In July 1998, Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), which created ...

Message from the IG

This year we are proud to join in the observance of the 25^th anniversary of the Inspector General (IG) Act. We will describe

the evolution of the Treasury Inspector General for Tax Administration (TIGTA), one of the newer IGs established in 1999, and our continued contribution to the IG community and the public-at-large (see page 5).

In looking over the past six months, we have continued to operate successfully during a period of transition and critical developments. We began 2003 by welcoming a new Secretary of the Treasury, John W. Snow. Additionally, the divestiture of a significant portion of Treasury resources to the Department of Homeland Security has had a major impact throughout the Department.

We are eagerly anticipating working with a new Commissioner of Internal Revenue, as well as a new Internal Revenue Service (IRS) executive leadership team. During IRS’ transition period, it is vital for TIGTA’s work to provide useful, balanced information to decision-makers. We are doing this by supporting IRS in achieving its strategic goals, identifying and addressing IRS’ material weaknesses, and by ferreting out and neutralizing threats posed to tax administration by corruption, fraud, and terrorism. Our accomplishments during this reporting period helped improve tax administration and subsequently aided taxpayers nationwide. With the issuance of 89 audit reports, we identified more than $43 million in cost savings, and an additional $12.8 million in increased revenue or revenue protected. Our audits assessed such IRS operational and programmatic issues as business systems modernization, tax compliance initiatives, computer and physical security, performance and financial management, customer service, returns processing, and the filing season.

To combat fraud, waste and abuse, our investigative work centered on IRS employee integrity, IRS employee and infrastructure security, and external attempts to corrupt federal tax administration. During this reporting period, we received 3,997 complaints of alleged criminal wrongdoing or administrative misconduct. We opened 2,487 investigations and closed 2,489. Additionally, Counsel reviewed 85 proposed regulations and legislative requests. Highlights of our work are included in this Semiannual Report to Congress.

As we approach the second half of the fiscal year, we look forward to working with the new Treasury and IRS executives and with Congress to establish a productive relationship that benefits the public through improved tax administration.

Sincerely,

Pamela J. Gardiner March 31, 2003

Table of Contents

Page

Message from the IG ................................................................ 1

25^th Anniversary of the IG Act................................................. 5

TIGTA’s Organizational Structure............................................ 8

TIGTA Strategic Goal: Improving the Economy,
Efficiency and Effectiveness of Tax Administration ............. 11

IRS Systems Modernization ................................................. 12

Tax Compliance Initiatives .................................................. 13

IRS Security ....................................................................... 14

Integrating Performance and Financial Management ............ 16

Customer Service, Returns Processing and the Filing
Season ............................................................................ 18

Taxpayer Protection and Rights ........................................... 21

TIGTA Strategic Goal: Detecting and Deterring Fraud in IRS Programs and Operations .............................................. 25

IRS Employee Integrity ....................................................... 26

IRS Employee and Infrastructure Security ............................ 27

External Ate
tmpts to Corrupt Tax Administration .................. 30

Congressional Testimony ...................................................... 32

Kudos...................................................................................... 32

Appendices Appendix I Audit Statistical Reports

t
Audit Repors With Questioned Costs ................................... 33

tRepors With Recommendations That Funds BePut to
t
Beter Use ....................................................................... 34

tRepors With Additional Quantifiable Impact on Tax
Administration .................................................................. 35

t
Prior Period Repors .......................................................... 37

t
Financial Accomplishments .................................................. 39

Status of Closed Criminal Investigations .............................. 40

Criminal Dispositions .......................................................... 40

Administrative Disposition on ClosedTIGTA
Investigations .................................................................. 41

Complaints/Allegations Received by TIGTA .......................... 42

I
Status of Complaints/Allegations Received by TGTA ............ 42

Allegations of Misconduct Against IRS Employees ................. 43

Appendix III Statistical Reports — Others

tAudit Repors With Significant Unimplemented Corrective
Actions ............................................................................ 47

Statistical Reports - Others ................................................. 58

Appendix IV Audit Products
(October 1, 2002 – March 31, 2003) .................................... 59

Appendix V Statutory TIGTA Reporting Requirements ................. 67

Appendix VI Section 1203 Standards ......................................... 73

Hotline Information ............................................................... 75

Page

Appendix II Investigations Statistical Reports

Invesigations Opened and Closed....................................... 39

25^thAnniversary of theIG Act

his marks the 25^th year of the IG Act,¹which was enacted on October 12, 1978. Today, it remains the cornerstone for

centralized, independent audits and investigations that foster accountability and integrity in government programs and operations. Currently, there are 57 statutory IGs who view themselves as “agents of positive change,” providing a significant, positive force in the federal government for improving economy, efficiency, and effectiveness; strengthening accountability and transparency; and detecting and deterring fraud, waste, and abuse.

IRS’ Office of Chief Inspector (also known as the Inspection Service) was created in October 1951 in response to reports of widespread corruption in IRS. The Chief Inspector reported directly to the Commissioner and Deputy Commissioner and derived specific and general authority by delegation from them.

In 1998, after comprehensive consideration of the operations and

organization of the IRS, Congress ordered sweeping changes. As part of its IRS reorganization, Congress concluded that the Inspection Service lacked sufficient structural and actual autonomy to provide the needed oversight to IRS. Further, the relationship between the Treasury IG and the IRS’ Office of Chief Inspector did not foster appropriate IRS oversight.

Congress decided to establish an independent IG within the Department of Treasury. Its primary focus and responsibility would be to audit, investigate, and evaluate IRS programs to improve the quality and credibility of IRS oversight. As a result, the Internal Revenue Service

¹ Inspector General Act of 1978, 5 U.S.C.A. app. 3 (West Supp.2003).

25^thAnniversary of the IG Act

Page 5

Restructuring and Reform Act of 1998 (RRA 98) ²created TIGTA, and it became an operational IG in 1999.

Early on, TIGTA concentrated on becoming compliant with numerous laws and IG regulations and assuring that it operated in a manner compatible and conforming with Treasury policies. Simultaneously, TIGTA addressed the need to significantly increase productivity levels. TIGTA immediately abolished the regional structure of its predecessor organization, which eliminated an unnecessary and remote layer of management. TIGTA organized the Office of Investigations into direct report field offices and the Office of Audit reorganized into specialized issue areas that parallel IRS’ business unit structure. TIGTA was able to provide internal support services more efficiently and eliminated two layers of management through its streamlining efforts. TIGTA also identified ways in which audits and investigations could be completed faster and more efficiently.

Ahead of the curve, TIGTA integrated its budget and performance functions before this became one of the top issues of the President’s Management Agenda.³ TIGTA fully embraced the idea of telecommuting by instituting a program, entitled the Virtual Resource Solution. Currently, 98% of TIGTA employees are eligible to telecommute and, of these, 37% actually do so two or more days per week.

• FINANCIAL ACCOMPLISHMENTS TIGTA has significantly increased its productivity levels despite having reduced historic full-time equivalent (FTE) staffing. For FY 2002, TIGTA had financial accomplishments resulting from proposed cost savings and increased revenue/revenue protected of $800.5 million. TIGTA continues to be a good investment for the American public. For FY 2002, we returned $6 for every budget dollar invested in TIGTA. For every FTE, we returned $862,000.

• PCIE SUPPORT Between 1999 and 2003, TIGTA managed the Inspector General Training Academy, which was partially staffed by TIGTA personnel. Additionally, TIGTA’s Inspector General served as editor-in-chief of the President’s Council on Integrity and Efficiency (PCIE) Journal of Public Inquiry from 1999 through 2002.

² Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) Pub. L.105-206, 112 Stat. 685. (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C., 5 No. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.)

Page 6

• COUNTER-TERRORISM VIGILANCE After the terrorist attacks of September 11, 2001, TIGTA faced great challenges in combating terrorism targeted at the IRS. In response to heightened security concerns and TIGTA’s responsibility for investigating threats against the IRS and its employees, TIGTA established a Counter-Terrorism Section (CTS). The CTS coordinates investigative efforts and is the centralized repository and dissemination point of threat information to the IRS. The CTS proactively identifies domestic and international threats made to the IRS by participating on nationwide Federal Bureau of Investigation (FBI) Joint Terrorism Task Forces (JTTFs); evaluating information developed by JTTFs and other sources; initiating investigations; and issuing intelligence reports and advisories notifying TIGTA and IRS management of potential threats.

In noting this 25^th anniversary, TIGTA continues to support the IG community and serve the American public by successfully carrying out the intent and statutory requirements of the IG Act.

Page 7

TIGTA’s Organizational Structure

TA provides independent oversight of IRS activities, the IRS

Oversight Board, and the IRS Office of Chief Counsel. TIGTA is

organizationally placed within the Department of Treasury, but it is independent of the Department and all other Treasury offices. TIGTA’s focus is devoted to all aspects of work related to tax administration.

TIGTA’s primary organizational functions are the Office of Audit (OA) and the Office of Investigations (OI). TIGTA’s Offices of Chief Counsel, Information Technology, and Management Services support OA’s and OI’s efforts.

TIGTA is structured to conduct audits and investigations designed to:

• Promote economy, efficiency, and effectiveness in administering the nation’s tax system.

