TREASURY INSPECTOR GENERAL

TREASURY INSPECTOR GENERAL

FOR TAX ADMINISTRATION

THE INTERNAL REVENUE SERVICE'S PLANNING PROCESS NEEDS IMPROVING TO FULLY RESOLVE ALL ISSUES AFFECTING TAX RETURN PROCESSING ACTIVITIES

March 2000

Reference No. 2000-40-054

Executive Summary

The Internal Revenue Service (IRS) faces significant challenges as it prepares to process the 128 million individual tax returns it expects to receive during the Year 2000 filing season. Some of these challenges include recruiting and training employees, changing the computer system it uses to process tax returns, and implementing new tax law changes. To assess the IRS’ effectiveness in meeting these challenges, the Treasury Inspector General for Tax Administration (TIGTA) has conducted a series of reviews to evaluate the effectiveness of the IRS’ process for preparing for the Year 2000 filing season.

The objective of this review was to assess the adequacy of the IRS’ process for preparing for tax return and payment processing during the Year 2000 filing season. In separate audit reports, TIGTA provides readiness assessments for other critical filing season activities, including the process the IRS uses for preparing tax forms and publications, and for ensuring quality customer service.

Results

The IRS has established a loosely controlled process for preparing for tax return and payment processing activities. This process relies heavily on the institutional knowledge of various IRS employees to identify and resolve significant issues. It does not ensure that all problems are sufficiently documented, detailed action lists are prepared, and follow-up analyses are conducted. As a result, the IRS faces a risk that processing activities will be underfunded, equipment used to sort millions of pieces of mail will not operate effectively, and all tax return information will not be input into computerized records.

Additional Guidelines are Needed for the Filing Season Planning Process to Ensure All Concerns Are Resolved

To oversee the preparation for the filing season, the IRS established the Executive Steering Committee for Filing Season Readiness (Readiness Committee). This committee, comprised of high-level IRS employees, is responsible for ensuring that significant issues impacting the filing season are resolved. The IRS also requires offices that process tax returns and payments (referred to as processing centers) to prepare plans outlining specific actions they have taken to prepare for the upcoming filing season.

The process used by the Readiness Committee and the processing centers is the IRS’ major control to ensure that it is prepared for the upcoming filing season. One element of an adequate control system is that clearly written instructions for internal controls are readily available. These written instructions provide a degree of assurance that control objectives are being achieved.

Additional written guidelines describing the planning process used by both the Readiness Committee and the local processing centers are needed to ensure the success of future planning efforts. The process should also ensure that the IRS prepares sufficiently detailed action lists to resolve significant issues. These changes are particularly important since the IRS is implementing an extensive reorganization.

The Readiness Committee Charter identifies general steps to be taken in planning for the upcoming filing season. For example, it provides dates for completing certain activities, such as conducting the first committee meeting and requesting input from stakeholders on significant issues impacting the filing season. However, it does not provide any specific requirements or steps necessary to accomplish these milestones.

Process for Identifying Issues

The Readiness Committee solicits input from various IRS and non-IRS sources on issues that should be resolved during the readiness process. We were advised that IRS employees also review internal reports and new tax law provisions to identify issues impacting the filing season. However, there are no formal guidelines documenting the complete identification process.

While the Readiness Committee Charter identifies general steps to be taken, it does not provide guidelines on the types of reports that should be reviewed, examples of the external stakeholders that should be contacted, or actions to take in the absence of a response. Instead, employees rely on the knowledge and expertise of prior participants in the readiness process or documents prepared during the prior years’ readiness work to repeat the process each year.

Process for Recording and Assigning Responsibility for Issues

Readiness Committee members advised that the action list included concerns expressed by more than one processing center or issues having a significant impact on the IRS’ ability to process tax returns and payments. The Readiness Committee then assigns action items to IRS officials to resolve. However, there are no written procedures describing the process for recording and assigning responsibility for items on the action list. Also, there are no guidelines defining how detailed the items should be on the action list (e.g., include only a general, high-level topic or more specific concerns about the issue in question).

Through discussions with IRS officials and analysis of IRS reports, we identified issues impacting the processing of tax returns and payments during the Year 2000 filing season. We judgmentally chose six significant issues and determined whether they were adequately identified and controlled by the IRS’ readiness process. Our analysis showed that three of the six issues were not adequately controlled in the functions, or required significant additional work to ensure they were resolved prior to the filing season. Details follow.

