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DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220

INSPECTOR GENERAL for TAX ADMINISTRATION

April 30, 2001

The Honorable Paul H. O'Neill Secretary of the Treasury Washington, D.C. 20220

Dear Mr. Secretary:

I am forwarding to you the Treasury Inspector General for Tax Administration's (TIGTA) Semiannual Report to the Congress for the six-month period ending March 31, 2001. We issued 60 audit reports that identified over $410 million in financial accomplishments. Most of the financial accomplishments involved issues that would increase tax assessments and collections, or protect revenue from erroneous claims or refunds.

TIGTA closed over 2,250 investigations and investigative recoveries totaled just over $8.3 million during this reporting period. The Office of Investigations has focused on the emerging problem of domestic terrorism, as well as threats and assaults against Internal Revenue Service (IRS) employees as they carry out their tax administration responsibilities.

The Office of Audit dedicates resources to helping the IRS address its major challenges, i.e., technology modernization, customer service, filing season, and tax compliance, to include the challenges presented by a global economy. The annual audit requirements involving taxpayer rights imposed by the IRS Restructuring and Reform Act of 1998 are underway and will be reported in our next semiannual report.

TIGTA special agents conducted integrity awareness presentations for over 15,500 individuals, of which 89 percent were IRS employees. Our goal is to reach one third of IRS employees with our integrity briefings by the end of the fiscal year. We believe these presentations heighten integrity awareness and have a potential deterrent effect on fraud and misconduct.

I look forward to working with you in helping the IRS become a highly effective and respected government agency for the American public.

Sincerely,

Enclosure

Semiannual Report to the Congress

Table of Contents

Office of the Inspector General for Tax Administration ...............................................1

Authorities .........................................................................................................................1

Major Issues Facing the IRS............................................................................................1

Office of Audit....................................................................................................................9

Office of Investigations ..................................................................................................29

Appendix I

Statistical Reports for the Office of Audit...................................................................... 43
Questioned Costs, Funds Put to Better Use, Additional Quantifiable Impact on Tax
Administration

Appendix II

Statistical Reports for the Office of Investigations........................................................ 47

Investigative Results, Complaints/Allegations Received by TIGTA, Status of Complaints/Allegations Received by TIGTA, Complaints/Allegations Received by the IRS, Disposition of Complaints/Allegations Received by the IRS

Appendix III

Statistical Reports—Other ...........................................................................................53
Audit Reports With Significant Unimplemented Corrective Actions, Access to Information,
Audit Reports Issued in Prior Reporting Period With No Management Response,
Revised Management Decisions, Disputed Audit Recommendations,
Review of Legislation and Regulations

Appendix IV
TIGTA Audit Report Listing ..........................................................................................69

Appendix V
Section 1203 Standards...............................................................................................75

Appendix VI
Statutory TIGTA Reporting Requirements ..................................................................77

Appendix VII
Government Performance and Results Act Audits .....................................................81

Appendix VIII
Acronyms .....................................................................................................................83

Appendix IX
OrganizationChart .......................................................................................................85

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

Office of Treasury Inspector General for Tax Administration

INFORMATION ABOUT THE TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

The Office of the Treasury Inspector General for Tax Administration (TIGTA) provides independent oversight of the Internal Revenue Service (IRS) activities, the IRS Oversight Board, and the IRS Office of Chief Counsel. TIGTA is organizationally placed within the Department of the Treasury, but 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 audit and investigative activities are designed to:

_•Promote economy, efficiency, and effectiveness in the administration of the nation’s tax system.

_•Detect and deter fraud and abuse in IRS programs and operations.

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

Other responsibilities include:

_•Investigating allegations of misconduct by IRS employees.

_•Reviewing and making recommendations regarding existing and proposed legislation and regulations relating to the programs and operations of the IRS and TIGTA.

_•Recommending actions to resolve fraud, abuses, and deficiencies in IRS programs and operations.

_•Informing the Secretary of the Treasury and the Congress of problems and the progress made in resolving them.

