Management Advisory Report: The Large and Mid-Size Business Division Substantially Accomplished Organizational Stand-Up
September 2000
Reference Number: 2000-30-144
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
September 28, 2000
MEMORANDUM FOR COMMISSIONER ROSSOTTI
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for Audit
SUBJECT: Final Management Advisory Report - The Large and Mid-Size Business Division Substantially Accomplished Organizational Stand-Up
This report presents the results of our review of the Large and Mid-Size Business (LMSB) Division’s stand-up. As part of its overall reorganization, the Internal Revenue Service’s (IRS) design plans included a process called "standing-up," which means a new function has the minimum requirements for operating. These requirements include:
However, stand-up is not the final act of creating a new organization. Considerable additional effort is required to be fully operational.
In summary, the LMSB Division was successful in substantially completing the critical elements needed for standing-up. We identified two issues, relating to communicating with employees and outside stakeholders and improving controls over agreements with other business units, where additional actions would help minimize risks associated with the beginning of the division’s full operations. This report is being provided to you for your information.
Copies of this report are also being sent to the IRS managers affected by the report. Please contact me at (202) 622-6510 if you have questions, or your staff may call Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs), at (202) 622-3837.
Key Management Positions Have Been Filled
Actions to Realign Positions Have Substantially Been Completed
The Financial Office and Budget Have Been Established
The Division Has Received Delegations of Authority To Fulfill Its Mission
Initiatives and Workarounds to Allow the Division to Function Have Been Completed
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Memorandum - Responding to Stakeholder Questions
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.
Results
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.
Key Management Positions Have Been Filled
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.
Actions to Realign Positions Have Substantially Been Completed
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 Financial Office and Budget Have Been Established
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 Division Has Received Delegations of Authority To Fulfill Its Mission
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.
Initiatives and Workarounds to Allow the Division to Function Have Been Completed
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.
The overall objective of this review was to validate whether the Large and Mid-Size Business (LMSB) Division’s stand-up process was completed. We did not conduct in-depth analysis and tests of the organizational design or the effectiveness of operating procedures.
The stand-up process is defined as the establishment of a new organization with at least the minimum requirements of operating. These include:
The Treasury Inspector General for Tax Administration (TIGTA) has identified modernization as one of the major challenges facing the Internal Revenue Service (IRS). The IRS’ modernization includes a multi-year schedule necessary to accomplish full implementation. We plan to continue our modernization reviews as part of our Fiscal Year (FY) 2001 audit program.
We conducted the review at LMSB Headquarters in Washington, DC, from June through August 2000. The review was performed in accordance with the President’s Council on Integrity and Efficiency Quality Standards for Inspections.
Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.
In early 1998, the 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), mandating that the IRS modernize to improve operations and to better serve its customers.
The IRS modernization is based on five levers of change: revamping business processes; creating management roles with clear accountability; instituting a balanced performance measurement system; implementing new technology; and establishing customer-focused operating divisions.
The IRS is reorganizing into four operating divisions that will focus on serving specific taxpayer groups with similar needs. The four operating divisions are: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business, and Tax Exempt and Government Entities. These divisions were designed and are being implemented on a phased approach that will take 2 to 3 years. The phases are defined as follows:
The LMSB Division will be organized by industry groups, which will allow the IRS to build greater expertise and improve service for specific industries. The Division will serve 210,000 corporations and partnerships that have assets greater than $5 million and that pay an estimated $712 billion annually in taxes.
The LMSB Division stood-up on June 4, 2000. Overall, the Division was successful in substantially completing the IRS definition for standing-up the new operating division. Specifically:
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.
Key Management Positions Have Been Filled
This critical element of the stand-up process required that the following key actions be taken:
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 has successfully filled 129 (91 percent) of its 141 key management positions as of July 2000. The 12 vacancies are on schedule to be filled. The Division had an all-managers meeting to discuss the vision, structure and functions of the new Division. These actions have contributed to substantially establishing the management structure for the LMSB Division.
However, communicating the vision, structure and functions to employees, practitioners and industry trade groups is also important. While communication efforts were generally effective, we identified one area where the LMSB Division could improve to better serve its stakeholders.
Controls are needed to ensure that responses to employee and stakeholder questions are timely answered and appropriately shared
The LMSB communication system did not always ensure that adequate and timely answers were provided for all employee, customer, and stakeholder questions because of other work priorities. As the LMSB Division expands its communication efforts, more questions from employees, practitioners, and industry trade groups are expected. Therefore, the Division needs a sound control system to ensure questions from these groups are timely answered.
During our review we advised LMSB management of this issue. Our memorandum is included as Appendix IV of this report. LMSB management is exploring several software options to better manage this process.
Actions to Realign Positions Have Substantially Been Completed
This critical element of the stand-up process required that the following key actions be taken:
As of July 2000, the LMSB Division realigned 6,399 (89 percent) of its 7,227 positions. Of the 828 unfilled positions, 114 were team manager positions. Interviews were scheduled to fill most of the vacant team manager positions. In addition, the Division is addressing support position realignment needs, and plans to manage employees during the transition period are in place.
The payroll conversion has been successfully completed. Uninterrupted payroll and personnel services have been provided to most LMSB employees.
The Financial Office and Budget Have Been Established
This critical element of the stand-up process required that the following key actions be taken:
The LMSB CFO was in place as of the stand-up date. The Division operated with a limited budget process in 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. Procurement controls over purchase cards, including card assignments, approval authority, and payment monitoring are operational.