Funding for Returns Processing Activities: With guidance from the National Director, Submission Processing, the processing centers prepare work plans that identify the amount of staff needed to process anticipated tax returns and payments. As of September 2, 1999, work plans showed that the processing centers needed approximately 1,000 staff years (a staff year is equal to 2,088 hours of work) more than the IRS had budgeted for processing tax returns and payments. The action list for filing season readiness did not include a specific item to address whether sufficient funding was available to accomplish tax return processing activities.

We reported this issue to IRS management during our review. Managers in the National Office had prepared a list of proposals to address the returns processing funding issue. However, at the time of our review, no final decisions had been made on the proposals.

The Service Center Automated Mail Processing System (SCAMPS): The SCAMPS is the new mail sorting system for processing the millions of pieces of incoming and outgoing mail handled by the processing centers.

Officials at three of the five processing centers we visited expressed specific concerns with the SCAMPS that were not shown on the action list. The list included an item for the SCAMPS that stated, "Ensure SCAMPS is ready for the filing season processing." However, specific issues related to the reliability and effectiveness of the system were not shown on the list. Concerns expressed that were not on the list include:

Poor check detection rates by the SCAMPS—Information from several processing centers showed check detection error rates ranging from 55 to 88 percent.
Inexperienced vendor technicians—The lack of experience of vendor technicians at two processing centers could delay resolving problems during the filing season.

We reported the SCAMPS issues to IRS management during our review. Discussions with National Office managers and our limited review of information maintained by the National Office function responsible for the SCAMPS showed problems with the SCAMPS had been identified and an initial plan of action had been developed. The plan identified several issues requiring action, but did not assign responsibilities, set due dates, or establish the expected resolution of the issue. Subsequent to our discussion of the SCAMPS issues with management, employees developed a comprehensive listing of SCAMPS projects assignments that identified issues, assigned the issues to employees, set completion dates, and described expected results. Managers informed us that they were aware of many of these issues and were working with the vendor to resolve them.

The Integrated Submission and Remittance Processing (ISRP) System: The ISRP system is the new system for converting paper tax returns and payments to computerized records in the processing centers.

Officials at two processing centers expressed concerns that were not included on the action list related to problems created when converting paper return information to computerized records. These concerns were also raised in prior TIGTA memoranda. While the readiness action list includes an item pertaining to the implementation of the ISRP system, it does not address the following issues raised by the processing centers or previously reported by TIGTA.

Ensuring that all tax return data are correctly entered into the IRS computer system—Because of problems resulting from the installation of the ISRP system, IRS employees did not enter all data into IRS computers for all tax returns received for processing. Correcting the problem would require inputting additional information into the IRS computer system for each tax return received. IRS budget allocations did not include resources needed to process this additional information.
Completing the ISRP system contingency plans for payment processing activities—As of October 4, 1999, the IRS had not completed negotiations with specific commercial banks to ensure that they would process payments for the IRS if significant problems were encountered with the ISRP system.

We reported these ISRP system issues to IRS management during our review. They informed us that they were working on both problems in their day-to-day activities without including them on the action list. The resources needed for entering additional information into IRS computers for each tax return received would increase the deficit of 1,000 staff years discussed above.

Follow-up and Resolution of Identified Issues

The IRS official responsible for resolving the action item provides status briefings during bi-weekly committee meetings. Minutes of these meetings are prepared and provided to appropriate participants. The action list items are updated periodically to reflect the status of the item. Near the end of the calendar year, the Readiness Committee requests that the processing centers certify they are prepared for the filing season.

However, there are no guidelines describing the steps to be taken during this part of the planning process. The Readiness Committee Charter provides for requesting the certifications from the processing centers, but does not provide instructions for obtaining feedback on action items or the type of feedback required. Also, the December 10, 1999, due date for the certifications may not allow sufficient time to correct significant, unresolved issues prior to the upcoming filing season.

Because this is an on-going process, IRS managers did not see the need to formally document the steps taken to prepare for the Year 2000 filing season. As stated above, they rely on the knowledge of the Readiness Committee members and others involved in the process to ensure the IRS is prepared for the upcoming filing season.

Without formal guidelines, the IRS cannot be assured that the readiness planning process will be followed in the future or that all aspects of action items are addressed and resolved prior to the filing season. Again, this is particularly important since the IRS is implementing an extensive reorganization.

Summary of Recommendation

The IRS should prepare more definitive written guidelines for the filing season readiness process. The guidelines should include criteria for including items on the action list, and define the degree of specificity required for each action item. These guidelines should also emphasize early resolution of issues affecting staffing and other budget items.

Management’s Response: We provided the IRS with a draft report on February 7, 2000, with a 30 calendar day response period. However, as of the date of this report, IRS management had not provided a response to the draft report.