The Offices of Audit and Investigations carry out these duties and are supported in their efforts by the Offices of Chief Counsel, Information Technology, and Management Services.

MAJOR ISSUES FACING THE IRS

As the nation’s tax administrator, the IRS collects 95 percent of federal tax revenues. For Fiscal Year (FY) 2001, the IRS is projected to collect $2.1 trillion. The IRS processes approximately 233 million tax returns and provides assistance to more than 128 million taxpayers annually. The IRS also

¹Pub. L. No. 95-452 Stat. 1101, as amended, at 5
U.S.C. app. 3 (1994 & Supp. II 1996)
²Pub. L. No. 105-206, 112 Stat. 685

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Semiannual Report to the Congress

implements tax law changes and manages over 700 office locations. This formidable task is carried out in an environment where providing quality customer service and enforcing tax laws go hand in hand.

In December 2000, TIGTA advised Congress of the following major challenges facing the IRS in FY 2001:

_•Modernizing the IRS:

Organizational Restructuring

Technology Modernization

_•Providing Security Over Information Systems

_•Processing Returns and Implementing Tax Law Changes

_•Providing Customer Service and Ensuring Tax Compliance

_•Providing Quality Customer Service Operations

_•Protecting Revenue and Minimizing Tax Filing Fraud

_•Protecting Taxpayer Rights

_•Implementing the Government Performance and Results Act of 1993 (GPRA)³

_•Managing Finances

_•Addressing the Impact of the Global Economy on Tax Administration

These major challenges have been the focus of TIGTA’s audit and investigative activities during this six-month reporting period. The following sections provide a summary of the issues and TIGTA’s activities to help the IRS address these issues. Details of some of the more significant audit and investigative activities, as well as information on statutory requirements, can be found on pages

³ Pub. L. No. 103-62, 107 Stat. 285

9 through 27, 29 through 42, and in Appendix VI, respectively.

MODERNIZING THE IRS

Creating a modernized IRS is a top priority of the Commissioner, as well as a principal focus of Congressional oversight. Modernization is the most significant challenge the IRS faces over the next few years. Modernization includes both organizational restructuring and implementation of new computer systems and technology. The ability to achieve the IRS’ modernization concept is largely dependent on restructuring to better meet taxpayer needs and developing new technology to replace deficient and obsolete systems.

Organizational Restructuring

On October 1, 2000, the IRS achieved its first milestone toward modernization by implementing its new organizational structure. The four major components of the new IRS are the Wage and Investment Income (W&I), Small Business/ Self-Employed (SB/SE), Large and Mid-Size Business (LMSB), and Tax Exempt and Government Entities (TE/GE) Divisions.

The stand up of the new business unit structure was an important first step in the IRS’ restructuring, though far from the last of this long-term endeavor.

TIGTA audits found that the four new business units had substantially completed the critical elements needed for standing up. Specifically, most key management positions were filled, most employees had been realigned, finance offices and budgets were established, many delegations of authority were revised, and detailed plans of workarounds ⁴were developed. However,

⁴A “workaround” is a temporary solution to a problem that allows a new organization to be operational until a final solution can be developed and implemented.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

additional actions were needed in the area of staffing unfilled positions in the W&I Division and minimizing the risks of implementing the TE/GE Division’s modernization vision.

With the new business structure in place, the IRS must focus on important issues such as taxpayer access to “walk-in” and “toll-free” services; defining new customer bases and determining customer needs; accuracy of responses to taxpayers; the ability to hire and train a qualified workforce; and, reversing the decline in enforcement results.

Technology Modernization

Almost $400 million has been spent on technology modernization in the past two years. While significant progress has been made, including development of the modernization blueprint and establishment of program management processes, most of the ongoing systems modernization projects have taken longer and cost more than originally planned. This is attributed, in part, to the IRS learning to manage its complex systems modernization effort, and the roles and responsibilities of the IRS and the PRIME contractor being inadequately defined during the early phases of the modernization.