• Detect and deter waste, fraud and abuse in IRS programs and operations.

• Protect IRS against external attempts to corrupt or threaten its employees.

AUTHORITIES TIGTA has all the authorities granted under the Inspector General Act of 1978, as amended. TIGTA also has access to tax information in the performance of its tax administration responsibilities and has the obligation to report potential criminal violations directly to the Department of Justice. The IG and the Commissioner of Internal Revenue have established policies and procedures delineating responsibilities to investigate potential criminal offenses under the internal revenue laws.

In addition, RRA 98 amended the Inspector General Act of 1978 to give TIGTA statutory authority to carry firearms and execute the provisions of the Internal Revenue Code(I.R.C.)§7608(b)(2). These provisions include law enforcement authority to execute and serve search warrants, serve subpoenas, and make arrests.

The following two report sections highlight TIGTA’s significant audit and investigative activities for this semiannual period.

Page 10

TIGTA Strategic Goal:

Improving the Economy, Efficiency
and Effectiveness of Tax
Administration

IGTA provides an independent oversight function to IRS, which collects more than $2.1 trillion annually to fund the nation’s

government. TIGTA ensures that it meets the strategic goal of improving the economy, efficiency and effectiveness of tax administration by focusing resources on fundamental goals related to IRS’ programs. Emphasis is also placed on statutory coverage imposed by RRA 98, as well as areas of concern to the Commissioner of Internal Revenue.

Each year, TIGTA identifies the major management challenges facing IRS. The MAJOR MANAGEMENT CHALLENGES in FY 2003, in order of priority, are:

This section highlights the significant contributions TIGTA has made to IRS programs and operations through its audits in seven of the ten major management challenge areas.

Dramatic improvements in service to taxpayers are heavily dependent on modernizing IRS’ core computer systems, which has been an ongoing challenge. IRS’ major modernization projects continue to experience delays, cost increases, management difficulties, and reductions in deliverables.

BUSINESS SYSTEMS Beginning in 2001, the Business Systems Modernization (BSM) program MODERNIZATION: has been deploying projects and learning valuable lessons that should COSTS, SCHEDULES, help improve future projects. Deployed projects have increased the AND FUNCTIONALITY capacity of IRS’ telephone system; improved the ability to receive, route,

and respond to taxpayer telephone calls; and provided refund information via the Internet. However, as reported in previous TIGTA and General Accounting Office reports, the BSM program has experienced difficulties meeting the original cost, schedule, and functionality estimates included in the BSM Spending Plans submitted to Congress.

So far, the eight BSM projects that are currently being developed and deployed have experienced cost increases of 26% and delays averaging 13 months over initial estimates, most occurring during the planning and design phases of these projects. The BSM Office forecasts that future project costs and schedules will be much closer to the estimates. Since the purpose of this review was to identify and analyze the cost, schedule, and functionality performance compared to the original project estimates, TIGTA made an assessment but did not make any recommendations. IRS management agreed with TIGTA’s assessment. Report Reference No. 2003-20-007

CUSTOMER ACCOUNT The Customer Account Data Engine (CADE) will replace IRS’ current DATA ENGINE – THE Master File of taxpayer accounts, and is the foundation for managing MASTER FILE these accounts in IRS’ modernization plan. The individual tax accounts REPLACEMENT portion of the CADE will be deployed in five segments (releases) over

several years.

The following report presents the results of TIGTA’s review of Release 1. IRS and its contractor have made progress in delivering the CADE project by building a substantial portion of Release 1 and creating a comprehensive foundation for all five releases. However, the development of the CADE project by the contractor has experienced significant delays, with the Release 1 deployment date now estimated to be June 2003 (about 18 months behind its planned delivery date). The development has also experienced cost increases, with the original estimate for Release 1of approximately $51.9 million being revised six months later to $64.6 million. IRS had actually spent $54.5 million on Release 1 through September 2002. Project delays can be attributed to difficulties in identifying and managing the project requirements,

Strategic Goal: Improving the Economy, Efficiency
and Effectiveness of Tax Administration

Page 12

specifically in developing the balancing, control, and reconciliation process; comprehensive documentation for the CADE Computer Operations Handbook; and computer system naming standards.

To help meet the Release 1 deployment expectations, TIGTA recommended IRS’ BSM Office work with the contractor to ensure that the business system design is completed, and establish a detailed schedule of the remaining work. IRS management agreed with the recommendations and is taking corrective action. Report Reference No. 2003-20-089

TAX COMPLIANCE INITIATIVES

IRS’ goal of providing world-class service to taxpayers hinges on the theory that if IRS provides the right mix of education, support, and up-front problem solving to taxpayers, the overall rate of voluntary compliance with the tax laws will increase. The challenge to IRS management is to establish a tax compliance program (examining tax returns and collecting tax liabilities) that identifies those citizens who do not meet their tax obligations - either by not paying the correct amount of tax or not filing proper tax returns - and that effectively brings them into compliance. As part of its 2000 reorganization, IRS has begun to revamp its business processes to stabilize the traditional compliance activities.

LEGAL ADVICE IRS’ Large and Mid-Size Business (LMSB) Division has been working to PROVIDED TO improve the timeliness of providing legal advice in LMSB Division EXAMINERS examinations. It has made positive organizational changes and

implemented new initiatives that show promise in reducing the length of LMSB Division examinations. However, the length of time it takes to provide legal advice to examiners is substantial because of issues in both the requesting and delivering of legal services. This may hamper the Division’s ability to meet its FY 2003 goal for timely completing examinations.

TIGTA recommended that IRS attorneys be required to assist in the risk analysis process to better ensure the need for legal advice is identified and requested earlier in examinations. In addition, management should ensure that the data in the Office of Chief Counsel’s management information system is complete so delays and other problems in the delivery of legal advice can be quickly identified and addressed. IRS management agreed with the recommendations and is taking corrective action. Report Reference No. 2003-30-021

CONTRACTING OUT COLLECTION ACTIVITY

COMPUTER SECURITY

PHYSICAL SECURITY

TIGTA reviewed IRS’ plan to contract out some collection activity to private contractors. IRS’ preliminary planning related to the use of Collection Contract Support (CCS) companies was extensive and included a detailed evaluation of similar existing programs at other federal and state government entities. IRS also prepared a draft Request for Quotation (RFQ) for the CCS initiative, which it planned to issue during the second quarter of FY 2003.

Although IRS’ preliminary planning efforts have been good, overall effectiveness could be enhanced by providing greater specificity in the draft RFQ regarding the management information IRS will require from contractors, such as weekly telephone reports; providing more detailed requirements in the draft RFQ regarding the protection of taxpayer rights; and reexamining IRS’ preliminary projections regarding the volume of cases to be initially released to CCS companies. IRS management agreed to the recommendations and has implemented corrective actions. Report Reference No. 2003-30-075

IRS SECURITY

The terrorist attacks on September 11, 2001 and the subsequent anthrax incident highlighted vulnerabilities in many businesses and government agencies. Like other organizations, IRS must remain vigilant to all opportunities to enhance employee safety and the security of its information systems and taxpayer data.

IRS is responsible for maintaining the privacy of tax information for about 130 million taxpayers. To enhance security, TIGTA believes it is critical that IRS understand the techniques used by those who could benefit from unlawfully accessing taxpayer information. Consequently, TIGTA asked a contractor to test the security access to IRS’ systems, by attempting to “hack” into IRS systems both from the Internet and when given internal access. The contractor found no security vulnerabilities that could be exploited at the Internet gateways; but, when the contractor had access to the internal computers, it found numerous security weaknesses that needed corrections. Recommendations were made to correct the specific weaknesses identified with which IRS management agreed. Report Reference No. 2003-20-082

IRS requires both its employees and its contractors to have background investigations to ensure their honesty and integrity. A TIGTA audit showed that IRS had assured that 93% of the employee background investigations and 96% of the re-investigations were completed or in-process at the time of TIGTA’s review.

However, contractor employee background investigations were not properly controlled, and not all background investigations were requested when required. Similarly, identification badges were issued without required background investigation documentation, allowing more than 500 contractor employees to have access to IRS’ New Carrollton, Maryland building without background checks.

TIGTA recommended that follow-up actions should be taken to initiate or complete background investigations on the employees without current, completed investigations; management reports should be properly used to monitor timely completion of future background investigations; database information should be complete and accurate; and a consolidated or integrated computer system that meets the needs of all stakeholders should be implemented. IRS management agreed with the recommendations presented in this report and is planning corrective actions. Report Reference No. 2003-20-049

In other physical security work, TIGTA auditors and investigators reviewed IRS’ Guard Service Contract as a joint initiative because of heightened security concerns after the events of September 11, 2001. Validations completed through October 2002 did not identify any issues related to the current employment of security guards with criminal convictions or immigration violations, but TIGTA is continuing to perform additional verifications and follow-up with the appropriate government agencies.

