corporate examinations.
FY 2004 Performance: Target Achieved. LMSB's strong emphasis on case
currency and cycle time reduction, coupled with close monitoring of
inventory levels, led to more effective case management and higher than
expected productivity. The FY 2004 Plan was below the FY 2003 results
because the IRS is working more complex, time-consuming inventory.
Number of Business Returns Examined:
FY 2001: 23,163;
FY 2002: 21,159;
FY 2003: 18,957;
FY 2004 Plan: 15,283;
FY 2004 Actual: 16,563.
[End of table]
Future Plans: Plans are to hire 619 additional technical employees to
refresh the workforce and maintain a pipeline of agents to address
complex issues. Abusive tax avoidance transactions will continue to be
emphasized, especially promoter activity. LMSB and SBSE also plan to
develop a joint strategy to address high-risk flow-through entities
related to high wealth individuals.
During FY2005, emphasis will be placed upon increasing the small
business corporation examination coverage by:
* Identifying the most productive small business corporation work and
placing those returns into the audit stream as quickly as possible:
* Utilizing examiners who completed corporate training late in Fiscal
Year 2004;
* Continuing to reap benefits from the Examination Reengineering
initiative;
* Realigning along functional lines, which is expected to maximize
program effectiveness and efficiencies;
3. Automated Underreporter Closures:
Description: Total number of closures of Automated Underreporter (AUR)
cases.
FY 2004 Performance: Target Achieved. FY 2004 AUR Number of Cases
Closed exceeded the Plan due to increased productivity from process and
systemic improvements put in place in FY 2003 to select more productive
cases. Another improvement was the use of the inventory management tool
to forecast resource demand consistent with projected correspondence,
telephone demand, and case assignment.
Automated Underreporter Closures:
FY 2001: 2,511,424;
FY 2002: 2,922,182;
FY 2003: 2,905,478;
FY 2004 Plan: 3,081,830;
FY 2004 Actual: 3,482,661.
[End of table]
Future Plans: AUR will continue to use the inventory management tool to
forecast resource demand consistent with projected correspondence,
telephone demand, and case assignments. Factors expected to impact FY
2005 performance include:
* AUR adding additional returns to the workstream, such as Schedules
2106, C and E;
* More complex returns, which while expected to yield higher dollars
take more time to work;
* Implementation of planned program to;
1. Provide access to AUR case information and the ability to assign and
re-assign cases to any AUR site providing the ability to move work
among sites to address demand.
2. Modify the "Virtual Private Database" (VPD) feature to allow users
to have secure access to all AUR data.
4. Correspondence Exam: Total Number of Earned Income Tax Credit
Returns Examined:
Description: The number of Earned Income Tax Credit Returns (EITC)
audit closures produced in Correspondence Examination.
FY 2004 Performance: Target Achieved. EITC closures exceeded the Plan
due to process improvements that reduced examination cycle time.
Improvements included: implementing the requirement for managerial
approval for all follow-up requests to taxpayers for additional
information and establishing first-read units to expedite EITC pre-
refund correspondence.
Correspondence Exam Total Number of EITC Returns Examined:
FY 2001: 479,983;
FY 2002: 367,799;
FY 2003: 418,237;
FY 2004 Plan: 422,431;
FY 2004 Actual: 446,152.
[End of table]
Future Plans: Improved course material focusing on inventory management
and program monitoring to improve the timeliness of Correspondence Exam
casework was distributed in October 2004. The Correspondence Exam
Automated System (CEAS) will be implemented to systemically move
inventory through the cycle process, virtually eliminating manual
inputs to update a case, a major cause of delay in performance
reporting.
5. Correspondence Exam: Total Number of Non-EITC Returns Examined:
Description: The number of non-EITC (discretionary) audit closures
produced in Correspondence Examination.
FY 2004 Performance: Target Achieved. Non-EITC closures exceeded the
Plan due to process improvements that reduced cycle time and return
selection. In addition, a staff reorganization and establishment of a
team to focus on the Non-EITC workload contributed.
Correspondence Exam Total Number of Non-EITC Returns Examined:
FY 2001: 146,621;
FY 2002: 177,447;
FY 2003: 262,431;
FY 2004 Plan: 288,636;
FY 2004 Actual: 356,099.
[End of table]
Future Plans: Full implementation of a series of automation initiatives
is planned for FY 2005, including:
* Systemic updates for inventory as it cycles through the system, thus
eliminating manual inputs for status updates, allowing for increased
quality through reduced input errors, improved cycle time and
productivity;
Migration to the National Print Center, generating resource savings
given the volume of prints and resources that are used locally:
Document Archive Environment (DAE) Enhancements identify and screen
inventory will substantially reduce manual inputs and reduce errors:
A shift in workload mix to focus on small business issues, including
just-in-time training for delivery of the inventory;
6. Number of Tax Exempt/Government Entities Compliance Contacts:
Description: The number of Employee Plan (EP), Exempt Organization and
Government Entity return examinations and compliance checks closed in
all categories.
FY 2004 Performance: Target Not Achieved. Although closures are up 27
percent from last year, TE/GE did not meet its goal for compliance
contacts closed because examination agents in EP required more time
than expected to close out their residual determination inventories
from FY 2003.
Number of TE/GE Compliance Contacts:
FY 2001: 15,988;
FY 2002: 13,549;
FY 2003: 13,029;
FY 2004 Plan: 19,100;
FY 2004 Actual: 16,518.
[End of table]
Future Plans: TE/GE expects to increase dramatically its compliance
contacts next year due to (1) the elimination of mixed determination
and examination inventories in Employee Plans, which will increase the
resources available for examinations, and (2) the first full year of
operation for Exempt Organizations Compliance Unit, which initiates
compliance checks to resolve issues with returns filed by tax-exempt
organizations.
B. Earned Income Tax Credit:
1. Earned Income Tax Credit: Percent of Eligible Taxpayers who file for
EITC:
Description: The number of taxpayers who actually claim the Earned
Income Tax Credit (EITC) compared to the number of taxpayers who appear
to be eligible for the EITC.
FY 2004 Performance: Data to calculate the actual results is expected
to be available after the close of Calendar Year 2004.
Percent of Eligible Taxpayers Who File for EITC:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: 80%;
FY 2004 Actual: N/A.
[End of table]
Future Plans: EITC is exploring the use of two different methods for
estimating the EITC participation rate. Method 1: Create a Mathematical
Participation Rate Model based on regression models. Method 2: Use
revised Census Current Population Survey (CPS) data to quantify the
number of ineligible EITC recipients (may be available by the end of
Calendar Year 2004).
2. Dollar Value of Earned Income Tax Credit (EITC) Claims Paid in
Error:
Description: EITC claims paid that are later determined to have been
made in error via amended return filing, claim filing or other.
FY 2004 Performance: Data to calculate the actual results is expected
to be available after the close of Calendar Year 2004.
Dollar Value of EITC Claims Paid in Error:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: N/A;
FY 2004 Actual: N/A.
[End of table]
Future Plans: IRS based the current targets on the estimates of the
1999 compliance study with adjustments for changes in the overall
population and statutory changes related to EITC. An individual
reporting compliance study for Tax Year 2001 is currently underway as
part of the National Research Program (NRP). IRS will use the results
to refine the estimates for future years. This information should be
available by mid-FY 2005.
C. Quality:
1. Examination Quality - Large & Mid-Size Business (LMSB):
Description: The average of the percentage of critical elements passed
on Coordinated Industry (CIC) and Industry Cases (IC) reviewed. The
quality measurement rating system consists of four Technical Standards
and a two-part Administrative Procedures section. The standards include
Planning the Examination; Inspection/Fact Finding; Development,
Proposal and Resolution of Issues; and Workpapers/Reports.
FY 2004 Performance: Targets Not Achieved. The Rating of the
Administrative Procedures Document, which accounts for 20 percent of
the overall quality score, negatively impacted the Quality scores in FY
2004. In a number of instances, Revenue Agents and Managers failed to
include the document in the case file or properly sign it as required.
Actions are being taken to re-emphasize the importance of this form. In
addition, the growing complexity of returns examined by LMSB, including
returns such as Tax Equity and Fiscal Responsibility Act, and Tax
Shelters, affect quality scores. These are more complex returns and
often include requirements and procedures with which agents are less
familiar. As a result, incidents of errors, mistakes or oversights
increased.
Examination Quality - LMSB:
Examination Quality - CIC:
FY 2001: 80%;
FY 2002: 78%;
FY 2003: 89%;
FY 2004 Plan: 90%;
FY 2004 Actual: 87%.
Examination Quality - IC:
FY 2001: 70%;
FY 2002: 69%;
FY 2003: 74%;
FY 2004 Plan: 80%;
FY 2004 Actual: 74%.
[End of table]
Future Plans: Communications highlighting the importance of including
the Administrative Procedures Document in the case file for quality
review will continue to be included in the IRS Quality Newsletter and
other publications sent to the Field. The "LAMS Administrative
Procedures Document, Form 13327" will also be a topic for the FY2005
Continuing Professional Education. The Quality Review staff will
continue to do presentations on the Quality Measurement System at Group
and/or Territory meetings. A "pilot test' will be conducted in which
Team Managers will visit the review site and observe cases being
reviewed to gain a clearer understanding of what is specifically
required to be in a case file in order to receive a pass rating. Also,
a Team Manager Check sheet recently developed and distributed by the
Case Quality Improvement Council (CQIC) will aid managers in how to
effectively evaluate the quality of cases prior to closing from the
group.
2. Examination Quality Score - Small Business & Self Employed (SBSE):
Description: The score awarded to a reviewed Field & Office Examination
case by a Quality Reviewer using the Examination Quality Measurement
System quality standards.
FY 2004 Performance: Targets Achieved. Improvements in five of the
eight Field Examination quality standards increased performance results
this year.
Examination Quality Score - SBSE:
Office Examination Quality:
FY 2001: 70%;
FY 2002: 74%;
FY 2003: 76%;
FY 2004 Plan: 75%;
FY 2004 Actual: 76%.
Field Examination Quality:
FY 2001: 70%;
FY 2002: 71%;
FY 2003: 75%;
FY 2004 Plan: 78%;
FY 2004 Actual: 78%.
[End of table]
Future Plans: Field Examination - IRS will continue to monitor the
impact of Examination Reengineering initiatives on case quality. In
addition, the Field Compliance Embedded Quality initiative is scheduled
to be piloted during the fourth quarter of FY 2005.
3. Automated Underreporter Accuracy:
Description: Accuracy 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 2004 Performance: Target Achieved. AUR established more focused
training to improve case quality and held monthly consistency calls to
discuss quality attributes.
Automated Underreporter Accuracy:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: 94%;
FY 2004 Actual: 95%.
[End of table]
Future Plans: Increases in accuracy will be achieved by using review
data to identify areas of improvement and focus on these areas during
training. In FY 2005, AUR will be transitioning to work returns with
Schedules 2106, C and E. The impact of solely working these more
complex returns (rather than the more straightforward Schedules A, B
and D) may initially impact quality performance.
4. Correspondence Examination Accuracy:
Description: Correspondence Exam Accuracy 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.
This measure is new for SBSE in FY 2004 (baselined in FY 2003).
FY 2004 Performance: Target Not Achieved. Several challenges associated
with penalty computations and sampling methodology affected
performance. Baseline measures were identified in FY2003. In FY2004,
sampling methodology changed to produce an improved statistically sound
predictor of an accurate error rate and managers and reviewers were
trained on the attributes to ensure consistency of reviews and coding.
Several problems early in the fiscal year impacted performance:
Automation problems in one campus resulted in certain penalties being
computed manually, which had a negative impact on quality results; this
issue was corrected:
An error in the sampling methodology negatively impacted quality; this
problem was also corrected;
Correspondence Examination Accuracy:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: 94%;
FY 2004 Actual: 89%.
[End of table]
Future Plans: Actions IRS will take to improve FY 2005 performance:
* Just-in-time training will be delivered on new casework initiatives;
* As the Campus locations move into more of the SBSE inventory,
training will be coordinated with inventory delivery;
* Operational reviews will continue to stress the importance of
emphasizing quality in team, department and operations meetings
throughout the year;
5. Employee Plans and Exempt Organizations (EP/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 (TEAMS). The quality score is the average percentage
of quality standards met.
FY 2004 Performance: Target Achieved. Both programs have focused
attention on their weakest standards and have instituted a series of
actions to enhance quality and consistency.
EP/EO Examination Quality:
FY 2001: 73%;
FY 2002: 75%;
FY 2003: 82%;
FY 2004 Plan: 82%;
FY 2004 Actual: 85%.
[End of table]
Future Plans: Both programs will continue to target for improvement
those standards with the lowest performance in FY 2004. These areas
include Timeliness and Workpapers in EP and Timeliness, Examination
Planning and Examination Scope in EO. Actions to help improve these
ratings include continuing to share and discuss results of the
technical review with field managers, establishing manager performance
commitments for TEAMS, and asking area managers to develop action plans
to improve their area's specific TEAMS ratings. However, gains in
quality may be offset by a significant number of new hires in EO
Examination brought on board at the end of FY 2004.
D. Customer Satisfaction:
1. Examination Customer Satisfaction - Large & Mid-Size Business
(LMSB):
Description: The percentage of satisfied respondents to the LMSB
customer satisfaction survey for Industry and Coordinated Industry
cases.
FY 2004 Performance: Target Not Achieved. While LMSB did not meet its
customer satisfaction goals, Coordinated Industry taxpayers who have
been through an audit are generally satisfied with the process. Lower
scores were attributed to the Length of the Process and the Time Spent
on the Audit, critical factors to the Industry taxpayer.
Examination Customer Satisfaction-LMSB:
FY 2001: N/A;
FY 2002: 86%;
FY 2003: 80%;
FY 2004 Plan: 83.5%;
FY 2004 Actual: 78%.
[End of table]
Future Plans: LMSB has several initiatives underway that will make
examinations more efficient and enable LMSB to expand compliance
coverage. Initiatives include: increased participation in case planning
through a joint planning of the audit process; lead specialist
responsibilities that include more interaction with taxpayers;
increased managerial interaction with specialists and taxpayers and
implementation of the Individual Document Request Management Process,
which gives the Examination Team a structured process to use when
gathering information during an examination.
2. Examination Customer Satisfaction - Small Business & Self Employed
(SBSE):
Description: Represents the level of satisfaction customers experience
in interactions with IRS Field Examination employees. Survey recipients
are asked to rate IRS performance on a five-point scale, where 1
indicates Very Dissatisfied and 5 indicates Very Satisfied. A
limitation on survey data not affecting the statistical validity in the
survey population is that the measure is based solely on the audit
closures of individual taxpayers.
FY 2004 Performance: Target Not Achieved: Satisfaction results in
Examination correlate directly with the workload mix. There was an
increase in the volume of customers with unagreed tax deficiencies and
they tend to be less satisfied. Actions undertaken to enhance customer
satisfaction include: reducing the life cycle of the examination
process from selection to conclusion, holding consultations between the
agent and manager after the initial taxpayer meeting and improving
communication between the taxpayer and agent to specify examination
issues.
Examination Customer Satisfaction-SBSE:
FY 2001: 47%;
FY 2002: 47%;
FY 2003: 63%;
FY 2004 Plan: 60%;
FY 2004 Actual: 57%.
[End of table]
Future Plans: The Examination Reengineering initiative implemented in
FY 2004 will aid in addressing many of the key customer issues (the
time customers spend on their audits, the length of the examination
process, and issues surrounding the request for customer records)
associated with customer satisfaction. SBSE will continue to monitor
the impact of Examination Reengineering on customer satisfaction
results.
A new SBSE Customer Satisfaction survey will focus on data received
from a sample of the entire SBSE customer base with emphasis on
customers' pre-filing/filing experiences, including those customers
who have not had specific interactions (examinations) with the Service.
This survey data will be used to identify additional improvement
opportunities with all SBSE taxpayers.
3. Correspondence Exam - Customer Satisfaction:
Description: Customer's overall level of satisfaction with the IRS
Correspondence Examination process. The following limitations are
placed on the Correspondence 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 five-point scale, where 1 indicates Very
Unsatisfied and 5 indicates Very Satisfied.
FY 2004 Performance: Target Achieved. Many improvements were
implemented throughout the Correspondence Examination, including
establishing telephone call units in each EITC operation to respond to
taxpayers' most frequently asked general questions regarding the first
notices and to assist the taxpayers in understanding the documentation
requests. In an effort to increase customer satisfaction in this area,
a system change was implemented in January 2004 to freeze only the EITC
portion of the refund as opposed to the entire refund. Additional
actions were taken to reduce cycle time. These actions include
establishing correspondence first-read/screening groups to ensure
correspondence received on EITC pre-refund cases is handled in a
priority environment.
Correspondence Exam-Customer Satisfaction:
FY 2001: 34%;
FY 2002: 33%;
FY 2003: 36%;
FY 2004 Plan: 38%;
FY 2004 Actual: 40%.
[End of table]
Future Plans: Inventory Control Managers are being established at each
campus to ensure the timely movement of cases. Goals are also being
established to ensure that overage cases and correspondence are handled
expeditiously. A Campus Examination Customer Satisfaction Improvement
Team was formed to better manage expectations and identify ways to
streamline the exam process and procedures.
4. Automated Underreporter Customer Satisfaction:
Description: The percentage of satisfied respondents to the Automated
Underreporter (AUR) customer satisfaction survey FY 2004 Performance:
Target Achieved.
AUR accelerated its work process by more than one month earlier than in
prior years to reduce the length of time between filing and receiving a
notice from the IRS regarding discrepancies, which customer
satisfaction survey results identified as one of AUR's top improvement
priorities;
Automated Underreporter - Customer Satisfaction.
FY 2001: N/A;
FY 2002: N/A;
FY 2003: 43%;
FY 2004 Plan: 49%;
FY 2004 Actual: 55%.
[End of table]
Future Plans: AUR is stressing the need for Operations Managers to
employ the AUR "work planning" tool to ensure adequate telephone
coverage. Actions are also being taken to improve the telephone scripts
so that taxpayers can more easily use the automated phone system.
E. Criminal Investigations:
1. Criminal investigations Completed:
Description: The 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 2004 Performance: Target Achieved. The IRS exceeded its year-end
plan for investigations completed by 29 percent. In part, these
achievements were a result of increased management oversight and
emphasis on improving investigative efficiencies. To bolster efficiency
and reduce taxpayer burden, the IRS also streamlined administrative and
investigative processes.
Criminal Investigations Completed:
FY 2001: 3,340;
FY 2002: 3,201;
FY 2003: 3,766;
FY 2004 Plan: 3,400;
FY 2004 Actual: 4,387.
[End of table]
Future Plans: CI will continue to enforce the criminal provisions of
the Internal Revenue Code, the Bank Secrecy Act and the anti-money
laundering statutes, with a continued focus on increasing the
application of resources to tax administration investigations. CI will
also maintain key stakeholder relationships to assist in identifying
and investigating egregious financial crimes that adversely affect tax
administration. In order to implement the above strategies, CI will
focus on the fraud referral, non-filer and employment tax programs, as
well as abusive tax schemes and refund crimes.
CI will continue to strengthen the fraud referral program by working
closely with the Small Business and Self-Employed (SBSE), Large and
Mid-Sized Business (LMSB), Wage and Investment (W&I) and Tax Exempt/
Government Entities (TE/GE) Operating Divisions. To specifically
address the increasing problem with corporate fraud, CI will coordinate
fraud awareness training with the Operating Divisions on key compliance
risks. In FY 2005, CI will also strengthen its partnership with SBSE,
LMSB, and W&I to develop and implement a comprehensive program to
identify egregious, high-income, non-filer cases covering a broad
spectrum of occupations and professions with particular emphasis on
frivolous non-filers.
In FY 2005, CI will continue to work jointly with SBSE, LMSB, and TE/GE
on several offshore and domestic programs including the Offshore Credit
Card Project and the Abusive Tax Avoidance Transaction Project. CI,
through its Refund Crimes Program, will continue to pursue vigorously
unscrupulous preparers of fraudulent returns who claim tax benefits to
which the filers are not rightfully entitled.
Rate of Filing Compliance:
The rate of filing compliance is the percentage of individual returns
that are filed timely for a given tax year. This rate for individual
taxpayers is computed by dividing the estimated number of returns filed
on time for a given tax year by the estimated number of all returns
required to be filed.
Taxpayer Delinquent Investigations (TDI):
Automated Collection System (ACS) Closures - TDI:
Description: The measure reflects the number of ACS TDI taxpayer
dispositions minus any TDI taxpayer cases systemically removed from
inventory after being in the non-active inventory for approximately one
year.
Field Collection - Number of Cases Closed - TDI:
Description: The number of Taxpayer Delinquency Investigation (TDI)
investigations that moved to immediate resolution status or delayed
resolution status/no results status excluding surveyed investigations.
Includes all TDIs regardless of whether or not they are associated with
an open Tax Delinquent Account.
FY 2004 Performance: ACS closures - TDI: Target Achieved. TDI
performance results show improvement over last year. There is an
increase in notices sent to potential non-filers, who subsequently
provided returns shortly after cases moved to ACS status.
Several factors contributed to improved performance, including:
* Reengineering efficiencies that elevated employment tax cases with
delinquencies less than a year old to the highest priority;
* A programming anomaly that resulted in unscheduled case creation;
* Automatic closure of 17,000 cases to Correspondence Exam;
* Improvements to the automated 6020(b) substitute for return program;
Field Collection closures - TDI Target Achieved. The TDI closure rate
is more than 25 percent above the Plan. A large portion of the high-
priority cases are employment tax delinquencies and IRS is working them
more efficiently at an earlier stage. By intervening in the pattern of
delinquency earlier, delinquencies are smaller in scale and can be
resolved more quickly.
Taxpayer Delinquent Investigations:
ACS Closures - TDI:
FY 2001: 297,791;
FY 2002: 190,411;
FY 2003: 197,517;
FY 2004 Plan: 198,155;
FY 2004 Actual: 295,010.
Field Collection - Cases Closed TDI:
FY 2001: 119,451;
FY 2002: 140,737;
FY 2003: 150,190;
FY 2004 Plan: 152,153;
FY 2004 Actual: 197,499.
[End of table]
Future Plans: IRS projects increases in TDI closures resulting from
improved inventory efficiencies in ACS along with a FY 2005 hiring
initiative that will increase staffing (and thus increase TDI
closures). Inventory efficiencies include gains from increased employee
experience, the use of tools like Desktop Integration and Contact
Recording, along with improved case processing and selection through
corporate inventory management, consolidation and specialization where
possible. IRS expects that the ACS new hires will exclusively work TDIs
for one quarter.
IRS is closely monitoring the impact of the case assignment priorities
to ensure that planning assumptions for case assignments are accurate.
Two new case assignment filters were implemented in August 2004 to
ensure expedited assignment of TDIs. Factors impacting FY 2005
performance include:
Enhancements to the automated 6020(b) substitute for return program
will result in additional closures, including Form 943 being added to
automated processing;
Form 1040 cases will be run through decision analytics, which is
anticipated to provide ACS with better cases to work;
An increase in the Selection Codes of cases eligible for Automated
Substitute for Return (ASFR) will reduce potential inventory in ACS;
Rate of Payment Compliance:
The voluntary payment compliance rate is the percentage of the total
tax liability reported on timely filed returns that is paid in a timely
manner. The voluntary payment compliance rate is 98.5 percent for Tax
Year 2002.
1. Taxpayer Delinquent Accounts (TDA):
Automated Collection System-TDA:
Description: The number of Automated Collection System (ACS) TDA
taxpayer closures minus any TDA taxpayer cases systemically removed
from inventory. Closures include fully paid accounts, installment
agreements and currently not collectible accounts.
Field Collection-Number of Cases Closed-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 2004 Performance: Automated Collection System - TDA Target Achieved.
The process and management improvements that were made in FY 2003
continue to positively impact performance in FY 2004. The
implementation of the ACS Corporation Inventory Strategy in January
2004 resulted in productivity gains. Additional automation innovations
have allowed for an increase in letter generation. The improvement in
productivity and a decrease in receipts in ACS Support and Compliance
Services Collection Operations has allowed for additional resources to
be devoted to ACS inventories.
FY 2004 Performance: Field Collection Closed - TDA Target Achieved. TDA
closures continue to show improvement, exceeding the Plan and last
year's accomplishments. Productivity increased due to a number of
factors including:
* Direct case activity as a result of the elimination of details to
support the filing season;
* Overall reduction in overhead costs resulting in more direct time
available;
* Reduction of the verification required to close unproductive cases
when the liability is below a specified dollar amount;
* Use of enforcement tools, which contributed to quicker dispositions;
* Collection Reengineering changes that began last year, which continue
to deliver more productive work to revenue officers;
* New assignment rules that prioritize cases with earlier
delinquencies, when the taxpayer is more capable of paying in full;
* Improved filters help to identify appropriate cases for Revenue
Officer intervention;
Taxpayer Delinquent Accounts:
ACS - Closures TDA:
FY 2001: 1,006,600;
FY 2002: 950,696;
FY 2003: 1,155,697;
FY 2004 Plan: 1,139,016;
FY 2004 Actual: 1,337,904.
Field Collection - Cases Closed TDA:
FY 2001: 757,392;
FY 2002: 724,430;
FY 2003: 880,939;
FY 2004 Plan: 892,460;
FY 2004 Actual: 949,521.
[End of table]
Future Plans: ACS Closed - TDA. Improvements to the automated lien and
levy program in January 2005 are expected to significantly improve TDA
productivity.
Future Plans: Field Collection Cases Closed - TDA. Some Case Processing
and Insolvency paraprofessional activities will be moved to the
campuses in FY 2005. The savings in staff will be reinvested in
additional customer-facing field employees by FY 2006.
2. Automated Collection System (ACS) - Accuracy:
Description: A measure of accuracy in providing the correct response
with the correct resolution. It measures the percentage of time the
customer received the correct answer to their inquiry and/or had their
case resolved correctly based upon all available information and IRM
required actions. This is a new measure as of FY 2003.
FY 2004 Performance: Target Achieved. FY 2004 is the first full year of
"embedded quality' (EQ) after the FY 2003 IRS baselining efforts. There
was significant oversight provided to the quality program, using EQ
reports and data to drive improvement efforts. There were also site
level visitations to the ACS call sites that focused on the management
oversight of quality and on improvement of the business measures.
ACS Accuracy:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: 88%;
FY 2004 Actual: 89%.
[End of table]
Future Plans: Continued work with employees through Contact Recording
is expected to have a positive impact on quality. In addition,
improvements planned in FY 2005 are:
* Desktop Integration will be rolled out, which is expected to
positively impact the operation;
* Call recording capability will provide staff with more specific
feedback by enabling them to actually hear the call and discuss the
actual events that occurred with management.
3. Automated Collection System-Customer Satisfaction:
Description: Represents the customer's perception of IRS service
received through contact with employees in the Automated Collection
System (ACS) 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 five-point scale, where 1 indicates Unsatisfied and 5
indicates Very Satisfied. In FY 2002, a four-point scale was used,
which limits the IRS' ability to make comparisons.
FY 2004 Performance: Target Achieved. ACS has maintained the current
customer satisfaction levels for the past several surveys. In FY 2003,
ACS modified the survey to allow additional feedback on a few open-
ended questions to allow the sites to have more specific information to
improve satisfaction levels.
ACS-Customer Satisfaction:
FY 2001: 56%;
FY 2002: 53%;
FY 2003: 91%;
FY 2004 Plan: 91%;
FY 2004 Actual: 91%.
[End of table]
Future Plans: The IRS expects an increase in Customer Satisfaction due
to planned changes in telephone scripts that provide more options for
taxpayers to obtain answers to their questions. The new scripts are
designed to decrease telephone wait time.
4. Compliance Services Collection Operation (CSCO) Accuracy:
Description: CSCO Accuracy measures how often the customer received the
correct answer to their inquiry and/or had their cases resolved
correctly based upon all available information and IRM required
actions. It is calculated based on Defects-Per-Opportunity, which
focuses on how many attributes were scored incorrectly versus how many
possible attributes are applied to that particular transaction.
FY 2004 Performance: Target Not Achieved.
Significant cross training of new hires in FY 2004 to prepare for FY
2005 non-filer initiatives, such as the Automated Substitute For Return
and High-Income Non-Filer Strategy, caused the IRS to miss the goal by
one percent.
Compliance Services Collection Operation Accuracy:
FY 2001: N/A;
FY 2002: N/A;
FY 2003: N/A;
FY 2004 Plan: 95%;
FY 2004 Actual: 94%.
[End of table]
Future Plans: Continued work on consistency between the CSCO sites is
expected to improve quality overall among the sites. With the
conclusion of the FY 2004 training program, the senior personnel who
conducted the training will return to the front-line work and the new
hires will have completed their training, therefore FY 2005 accuracy
will improve against FY 2004 performance.
5. Field Collection Quality:
Description: Scores are awarded to Collection cases by a third-party
reviewer, who uses the Collection Quality Measurement System (CAMS)
standards. Each standard, if met, has a value; they are totaled to
arrive at the score, with deductions in the overall composite score for
failure to meet a standard designated as critical.
FY 2004 Performance: Target Not Achieved. Case Quality performance is
on a slight negative trend, falling two points from historic results
rather than the targeted two-point improvement. Analysis of performance
on the various CAMS standards indicates that the greatest potential for
improvement is in: setting clear action dates, documentation, no
activity lapses greater than 75 days, and full compliance check.
Responding to the trend, a Manager's Tool Kit to aid improvement in
overall quality of Collection casework is issued in quarterly editions,
highlighting critical aspects of work products and suggested guidance
for correction. The package includes: a slide show presentation,
instructor/leader notes and a user guide to assist managers in
presenting and leading group discussions for specific quality
performance measures.
