The Internal Revenue Service (IRS) collects billions of dollars in tax revenue each year at its processing centers, district offices, and banks under IRS contract. During 1998, audits conducted by the General Accounting Office and the IRS’ Internal Audit function reported that a weak control environment exposed these payments to theft.

In response to these audits, the IRS convened a task force to identify significant characteristics of payment theft cases, including the location where the thefts occurred and whether the IRS ensured taxpayers were not harmed. While the IRS has not issued a final report, a February 1999 briefing document showed that some taxpayers were subjected to collection actions due to the thefts.

The Treasury Inspector General for Tax Administration (TIGTA) Office of Investigations is responsible for investigating thefts of tax payments. It may receive allegations of a stolen payment from the IRS or from other sources. Such sources include local police departments, Postal Inspectors, and the TIGTA toll-free 800 number that is available to the general public. If TIGTA’s investigation determines that the taxpayer’s payment was stolen, TIGTA should notify the IRS by memorandum. The IRS should then ensure that the taxpayer is appropriately compensated.

We conducted this audit in response to a question from the United States Senate Finance Committee on how well the IRS makes taxpayers "whole" after the theft of their payment. To answer this question, we assessed how effectively the IRS identifies, controls, and resolves instances of payment thefts.

Identification of payment theft cases is the first step towards ensuring that taxpayers are made "whole" after their tax payments are stolen. Once potential thefts are identified, they should be properly controlled and resolved to ensure that taxpayers are accurately compensated.

During our audit period, 54 instances of potential payment thefts were identified. While this is a relatively small number, the IRS did not have an effective process for identifying and controlling potential payment theft cases it received as direct referrals from taxpayers. Process improvements are also needed to ensure the IRS consistently:

• Suspends collection activity while cases are under investigation.
• Resolves cases timely and accurately.

The IRS task force identified similar weaknesses and offered recommendations to correct them. However, these recommendations have not been adopted, and we were unable to identify actions taken to address them.

The IRS did not adequately train its employees to identify thefts of payments

Training provided to employees in the two functional areas most likely to identify potential payment thefts did not address this topic. As a result, the IRS cannot ensure that all instances of payment thefts have been identified and referred for investigation.

After the IRS identifies a potential payment theft, it should refer the case to TIGTA and assign the case to an employee’s work inventory. This employee should monitor the taxpayer’s account to prevent collection action from occurring while the case is under investigation. However, the IRS does not provide employees with clear and consistent instructions regarding when cases should be assigned to an employee’s work inventory and what follow-up actions should be taken.

IRS procedures required suspending collection action for a maximum of 105 days. However, procedures did not ensure that the suspension actually occurred and did not require that a suspension be extended if the case was not resolved within this time period.

We identified instances where collection action occurred while cases were being investigated. The IRS task force also identified taxpayers whose accounts were placed in collection status.

Good customer service requires the IRS to quickly reimburse taxpayers after it determines an IRS employee stole a payment. The IRS task force identified 5 payment theft cases where the reimbursement took longer than 30 days.

The IRS’ instructions did not specify procedures to follow to ensure taxpayers incurred no interest and penalty charges due to the thefts.

If the IRS determines a taxpayer should receive a reimbursement, his/her account should be credited as if the theft had not occurred. If not, he/she may incur late payment interest and penalty charges. The IRS task force and our audit identified instances of taxpayers being assessed penalty and interest charges.

The IRS should improve its procedures to ensure that all thefts of payments are properly resolved. Additional emphasis should be placed on training employees in the identification and control of payment theft cases. Procedures should also be changed to prevent taxpayers from receiving collection notices and interest or penalty charges due to the theft.

To ensure taxpayers are not harmed, the IRS should research missing payment complaints to identify potential payment theft cases not previously identified and forwarded to the TIGTA Office of Investigations. The IRS should also establish a consistent process in its instruction manual(s) for identifying and controlling payment theft cases.

Management’s Response: The IRS agreed with most of our recommendations and concurred with our outcome measures, as listed in Appendix IV of this report. The IRS believes that its current payment tracer process satisfies our recommendation to research missing payment complaints, and therefore, it does not plan any additional corrective actions. The IRS will develop a training module to identify, process, refer to TIGTA, control, and monitor thefts. It will update the Internal Revenue Manual to reflect more concise and in-depth procedures for identifying, researching, forwarding, and controlling missing payment complaints. The IRS established the position of "Remittance Security Coordinator" to serve as the "point of contact" and be responsible for ensuring taxpayers accounts are properly credited. Management’s complete response to the draft report is included as Appendix V.

Office of Audit Comment: The IRS needs the information from the cashed check or money order to make a payment tracer. However, if the taxpayer is unable to obtain a copy of the cashed money order, this case may not be referred for investigation. We did not review the IRS’ payment tracer process to determine whether employees identified and referred all instances of potentially stolen remittances. However, we will include this topic in future audit coverage. Also, the "Remittance Security Coordinator" position was established subsequent to our review.