In early 1998, the Internal Revenue Service (IRS) Commissioner outlined a program to modernize the IRS, offering more efficient work processes and better service to American taxpayers. The Congress subsequently passed the IRS Restructuring and Reform Act of 1998 (RRA 98), which directed the IRS to modernize to improve operations and to better serve its customers. The modernization plan has four new operating divisions, including the Large and Mid-Size Business (LMSB) Division which is designed to serve approximately 210,000 corporations and partnerships with at least $5 million in assets. These businesses pay an estimated $712 billion annually in taxes.

The IRS organization design plans included a process called "standing-up," which means the new function has the minimum requirements for operating. These requirements include filling key management positions, completing actions to realign positions, establishing a finance office and separate budget, ensuring necessary business authorities are in place, and ensuring workarounds are functional. Stand-up is not the final act of creating a new organization. Considerable additional effort is required to be fully operational. The overall objective of this review was to validate whether the LMSB Division’s stand-up process was completed.

The LMSB Division stood-up on June 4, 2000. Overall, the Division was successful in substantially completing the critical elements needed for standing-up the new operating division as defined by the IRS. Specifically, the LMSB has a Division Commissioner and most key managers in place, employees have been realigned, the finance office is in place, delegations of authority have been conferred, and workarounds have been developed.

We identified two issues where the Division could strengthen controls. These are in the areas of communicating with employees and stakeholders, and monitoring services provided by other IRS functions.

The LMSB Commissioner and Deputy Commissioner were in place as of the stand-up date. Most key and senior level managers were also selected. In fact, the Division successfully filled 129 (91 percent) of its 141 key management positions as of July 2000.

In addition, the LMSB Division had an all-managers meeting to communicate the vision, structure, and functions of the new Division. While the all-managers meeting and other communications were generally effective, we identified one area in the LMSB communication system where controls could be improved. Specifically, the Division did not fully ensure that adequate and timely answers were provided for all questions received from employees and stakeholders. During our review we advised LMSB management of this issue. LMSB management is exploring several software options to better manage this process.

The LMSB Division realigned 6,399 (89 percent) of its 7,227 positions as of July 2000. The payroll conversion was successfully completed. Plans and procedures were also in place to manage employees during the transition period.

The LMSB Chief Financial Officer has been selected. The Division operated with a limited budget in Fiscal Year (FY) 2000. In FY 2001, the LMSB Division will receive a budget and execute a financial plan. Procedures and controls, including financial codes, for the LMSB accounting system were established.

The IRS’ Delegation Orders were revised giving the LMSB Division the proper authority to operate. The Commissioner, Directors and subordinate managers in the Division have equivalent authority to similar level positions in the prior organization. The revised Delegation Orders are in compliance with applicable laws, Treasury regulations, and IRS policies.

The LMSB Division changed existing work control and management information systems for the new organization. Workarounds were devised so operations continued uninterrupted. The Division also established Memoranda Of Understanding (MOU) with other IRS functions to perform specified services.

While the LMSB Division has adequately addressed the contents of the workarounds, improved controls are needed with the MOU agreements to measure performance and provide feedback to the other IRS functions. This would reduce the risks of inconsistent or unsatisfactory levels of service for extended periods of time.