A photocopy user fee is the fee that is paid to the Internal Revenue Service (IRS) for providing a taxpayer with a copy of their tax return. Taxpayers prepay the fee of $23 for each tax return photocopy requested when submitting a Request for Copy or Transcript of Tax Form (Form 4506). The fee is refunded to the taxpayer if the IRS later determines that it cannot provide a photocopy of the requested tax return.

This review was conducted at the Memphis Service Center (MSC) in part because of concerns that photocopy user fee payments could result in fraudulent refunds. We evaluated controls over photocopy user fee refunds and determined whether material fraud had occurred. This included evaluating whether photocopy user fee refunds had been properly recorded and accounted for, whether refunds were adequately supported and properly approved, and whether cancelled refunds were properly resolved. We also evaluated various inventory controls, and determined whether appropriate actions had been taken to timely provide taxpayers with photocopies of tax returns.

While we did not find indications of IRS employees embezzling photocopy user fee refunds, we did find that controls over these fees were not adequate to help prevent the opportunity for improper activity. In addition to these control weaknesses, we also determined that taxpayers did not always receive timely and complete responses to their requests for tax return photocopies. Specifically, we found the following.

• MSC did not have adequate input, approval, and certification controls over photocopy user fee refunds. Management did not ensure that adequate controls existed over the process to input, approve, and certify photocopy user fee refunds. Weaknesses were found in the access provided to the database used to input the refunds, in the separation of duties between authorizing and inputting refunds to the system, and in the review and approval process used to certify the refunds by management. Additionally, the database used to control photocopy user fees does not always provide an accurate audit trail for refunds issued, and some documents required to authenticate refunds could not be located.
• MSC did not perform adequate preprocessing of Forms 4506. Employees did not always identify and reject unprocessable Requests for Copy or Transcript of Tax Forms (Forms 4506). In addition, Photocopy Unit personnel disclosed four taxpayers’ tax return information to unauthorized third party requestors.
• MSC did not always take adequate actions to secure requested tax returns. Photocopy Unit personnel did not locate 13 of 26 returns which should have been available. The employees also did not always document follow-up actions when their initial requests did not produce the returns but information received or a lack of response to the request indicated that follow-up would be appropriate.
• MSC did not have adequate inventory controls over photocopy user fee cases. Photocopy requests that resulted in refunds were frequently not controlled and processed timely. In addition, Photocopy Unit personnel generally did not issue subsequent interim letters to inform taxpayers when to expect a response if the response was delayed longer than expected.
• MSC did not have adequate controls over cancelled photocopy user fee refund checks. MSC did not properly research and resolve cancelled refund checks. In addition, the Accounting Branch did not properly record cancelled photocopy refund checks in the General Ledger.

Management’s Response: During this review, we issued a memorandum to IRS management addressing each of the conditions included in this report. MSC IRS management agreed with all of the findings we identified in our review. Management’s complete response is included as Appendix IV.