While growing pains are not uncommon for major systems development projects, the reality is that a restructured IRS may take longer to realize than initially anticipated.

Assessing the IRS’ modernization efforts continues to be a top priority for TIGTA. TIGTA has identified the following areas that could seriously impact the success of technology modernization:

_•Delays and cost overruns in delivering tangible benefits to taxpayers.

_•Potential funding problems.

_•Inconsistencies in implementing key systems development processes.

_•Business needs not always being well defined.

In addition, the Office of Audit recently reported that while the IRS has established a framework for meeting its electronic filing goals, it is questionable whether these goals can be met. The ability to achieve 80 percent electronically filed returns by 2007 will require aggressive and sustained efforts. For example, 23 percent of all individual returns were filed electronically in FY 1999. While the percentage of individual returns filed electronically increased five percent in FY 2000, even more substantial increases are needed to achieve the goal of 80 percent by 2007.

Modernizing the IRS

Additional Management Actions Are
Needed to Ensure the Timely and
Successful Modernization of the Tax
Exempt and Government Entities
Division
(Reference No. 2001-10-026)

The mission of the new TE/GE Division is to focus on providing customers top quality service and protecting the public interest by applying the tax laws with integrity and fairness to all. The IRS has taken positive steps toward ensuring the successful migration to the new TE/GE Division. Nonetheless, additional actions are needed to minimize the inherent risks associated with such a major endeavor. Timely addressing these risks is critical to ensure the successful implementation of the TE/GE Division’s modernization initiatives.

The Office of Audit determined that the TE/GE Division has not incorporated the concept of a single executive or senior-level person with end-to-end accountability into its implementation governance structure to manage its modernization initiatives. Also, additional actions should be taken to better control, evaluate, and report internal and external stakeholder concerns and comments. TE/GE Division management would then be in a better position to readily identify and resolve critical issues facing transition from the old to the new organization.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

The TE/GE Division does not have an effective process to identify and monitor the status of workarounds. The inability to adequately capture and monitor workarounds may prevent the TE/GE Division from effectively tracking its efforts to timely replace vital processes with permanent solutions. Workarounds that are not timely replaced with permanent solutions could result in work stoppages and prevent the TE/GE Division from achieving its modernization vision.

Now that the TE/GE Division has become an independent entity within the IRS, it must rely on other business units to assist its managers in meeting the modernization vision. Without establishing effective working relationships with these other business units, the TE/GE Division could be at risk of not accomplishing its mission, goals, and objectives.

The Office of Audit recommended that a senior-level official be selected to oversee future modernization activities and establish ownership and oversight responsibility for addressing stakeholder concerns and comments. Also, management should establish formal agreements and processes to better plan, control and oversee the work performed by internal and external support organizations. In addition, the risks that core processes could result in disruptions to customer service should be identified and monitored.

IRS management agreed with the audit recommendations.

Controls Over the Development of the Practitioner Secure Messaging System Prototype Should Be Improved (Reference No. 2001-20-022)

The IRS’ Electronic Tax Administration (ETA) management developed the Practitioner Secure Messaging System (PSMS) Prototype to support the design of a full-scale system that will provide a secure Internet environment for tax practitioners and the IRS to exchange tax information. The purpose of the Prototype is to provide information (such as lessons learned) to the related Business Systems Modernization Program project that is building the full-scale secure messaging system.

The PSMS Prototype is the IRS’ first system that uses the Internet to directly interact with the public to exchange taxpayer information. The Prototype identified significant lessons concerning the implementation of an Internet-based messaging process. However, IRS management should move the PSMS Prototype and similar ETA systems development initiatives to the Chief Information Officer’s (CIO) organization to be consistent with the IRS’ response to prior audit recommendations as well as the IRS Organization Blueprint 2000, which consolidates all systems development activities under the CIO. Also, the IRS should strengthen the PSMS Prototype project management and spending controls.