Field Collection Quality of Cases Handled in Person:
FY 2001: 84%;
FY 2002: 84%;
FY 2003: 84%;
FY 2004 Plan: 86%;
FY 2004 Actual: 82%.
[End of table]
Future Plans: In FY 2005, IRS will test a new Embedded Quality (EQ)
system to replace CAMS. By aligning quality measures and individual
performance, EQ creates a way of doing business that builds commitment
and capability among all individuals to continually improve customer
service, employee satisfaction and business results. EQ standards are
linked directly to employee Critical Job Elements (CJEs) enabling
employees to see how individual performance impacts SBSE objectives.
6. Field Collection-Customer Satisfaction:
Description: Customers' overall level of satisfaction with the way
their cases were handled by the IRS Field Collection program. The
following limitations are placed on the Collection sample: only those
customers who owe money to the IRS and have been referred to Collection
are sampled. Samples drawn from the Collection Quality Measurement
System (CAMS) database only include three types of closures: Currently
Not Collectible/Hardship, Installment Agreements, and Full Pays. The
sample does not include: cases with no case history, cases for
customers the IRS cannot locate, cases where the statute has expired,
bankruptcy cases, deceased taxpayers, and defunct or insolvent
corporations. For cases involving an Offer in Compromise, only those
offers that are accepted by the IRS are currently included. Customer
satisfaction is measured on a five-point scale, where 1 indicates Very
Unsatisfied and 5 indicates Very Satisfied.
FY 2004 Performance: Target Achieved. Customer Satisfaction results
continue to show slight improvement both in terms of an increase in the
percent satisfied and a decrease in the percent dissatisfied. The Field
Collection Consultative Initiative piloted last year was rolled out to
all Compliance Areas by March 2004. Non-evaluative meetings focus on
confirming the plan of action and setting reasonable dates for expected
case closures, resulting in improvement in case quality and timeliness.
Process changes were implemented to establish field visits as the
preferred method for initial contact and formal program reviews focused
on appropriate case actions.
Field Collection Customer Satisfaction:
FY 2001: 53%;
FY 2002: 51%;
FY 2003: 60%;
FY 2004 Plan: 59.2%;
FY 2004 Actual: 61%.
[End of table]
Future Plans: The new SBSE Customer Satisfaction survey will focus on
data received from a sample of the entire SBSE 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) with the Service. This information will
be utilized to identify improvement opportunities with SBSE taxpayers.
7. Employee Plans and Exempt Organizations (EP/EO) Customer
Satisfaction:
Description: Customers' overall level of satisfaction with the way
their cases were handled by the IRS Employee Plans (EP) and Exempt
Organizations (EO) Examination programs, based on responses to Customer
Satisfaction Transactional Surveys. Customer satisfaction is measured
on a seven-point scale. Scores represent the percentage of respondents
who indicated a 6 or 7 (where 7 indicates Very Satisfied) when asked
about their overall satisfaction with their examination experience.
FY 2004 Performance: Target Achieved. TE/GE met its target for EP and
EO Examination Customer Satisfaction and improved performance over last
year.
EP/EO Customer Satisfaction:
FY 2001: 68%;
FY 2002: 70%;
FY 2003: 72%;
FY 2004 Plan: 73%;
FY 2004 Actual: 74%.
[End of table]
Future Plans: EP and EO will continue their efforts to improve customer
satisfaction through actions to address customers' top improvement
priorities of Length of Process and Time Spent on Audit.
Strategic Goal 3: Modernize the IRS through its people, processes and
technology:
Objectives:
* Increase organizational capacity to enable full engagement and
maximum productivity of employees.
* Modernize information systems to improve service and enforcement.
* Ensure the safety and security of people, facilities and information.
* Modernize business processes and align the infrastructure support to
maximize resources devoted to front-line operations.
Major Results and Accomplishments;
Increase organizational capacity to enable full engagement and maximum
productivity of employees.
The IRS successfully partnered with the Office of Personnel Management
Go Learn e-training initiative in support of the President's Management
Agenda. Go Learn will host our Enterprise Learning Management System
(ELMS), which will comprise a Learning Management System (LMS) and a
Learning Content Management System (LCMS). The LMS supports the people
aspects of training, while the LCMS supports the content aspects of
training. The LMS component will be deployed first and will provide
comprehensive learning management capabilities for employees,
managers, and training specialists including tailored instruction,
competency management, training administration, and launching e-
content. The Service acquired 128,000 perpetual user licenses for the
Plateau LMS. Migration of the LMS to the Go Learn trusted hosting
facility is scheduled for enterprise-wide implementation in November
2004. Deployment of the LMS will allow the Service to retire legacy
training management systems in 2005.
Training for newly hired revenue agents has been reengineered from
sixty weeks to twenty-two weeks, as recommended by the Recruitment,
Hiring & Training Breakthrough team, thereby making new hires
productive earlier. In addition, re-employed former IRS employees have
been recruited for On-the-Job Instructor and Classroom Instructor
positions, allowing highly skilled, senior professionals to remain on
the frontlines.
The Taxpayer Advocate Service (TAS) received praise from the IRS
Oversight Board for completing its comprehensive training plan that
includes implementation of an ongoing four-year technical training plan
for all occupations within TAS. This will help employees in all TAS
occupations establish clear career paths.
The Treasury Inspector General for Tax Administration conducted an
Independent Audit of Section 1204 of the IRS Restructuring and Reform
Act of 1998. This provision prohibits the use of enforcement statistics
to evaluate IRS employees and impose or suggest production quotas or
goals. The report concluded that the IRS is in compliance with Sections
1204 (a) and (b).
Modernize information systems to improve service and enforcement:
The ability to achieve the two previous IRS strategic goals depends on
fully engaged employees, efficient business processes, and the
successful completion of technology modernization efforts. In FY 2003
and 2004, the IRS took steps to balance the scope and pace of its
technology modernization program with the management capacity of the
IRS and the modernization contractor consortium. While this caused IRS
to defer the start of several new projects, the delay allowed
improvement in overall program management and focus. Implementing a
newly-developed Business Systems Modernization Action Challenges Plan
helped put the necessary policies and procedures in place to strengthen
the IRS's overall performance on the modernization program, including
improving management controls and capabilities and systems acquisition
practices. While there has been significant progress, there is still
much more work to do.
Under the modernization program in FY 2003 and 2004 the IRS has
deployed a number of business solutions;
* e-Services delivers electronic services to tax practitioners, and
other third parties such as banks and brokerage firms that file Form
1099s. E-Services products fully deployed and available over the
Internet include: Indirect Channel Management for IRS Internet
stakeholder relationship management; secure Electronic Return
Originator application process; and access to e-Services registration
by large corporations and tax-exempt organizations. In addition, e-
Services products now in production and available for use by IRS staff
and selected taxpayers, include: Application for e-Filing (external);
Electronic Account Resolution; Electronic Taxpayer ID Number Matching
(Bulk Requests); Disclosure Authorization; and Infrastructure support
for outbound facsimile service.
* "Where's My Refund?" a secure, on-line (web-based) system allows
taxpayers to check the status of their refunds online 24/7. Almost 24
million people have visited the site this year to check on the status
of their refunds. It's a quick, easy and safe way to get information
from the IRS. Taxpayers who file electronically can use the service
within 72 hours of submitting their returns. Paper filers can use
'Where's My Refund?" three to four weeks after mailing their returns.
The success of "Where's My Refund?" led to the launch of another
successful IRS service, 'Where's My Advanced Child Tax Credit," which
gave taxpayers instant updates on the status of their credit. Over 9.2
million taxpayers used this service in 2004.
* Modernized e-File (MeF) provides electronic filing for the first time
ever to large corporations and tax-exempt organizations. MeF Release 1,
deployed in February 2004, provides 53 forms and schedules for 1120/
1120S and 5 for 990 e-filing, along with the functionality to support
those forms, including applicable interfaces, validations, retrieval
and display options, the capability for large taxpayers to file using
the Internet, and the capability to attach Adobe files. Release 2,
deployed in August 2004, provided the remaining 43 forms and schedules
for 1120/1120S, a redesign of the Form 8453 (Individual Declaration for
IRS e-file Return) signature matching process, and required public
access (access to redacted information non-profit organizations) to the
filed 990s.
The Customer Account Data Engine (CADE) started processing an initial
set of 1040EZ tax returns in July 2004. When fully operational, CADE
will be a modern database that will house tax information for more than
200 million individual and business taxpayers. It ultimately will
replace an antiquated system called the Master File. The magnetic tape-
based system came into use four decades ago, takes a week to update
records and creates delays in providing accurate account information
for taxpayers. When completed, CADE will provide a variety of benefits
to taxpayers, such as faster refunds along with daily postings of
transactions and updating of accounts.
--While the returns are the most basic of 1040EZ forms and have a
narrow range of taxpayer information, it marks the first time since the
1960s that individual tax returns have been processed in a new way.
CADE will process more than 2 million 1040EZ tax returns during the
2005 filing season. Additional releases of CADE are scheduled to be
phased in over several years, processing increasingly more complex tax
returns in stages, ultimately replacing the 40-year-old system the IRS
now uses to process tax return data.
--New projects are planned in the next several years to help assistors
provide better quality answers to customer account questions and to
provide private collection agencies a support application which will
help the IRS collect delinquent taxes. The Custodial Accounting Project
(CAP) will provide the IRS a data warehouse of detailed taxpayer
account information to be used for analysis and financial reporting to
oversight organizations. The first release of CAP will address revenue
from individual taxpayers on initial tax payments. The Integrated
Financial System (IFS) will operate as the IRS's new core accounting
system. IFS Release 1.0 will replace the IRS's core financial systems -
including expenditure controls, accounts payable, accounts receivable,
general ledger, budget formulation, and purchasing controls. The IRS
will continue to intensely monitor its BSM projects to ensure timely
rollout to meet operational needs.
Ensure the safety and security of people, facilities and information;
In FY 2004, the Department of Labor and the White House issued to the
heads of all executive departments and agencies the Safety, Health, and
Return-to-Employment (SHARE) Initiative for all Federal agencies. This
initiative was developed to improve Federal workplace safety and health
and to reduce the cost of workplace injuries. The IRS goal is to reduce
the total injury case rate by 6 percent each year. In FY 2003 the IRS
lost-time case rate was 1.21. The Department of Labor lost-time case
rate computation is the number of lost-time cases x 200,000 [100
workers x 2000 hours], divided by the number of hours worked by all
employees since the beginning of the fiscal year. The projected IRS
lost-time case rate for FY 2004 is 1.20. The Department of Labor data
will be available in January 2005.
IRS has improved the overall safety of employees and visitors in our
facilities by: Implementing a Shelter-in-Place program safety
procedure, which is an alternative to building evacuation (during an
emergency, employees remain in their building until it is safe to
leave);
Addressed bio-terrorism issues and concerns through risk assessments
and ventilation controls initiatives at IRS Campus sites:
--Implementing steps, including guides, assessments and consultations,
to address ergonomic issues;
--Improving the safety awareness of all employees via multiple
communication and training initiatives;
--Improved the safety awareness of all employees to control hazards and
prevent injury and illness;
--Conducted an All-Employee Mandatory Safety and Health Briefing to
promote safe practices on the job;
--Developed and provided local Safety Advisory Committee (SAC) training
to enhance local Safety and Health Program effectiveness;
--Ensured air quality at IRS facilities and thermal comfort of
employees;
--Assessments were conducted at twenty-two IRS worksites in response to
business unit customer requests;
--Issued guidance to ensure building systems meet safety needs of
employees;
Modernize business processes and align the infrastructure support to
maximize resources devoted to front-line operations;
In FY 2004, AWSS continued the development of the Employee Resource
Center (ERC), which handled more requests than in any previous year.
The "one-stop" resolution rate increased by 48 percent and the customer
satisfaction improved by 14 percent. At the same time, AWSS focused on
improving resource usage by implementing several cost-cutting
initiatives, such as realigning from nine Transactional Processing
sites to four centralized operations in Centers of Excellence. The
Centers process employee personnel actions and account inquiries.
The Chief Financial Officer (CFO) conducted an Optimization study to
review the financial (budget and accounting) functions performed in the
offices and identify staff assigned to each function. In FY 2004, the
CFO consolidated all relocation services and moved them to the Beckley
Finance Center.
Following are the categories for measuring success in modernizing the
IRS through its people, processes and technology from the IRS Strategic
Plan for 2005 through 2009.
Level of Employee Engagement:
The Level of Employee Engagement measures the number of IRS employees
who feel they are in the right job, are managed well and are
productive. Data used to determine this result is taken from the IRS'
annual employee satisfaction survey.
In 2004, survey participation reached an all-time high of 78 percent.
This level of participation exceeded the previous record of 73 percent,
achieved in 2003, which demonstrates a strong commitment to the
employee satisfaction process throughout the agency. For the first
time, all surveys were completed using either web-based or telephone-
based technologies. This allowed IRS to maximize the cost benefits,
time savings, and user-friendliness of an electronic mode of survey
administration.
The agency wide employee satisfaction is the measure of employees'
satisfaction with his/her job at the IRS. At the Service-wide level,
the results of Survey Item 17, which asks "Considering everything, how
satisfied are you with your job?" are used as the sole determining
factor in the externally reported results. The IRS agency wide employee
satisfaction was 60 percent in 2004, the same as in 2003, but below the
62 percent target for 2004.
Additionally, survey questions regarding employees' perception of
management practices, organizational barriers, and overall work
environment are used in the internally reported results. IRS results
improved for survey items addressing: receiving recognition and
receiving feedback on progress. IRS provided results of "SURVEY2004" to
employees for discussions in workgroups, with subsequent action plans
developed to ensure continued improved working conditions. Responses to
questions about training and development also continued to improve. The
addition of the employee scholarship program targeted at key staffing
needs reinforced our commitment to employee development. The Human
Resources Investment Fund, established in response to earlier employee
feedback about training needs, also continued as a complement to the
scholarship program.
A majority of employees (65 percent) reported that they participated in
team feedback and action planning sessions, a crucial part of the
employee satisfaction process. Employees who participated in these
meetings also reported much higher levels of satisfaction than
employees who did not. 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 prior years, this approach
proved to be very beneficial for a number of business units. Based on
their value-added in FY2004, the new survey questions on the topics of
safety, security and participation in feedback sessions will be
included in FY2005.
Index of Employee Perceptions of Performance Management System:
This is an index based on how employees responded to certain questions
on the Federal Human Capital Survey conducted annually by the Office of
Personnel Management. Benchmark data has been collected and is being
analyzed to develop recommendations for target levels and goals to be
established by IRS Senior Leadership.
President's Management Agenda Scorecard:
The President's Management Agenda scorecard is a measurement of the
IRS' progress in implementing the President's Management Agenda. See
the addendum to section V, Financial Highlights.
Ratio of Mission-Critical Occupations (MCO) Employees to Non-MCO
Employees:
This is the proportion of staff employed in mission-critical areas,
those that support tax processing, administration, and enforcement
functions of the IRS, to the non mission-critical areas. Though not yet
required to report at the Bureau level, the Human Capital Office will
be prepared to deliver a human capital scorecard during the
implementation phase of the Human Capital metrics project. Human
Capital Metrics will be reported by December 2004.
Benchmark IT Services and Development to Private Industry Standards for
Cost, Scheduling, and Functionality:
This measures Business Systems Modernization performance in budget,
cost controls and program requirements stability.
For FY 2005, Business Systems Modernization measures will include:
1. The Contracted Program Cost and Scheduled Variance from prior year
measure, which will indicate the variance in obligated amounts from
original contract amounts, and the variance in original schedule to
current schedule.
2. The Contracted Requirements Stability and Contracted Requirements
Delivered from prior year measure will indicate variance in cumulative
contracted requirements from original contracted baseline requirements
and percent of total contracted requirements that are delivered.
New Modernization, Information Technology and Security Services (MITS)
measures include:
1. Percent System Response Time (Under One Second), which is the
percent of time that the major tax processing systems responds in a
timely manner to an end user. It records the round-trip Systems
Response Time from a customer perspective.
2. The Percent Systems Availability measure is the percent of the total
scheduled hours in a day that a system is available for use by an end
user.
In FY 2005, these performance measures relating to Modernization and
Information Technology Services will replace the two FY 2004
performance measures below included in the Treasury Performance
Reporting System.
1. Percent Resolution at First Contact:
Description: The percent of tickets that can be resolved by the
technician making first contact that are in fact resolved by the first
contact technician. A ticket is a request to fix a technology problem
sent to the Modernization and Information Technology Services (MITS)
Help Desk.
FY 2004 Performance: Target Achieved. Efforts that contributed to
accomplishing the Percent Resolution at First Contact target of 70
percent include extensive training for Enterprise Service Desk (ESD)
Call Assistors with emphasis on first call resolution, proper coding of
problem management tickets, and increased management and employee
attention to improving customer service. In addition, tickets are
evaluated against the criteria published in the IRS Data Dictionary,
which provides definitions of IRS performance measures, to determine
the potential to be resolved at first contact.
Percent Resolution at First Contact:
FY 2001: N/A;
FY 2002: 47%;
FY 2003: 70%;
FY 2004 Plan: 70%;
FY 2004 Actual: 72%.
[End of table]
Future Plans: Enterprise Service Desk assistors will continue to review
categories of tickets that have the potential to be resolved on first
contact. As additional tools are deployed, the potential for first
contact resolution will increase. Improved communication with
Enterprise Systems Management and Technical Services, combined with
training updates and implementation of a knowledge base (Get Answers),
will provide assistors immediate access to a more comprehensive view of
technical Information Technology solutions. In addition, ESD was
selected to pilot a measures program targeted at measuring
productivity, including problem resolution at first contact.
Also, modifications to the web-based ticketing tool are under
investigation. These modifications will allow more tickets to be
expeditiously assigned to the most appropriate service provider.
Additional management controls will be implemented to ensure that
tickets with 4 and 8-hour priority target resolution times are
appropriately opened and assigned timely. Quality review of these as
well as other tickets will continue. A ticket performance review system
will be implemented so that review results can be captured and reports
generated, allowing management to quickly address areas needing
improvement.
2. Percent Resolved On Time:
Description: The percent of tickets closed within the time targets set
forth in the Corporate Problem Management Guidelines and the Master
Service Level Agreement. A ticket is a request to fix a technology
problem sent to the Modernization and Information Technology Services
(MITS) Help Desk.
FY 2004 Performance: Target Achieved. Efforts that contributed to
accomplishing the Percent Resolved on Time target of 90 percent include
the fiscal year 2003 deployment of a web-based inventory management
reporting tool, extensive training for service providers regarding
enterprise problem management procedures, including the proper coding
of problem management tickets, and increased management and employee
attention to improving customer service.
Percent Resolved On Time:
FY 2001: N/A;
FY 2002: 71%;
FY 2003: 65%;
FY 2004 Plan: 90%;
FY 2004 Actual: 90%.
[End of table]
Future Plans: Plans are in place for the Enterprise Service Desk to
more quickly assign break/fix tickets when resolution cannot be
achieved. The target resolution times for these tickets are two or four
business days. Additionally, modifications to the web-based ticketing
tool are under way to enable tickets to be expeditiously assigned to
the most appropriate service provider, decreasing the handle time
required by the Enterprise Service Desk.
Additional management controls will be implemented to ensure that
tickets with 4 and 8-hour priority target resolution times are
appropriately opened and assigned timely. Quality review of these as
well as other tickets will continue. A ticket performance review system
will be implemented so that review results can be captured and reports
generated, allowing management to quickly address areas needing
improvement.
III. System Controls and Legal Compliance:
Federal Managers' Financial Integrity Act (FMFIA):
During FY 2004, the Internal Revenue Service (IRS) complied with the
internal control requirements of the Federal Managers' Financial
Integrity Act (FMFIA) and the review requirements of the Federal
Financial Management Improvement Act (FFMIA). 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;
--Laws and regulations are followed;
--Controls are sufficient to minimize improper and erroneous payments;
The number of open material weaknesses for IRS is six. Because the IRS
has remaining material weaknesses and the IRS' financial management
systems do not substantially comply with FFMIA, IRS provides qualified
assurance that the objectives of the FMFIA are being achieved.
The material weaknesses are:
--Measuring Taxpayer Compliance (scheduled to close March 2005);
--Collection of Unpaid Taxes (scheduled to close April 2007);
--Improve Modernization Management Controls and Processes (scheduled to
close January 2006);
--Financial Accounting of Revenue-Custodial (Future releases canceled
for Custodial Accounting Project (CAP) until successful implementation
of CAP Release 1);
--Earned Income Tax Credit Non-Compliance (scheduled to close September
2006);
--Computer Security (new action plan under development);
Federal Financial Management Improvement Act (FFMIA):
As of September 30, 2004, 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. Future releases for the Integrated Financial System
(IFS) and Custodial Accounting Project (CAP) have been canceled pending
successful implementation of Release 1 for each system. At that time
new action plans will be developed and added for future releases. 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, 2004, 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. Action plans to address the non compliance
issues are being monitored by the Financial and Management Controls
Executive Steering Committee.
Reports Consolidation Act of 2000:
In accordance with the Reports Consolidation Act of 2000, the IRS
provides assurance that the critical performance measures are reliable.
Internal Revenue Manual 1.5, "Managing Statistics in a Balanced
Measurement System Handbook," provides a detailed measures template
that facilitates a common understanding across the organization of a
measurement's definition, formula, reliability and reporting
frequency. These controls enable IRS to ensure that the data reported
to external reviewers, such as Congress, Treasury, Office of Management
and Budget, and the Oversight Board, is consistently collected and
defined over time.
Continuity of Operations:
IRS made significant progress in further improving our Continuity of
Operations (COOP) capabilities, policies, and processes. IRS conducted
a number of COOP table-top exercises and participated in the successful
government-wide COOP test conducted in May 2004 (known as Forward
Challenge 04). Remaining risks in this area have been reduced to
reasonable levels.
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 the Office of Management and Budget, 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 Government
Accountability 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. As the IRS begins FY2005, it is faced with challenges,
both from within and outside of its organization. The following
discussion identifies some of the most significant challenges.
Abusive Tax Shelters - Abusive tax avoidance transactions are a
continuing challenge and are a very high enforcement priority. The
ongoing evolution in the complexity, structure and variety of tax
shelters, coupled with the economic rewards experienced by promoters
and investors, makes them difficult to detect and eliminate.
Significant resources have been allocated to detect, deter and resolve
abusive transactions. Several tools were instituted to enhance the
transparency and detection of these transactions, including
registrations, disclosures and investor lists. Enhanced emphasis on
published guidance puts taxpayers on notice that certain transactions
should be avoided. Processes to insure efficient, consistent and timely
identification, development and resolution of these issues are also
utilized, including promoter investigations, penalty policies and
settlement initiatives. Criminal enforcement and civil injunctions are
used as appropriate. Recently, the Joint International Tax Shelter
Identification Centre was established, representing a cross-border
approach with Canada, Australia and the United Kingdom, to further
enhance our ability to address abusive activity on a global basis.
Technology Modernization Projects - In FY 2003 and 2004, the IRS took
steps to balance the scope and pace of its technology modernization
program with the management capacity of the IRS and the modernization
contractor consortium. While this caused IRS to defer the start of
several new projects, the delay allowed improvement in overall program
management and focus. Implementing a newly-developed Business Systems
Modernization (BSM) Action Challenges Plan helped put the necessary
policies and procedures in place to strengthen the IRS's overall
performance on the modernization program, including improving
management controls and capabilities and systems acquisition practices.
While significant progress was made, there is still much more work to
do and the IRS has now formulated a number of key additional steps to
address improving overall program performance.
New projects are planned in the next several years to help assistors
provide better quality answers to customer account questions and to
provide private collection agencies a support application which will
help the IRS collect delinquent taxes. The Custodial Accounting Project
(CAP) will provide the IRS a data warehouse of detailed taxpayer
account information to be used for analysis and financial reporting to
oversight organizations. The first release of CAP will address revenue
from individual taxpayers on initial tax payments. The Integrated
Financial System (IFS) will operate as the IRS's new core accounting
system. IFS Release 1.0 will replace the IRS's core financial systems -
including expenditure controls, accounts payable, accounts receivable,
general ledger, budget formulation, and purchasing controls. The IRS
will continue to intensely monitor its BSM projects to ensure timely
rollout to meet operational needs.
Taxpayer Attitudes - The IRS Oversight Board annually commissions an
independent survey by NOP World (formerly Roper Starch Worldwide) to
assess taxpayers' attitudes. The results of the 2003 survey show that
taxpayers report that their 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 fewer taxpayers
feel that everyone who cheats should be held accountable. Other results
from the 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 Government Accountability 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.
Management Challenge or High Risk Area: Systems Modernization of the
IRS;
Budget Activity: Business Systems Modernization.
Management Challenge or High Risk Area: Processing Returns &
Implementing Tax Law Changes During Filing Season;
Budget Activity: Pre-Filing;
Budget Activity: Filing.
Management Challenge or High Risk Area: Providing Quality Customer
Service Operations; Improving Taxpayer Service;
Budget Activity: Pre-Filing;
Budget Activity: Filing;
Budget Activity: Compliance.
Management Challenge or High Risk Area: Complexity of the Tax Law;
Budget Activity: Compliance.
Management Challenge or High Risk Area: Tax Compliance Initiatives;
Budget Activity: Pre-Filing;
Budget Activity: Filing;
Budget Activity: Compliance;
Budget Activity: Research & SOI.
Management Challenge or High Risk Area: Erroneous Payments; Earned
Income Credit Noncompliance;
Budget Activity: Pre-Filing;
Budget Activity: Filing;
Budget Activity: Compliance;
Budget Activity: EITC.
Management Challenge or High Risk Area: Collect Unpaid Taxes;
Budget Activity: Pre-Filing;
Budget Activity: Compliance;
Budget Activity: Research & SOI.
Management Challenge or High Risk Area: Integrating Performance and
Financial Management – Financial Management; Compliance with Federal
Financial Managers Improvement Act (FFMIA) of 1996;
Budget Activity: General Management & Administration.
Management Challenge or High Risk Area: Integrating Performance and
Financial Management – Performance Management: Performance Measures and
Cost-Based Performance Information;
Budget Activity: General Management & Administration.
Management Challenge or High Risk Area: Security of the IRS –
Information Security;
Budget Activity: Information Services.
Management Challenge or High Risk Area: Security of the IRS –
Employees and Facilities;
Budget Activity: Shared Services.
Management Challenge or High Risk Area: Human Capital;
Budget Activity: General Management & Administration.
Management Challenge or High Risk Area: Taxpayer Protection and Rights;
Budget Activity: Pre-Filing;
Budget Activity: Filing;
Budget Activity: Compliance.
[End of table]
The following pages summarize each Management Challenge and High-Risk
issue, FY 2004 accomplishments, and actions identified for completion
in FY 2005 and beyond;
Systems Modernization of the IRS:
Issue: The modernization of the IRS tax administration and internal
management systems and processes is the greatest long-term challenge
the IRS faces. Recognizing the long-term commitment needed to solve the
problem of modernizing antiquated information systems, Congress created
a special Business Systems Modernization (BSM) program to bring the IRS
business systems to a level equivalent with best practices in the
private and public sectors.
Actions Taken:
In FY 2004, IRS implemented three major recommendations resulting from
external independent studies conducted in late FY 2003:
* Scale back the modernization portfolio to better align with IRS and
contractors' capacities;
* Engage IRS business units to drive the projects with a business
focus;
* Improve contractor performance on cost, scheduling, and
functionality;
The studies also raised a number of other key improvement
opportunities, including;
* Adding outside expertise to manage the program and to complement IRS
skills;
* Ensuring projects are staffed appropriately;
* Adhering to methodologies in areas such as configuration management,
cost and schedule estimating, and contract management;
* Simplifying the budget process;
* Initiating the testing of the CADE Business Rules;
IRS used the results from the four comprehensive studies to create a
BSM Challenges Action Plan comprised of more than forty action items.
Since then the IRS has closed several key action items, including:
clarifying the roles of committees as advisory to enforce that
accountability resides with individuals and not committees, identifying
"blockers" on contracting issues, appointing business leaders to each
project and defining their roles, establishing a risk-adjusted schedule
and new baseline for CADE Releases 1.0 and 1.1, and increasing the
frequency of CADE reviews with the business leader to twice monthly.
Many of the action items are still works-in-progress, some of which
will take time to fully complete. Others will span the life of the BSM
program.
Modernized Functionality Delivered to-Date:
* E-Services delivered electronic services to tax practitioners and
other third parties, such as banks and brokerage firms that file Form
1099s.
* The first and second phases of Modernized e-File (MeF) were released,
which provide electronic filing for the first time to large
corporations and tax exempt organizations. Ninety-nine forms and
schedules for corporations and tax-exempt organizations are available;
* Customer Account Data Engine (CADE) Release 1.1 went into production
in July 2004, processing a small number of the simplest tax returns (a
subcomponent of the 1040 EZs) for the 2004 filing season, and issued
refunds up to 50 percent faster. Full implementation will allow IRS to
process tax returns on a 24-hour cycle, ending the forty-year old
standard of processing on a weekly cycle within the current master
file.
* In FY 2004, there have been 23.9 million accesses to the Internet
Refund/Fact of Filing (IRFoF) application, with 14.8 million services
provided.
* In FY 2004, there have been 12.3 million accesses to the Internet
Refund/Advance Child Tax Credit (IRACTC) application, with 9.6 million
services provided.