However, increased oversight is needed to ensure the contractor’s compliance with all contract terms and conditions, particularly those concerning licensing. The contractor operated for periods of time in two Washington, D.C. metropolitan area offices without all company and individual security guard licensing and certifications required by the contract and by law. IRS paid approximately $4.7 million during the time the contractor was in violation of the contract. Also, security guards at one location were in effect carrying weapons without legal authority to do so. TIGTA auditors recommended that additional monitoring should be performed to ensure the contractor complies with all contract terms and conditions; and, all remedies regarding appropriate legal action should be coordinated with the United States Attorney’s Office and with TIGTA’s investigative function. In addition, TIGTA recommended changes should be considered to the award fee plan to make compliance with all contract terms and conditions a prerequisite for award fee eligibility. IRS management agreed with the recommendations and is taking corrective actions. Report Reference No. 2003-10-076

Strategic Goal: Improving the Economy, Efficiency
and Effectiveness of Tax Administration

Page 15

Improving government performance is an overall goal of the current Administration. In particular, a clean financial audit is a basic prescription for any well-managed organization. Without accurate and timely financial information, it is not possible to accomplish the President’s Management Agendato secure the best performance and highest measure of accountability for the American people.

PERFORMANCE In May 2002, IRS completed a competitive sourcing feasibility study of

MANAGEMENT the print operation and computer support function, which recommended an Office of Management and Budget Circular A-76 competition. As part of the 1997 Service Center Mainframe Consolidation (SCMC) Business Case, IRS standardized the organizational structure of the Information Systems Division, which includes the print operation and computer support function at the IRS’ 10 campuses;⁴ standardized mission statements, roles, and responsibilities; and proposed significant staffing reductions. Since then, management has frequently evaluated and modified the organizational structure to accomplish program objectives.

However, TIGTA recommended further management actions to increase electronic dissemination of internal reports and improve performance measures, which could result in additional cost savings and increased productivity. IRS management agreed with the recommendations and is taking corrective action. Report Reference No. 2003-20-035

FINANCIAL IRS is authorized to collect a federal employer tax to fund the

MANAGEMENT Unemployment Trust Fund (UTF). The Secretary of Treasury pays from the UTF the amount estimated to be expended by the Department of the Treasury, including IRS (which accounts for approximately 99% of the expenses), for this collection service. TIGTA’s review of IRS’ UTF reporting for FY 1999 through the third quarter of FY 2002 showed that reported administrative expenses could not be supported or replicated, and that required reports were not always properly prepared or timely submitted. As a result, TIGTA was not able to substantiate the reported expenses or make any assurances that they were accurate, complete, or consistent.

In addition, IRS’ recently adopted method of reporting the expenses, based on a ratio of revenue collected, might not be appropriate.

⁴ IRS’ 10 campuses process paper and electronic submissions, correct errors, and forward data to the computing centers for analysis and posting to taxpayer accounts.

IRS applied a complexity adjustment to compensate for the significant increase (from $240 million to over $2.8 billion) in the charges to the Federal Old Age and Survivors Insurance (FOASI) Trust Fund, and thus brought the reportable FOASI amount back to what had been historically reported. This complexity adjustment did not have any supporting analysis or an accounting of the true costs to IRS to administer the trust fund taxes. Instead, TIGTA believes that data may exist that could be used to more accurately estimate these expenses.

TIGTA recommended that written procedures be developed to ensure the most reasonable and timely means of identifying and reporting all expenses, and that controls be established to ensure that any amounts are reviewed and approved by a senior level IRS executive. Also, IRS needs to ensure that the ability to record and report these expenses is properly implemented as envisioned in the Integrated Financial System development plan. IRS management agreed with the recommendations and is taking corrective action. Report Reference No. 2003-10-054

FEDERALFINANCIAL The Federal Financial Management Improvemen Act of 1996 (FFMIA)

t⁵MANAGEMENT requires agencies to maintain financial management systems that comply IMPROVEMENTACT substantially with federal requirements. If a determination is made that OF1996 an agency does not comply with these requirements, a remediation plan

should be established with resources, remedies, and intermediate target

dates to bring the agency into substantial compliance. FFMIA further

mandates that IGs report to Congress instances and reasons when an

agency has not met intermediate target dates.

TIGTA reviewed IRS’ remediation plan and did not identify any instances where the IRS did not meet established target dates. However, 18 intermediate target dates were extended with acceptable reasons for actions scheduled for completion in Calendar Year (CY) 2002. The IRS properly obtained Office of Management and Budget concurrence for remedial actions with target dates that extend longer than three years from the initial reporting of the financial weakness. In addition, the IRS adequately addressed General Accounting Office recommendations meeting FFMIA criteria in the remediation plan.

TIGTA did identify, however, that some resources included in the remediation plan were not verifiable to supporting documentation and that functional areas were not consistently reporting resources shown in the remediation plan. Accordingly, TIGTA recommended that procedures be established that include a process for verifying the resources included

⁵ Federal Financial Management Improvement Act of 1996, 31 U.S.C. § 3512.

Strategic Goal: Improving the Economy, Efficiency
and Effectiveness of Tax Administration

Page 17

in the IRS’ FFMIA remediation plan and that provide for consistent reporting of such resources by the responsible functions. IRS management agreed with the recommendation and has taken corrective action. Report Reference No. 2003-10-079

CUSTOMER SERVICE, RETURNS PROCESSING AND THE FILING SEASON

Providing top quality service to every taxpayer in every transaction is integral to IRS’ modernization plans. There are many ways in which IRS provides customer service. The most direct include walk-in service, toll-free telephone service, access through the IRS’ Internet (Digital Daily), written communications to taxpayers, and accurate and timely tax refunds. Each of these services affects a taxpayer’s ability and desire to voluntarily comply with the tax laws. The tax return filing season also impacts every American taxpayer and is, therefore, always a highly critical program for IRS. In addition to providing customer service to American taxpayers, IRS must coordinate tax law changes, programs, activities, and resources to effectively plan and manage each filing season.

TAXPAYER Throughout the past year, TIGTA has been reviewing the performance of ASSISTANCE the Taxpayer Assistance Centers (TAC) in providing answers to taxpayers’ CENTERS questions via walk-in service, based on concerns expressed by

Senator Byron Dorgan (D-North Dakota), then Chairman of the

Subcommittee on Treasury and General Government. While IRS has

made some progress in improving the quality of service at TACs,

additional improvements are needed. During July through December

2002, auditors asked 332 tax law questions in 83 TACs. TIGTA reported

that IRS employees incorrectly answered 92 questions (28%) and

referred the auditor to IRS publications to conduct his or her own

research for 40 questions (12%). TIGTA has not made any

recommendations thus far, but will be issuing a roll-up report that will

include recommendations to help improve the accuracy rate. Also, in

October 2002, IRS began its own internal quality review visits to TACs to

anonymously ask tax law questions.

TIGTA auditors generally had positive experiences when they visited TACs and found that the employees were both professional and courteous, providing service within an hour. However, TIGTA auditors found in many instances that the TAC office hours and addresses obtained from IRS toll-free telephones and its internet site did not always match the information posted at the TAC. Report Reference Numbers 2003-40-023 ; 2003-40-024 ; 2003-40-040 ; and 2003-40-072

Strategic Goal: Improving the Economy, Efficiency
and Effectiveness of Tax Administration

Page 18 TOLL-FREE TELEPHONE SYSTEM

TAX RELIEF REFUNDS FOR VICTIMS OF TERRORIST ATTACKS

During the 2002 Filing Season,⁶taxpayers called IRS almost 76.5 million times. While IRS answered 1.6 million more total calls during the 2002 Filing Season than in the prior year, the additional calls answered were through automated services. During the 2002 Filing Season, the Customer Service Representatives (CSR) actually handled 1.73 million fewer calls than in the comparable 2001 period, and the number of calls answered by CSRs was 2.6 million less than IRS planned, thereby increasing the average cost per call answered, in salary alone, by $0.57. This occurred even though IRS received 9 million more calls than in 2001. IRS cited its reallocation of resources to work paper inventory, an increase in transferred calls, and high CSR availability rates as the reasons why the “CSR calls answered” goal was not met. Finally, IRS’ toll-free system is designed to provide callers with automated assistance or, when desired, access to a CSR. IRS’ critical measure for this access is based on the percentage of callers who reach a CSR after selecting that option. However, the measure omits calls where the taxpayer hung up before choosing to enter the call queue to speak with a CSR or before completing an automated service.

IRS needs to identify methods to reduce the number of transfers by determining whether there are problems in the routing scripts and whether the CSR call specialization approach needs some modification; identify ways to further refine the forecast accuracy by consulting call center industry experts; achieve greater flexibility to move CSRs from applications with low demand to applications with higher demand; and, for the current CSR Level of Service measure, develop criteria to distinguish between those taxpayers who call and hang up because they clearly did not want a service and those who disconnect for other reasons. IRS management generally agreed with the recommendations and has planned or taken corrective actions. Report Reference No. 2003-30-001

TIGTA reported that IRS had implemented special procedures to process tax relief refunds for tax returns filed for deceased victims of the September 11, 2001 anthrax and Oklahoma City terrorist attacks. The program for processing these returns was referred to as the Killed in Terrorist Action (KITA) Program. IRS expected the processing of these highly sensitive KITA returns to be expedited at all times.

⁶The Filing Season is the period from January through mid-April each year during which most individual income tax returns are filed.