The Division Has Received Delegations of Authority To Fulfill Its Mission
This critical element of the stand-up process required that the following key actions be taken:
The LMSB Division developed new functional statements that describe organizational components and their responsibilities. The IRS’ Delegation Orders were revised giving the Division the legal 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.
Initiatives and Workarounds to Allow the Division to Function Have Been Completed
This critical element of the stand-up process required that the following key actions be taken:
The LMSB Division changed existing work control and management information systems for the new organization. Workarounds were devised so operations continued uninterrupted.
The Division established Memoranda Of Understanding (MOU) with other IRS functions to perform specified services. The MOUs identify the services to be provided and the related performance measures. While the LMSB Division has adequately addressed the contents of the workarounds, we identified one area where it could improve controls over MOUs.
Controls over tracking performance and providing feedback on Memorandums of Understanding need to be established and strengthened
The LMSB Division does not have controls to monitor the performance levels provided through the MOU agreements. Additionally, improved controls are needed to provide performance feedback to the other IRS functions.
Currently, when issues arise with other IRS functions, they are resolved through informal methods. This approach may leave the Division vulnerable to the risks of reduced, inconsistent, or unsatisfactory levels of service for extended periods of time.
The General Accounting Office’s Standards for Internal Control in the Federal Government include control activities to assure that ongoing monitoring occurs in the course of normal operations. Control activities that are pertinent to the MOU issue include the following standards:
The control weakness occurred because emphasis was being placed on ensuring the timely stand-up of the new operating division. During this period the LMSB Division was relying on informal discussions between the MOU partners to assess the services provided.
Overall, LMSB executives and the design teams have substantially accomplished a successful stand-up of the new business operating division. Management attention to the two issues presented in this report will further strengthen the LMSB Division’s system of controls.
Appendix I
Detailed Objective, Scope, and MethodologyThe objective of this review was to validate whether the Large and Mid-Size Business (LMSB) Division’s stand-up process was completed. To accomplish our overall objective, we:
Appendix II
Major Contributors to This ReportGordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs)
Philip Shropshire, Director
Richard Hayes, Audit Manager
Donna Saranchak, Senior Auditor
Larry Smith, Senior Auditor
E. John Thomas, Senior Auditor
John Ochal, Auditor
Anthony Snowden, Auditor
James Wellman, Auditor
Appendix III
Report Distribution ListCommissioner, LMSB
National Taxpayer Advocate C:TA
Office of the Chief Counsel CC
Office of Management Controls CFO:A:M
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis M:O
LMSB Audit Liaison
Appendix IV
Memorandum – Responding to Stakeholder QuestionsJuly 17, 2000
MEMORANDUM FOR COMMISSIONER, LARGE AND MID-SIZE BUSINESS DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Associate Inspector General (Small Business and Corporate Programs)
SUBJECT: Responding to Stakeholder Questions
During our review of the Large and Mid-Size Business Division (LMSB) stand-up process, we identified an issue that we wanted to bring to your attention: communications management risks. Specifically, the concern is whether LMSB is adequately ensuring that individual employee and stakeholder questions are answered in a timely manner. Likewise, we are concerned whether the responses to individual questions are made available to others when appropriate.
LMSB executives have made a concerted effort to develop a team approach within LMSB. A large component of the team approach is communication. To further effective communication within LMSB, a question/answer process was implemented. When employees submitted questions they expected timely responses. However, in some cases the work priorities prevented answering all the questions received.
Periodically during the design of LMSB, employee and manager questions have been submitted for the design team to clarify or explain issues involving new LMSB policies, procedures, or business methods. The design team advised us that they have responded to the initiators of these questions. However, controls have not been established to record and monitor these questions, so it is not possible to determine whether adequate and timely responses were provided to all initiators, or whether the responses were shared with the entire LMSB employee population. The design team advised that all questions and responses over the past year have been destroyed, with the exception of those questions received since late March 2000.
In preparation for the LMSB Orientation Guide the design team solicited field questions in April 2000. Of the approximately 240 to 260 questions that were received by the design team, 59 questions and responses were included in the Orientation Guide. The design team advised that some of the 59 questions represented the combination of similar issues from multiple employees. Of the approximately 240 to 260 questions, 207 questions had been retained. Analysis of the retained questions showed that 60 were not included in the Orientation Guide, and there is no documentation to show that they were answered. Similarly, there is no documentation for the approximately 33 to 53 other questions that were not retained, nor for any that had been submitted prior to late March 2000.
Questions for which a response was not documented included such issues as:
As the design teams conclude their work and return to their permanent job assignments it is expected that questions will continue to be raised by LMSB employees. The Orientation Guide includes an email address for employees to express their concerns or request guidance on issues important to them. Currently there are no procedures in place to record, control, and process additional questions received and disseminate information to employees who asked the questions and to the entire LMSB employee population, as appropriate.
During the summer months of 2000 the Commissioner, LMSB is hosting a series of town hall meetings with outside interest groups, such as practitioners and industry trade groups. At these meetings it is expected that there will be opportunities for the outside stakeholders to make comments and ask questions. Again, there are no procedures currently in place to record, control, and process questions received at these meetings and disseminate information to other related outside stakeholders who have an interest in the subject matter.
There are several potential effects of not controlling the question/answer format:
RECOMMENDATIONS
LMSB management should consider the following:
No formal response to this memorandum is required. However, we would like to discuss the issue with you or a designee in the next 10 days, so we will be in touch very soon to set up a meeting. Should you have any questions, please contact me at (202) 622-3837, or your staff may call Phil Shropshire, Director, Corporate and Customer Service at (215) 516-2341, or Richard Hayes, Audit Manager, at (973) 808-0716 ext. 6688.