Actions Planned or Underway;
* Custodial Accounting Project (CAP) will deploy an integrated link
between tax administration revenue financial information and internal
management administrative financial information. Custodial Accounting
Project Release 1.2 is scheduled to deliver mid-year 2004 changes and
the CADE data solution. (11/2004);
* The first steps in implementing the new Filing & Payment Compliance
series of projects is designated Collection Contract Support and will
enable private collection agencies to supplement the IRS internal
collection staff. (Date To Be Determined upon passage of legislation);
* Integrated Financial System (IFS) will operate as the IRS new core
accounting system. Release 1.0 will deploy expenditure controls,
accounts payable, accounts receivable, general ledger, budget
formulation, and purchasing controls. (11/2004);
* CADE Release 1.2 will include tax law changes for filing season 2005.
IRS estimates that CADE will process more than two million of the most
basic 1040 EZ tax returns during the 2005 filing season. (01/2005);
* Modernized e-File, MeF Release 3.0, includes additional corporate and
tax-exempt organization forms, an interface with state retrieval
systems, a redesign of the signature matching process, and tax law
changes for filing season 2005.
* Update the e-Services platform and software. (09/2005);
* Develop and publish e-Strategy for Growth: Expanding e-Government for
Taxpayers and Representatives. (09/2005);
* Complete Modernized e-File re-sequencing plan to support Disaster
Recovery requirements. (09/2005);
New Business Systems Modernization measures include: The Contracted
Program Cost and Scheduled Variance from prior year measure, which will
indicate the variance in obligated amounts from original contract
amounts, and the variance in original schedule to current schedule. The
Contracted Requirements Stability and Contracted Requirements
Delivered from prior year measure will indicate variance in cumulative
contracted requirements from original contracted baseline requirements
and percent of total contracted requirements that are delivered.
New Modernization, Information Technology and Security Services (MITS)
measures include: Percent System Response Time (Under One Second),
which is the percent of time that the major tax processing systems
responds in a timely manner to an end user. It records the round-trip
Systems Response Time from a customer perspective. The Percent Systems
Availability measure is the percent of the total scheduled hours in a
day that a system is available for use by an end user.
Processing Returns & Implementing Tax Law Changes during the Filing
Season:
Issue: The filing season impacts every American taxpayer and is always
a highly critical program. Many programs, activities and resources have
to be planned and managed effectively for the filing season to be
successful.
Actions Taken:
The 2004 filing season was very successful as electronic filing reached
a record high of over 61 million returns, an increase of approximately
16 percent from 2003.
* Home computer usage by individuals to prepare and e-file tax returns
soared to over 14 million. Tax professional use of e-file jumped over
15 percent, with 42.8 million filing electronically.
* In its second year, 3.5 million taxpayers used Free File, the on-line
filing service, representing a 26 percent increase from 2003.
* More taxpayers used the IRS web site, including the "Where's My
Refund?" feature which allows taxpayers to inquire if the IRS received
their return and whether their refund was processed and sent to them.
There were almost 24 million inquiries to the on-line service to check
on refunds.
* With more account and tax law inquiries moving to the Internet for
resolution, the toll-free level of service for taxpayers who do not get
a busy signal and get into the system is at 87 percent.
* IRS processed over 131 million individual returns and issued
approximately 100 million refunds totaling $207.9 billion.
* Nearly 49 million taxpayers chose direct deposit of refunds this
year, an increase of just under 11 percent increase from the 2003
record.
Actions Planned or Underway;
* 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.
(09/2005);
* Develop secure access for taxpayers who file electronically to enable
them to review their account electronically. (09/2005);
* Complete the ramp down of the Memphis Submission Processing Center
(MSPC). (09/2005);
* Begin development of strategies to consolidate the Philadelphia
Submission Processing Center (PSPC). (Multi-year initiative);
* Continue to rollout The Transcription Delivery System (TDS) to
improve efficiency by implementing a "One-click process" for servicing
transcript requests. (12/2005);
* Ensure the Corporate Filing Season Readiness Process is operational
for filing seasons 2005 and 2006 and covers all aspects of the filing
season, including the Annual Readiness Certification. (09/2005);
The majority of filing season activities are embedded and measured in
key operational programs; however, during the filing season critical
success factors are measured by the following: Percent of Individual
Returns Processed Electronically; Percent of Business Returns Processed
Electronically; Individual Return Deposit Timeliness - paper; Business
Return Deposit Timeliness; Individual Return Deposit Error Rate;
Business Return Deposit Error Rate; Refund Timeliness - Individual
(paper); Refund Error Rate with Systemic Errors - Individual (paper);
and Business Master File Refund Interest. Note: Long-term goal of
achieving 80 percent of returns processed electronically.
Providing Quality Customer Service Operations; Improving Taxpayer
Service:
Issue: Providing top quality service to every taxpayer in every
transaction is an integral part of IRS strategic and modernization
plans.
Actions Taken:
* Assisted taxpayers in filing correct, complete and compliant returns
through pre-filing agreements and Industry Issue Resolutions.
* Emphasized increased use of Published Guidance to clarify the law and
resolve uncertainty regarding its application.
* Deployed the e-File application process - the online, integrated
application for participation in both individual and business IRS e-
File programs.
* Redesigned and implemented an additional six taxpayer notices in
January 2004.
* In August 2004, conducted its first full competitive sourcing study,
which resulted in a decision to keep the Area Distribution Center
functions in-house.
* Initiated a Collection Notice Project Team to modify the entire range
of Collection notices. The team developed new Balance Due and Taxpayer
Delinquency notices.
* Stakeholder Partnership, Education & Communication (SPEC) is using
research databases such as the Census Bureau and Mappoint to identify
the customer segment penetration of SPEC's underserved population and
to support Field Assistance Taxpayer Assistance Center (TAC) Offices.
* Completed 79 models of the Taxpayer Assistance Center model redesign,
which provides adequate space to accommodate customer traffic,
modernized workstations, technology enhancements, along with improved
privacy and enhanced security.
* Networked Field Assistance Queuing Management to 158 Taxpayer
Assistance Centers to facilitate customer traffic.
* Deployed Modernized e-File, which provides e-filing for the first
time to large corporations and tax-exempt organizations.
* Redesigned Form 941 and Schedule K-1 to improve information
formatting and readability; affecting 6.6 million employers who file
quarterly returns.
Actions Planned or Underway;
* Improve the quality and clarity of computer-generated notices issued
to taxpayers to reduce the number of telephone contacts and make it
easier for taxpayers to understand and comply with their tax
requirements. (09/2005);
* Expand electronic tax products for businesses including
implementation of the second phase of the Internet Employer
Identification Number (EIN) application. (01/2005);
* Begin the rollout of Contact Recording, which will enable
synchronized voice/data recordings to monitor face-to-face
interactions, assessing quality as well as trends. (06/2005);
* Improve and enhance the availability of online services such as
Internet EIN (Employer Identification Number), CAF (Centralized
Authorization File) and PPS (Practitioner Priority Services). (09/
2005);
* Continue redesigning and simplifying notices, forms and publications.
(09/2005);
* Continue to work with private industry to expand low-cost Internet
filing options. (09/2005);
* Finish deployment of e-Services to include additional customer access
to electronic transcript delivery, disclosure authorization and
electronic account resolution. (09/2005);
* Enhance research to maximize the best use of resources for the
volunteer income tax assistance (VITA) site identification, partnership
development and return preparation. (09/2005);
* Complete remaining Taxpayer Assistance Center (TAC) Model redesign to
retrofit TACs to provide adequate space to accommodate customer
traffic, provide modernized workstations, integrate technology
enhancements, improve privacy and enhance security. (09/2005);
* Expand the Internet Refund Fact of Filing (IRFOF) application to
reduce toll-free demand and offer customers alternative methods of
service. (09/2006);
* Develop a TeleFile/Internet electronic funds withdrawal (Direct
Debit) application for notice payments. (09/2006);
* Develop an electronic funds withdrawal (Direct Debit) application for
installment agreements. (09/2006);
* Complete the rollout of Q-Matic (Queuing Management) to facilitate
customer traffic and workload planning. (09/2006);
* Begin the rollout of Contract Recording in Taxpayer Assistance
Centers, which will enable synchronized voice/data recordings to
monitor face-to-face interactions, assessing quality as well as trends.
(6/2005);
While quality customer service remains a foundation of our Strategic
Plan and its performance is monitored and measured in key IRS programs,
two measures are used as indicators of IRS success in this high risk
area: Toll-free Customer Satisfaction and Field Assistance Walk-in
Customer Satisfaction.
Complexity of the Tax Law:
Issue: Recent Annual Reports by the National Taxpayer Advocate (NTA) to
the Congress cite tax law complexity as a serious problem for
individual and business taxpayers. The effect of tax law complexity is
compounded as the IRS modernizes. Since complexity can be a major
factor in the cost of operations, IRS must devote resources to
simplifying tax administration within current law while at the same
time modernizing its systems and processes.
Actions Taken:
The National Taxpayer Advocate's 2003 Annual Report to Congress focuses
on three themes: "extremely serious" problems facing taxpayers, the
need to balance enforcement and customer service, and how Congress and
the IRS should handle "perceived" problems in tax administration. The
report urges Congress to address the alternative minimum tax before it
bogs down tax administration and increases taxpayers' cynicism to such
a level that overall compliance declines. The National Taxpayer
Advocate also proposes that Congress direct Treasury to create a joint
task force to compile information about the extent of 'problematic
paid-preparer behavior.
Actions Planned or Underway:
The National Taxpayer Advocate's Fiscal Year 2005 Objectives Report to
Congress provides a number of examples of TAS activities that will
address the issues cited above, including but not limited to:
* Providing Congress with legislative recommendations in the upcoming
Annual Report to Congress (December 2004), including a revised non-wage
withholding recommendation.
* Finalizing the Taxpayer Rights Impact Settlement.
* Continuing to work with the IRS Office of Chief Counsel and the
Treasury Department on revisions to the regulations under Internal
Revenue Code 7216, relating to the use and disclosure of tax return
information by tax returns preparers.
* Exploring IRS' training program relative to how employees are
familiarized with TAS and with issues pertaining to protection of
taxpayer rights.
* Examining the possibility of a Unified Family Credit that will
combine the provisions of the Earned Income Tax Credit, Child Tax
Credit, and Dependency Exemption, thereby further reducing taxpayer
compliance burdens associated with claiming these provisions;
* Encouraging IRS to develop a system to protect victims of identity
theft from unwarranted, intrusive, and repetitive audits and collection
activity attributable to the misreported income;
* Participating in research initiatives such as Abusive Tax Schemes:
The "Tipping Point" Study; The Impact of Representation on the Outcome
of Earned Income Tax Credit (EITC) Audits, Federal Case Registry Study;
EITC Certification Test; EITC Pre-certification Test; EITC
Recertification; Downstream Effects of Compliance Initiatives.
* Advocating that taxpayers be provided the opportunity for an
independent appeal of their case with an IRS Appeals Officer.
Tax Compliance Initiatives:
Issue: One of the IRS's strategic goals is to improve service options
by helping people to understand their tax obligations and make it
easier to participate in the tax system. The IRS management challenge
is to establish a tax compliance program that identifies those citizens
who do not meet their tax obligations, either by not paying the correct
amount of tax or not filing proper tax returns, and ensure that they
meet their tax obligations.
Actions Taken:
* Established the Exempt Organization Compliance Unit to address non-
compliance by tax-exempt organizations through correspondence and
telephone contacts, reaching a greater number of organizations than
possible through traditional audits.
* The IRS aggressively investigated allegations of fraud among consumer
credit counseling organizations. Criminal Investigation is
coordinating with TE/GE to determine the extent of the fraud; Criminal
Investigation is creating liaisons to ensure that any referrals are
directed to them.
* Issued six notices and announcements related to corporate tax
shelters to increase examination compliance on tax shelter promoter
activity through increased investigations;
* The IRS is promoting and supporting the Joint International Tax
Shelter Identification Center (JITSIC) with the United States, Canada,
United Kingdom, and Australia, to coordinate knowledge and actions to
detect and deter Abusive Tax Avoidance Transactions (ATAT). JITSIC will
focus primarily on promoters and investors.
* The IRS Office of Tax Shelter Administration, Chief Counsel, and
Treasury began regular meetings to discuss trends identified through
disclosures, registrations and other sources regarding ATAT. These
meetings promote identification of issues and earlier action to detect
and deter ATATs through guidance or legislation.
* Publicized a settlement initiative for taxpayers who invested in an
abusive tax shelter commonly known as "Son of Boss," which evolved from
a bond and option sales strategy shelter. More than 1,500 taxpayers
files Notices of Election by June 21, 2004 to accept an IRS settlement
offer to resolve their tax issues.
* Implemented a Schedule M3 for corporate taxpayers to expand the
detail of data provided on the tax return.
* Identified and prioritized Reporting Compliance Risks specifically
addressing Offshore Compliance Risks, Special Purpose Entities, and
book-to-tax differences.
* Implemented strategies to ensure compliance with transfer pricing
rules and documentation provisions, including new cost-sharing and
services regulations.
* Expanded the use of limited issue focused examination processes to
increase IRS ability to improve case resolution.
* Resolved tax shelter issues in a timely and consistent manner by
improving issue development, resolution and settlement strategies
through the application of alternative dispute resolution procedures
and other issue resolution programs, such as Pre-filing Agreements,
Industry Issue Resolutions and Fast Track.
* Focused pre-filing efforts on abusive trusts, e-commerce, flow-
through entities, voluntary agreements and burden reduction.
* Advanced the use of Voluntary Compliance Agreements, reducing the
need for traditional enforcement actions.
* Developed a strategy to address the growth of noncompliance in the e-
commerce market segment.
Actions Planned or Underway:
* The IRS' Individual Reporting Compliance Study for Tax Year 2001 is
in its final stages. Data from this study will be available by December
31, 2004.
* Begin a pilot reporting compliance study of flow-through entities. If
the results from the pilot warrant, IRS will request authorization for
a larger study of flow-through entities. (10/2004);
* Establish the Exempt Organization Fraud and Financial Transactions
Unit to provide specialized exempt organization expertise to law
enforcement in identifying and working fraud cases. (4/2005);
* Streamline Joint Committee and claims processes. (09/2005);
* Continue to explore remote audit alternatives and review audit team
composition and placement practices. (09/2005);
* 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. (09/2005);
* Focus resources on key areas of noncompliance with tax laws
including: the promotion of abusive tax schemes, the misuse of devises
such as offshore accounts to hide or improperly reduce income, the use
of abusive corporate tax avoidance transactions, the underreporting of
income by higher-income individuals and non-filing by higher-income
individuals. (09/2005);
* Continue to identify flow-through entities and other strategies used
to disguise questionable structured transactions by high-income
taxpayers. Detect those engaging in abusive tax practices through
enforcement, full implementation of K-1 matching, education and
research. (09/2005);
* Develop enhancements to a multifunctional non-filer strategy that
will target outreach and compliance efforts; develop alternative
treatments to influence non-filing taxpayer behavior and promote
compliance. (09/ 2005);
* Strengthen Field Assistance enforcement programs to increase
voluntary compliance and reduce the risk of noncompliance. (09/2005);
* Enhance risk-based compliance approaches for both collection and
examination activities. Continue to ensure that proposed long-term
solutions are aligned and technically compatible. (09/2005);
* Complete the examination phase of the individual income tax reporting
compliance study.
* Implement a pilot reporting study for partnership and sub-chapter S
corporations.
* Initiate research to assess changes in taxpayer Earned Income Tax
Credit (EITC) filing volume and track EITC return math error accuracy,
through outreach campaigns and volunteer tax return preparation.
(Ongoing);
The IRS developed two measures to assess payment compliance. The
Voluntary Payment Compliance Rate (VPCR) is the percentage of the total
tax liability reported on timely-filed returns that is paid in a timely
manner. The Cumulative Payment Compliance Rate (CPCR) is the ratio of
timely and untimely payments to the total tax liability reported on
timely filed returns. The National Research Program (NRP) updates the
VPCR annually and the CPCR monthly. The NRP Office has delivered the
payment compliance measures for Tax Years 1999 through 2002. In 2001,
the Filing Rate for individual income taxpayers for Tax Years 1992
through 1999 was developed. The IRS Office of Research subsequently
updated the Filing Rate on an annual basis.
Erroneous Payments; Refund Fraud; Earned Income Credit Noncompliance:
Issue: 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. Despite extensive education and
outreach, the EITC has continued to experience high error rates due to
its complicated calculation, taxpayer awareness of eligibility, and
even fraud. IRS processing systems currently lack the capacity to
detect some of the errors before the EITC claim is paid and IRS
business processes are not designed to adequately administer the
credit.
Actions Taken:
* Developed a detailed, long-term EITC business plan in the form of a
Concept of Operations with a focus on a balanced EITC Program - one
that reduces erroneous payments while increasing participation by
eligible taxpayers. These efforts during FY 2004 included customer
service and public outreach campaigns, enforcement activities and
enhanced research efforts.
* Continued to pursue and implement components of the five-point
initiative announced in June 2003 to improve service, fairness and
compliance with the EITC rules.
* Took aggressive actions to reduce overage inventory and cycle time.
In FY 2004, 1.30 percent of EITC audits were in process over 365 days.
This is down significantly from the 6.24 percent reported in the prior
year. IRS also reduced audit cycle time by 7.51 percent from the prior
year.
* Continued to educate taxpayers through partnerships with key
stakeholders and a public service campaign.
* Worked with over 180 partners at the national level and 165
community-based partners to educate taxpayers on EITC requirements. The
IRS public education campaign generated over one-half billion potential
contacts through media and grassroots community partnerships.
* Began several tests to evaluate new ways of reducing erroneous EITC
payments while maintaining participation by eligible taxpayers;
1. Qualifying Child Test: Required EITC claimants to certify that they
meet qualifying child residency requirement before paying out the
refund.
2. Filing Status Test: Reviewed filing status claims to ensure they are
correct.
IRS selected claimants whose filing status had changed to one that
increased the value of the credit (generally, from married filing joint
to head of household).
3. Misreporting Income (Automated Underreporter) Test: Enhanced error
detection through the automated under-reporter program. This test
focuses not on the number of cases IRS is reviewing, but on improved
selection methodologies.
* Continued to use a multifaceted approach to address EITC compliance
including pre/post refund examinations, use of math error authority,
and the Criminal Investigation's Fraud Detection Centers to identify
and address erroneous claims.
* Examined approximately 268,500 EITC claims and recommended additional
dollars assessed of about $606 million, an average of $2,259 per
return.
* IRS Criminal Investigation identified 56,974 fraudulent returns and
$180,695,090 of EITC as fraudulent.
Actions Planned or Underway;
* Ensure that EITC examination inventories are current to prevent an
adverse impact on subsequent claims for the EITC by taxpayers.
(Ongoing);
* Support the implementation of technology solutions, including Risk
Based Scoring and Selection - RBSS (01/2005); Selection/Assignment and
Decision Support Tool - DST (01/2006); Corporate Inventory Management-
CIM/Routing; and Contact Management/Outreach (01/2006).
* Continue testing approaches to identify taxpayers who misreport
income. (Ongoing);
* Test approaches to substantiate EITC eligibility for claimants whose
returns are associated with a high risk of error. (Ongoing);
* Develop an integrated strategy to enhance EITC compliance through
return preparers. (03/2005);
* Complete analysis of the certification initiative. (07/2005);
* Assess the overall EITC marketing/awareness campaigns that target the
eligible EITC non-claimant population and refine/refocus as necessary
to improve compliance and increase overall participation. (Ongoing);
* Ensure the EITC Outreach Program educates the diverse EITC taxpayer
population and tax practitioners about EITC issues and provides
sufficient EITC products and services to assist Limited English
Proficient taxpayers. (Ongoing);
* Execute a strategy that leverages partnership opportunities with
states that offer tax credits comparable to the EITC. (09/2005);
* Determine the impact of education on the high rate of preparer EITC-
related errors. (12/2005);
* Evaluate the effectiveness of a procedure that will allow IRS to
obtain the National Directory of New Hires (NDNH) from Health and Human
Services to provide quarterly employee wage information by employer,
and also information on newly hired employees. This information will
allow for the identification of fraudulent W-2s or the substantiation
of valid W-2s (Dependent upon authorizing legislation). (12/2005);
* Provide improved EITC information and customer access via IRS
internal and external web sites. (Ongoing);
* Charter 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. (Ongoing);
* Utilizing results of the National Research Program (NRP) study, IRS
will assess and refine the EITC compliance strategy based on current
research and data. (Ongoing);
* Explore new data sources to enhance Dependent Database usability.
(Ongoing);
* Develop and implement procedures to use the Dependent Database to
screen and select amended returns. (Ongoing);
In accordance with the Improper Payments Information Act of 2002 (IPIA)
and the Department of the Treasury implementation of this Act, IRS
conducted risk assessments on programs with funding greater than $10
million. IPIA legislation has greatly expanded the Government's efforts
to identify and reduce erroneous payments in the government's programs
and activities. It requires an annual review of programs and activities
to identify those that are susceptible to significant erroneous
payments. A significant erroneous payment is an estimated error rate
and dollar amount that exceeds the threshold of 2.5 percent and $10
million. Once high-risk programs are identified, a method for
systematically reviewing them is developed, and statistically valid
sampling is conducted to determine error rate estimates. Other than the
Earned Income Tax Credit, whose risk was identified several years ago,
IRS has no high risk programs that require baseline and annual error
rate measurements, or the development of a reduction plan with annual
targets.
Earned Income Tax Credit measures include: Percent of Eligible
Taxpayers Who File for EITC; Dollar Value of EITC Claims Paid in Error;
and Correspondence Exam: Total Number of EITC Returns Examined.
Collect Unpaid Taxes:
Issue: Collecting taxes due the government has always been a challenge
for the IRS. Congress and others are concerned that the decline in the
IRS's compliance and collections programs are eroding taxpayers'
confidence in the fairness of our tax system. The IRS's new effort to
review compliance, the National Research Program, provides IRS payment
and filing compliance data on a regular basis and with the first up-to-
date information on reporting compliance rates and sources of
noncompliance since tax year 1988.
Actions Taken:
* The IRS developed a comprehensive strategy and approach to modernize
technology and improve collection processes.
* Completed implementation of a decision tool for the automated
collection system that assists in managing calls and improve quality.
* Completed the data gathering phase of the National Research Program.
The results phase is expected to provide the first up-to-date
information on compliance rates and sources of noncompliance since it
was last measured using 1988 tax returns.
* Implemented contact recording capability at one call site, a tool
which allows managers to review call content with employees to focus on
quality and efficiency of taxpayer contacts. Capability is being
provided to other sites.
* Commenced a desktop integration pilot that enables collection
employees to provide better service and expedite case dispositions.
* Implemented Automated Queue announcements which provided management
flexibility in creating unique messages for taxpayers, providing for
additional payment options while on hold.
* Initiated the use of Predictive Models to better select inventory for
assignment to personnel. Those with a "full pay' indicator have the
highest priority.
* Working with Treasury, IRS developed a legislative proposal for the
use of Private Collection Agencies (PCA) to support its collection
efforts. On October 10, 2004, Congress passed the legislation. Next
steps include building a system and processes to allow PCAs to work
cases best suited for resolution based on their authority and skills.
* Procedures were implemented that enable collection employees to work
individual balance due cases exceeding $100,000, resulting in
significant and timely attention being paid to collecting high dollar/
high risk accounts.
* Increased closures of delinquent balance due cases 37 percent from FY
2002 to FY 2004, up 41 percent in phone collection and 31 percent for
in-person collection.
* Increased identified and secured delinquent returns from non-filers
49 percent from FY 2002 to FY 2004, up 55 percent in phone collection
and 40 percent for in-person collection.
Actions Planned or Underway:
* Improve efficiency, effectiveness, quality and case resolution in the
Automated Collection System. (09/2005);
* Develop and implement an Installment Agreement Risk and Treatment
Approach to improve case processing. (09/2005);
* Implement Collection Tax Delinquent Account Reengineering to better
identify cases with a high or low propensity to pay or to be
unproductive, thus allowing for a better use of scarce resources. (09/
2005);
* Continue to enhance and analyze payment and compliance data to set
baselines, targets and develop strategies annually. (09/2005);
* Enhance our comprehensive strategy to address the growing inventory
of accounts receivable and continue to maximize the effectiveness of
resources targeted to identifying and collecting unpaid tax
liabilities. (09/2005);
* Develop and implement the filing and payment compliance modernization
project. (09/2006);
* Develop a TeleFile/Internet electronic funds withdrawal (Direct
Debit) application for notice payments. (09/2006);
* Develop an electronic funds withdrawal (Direct Debit) application for
installment agreements. (09/2006);
* Continue to improve the processes employed in the collection of taxes
due within the Automated Collection System, including continued
emphasis on such programs as the Large Dollar Initiative. (Ongoing);
The collection of unpaid taxes is the cornerstone of the IRS
enforcement program. The key program measures to gauge success are:
Automated Collection System - Tax Delinquent Accounts and Field
Collection, Number of Cases Closed - Tax Delinquent Accounts.
Integrating Performance and Financial Management - Financial
Management; Compliance with Federal Financial Management Improvement
Act (FFMIA) of 1996:
Issue: The IRS's financial management systems remain a challenge to IRS
management, despite the IRS producing combined financial statements
covering tax custodial and administrative activities for the second
consecutive year. Also, the IRS achieved an unqualified audit opinion
from the Government Accountability Office (GAO) on all financial
statements for FY 2002 and FY 2003. IRS's 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.
Actions Taken:
* Continued implementation of the Custodial Accounting Project (CAP).
The development and testing work has been completed for Releases 1.0
and 1.1.
* Systems Acceptance Testing (SAT) is continuing on CAP Release 1.2.
* Certification and accreditation of Integrated Financial System (IFS)
and CAP completed.
Actions Planned or Underway;
* IFS on schedule to begin initial operating capability - November
2004.
* IFS on schedule to begin full operating capability - February 2005.
* CAP will be updated for mid-year tax law changes and begin to load
fiscal year 2005 data;
* CAP will be used beginning in June 2005 to perform a parallel audit
for the FY 2005 statements.
* The second release of CAP is currently on hold pending successful
completion of the Release 1 activities. CAP Release 2 will expand the
warehouse to include Business Master File (BMF) data and Non-Master
File (NMF) data.
Success is measured by a set of key milestones for each project
identified in the detailed project plans developed for Tier A projects.
Success is also measured by the Office of Management and Budget through
the President's Management Agenda. IRS receives scores for both Plan
and Status on a quarterly basis.
Integrating Performance and Financial Management - Performance
Management; Performance Measures and Cost-Based Performance
Information;
Issue: The purpose of the Government Performance and Results Act of
1993 (GPRA) is to increase agency accountability and improve the
quality and delivery of Government services. The GPRA holds Federal
agencies accountable for program results by emphasizing goal setting,
customer satisfaction, and results measurement. IRS could make
additional progress in linking its budget request to projected results
so that Congress could make more informed budget decisions and better
assess IRS' use of resources.
Actions Taken:
* IRS updated and published its strategic plan for FY 2005 - FY 2009.
The plan links the strategic goals and objectives to the performance
goals in the Annual Performance Plan and budget. Performance data is
collected, collated and reported through the Data Mart and Business
Performance Management System (BPMS) for the IRS' critical measures.
* IRS continued to expand the use of the Office of Management and
Budget's Program Assessment Rating Tool (PART). A five year-PART plan
was developed with new programs being added each year to reach the goal
of 100 percent of IRS programs being reviewed in five years.
* To facilitate the full integration of performance measures into the
budget and prepare a true performance-based budget, the IRS submitted a
proposal to restructure its budget.
* Reviewed current performance measures to transition from a largely
output-based system, to one focused on evaluating the outcomes for all
major processes.
* Continued to automate data collection and reporting through Data Mart
and the Business Performance Management System.
* IRS Operating Divisions linked their resources to relevant strategic
goals and objectives.
* Included twenty outcome measures and six efficiency measures in the
FY 2006 budget.
Actions Planned or Underway:
* Deploy the Integrated Financial System (IFS) to provide timely and
easier access to accurate and consistent financial data.
* Once the IFS is implemented, IRS will:
--Begin capturing the full cost of IRS programs;
--Allocate overhead costs based on proven business methodologies, that
are consistently applied, easy to maintain and will support internal
and external audit D Track and control resources to a specific
organizational unit and level of responsibility;
* Provide both direct and indirect cost data to help move the Service
forward in transitioning to a performance-based budget;
* Identify and report the full cost of each program activity;
* Develop new long-term goals for each of the IRS' eight program
activities (01/2005);
Security of the IRS - Information Security:
Issue: IRS has made considerable progress toward improving computer
security controls. Despite this progress, additional steps have to be
taken to achieve an acceptable level of assurance that automated
systems and taxpayer data are not placed at risk from both internal and
external threats.
Actions Taken:
* Realigned IRS security organizations into a single entity, Mission
Assurance, to leverage resources and integrate security activities for
more effective delivery of security functions;
* Defined four critical security program areas: Physical, InfoSec,
Personnel and Emergency Preparedness/Critical Infrastructure
Protection to more effectively focus IRS security activities.
* Aligned IRS systems and networks to OMB A-130, Appendix III and NIST
Major Application and General Support System definitions.
* Formed executive-level Emergency Preparedness Working Group, led by
Chief, Mission Assurance, to ensure effective engagement of business,
IT and security organizations in business resumption, disaster
recovery, and safety issues.
* Expanded training, testing and exercise activities for business
continuity, including participation in Forward Challenge.
* Continued progress in certification of sensitive systems.
* Improved business engagement in Federal Information Security
Management Act of 2002 (FISMA) review process.