Strategic Goal: Improving the Economy, Efficiency
and Effectiveness of Tax Administration

Page 19 ELECTRONIC RETURN ORIGINATORS

The KITA Project Office identified approximately 2,900 KITA victims. As of October 31, 2002, IRS had received approximately 4,500 returns for 2,400 victims to be processed in the KITA program. Based on information submitted by victims’ families, IRS employees correctly computed tax relief amounts for these returns and issued manual refunds to speed relief to victims’ families. However, IRS did not issue 40% of the tax relief refunds in TIGTA’s sample within the time period set as a goal by KITA program management, or within a time period that TIGTA would consider to be expedited. Also, IRS did not always notify victims’ families of the processing results for their tax relief requests. Based on TIGTA’s concerns about processing delays and its suggestions to both clarify expected processing time periods and notify victims’ families of processing results, KITA program management took actions to improve KITA processing during this review.

In addition, IRS did not always identify victims’ accounts as KITA accounts on its computer system, and did not always process victims’ returns through the KITA program. TIGTA recommended that the KITA project office compare its list of victims to its list of KITA-processed returns and research the accounts with no KITA-processed returns. For the accounts researched, the KITA indicator should be input to those accounts identified as needing it. In addition, for those accounts researched, any returns filed where tax relief was not granted should be corrected. IRS management agreed with the recommendations and is taking corrective action. Report Reference No. 2003-40-080

Congress has mandated that IRS significantly increase the number of taxpayers who file their returns electronically, with a goal of having at least 80% of all such returns filed electronically by CY 2007. At present, the majority of tax returns filed in IRS’ electronic filing (e-file) program are through Authorized IRS e-fileproviders. An Electronic Return Originator (ERO) is the authorized IRS e-fileprovider who originates the electronic submission of a return to IRS. More than 119,000 EROs are authorized to participate in IRS’ e-i

fleprogram.

TIGTA reported that IRS’ ERO monitoring program could better evaluate, document, and ensure the compliance of EROs. Specifically, IRS has neither established a performance measure to determine the program’s impact on ERO compliance, implemented a planning process that provides for timely training and use of effective case building information, nor developed a risk-based methodology for selecting monitoring visits. Further, program coordinators and monitors have difficulty determining the level of infractions and are not ensuring case documentation is complete.

SAFEGUARDING TAXPAYER INFORMATION

TIGTA recommended that a meaningful performance goal and measurement for the ERO monitoring program be established; ensure follow-up visitations are made; establish a planning process to ensure timely training and case preparation; and enhance the use of the database of EROs. Also, IRS needs to better determine the mix of random and mandatory ERO visits; develop more detailed guidance on sanctions; and improve monitoring case documentation. IRS management agreed with the majority of the recommendations and has taken full or partial corrective actions, but disagreed with the recommendation to establish a goal and method of measuring program effectiveness. Management stated that while the results on specific cases, types of cases or trends could be tracked and measured, it would be impossible to measure the effect on voluntary compliance for all authorized IRS e-fileproviders. TIGTA is concerned about IRS’ decision not to establish a goal and method for measuring program effectiveness in improving ERO compliance. The President’s Managemen Agenda

t includes a requirement to link performance with the budgeting process. Further, the Government Performance and Results Act, the General Accounting Office’s Sandards for Internal Control in the Federal

t Government, and the Office of Management and Budget’s Circular A123,

-Management Accountability and Control, ⁷all discuss the need to set performance goals and report annually on actual performance compared to goals. TIGTA recognizes that indicators may be difficult to develop, but believes the benefits will far outweigh the costs in linking performance with the budget process, and in allocating resources where they will have the most impact. Report Reference No. 2003-30-039

Appendix III – Statistical Reports – Others

Audit Reports With Significant Unimplemented Corrective Actions

The Inspector General Act of 1978 requires identification of significant recommendations described in previous semiannual reports on which corrective actions have not been completed. The following list is based on information from the IRS Office of Management Control’s automated tracking system maintained by Treasury management officials.

093602	April 1999		The Internal Revenue Service Needs To Improve Treatment of Taxpayers During Office Audits
		04/15/03	F-1, R-3, P-2. Require a separation of duties among auditors who identify Midwest Automated Compliance System (MACS) returns with potential tax changes, auditors who select MACS returns to be audited, and auditors who conduct the examinations.
		10/01/05	F-1, R-4, P-2. Ensure that all MACS data discs forwarded from the MACS Development Center to district offices are properly accounted for and secured.
		05/15/03	F-2, R-4, P-1. Clarify the Internal Revenue Manual to provide specific guidance for conducting correspondence audits in district office settings.

093009	June 1999		Review of the Electronic Fraud Detection System
		01/01/04 01/01/04 01/01/04 01/01/04	F-2, R-1, P-3. Program the Electronic Fraud Detection System (EFDS) application audit trail to record all accesses to taxpayer data (including access to prior year records, records assigned to specific tax examiners, and records assigned to other service center sites). F-2, R-2, P-3. Design an audit trail application to record access to taxpayer data through secondary sources such as the database administrator, system query tools, or contract vendors. F-3, R-1, P-3. The EFDS Project Office should work with EFDS developers to ensure that the following programming changes are made: The EFDS application audit reports should be changed to include a date range field and service center site field where applicable. F-3, R-4, P-3. An assessment should be completed and take into consideration the audit trail issues referred to in the Memorandum
			of Understanding to improve the usefulness of the EFDS application audit trail.
1999-20-063	August 1999		The General Controls Environment Over the Internal Revenue Service’s Unisys 2200 Systems Can Be Improved
		05/01/03	F-2, R-1, P-1. Standardize control settings for files common to the Unisys 2200 production mainframes.
2000-30-015	December 1999		Consolidated Report on Opportunities for the Internal Revenue Service to Improve Service to Business Taxpayers
		01/01/04	F-2, R-1, P-1. Expand the current Federal Tax Deposits alert reengineering effort to re-evaluate the cost effectiveness of the Program.
2000-10-033	February 2000		The Internal Revenue Service Can Further Reduce the Burden on Taxpayers Who Disagree With Proposed Assessments
		06/15/03	F-1, R-1, P-1. Send letters of proposed changes (30-Day Report) via certified mail, with return receipt requested, when taxpayers do not respond to the initial contact letter.

2000-30-059	March 2000		The Internal Revenue Service Can Improve the Estate Tax Collection Process
		07/15/03	F-1, R-1, P-1. Assign the responsibility for determining whether a bond or tax lien should be secured to the service center
			employees who process the installment agreements, instead of to the district offices.
		07/01/03 11/01/03	F-2, R-2, P-1. Develop procedures to periodically reconcile tax liens on the Automated Lien System (ALS) with information shown on the taxpayer accounts. F-2, R-3, P-1. Clarify procedures to employees that all estate tax liens should be recorded on the ALS.
		03/15/04	F-3, R-4, P-1. Coordinate to develop a procedure to identify accounts with multiple assessments and collection statute dates to ensure partial abatements occur when the earliest Collection Statute Expiration Date is reached.
2000-20-094	June 2000		A Comprehensive Program for Preventing and Detecting Computer Viruses Is Needed
		06/01/03 01/02/04 01/01/04	F-2, R-1, P-1. Develop and implement IRS-wide procedures detailing the frequency and steps to be followed for reliably updating anti-virus software on both networked and portable notebook computers. F-2, R-2, P-1. Establish controls for ensuring all updates have been successfully accomplished. F-3, R-1, P-1. Develop a system for gathering information to help analyze and monitor the effectiveness of the program’s virus detection and prevention activities.
2000-30-120	August 2000		Expanding the Electronic Tax Law Assistance Program
		04/15/04	F-1, R-1, P-1. To meet its Electronic Tax Administration goals, the IRS needs to redesign the Electronic Tax Law Assistance (ETLA) program to leverage technology that will provide enhanced access to tax information, maximize efficiency, and improve electronic customer service.
		10/01/03	F-2, R-1, P-1. To effectively administer the rapid growth of taxpayer demand, economically use resources, and design future enhancements of the program, IRS needs to fully commit to the ETLA program by converting it from a long-term research project to a fully supported independent function.

2000-30-130 September 2000

2000-30-154 September 2000

2000-30-162 September 2000

2001-30-014 November 2000

10/01/03

06/01/03

01/01/04

07/01/03

P-1: 07/01/03 P-2: 08/15/03

12/15/03

Opportunities Exist to Enhance the International Field Assistance Specialization Program

F-2, R-1, P-1. Improve the management information system by linking the International Field Assistance Specialization Program (IFASP) indicator to specific issues listed in the International Case Management System. F-2, R-2, P-2. Ensure international examiners gain greater access to the IRS’ Intranet so that the IFASP can accumulate and disseminate more information electronically, including an electronic referral form for IFASP assistance.

Significant Improvements Are Needed in Processing Gift Tax Payments and Associated Extensions to File

F-1, R-1, P-1. Require that all balance due notices generated for gift tax accounts be reviewed. Tax examiners should be instructed to review the taxpayers’ corresponding individual income tax and gift tax accounts to determine if the taxpayers’ gift tax payments and extensions were correctly processed.