IRS management agreed with the project management and spending control issues and has initiated corrective actions. However, IRS management did not agree with the recommendation to move the PSMS Prototype and similar ETA systems development initiatives to the CIO organization. The Office of Audit continues to believe that managing systems development initiatives outside the CIO organization increases the risk of inconsistent and ineffective project management processes and of fragmented systems modernization initiatives, which could lead to delays, cost overruns and rework.

Electronic Signature Initiatives Could Be Better Defined and Evaluated (Reference No. 2001-20-043)

The IRS’ goal is to have at least 80 percent of all tax returns filed electronically by 2007. To increase the number of electronically filed returns, the IRS has implemented Personal Identification Numbers (PIN) as an alternative

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

to handwritten signatures. As of
September 24, 2000, the IRS had
electronically received approximately
35 million (28 percent) of the 126 million
individual income tax returns filed. Of the
35 million electronically filed individual
returns, nearly 12 million were signed with a
PIN.

Source: IRS Service Center Processing and Production Reports

The Office of Audit reported that the IRS has not finalized requirements defining the minimum acceptable controls for the use of PINs as alternative signatures. In addition, the IRS lacks detailed cost benefit analyses for the operational alternative signature initiatives and comprehensive assessments of program performance. Therefore, the cost effectiveness of decisions to expand or terminate specific alternative signature initiatives, and the anticipated effect on the number of electronic returns filed by taxpayers, are not readily available.

The Office of Audit recommended that the IRS finalize requirements for the use of PINs and ensure that all operational alternative signature initiatives comply with the requirements. In addition, the IRS should prepare detailed program evaluations for operational PIN alternative signature initiatives and conduct comprehensive cost benefit analyses for future initiatives.

IRS management agreed to finalize the signature authentication requirements and review the operational alternative signature initiatives for compliance. However, IRS management did not agree to revise the program evaluation process. Instead, the IRS believes that existing program evaluation measures and cost related documents are sufficient to evaluate the program, identify areas for improvement, and select the most feasible approach.

The Office of Audit continues to believe that improvements are needed to ensure that the cost effectiveness of decisions to expand or terminate specific alternative signature initiatives, and the anticipated effect on the number of electronic returns filed by taxpayers, are readily available. Although management indicated program evaluations were done for each alternative, the Office of Audit was unable to obtain documentation of the evaluations for several of the alternatives.

Management Advisory Report: The
Probability of Meeting Electronic Tax
Administration Goals Remains
Questionable
(Reference No. 2001-40-047)

The IRS processes over 200 million returns while collecting tax revenues totaling $1.7 trillion each year. However, efforts to modernize its processing systems remain constrained since most tax returns are filed on paper rather than electronically. Increasing electronic filing improves tax return processing by significantly reducing errors and labor costs and is essential for modernization to be effective.

The IRS has established a framework for accomplishing its electronic filing goals in the ETA Strategic Plan, but the probability of meeting these goals remains questionable. From 1998 to 1999, the IRS increased the number of electronically filed returns by over 19 percent for individual returns and 56 percent for information returns. During 2000, it also experienced an increase in electronic filing. For example, electronically

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

filed individual returns increased from 23.4 percent in 1999 to 28 percent in 2000.

While the IRS increased the number of electronically filed returns in both 1999 and 2000, achieving the 2003 interim goal of having all computer-prepared paper returns filed electronically is not probable. It is also questionable whether the IRS can accomplish the 2007 goal of having 80 percent of all federal tax and information returns filed electronically. Success will require a sustained and substantial effort by the IRS to increase the number of electronically filed returns over the next seven years.