Actions Planned or Underway:
* Complete certification of IRS redefined Major Applications and
General Support Systems (07/2005);
* Improve Federal Information Security Management Act of 2002 (FISMA)
reporting process to fully and actively engage business management.
(Ongoing through the FY 2005 reporting process);
* Conduct annual security reviews of information systems as required by
the FISMA, supplementing these reviews with in-depth assessments of the
effectiveness of corrective actions in Plans Of Actions & Milestones
(POA&M). (9/2005);
* 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. (9/2005);
* Continue currency of IRS incident response capability and practices.
(Ongoing);
Security of the IRS - Employees and Facilities:
Issue: 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.
Actions Taken:
* Continued work with the General Services Administration (GSA) and
local law enforcement to safeguard personnel and assets.
* Monitored and changed as appropriate procedures for inspection of
incoming mail and packages.
* Completed implementation of Level V security enhancements.
* Developed, and began implementation of a Federal Emergency Management
Agency-based incident command structure, using Senior Commissioner
Representatives as command managers.
* IRS is implementing a Shelter-in-Place program safety procedure,
which is an alternative to building evacuation (during an emergency,
employees remain in their building until it is safe to leave).
Actions Planned or Underway:
* Complete build out of incident command structure. (9/2005);
* Unify guard services contract management. (9/2005);
* Continue and expand IRS ability to respond to emergencies through
more frequent exercise of Continuity of Operations Plan (COOP) and
other emergency response actions. (9/2005);
* Update and complete business resumption plans in response to changes
in threat conditions. (9/2005);
* Fully support government-wide and Departmental emergency response
initiatives. (9/2005);
Human Capital:
Issue: The Government Accountability Office (GAO) considers strategic
human capital management as a high-risk area for the government, and it
is one of the five initiatives in the President's Management Agenda.
Inadequate attention to strategic human capital management has created
a government-wide risk of eroding the capacity of some agencies to
perform their missions. Like many other government agencies, IRS
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.
Actions Taken:
* 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;
* Implemented a robust succession-planning model and used executive
search assistance to fill critical executive positions.
* Introduced a new, competency-based, transformational leadership
development program to equip current and future leaders for increased
service to both IRS employees and taxpayers. Decentralized training to
give the operating divisions responsibility for technical training so
it can be tailored to meet the needs of their specific taxpayers.
* Successfully partnered with the OPM Go Learn e-training initiative to
acquire e-training products and services to leverage government-wide
economies of scale.
* Reengineered training for newly hired revenue agents from sixty weeks
to twenty-two weeks.
* Re-employed annuitants have been recruited for On-the-Job Instructor
and Classroom Instructor positions, allowing highly skilled, senior
professionals to remain on the frontlines.
Actions Planned or Underway:
* Implement a comprehensive Human Capital Strategic plan, addressing
the six human capital standards for success: strategic alignment,
workforce planning and deployment, leadership and knowledge management,
performance culture, talent, and accountability. (09/2005):
* Evaluate each new human capital initiative for workforce impact and
determine effective and appropriate mitigation strategies to address
the results. (09/2005):
* Build managerial capacity to implement complex organizational change
with minimal productivity loss during the transition to the new and
more efficient structure. (09/2005);
* 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. (09/2005);
* Use Competency Models/Occupational Studies within the IRS to identify
and target the competencies necessary for successful performance in all
of our frontline occupations; target these competencies in the
recruitment/hiring process, and the individual/employee training
process as well, to address skill gaps. (09/2005);
* Develop a Career-Pathing process that focuses on training,
application, assessment and feedback to provide opportunities to
develop technical expertise needed for senior professional positions.
(09/2005);
* Extend partnerships with key colleges and universities. (Ongoing);
* Improve recruiting performance through such initiatives as expansion
of category ratings and the increased use of simulations in assessing
job applicants-particularly in the front line occupations. (Ongoing);
* Expand QuickHire, an Internet-based tool that automates the hiring
process, to include additional occupations. (09/2005);
* In concert with the Go Learn initiative, ensure that the learning
infrastructure is robust enough to enable 24/7 access to comprehensive
e-learning and performance support products to include competency
management and assessments, individual career development plans and
metrics. (09/2005);
* Design continuous training for managers using tailored case studies,
simulations in training, and work-out sessions, providing hands-on
experience to realize the "stepping stone" approach. (Ongoing);
* Continue the selective use of Voluntary Employee Retirement Authority
(early-outs) and Voluntary Separation Incentive Payments (buyouts) to
support organizational restructuring and workforce reshaping
initiatives. (Ongoing);
IRS will establish baseline performance under the new Human Capital
Metrics and identify areas for improvement activity in FY 2005.
Taxpayer Protection and Rights;
Issue: The IRS Restructuring and Reform Act of 1998 (RRA 98) contains
seventy-one provisions that increase or help protect taxpayers' rights.
RRA 98 included fundamental changes to tax law procedures, and required
IRS to change its organizational structure from one that was
geographically structured to one that was set up to serve particular
groups of taxpayers with similar needs. IRS has made significant
progress in complying with RRA 98 and most provisions have been
implemented. Significant management attention is still required to
ensure that taxpayers' rights are not restricted by any IRS enforcement
actions.
Actions Taken:
* Conducted an independent review to determine IRS' compliance with RRA
98 Section 1204, which prohibits the use of enforcement statistics to
evaluate IRS employees or to impose or suggest production quotas or
goals. All appropriate supervisors certified each quarter that they had
not improperly used enforcement statistics in evaluating employees.
* TIGTA conducted an Independent Audit of the Section 1204 Program and
found that: the IRS is in compliance with RRA 98 §1204 (a) and (b); no
potential violations of the use of Records of Tax Enforcement Results
were found; and employees were evaluated on the fair and equitable
treatment of taxpayers.
* Implemented the K-1 matching program, reconciled partnership income
reporting documents to the beneficiaries of this income on federal
income tax returns, which promotes fairness of the tax system.
* Implemented information-sharing programs to promote income document
matching and fairness of the tax system.
* Partnered with state taxing agencies to implement programs that
compare state tax information with federal income and/or employment tax
return information. Approximately 35,000 audit leads and other
information were shared with the states.
Actions Planned or Underway:
* Focus on taxpayer groups that are at higher risk of noncompliance to
maintain confidence in the integrity of the tax administration program.
(Ongoing):
* Develop a new workload methodology that will focus on those areas of
the filing population constituting the greatest increase in compliance
risk with a high probability of unreported income. This strategy will
promote fairness of our tax system by identifying potential
noncompliance from taxpayers who would not otherwise be subject to
matching document reviews. (09/2005):
* Ensure protection of taxpayer information entered at return
preparation sites and local offices. (Ongoing);
* Refine procedures to certify compliance with requirements of Title VI
of the Civil Rights Act of 1964 to provide equal access and non-
discriminatory services to all eligible taxpayers. (Ongoing);
* Rollout the Taxpayer Assistance Center (TAC) model, as it is critical
to maintaining taxpayers' privacy and confidentiality, particularly as
the IRS becomes more involved in compliance activities. (09/2005);
* Work under auspices of the Electronic Tax Administration Policy
Council (ETAPC) to establish security policy and address issues.
(Ongoing);
* Implement a solution for encrypting electronic return data during the
transmission process from electronic return transmitters. (01/2005);
* Continue systems modernization efforts to enhance IRS's security
program. (Ongoing);
* Complete additional reviews requested by ETAPC of the authentication
methods. Continue to implement new website functionality requested by
the Business Operating Divisions. (Ongoing);
* Review IRS training to ensure that employees, particularly in
compliance functions, are properly and regularly trained on the
protection of taxpayer rights. (09/2005);
* Develop and implement the Taxpayer Rights Impact Statement to help
IRS incorporate awareness and consideration of taxpayer rights into its
program planning and implementation. (Ongoing);
* Work with preparers to design a program that enables the majority of
taxpayers to feel confident that their preparers are competent to
prepare their taxes and that IRS will punish preparers when they
perform negligently or recklessly. (Ongoing);
* Advocate enforcement of existing penalties for paid preparers as well
as the strengthening and enhancement of penalties by Congress.
(Ongoing);
The IRS requires a quarterly certification from all section 1204 IRS
managers. In addition, the IRS also conducts an annual review of all
section 1204 managers to ensure that operating divisions and functions
are in compliance with the section 1204 regulations.
V. Financial Highlights:
Stewardship Information Analysis:
a. Overview of Revenue and Administrative Accounts:
The IRS' financial statements and footnotes received an unqualified
audit opinion for the fifth consecutive year for administrative
accounts and the eighth 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 $ 25.6 billion. Of these
assets, 78 percent are Federal Taxes Receivable. These receivables are
the amounts expected to be collected from past due accounts. The
increase in assets of $ 0.76 billion is primarily attributable to an
increase in the amounts due from Treasury for tax refunds due taxpayers
and increased capital investment in software. The majority of the
liabilities, 85 percent, consist of amounts due to Treasury related to
Federal Taxes Receivable.
The Statement of Custodial Activity shows that IRS programs resulted in
$ 2.018 trillion in Federal receipts. IRS collections constitute 96
percent of the Federal Government receipts, as shown in the chart
below.
Total Federal Receipts - (Percent):
Pie chart with 2 items.
IRS Collections: 96%;
Non-IRS Collections: 4%.
[End of figure]
b. Financing Sources:
The IRS receives the majority of its funding through annual and multi-
year appropriations which are available for use within certain
specified statutory limits. There are three major and two 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, 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, as
well as providing resources for expanded customer service and
education, strengthened enforcement, and enhanced research to reduce
valid claims and erroneous filings associated with the Earned Income
Tax Credit (EITC) program. The Information Services appropriation funds
costs for data processing and information and telecommunications
support for the Service's activities. The Business Systems
Modernization Account is the most significant of the minor operating
appropriations and funds capital asset acquisitions of information
technology systems. The Health Coverage Tax Credit appropriation (HCTC)
funds necessary expenses to implement the program.
Budget Fiscal Year 2004 Appropriations - (Percent):
Pie chart with 4 items.
Processing, Assistance, and Management (PAM): 40%
Tax Law Enforcement (TLE): 40%;
Information Services (IS): 16%;
Business Systems Modernization and Other (BSM): 4%.
[End of figure]
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:
How the Service Used Its Resources - (Percent):
Pie chart with 4 items.
Compliance Services: 59%;
Filing and Account Services: 33%;
Pre-filing Taxpayer Assistance and Education: 6%;
Administration of Tax Credit Programs: 2%.
[End of figure]
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 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 pre-filing, filing and account services, and
compliance activities, and HCTC health insurance tax credit program
activities.
Revenue and Refund Trend Information:
Federal tax revenues are collected through six major classifications:
individual income, corporate income, excise taxes, estate and gift
taxes, railroad retirement, and Federal unemployment taxes. Overall
revenue receipts (approximately $2.018 trillion) for FY 2004 increased
by approximately 3 percent from FY2003 to FY2004. Individual income
taxes, which include both FICA and SECA taxes, increased by more than 1
percent. Corporate income taxes increased by 19 percent. Collections
from all other tax sources increased 7 percent from FY2003 to FY2004.
The increase in individual taxpayer refunds and decrease in tax
payments not subject to withholding between 2003 and 2004 were due to
the mid-year enactment of the Jobs and Growth Tax Relief and
Reconciliation Act of 2003 (JGTRRA). Due to the retroactive nature of
the tax cuts, many taxpayers were over-withheld in the first half of
2003 and did not capture the full impact of their tax cut until 2004.
The net corporate receipts increase was due to a decrease in refunds
over this period. Refunds in 2003 were above the normal due to a change
in the loss carryback provision of the Job Creation and Worker
Assistance Act of 2002. The majority of the large refunds were claimed
by the end of 2003, inflating the total for that year relative to 2004.
The growth in gross corporate tax receipts over the two periods was
related to corporate profits before tax.
Collections of Federal Tax Revenue (in billions):
Bar graph with 12 items.
Tax Class: Individual, FICA/SECA and Other:
FY 2004: $1696;
FY 2003: $1671.
Tax Class: Corporate:
FY 2004: $230;
FY 2003: $194.
Tax Class: Excise:
FY 2004: $55;
FY 2003: $53.
Tax Class: Estate & Gift:
FY 2004: $26;
FY 2003: $23.
Tax Class: Railroad Retirement:
FY 2004: $4;
FY 2003: $4.
Tax Class: Federal Unemployment:
FY 2004: $7;
FY 2003: $7.
[End of figure]
Tax Class:
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 $278 billion.
In fiscal year 2004, the Service issued $64 million 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 decreased by 7 percent. The table on page
73 shows that all tax class refunds remained consistent year to year
with the exception of the Corporate income class.
Federal Tax Refund Activity (in billions):
Bar graph with 12 items.
Tax Class: Individual, FICA/SECA and Other:
FY 2004: $231;
FY 2003: $232.
Tax Class: Corporate:
FY 2004: $47;
FY 2003: $66.
Tax Class: Excise:
FY 2004: $0;
FY 2003: $1.
Tax Class: Estate & Gift:
FY 2004: $0;
FY 2003: $1.
Tax Class: Railroad Retirement:
FY 2004: $0;
FY 2003: $0.
Tax Class: Federal Unemployment:
FY 2004: $0;
FY 2003: $0.
Note: due to rounding in billions actual data for Railroad Retirement
was $11 million for FY 2003 and $6 million for FY 2004 and for Federal
Unemployment it was $122 million for FY 2003 and $130 million for FY
04.
[End of figure]
Analysis of Unpaid Assessments Most Unpaid Assessments Are Not
Receivables and Are Largely Uncollectible:
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. As reflected
in the supplemental information to IRS' fiscal year 2004 Financial
Statements, the unpaid assessment balance was about $237 billion as of
September 30, 2004.
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 write-
offs.
Components of IRS' $237 Billion of Unpaid Assessments:
Pie chart with 3 items.
Write-offs: $115 billion (48%);
Taxes Receivable: $89 billion (38%);
Compliance: $33 billion (14%).
[End of figure]
Of the $237 billion balance of unpaid assessments, $115 billion
represents write-offs. Write-offs principally consist of amounts owed
by defunct corporations with no assets and include many failed
financial institutions assisted by the Resolution Trust Corporation
(RTC) and the Federal Deposit Insurance Corporation (FDIC). The
remaining amounts are owed by taxpayers with extreme economic and/or
financial hardships, deceased taxpayers, and taxpayers who are
insolvent due to bankruptcy. Write-offs at September 30, 2004 ($115
billion) decreased about 9 percent from September 30, 2003 ($126
billion) due to the expiration of the statute for collections on
amounts owed by defunct corporations and failed financial institutions.
Components of IRS' $115 Billion of Write-offs:
Pie chart with 7 items
Financial Hardship: 31%;
Defunct Corporation: 25%;
RTC/FDIC Insolvent: 23%;
Other: 9%;
Unable to Locate: 5%;
Insolvent/Bankruptcy: 4%;
Deceased: 3%.
[End of figure]
The $33 billion of the unpaid assessments representing compliance
assessment are amounts that have not been agreed to by either the
taxpayer or a court. These assessments result primarily from various
Service enforcement programs promoting voluntary compliance. Due to the
lack of agreement, they have less potential for future collection than
the unpaid assessments considered federal taxes receivable.
The remaining $89 billion of unpaid assessments represent federal taxes
receivable. About $69 billion (78 percent) 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 actions 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 (22 percent) 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, 2003 to September 30, 2004 remains unchanged
at $89 billion. The percent estimated to be collectible at September
30, 2004 (22 percent), remains the same from September 30, 2003 (22
percent).
Components of IRS' $89 Billion of Taxes Receivable:
Pie chart with 2 items.
Taxes Receivable - Uncollectable: $69 billion (78%);
Taxes Receivable - Collectable: $20 billion (22%).
[End of figure]
It is important to note that the unpaid assessment balance contains
unpaid assessed tax, penalty, and interest, and accrued penalty and
interest computed through September 30, 2004.
About $144 billion (61 percent) of the unpaid assessment balance as of
September 30, 2004, contains interest and penalties and are largely
uncollectible.
Unpaid Taxes and Interest and Penalty Components of $237 Billion in
Unpaid Assessments:
Pie chart with 2 items.
Interest & Penalties: $144 billion (61%);
Taxes: $93 billion (39%).
[End of figure]
Interest and penalties are such a high percentage of the balance of
unpaid assessments 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 2004 was mostly
attributable to the accrual of interest and penalties.
ADDENDUM: President's Management Agenda:
The IRS made steady progress on the President's Management Agenda this
year, earning "Green" in progress on both Competitive Sourcing and
Budget and Performance Integration. IRS adjusted its "getting to green
plans" to reflect the new "proud to be" criteria to achieve these goals
during 2004. The table below summarizes the IRS' FY 2004 scorecard, as
rated by the Department of Treasury.
Proposed Human Capital metrics have been developed and are awaiting
approval by the IRS Human Capital Board. Benchmark data has been
collected and is being analyzed to develop recommendations for target
levels. Though not yet required to report at the Bureau level, the
Human Capital Officer will be prepared to deliver a human capital
scorecard during the implementation phase of the Human Capital metrics
project. Human Capital Metrics will be reported by December 2004.
IRS Overall Ratings as of September 30, 2004:
Human Capital:
Status: Q1: Not rated;
Status: Q2: Not rated;
Status: Q3: Not rated;
Status: Q4: Not rated;
Progress: Q1: Not rated;
Progress: Q2: Not rated;
Progress: Q3: Not rated;
Progress: Q4: Not rated.
Competitive Sourcing:
Status: Q1: Does not meet criteria;
Status: Q2: Partially meets scorecard criteria;
Status: Q3: Partially meets scorecard criteria;
Status: Q4: Meets OMB Scorecard criteria;
Progress: Q1: Meets OMB Scorecard criteria;
Progress: Q2: Meets OMB Scorecard criteria;
Progress: Q3: Meets OMB Scorecard criteria;
Progress: Q4: Meets OMB Scorecard criteria.
Budget & Performance Integration:
Status: Q1: Does not meet criteria;
Status: Q2: Does not meet criteria;
Status: Q3: Does not meet criteria;
Status: Q4: Partially meets scorecard criteria;
Progress: Q1: Meets OMB Scorecard criteria;
Progress: Q2: Meets OMB Scorecard criteria;
Progress: Q3: Partially meets scorecard criteria;
Progress: Q4: Meets OMB Scorecard criteria.
E-Government:
Status: Q1: Does not meet criteria;
Status: Q2: Does not meet criteria;
Status: Q3: Does not meet criteria;
Status: Q4: Does not meet criteria;
Progress: Q1: Partially meets scorecard criteria;
Progress: Q2: Partially meets scorecard criteria;
Progress: Q3: Partially meets scorecard criteria;
Progress: Q4: Meets OMB Scorecard criteria.
Financial Performance:
Status: Q1: Does not meet criteria;
Status: Q2: Does not meet criteria;
Status: Q3: Does not meet criteria;
Status: Q4: Does not meet criteria;
Progress: Q1: Partially meets scorecard criteria;
Progress: Q2: Does not meet criteria;
Progress: Q3: Partially meets scorecard criteria;
Progress: Q4: Does not meet criteria.
[End of table]
Major Accomplishments and Future Plans:
Human Capital:
Accomplished:
* Leveraged electronic media and print advertising to recruit job
applicants;
* Launched Career Connector, an automated staffing tool, to improve
hiring efficiency;
* Continued expansion of Category Rating process for determining job
applicant qualifications;
* Completed HR Connect roll-out Servicewide to replace existing human
resources information management system;
* Launched Learning Content Management System prototype;
* Implemented a variety of mitigation strategies for employees impacted
by restructuring activities;
* Received the W. Edwards Deming Outstanding Training Award for
accomplishments in using emerging technologies to implement a
Servicewide e-learning strategy;
* Instituted Organizational Change Office to improve coordination of
the review and implementation of workforce change initiatives;
* Developed and implemented the Servicewide mitigation strategy to
reduce involuntary separation;
Planned:
* Design and Implement Senior Executive Service Pay for Performance;
* Implement the Automated Performance Management System to enhance the
performance management process;
* Implement Servicewide Electronic Learning Management System, a web
based in-house training tracking tool;
* Develop the IRS Human Capital Strategic Plan;
* Implement the Labor Relations Strategic Plan;
* Implement Learning Management System and migration to Go-Learn
Servicewide;
* Finalize Human Capital Metrics for use Servicewide;
* Implement Frontline Manager Paybanding;
* Implement Maxi-Flex tour of duty;
Competitive Sourcing:
Accomplished:
* Completed two full IRS studies;
--Area Distribution Center (ADC), 500 Full Time Equivalent (FTE)
employees, with over 55 percent projected annual cost reduction;
--Campus Operations study (Modernization & Information Technology
Services) (350 FTE) with over 80 percent projected yearly cost
reduction;
* Completed the Toll-Free Forms Calls study, a direct conversion
awarded to a preferred provider;
* Released solicitation for Building Delegation Study (85 FTE);
* Implemented mailroom study fully in 10 locations and partially in 2
locations;
* Began Business Case Analysis for Fuel Compliance Activity study (140
FTE);
* Began developing RFP for Learning and Education study (617 FTE);
* Improved Intranet web site to simplify user information selection
which has resulted in increased user questions;
* Recognized by the Secretary of the Treasury for Independent Review
Partnership with Treasury and TIGTA;
--Provided Treasury first-hand knowledge of the challenges the IRS
faces in conducting competitive sourcing studies;
--Improved dialogue with OMB on the issues;
* Recognized as a best practice by GAO in "Competitive Sourcing,
Greater Emphasis Needed on Increasing Efficiency and Improving
Performance";
Planned;
* Transition ADC to the Most Efficient Organization (MEO), its new
organization, by December 2004;
* Transition Campus Operations to the MEO by December 2004;
* Determine and implement results of Business Case Analysis for Fuel
Compliance Activity study;
* Implement mailroom study in remaining 20 locations in 15` Quarter of
FY 2005 based on favorable Federal Services Impasses Panel decision;
* Announce Special Enrolled Agents Examination Streamlined Study
November 2005;
* Draft RFP for Warehouse and Transportation study (160 FTE) December
2005;
* Publish the RFP and announce the Learning and Education study June
2005;
* Deploy Competitive Sourcing web page to Internet web site on IRS.gov;
* Complete University of Maryland Competitive Sourcing Best Practice
project-report release scheduled November 2005;
* Complete development of Competitive Sourcing video in partnership
with other Federal agencies in conjunction with the Federal Acquisition
Council;
Budget & Performance Integration:
Accomplished:
* Proposed new outcome and efficiency performance measures in the OMB
budget submission and included at least one efficiency measure for each
Program Assessment Rating Tool (PART) program;
* Fully implemented the Business Performance Review process among all
17 divisions;
* Conducted Quarterly Business Performance Reviews and issued monthly
performance reports to address significant business performance issues;
* Proposed a new budget structure that aligns support and overhead
expenses among eight new program activities to show the full cost of
providing the service;
* Integrated PART results and action plans into the Strategic
Assessment phase of the Strategic Planning and Budgeting process;
* Established allocation rules for determining costs of programs;
* Revised and published the IRS strategic plan, which includes outcome
goals and objectives;
* Linked 100 percent of IRS executive performance plans with the
strategic goals and differentiated awards by performance and
achievement of objectives;
Planned:
* Realign IRS budget structure in FY 2006;
* Produce the FY 2006 President's budget in the new structure;
* Develop and establish long-term performance targets;
* Implement action plan to improve PART scores;
* Develop efficiency measures for programs that will be PARTed in the
future;
* Implement IFS Cost Module and provide full cost accounting data;
E-Government:
Accomplished:
Capital Planning & Investment Control (CPIC):
* Established a permanent Capital Planning and Investment Control
Office to provide the tools for a governance process for IT
development; developed draft CPIC Guidance;
* Used the Exhibit 300 framework to establish more standard risk
management practices and incorporate information in the development of
E-300s for this fiscal year;
* Developed, reviewed and scored all first draft Exhibit 300s in
preparation for their submission to Treasury and OMB;
Security Certification:
* Identified and implemented a number of enhancements to computer
security programs, policies, processes, and procedures;
* Completed the revalidation of the ITS inventory of systems and re-
categorized the inventory as General Support Systems (GSS), Major
Applications, and "Other" per OMB guidance;
* Began Certification & Accreditation efforts for all GSS; on-site work
begun in May 2004 with completion expected in June 2005;
Electronic Tax Products for Businesses:
* Launched Form 1120 (Corporate Income Tax Return) and 990 (Return of
Organization Exempt from Income Tax) enabling, for the first time,
electronic submission;
Received the following volumes since implementation: Form 1120 36,154;
Form 990 562 Continued use of other forms: Form 94x 317,010;
Internet EIN 1,532,576 for 766,288 burden hours saved;
* Assisted the states of Georgia, New York, Kansas, and Oklahoma with
the development and implementation of the interfaced state registration
number and federal Employer Identification Number (EIN) application;
Free File:
* Launched the second year of Free File at a media event on January 22,
2004;
* Free File Alliance members processed 3.5M Free File returns - an
increase of 26 percent from last year (2.8M);
* Considered a Free File Alliance proposal to address performance and
the customer satisfaction level.
* Identified new or enhanced program requirements for the 2005 filing
season;
Planned:
* Complete General Support Systems accreditations by June 2005;
* Continue full implementation of enhanced computer security programs,
policies, and processes;
* Finalize work on the interfaced state registration number and federal
Employer Identification Number (EIN) application with the state of
Georgia and continue implementation with New York, Kansas and Oklahoma;
* Complete Free File plans and marketing for the 2005 filing season;
Financial Performance:
Accomplished:
* Began Integrated Financial Systems (IFS) deployment on September 1,
2004; on schedule for delivery and implementation in the 1st Quarter of
FY 2005;
* Completed certification and accreditation of IFS and Custodial
Accounting Project (CAP);
* Completed CAP Release 1.1 and established Initial Operating
Capability (IOC) on September 15, 2004;
* Achieved a clean audit opinion for the fifth consecutive year;
* Met audited financial statement reporting deadline two days earlier
than required;
* Had no anti-deficiency act violations;
* Completed Application Qualification Testing (AQT) and Systems
Integrated Testing (SIT) on IFS Cost Module; began implementation plan
development;
* Developed business plan for Earned Income Tax Credit (EITC) based on
the EITC Task Force recommendations and the Commissioner's five-point
initiative;
* Completed and reported to Congress on the following EITC Proof of
Concept (POC) tests: Qualifying Child, Filing Status, and Automated
Under-Reporter;
Planned:
* Complete CAP Systems Acceptance Testing for Release 1.2 in 15`
Quarter of FY 2005;
--Perform initial load of 2005 Individual Master File data;
--Begin back processing of FY 2005 in 1st quarter;
* Implement release of Integrated Financial System (IFS) in FY 2005;
--Establish and implement FY 2005 Audit Plan under the IFS System D
Maintain clean audit opinion;
--Develop IFS programs to support new IRS FY 2006 budget structure with
cost reporting;
* Continue E ITC Proof of Concept testing;
* Evaluate the results of the Qualifying Child, Filing Status and
Income Misreporting testing;
* Partner with state, federal, and private organizations to identify
new ways to engage eligible taxpayers and prevent erroneous payments;
* Implement a more robust Paid Preparer Program to educate and enforce
due diligence requirements.
[End of section]
Financial Statements:
Balance Sheets:
Internal Revenue Service:
Balance Sheet:
As of September 30, 2004 and 2003:
(In Millions):
Internal Revenue Service:
Balance Sheet:
As of September 30, 2004 and 2003 (In Millions):
Assets: Intragovernmental: Fund balance with Treasury (Note 2);
2004: $1,725;
2003: $1,666.
Assets: Intragovernmental: Due from Treasury (Note 13);
2004: $1,801;
2003: $1,193.
Assets: Intragovernmental: Other assets (Note 4);
2004: $149;
2003: $140.
Assets: Total Intragovernmental;
2004: $3,675;
2003: $2,999.
Assets: With the Public: Cash and other monetary assets (Notes 3, 13);
2004: $86;
2003: $120.
Assets: With the Public: Federal Taxes receivable, net of allowance for
doubtful accounts (Notes 5, 13);
2004: $20,000;
2003: $20,000.
Assets: With the Public: Other assets (Note 4);
2004: $21;
2003: $28.
Assets: Total with the Public;
2004: $20,107;
2003: $20,148.
Assets: Property and equipment, Net (Note 6);
2004: $1,775;
2003: $1,652.
Total Assets;
2004: $25,557;
2003: $24,799.
Liabilities: Intragovernmental: Due to Treasury (Notes 5, 13);
2004: $20,000;
2003: $20,000.
Liabilities: Intragovernmental: Other liabilities (Note 7);
2004: $165;
2003: $147.
Liabilities: Total Intragovernmental;
2004: $20,165;
2003: $20,147.
Liabilities: Federal tax refunds payable (Note 13);
2004: $1,801;
2003: $1,193.
Liabilities: Other liabilities (Notes 7 to 10);
2004: $1,524;
2003: $1,673.
Total Liabilities;
2004: $23,490;
2003: $23,013.
Net Position: Unexpended Appropriations;
2004: $1,255;
2003: $1,139.
Net Position: Cumulative Results of Operations;
2004: $812;
2003: $647.
Total Net Position;
2004: $2,067;
2003: $1,786.
Total Liabilities and Net Position;
2004: $25,557;
2003: $24,799.
[End of table]
The accompanying notes are an integral part of these statements:
Financial Statements:
Statements of Net Cost:
Internal Revenue Service:
Statement of Net Cost For the Years Ended September 30, 2004 and 2003:
(In Millions):
Program: Pre-Filing Taxpayer Assistance and Education: Full cost;
2004: $673;
2003: $716.