The Internal Revenue Service Needs to Better Address Bankruptcy Automatic Stay Violations

F-1, R-2, P-1. Provide additional computer programming enhancements to improve the value of litigation transcripts. F-2, R-1, P-1, P-2. Request that the Automated Insolvency System be reprogrammed so that the actual receipt date of the case can be input into the system to provide management with more accurate data on timeliness of input of new case information. F-2, R-2, P-1, P-2. Ensure that all employees review the Potentially Invalid Taxpayer report and resolve all cases promptly to ensure timely posting of the bankruptcy to the taxpayer’s account.

The Internal Revenue Service Does Not Effectively Use the Trust Fund Recovery Penalty as a Collection Enforcement Tool

F-1, R-5, P-1. Make programming changes to the Automated Trust Fund Recovery System to ensure that delinquent tax returns are addressed when making trust fund recovery penalty calculations.

2001-10-027 January 2001

2001-20-043 February 2001

2001-30-052 March 2001

2001-30-099 June 2001

	Improved Case Monitoring and Taxpayer Awareness Activities Can Enhance the Effectiveness of the Tax
	Practitioner Disciplinary Proceedings Program
03/31/03	F-1, R-1, P-1. Upgrade the automated case management system to provide more timely and accurate data on case activities and the use of program resources.
	Electronic Signature Initiatives Could Be Better Def ned and Evaluated i
10/15/03 11/15/03	F-1, R-1, P-1. Finalize IRS requirements for the use of Personal Identification Numbers as alternative signatures for electronically filed returns based on evolving guidance and the draft IRS authentication security policy and implementation guide. F-1, R-2, P-1. Ensure that all operational alternative signature initiatives comply with the requirements.
	Program Improvements Are Needed to Encourage Taxpayer Compliance in Reporting Foreign Sourced Income
01/01/04 01/01/04 P-1: 01/01/07 P-2: 01/01/07	F-1, R-1, P-1. Ensure the prior recommendations are implemented. Establishing a formal program with goals, objectives, processes and measures could help ensure that sufficient management attention is devoted to improving the use of the Routine Exchange of Information Program for compliance. F-2, R-1, P-1. Identify the highest risk foreign sourced income documents and use them to coordinate with tax treaty partners to positively identify the U.S. taxpayers involved. F-3, R-1, P-1, P-2. Improve systems that process data the IRS receives on foreign sourced income.
	Management Advisory Report: The Internal Revenue Service Could Reduce the Number of Business Tax Returns
	Destroyed Because of Missing Information
P-2: 07/01/03 P-3: 07/01/03	F-1, R-1, P-2, P-3. Make necessary modifications to tax forms and instructions to ensure taxpayers understand that their names, addresses, and taxpayer identification numbers are required on both their tax forms and payment vouchers.

2001-10-103	August		Improvements Are Needed to Comply With Legal and
	2001		Procedural Requirements for Collection Statute Extensions
			and Installment Agreements
		05/15/03	F-2, R-1, P-1. Develop a comprehensive plan for implementing
			the provisions of RRA 98 § 3461(c).
		07/01/03	F-4, R-1, P-1. Provide training to applicable IRS employees and
			managers on the requirements and the method to compute
			installment agreements and collection statute extensions,
			consistent with the law and IRS policy and procedures.
2001-20-146	August		The Internal Revenue Service Is Making Progress, But Is
	2001		Not Yet in Full Compliance With the Requirements of the
			Clinger-Cohen Act
		08/01/03	F-1, R-1, P-1. Prepare an overall strategy, plan and schedule to
			bring the IRS in full compliance with the Clinger-Cohen Act.
2001-30-132	August		Significant Tax Revenue May Be Lost Due to Inaccurate
	2001		Reporting of Taxpayer Identif cation Numbers for i
			Independent Contractors
		07/01/03	F-2, R-1, P-1. Explore opportunities to supplement the IRS’ future
			Internet-based Taxpayer Identification Number (TIN) confirmation
			program with an automated telephone-based TIN confirmation
			process for those payers who do not have Internet access.
2001-10-147	September		Compliance with Certain Taxpayer Rights Provisions
	2001		Contained in the Internal Revenue Service Restructuring
			and Reform Act of 1998 Could Be Improved
		07/01/03	F-1, R-2, P-1. Complete the request for programming changes for
			the Integrated Data Retrieval System, Automated Collection
			System, and Integrated Collection System to print detailed interest
			and penalty notices.
2002-30-042	December		The Internal Revenue Service Has Made Some Progress,
	2001		but Significant Improvements Are Still Needed to Reduce
			Errors in Manual Interest Calculations
		05/01/03	F-1, R-2, P-1. Establish a national quality review process that
			includes all restricted interest cases.

2002-10-009	January 2002		GPRA: Criminal Investigation Can Improve Its Performance Measures to Better Account for Its Results
		10/01/03	F-2, R-1, P-1. Establish a process by which the Criminal Investigation Management Information System data will be verified and validated.
		03/01/03	F-2, R-2, P-1. Ensure that audit trail requirements are met and documented, and that an Information System Security Officer is assigned to review audit trail data.
2002-30-050	February 2002		Significant Efforts Have Been Made to Combat Abusive Trusts, but Additional Improvements Are Needed to Ensure Fairness and Compliance Objectives Are Achieved
		03/01/03	F-2, R-1, P-1. Ensure the Abusive Trust Program consistently applies the accuracy-related penalty in accordance with IRS policy, in order to help ensure fair and equitable taxpayer
			treatment.
		02/01/03 10/01/03	F-2, R-2, P-1. Provide examiners with formal guidance on the appropriate application of the accuracy-related penalty, in order to help ensure its consistent application. F-4, R-1, P-1. Develop a system to capture the results of U.S. Income Tax Returns for Estates and Trusts(Form 1041) examinations that would provide management with information on emerging abusive trust issues, further noncompliance and allocate resources to maximize audit results.
2002-30-062	March		The Internal Revenue Service Continues to Owe Millions of
	2002		Dollars in Interest to Taxpayers with Frozen Refunds
		01/01/04	F-1, R-1, P-1. Modify the IRS’ computer system to systemically release the newly established Million Dollar Freeze for credit balances that fall below the $10 million threshold.
		P-1: 01/01/04 P-2: 01/01/04	F-1, R-2, P-1, P-2. Establish indicators on key computer screens and generate periodic notices as alerts for employees to review accounts with Million Dollar Freeze and take appropriate resolution actions.
		P-1: 03/01/04 P-2: 03/15/04	F-2, R-1, P-1, P-2. Coordinate efforts to provide updated training for employees that manually initiate refunds.

2002-10-078	March 2002		The Internal Revenue Service’s Levy Process Can Be Improved to Ensure Compliance With the Internal Revenue Code
		07/01/03 07/01/03 07/01/03	F-1, R-1, P-2. Take additional actions to ensure that open levies are identified and released as appropriate when Automated Collection System (ACS) personnel close a case Currently Not Collectible (CNC) Hardship. F-1, R-2, P-1. Ensure that revenue officers review available information to properly identify levies issued by ACS personnel and ensure the levies are appropriately released prior to closing a case CNC (Hardship). F-1, R-3, P-2. Before approving a CNC (Hardship) case closure, the case files should be reviewed to ensure levies are released, if
		07/01/03	appropriate, in compliance with the Internal Revenue Code. The revenue officer should document in the case history the reason why a levy was closed rather than released. F-2, R-2, P-1. Ensure that a hardship determination is made before approving cases closed CNC.
2002-30-125	July 2002		The Internal Revenue Service Does Not Always Address Subchapter S Corporation Officer Compensation During Examinations
		06/15/03 02/01/04	F-1, R-1, P-1. Provide technical guidance and resources (such as software) to field personnel to aid in determining reasonable officer compensation. F-2, R-1, P-1. Submit a Request for Information Services (RIS) that would require the corporate distributions on the Schedule M-2 to be input to the IRS’ computer system during returns processing, and therefore available to the
		03/01/03 02/01/04	IRS Midwest Automated Compliance System (MACS) database. F-3, R-1, P-1. Submit a RIS to existing (and/or future) information systems (such as Examination Operational Database) to identify officer compensation-related adjustment assessments made to S Corporation employment tax accounts. F-4, R-1, P-1. Establish consistent materials for educating and informing taxpayers and representatives of their S Corporation officer compensation tax obligations.