Source: 1999 A Strategy for Growth and the Electronic Tax Administration Advisory Committee Report to Congress dated June 30, 2000

Source: Statistics of Income Projections of Information and Withholding Documents in the United States for Paper and

Non-Paper Totals for Filing Seasons 2000-2008 and Combined Total of Electronically Transmitted Magnetic Tape and Paper

	Total	E-File	Percent of Total
Individual Returns	125.1	29.3	23.4
Business Returns	69.8	5.7	8.2
Information Returns	1,240.0	121.5	9.8
Total	1,434.9	156.5	10.9

Percentage of 1999 Returns Filed Electronically (In Millions)

Source: ETA Strategy for Growth, Information Return Volumes for 1999 from the Executive Officer of Service Center

Operations, and Statistics of Income Projections for Returns to be Filed

The Office of Audit recommended that the IRS improve its strategic planning process to include incremental project milestones or sufficient performance measures to evaluate each initiative’s progress and its ultimate impact on electronic filing. The ETA Strategic Plan should also clearly define the impact of information returns filed on magnetic media. These returns will significantly affect the IRS’ ability to achieve its electronic filing goals because banks and employers will need to convert over one billion returns from magnetic tape to electronic filing within the next seven years. The plan did not adequately distinguish between those returns filed electronically versus those received on magnetic tape.

In January 2000, the IRS reviewed the ETA strategy and identified the need to focus its efforts on the most critical issues. In addition, an outside advisory council emphasized that the past increases in the electronic filing rate must be sustained and suggested establishing new initiatives to help achieve the necessary growth rate. By addressing these concerns and implementing enhancements in the strategic planning process, the IRS should increase the likelihood that its vision for electronic filing becomes a reality.

This report was issued for information use only and did not require a response.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

Management Advisory Report:
Additional Management Actions Are
Needed for Placing Small
Business/Self Employed Division
Transition Employees
(Reference No. 2001-30-054)

The Office of Audit determined that management of the new SB/SE Division generally took effective steps to ensure transition employees were placed in temporary assignments after the stand up of the division. However, information provided to transition employees regarding their temporary assignments was sometimes incomplete. In addition, a long-term coordinated strategy is needed for placing the remaining transition employees in permanent positions.

IRS records indicate that, of the over 800 transition employees located in the SB/SE Division at stand-up, there were 394 transition employees still remaining as of February 10, 2001. Approximately 28 percent of these 394 employees are IRS analysts (job series 343), and 38 percent of the remaining employees are grade 13 or higher. Based upon the current transition process, it could be several months or even years before all transition employees have resigned, retired, or been placed in permanent positions.

This report was issued for information use only and did not require a management response.

Processing Returns and Implementing Tax Law Changes

Letter Report: More Small Corporate
Taxpayers Can Benefit from the
Alternative Minimum Tax Exemption
Provision
(Reference No. 2001-30-019)

The Taxpayer Relief Act of 1997⁸provided
an exemption from the alternative minimum
tax for qualified small business corporations
for tax years beginning after
December 31, 1997. Once a corporation
qualifies as a small corporation, it will not be
liable for the alternative minimum tax so long
as it remains a small corporation.

The Office of Audit identified over 2,000
businesses that paid the alternative minimum
tax as part of their calendar year 1998 taxes,
yet appeared to meet the gross receipts criteria
to qualify as small corporations. In a
statistical sample of these businesses,
93 percent qualified for the exemption but had
self-assessed an average of $11,638 in
alternative minimum tax. The Office of Audit
estimated that these corporations paid over
$25 million in alternative minimum tax that
the Act specifically exempted.

The Office of Audit concluded that many
taxpayers and their tax professionals may
have overlooked their qualification for the

⁸ Pub. L. No. 105-34, 111 Stat. 788

small corporation exemption from the alternative minimum tax. Without significant manual effort, the IRS could not identify these errors. As a result, these taxpayers were not informed of their errors and, accordingly, are likely to repeat them.

The Office of Audit recommended that the IRS publicize the alternative minimum tax exemption by issuing a public announcement to taxpayers and by enhancing taxpayer education materials.

By the beginning of the 2001 filing season, the IRS agreed to incorporate the alternative minimum tax issue into various outreach programs, workshops, and practitioner institutes. The IRS also plans to design a strategy to identify the taxpayers affected by this issue and determine corrective actions for these taxpayers. Finally, the IRS plans to explore ways to enhance taxpayer instructions in publications and on tax forms to emphasize the alternative minimum tax exemption for qualifying small corporations.