Program: Pre-Filing Taxpayer Assistance and Education: Exchange
revenue;
2004: ($59);
2003: ($112).
Program: Pre-Filing Taxpayer Assistance and Education: Net cost of
program;
2004: $614;
2003: $604.
Program: Filing and Account Services: Full cost;
2004: $3,452;
2003: $3,441.
Program: Filing and Account Services: Exchange revenue;
2004: ($69);
2003: ($28).
Program: Filing and Account Services: Net cost of program;
2004: $3,383;
2003: $3,413.
Program: Compliance Services: Full cost;
2004: $6,280;
2003: $5,973.
Program: Compliance Services: Exchange revenue;
2004: ($159);
2003: ($108).
Program: Compliance Services: Net cost of program;
2004: $6,121;
2003: $5,865.
Program: Administration of Tax Credit Programs: Full cost;
2004: $280;
2003: $239.
Program: Administration of Tax Credit Programs: Exchange revenue;
2004: $-;
2003: $-.
Program: Administration of Tax Credit Programs: Net cost of program;
2004: $280;
2003: $239.
Program: Net Cost of Operations (Note 17);
2004: $10,398;
2003: $10,121.
[End of table]
The accompanying notes are an integral part of these statements:
Financial Statements:
Statements of Changes in Net Position:
Internal Revenue Service Statement of Changes in Net Position For the
Years Ended September 30, 2004 and 2003 (In millions):
Beginning Balances;
2004: Cumulative Results of Operations: $647;
2004: Unexpended Appropriations: $1,139;
2003: Cumulative Results of Operations: $550;
2003: Unexpended Appropriations: $1,039.
Budgetary Financing Sources: Appropriations received;
2004: Unexpended Appropriations: $10,245;
2003: Unexpended Appropriations: $9,911.
Budgetary Financing Sources: Canceled appropriations and rescissions
and other (Note 18);
2004: Unexpended Appropriations: ($138);
2003: Unexpended Appropriations: ($126).
Budgetary Financing Sources: Appropriations used;
2004: Cumulative Results of Operations: $9,991;
2004: Unexpended Appropriations: ($9,991);
2003: Cumulative Results of Operations: $9,685;
2003: Unexpended Appropriations: ($9,685).
Other Financing Sources: Imputed financing from costs absorbed by
others;
2004: Cumulative Results of Operations: $611;
2003: Cumulative Results of Operations: $565.
Other Financing Sources: Transfers in/out without reimbursement;
2004: Cumulative Results of Operations: $15;
2003: Cumulative Results of Operations: $12.
Other Financing Sources: Transfers to General Fund;
2004: Cumulative Results of Operations: ($54);
2003: Cumulative Results of Operations: ($44).
Total Financing Sources;
2004: Cumulative Results of Operations: $10,563;
2004: Unexpended Appropriations: $116;
2003: Cumulative Results of Operations: $10,218;
2003: Unexpended Appropriations: $100.
Net Cost of Operations;
2004: Cumulative Results of Operations: ($10,398);
2003: Cumulative Results of Operations: ($10,121).
Ending Balances;
2004: Cumulative Results of Operations: $812;
2004: Unexpended Appropriations: $1,255;
2003: Cumulative Results of Operations: $647;
2003: Unexpended Appropriations: $1,139.
[End of table]
The accompanying notes are an integral part of these statements:
Financial Statements:
Statements of Budgetary Resources:
Internal Revenue Service Statement of Budgetary Resources For the
Years Ended September 30, 2004 and 2003 (In millions):
Budgetary Resources: Budget Authority: Budgetary appropriations
received: (Note 11)
2004: $10,329;
2003: $9,987.
Budgetary Resources: Unobligated balance, beginning of period;
2004: $473;
2003: $442.
Budgetary Resources: Spending authority from offsetting collections;
(Note 20);
2004: $173;
2003: $148.
Budgetary Resources: Recoveries of prior year obligations;
2004: $154;
2003: $116.
Budgetary Resources: Permanently not available: (Note 18);
2004: ($138);
2003: ($126).
Total Budgetary Resources;
2004: $10,991;
2003: $10,567.
Status of Budgetary Resources: Obligations incurred: (Note 19);
2004: $10,421;
2003: $10,094.
Status of Budgetary Resources: Unobligated balance - available: (Note
2);
2004: $178;
2003: $277.
Status of Budgetary Resources: Unobligated balance - not available;
(Note 2);
2004: $392;
2003: $196.
Total Status of Budgetary Resources;
2004: $10,991;
2003: $10,567.
Relationship of Obligations to Outlays: Obligated balance, net,
beginning of period
2004: $1,266;
2003: $1,225.
Relationship of Obligations to Outlays: Obligated balance, net, end of
period: (Note 12);
2004: ($1,161);
2003: ($1,266).
Relationship of Obligations to Outlays: Outlays: Disbursements;
2004: $10,372;
2003: $9,924.
Relationship of Obligations to Outlays: Outlays: Less: collections;
2004: ($173);
2003: ($136).
Relationship of Obligations to Outlays: Outlays: Less: offsetting
receipts;
2004: ($89);
2003: ($79).
Net Outlays;
2004: $10,110;
2003: $9,709.
[End of table]
The accompanying notes are an integral part of these statements.
Financial Statements;
Statement of Financing:
Internal Revenue Service:
Statement of Financing:
For the Years Ended September 30, 2004 and 2003 (In Millions):
Resources Used to Finance Activities: Budgetary Resources Obligated:
Obligations incurred: (Note 19);
2004: $10,421;
2003: $10,094.
Resources Used to Finance Activities: Budgetary Resources Obligated:
Less: spending authority from offsetting collections and recoveries;
2004: ($327);
2003: ($264).
Resources Used to Finance Activities: Budgetary Resources Obligated:
Less: offsetting receipts;
2004: ($89);
2003: ($79).
Resources Used to Finance Activities: Budgetary Resources Obligated:
Net obligations;
2004: $10,005;
2003: $9,751.
Resources Used to Finance Activities: Imputed financing from costs
absorbed by others;
2004: $611;
2003: $565.
Resources Used to Finance Activities: Transfers in/out without
reimbursement;
2004: $15;
2003: $12.
Resources Used to Finance Activities: Exchange revenue, net of
offsetting receipts;
2004: ($48);
2003: ($41).
Total Resources Used to Finance Activities;
2004: $10,583;
2003: $10,287.
Resources Used to Finance Items Not Part of the Net Cost of Operations:
Change in budgetary resources obligated for goods, services, and
benefits ordered but not yet provided;
2004: ($40);
2003: ($81).
Resources Used to Finance Items Not Part of the Net Cost of Operations:
Resources that finance the acquisition of assets;
2004: ($572);
2003: ($559).
Resources Used to Finance Items Not Part of the Net Cost of Operations:
Total Resources Used to Finance Items Not Part of the Net Cost of
Operations;
2004: ($612);
2003: ($640).
Total Resources Used to Finance the Net Cost of Operations;
2004: $9,971;
2003: $9,647.
Components of the Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period: Components Requiring or
Generating Resources in Future Periods: Increase in annual leave
liability;
2004: $22;
2003: $52.
Components of the Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period: Components Requiring or
Generating Resources in Future Periods: Other;
2004: $15;
2003: $23.
Components of the Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period: Components Not Requiring or
Generating Resources in Future Periods: Depreciation and amortization;
2004: $390;
2003: $399.
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period;
2004: $427;
2003: $474.
Net Cost of Operations;
2004: $10,398;
2003: $10,121.
[End of table]
The accompanying notes are an integral part of these statements.
Financial Statements:
Statements of Custodial Activity:
Internal Revenue Service:
Statement of Custodial Activity:
For the Years Ended September 30, 2004 and 2003 (In Billions):
REVENUE ACTIVITY: Collections of Federal Tax Revenue: (Note 15):
Individual income, FICA/SECA, and other;
2004: $1,696;
2003: $1,671.
REVENUE ACTIVITY: Collections of Federal Tax Revenue: (Note 15):
Corporate income;
2004: $230;
2003: $194.
REVENUE ACTIVITY: Collections of Federal Tax Revenue: (Note 15):
Excise;
2004: $55;
2003: $53.
REVENUE ACTIVITY: Collections of Federal Tax Revenue: (Note 15):
Estate and gift;
2004: $26;
2003: $23.
REVENUE ACTIVITY: Collections of Federal Tax Revenue: (Note 15):
Railroad retirement;
2004: $4;
2003: $4.
REVENUE ACTIVITY: Collections of Federal Tax Revenue: (Note 15):
Federal unemployment;
2004: $7;
2003: $7.
Total Collections of Federal Tax Revenue;
2004: $2,018;
2003: $1,952.
Increase/(Decrease) in federal taxes receivable, net; None.
Total Federal Tax Revenue;
2004: $2,018;
2003: $1,952.
Distribution of federal tax revenue to Treasury;
2004: $2,018;
2003: $1,952.
Increase/(Decrease) in amount due to Treasury; None.
Total Disposition of Federal Tax Revenue;
2004: $2,018;
2003: $1,952.
NET FEDERAL REVENUE ACTIVITY; None.
FEDERAL TAX REFUND ACTIVITY: (Note 16): Total Refunds of Federal
Taxes;
2004: $278.
2003: $300.
FEDERAL TAX REFUND ACTIVITY: (Note 16): Appropriations Used for Refund
of Federal Taxes;
2004: ($278);
2003: ($300).
NET FEDERAL TAX REFUND ACTIVITY; None.
[End of table]
Financial Statements:
Notes to the Financial Statements:
Internal Revenue Service Notes to the Financial Statements For the
Years Ended September 30, 2004 and 2003:
Note 1. Summary of Significant Accounting Policies:
A. Reporting Entity:
The Internal Revenue Service (the Service) is a bureau of the U.S.
Department of the Treasury (Treasury). The Service originated in 1862,
when Congress established the Office of the Commissioner of the
Internal Revenue. In 1952, the Bureau was reorganized by Congress and
became the Internal Revenue Service (IRS) in 1953.
Currently, the organization consists of:
* Four operating divisions - Wage and Investment (WAGE) addresses the
needs of taxpayers with wage and investment income only. Small Business
and Self-Employed (SBSE) serves self-employed individuals and small
businesses. Tax-Exempt and Government Entities (TEGE) supports employee
plans, tax exempt organizations, and government entities. Large and
Mid-Size Business (LMSB) serves corporations, sub-chapter S
corporations, and partnerships with assets greater than $5 million.
* Functional support - Appeals, Criminal Investigation, Taxpayer
Advocate and Chief Counsel are independent of the operating divisions
and other units of the Service. Taxpayer Advocate reports directly to
Congress and Chief Counsel reports to the Secretary of the Treasury.
* National Headquarters fills the role of setting broad policy,
providing executive oversight, reviewing plans and goals of the
operating units, and developing major improvement initiatives.
* Two cross-servicing organizations - Modernization and Information
Technology Services (MITS) and Agency Wide Shared Services (AWSS) SS)
provide central support to all areas of the Service.
The mission of the Service is to provide America's taxpayers with top-
quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.
B. Basis of Accounting & Presentation:
The financial statements have been prepared from the accounting records
of the Service in conformity with accounting principles generally
accepted in the United States (GAAP), and the Office of Management and
Budget (OMB) Bulletin 01-09, "Form and Content of Agency Financial
Statements". Accounting principles generally accepted for federal
entities are the standards prescribed by the Federal Accounting
Standards Advisory Board (FASAB). FASAB is recognized by the American
Institute of Certified Public Accountants as the official accounting
standards-setting body of the Federal Government.
These financial statements are provided to meet the requirements of the
Government Management Reform Act of 1994. They consist of the Balance
Sheet, the Statement of Net Cost, the Statement of Changes in Net
Position, the Statement of Budgetary Resources, the Statement of
Financing, and the Statement of Custodial Activity. The statements and
the related notes are prepared in a comparative form to present both FY
2004 and FY 2003 information.
Balance Sheet, Statement of Changes in Net Position:
These statements are presented on the accrual basis of accounting.
Under the accrual method, revenues are recognized when earned, and
expenses are recognized when costs are incurred or goods or services
are received, without regard to receipt or payment of cash.
Statement of Net Cost:
This statement is presented on the accrual basis of accounting. The
Statement of Net Cost presents the costs incurred by the Service in
performing its mission, net of related exchange revenues. These costs
include direct costs, indirect costs assigned in a manner that reflects
direct consumption of resources, and a proportionate share of other
indirect costs.
Program costs are aggregated across divisional lines into broad-based
cost centers - pre-filing, filing, compliance and administration of tax
credit programs described below.
Pre-Filing Taxpayer Assistance and Education:
Provides services to taxpayers before returns are filed to assist
taxpayers in preparing correct returns. Primary activities include
interpretations, preparing and disseminating tax publications and
information, taxpayer education programs, researching customer needs,
pre-filing agreements and determinations, and initiatives to promote
electronic tax filing. Exchange revenues include user fees from the
pre-filing agreements and determinations, letter rulings, and enrolled
agent fees.
Filing and Account Services:
Performs accounts maintenance functions of processing tax returns,
recording tax payments, issuing refunds, and maintaining taxpayer
accounts. The scope extends to all tax returns and taxpayer accounts
regardless of type and method of filing. Program activities also
include providing field assistance in preparing tax returns and
supplying tax forms to the public. Exchange revenues primarily include
revenues from other services provided to other federal agencies.
Compliance Services:
Administers compliance activities after a return is filed in order to
identify and correct possible errors or underpayments. This program
includes field collection activities, document matching, examination of
returns, criminal investigation, and tax litigation. Exchange revenues
include installment agreement fees.
Administration of Tax Credit Programs:
Administers the Earned Income Tax Credit (EITC) and Health Coverage Tax
Credit (HCTC) programs. EITC includes expanded customer service, public
outreach, enforcement, and research efforts to reduce claims and
erroneous filings associated with the program. EITC comprises pre-
filing, filing and account services, and compliance activities. EITC
payments actually refunded to individuals or credited against other tax
liabilities are not included in program costs. HCTC includes activities
focused on implementing the health insurance tax credit program set out
in the Trade Act of 2002.
Statement of Budgetary Resources:
The Statement of Budgetary Resources is presented using the budgetary
basis of accounting. Budgetary accounting facilitates compliance with
legal constraints and controls over the use of federal funds. This
financial statement is in addition to the reports prepared by the
Service throughout the year pursuant to OMB directives for purposes of
monitoring and controlling the Service's obligation and expenditure of
budgetary resources.
Statement of Financing:
The Statement of Financing is presented using both an accrual and a
budgetary basis of accounting as a means to facilitate understanding of
the differences between the two accounting bases.
Statement of Custodial Activity:
The Statement of Custodial Activity is presented on the modified cash
basis of accounting. This method initially reports revenue in the
financial statements on the cash basis, which is then adjusted by the
change in net federal taxes receivable --net of the change in refunds
payable--during the current fiscal year. This adjustment effectively
converts the cash basis revenue and refunds to a full accrual amount.
The related distribution of all such collections to the Treasury is
similarly reported on the cash basis. It is then adjusted to the
accrual basis by the net change during the fiscal year in uncollected
amounts due to Treasury.
Refunds of taxes and interest are reported on the cash basis. Refunds
include payments of earned income tax credits (EITC), health coverage
tax credits (HCTC), and child care credits, as well as overpayments of
taxes.
Reclassifications:
Reclassifications have been made in the FY 2003 financial statements to
conform to the presentation used in FY 2004.
C. Financing Sources and Exchange Revenue:
The Service receives the majority of its funding through annual, multi-
year, and no-year appropriations that are available for use within
statutory limits for operating and capital expenditures. Appropriations
are recognized as financing sources when the related expenses are
incurred. The following are the different types of operating
appropriations:
Processing. Assistance, and Management:
This appropriation provides funds for processing tax returns and
related documents, assisting taxpayers in the filing of their returns
and in paying taxes that are due, strategic planning and oversight,
finance, human resources, and agency-wide shared services.
Tax Law Enforcement:
The purpose of this appropriation is to provide funds for the
enforcement of Internal Revenue Laws, examination of tax returns,
administration of taxpayer appeals, collection of unpaid accounts, and
securing unfiled tax returns and payments. It also provides for issuing
technical rulings, monitoring employee pension plans, qualifying exempt
organizations, examining exempt tax returns, and compiling statistics
of income and compliance research.
Information Systems:
This appropriation funds costs for data processing and information and
telecommunication support for the Service's activities, including
developmental information systems and operational information systems.
The operational systems are located in a variety of sites including the
Martinsburg Computing Center, the Detroit Computing Center, the
Tennessee Computing Center, and in field offices and service centers.
Other:
These budgetary accounts consist of an aggregate of smaller multi-
functional funds that support the Service's mission to collect the
proper amount of tax and provide improved customer service to the
taxpayer. The Business Systems Modernization (BSM) appropriation is the
largest of these funds and may be obligated as Congress approves
expenditure plans. The Health Insurance Tax Credit Administration
appropriation funds necessary expenses to implement the health
insurance tax credit and was included in the Trade Act of 2002.
In addition, the Service incurs certain costs that are paid in total or
in part by other federal entities, such as pension costs administered
by the Office of Personnel Management and legal judgments paid by the
Treasury Judgment Fund. These constitute subsidized costs and are
recognized by the Service on its Statement of Changes in Net Position
and Statement of Financing as imputed financing sources equal to the
cost paid by other federal entities.
D. Fund Balance with Treasury:
The fund balance with Treasury is the aggregate amount of funds in the
Service's accounts, including appropriated funds, from which the
Service is authorized to make expenditures and pay liabilities, as well
as funds in deposit, suspense, and clearing accounts.
E. Other Assets -Accounts Receivable:
Intragovernmental accounts receivable consist of amounts due from
federal agencies. Accounts receivable are recorded, and reimbursable
revenues are recognized, as the services are performed and costs are
incurred. The allowance for uncollectible accounts is based on an
annual review of groups of accounts by age and includes accounts
receivable balances older than one year.
Advances to government agencies primarily represent funds paid to the
Treasury Working Capital Fund (WCF). Amounts in the fund are available
for expenses of operating and maintaining common administrative
services of Treasury that can be performed more economically as a
centralized service. Centralized services funded through the WCF for
the Service consist primarily of telecommunications services, payroll
processing, and depreciation of property and equipment owned by the
WCF.
The majority of advances to the public are for investigations and
employee travel advances, which are expensed upon receipt of employees'
expense reports.
F. Property and Equipment:
The net book values of Property and Equipment as of September 30, 2004
and 2003 consist of the following components:
Property and Equipment acquired before October 1, 1999:
The estimated net book value of ADP equipment, telecommunication
equipment, office equipment and furniture, investigative equipment, and
vehicles as of September 30, 1999, was derived based upon estimates of
the net book value of a statistically selected sample of assets, using
techniques prescribed by the Uniform Standards of Appraisal Practice.
These estimated net book values were then projected to the entire
population of assets. Depreciation of these assets is calculated using
the straight line method and is based on the estimated net book values
and projected remaining useful lives of the assets as of September 30,
1999.
Property and Equipment acquired after September 30, 1999:
Property and equipment acquired after September 30, 1999, is recorded
at historical cost. The Service acquires property and equipment through
direct purchase, construction, development of software and systems, and
through capital lease agreements. Property and equipment consists of
tangible assets and software that are intended for use by the Service
and have an estimated life of two years or greater. Other than limited
exceptions noted below, property and equipment is capitalized
regardless of acquisition cost. The Service depreciates property and
equipment on a straight line basis with a half year depreciated in the
first and final years. Disposals are recorded when deemed material.
The Service classifies property and equipment into the following
classes: ADP equipment, non-ADP equipment, furniture, investigative
equipment, vehicles, major systems, internal use software, and
leasehold improvements.
ADP Equipment:
ADP Equipment consists of five types of equipment: 1) mainframe
computers and related equipment, 2) minicomputers and related
equipment, 3) local area network (LAN) servers and related equipment,
4) desktop and laptop computers and related equipment, and 5)
telecommunications equipment. ADP equipment includes all related
software, including commercial off-the-shelf software, except as
separately stated under Internal Use Software discussed below.
Mainframe computers and related equipment, minicomputers and related
equipment, and telecommunications equipment have an estimated useful
life of seven years. The useful life of LAN servers and equipment has
been changed in FY 2004 from seven years to four years. Desktop and
laptop computers and related equipment have an estimated useful life of
three years.
Office Equipment and Furniture, Investigative Equipment, and Vehicles
acquired after September 30, 1999:
The Service capitalizes office equipment and furniture, investigative
equipment, and vehicles acquired after September 30, 1999, with an
individual-asset acquisition cost of $5,000 or more. The estimated
useful life of office equipment and investigative equipment is ten
years. Furniture has an estimated useful life of eight years, and
vehicles have an estimated useful life of five years.
Major Systems:
Prior to FY 2001, the Service capitalized certain costs of large-scale
computer software systems as major systems. Subsequently, such costs
are included in internal use software. Only projects exceeding $20
million were considered major systems. Major systems capitalized prior
to September 30, 2000, had an estimated useful life of seven years, and
continue to be depreciated over their remaining useful lives.
Financial Statements:
Internal Revenue Service Notes to the Financial Statements For the
Years Ended September 30, 2004 and 2003:
Internal Use Software:
In accordance with Statement of Federal Financial Accounting Standards
No. 10 (SFFAS No. 10), Accounting for Internal Use Software, beginning
in FY 2001, the Service capitalizes all internal use software projects
recognized and authorized by management as major development projects.
Only projects with useful lives of two years or more and recognized as
major development projects by the Modernization and Information
Technology Services Executive Governance Council are capitalized.
The Service capitalizes direct and indirect costs of internal use
software incurred in the development phase of a project as defined in
the SFFAS No. 10. Direct costs include direct salaries and benefits of
IRS employees assigned to the projects, consultant fees, and
contracting costs. Related infrastructure and project management costs
are allocated to the projects. Direct costs exclude maintenance
contracts in effect at any time during development or thereafter.
The Service applies indirect overhead to internal use software projects
using a three-year average rate of overhead costs. The overhead rate is
applied only to salaries and benefits of IRS employees directly
assigned to the internal use software projects.
In accordance with SFFAS No. 10, costs incurred for the development
phase of a project are capitalized, while costs incurred for design
(prior to the development phase) and operations (after the development
phase) are expensed. The design phase, defined by Standard No. 10,
includes conceptual formulation of alternatives, determination and
testing of alternatives, determination of existence of needed
technology, and final selection of alternatives. The development phase
includes developing the software configuration and interfaces, coding,
installation of hardware and software, and testing. The operational
phase begins upon successful completion of testing.
Internal use software's capitalized costs are accumulated in work in
process until final acceptance and testing are successfully completed.
Once completed, the costs are transferred to depreciable property.
Internal use software has an estimated useful life of seven years with
no residual value, and is depreciated using the straight-line method
with a half-year convention in the first and final years.
In accordance with SFFAS No. 10, disposals are recognized when software
is determined to be obsolete or nonfunctional. The IRS treats
terminated projects and/or subprojects as 100% obsolete. Obsolete
projects are adjusted to reduce both the asset and accumulated
depreciation accounts, and record any losses as a result of the
disposal.
Leasehold Improvements:
For projects initiated before October 1, 1999, a $50,000 threshold was
used to identify projects capitalized as leasehold improvements. All
leasehold improvement projects initiated after September 30, 1999, are
capitalized regardless of cost. Leasehold improvements have an
estimated useful life often years.
Capital Lease Liability:
Capital lease liability includes amounts for non-ADP equipment and
computer software leased under software licensing agreements. The
liability reported represents the lesser of the net present value of
future lease payments or the fair market value of the asset acquired.
The liability for non-ADP equipment acquired under a capital lease is
included in funded liabilities. The liability for software licenses is
generally included in Liabilities Not Covered by Budgetary Resources.
H. Permanent and Indefinite Funds:
The Service uses a special class of funds, designated as "permanent and
indefinite", to disburse tax refund principal and related interest.
These permanent and indefinite funds are not subject to budgetary
ceilings set by Congress during the annual appropriation process.
Because Congress permanently funds tax refunds from a budgetary
standpoint, tax refunds payable at year-end are fully funded. The asset
"Due from Treasury" designates this approved funding to pay year-end
tax refund liabilities, which are reflected in the funds used for
refund of federal taxes on the Statement of Custodial Activity along
with tax refund payments for the year.
Although funded through the appropriation process, refund activity is
reported as a custodial activity of the Service. This presentation is
appropriate because refunds are, in substance, a custodial revenue-
related activity. Federal tax revenue received from taxpayers is not
available for use in the operation of the Service and is not reported
on the Statement of Net Cost. Likewise, the resultant refunds of
overpayments are not available for use by the Service in operations.
Consequently, to present refunds as an expense of the Service on the
Statement of Net Cost with related appropriations used would be
inconsistent with the reporting of the related federal tax revenue and
would materially distort the costs incurred by the Service in meeting
its strategic objectives.
I. Tax Assessments and Abatements:
Under the Internal Revenue Code Section 6201, the Commissioner of the
IRS, as delegated by the Secretary of the Treasury, is authorized and
required to make inquiries, determinations, and assessments of all
taxes that have been imposed and accruing under any internal revenue
law but have not been duly paid (including interest, additions to the
tax, and assessable penalties). Unpaid assessments result from
taxpayers filing returns without sufficient payments, as well as from
the Service's enforcement programs, such as examination, under-
reporter, substitute for return, and combined annual wage reporting.
The Commissioner of the IRS also has authority to abate the paid or
unpaid portion of an assessed tax, interest, and penalty. Abatements
occur for a number of reasons and are a normal part of the tax
administration process (abatements may be allowed for a qualifying
corporation that claimed a net operating loss which created a credit
that can be carried back to reduce a prior year's tax liability, amend
tax returns, and to correct an assessment from an enforcement program,
taxes discharged in bankruptcy, accepted offers in compromise, penalty
abatements for reasonable cause, contested assessments made due to
mathematical or clerical errors, and assessments contested after the
liability has been satisfied). Abatements may result in claims for
refunds or a reduction of the unpaid assessed amount.
J. Federal Taxes Receivable:
Federal taxes receivable and the corresponding liability, "Due to
Treasury", are not accrued until related tax returns are filed or
assessments made by IRS and agreed to by either the taxpayer or the
court and prepayments netted against liabilities. Accruals are made to
reflect penalties and interest on taxes receivable through the balance
sheet date.
Taxes receivable consist of unpaid assessments (taxes and associated
penalties and interest) due from taxpayers for which the Service can
support the existence of a receivable through taxpayer agreement, such
as filing of a tax return without sufficient payment, or a court ruling
in favor of the Service. Taxes receivable are shown on the balance
sheet net of an allowance for doubtful accounts. The allowance for
doubtful accounts reflects an estimate of the portion of total taxes
receivable deemed to be uncollectible.
Compliance assessments are unpaid assessments for which neither the
taxpayer nor a court has affirmed that the taxpayer owes amounts to the
Federal Government. Examples include assessments resulting from an IRS
audit or examination in which the taxpayer does not agree with the
results. These amounts are not reported on the balance sheet; however,
statutory provisions require that these accounts be maintained until
the statute for collection expires.
Write-offs consist of unpaid assessments for which the Service does not
expect further collections due to factors such as taxpayers'
bankruptcy, insolvency, or death. These amounts are also not reported
on the balance sheet; however, statutory provisions require that these
accounts be maintained until the statute for collection expires.
Note 2. Fund Balance with Treasury (in Millions):
Fund balance with Treasury as of September 30, 2004 and 2003, consist
of the following:
Fund Balance:
Appropriated funds and Other;
2004: $1,725;
2003: $1,666
Fund Balance with Treasury;
2004: $1,725;
2003: $1,666.
Status of Fund Balance with Treasury:
Unobligated balances: Available;
2004: $178;
2003: $277.
Unobligated balances: -Unavailable;
2004: $392;
2003: $196.
Obligated balances not yet disbursed;
2004: $1,161;
2003: $1,266.
Other funds;
2004: ($6);
2003: ($73).
Fund Balance with Treasury;
2004: $1,725;
2003: $1,666.
[End of table]
The Business Systems Modernization (BSM) fund represents $340 million
and $343 million of the appropriated fund balance as of September 30,
2004 and 2003, respectively. BSM funds can only be obligated pursuant
to an expenditure plan approved by Congress. As of September 30, 2004,
Congress has approved a cumulative amount of $1,734 million in BSM
appropriations received, of which $1,498 million has been obligated.
Unobligated balances include $236 million and $166 million of the BSM
fund as of September 30, 2004 and 2003, respectively. As of September
30, 2004, $95 million of the unobligated balance was approved for
expenditure. As of September 30, 2003, $166 million of the unobligated
balance was approved for expenditure. Other funds primarily consist of
suspense, deposit, and clearing funds.
Note 3. Cash and Other Monetary Assets (In Millions):
Cash and other monetary assets with the public as of September 30, 2004
and 2003, consist of the following:
Imprest fund;
2004: $3;
2003: $4.
Other custodial assets;
2004: $83;
2003: $116.
Total Cash and Other Monetary Assets;
2004: $86;
2003: $120.
[End of table]
Imprest funds are maintained by Headquarters and field offices in
commercial bank accounts.
Other custodial assets primarily represent voluntary deposits received
from taxpayers, pending application of the funds to unpaid tax
assessments. This category also includes seized monies of $1 million as
of both September 30, 2004 and 2003, which are held pending the results
of criminal investigations. As described in Note 13, other custodial
assets are classified as "Non-entity Assets" and are offset by an equal
liability in other custodial liabilities.