2002-30-141	July 2002		The Internal Revenue Service Successfully Processed Schedules K-1 for Its Matching Program, However, Tax Form Changes Would Reduce Unnecessary Notices to Taxpayers
		10/01/03	F-3, R-1, P-1. Make changes to the U.S. Individual Income Tax Return, Supplemental Income and Loss (Form 1040, Schedule E) as recommended in the District Office Research and Analysis study. Consideration should be given to classifying and reporting pass through income to facilitate easier comparisons to Schedules K-1 and to make the matching program more effective and less subject to extensive manual screening.
2002-40-144	August 2002		Computers Used to Provide Free Tax Help and That Contain Taxpayer Information Cannot Be Accounted For
		07/15/03 06/15/03	F-1, R-1, P-1. Perform a physical inventory of all computers included in the IRS’ Volunteer Income Tax Assistance/Tax Counseling for the Elderly (VITA/TCE) Program. This inventory should include verification of computers presently recorded on the Information Technology Asset Management System (ITAMS) as well as identification of computers in the VITA/TCE Program that are not yet recorded on ITAMS. F-1, R-4, P-1. Develop, distribute, and implement procedures to ensure that only authorized software is loaded onto computers used in the IRS’ VITA/TCE Program. Included in these procedures should be an immediate assessment of computers previously provided to volunteers to ensure that unauthorized software, if identified, is removed.
		05/15/03 05/15/03	F-1, R-5, P-1. Ensure that prior to loading software not specifically used in tax return preparation a written opinion from IRS Counsel is obtained to ensure that the IRS has the legal authority to provide the software. F-1, R-6, P-1. In the long term, pursue legislative changes that would allow IRS to transfer ownership of the computers to the VITA/TCE organizations.

2002-30-156	September		The Internal Revenue Service Does Not Penalize
	2002		Employers that File Wage and Tax Statements with
			Inaccurate Social Security Numbers
		07/01/04	F-1, R-1, P-1.	Ensure that the IRS initiate, as proposed in their
			response to our memorandum dated February 1, 2002, a regularly
			scheduled program for proposing penalties for Wage and Tax
			Statements (Forms W-2) with inaccurate name/Social Security
			Number combinations.
		07/15/03	F-1, R-2, P-1.	Prepare a document describing the objective of the
			joint IRS/Social Security Administration program for the most
			egregious non-compliant employers, as well as the tasks,
			responsibilities, and agreements that are needed between the two
			agencies to meet the objective.
2002-30-186	September		The Internal Revenue Service Needs to Simplify Fil ng i
	2002		Requirements and Clarify Processing Procedures for Small
			Business Corporate Returns
		P-1: 01/15/04	F-1, R-1, P-1, P-2.		Simplify the process of filing election forms and
		P-2: 01/15/04	US. Income Tax Returns for an S Corporation(Form 1120S) for.
			new filers by determining if there are alternatives to make it easier
			for first-time filers to be granted elections and file their Forms
			1120S, and by considering implementing alternatives and seeking
			modification of the legal requirements, as necessary.
		P-1: 01/15/04	F-1, R-2, P-1, P-2.		Develop procedures that would improve and
		P-2: 01/15/04	simplify the process for approving, recording, and controlling
			elections and the related notification process to make it easier for
			taxpayers to file their Forms 1120S.
		01/15/04	F-2, R-1, P-1.	Establish procedures for ensuring that IRS records
			accurately reflect the filing of Forms 1120S once the IRS
			subsequently verifies that an election was granted. Specific
			procedures should be developed for converting the Forms 1120
			back to the originally intended Forms 1120S.
		01/15/04	F-2, R-2, P-1.	Clarify Internal Revenue Manual procedures and
			assign responsibility for determining and assessing the correct
			taxes and issuing statutory notices of deficiency for small business
			corporate returns that could not be processed because the IRS
			could not verify that valid elections were filed.

2002-10-187	September 2002		The New Suspension of Interest Provision Is Not Always Calculated Correctly
		06/01/03 06/01/03	F-1, R-1, P-1. Create a systemic reminder when tax audits are completed that would prompt employees and managers to consider whether the suspension of interest provision applies. F-1, R-2, P-1. Incorporate review requirements for the suspension of interest provision in the Examination Quality Review Process
		06/01/03 06/01/03	system. F-2, R-1, P-1. Identify all taxpayers with under assessed interest caused by the original Master File computer programming, regardless of whether or not the interest had been reestablished on the accounts, and zero out any under assessed amounts to prevent burden on future disaster relief taxpayers or other taxpayers in special military conditions. F-2, R-2, P-1. Identify disaster relief taxpayers and refund the amounts that were automatically collected on the under assessed interest.
		01/01/04 01/01/04 01/01/04	F-3, R-1, P-1. Submit a request for information services that will change the Master File computer programming for this 1-day discrepancy when calculating suspension of interest. F-3, R-2, P-1. Determine the feasibility of an earlier anticipated operational date of the Master File computer programming modification involving weekend and holidays when calculating suspension of interest. F-3, R-3, P-1. Identify taxpayers’ accounts for Tax Years 1998 and 1999 with disallowed Earned Income Tax Credit amounts that
			qualified for suspension of interest and reduce the amount of over assessed interest on these accounts.
2002-10-196	September 2002		Criminal Investigation’s Use of Confidential Funds for Undercover Operations Is Appropriate; However, Certain Aspects of Undercover Operations Need Improvement
		01/01/04	F-1, R-2, P-1. Develop a methodology for determining when IRS employees access tax identifying numbers that are associated with undercover identities and entities.
		10/01/03	F-4, R-1, P-1. Reemphasize the procedures to ensure that operational and financial reviews are timely performed as required, and prescribe the level of detail to be recorded in storefront logs to enhance the usefulness of this document as a monitoring and evaluative tool.

Appendix IV – Audit Products

Audit Products : October 1, 2002 – March 31, 2003

February, 2003

• 2003-0T-096 Hearing Before the House Appropriations Transportation, Treasury, and Independent Agencies Subcommittee

October, 2002 October, 2002

•	2003-20-005	Many Advances Made, But Additional Emphasis Is Needed on Key Initiatives in the Security Services Organization
•	2003-40-002	The Internal Revenue Service Needs to Improve Oversight of Remittance Processing Operations
•	2003-20-004	tPhysical Security Can Be Improved to Maximize Pro ection Against Unauthorized Access and Questionable Mail
•	2003-30-001	rSignificant Efforts Have Been Made to P ovide Taxpayers Better Access to the Toll-Free Telephone System, but Additional Improvements Are Needed
•	2003-20-003	Continued Emphasis Is Needed to Establish a Mature Intrusion Detection System
•	2003-20-019	Computer Security Vulnerabilities Vary Among Internal Revenue Service Offices
•	2003-40-006	Improvements to the Questionable Form W-4 Program Are Needed to Determine Program Impact on Taxpayer Compliance
•	2003-1C-008	TIRNO-95-D-00062 Incurred Costs Audit for Fiscal Year 2000

• 2003-1C-009

• 2003-1C-010

• 2003-1C-011

• 2003-1C-012

• 2003-1C-013

• 2003-1C-015

• 2003-1C-016

• 2003-1C-017

• 2003-20-007

• 2003-40-014

November, 2002

• 2003-20-018

• 2003-30-020

• 2003-40-025

• 2003-40-023

• 2003-40-024

TIRNO-95-D-0067, TIRNO-95-D-00048, and TIRNO 98-R-00001

-Report on Examination of Direct and Indirect Costs and Rates for Fiscal Year Ended December 24, 1999

-TIRNO-95-D-00066 and TIRNO-00-D 00020 Incurred Cost Audit for Fiscal Years Ended June 30, 2000 and 2001

TIRNO-95-D-00066 Cumulative Allowable Cost Worksheet Fiscal Years Ended June 30, 1998 and 1999

f rI ---rAudit o Final Vouche T RNO 95 D 00057 Task O der Number0008

,rAudit of Final Voucher TIRNO-95-D-00057 Task Orde Number 0009

,rAudit of Final Voucher TIRNO-95-D-00057 Task Orde Number 0015

,rAudit of Final Voucher TIRNO-95-D-00057 Task Orde Number 0021

,rAudit of Final Voucher TIRNO-95-D-00057 Task Orde Number 0023

tAnalysis of Business Systems Moderniza ion Cost, Schedule, and Functionality Performance

Response Accuracy Is Higher for the Internet Program Than for Other Options Available to Taxpayers Needing Assistance With Tax Law Questions (Taxpayer Burden: 16% no-response rate for taxp ayers’ qu esti ons ask e d via the Inter n et.)