The Internal Revenue Service Had a
Successful 2000 Filing Season;
However, Opportunities Exist to More
Effectively Implement Tax Law
Changes
(Reference No. 2001-40-041)

The IRS effectively processed individual paper tax returns filed during the 2000 filing season. As of April 28, 2000, the IRS had processed over 54 million paper individual tax returns. Although there were some isolated problems, opportunities do exist for the IRS to more effectively implement three tax law changes that were in effect during the 2000 filing season. These laws related to the Child Tax Credit (CTC), the Additional Child Tax Credit (ACTC), and to S-SSNs.

The IRS postponed programming changes designed to validate the date of birth related to the CTC and the ACTC. As a result, it did not identify potentially unqualified or erroneous CTC and ACTC claims. The

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

Office of Audit identified over 750,000 1998 and 1999 tax returns with over $339 million of potentially unqualified CTCs that could not be supported by IRS date of birth information. The Office of Audit also identified 33,000 tax returns that had over $12 million in potentially unqualified ACTC claims.

The IRS Assistant Chief Counsel (Income Tax and Accounting) concluded in 1999 that the IRS may not recover through assessment an erroneous ACTC refund due to legal limitations. However, collection actions can be initiated on the potentially erroneous refunds resulting from the unqualified CTC claims.

In addition, during the 2000 filing season, the IRS modified its computer programming designed to verify S-SSNs. This action was taken due to storage limitations on the computer systems it uses to correct errors on tax returns. As a result, the IRS could not ensure that taxpayers were compliant with these tax laws. According to the IRS’ own estimates, approximately 2.7 to 3 million taxpayers have invalid S-SSNs.

The Office of Audit recommended that the IRS should implement computer programming changes to ensure that taxpayers comply with tax laws relating to the CTC, the ACTC, and S-SSNs and initiate actions to recover the potential lost revenue due to the postponed programming for these issues. The IRS should also ensure that its computer system has the capacity to correctly process tax returns and should send notices to taxpayers with invalid S-SSNs in sufficient time to allow for corrections.

IRS management agreed with three of the five recommendations. IRS management believes that the current capacity of the computer system used to store errors found on returns is sufficient. They also stated that additional legal guidance would be needed to attempt recovery of the CTC mentioned in the report, and that the collection costs would likely exceed the amount of overpayments.

The Office of Audit plans to address the issue of system capacity during the audit of the FY 2001 filing season. The Office of Audit continues to encourage the IRS to focus on recovering the refunds resulting from the unqualified CTC claims.

Electronic Returns Were Processed
Effectively
(Reference No. 2001-40-008)

E-filed returns improve service for taxpayers and boost production by reducing errors, speeding refunds, and reducing labor costs. As of June 15, 2000, the IRS had processed 35.2 million individual electronic returns, 105 percent of the 33.6 million projected for the 2000 filing season.

Overall, the IRS’ system for accepting and processing individual electronic returns was effective. For example, the controls for ensuring that individual electronic returns are accepted only from Authorized IRS E-file Providers were working properly, and the IRS properly notified unauthorized E-file Providers when their transmissions were rejected. While some problems occurred early in the filing season, they were quickly identified and corrected. In addition, the IRS effectively implemented the enhancements added to the individual E-file Program for the 2000 filing season.

The Office of Audit identified an opportunity for the IRS to improve the service it provides to Authorized Providers through its Help Desk. The Office of Audit reviewed the Help Desk operations at three of the five processing sites. One site servicing over 37,000 Authorized Providers delivered ineffective customer service.

When Authorized Providers do not receive timely help in resolving their processing problems, the IRS is at risk of damaging relations with, and increasing the burden on both the Authorized Providers and the taxpayers they represent. In addition, the Providers may have to make additional

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Semiannual Report to the Congress

contacts with the IRS to resolve inquiries, and may ultimately call another processing site’s Help Desk, causing workload imbalances among the processing sites.