Note 4. Other Assets (In Millions):
Other assets as of September 30, 2004 and 2003, consist of the
following:
Advances;
2004: Intragovernmental: $129;
2004: With the Public: $12;
2003: Intragovernmental: $114;
2003: With the Public: $21.
Accounts receivable, net;
2004: Intragovernmental: $19;
2004: With the Public: $7;
2003: Intragovernmental: $20;
2003: With the Public: $2.
Federal tax lien revolving fund;
2004: With the Public: $1;
2003: With the Public: $5.
Suspense;
2004: Intragovernmental: $1;
2004: With the Public: $1;
2003: Intragovernmental: $6.
Total Other Assets;
2004: Intragovernmental: $149;
2004: With the Public: $21;
2003: Intragovernmental: $140;
2003: With the Public: $28.
[End of table]
Note 5. Federal Taxes Receivable, Net:
Federal taxes receivable (gross) were $89 billion as of both
September 30, 2004 and 2003, and consisted of tax Federal Taxes
assessments, penalties, and interest that were not paid or abated, and
which were agreed to by the taxpayer and the Receivable, Service, or
upheld by the courts.
Federal taxes receivable (net) equaled $20 billion as of both September
30, 2004 and 2003, and are the portion of federal taxes receivable
(gross) estimated to be collectible. It is based on projections of
collectibility from a statistical sample of taxes receivable. An
allowance for doubtful accounts of $69 billion was established in both
FY 2004 and FY 2003, for the difference between the gross federal taxes
receivable and the portion estimated to be collectible. Due to Treasury
is the offsetting liability to federal taxes receivable, representing
amounts to be transferred to Treasury when collected.
Note 6. Property and Equipment (In Millions):
Property and Equipment as of September 30, 2004 and 2003, is shown in
the schedule below. The Cost column for property and equipment
represents the combination of (1) estimated net book value of certain
property and equipment acquired before October 1, 1999, as discussed in
Note 1, and (2) the actual cost of property and equipment acquired
after September 30, 1999, net of disposals. The net book value of
property and equipment derived from estimates, most of which related
to ADP equipment, for FY 2004 and FY 2003 was $38 million and $98
million, respectively. The cost basis for FY 2004 and FY 2003 is $3,422
million and $2,941 million, respectively. Accumulated depreciation for
FY 2004 and FY 2003 is $1,647 million and $1,289 million, respectively.
Category: ADP assets;
Useful Life: 3 to 7 Years;
Cost: $1,540;
Accumulated Depreciation: ($1,006);
2004 Net Book Value: $534;
2003 Net Book Value: $562.
Category: Furniture and non-ADP equipment;
Useful Life: 8 to 10 Years;
Cost: $57;
Accumulated Depreciation: ($33);
2004 Net Book Value: $24;
2003 Net Book Value: $28.
Category: Investigative equipment;
Useful Life: 10 Years;
Cost: $12;
Accumulated Depreciation: ($9);
2004 Net Book Value: $3;
2003 Net Book Value: $5.
Category: Vehicles;
Useful Life: 5 Years;
Cost: $85;
Accumulated Depreciation: ($60);
2004 Net Book Value: $25;
2003 Net Book Value: $21.
Category: Major systems;
Useful Life: 7 Years;
Cost: $422;
Accumulated Depreciation: ($272);
2004 Net Book Value: $150;
2003 Net Book Value: $210.
Category: Internal use software;
Useful Life: 7 Years;
Cost: $143;
Accumulated Depreciation: ($39);
2004 Net Book Value: $104;
2003 Net Book Value: $127.
Category: Internal use software -work in process;
Cost: $635;
2004 Net Book Value: $635;
2003 Net Book Value: $360.
Category: Leasehold improvements;
Useful Life: 10 Years;
Cost: $404;
Accumulated Depreciation: ($179);
2004 Net Book Value: $225;
2003 Net Book Value: $232.
Category: Assets Under Capital Lease;
Useful Life: 3 to 10 Years;
Cost: $124;
Accumulated Depreciation: ($49);
2004 Net Book Value: $75;
2003 Net Book Value: $107.
Category: Total Property and Equipment;
Cost: $3,422;
Accumulated Depreciation: ($1,647);
2004 Net Book Value: $1,775;
2003 Net Book Value: $1,652.
[End of table]
Prior to FY 2001, the Service captured the costs of major systems
consulting and contractual services in the category "Major Systems".
The Service has ten systems it considers major systems as of September
30, 2004 and 2003. As of September 30, 2004, major systems consisted
largely of costs associated with re-engineering the Martinsburg and
Tennessee Computing Centers, known as the Mainframe Consolidation
project, and a system to convert paper tax documents and remittances
into electronic records, known as the Integrated Submission and
Remittance Processing (Continued) System.
Major systems consist of the following:
Category: Mainframe Consolidation;
Cost: $201;
Accumulated Depreciation: ($129);
2004 Net Book Value: $72;
2003 Net Book Value: $101.
Category: Integrated Submission and Remittance Processing System;
Cost: $97;
Accumulated Depreciation: ($62);
2004 Net Book Value: $35;
2003 Net Book Value: $48.
Category: Other;
Cost: $124;
Accumulated Depreciation: ($81);
2004 Net Book Value: $43;
2003 Net Book Value: $61.
Totals;
Cost: $422;
Accumulated Depreciation: ($272);
2004 Net Book Value: $150;
2003 Net Book Value: $210.
[End of table]
After FY 2000, the Service captured development of major systems as
Internal Use Software. As of September 30, 2004 and 2003, the Service
has 15 internal use software projects, including deployed and work in
process. Deployed projects include Security and Technology
Infrastructure Release (STIR), Internet Refund Fact of Filing,
Enterprise Systems Management (ESM), and Customer Communications. STIR
is a project to modernize and standardize the information technology
security infrastructure throughout the Service. Internet Refund Fact of
Filing is a project to allow taxpayers to review the status of their
refund. ESM is a project that created a new information technology
infrastructure, and Customer Communications is a customer service
telephone system.
Deployed internal use software projects consist of the following:
Category: Security Technology Infrastructure Release;
Cost: $76;
Accumulated Depreciation: ($16);
2004 Net Book Value: $60;
2003 Net Book Value: $71.
Category: Internet Refund Fact of Filing;
Cost: $15;
Accumulated Depreciation: ($3);
2004 Net Book Value: $12;
2003 Net Book Value: $14.
Category: Enterprise Systems Management;
Cost: $16;
Accumulated Depreciation: ($4);
2004 Net Book Value: $12;
2003 Net Book Value: $15.
Category: Customer Communications;
Cost: $25;
Accumulated Depreciation: ($11);
2004 Net Book Value: $14;
2003 Net Book Value: $18.
Category: Other;
Cost: $11;
Accumulated Depreciation: ($5);
2004 Net Book Value: $6;
2003 Net Book Value: $9.
Totals;
Cost: $143;
Accumulated Depreciation: ($39);
2004 Net Book Value: $104;
2003 Net Book Value: $127.
[End of table]
Until deployed, internal use software projects are carried as work in
process. Major projects in process include Customer Account Data Engine
(CADE), Custodial Accounting Project, Integrated Financial System, E-
Services, and Modernized E-File. CADE is a project to replace the
Service's master file for taxpayer accounts. Custodial Accounting
Project is an integrated tax revenue general ledger. Integrated
Financial System is an administrative financial system. E-Services is a
project to develop web-based products and services to communicate with
the public and expand electronic filing of returns and requests.
Modernized E-File is an electronic filing system for corporate tax
returns.
The costs of Internal use software - work in process consist of the
following:
Category: Customer Account Data Engine;
2004: $119;
2003: $72.
Category: Integrated Financial Systems;
2004: $140;
2003: $56.
Category: Custodial Accounting Project;
2004: $130;
2003: $83.
Category: E-Services;
2004: $147;
2003: $102.
Category: Modernized E-File;
2004: $96;
2003: $44.
Category: Other;
2004: $3;
2003: $3.
Totals;
2004: $635;
2003: $360.
[End of table]
Equipment and software licenses acquired through capital leases are
included in the categories below. Disclosures concerning associated
capital lease liabilities are provided in Notes 7 and 8.
Category: ADP Assets: Software Licenses;
Useful Life: 3 to 7 Years;
Cost: $121;
Accumulated Depreciation: ($48);
2004 Net Book Value: $73;
2003 Net Book Value: $105.
Category: Equipment-Photocopiers;
Useful Life: 10 Years;
Cost: $3;
Accumulated Depreciation: ($1)
2004 Net Book Value: $2;
2003 Net Book Value: $2.
Totals;
Cost: $124;
Accumulated Depreciation: ($49);
2004 Net Book Value: $75;
2003 Net Book Value: $107.
[End of table]
Note 7. Other Liabilities (In Millions):
Other liabilities as of September 30, 2004 and 2003, consist of
the following:
Accrued expenses;
2004 Intragovernmental: $30;
2004 With the Public: $188;
2003 Intragovernmental: $25;
2003 With the Public: $346.
Accrued payroll and benefits;
2004 Intragovernmental: $42;
2004 With the Public: $199;
2003 Intragovernmental: $30;
2003 With the Public: $141.
Workers' compensation;
2004 Intragovernmental: $92;
2004 With the Public: $547;
2003 Intragovernmental: $91;
2003 With the Public: $533.
Accrued annual leave;
2004 With the Public: $456;
2003 With the Public: $434.
Other custodial liabilities;
2004 With the Public: $83;
2003 With the Public: $116.
Capital Leases;
2004 Intragovernmental: 1;
2004 With the Public: $51;
2003 Intragovernmental: $1;
2003 With the Public: $103.
Total Other Liabilities;
2004 Intragovernmental: $165;
2004 With the Public: $1,524;
2003 Intragovernmental: $147;
2003 With the Public: $1,673.
[End of table]
Other custodial liabilities (the offsetting liability to other
custodial assets) primarily consist of liabilities to taxpayers for
deposits pending application of the funds to outstanding tax
deficiencies and liability for seized monies.
Note 8. Leases (In Millions):
The capital lease liability as of September 30, 2004 and 2003, is $52
million and $104 million, respectively, for photocopiers and software
licenses. In FY 2004 and FY 2003, photocopiers were leased under Lease-
To-Ownership-Plans (LTOPs). The terms of the LTOPs provide for 48 to 60
monthly payments for photocopiers. Under each LTOP, the equipment is
owned as of the last monthly payment. Capital lease treatment is
accorded to computer software leased under software licensing
agreements. These licensing agreements provide for payments over
periods ranging from four to six years. Interest rates for capital
leases range from 3 to 11 percent.
Future payments due on capital leases are as follows:
Photocopiers;
Total: $1;
2005: $1.
Software licenses;
Total: $54;
2005: $30;
2006: $13;
2007: $11.
Total Lease Obligations;
Total: $55;
2005: $31;
2006: $13;
2007: $11.
Total Lease Obligations: Less: Interest;
Total: ($3).
Present Value of Lease Payments;
Total: $52.
Lease Liabilities covered by budgetary resources;
Total: $1.
Lease Liabilities not covered by budgetary resources;
Total: $51.
[End of table]
The Service leases office space, vehicles and equipment under annual
operating leases. These leases are cancelable or renewable on an annual
basis at the option of the Service. They do not impose binding
commitments on the Service for future rental payments on leases with
terms longer than one year.
Note 9. Contingencies:
The Service is subject to contingent liabilities involving litigation
cases whose ultimate disposition is unknown. Based on the information
currently available, however, it is management's opinion that the
expected outcome of these matters, either individually or in the
aggregate, will not have a material effect on the financial statements.
As of September 30, 2004, the Service does not have contractual
commitments for payments on obligations related to canceled
appropriations.
Note 10. Liabilities Not Covered by Budgetary Resources (In Millions):
Liabilities not covered by budgetary resources as of September 30, 2004
and 2003, consist of the following:
Workers' compensation;
2004 Intragovernmental: $92;
2004 With the Public: $547;
2003 Intragovernmental: $91;
2003 With the Public: $533.
Accrued annual leave;
2004 With the Public: $456;
2003 With the Public: $434.
Capital lease liability;
2004 With the Public: $51;
2003 With the Public: $102.
[End of table]
Note 11. Appropriations Received:
Appropriations received reported in the Statement of Budgetary
Resources in FY 2004 and FY 2003, include $84 million and $76 million,
respectively, in user fees received from the public for services
provided. These funds are retained by the agency to reduce its net cost
of operations.
Note 12. Obligated Balances (In Millions):
Obligated balances as of September 30, 2004 and 2003, in the Statement
of Budgetary Resources are as follows:
Undelivered orders - unpaid;
2004: ($718);
2003: ($678).
Budgetary accounts payable;
2004: ($462);
2003: ($606).
Budgetary accounts receivable;
2004: $19;
2003: $18.
Total Obligated Balances;
2004: ($1,1611);
2003: ($1,266).
[End of table]
Note 13. Non-entity Assets (In Millions):
Non-entity assets arise from the Service's custodial duty to collect
taxes, disburse tax refunds and maintain proper accounting for these
activities in the books and records of the Service. Non-entity assets
as of September 30, 2004 and 2003, consist of the following:
Due from Treasury;
2004 Intragovernmental: $1,801;
2003 Intragovernmental: $1,193.
Federal taxes receivable, net of allowance for doubtful accounts;
2004 With the Public: $20,000;
2003 With the Public: $20,000.
Other custodial assets;
2004 With the Public: $83;
2003 With the Public: $116.
[End of table]
Due from Treasury represents tax refunds due to taxpayers but not
disbursed as of September 30, 2004 and 2003.
Federal taxes receivable are transferred to Treasury upon receipt. An
amount equal to federal taxes receivable has been recognized as an
offsetting intragovernmental liability - Due to Treasury. Federal taxes
receivable is described in more detail in Note 5.
Other custodial assets, also discussed in Note 3, primarily relate to
seized monies and the deposits received from taxpayers, pending
application of the funds to unpaid tax assessments.
Note 14. Comparison of Statement of Budgetary Resources and the
President's Budget (In Millions):
Statement of Federal Financial Accounting Standards No. 7, Accounting
for Revenue and Other Financing: Sources and Concepts for Reconciling
Budgetary and Financial Accounting, calls for explanations of material
differences between budgetary resources available, status of those
resources and outlays as presented in the Statement of Budgetary
Resources (SBR) to the related actual balances published in the Budget
of the United States Government. However, the Budget of the United
States Government that will include FY 2004 actual budgetary execution
information has not yet been published. The Budget of the United States
Government is scheduled for publication in January 2005. Accordingly,
information required for such disclosure is not available at the time
of publication of these financial statements.
Balances reported in the FY 2003 Statement of Budgetary Resources and
the related President's Budget are shown in the table below for each of
the major appropriations and the Business Systems Modernization fund.
The resources for the EITC program were formerly provided in a separate
appropriation. The President's Budget combines EITC administration and
Tax Law Enforcement budgetary execution information. Accordingly, EITC
administration has been combined with Tax Law Enforcement in the SBR
column in order to be consistent with the President's budget. The table
does not include other minor appropriations.
There are significant differences between the SBR and the President's
Budget that are attributable to differing requirements imposed by
Treasury and OMB. The differences are primarily due to reporting
requirement differences for expired and unexpired appropriations
between the Treasury guidance used to prepare the SBR and the OMB
guidance used to prepare the President's Budget. The SBR includes both
unexpired and expired appropriations, while the President's Budget
discloses only unexpired budgetary resources that are available for new
obligations.
Processing, Assistance, and Management: Total Budgetary Resources;
FY 2003 Statement of Budgetary Resources: $4,158;
FY 2003 President's Budget: $4,061.
Processing, Assistance, and Management: Status of Budgetary Resources:
Obligations incurred;
FY 2003 Statement of Budgetary Resources: $4,070;
FY 2003 President's Budget: $4,037.
Processing, Assistance, and Management: Status of Budgetary Resources:
Unobligated balances - available;
FY 2003 Statement of Budgetary Resources: $25;
FY 2003 President's Budget: $24.
Processing, Assistance, and Management: Status of Budgetary Resources:
Unobligated balances - unavailable;
FY 2003 Statement of Budgetary Resources: $63.
Processing, Assistance, and Management: Total Status of Budgetary
Resources;
FY 2003 Statement of Budgetary Resources: $4,158;
FY 2003 President's Budget: $4,061.
Processing, Assistance, and Management: Outlays;
FY 2003 Statement of Budgetary Resources: $3,943;
FY 2003 President's Budget: $3,945.
Tax Law Enforcement: Total Budgetary Resources;
FY 2003 Statement of Budgetary Resources: $4,053;
FY 2003 President's Budget: $3,987.
Tax Law Enforcement: Status of Budgetary Resources: Obligations
incurred;
FY 2003 Statement of Budgetary Resources: $3,982;
FY 2003 President's Budget: $3,967.
Tax Law Enforcement: Status of Budgetary Resources: Unobligated
balances - available;
FY 2003 Statement of Budgetary Resources: $21;
FY 2003 President's Budget: $20.
Tax Law Enforcement: Status of Budgetary Resources: Unobligated
balances - unavailable;
FY 2003 Statement of Budgetary Resources: $50.
Tax Law Enforcement: Total Status of Budgetary Resources;
FY 2003 Statement of Budgetary Resources: $4,053;
FY 2003 President's Budget: $3,987.
Tax Law Enforcement: Outlays;
FY 2003 Statement of Budgetary Resources: $3,840;
FY 2003 President's Budget: $3,838.
Information Systems: Total Budgetary Resources;
FY 2003 Statement of Budgetary Resources: $1,700;
FY 2003 President's Budget: $1,622.
Information Systems: Status of Budgetary Resources: Obligations
incurred;
FY 2003 Statement of Budgetary Resources: $1,591;
FY 2003 President's Budget: $1,594.
Information Systems: Status of Budgetary Resources: Unobligated
balances - available;
FY 2003 Statement of Budgetary Resources: $28;
FY 2003 President's Budget: $28.
Information Systems: Status of Budgetary Resources: Unobligated
balances - unavailable;
FY 2003 Statement of Budgetary Resources: $81.
Information Systems: Total Status of Budgetary Resources;
FY 2003 Statement of Budgetary Resources: $1,700;
FY 2003 President's Budget: $1,622.
Information Systems: Outlays;
FY 2003 Statement of Budgetary Resources: $1,600;
FY 2003 President's Budget: $1,599.
Business Systems Modernization Fund: Total Budgetary Resources;
FY 2003 Statement of Budgetary Resources: $548;
FY 2003 President's Budget: $541.
Business Systems Modernization Fund: Status of Budgetary Resources:
Obligations incurred;
FY 2003 Statement of Budgetary Resources: $382;
FY 2003 President's Budget: $378.
Business Systems Modernization Fund: Status of Budgetary Resources:
Unobligated balances - available;
FY 2003 Statement of Budgetary Resources: $163;
FY 2003 President's Budget: $163.
Business Systems Modernization Fund: Status of Budgetary Resources:
Unobligated balances - unavailable;
FY 2003 Statement of Budgetary Resources: $3.
Business Systems Modernization Fund: Total Status of Budgetary
Resources;
FY 2003 Statement of Budgetary Resources: $548;
FY 2003 President's Budget: $541.
Business Systems Modernization Fund: Outlays;
FY 2003 Statement of Budgetary Resources: $375;
FY 2003 President's Budget: $375.
[End of table]
Note 15. Collections of Federal Tax Revenue (In Billions):
The Service transfers total tax collections to the U.S. Treasury.
Collection activity, by financial statement line item for the fiscal
years ended September 30, 2004 and 2003, and by tax year for fiscal
year ended September 30, 2004, is as follows:
Individual income, FICA/SECA, and other;
Tax Year 2004: $1,129*;
Tax Year 2003: $541;
Tax Year 2002: $13;
Tax Year: Prior Years: $13;
Collections Received FY 2004: $1,696;
Collections Received FY 2003: $1,671.
Corporate income;
Tax Year 2004: $151**;
Tax Year 2003: $67;
Tax Year 2002: $1;
Tax Year: Prior Years: $11;
Collections Received FY 2004: $230;
Collections Received FY 2003: $194.
Excise;
Tax Year 2004: $40;
Tax Year 2003: $15;
Collections Received FY 2004: $55;
Collections Received FY 2003: $53.
Estate and gift;
Tax Year 2003: $17;
Tax Year 2002: $1;
Tax Year: Prior Years: $8;
Collections Received FY 2004: $26;
Collections Received FY 2003: $23.
Railroad retirement;
Tax Year 2004: $3;
Tax Year 2003: $1;
Collections Received FY 2004: $4;
Collections Received FY 2003: $4.
Federal unemployment;
Tax Year 2004: $5;
Tax Year 2003: $2;
Collections Received FY 2004: $7;
Collections Received FY 2003: $7.
Total;
Tax Year 2004: $1,328;
Tax Year 2003: $643;
Tax Year 2002: $15;
Tax Year: Prior Years: $32;
Collections Received FY 2004: $2,018;
Collections Received FY 2003: 1,952.
Tax Year 2004: 65%;
Tax Year 2003: 32%;
Tax Year 2002: 1%;
Tax Year: Prior Years: 2%;
Collections Received FY 2004: 100%.
* Includes other collections of $644 million.
** Includes tax year 2005 corporate income tax receipts of $7 billion.
[End of table]
In FY 2004, Individual income, FICA/SECA, and other taxes include $63
billion in payroll taxes collected from other federal agencies. Of this
amount, $11 billion represents the portion paid by the employers.
Note 16. Federal Tax Refund Activity (In Billions):
Refund activity, broken out similarly to collection activity by
financial statement line item for the fiscal years ended September 30,
2004 and 2003, and by tax year for fiscal year ended September 30,
2004, is as follows:
Individual income, FICA/SECA, and other;
Tax Year 2004: $1;
Tax Year 2003: $210;
Tax Year 2002: $13;
Tax Year: Prior Years: $7;
Refunds Disbursed FY 2004: $231;
Refunds Disbursed FY 2003: $232.
Corporate income;
Tax Year 2004: $1;
Tax Year 2003: $9;
Tax Year 2002: $7;
Tax Year: Prior Years: $30;
Refunds Disbursed FY 2004: $47;
Refunds Disbursed FY 2003: $66.
Excise;
Refunds Disbursed FY 2003: $1.
Estate and gift;
Refunds Disbursed FY 2003: $1.
Total;
Tax Year 2004: $2;
Tax Year 2003: $219;
Tax Year 2002: $20;
Tax Year: Prior Years: $37;
Refunds Disbursed FY 2004: $278;
Refunds Disbursed FY 2003: $300.
Total;
Tax Year 2004: 1%;
Tax Year 2003: 79%;
Tax Year 2002: 7%;
Tax Year: Prior Years: 13%;
Refunds Disbursed FY 2004: 100%.
[End of table]
Individual income, FICA/ SECA, and other refund amounts include EITC
and child tax credit refunds.
Note 17. Net Cost by Budget Functional Classification:
Gross cost and earned revenue for the Service are classified under the
budget functional classification of General Government under the
President's Budget. Gross cost and earned revenue are categorized as
follows:
Gross Cost;
2004: Intragovernmental: $3,374;
2003: Intragovernmental: $3,156;
2004: With the Public: $7,311;
2003: With the Public: $7,213;
2004: Total: $10,685;
2003: Total: $10,369.
Earned Revenue;
2004: Intragovernmental: ($123);
2003: Intragovernmental: ($108);
2004: With the Public: ($164);
2003: With the Public: ($140);
2004: Total: ($287);
2003: Total: ($248).
Net Cost;
2004: Intragovernmental: $3,251;
2003: Intragovernmental: $3,048;
2004: With the Public: $7,147;
2003: With the Public: $7,073;
2004: Total: $10,398;
2003: Total: $10,121.
[End of table]
Note 18. Budgetary Rescissions:
In FY 2004, the Statement of Budgetary Resources reflects rescissions
of budget authority of $61 million and canceled appropriations of $77
million. In FY 2003, rescissions of budget authority and canceled
appropriations were $75 million and $51 million, respectively.
Rescissions and canceled appropriations are also reported in the
Statement of Changes in Net Position. Rescissions in FY 2004 were
enacted under Public Law 108-199. Rescissions in FY 2003 included $11
million under Public Law 107-67, which were reappropriated to multi-
year and no-year appropriations, and $64 million under Public Law 108-
7.
Note 19. Obligations Incurred:
Each fiscal year, the Office of Management and Budget apportions the
Service's budgetary resources under apportionment Category B by
activities and/or projects. In FY 2004, the Service incurred $10,256
million in obligations funded by direct appropriations and $165 million
funded by reimbursable revenue and transfers from the Treasury Asset
Forfeiture Fund. In FY 2003, the Service incurred $9,955 million in
obligations funded by direct appropriations and $139 million funded by
reimbursable revenue and transfers from the Treasury Asset Forfeiture
Fund.
Note 20. Spending Authority from Offsetting Collections (In Millions):
Spending authority from offsetting collections as of September 30, 2004
and 2003, in the Statements of Budgetary Resources and Financing is as
follows:
Reimbursable revenue;
2004: $150;
2003: $127.
Receipts for Tax Lien Revolving Fund;
2004: $6;
2003: $8.
Refunds from vendors;
2004: $2;
2003: $1.
Treasury Asset Forfeiture Fund Transfers;
2004: $15;
2003: $12.
Total Spending Authority From Offsetting Collections;
2004: $173;
2003: $148.
[End of table]
[End of section]
Supplemental and Other Accompanying Information:
Internal Revenue Service Supplemental Information - Unaudited For the
Years Ended September 30, 2004 and 2003:
Statement of Net Cost by Responsibility Segment (In Millions):
Operating Divisions: WAGE;
Net Cost: 2004: $2,210;
Net Cost: 2003: $2,191.
Operating Divisions: SBSE;
Net Cost: 2004: $2,905;
Net Cost: 2003: $2,728.
Operating Divisions: TEGE;
Net Cost: 2004: $725;
Net Cost: 2003: $678.
Operating Divisions: LMSB;
Net Cost: 2004: $231;
Net Cost: 2003: $225.
Operating Divisions: Total;
Net Cost: 2004: $6,071;
Net Cost: 2003: $5,822.
Functional Support: Appeals;
Net Cost: 2004: $205;
Net Cost: 2003: $196.
Functional Support: Chief Counsel;
Net Cost: 2004: $298;
Net Cost: 2003: $287.
Functional Support: Criminal Investigation;
Net Cost: 2004: $472;
Net Cost: 2003: $448.
Functional Support: Taxpayer Advocate;
Net Cost: 2004: $180;
Net Cost: 2003: $173.
Functional Support: Communications;
Net Cost: 2004: $47;
Net Cost: 2003: $63.
Functional Support: Total;
Net Cost: 2004: $1,202;
Net Cost: 2003: $1,167.
Operating Net Cost:
Net Cost: 2004: $7,273;
Net Cost: 2003: $6,989.
General and Administration;
Net Cost: 2004: $1,400;
Net Cost: 2003: $1,201.
Information Technology;
Net Cost: 2004: $1,335;
Net Cost: 2003: $1,532.
Depreciation;
Net Cost: 2004: $390;
Net Cost: 2003: $399.
Total Net Cost;
Net Cost: 2004: $10,398;
Net Cost: 2003: $10,121.
[End of table]
Other Claims for Refunds:
Management has estimated amounts that may be paid out as other claims
for tax refunds. This estimate represents an amount (principal and
interest) that may be paid for claims pending judicial review by the
Federal courts or, internally, by Appeals. In FY 2004, the total
estimated payout (including principal and interest) for claims pending
judicial review by the Federal courts is $1.7 billion and by Appeals is
$6.7 billion. In FY 2003, the total estimated payout (including
principal and interest) for claims pending judicial review by the
Federal courts was $6.5 billion and by Appeals was $7.6 billion.
Although these refund claims have been deemed to be probable, they do
not meet the criteria in SFFAS No. 5 for reporting the amounts in the
balance sheet or for disclosure in the notes to the financial
statements; however, they meet the criteria in SFFAS No. 7 for
inclusion as supplemental information. To the extent judgments against
the government in these cases prompt other similarly situated taxpayers
to file similar refund claims, these amounts could become significantly
greater.
Federal Taxes Receivable, Net (In Billions):
In accordance with SFFAS No. 7, some unpaid assessments do not meet the
criteria for financial statement recognition as discussed in Note 1 to
the financial statements. Although compliance assessments and write-
offs are not considered receivables under federal accounting standards,
they represent legally enforceable claims of the IRS acting on behalf
of the federal government. There is, however, a significant difference
in the collection potential of these categories.
The components of the total unpaid assessments and derivation of net
federal taxes receivable as of September 30, 2004 and 2003, were as
follows:
Total unpaid assessments;
2004: $237;
2003: $246.
Less: Compliance assessments;
2004: ($33);
2003: ($31).
Write-offs;
2004: ($115);
2003: ($126).
Gross Federal Taxes Receivable;
2004: $89;
2003: $89.
Less: Allowance for doubtful accounts;
2004: ($69);
2003: ($69).
Federal Taxes Receivable, Net;
2004: $20;
2003: $20.
[End of table]
The Service cannot reasonably estimate the amount of allowance for
doubtful accounts pertaining to its compliance assessments, and thus
cannot determine their net realizable value or the value of the pre-
assessment work-in-process.
To eliminate double-counting, the compliance assessments reported above
exclude trust fund recovery penalties, totaling $13 billion as of both
September 30, 2004 and 2003 that were assessed against officers and
directors of businesses who were involved in the non remittance of
federal taxes withheld from their employees. The related unpaid
assessments of those businesses are reported as taxes receivable or
write-offs, but the Service may also recover portions of those
businesses' unpaid assessments from any and all individual officers and
directors against whom a trust fund recovery penalty is assessed.