Improvements in the Customer Account Data Engine Pilot Plan Need to Be Considered to Help Ensure the Pilot’s Success

Management Oversight of the Acceptance Agent Program Is Needed to Assure that Individual Taxpayer Identification Numbers Are Properly Issued

Taxpayer Rights to Appeal Federal Tax Liens Were Protected

Trends in Customer Service in the Taxpayer Assistance Centers Show Procedural and Training Causes for Inaccurate Answers to Tax Law Questions (Fund s Put to Better Use: $277,0 00; Taxpayer Burden: 126 taxpay ers c o ul d have receiv ed incorrect r e spon ses at Ta xpayer A s sistan ce Cent ers.)

tTaxpayers That Visited Taxpayer Assis ance Centers in July and August 2002 Received Incorrect Answers to Some Tax Law Questions

December, 2002 January, 2003

•	2003-1C-027	TIRNO-95-D-00059 Incurred Costs Audit for Fiscal Year 1999
•	2003-1C-028	General and Administrative Rate Application Submission
•	2003-1C-029	Audit of Final Voucher TIRNO-95-D-00057 Task Order Number
		IR-96-NO-1014
•	2003-1C-030	Audit of Final Voucher TIRNO-95-D-00057, Task Order Number
		IR-96-NO-0785
•	2003-1C-032	Audit of Final Voucher TIRNO-95-D-00057, Task Order Number
		IR-96-NO-3238
•	2003-1C-033	Audit of Final Voucher TIRNO-95-D-00057, Task Order Number
		IR-96-NO-4701
•	2003-30-021	Continued Progress Is Needed to Improve the Timeliness of Providing Legal Advice in Large and Mid-Size Business Division Examinations
•	2003-20-026	tThe Internal Revenue Service Has Made Substan ial Progress in Its Business Continuity Program, but Continued Efforts Are Needed
•	2003-40-034	t ti The Internal Revenue Service Successfully Planned for and Execu ed the Rate Reduc on Credit Recovery Program
•	2003-40-037	Not All Available Information Was Considered When Examining Tax Returns at the Austin Campus During the Fiscal Year 2000 Earned Income Credit Initiative (Increased Revenue: $10,623; Taxpayer Rig h ts and Entitl ement s : thre e taxp ayer s i m pacted by the loss of Social Security quarter credit s.)
•	2003-40-022	tImprovements Are Needed to Prevent the Poten ial Disclosure of Confidential Taxpayer Information (Taxp a yer Privacy and Security: 1.1 million Taxpayer Identification Numbers (TIN) improperly transmitted an d 210,017 TI Ns tran smitted to private contrac t or s whose f a cilities were not in spected to in sure adequat e protection .)
•	2003-1C-036	Audit of Final Vouchers TIRNO-95-D-00065, Task Order Numbers 0001 and 0021
•	2003-30-038	Business Tax Returns Were Successfully Processed in Two Locations in 2002; However, Taxpayers Need More Information on Where to File (Funds P u t to Better Use: $1.19 million.)
•	2003-20-035	Additional Cost Savings and Increased Productivity in the Print Operation and Computer Support Function Can Be Achieved at the Campus Locations (Fun ds Put to Better Use: $2.24 million.)

•	2003-40-040	tTaxpayers That Visited Taxpayer Assis ance Centers During September and October 2002 Received More Correct Answers to Tax Law Questions Than in Prior Months
•	2003-30-039	tr Improvements to the Elec onic Return Originator Monitoring Program Are Needed
•	2003-30-041	The Examination Quality Measurement System Program Can Be Enhanced (Increased Rev e nue: $9.8 mill ion.)
•	2003-30-042	The Internal Revenue Service Needs to Be Consistent and Fair
		When Assessing Interest and Penalties on Employers Who Misclassify Their Employees (Taxp a yer Rights and Enti tlement s : $11.4 million in over assessed pe nal t ies and interest affecting 4,610 tax returns.)
•	2003-30-043	tThe Internal Revenue Service Has Made Substan ial Progress Towards Recording Calls as Part of the Quality Assurance Monitoring of its Toll-Free Telephone Assistance
•	2003-30-044	Actions Are Being Taken to Improve the Automated Collection System, but a More Effective Planning and Management Framework Is Needed
•	2003-1C-031	Audit of Final Voucher TIRNO-95-D-00057, Task Order Number IR-95-NO-4282
•	2003-40-045	Significant Progress Has Been Made to Provide Interpreter Services to Non-English Speaking Taxpayers in the Taxpayer Assistance Centers, but Improvements Are Needed (Taxpay e r Burden: 61,0 00 non-English speaking p e rson s th at di d not have acce ss t o Ta x p ayer As sis t a n ce Ce nter ov er-the-phon e interpreter service.)
•	2003-40-046	Analysis of Statistical Information for Returns With Potentially Unclaimed Additional Child Tax Credit
February, 2003
•	2003-10-048	Significant Progress Has Been Made to Increase the Percentage of Electronic Vendor Payments
•	2003-20-047	Progress Has Been Made in Protecting Critical Assets
•	2003-20-053	Enhancements to the Internet Refund Project Need to Be Completed to Ensure Planned Benefits to Taxpayers Are Realized
•	2003-20-056	rUse of Unapp oved Wireless Technology Puts Sensitive Data at Risk

February, 2003

• 2003-20-064

• 2003-40-055

• 2003-1C-050

• 2003-1C-057

• 2003-40-066

• 2003-20-067

• 2003-10-065

• 2003-20-049

• 2003-20-070

Appendix V – Statutory TIGTA Reporting Requirements

Eighteen statutory audit reports that dealt with the adequacy and security of IRS technology were issued during this reporting period.¹

In FY 2003, TIGTA completed its fourth round of statutory reviews that are required annually by Internal Revenue Service Restructuring and Reform Act of 1998(RRA 98). The following table reflects the status of the FY 2003 RRA 98 statutory reviews.

Reference to Statutory	Explanation of the
Coverage	Provision	Comments/TIGTA Audit Status
Enforcement Statistics	An evaluation of IRS’	Reference No. 2003-40-090, March 2003:
I.R.C. § 7803(d)(1)(A)(i)	compliance with restrictions under Section 1204of RRA 98on the use of	IRS is generally complying with the law. A review of 74 judgmentally sampled enforcement employees’ performance and related supervisory
	enforcement statistics	documentation prepared between
	to evaluate IRS	October 1, 2001, and August 31, 2002, revealed
	employees.	no instances of the use of records of tax
		enforcement results, production quotas, or goals
		to evaluate employee performance. There was
		also improvement over the previous year in
		documenting the evaluation of employees on the
		fair and equitable treatment of taxpayers. In
		addition, a review of 21 statistically sampled
		appropriate supervisors showed the IRS completed
		the required consolidated office certification
		memorandums on whether records of tax
		enforcement results were used in a prohibitive
		manner.
Restrictions on Directly	An evaluation of IRS’	Audit fieldwork in progress.
Contacting Taxpayers	compliance with restrictions under I.R.C.
I.R.C. § 7803(d)(1)(A)(ii)	§ 7521on directly contacting taxpayers
	who have indicated that
	they prefer their
	representatives be
	contacted.

¹This includes 8 audit reports on IRS information technology, and 10 audit reports on the security of IRS technology. All information technology program reviews are considered statutory based on the RRA 98 requirement to report annually on the adequacy and security of IRS technology.

Appendix V – Statutory TIGTA

Reporting Requirements

Page 67

Reference to Statutory	Explanation of the
Coverage	Provision	Comments/TIGTA Audit Status
Filing of a Notice of Lien I.R.C. § 7803(d)(1)(A)(iii)	An evaluation of IRS’ compliance with required procedures under I.R.C.§ 6320 (Supp. IV 1998)upon the filing of a notice of lien.	. Reference No. 2003-40-066, February 2003: IRS did not completely comply with the law. A review of 300 Notices of Federal Tax Liens (NFTLs) identified 12 NFTLs (4%) where IRS did not comply with all the provisions of I.R.C § 6320. IRS correctly mailed the lien notices; however, it did not mail all of them timely. In addition, for another 16 NFTLs (5%), OA could not determine if IRS complied with the law because it did not provide proof of timely mailing. In 59 (20%) of the 300 NFTLs, IRS did not follow its own internal guidelines when issuing lien notices, including its guidelines for notifying taxpayer representatives and receipting and maintaining certified mail registers.
Levies	An evaluation of IRS’	Audit fieldwork completed.
	compliance with
I.R.C.	required procedures
§ 7803(d)(1)(A)(iv)	under I.R.C§ 6330
	(Supp. IV 1998)
	regarding levies.
Collection Due Process	An evaluation of IRS’	Audit fieldwork in progress.
	compliance with
I.R.C. § 7803(d)(1)(A)(iii) and (iv)	required procedures under I.R.C.§§ 6320 and 6330 (Supp. IV 1998) regarding the
	taxpayers’ rights to
	appeal lien or levy
	actions.
Seizures	An evaluation of IRS’	Discussion draft audit report issued to
I.R.C. § 7803(d)(1)(A)(iv)	compliance with required procedures under Subchapter D of Chapter 64for seizure	IRS management.
	of property for
	collection of taxes.

Reference to Statutory	Explanation of the
Coverage	Provision	Comments/TIGTA Audit Status
Taxpayer Designations –	An evaluation of IRS’	Draft audit report issued.
Illegal Tax Protester	compliance with
Designation and Nonfiler	restrictions under
Designation	Section 3707of RRA 98
	on designation of
I.R.C.	taxpayers.
§ 7803(d)(1)(A)(v)
Disclosure of Collection	Review and certify	Draft audit report issued.
Activities With Respect to	whether or not IRS is
Joint Returns	.complying with I.R.C
	§ 6103(e)(8) to disclose
I.R.C.	information to an
§ 7803(d)(1)(B)	individual filing a joint
	return on collection
.I.R.C	activity involving the
§ 6103(e)(8)	other individual filing
	the return.
Taxpayer Complaints	Requires TIGTA to	Statistical results on the number of taxpayer
I.R.C. § 7803(d)(2)(A)	include in each of its Semiannual Reports to Congress the number of	complaints received is prepared by TIGTA’s Office of Investigations and is reflected in Appendix II.
	taxpayer complaints	TIGTA’s Office of Audit’s annual review of
	received and the	IRS management’s process for accumulating and
	number of employee	reporting taxpayer complaint data is currently in
	misconduct and	the audit planning process.
	taxpayer abuse
	allegations received by
	IRS or TIGTA from
	taxpayers, IRS
	employees and other
	sources.