The auditors recommended the IRS carry out its plans to develop and implement National Headquarters standards and guidance to correct the operational weaknesses identified.

IRS management acknowledged the need to improve the customer service provided to Authorized IRS E-file Providers and identified several steps to address this need.

Providing Customer Service and Ensuring Tax Compliance

Progress in Developing the Customer
Communications Project Has Been
Made, But Risks to Timely Deployment
in 2001 Still Exist
(Reference No. 2001-20-055)

The Customer Communications Project (CCP) is intended to increase telephone and communication service levels to taxpayers comparable to those of similar customer service operations in the private sector.

While the IRS has demonstrated progress in developing project management capabilities, it acknowledged that it would not be able to provide taxpayers all of the enhancements and benefits that it originally proposed for the 2001 filing season. For example, the telephone and Internet self-service applications were postponed until 2002, and the remaining capabilities were rescheduled for deployment during the latter part of the 2001 filing season.

The Office of Audit reported that the CCP fell behind schedule, in part, because some key Enterprise Life Cycle (ELC) work products were not timely completed and identified barriers to project deployment had not yet been overcome. Delays in delivering CCP benefits will hamper the IRS’ expectations of answering an additional 9.6 million taxpayer calls in 2001, and postpones plans to free up telephone assistors for other work.

The Office of Audit recommended that project managers timely complete all ELC recommended work products and not allow projects to exit ELC milestone requirements when significant work products are incomplete. Further, project managers need to develop and communicate realistic project schedules, timely incorporate necessary security considerations, and ensure that risk tracking and reporting are timely, complete and accurate.

IRS management agreed with some of the recommendations and has either taken or initiated corrective actions for these recommendations. However, they did not agree that all critical work products be completed before moving to the next ELC milestone. The Office of Audit believes that failure to do so increases the risk of unexpected project glitches, delays, and cost overruns. Since the IRS is in the early stages of its systems modernization effort, the Office of Audit believes it is important to completely follow the ELC methodology in order to apply lessons learned to other projects. As the IRS matures, more flexible program management can and should be considered.

The Internal Revenue Service Does Not
Effectively Use the Trust Fund
Recovery Penalty as a Collection
Enforcement Tool
(Reference No. 2001-30-014)

The Trust Fund Recovery Penalty (TFRP) is an IRS enforcement tool established both to encourage the prompt payment of taxes that employers withhold or otherwise collect, and to provide the IRS with a secondary source of collection in the event these taxes are not paid. When assessments are not made timely against responsible company officers, the financial ability of the officers could deteriorate, thereby decreasing the IRS’ chances to collect taxes due.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

Based on a sample review of 82 trust fund cases, the Office of Audit reported that the Collection Field function (CFf) did not properly use the TFRP to enforce collection of trust fund taxes and, when utilized, it was used ineffectively, incorrectly or too late in the collection process.

In 58 instances, the CFf did not properly complete the investigative process or assess the penalty when appropriate. In 17 other cases, the CFf assessed the penalty but did not make the decision within the required time frame.

The CFf also accepted installment agreements on repeater taxpayers and delayed the TFRP process. A “repeater” is defined as a taxpayer who owes taxes for multiple periods, over a specified amount. IRS guidelines state that installment agreements are not to be granted to a “repeater” except under the most stringent conditions.

Finally, the CFf did not always assess the TFRP against all responsible company officers. All individuals identified as responsible officers are to be assessed the TFRP, when it is applicable. The CFf did not always consider unfiled returns when determining whether to assess the TFRP. The TFRP is to be assessed when the total amount of tax liability exceeds a specific dollar amount. Part of the CFf’s compliance check is to secure delinquent returns or prepare substitutes when originals are not filed.