Earned Income Tax Credit:
The EITC is a special credit for taxpayers who work and whose earnings
fall below the established allowance ceiling. In FY 2004, the Service
issued $33 billion in EITC refunds. In FY 2003, the Service issued $32
billion in EITC refunds. An additional $5.2 billion and $5.1 billion of
the EITC was applied to reduce taxpayer liability for FY 2004 and FY
2003, respectively.
Intra-Governmental Assets (In Millions):
Agency: Treasury;
Fiscal Year 2004: Fund Balance With Treasury: $1,725;
Fiscal Year 2004: Due From Treasury: $1,801;
Fiscal Year 2004: Accounts Receivable, Net: $18;
Fiscal Year 2004: Advances to Government Agencies: $128.
Agency: Other;
Fiscal Year 2004: Accounts Receivable, Net: $1;
Fiscal Year 2004: Advances to Government Agencies: $1.
Total;
Fiscal Year 2004: Fund Balance With Treasury: $1,725;
Fiscal Year 2004: Due From Treasury: $1,801;
Fiscal Year 2004: Accounts Receivable, Net: $19;
Fiscal Year 2004: Advances to Government Agencies: $129.
[End of table]
Agency: Treasury;
Fiscal Year 2003: Fund Balance With Treasury: $1,666;
Fiscal Year 2003: Due From Treasury: $1,193;
Fiscal Year 2003: Accounts Receivable, Net: $18;
Fiscal Year 2003: Advances to Government Agencies: $114.
Agency: Other;
Fiscal Year 2003: Accounts Receivable, Net: $2.
Total;
Fiscal Year 2003: Fund Balance With Treasury: $1,666;
Fiscal Year 2003: Due From Treasury: $1,193;
Fiscal Year 2003: Accounts Receivable, Net: $20;
Fiscal Year 2003: Advances to Government Agencies: $114.
[End of table]
Intra-Governmental Liabilities (In Millions):
Agency: General Fund of the Treasury;
Fiscal Year 2004: Accrued Payroll and Benefits: $8.
Agency: Treasury;
Fiscal Year 2004: Due to Treasury: $20,000;
Fiscal Year 2004: Accrued Expenses: $1.
Agency: Department of Labor;
Fiscal Year 2004: Accrued Expenses: $17;
Fiscal Year 2004: Workers‘ Compensation: $92.
Agency: Office of Personnel Management;
Fiscal Year 2004: Accrued Payroll and Benefits: $34.
Agency: National Archives;
Fiscal Year 2004: Accrued Expenses: $5.
Agency: GSA;
Fiscal Year 2004: Accrued Expenses: $5.
Agency: Other;
Fiscal Year 2004: Accrued Expenses: $2.
Total:
Fiscal Year 2004: Due to Treasury: $20,000;
Fiscal Year 2004: Accrued Expenses: $30;
Fiscal Year 2004: Accrued Payroll and Benefits: $42;
Fiscal Year 2004: Workers‘ Compensation: $92.
[End of table]
Agency: General Fund of the Treasury;
Fiscal Year 2003: Accrued Payroll and Benefits: $7.
Agency: Treasury;
Fiscal Year 2003: Due to Treasury: $20,000;
Fiscal Year 2003: Accrued Expenses: $3.
Agency: Department of Labor;
Fiscal Year 2003: Accrued Expenses: $12;
Fiscal Year 2003: Workers‘ Compensation: $91.
Agency: Office of Pers. Mgmt;
Fiscal Year 2003: Accrued Expenses: $1;
Fiscal Year 2003: Accrued Payroll and Benefits: $23.
Agency: National Archives;
Fiscal Year 2003: Accrued Expenses: $3.
Agency: GSA;
Fiscal Year 2003: Accrued Expenses: $6.
Total;
Due to Treasury: $20,000;
Fiscal Year 2003: Accrued Expenses: $25;
Fiscal Year 2003: Accrued Payroll and Benefits: $30;
Fiscal Year 2003: Workers‘ Compensation: $91.
[End of table]
Schedule of Budgetary Resources by Major Budget Accounts (In Millions):
Budgetary Resources: Budget authority: Appropriations received;
Fiscal Year 2004: Processing Assistance & Management: $4,092;
Fiscal Year 2004: Tax Law Enforcement: $4,145;
Fiscal Year 2004: Information Systems: $1,646;
Fiscal Year 2004: Business Systems Modernization and Other: $446;
Fiscal Year 2004: Total: $10,329.
Budgetary Resources: Unobligated balance - beginning of period;
Fiscal Year 2004: Processing Assistance & Management: $88;
Fiscal Year 2004: Tax Law Enforcement: $71;
Fiscal Year 2004: Information Systems: $109;
Fiscal Year 2004: Business Systems Modernization and Other: $205;
Total: $473.
Budgetary Resources: Spending authority from offsetting collections;
Fiscal Year 2004: Processing Assistance & Management: $41;
Fiscal Year 2004: Tax Law Enforcement: $116;
Fiscal Year 2004: Information Systems: $10;
Fiscal Year 2004: Business Systems Modernization and Other: $6;
Fiscal Year 2004: Total: $173.
Budgetary Resources: Recoveries of prior year obligations;
Fiscal Year 2004: Processing Assistance & Management: $66;
Fiscal Year 2004: Tax Law Enforcement: $34;
Fiscal Year 2004: Information Systems: $35;
Fiscal Year 2004: Business Systems Modernization and Other: $19;
Fiscal Year 2004: Total: $154.
Budgetary Resources: Permanently not available;
Fiscal Year 2004: Processing Assistance & Management: ($45);
Fiscal Year 2004: Tax Law Enforcement: ($43);
Fiscal Year 2004: Information Systems: ($47);
Fiscal Year 2004: Business Systems Modernization and Other: ($3);
Fiscal Year 2004: Total: ($138).
Total Budgetary Resources;
Fiscal Year 2004: Processing Assistance & Management: $4,242;
Fiscal Year 2004: Tax Law Enforcement: $4,323;
Fiscal Year 2004: Information Systems: $1,753;
Fiscal Year 2004: Business Systems Modernization and Other: $673;
Fiscal Year 2004: Total: $10,991.
Status of Budgetary Resources: Obligations incurred;
Fiscal Year 2004: Processing Assistance & Management: $4,123;
Fiscal Year 2004: Tax Law Enforcement: $4,244;
Fiscal Year 2004: Information Systems: $1,674;
Fiscal Year 2004: Business Systems Modernization and Other: $380;
Fiscal Year 2004: Total: $10,421.
Status of Budgetary Resources: Unobligated balance - available;
Fiscal Year 2004: Processing Assistance & Management: $33;
Fiscal Year 2004: Tax Law Enforcement: $26;
Fiscal Year 2004: Information Systems: $15;
Fiscal Year 2004: Business Systems Modernization and Other: $104;
Fiscal Year 2004: Total: $178.
Status of Budgetary Resources: Unobligated balance not available;
Fiscal Year 2004: Processing Assistance & Management: $86;
Fiscal Year 2004: Tax Law Enforcement: $53;
Fiscal Year 2004: Information Systems: $64;
Fiscal Year 2004: Business Systems Modernization and Other: $189;
Fiscal Year 2004: Total: $392.
Total Status of Budgetary Resources;
Fiscal Year 2004: Processing Assistance & Management: $4,242;
Fiscal Year 2004: Tax Law Enforcement: $4,323;
Fiscal Year 2004: Information Systems: $1,753;
Fiscal Year 2004: Business Systems Modernization and Other: $673;
Fiscal Year 2004: Total: $10,991.
Relationship of Obligations to Outlays: Obligated balance, net,
beginning of period;
Fiscal Year 2004: Processing Assistance & Management: $498;
Fiscal Year 2004: Tax Law Enforcement: $194;
Fiscal Year 2004: Information Systems: $369;
Fiscal Year 2004: Business Systems Modernization and Other: $205;
Fiscal Year 2004: Total: $1,266.
Relationship of Obligations to Outlays: Obligated balance, net, end of
period;
Fiscal Year 2004: Processing Assistance & Management: ($426);
Fiscal Year 2004: Tax Law Enforcement: ($247);
Fiscal Year 2004: Information Systems: ($363);
Fiscal Year 2004: Business Systems Modernization and Other: ($125);
Total: ($1,161).
Outlays: Disbursements;
Fiscal Year 2004: Processing Assistance & Management: $4,130;
Fiscal Year 2004: Tax Law Enforcement: $4,156;
Fiscal Year 2004: Information Systems: $1,644;
Fiscal Year 2004: Business Systems Modernization and Other: $442;
Fiscal Year 2004: Total: $10,372.
Outlays: Less: collections;
Fiscal Year 2004: Processing Assistance & Management: ($41);
Fiscal Year 2004: Tax Law Enforcement: ($116);
Fiscal Year 2004: Information Systems: ($9);
Fiscal Year 2004: Business Systems Modernization and Other: ($7);
Fiscal Year 2004: Total: ($173).
Outlays: Less: offsetting receipts;
Fiscal Year 2004: Business Systems Modernization and Other: ($89);
Fiscal Year 2004: Total: ($89).
Net Outlays;
Fiscal Year 2004: Processing Assistance & Management: $4,089;
Fiscal Year 2004: Tax Law Enforcement: $4,040;
Fiscal Year 2004: Information Systems: $1,635;
Fiscal Year 2004: Business Systems Modernization and Other: $346;
Fiscal Year 2004: Total: $10,110.
[End of table]
Schedule of Budgetary Resources by Major Budget Accounts (In Millions):
Budgetary Resources: Budget authority: Appropriations received;
Fiscal Year 2003: Processing Assistance & Management: $4,040;
Fiscal Year 2003: Tax Law Enforcement: $3,761;
Fiscal Year 2003: Information Systems: $1,595;
Fiscal Year 2003: Business Systems Modernization and Other: $591;
Fiscal Year 2003: Total: $9,987.
Budgetary Resources: Unobligated balance - beginning of period;
Fiscal Year 2003: Processing Assistance & Management: $120;
Fiscal Year 2003: Tax Law Enforcement: $40;
Fiscal Year 2003: Information Systems: $78;
Fiscal Year 2003: Business Systems Modernization and Other: $204;
Fiscal Year 2003: Total: $442.
Budgetary Resources: Spending authority from offsetting collections;
Fiscal Year 2003: Processing Assistance & Management: $28;
Fiscal Year 2003: Tax Law Enforcement: $105;
Fiscal Year 2003: Information Systems: $7;
Fiscal Year 2003: Business Systems Modernization and Other: $8;
Fiscal Year 2003: Total: $148.
Budgetary Resources: Recoveries of prior year obligations;
Fiscal Year 2003: Processing Assistance & Management: $40;
Fiscal Year 2003: Tax Law Enforcement: $26;
Fiscal Year 2003: Information Systems: $31;
Fiscal Year 2003: Business Systems Modernization and Other: $19;
Fiscal Year 2003: Total: $116.
Budgetary Resources: Permanently not available;
Fiscal Year 2003: Processing Assistance & Management: ($70);
Fiscal Year 2003: Tax Law Enforcement: ($36);
Fiscal Year 2003: Information Systems: ($11);
Fiscal Year 2003: Business Systems Modernization and Other: ($9);
Fiscal Year 2003: Total: ($126).
Total Budgetary Resources;
Fiscal Year 2003: Processing Assistance & Management: $4,158;
Fiscal Year 2003: Tax Law Enforcement: $3,896;
Fiscal Year 2003: Information Systems: $1,700;
Fiscal Year 2003: Business Systems Modernization and Other: $813;
Fiscal Year 2003: Total: $10,567.
Status of Budgetary Resources: Obligations incurred;
Fiscal Year 2003: Processing Assistance & Management: $4,070;
Fiscal Year 2003: Tax Law Enforcement: $3,834;
Fiscal Year 2003: Information Systems: $1,591;
Fiscal Year 2003: Business Systems Modernization and Other: $599;
Fiscal Year 2003: Total: $10,094.
Status of Budgetary Resources: Unobligated balance - available;
Fiscal Year 2003: Processing Assistance & Management: $25;
Fiscal Year 2003: Tax Law Enforcement: $20;
Fiscal Year 2003: Information Systems: $28;
Fiscal Year 2003: Business Systems Modernization and Other: $204;
Fiscal Year 2003: Total: $277.
Status of Budgetary Resources: Unobligated balance not available;
Fiscal Year 2003: Processing Assistance & Management: $63;
Fiscal Year 2003: Tax Law Enforcement: $42;
Fiscal Year 2003: Information Systems: $81;
Fiscal Year 2003: Business Systems Modernization and Other: $10;
Fiscal Year 2003: Total: $196.
Total Status of Budgetary Resources;
Fiscal Year 2003: Processing Assistance & Management: $4,158;
Fiscal Year 2003: Tax Law Enforcement: $3,896;
Fiscal Year 2003: Information Systems: $1,700;
Fiscal Year 2003: Business Systems Modernization and Other: $813;
Fiscal Year 2003: Total: $10,567.
Relationship of Obligations to Outlays: Obligated balance, net,
beginning of period;
Fiscal Year 2003: Processing Assistance & Management: $439;
Fiscal Year 2003: Tax Law Enforcement: $164;
Fiscal Year 2003: Information Systems: $417;
Fiscal Year 2003: Business Systems Modernization and Other: $205;
Fiscal Year 2003: Total: $1,225.
Relationship of Obligations to Outlays: Obligated balance, net, end of
period;
Fiscal Year 2003: Processing Assistance & Management: ($498);
Fiscal Year 2003: Tax Law Enforcement: ($171);
Fiscal Year 2003: Information Systems: ($369);
Fiscal Year 2003: Business Systems Modernization and Other: ($228);
Fiscal Year 2003: Total: ($1,266).
Outlays: Disbursements;
Fiscal Year 2003: Processing Assistance & Management: $3,970;
Fiscal Year 2003: Tax Law Enforcement: $9,789;
Fiscal Year 2003: Information Systems: $1,608;
Fiscal Year 2003: Business Systems Modernization and Other: $557;
Fiscal Year 2003: Total: $9,924.
Outlays: Less: collections;
Fiscal Year 2003: Processing Assistance & Management: ($27);
Fiscal Year 2003: Tax Law Enforcement: ($92);
Fiscal Year 2003: Information Systems: ($8);
Fiscal Year 2003: Business Systems Modernization and Other: ($9);
Fiscal Year 2003: Total: ($136).
Outlays: Less: offsetting receipts;
Fiscal Year 2003: Business Systems Modernization and Other: ($79);
Fiscal Year 2003: Total: ($79).
Net Outlays;
Fiscal Year 2003: Processing Assistance & Management: $3,943;
Fiscal Year 2003: Tax Law Enforcement: $3,697;
Fiscal Year 2003: Information Systems: $1,600;
Fiscal Year 2003: Business Systems Modernization and Other: $469;
Fiscal Year 2003: Total: $9,709.
[End of table]
Child Tax Credit:
The child tax credit was originally authorized by the Taxpayer Relief
Act of 1997 (Public Law 105-34). The child tax credit is a special
credit for taxpayers who work, whose earnings fall below the
established allowance ceiling, and who have a qualifying child. In FY
2004, the Service issued $9 billion in child tax credit refunds. An
additional $23 billion of child tax credits were applied to reduce
taxpayer liability. In FY 2003, the Service issued $6 billion in child
tax credit refunds. An additional $22 billion of child tax credits were
applied to reduce taxpayer liability. In FY 2003, the Service issued
$14 billion in advance payments of the child tax credit in accordance
with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Public
Law 108-27).
Tax Gap:
The tax gap is the aggregate amount of tax (i.e., excluding interest
and penalties) that is imposed by the tax laws for any given tax year
but is not paid voluntarily and timely. The Service currently projects,
based on compliance data from the 1980's, that the annual Federal gross
tax gap is somewhere between $300 billion and $350 billion. The tax gap
arises from three types of noncompliance: not filing timely tax returns
(the nonfiling gap), underreporting the correct amount of tax on
timely-filed returns (the underreporting gap), and not paying on time
the full amount reported on timely-filed returns (the underpayment
gap).
The collection gap is the cumulative amount of assessed tax, penalties,
and interest that the Service expects to remain uncollectible. In
essence, it represents the difference between the total balance of
unpaid assessments and the net taxes receivable reported on the
Service's balance sheet. The tax gap and the collection gap are related
and overlapping concepts, but they have significant differences. The
collection gap is a cumulative balance sheet concept for a particular
point in time, while the tax gap is like an income statement item for a
single year. Moreover, the tax gap estimates include all noncompliance,
while the collection gap includes only amounts that have been assessed
(a small portion of all noncompliance).
Tax Burden and Tax Expenditures:
The Internal Revenue Code provides for progressive rates of tax,
whereby higher incomes are generally subject to higher rates of tax.
The graphs below present the latest available information on income tax
and adjusted gross income (AGI) for individuals by AGI level and for
corporations by size of assets. For individuals, the information
illustrates, in percentage terms, the tax burden home by varying AGI
levels. For corporations, the information illustrates, in percentage
terms, the tax burden home by these entities by various sizes of their
total assets. The graphs are only representative of more detailed data
and analysis available from the Statistics of Income (SOI) office.
Total tax expenditures are the foregone federal revenue resulting from
deductions and credits provided in the Internal Revenue Code. Since tax
expenditures directly affect funds available from government
operations, decisions to forego federal revenue are as important as
decisions to spend federal revenue.
(All figures are estimates and based on samples provided by the
Statistics of Income Office):
AVERAGE INDIVIDUAL INCOME TAX LIABILITY AND AVERAGE ADJUSTED GROSS
INCOME (AGI):
TAX YEAR 2002:
Line chart with 2 lines with 6 items each.
[See PDF for image] –graphic text
[End of figure]
INDIVIDUAL INCOME TAX LIABILITY AS A PERCENTAGE OF AGI:
TAX YEAR 2002:
Line chart with 6 items.
[See PDF for image] –graphic text
[End of figure]
Adjusted gross income (AGI): Under $15,000;
Number of taxable returns (1) (in thousands): 38,133;
AGI (in millions): $211,417;
Total income tax (in millions): $3,942;
Average AGI per return (in whole dollars): $5,544;
Average income tax per return (in whole dollars): $103;
Income tax as a percentage of AGI: 1.9%.
Adjusted gross income (AGI): $15,000 under $30,000;
Number of taxable returns (1) (in thousands): 29,964;
AGI (in millions): $657,946;
Total income tax (in millions): $27,621;
Average AGI per return (in whole dollars): $21,958;
Average income tax per return (in whole dollars): $922;
Income tax as a percentage of AGI: 4.2%.
Adjusted gross income (AGI): $30,000 under $50,000;
Number of taxable returns (1) (in thousands): 24,556;
AGI (in millions): $959,677;
Total income tax (in millions): $70,761;
Average AGI per return (in whole dollars): $39,081;
Average income tax per return (in whole dollars): $2,882;
Income tax as a percentage of AGI: 7.4%.
Adjusted gross income (AGI): $50,000 under $100,000;
Number of taxable returns (1) (in thousands): 26,687;
AGI (in millions): $1,864,379;
Total income tax (in millions): $196,005;
Average AGI per return (in whole dollars): $69,862;
Average income tax per return (in whole dollars): $7,345;
Income tax as a percentage of AGI: 10.5%.
Adjusted gross income (AGI): $100,000 under $200,000;
Number of taxable returns (1) (in thousands): 8,442;
AGI (in millions): $1,112,924;
Total income tax (in millions): $175,904;
Average AGI per return (in whole dollars): $131,834;
Average income tax per return (in whole dollars): $20,837;
Income tax as a percentage of AGI: 15.8%.
Adjusted gross income (AGI): $200,000 or more;
Number of taxable returns (1) (in thousands): 2,419;
AGI (in millions): $1,233,062;
Total income tax (in millions): $323,558;
Average AGI per return (in whole dollars): $509,695;
Average income tax per return (in whole dollars): $133,745;
Income tax as a percentage of AGI: 26.2%.
Adjusted gross income (AGI): Total;
Number of taxable returns (1) (in thousands): 130,201;
AGI (in millions): $6,039,405;
Total income tax (in millions): $797,791.
(1) Includes returns with negative AGI.
[End of table]
(All figures are estimates and based on samples provided by the
Statistics of Income Office)
CORPORATION TAX LIABILITY AS A PERCENTAGE OF TAXABLE INCOME:
TAX YEAR 2001 DATA:
Line chart with 10 items.
[See PDF for image] –graphic text
[End of figure]
Total Assets (in thousands): Zero Assets;
Income subject to tax (in millions): $12,101;
Total income tax after credits (in millions): $3,410;
Percent age of income tax after credits to taxable income: 28.2%.
Total Assets (in thousands): $1 under $500;
Income subject to tax (in millions): $9,232;
Total income tax after credits (in millions): $1,662;
Percent age of income tax after credits to taxable income: 18.0%.
Total Assets (in thousands): $500 under $1,000;
Income subject to tax (in millions): $4,624;
Total income tax after credits (in millions): $1,027;
Percent age of income tax after credits to taxable income: 22.2%.
Total Assets (in thousands): $1,000 under $5,000;
Income subject to tax (in millions): $13,786;
Total income tax after credits (in millions): $4,031;
Percent age of income tax after credits to taxable income: 29.2%.
Total Assets (in thousands): $5,000 under $10,000;
Income subject to tax (in millions): $7,091;
Total income tax after credits (in millions): $2,310;
Percent age of income tax after credits to taxable income: 32.6%.
Total Assets (in thousands): $10,000 under $25,000;
Income subject to tax (in millions): $10,330;
Total income tax after credits (in millions): $3,399;
Percent age of income tax after credits to taxable income: 32.9%.
Total Assets (in thousands): $25,000 under $50,000;
Income subject to tax (in millions): $8,945;
Total income tax after credits (in millions): $2,892;
Percent age of income tax after credits to taxable income: 32.3%.
Total Assets (in thousands): $50,000 under $100,000;
Income subject to tax (in millions): $10,711;
Total income tax after credits (in millions): $3,379;
Percent age of income tax after credits to taxable income: 31.5%.
Total Assets (in thousands): $100,000 under $250,000;
Income subject to tax (in millions): $20,613;
Total income tax after credits (in millions): $6,378;
Percent age of income tax after credits to taxable income: 30.9%.
Total Assets (in thousands): $250,000 or more;
Income subject to tax (in millions): $537,824;
Total income tax after credits (in millions): $138,224;
Percent age of income tax after credits to taxable income: 25.7%.
Total Assets (in thousands): Total;
Income subject to tax (in millions): $635,257;
Total income tax after credits (in millions): $166,712;
Percent age of income tax after credits to taxable income: 26.2%.
[End of table]
[End of section]
Appendixes:
Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Material Weaknesses:
During our audits of the Internal Revenue Service's (IRS) fiscal years
2004 and 2003 financial statements, we continued to identify 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, (5) increased taxpayer burden,
and (6) reduced assurance that data processed by its information
systems are reliable and appropriately protected. 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) information security. We reported on each
of these issues last year[Footnote 12] and in prior audits. We
highlight these issues in the following sections. Less significant
matters involving IRS's system of internal controls and its operations
will be reported to IRS separately.
Financial Reporting:
In fiscal year 2004, as in prior years, IRS did not have financial
management systems adequate to enable it to accurately and timely
generate and report the information needed to both prepare financial
statements and manage operations on an ongoing basis. To overcome these
systemic deficiencies with respect to preparation of its annual
financial statements, IRS was compelled to rely on extensive
compensating procedures that were costly, labor intensive, and not
always effective. During fiscal year 2004, 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. Although labor-intensive compensating
procedures yielded financial statements that were fairly stated as of
September 30, 2004 and 2003, they do not afford real-time data needed
to assist in managing operations on a day-to-day basis, such as cost-
based performance information to assist in making or justifying
resource allocation decisions.
As in previous years,[Footnote 13] during fiscal year 2004, IRS's
general ledger system was not supported by adequate audit trails or
integrated with its supporting records for material balances, including
federal tax revenue, federal tax refunds, taxes receivable, and
property and equipment (P&E). 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 14]
or the requirements of the Federal Financial Management Improvement Act
of 1996 (FFMIA). Further, IRS's use of two separate general ledgers,
one to account for its tax collection activities and another to capture
the costs of conducting those activities greatly complicates efforts to
measure the cost of IRS's tax collection efforts.
In its Management Discussion and Analysis, IRS discusses implementation
of the Integrated Financial System (IFS). The first release of IFS is
designed to replace IRS's core financial systems, including its general
ledger, accounts payable, accounts receivable, funds and cost
management, budget formulation, and financial reporting. Due to
previous delays and problems, IRS has deferred future releases of IFS
until the initial phase has been successfully implemented. IRS plans
that these future releases of IFS will ultimately include such
functions as asset and procurement management.
In prior years, we reported that IRS did not timely record taxes
receivable and the related balances due to Treasury in its general
ledger. These balances are not based on the routine recording of
transactions. Instead, as discussed in the material weakness over
unpaid assessments, they are based on statistical estimates that
require months of effort to produce a balance for taxes receivable, the
single largest item on IRS's balance sheet. As a result of these
complexities and level of effort, IRS only updates its estimate of
taxes receivable annually, at fiscal year-end, and thus does not have
current, reliable information available on the balance of taxes
receivable at interim periods.
During fiscal year 2004, 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 other trust funds that receive excise tax receipts,
such as the Highway Trust Fund. 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 has taken the position that imposing such a
requirement would create an additional burden to those particular
taxpayers. In addition, IRS's systems cannot at present routinely
capture and report the information it does receive. 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.
Now that all federal agencies are required to meet a reporting date of
November 15, IRS's inability to timely report specific amounts of
excise tax revenue to recipient trust funds is even more significant
for these funds and their administrators. The annual excise tax
receipts reported by recipient trust funds now include 6 months of
estimated receipts. The trust funds must report 6 months of estimated
receipts because, under its existing processes, IRS takes 5 ½ months to
complete its certification of excise tax receipts and, therefore, does
not complete the certifications for the third and fourth quarters of
the fiscal year until after November 15. 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 15] In July 2003, we made recommendations to IRS for
accelerating its certification process. In response to our
recommendations, IRS has performed precertifications for the past year
to determine the extent to which an acceleration of the process would
affect distributions to the trust funds.
During fiscal year 2004, 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 System Requirements for Managerial Cost
Accounting.[Footnote 16] 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 and labor intensive, and thus such
information is not as a practical matter readily available as a tool to
manage costs.
Instead, IRS often finds it necessary to conduct special research
tailored to determine the cost of a specific task or project. In its
Management Discussion and Analysis, IRS stated that a new cost
management system, which includes a cost accounting module, will be a
component of IFS. Ultimately, IRS expects this system to timely provide
and reliably report cost information that it can use to assist in
managing its operations. However, the initial release of IFS that is
currently being implemented does not include the underlying cost
information in the cost accounting module. To make the module fully
operational, IRS must first determine the full range of cost
information it needs to support decision making and develop the 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 accurate, useful, and timely financial information to
assist in managing operations throughout fiscal year 2004. 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 2004, we continued to find serious internal control
issues that affected IRS's management of unpaid assessments.
Specifically, we continued to find (1) IRS lacked a subsidiary ledger
for unpaid assessments that would allow it to produce accurate, useful,
and timely information with which to manage and report externallyand
(2) errors and delays in recording taxpayer information, payments, and
other activities. These conditions continued to hinder IRS's ability to
effectively manage its unpaid assessments.[Footnote 17]
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
estimation techniques to data in its master files[Footnote 18] to
estimate the balances at year-end. While IRS continues to refine 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 significantly lower
amounts.
For example, during our audit we found that IRS incorrectly entered a
taxpayer's August 2002 tax return into a December 2001 tax period.
However, IRS appropriately posted the tax payments submitted by the
taxpayer to the correct tax account module. Because of the incorrect
posting of the tax return, IRS could not match the return to the tax
payments. As a result, IRS sent the taxpayer an erroneous notice of
taxes due because the tax period to which the return was posted showed
no payments. When IRS notified the taxpayer of a tax debt, the taxpayer
sent IRS copies of canceled checks showing that the required payments
had been made. IRS ultimately corrected the error, but not before
burdening the taxpayer by requiring the taxpayer to provide evidence
that the taxes had been paid. We also found that IRS subsequently
repeated the same type of error by entering the same taxpayer's August
2003 tax return into a December 2002 tax period. As a result, the
taxpayer was, once again, incorrectly sent a notice of tax deficiency
plus penalties and interest for more than $20,000.
In another example, IRS incorrectly entered into its systems a
taxpayer's tax of approximately $17,000 as more than $17 billion. IRS
subsequently identified the input error and was able to prevent its
systems from sending the taxpayer a notification to pay the erroneous
tax debt of more than $17 billion. IRS placed a hold status on all
collection activities related to this account until the input error
could be corrected. However, due to systems constraints, the taxpayer's
account will require at least 18 weeks to resolve.
Some input errors and posting delays can cost the government money. For
example, in October 1999, IRS found a corporate officer liable for not
remitting federal tax withholdings from employees' salaries to
IRS,[Footnote 19] but failed to enter the transaction into its
database. As a result, the officer received refunds from tax years
2001, 2002, and 2003 totaling more than $7,500 that IRS could have
retained to offset the tax debt. However, because IRS delayed posting
the tax to the taxpayer's account, the statutory period for assessing
new taxes expired, and IRS was therefore precluded from seeking payment
of taxes from that officer.[Footnote 20]
As in prior years, the most prevalent error we found during fiscal year
2004 involved IRS's failure to properly record payments to all related
taxpayer accounts associated with unpaid payroll taxes. 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 of that business paid some or all of the
outstanding taxes, IRS's systems were unable to automatically reflect
the payment as a reduction in the related account or accounts. In
reviewing 50 unpaid payroll tax cases included in a statistical sample
of unpaid assessments cases for which one or more individuals were
assessed a trust fund recovery penalty, we found 16 cases in which
payments were not properly recorded in all related taxpayer accounts.