Reference to Statutory Coverage	Explanation of the Provision	Comments/TIGTA Audit Status
Administrative or Civil Actions With Respect to the Fair Debt Collection Practices Act of 1996 I.R.C. . § 7803(d)(1)(G) I.R.C § 6304 Section 3466 of RRA 98	Include information regarding any administrative or civil actions with respect to violations of the fair debt collection provision of I.R.C.§ 6304, including a summary of such actions, and any resulting judgments or awards granted.	Audit fieldwork in progress.
Denial of Requests for Information I.R.C. . § 7803(d)(1)(F) I.R.C § 7803(d)(3)(A)	. Include information regarding improper denial of requests for information from IRS, based on a statistically valid sample of the total number of determinations made by IRS to deny written requests to disclose information to taxpayers on the basis of I.R.C.§ 6103or 5 U.SC. § 552(b)(7).	Audit fieldwork in progress.
Extensions of the Statute of Limitations for Assessment of Tax I.R.C. . § 7803(d)(1)(C) I.R.C § 6501	Include information regarding extensions of the statute of limitations for assessment of tax under I.R.C. § 6501 and the provision of notice to taxpayers regarding the right to refuse or limit the extension to particular issues or a particular period of time.	Audit fieldwork in progress.

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Reports With Questioned Costs (10/1/02 – 3/31/03)	Number of	Questioned Costs2	Unsupported Costs
Report Category	Reports	(In Thousands)	(In Thousands)
For which no management decision had
been made by the beginning of the
reporting period	3	$1,675	$0
Which were issued during the reporting period	1	$4,719	$0
Subtotals (Item 1 plus Item 2)	4	$6,394	$0
For which a management decision was
made during the reporting period
- Dollar value of disallowed costs	3	$1,118	$0
- Dollar value of costs not disallowed	1	$3	$0
For which no management decision had
been made by the end of the reporting
period (Item 3 minus Item 4)	2	$5,273	$0
For which no management decision was made within six months of report issuance	1	$573	$0

Reports With Recommendations That
Funds Be Put to Better Use	Number
(10/1/02 – 3/31/02)	of	Amount
Report Category	Reports	(In Thousands)
For which no management decision has been
made by the beginning of the reporting period	0	$0
Which were issued during the reporting period	6	$38,597
Subtotals (Item 1 plus Item 2)	6	$38,597
For which a management decision was made
during the reporting period
Dollar value of recommendations that were
agreed to by management
- Based on proposed management action	2	$307
- Based on proposed legislative action	1	$3,000
Dollar value of recommendations that were not
agreed to by management	2	$33,050
For which no management decision has been
made by the end of the reporting period
(Item 3 minus Item 4)	1	$2,240
For which no management decision was made
within six months of issuance	0	0

Reports With Additional Quantifiable Impact on Tax Administration (10/1/02 – 3/31/03) Outcome Measure Category	Number of Reports in Category1	Number of Taxpayer Accounts	Number of Hours	Dollar Value (In Thousands)	Other4
Taxpayer Rights and Entitlements at Risk	7	1,462,1572		$25,844	5
Reduction of Burden on Taxpayers	4	5,900,199		$312,700	6
Increased Revenue	4	1,550		$11,4563
Revenue Protection	1			$1,343
Taxpayer Privacy and Security	2				7
Protection of Resources	0
Reliability of Management Information	4	367		$339	8

Investigations Opened and Closed
Total Investigations Opened		2,487
Total Investigations Closed		2,489

Financial Accomplishments
Embezzlement/Theft Funds Recovered		$8,003,916
Court Ordered Fines, Penalties and Restitution		$8,297,349
Out-of-Court Settlements		$0

Status of Closed Criminal Investigations
Criminal Referrals1	Employee	Non-Employee	TOTAL
Referred – Accepted for Prosecution	24	233	257
Referred – Declined for Prosecution	360	395	755
Referred - Pending Prosecution Decision	35	148	183
TOTAL CRIMINAL REFERRALS	419	776	1,195
No Referrals	683	727	1,410

Criminal Dispositions2
	Employee	Non-Employee	TOTAL
Guilty	20	88	108
Nolo-Contendere	1	0	1
Pre-trial Diversion	3	13	16
Deferred Prosecution3	0	1	1
Not Guilty	0	0	0
Dismissed4	4	5	9
TOTAL CRIMINAL DISPOSITIONS	28	107	135

Administrative Disposition on Closed TIGTA Investigations5
Removed, Terminated or Other		123
Suspended/Reduction in Grade		71
Oral or Written Reprimand/Admonishment		123
Closed – No Action Taken		245
Clearance Letter Issued		136
Employee Resigned Prior to Adjudication		41
TOTAL ADMINISTRATIVE DISPOSITIONS		739

Complaints/Allegations Received by TIGTA
Complaints Against IRS Employees		2,271
Complaints Against Non-Employees		1,726
Number of Complaints/Allegations		3,997

Status of Complaints/Allegations Received by TIGTA
Investigation Initiated	1,673
In Process Within TIGTA6	174
Referred to the IRS for Action	236
Referred to the IRS for Information Only	1,011
Referred to a Non-IRS Entity7	19
Closed With No Referral	821
Closed With All Actions Completed	63
TOTAL COMPLAINTS	3,997

Allegations of Employee Misconduct Investigated by IRS Management
	Case Type
	Administrative 8	Employee Tax Matter 9	Total
Inventory on October 1, 2002	709	885	1,594
Add: Cases Received	1,647	1,156	2,803
Less: Cases Closed	(1,615)	(1,092)	(2,707)
Duplicates	(15)	(146)	(161)
Not Misconduct	(14)	(0)	(14)
Total Closures	(1,644)	(1,238)	(2,882)
Inventory on March 31, 2003	712	803	1,515

Disposition of Employee Misconduct Cases Investigated by IRS Management
Disposition		Employee Tax Matter	Total
Removal	73	6	79
Separation of Probationary Employees	228	4	232
Separation of Temporary Employees	16	2	18
Resignation/Retirement	89	27	116
Suspensions	136	31	167
Reprimands	262	316	578
Counseling	364	477	841
Alternative Discipline	55	24	79
Clearance	111	8	119
Closed Without Action	245	188	433
Forwarded to TIGTA	10	0	10
Not Otherwise Coded	26	9	35
TOTAL	1,615	1,092	2,707

IRS Summary of Substantiated § 1203 Allegations
§ 1203Violation	Removals	Penalty Mitigated
Seizure Without Approval	0		0
False Statement Under Oath	0		0
Constitutional & Civil Rights Issues	0		0
Falsifying or Destroying Records	0		0
Assault or Battery	0		0
Retaliate or Harass	0		0
Misuse of 6103	0		0
Failure to File Federal Tax Return	5		22
Understatement of Federal Tax Liability	4		12
Threat to Audit for Personal Gain	1		0
TOTAL	10		34

•	2003-1C-061	Report on Audit of Proposed Fiscal Year 2001 Direct Labor Forward Pricing Rates, Full Time Accounting Factor, and Escalation Rate
•	2003-1C-062	Report on Audit of Timekeeping Practices for Fiscal Year 2000
•	2003-10-068	The Internal Revenue Service Should Improve the Management of Its Energy Conservation Program (Reli a bility of Information: informati o n that is u s ed to report on c o mpliance with energy conservati on requirements is not reli able for the $21 million spent on energy/u tility expen s es at 11 delegated sites.)
•	2003-20-069	Improvements in the Measures Program for Information Technology Services Would Further Increase Its Value to Stakeholders
•	2003-40-072	tTaxpayers That Visited Taxpayer Assis ance Centers in November and December 2002 Received Incorrect Answers to Some Tax
		Law Questions
•	2003-10-074	The National Taxpayer Advocate Has Improved the Quality of Casework, but Continued Vigilance Is Needed to Increase Compliance With the Quality Standards
•	2003-10-076	tImproved Oversight of the Guard Services Con ract Is Needed to Ensure Compliance With Contract Terms and Conditions (Questioned Costs: $4 .72 million. )
•	2003-30-071	The Internal Revenue Service Could Reduce the Number of
		Unnecessary Notices Sent to Taxpayers Regarding Unreported Income From Schedules K-1 (Funds Put to Bett er Use :
		$3 million.)
•	2003-30-075	Efforts to Develop a Successful Collection Contract Support Program Could Be Enhanced
•	2003-40-073	Pre-Filing Season Activities to Address Specific Individual Electronic Filing Issues Were Adequately Conducted
•	2003-40-080	Terrorist Victims’ Tax Relief Refunds Were Accurate, but Some Were Delayed (Taxpayer Rights and En titlement s : fiv e returns with over -assessed taxe s of approxim a tely $60,000. )
•	2003-10-054	The Internal Revenue Service Needs to Establish an Effective
		tProcess to Accurately Iden ify, Record, and Report Unemployment Trust Fund Administrative Expenses (Reliability of Informati o n: the IRS rep o r t ed $294.6 mi llion of Un em ployment Trust Fund expenses th at c o uld not be supported or r e plicated .)