Based on our testing, we estimate that 16 percent of unpaid payroll tax
cases in which 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 does not
exceed 33 percent.
IRS has recognized the seriousness of this issue and has attempted to
compensate for the lack of an automated link between related accounts
by manually inputting a code in each account that cross-references it
to other related accounts. However, as in prior years, our work in
fiscal year 2004 continued to show that this compensating control has
not been fully effective: of the 16 cases with payments that were not
properly recorded, 9 had the required cross-references when the
payments were made.
Our audit results are consistent with an internal review that IRS
completed in 2004 of its operations in order to improve the accuracy of
taxpayer accounts involving trust fund recovery penalties. IRS's review
found that the actions taken by the operating divisions had not been
successful in reducing the errors in such accounts. For example, IRS
had identified more than 30,000 trust fund accounts that contained
errors and asked individual IRS locations to make corrections during
fiscal year 2003. IRS's own sampling of these cases, however, indicated
that fewer than half of the records had subsequently been corrected.
Another sample IRS performed to test the correct posting of taxpayer
information to cases with trust fund recovery penalties found that more
than 1 in 3 cases with recent activity had some form of posting error.
Despite IRS's efforts to manually correct these accounts, substantial
errors continue to be made, increasing the risk of both unnecessary
taxpayer burden and lost revenue to the federal government. 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 2004, we continued to find that IRS's controls were
not fully effective in maximizing the federal 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 2004 Federal Managers'
Financial Integrity Act of 1982 (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 erroneous EITC claims 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,
adversely 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 21] 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
22] 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 23]
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 erroneous
EITC claims to determine the validity of the claims.[Footnote 24] 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 negates their effectiveness as a
preventive control and instead serves only as a basis for pursuing
recovery after the fact.
Beginning in fiscal year 2004, the Improper Payments Information Act of
2002 requires the head of each federal agency to annually review all
programs and activities the federal agency administers to identify
those that may be susceptible to significant improper payments and to
estimate the amount of those improper payments in accordance with
guidance prescribed by the Office of Management and Budget
(OMB).[Footnote 25] Agencies are required to submit these estimates to
Congress by March 31, 2005. For Treasury, of which IRS is a significant
component, OMB guidance requested information related to EITCs, which
totaled $38.2 billion in fiscal year 2004. Of this amount, $33 billion
was refunded to taxpayers and $5.2 billion was used to reduce assessed
taxes. In its prescribed guidance, OMB identified EITC as a program
subject to the reporting requirements of the Improper Payments
Information Act. Based on the results of studies of EITC compliance in
tax years 1999 and 1997, IRS estimates that error rates ranged from 27
percent to nearly 32 percent of the dollar amount of EITC claims filed
during these years. If a comparable rate of EITC noncompliance occurred
during fiscal year 2004, IRS may have processed more than $10 billion
in invalid EITC claims and disbursed about $9 billion in related
improper refunds. IRS is currently conducting the National Research
Program study of tax year 2001 data,[Footnote 26] the results of which
will be available by mid-2005. IRS will use these results to update its
baseline error rate estimate for EITC and demonstrate whether the error
rate estimate is trending up or down.
Due to time and other constraints chronicled above, IRS relies
extensively on detective controls, such as automated matching of tax
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 and, as a result, cannot be used 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 2002,[Footnote
27] IRS's matching program for individuals identified 14.7 million
individual tax returns, with potential underreported taxes totaling
$15.4 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. Based on such an analysis for tax year
2002, IRS investigated 2.7 million (18 percent) of these returns, which
accounted for about $7.4 billion (48 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, some of 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, coupled with more timely receipt
of information and more effective systems to compare such information,
were devoted to follow-up efforts. At present, billions of dollars in
underreported taxes could remain uncollected and improper refunds could
be disbursed.
Information Security:
IRS relies extensively on interconnected computer systems to perform
vital functions, such as collecting and storing taxpayer data,
calculating interest and penalties, and generating refunds. While IRS
continues to respond to technical weaknesses identified in previous
audits, it has not fully instituted controls to detect or prevent the
reoccurrence of many identical or similar weaknesses. Specifically, IRS
has not instituted appropriate detective and preventive measures to
manage the risks associated with the increasingly automated and
interconnected environment in which it functions. Our May 1998 best
practices guide on information security management practices at leading
organizations found that these organizations managed their information
security risks through an ongoing cycle of risk management
activities.[Footnote 28] Such a cycle would include a framework that
provides guidance and procedures for assessing risks, establishing
appropriate policies and related controls, and monitoring and
evaluating the effectiveness of established controls. Further, the
Federal Information Security Management Act of 2002 (FISMA) was enacted
to strengthen security of information and systems within federal
agencies. FISMA provides the overall framework for ensuring the
effectiveness of information security controls that support federal
operations and assets and requires agencies to report annually to
Congress on their information security programs.[Footnote 29] As part
of their responsibilities under FISMA, agencies are required to perform
periodic assessments of the risk and magnitude of harm that could
result from the unauthorized access, use, disclosure, disruption,
modification, or destruction of information or information systems. A
consequence of the inadequacies in IRS's risk management activities we
observed during our audit is the pervasiveness of its information
security weaknesses--both old and new--which continue to impair the
agency's ability to ensure the confidentiality, integrity, and
availability of financial and sensitive data.
During our fiscal year 2004 review of selected IRS sites, we identified
continuing and new serious information security weaknesses that
increase the risk that (1) computer resources (programs and data) will
not be adequately protected from unauthorized disclosure, modification,
and destruction; (2) access to facilities by unauthorized individuals
will not be adequately controlled; and (3) computer resources will not
be adequately protected and controlled to ensure the continuity of data
processing operations when unexpected interruptions occur.
The following examples illustrate the types of information security
weaknesses that affect IRS's financial and tax processing systems:
* Employee access to areas containing highly sensitive computer
hardware was not adequately controlled.
* Non-IRS employees in positions of trust were given building
identification badges and key cards that allowed them access to
sensitive areas without proper background investigations.
* Access controls did not adequately prevent unauthorized access to
taxpayer and other sensitive data by users granted access to IRS
computer systems.
* Monitoring activities over critical computer systems were not
adequately performed to record and track security-related events.
* Disaster recovery and business resumption plans for critical systems
were not completed.
Information security controls are critical to IRS's ability to ensure
the confidentiality, integrity, and availability of its financial
resources. We observed that IRS had corrected many technical weaknesses
in its computer systems that were previously identified. However,
identical or very similar technical weaknesses continue to be observed,
in addition to several newly identified weaknesses. Collectively, these
problems represent a material weakness in IRS's internal controls over
information systems and data. Specifically, the continuing and newly
identified weaknesses decreased assurances regarding the reliability of
the data processed by the systems and increased the risk that
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. Until IRS successfully manages its information security
risks, management will not have assurance over the integrity and
reliability of the information that will be generated from the new
financial management systems. We will be issuing a separate report on
issues we identified regarding information security issues at IRS.
Reportable Conditions:
In addition to the material weaknesses discussed above, we identified
two reportable conditions concerning weaknesses in IRS's internal
controls over (1) hard-copy tax receipts and taxpayer information and
(2) P&E, both of which we have reported on in prior audits.
Hard-Copy Tax Receipts and Taxpayer Information:
IRS manually processes hard-copy tax returns and payments involving
hundreds of billions of dollars, along with related taxpayer
information, at its service center campuses and field offices and at
commercial lockbox banks that operate under contract with Treasury's
Financial Management Service on behalf of IRS. In previous audits, we
reported that weaknesses in IRS's controls designed to safeguard these
taxpayer receipts and information increase the risk that the receipts
in the form of checks, cash, and the like, may be misappropriated or
the information compromised. Recognizing its responsibility to protect
taxpayer receipts and information, IRS has taken action in the past
several years to address a number of these internal control
deficiencies. For example, IRS updated many of its policies and
procedures, began conducting periodic security reviews of receipt
processing areas, and implemented many improved hiring and courier
standards. Additionally, in fiscal year 2004, IRS implemented a new
lockbox courier policy requiring that more stringent background
investigations of couriers be satisfactorily completed before granting
them access to taxpayer receipts and data. IRS also reemphasized its
policy prohibiting certain personal belongings, such as purses and
books, in receipt processing areas at service centers. Nonetheless,
during fiscal year 2004, we continued to find that IRS's controls over
cash, checks, and related hard-copy data received from taxpayers were
inadequate to sufficiently limit the risk of theft, loss, or misuse of
such funds and data. This condition resulted primarily from
inconsistencies in the establishment and implementation of, and
compliance with, policies at IRS service center campuses, field
offices, and lockbox banks. We have reported on many of these issues in
our previous audits.
We previously reported on weaknesses in internal controls intended to
preclude unauthorized access to receipt processing areas and
unauthorized removal of taxpayer receipts and information from these
areas.[Footnote 30] In fiscal year 2004, we continued to find security
issues at all four service center campuses, all four lockbox banks, and
both field offices we visited. Specifically, we found the following:
* At one service center, in a restricted area, a bin intended for
regular trash contained two copies of torn tax returns with clearly
identifiable taxpayer information and approximately 100 envelopes that
had not gone through final candling.[Footnote 31] Regular trash is
simply disposed of, whereas IRS's procedures require that taxpayer data
and information no longer needed be destroyed through a process such as
shredding. When taxpayer information is placed in an ordinary trash
bin, it may bypass the destruction requirement and be disposed of
intact.
* At one service center, two lockbox banks, and both field offices,
several of the perimeter door alarms we tested did not function
properly, and at one lockbox bank, guards did not respond when we
activated a perimeter door alarm.
* At two service centers, one lockbox bank, and one field office,
unauthorized access was made easier by either (1) employees entering
the front entrance or restricted areas while the doors were still open
without requiring each individual to swipe his or her electronic access
cards; (2) a cipher lock combination to a restricted area that was
given to all employees in the unit and was changed only twice a year,
regardless of changes in employees' access rights; or (3) security
guards who did not always ask for identification from visitors and
issued some visitors incorrect badges--for example, a temporary badge,
which would allow unescorted access to nonrestricted areas. Further, at
one service center, a unit whose function is distinct from the process
of extracting taxpayer receipts and returns from envelopes was located
in the restricted extraction area, making it more difficult to monitor
potential improper activity in this area.
* At three service centers and two lockbox banks, we found that
contrary to IRS procedures, contractors who had either not undergone
background investigations or whose background investigations did not
meet current IRS requirements were nonetheless granted unescorted
access to restricted areas.
* At three service centers, we found that although cameras were barred
from restricted areas to prevent unauthorized reproduction of taxpayer
information, cellular telephones were not inspected to determine
whether they had camera capability before being allowed in restricted
areas. At one service center, we observed personal cellular telephones
in use in a restricted area.
We continued to find other weaknesses and inconsistencies in controls
over processing taxpayer receipts and taxpayer data at all four service
center campuses, all four lockbox banks, and both field offices we
visited. Specifically, we found the following:
* At one lockbox bank, a high-volume machine used to extract checks
from envelopes by opening them on three sides was deemed to meet all
IRS candling requirements because the envelopes were flattened and
traveled a distance of 3 linear feet inside the machine before dropping
into a bin. No visual inspection of the opened envelopes occurred. IRS
guidelines for candling at lockbox banks allow only one candling if the
envelope is opened on three sides and laid flat but do not require that
it be visibly inspected. Because envelopes opened by this high-volume
machine are not visible when laid flat, there is no assurance that all
their contents have been properly removed. Furthermore, while the
lockbox bank stated that preventive maintenance was performed on the
machine four times a year to ensure that it operated as designed, the
bank did not keep a log to document the maintenance. At present, IRS
does not have a policy requiring testing of automated candling machines
at appropriate intervals. When only one automated candling occurs, the
risk is increased that checks could be overlooked and subsequently
destroyed with the envelopes should the machine become less accurate
during use.
* At one service center, some returned refund checks were not
restrictively endorsed to mitigate vulnerability to theft as required
by IRS policy. Also, at one lockbox bank, some staff were unaware of
the endorsement requirement. As we previously reported, returned refund
checks are highly susceptible to theft.[Footnote 32]
* At both field offices, some staff responsible for processing checks
were unaware of the requirement to overstamp checks with the words
"United States Treasury" if the payee section is blank or does not
indicate these words. Several units processing checks did not have a
United States Treasury stamp in their possession. As we previously
reported, checks not clearly made out to "United States Treasury" are
more susceptible to alteration, and thus to theft.[Footnote 33]
* At two service centers, we observed that the candling function was
impeded by the substandard condition of the equipment used. At one
service center, light sources that are key for performing the first
candling were not functioning, while at the other service center the
intensity of the light at the tables used for final candling was too
low to adequately illuminate envelopes. In both cases, we observed
employees who either did not candle or did not follow candling
procedures.
In previous years, IRS made an effort to address courier security
weaknesses we cited by adopting more stringent security standards for
the couriers who transport IRS's daily deposits to depository
institutions. However, at all 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.
Specifically, we found the following:
* At one service center campus, we found an instance in which a single
courier picked up deposits, although IRS policy requires that two
couriers pick up and transport deposits.
* At two of four lockbox banks, we observed three instances over the
course of 2 days in which two couriers who had picked up taxpayer
receipts from the lockbox banks made an unauthorized stop and separated
at that point, and a single courier completed the deposit. This
violated both IRS policy and provisions of the contracts that these
courier companies have with the lockbox banks, which require that two
couriers complete each deposit delivery without making any stops.
* At two service centers and one lockbox bank, immediate family members
were allowed to work together to meet the two-courier requirement,
increasing the risk of collusion.
* At three lockbox banks, courier contracts did not include all
elements required by IRS policy. Specifically, these courier contracts
did not (1) make clear reference to privacy laws for handling taxpayer
data and (2) cover all required contingencies (e.g., labor disputes and
employee strikes) in their contingency plans. At a fourth lockbox bank,
the courier service did not have a contingency plan on file.
These continued 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. While
IRS has made progress in this area, our findings from this year's audit
indicate that much more remains to be done 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 34] Over the past several years, IRS has
made substantial progress in addressing internal control deficiencies
related to its P&E. In fiscal year 2004, we noted further improvements
in IRS's controls and procedures that enhanced its ability to account
for P&E. Specifically, IRS (1) increased the use of automated
procedures to record P&E in its inventory records and (2) improved the
timeliness of recording P&E activity in its accounting system. 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, 2004, that was fairly stated in all material respects.
Although IRS has made significant progress in its efforts to maintain
accurate and reliable P&E inventory records, fundamental system
deficiencies continue to exist. As of September 30, 2004, IRS did not
have an integrated property management system that appropriately
recorded P&E additions and disposals as they occurred and linked costs
on the accounting records to property records. Instead, IRS recorded as
expenses property purchases as they occurred, and then later extracted
the costs of property acquisitions from operating expenses and recorded
adjustments to remove property purchases from expenses and capitalized
them as P&E. In fiscal year 2003, IRS analyzed this activity monthly
and updated the P&E accounting records quarterly. In fiscal year 2004,
IRS improved the timeliness of recording P&E financial information by
updating P&E acquisitions on a monthly basis.
However, because IRS did not properly record P&E transactions in asset
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. During fiscal year 2003, IRS developed and
implemented procedures to use electronic data from vendors, such as
requisition numbers, serial numbers, and barcode numbers, to create
inventory records, which helps ensure that assets are promptly and
accurately recorded. In fiscal year 2004, IRS continued to pursue this
initiative by actively working with more vendors to obtain this
information electronically. As a result of having more accurate and
complete data in its inventory records, IRS is better able to link the
assets to the accounting records.
Although IRS's accountability over P&E continues to improve, the
deficiencies in IRS's property and accounting systems will continue to
exist until IRS has an integrated accounting and property system. After
significant delays, in October 2004 IRS began implementing the first
release of the new IFS, which provides core accounting functions and
allows IRS to record P&E additions as they occur. However,
implementation of subsequent IFS releases, which include a property
asset module that is intended to fully integrate the asset inventory
records to the accounting system, is being deferred indefinitely
because of the past problems and delays associated with IFS. According
to IRS, the integrated system, when fully implemented, will be capable
of recording P&E as assets when purchased and generating detailed
inventory 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 OMB
guidance. These relate to the release of federal tax liens against
taxpayers' property and the structure of installment agreements that
IRS enters into with taxpayers to satisfy their outstanding tax
liabilities. We also found that IRS's financial management systems do
not substantially comply with the requirements of FFMIA.
Release of Federal Tax Liens:
The Internal Revenue Code grants IRS the power to file a lien against
the property of any taxpayer who neglects or refuses to pay all
assessed federal taxes. The lien becomes effective when it is filed
with a designated office, such as a courthouse in the county where the
taxpayer's property is located. The lien serves to protect the interest
of the federal government and 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 each year since our audit of IRS's fiscal year 1999 financial
statements, 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,[Footnote 35] as required by the Internal Revenue
Code.[Footnote 36] We found that this condition continued to exist in
fiscal year 2004. 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 2004,
we found 13 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 34 days to more than 2,100 days. Based on our work, we estimate
that for 22 percent of unpaid tax assessment cases in which IRS had
filed a tax lien that were resolved in fiscal year 2004, 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.
In at least 4 of the 13 cases in which liens were not released timely,
the release was delayed either because IRS failed to post payments made
by the taxpayer to the taxpayer's account or because IRS did not follow
up to ensure that problems in posting payments to IRS's systems were
resolved timely. IRS stated that delays in 3 other cases occurred
because information was not being passed properly between the taxpayer
account in IRS's master file and IRS's lien system. When cases fail to
post from one system to another, an exception report is generated to
identify the problem and initiate corrective action. Our review of
IRS's lien release process found, however, that several key exception
reports were either not being resolved or not being resolved timely. If
exception reports are not resolved promptly, the lien release process
is delayed. For example, 1 of our sample cases in which the lien had
not been released timely remained unresolved on an exception report for
more than 3 months, when the lien was finally released as a result of
our identifying it in our audit. We will be issuing a separate report
on issues we identified regarding IRS's ability to timely resolve
exception reports related to lien processing.
Structuring of Installment Agreements:
Section 6159 of the Internal Revenue Code authorizes IRS to enter into
installment agreements with taxpayers to fully satisfy their tax
liability. Audits for prior years showed that IRS had not always
structured installment agreements to ensure that they would satisfy
taxpayers' outstanding tax liability, including future interest
accruals, before the statutory collection period for the tax liability
expired.[Footnote 38]
During our fiscal year 2004 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 2 instances in which the
terms of the installment agreements did not require full satisfaction
of the tax liability. Based on the results of our work, we estimate
that about 3.4 percent of new installment agreements entered into
during fiscal year 2004 had payment terms that would not fully satisfy
the tax liability within the statutory collection period.[Footnote 39]
It should be noted that recently enacted legislation eliminates the
requirement that installment agreements provide for full payment of the
tax debt. This measure, part of the American Jobs Creation Act of
2004,[Footnote 40] amends section 6159 of the Internal Revenue Code by
striking the requirement that all installment agreements fully satisfy
the debtor's liability. This amendment applies to installment
agreements entered into on or after October 22, 2004, the date the law
was enacted. Consequently, this long-standing issue will no longer
constitute a noncompliance condition for future audits.
Financial Management Systems' Noncompliance with FFMIA:
In fiscal year 2004, 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 System 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 detailed
records and transaction source documents for material balances, such as
tax revenues and tax refunds.
This substantial noncompliance with FFMIA 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 No. A-127, Financial Management Systems
(revised July 23, 1993). 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
2004.
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, but future corrective actions are on hold and are currently
unfunded. Due to the long-term nature of IRS's systems modernization
efforts, which IRS expects will resolve many of the most serious
issues, many of the planned time frames exceed the 3-year resolution
period specified in FFMIA. However, for these instances IRS has
received a waiver from this requirement from OMB, as authorized by
FFMIA.
[End of section]
Appendix II: Details on Audit Methodology:
To fulfill our responsibilities as the auditor of 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 31 U.S.C. § 3512 (c),
(d), commonly referred to as 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); Fair Labor
Standards Act of 1938, as amended (29 U.S.C. § 206); Civil Service
Retirement Act of 1930, as amended (5 U.S.C. §§ 5332, 5343); Federal
Employees' Retirement System Act of 1986, as amended (5 U.S.C. §§ 8422,
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 Act, 2004, Pub. L. No. 108-199, 118 Stat. 3 (Jan. 23,
2004).
* Tested whether IRS's financial management systems substantially
comply with the three requirements of the Federal Financial Management
Improvement Act of 1996 (Pub. L. No. 104-208, div. A, § 101(f), title
VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996) (codified at 31 U.S.C.
§ 3512 note).
[End of section]
Appendix III: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY:
INTERNAL REVENUE SERVICE:
DEPUTY COMMISSIONER:
WASHINGTON, D.C. 20224:
November 8, 2004:
Mr. David M. Walker:
Comptroller General:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Walker:
We believe your draft report titled, Financial Audit: IRS' Fiscal Years
2004 and 2003 Financial Statements, fairly presents our financial
progress and our remaining management and systems challenges. The IRS
has worked hard to improve, and we are pleased that our progress has
been recognized in this report. Because of our dedication to
improvement, this is the fifth consecutive year that IRS has earned an
"unqualified" opinion on the combined financial statements. While many
federal agencies are currently struggling to meet the accelerated
reporting date for the first time, it is the third consecutive year for
this achievement at IRS. Our record clearly demonstrates to our
stakeholders that the Service consistently, properly, repeatedly
accounts for approximately $2 trillion in revenue receipts, $278
billion in refunds, and $11 billion in appropriated funds.
We will continue to promote the highest standard of financial
management in the IRS. As you reported, we have made notable progress
in many areas and have laid the groundwork for sustainable improvements
in several others. Six years ago, poor accounting practices concerning
IRS' administrative accounts prevented the Service from attaining a
clean audit opinion on the consolidated statements. It is noteworthy
that, for the first time, the audit report makes no mention of
operational deficiencies in the Service's administrative accounting
processes.
Our continuing commitment to financial management is demonstrated by
the numerous improvements that we have undertaken over the last few
years. During fiscal year (FY) 2004, we instituted a number of
financial management reforms and improvements including:
* Deployed the Integrated Financial System (IFS) in September 2004,
currently on schedule for operation in the 1ST Quarter of FY 2005:
* Completed certification and accreditation of IFS and the Custodial
Accounting Project (CAP):
* Established Initial Operating Capability (IOC) of CAP Release 1.1 in
September 2004:
* Developed business plan for Earned Income Tax Credit (EITC) based on
the EITC Task Force recommendations and the Commissioner's five-point
initiative:
* Completed and reported to Congress on the following EITC Proof of
Concept tests: Qualifying Child, Filing Status, and Automated Under-
Reporter:
* Improved automation and controls over property accountability
including the use of electronic packing slips and monthly postings of
property acquisitions:
* Strengthened and streamlined our review process for unliquidated
obligations, yielding better fund utilization for the IRS and improving
the accuracy of our financial information at the interim periods:
The IFS is a key component of eliminating the remaining material
weakness in financial reporting. This new Enterprise Resource Planning
(ERP) system is in the final stages of conversion and validation and
will be used to produce the Service's FY 2005 financial statements. The
IFS is U.S. Standard General Ledger compliant and lays the foundation
for a cost accounting system that facilitates managerial decision
making at all levels of the Service. We are pleased that this new
system is coming to fruition and look forward to implementing the
fundamental improvements that will be possible with this first phase of
the technology.
We concur with the Government Accountability Office's (GAO) findings
and opinions related to information security. The IRS has already
started to develop plans and put programs in place to address the GAO's
issues as quickly as possible. We are fully aware of their importance
and will apply the appropriate priority to our efforts. We understand a
separate audit product will be released on this matter and look forward
to that assessment as we plan improvements in our security structure.
I appreciate the GAO's acknowledgment of our significant improvements
over the last several years. We wish to recognize the GAO's dedication
and professionalism throughout this year's audit process, especially as
our staffs and executives worked to balance the demands of the audit
process with the implementation of new financial systems. We thank you
for your support of our efforts, your excellent counsel, and your
willingness to work with us in completing our financial management
improvements.
In closing, while challenges remain, I believe the IRS has demonstrated
its ability to consistently and repeatedly produce accurate and
reliable financial statements. We have established a deep and
continuing commitment to improving financial management, which will be
furthered through the initial implementation of our modernized internal
management systems during FY 2005.
Sincerely,
Signed by:
John M. Dalrymple:
[End of section]
(196007):
FOOTNOTES
[1] GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington, D.C.:
February 1995).
[2] CFO Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15,
1990); Government Management Reform Act of 1994, Pub. L. No. 103-356,
108 Stat. 3410 (Oct. 13, 1994).
[3] IRS includes an estimate of the tax gap in the tax gap disclosures
contained in the other accompanying information to the financial
statements. This estimate is based on extrapolations of compliance data
from the late 1980s. IRS is currently developing new estimates of the
compliance rate for individuals and some small business taxpayers, and
is exploring approaches to developing compliance estimates for other
groups of taxpayers.
[4] GAO, Financial Audit: Examination of IRS' Fiscal Year 1992
Financial Statements, GAO/AIMD-93-2 (Washington, D.C.: June 30, 1993).
[5] 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 both fiscal years 2002 and 2003, the audits
of Treasury's financial statements, including those of its component
entities such as IRS, were completed and issued by November 15.
[6] 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.
[7] 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.
[8] IRS's master files contain detailed records of taxpayer accounts.
[9] This number does not include open recommendations related to
information security. These recommendations, because of their sensitive
nature, are contained in a series of Limited Official Use Only reports
that we have issued to IRS over the past several years.
[10] FFMIA, Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110
Stat. 3009, 3009-389 (Sept. 30, 1996) (codified at 31 U.S.C. § 3512
note).
[11] Pub. L. No. 103-62, § 4(b), 107 Stat. 285 (Aug. 3, 1993) (codified
at 31 U.S.C. § 1115).
[12] GAO, Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial
Statements, GAO-04-126 (Washington, D.C.: Nov. 13, 2003).
[13] GAO-04-126.
[14] JFMIP, Core Financial System Requirements, JFMIP-SR-02-01
(Washington, D.C.: November 2001). JFMIP is a cooperative undertaking
of the Office of Management and Budget, the Department of the Treasury,
the Office of Personnel Management, and GAO working in cooperation with
each other and with operating agencies to improve financial management
practices.
[15] The Transportation Equity Act for the 21ST Century, Pub. L. No.
105-178, 112 Stat. 107 (June 9, 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.
[16] Joint Financial Management Improvement Program, System
Requirements for Managerial Cost Accounting (Washington, D.C.: February
1998).
[17] Unpaid assessments consist of (1) federal taxes receivable, which
are taxes due from taxpayers for which IRS can support the existence of
a receivable through taxpayer agreement or a favorable court ruling;
(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.
[18] IRS's master files contain 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.
[19] 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.
[20] The statutory period for assessing new taxes is generally 3 years
from when a tax return is either filed or due, whichever is later.
I.R.C. § 6501(a).
[21] IRS 1099 forms are used by third parties, such as financial
institutions, to report taxpayers' interest income, dividend
distributions, and other miscellaneous income.
[22] The peak tax filing season primarily occurs from January 1 through
April 15 of each year.
[23] 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).
[24] Because it is a refundable 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, and the
amount due on the taxpayer's return before application of any credits,
it may or may not result in a refund for a particular tax year.
[25] See Improper Payments Information Act of 2002, Pub. L. No. 107-
300, 116 Stat. 2350 (Nov. 26, 2002); OMB, The Improper Payments
Information Act (Pub. L. No. 107-300), M-03-13 (Washington, D.C.: May
21, 2003).
[26] Tax year 2001 is the most recent year for which full data are
available for the study.
[27] 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 2002 is the most recently completed tax year for
which the cited data are available.
[28] GAO, Executive Guide: Information Security Management--Learning
from Leading Organizations, GAO/AIMD-98-68 (Washington, D.C.: May
1998).
[29] FISMA was enacted as title III, E-Government Act of 2002, Pub. L.
No. 107-347, 116 Stat. 2946 (Dec. 17, 2002).
[30] GAO, Internal Revenue Service: Status of Recommendations from
Financial Audits and Related Financial Management Reports, GAO-04-523
(Washington, D.C.: Apr. 28, 2004); Management Report: Improvements
Needed in IRS's Internal Controls and Accounting Procedures, GAO-04-
553R (Washington, D.C.: Apr. 26, 2004); 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);
Financial Audit: IRS's Fiscal Years 2003 and 2001 Financial Statements,
GAO-03-243 (Washington, D.C.: Nov. 15, 2002); and Internal Revenue
Service: Progress Made, but Further Actions Needed to Improve Financial
Management, GAO-02-35 (Washington, D.C.: Oct. 19, 2001).
[31] 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.
[32] GAO, Internal Revenue Service: Recommendations to Improve
Financial and Operational Management, GAO-01-42 (Washington, D.C.: Nov.
17, 2000).
[33] GAO-01-42.
[34] GAO-04-126.
[35] Under certain conditions, IRS is authorized to abate (reduce) an
assessment. For example, section 6404 of the Internal Revenue Code
authorizes IRS to abate erroneous assessments, which can be caused by
either IRS or taxpayer error.
[36] GAO-04-126.
[37] We are 95 percent confident that the error rate does not exceed 33
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. 26 U.S.C. § 6502.
[39] We are 95 percent confident that the error rate does not exceed 10
percent.
[40] American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 843
(Oct. 22, 2004).
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