The Office of Audit recommended that management reassess the time frames for making the TFRP decision and provide clear instructions on using the TFRP and installment agreement procedures on repeater trust fund cases. Use of the TFRP as an effective collection tool needs to be emphasized at all management levels, and management reviews need to be conducted on these priority cases.

IRS management agreed to implement all audit recommendations.

More Consideration Is Needed During
Examinations to Identify Potential
Fraud Issues and Refer Cases to
Criminal Investigation
(Reference No. 2001-30-063)

When Examination function employees identify potential fraudulent issues, such as significant amounts of unreported income, they are to refer the cases to the Criminal Investigation (CI) Office to determine whether taxpayers criminally violated federal tax laws. Over the past few years, IRS executives have attempted to identify ways to increase the number of quality fraud referrals. Despite these efforts, the number of investigations has declined from a high of 1,223 in FY 1996 to only 256 in FY 2000, as shown in the following chart:

Source: Criminal Investigation

Examination function managers and employees were not always recognizing and developing potential fraud issues and, therefore, were not referring cases to CI when appropriate. The Office of Audit’s review of 100 closed Examination cases identified 11 cases that met the criteria for a criminal fraud referral; however, they were not referred to CI. In addition, in 82 of the 100 cases, the examiners did not document in the case file, as required, whether potential fraud was recognized and considered. The majority of these cases involved understated income.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

Finally, required management involvement in the cases related to documenting whether fraud was considered was not sufficient in 64 of the 80 cases in which the return had understated income over $10,000.

Based on the sample results, the Office of Audit estimated that 381 additional cases nationwide may have had potential fraud issues for referral to CI during the 16-month sample period. Also, the Office of Audit estimated approximately $21.8 million additional revenue from civil fraud could have been assessed during the sample period.

Examination employees gave three overall reasons for not making referrals: RRA 98 has made employees reluctant to refer cases; CI rejects a high percentage of cases referred; and, they are no longer working the types of cases that yield referrals.

The Office of Audit recommended that IRS management enhance the processes that identify open cases with potential fraud issues through various methods including, for example, requiring certain cases be discussed with fraud specialists. IRS management should also adjust the mix of cases being examined to include more returns that have historically yielded fraud potential. In addition, IRS management should show front-line employees their commitment to the fraud referral program by regularly emphasizing its priority and setting clearer guidelines on what constitutes a successful fraud referral.

SB/SE Division management agreed with the findings and recommendations and is initiating corrective actions. However, they did not concur fully with the financial accomplishment discussed in the report.

Protecting Revenue and Minimizing Tax Filing Fraud

The Program for Ensuring Compliance With Anti-Money Laundering Reporting Requirements Should Be Improved (Reference No. 2001-40-024)

Since 1970, the Treasury Department has delegated to the IRS Commissioner the responsibility for assuring that businesses which routinely exchange or handle money, but are not banks, comply with Title 31 of the

Bank Secrecy Act (BSA)⁹. This section requires that certain financial institutions keep records of, and provide reports to the government, about large dollar and suspicious financial transactions.

A 1997 study by Coopers & Lybrand LLP estimated there were about 158,000 of these non-banks, such as money remitters and check cashers, handling financial transactions totaling $200 billion annually. The IRS’ Examination function is responsible for assuring that these non-banks comply with the BSA financial transaction reporting and record-keeping requirements, as part of the Examination Anti-Money Laundering (AML) Program.

The Office of Audit reported that the IRS needs to improve its program for ensuring compliance with AML reporting requirements and to improve controls over the program to reasonably ensure objectives are achieved. Without changes there is a significant risk of undetected noncompliance and increasingly inconsistent program delivery nationwide. There is also increased risk of not being able to evaluate the success of the program as provided by GPRA. In addition, the absence of effective controls makes it difficult for the IRS to identify and correct program weaknesses or deficiencies.

The Office of Audit recommended that the IRS: 1) establish oversight responsibility for

⁹ Pub. L. No. 91-508, 31 U.S.C. Chapter 53

the AML Program in the new IRS business units and strengthen that oversight capability;

2) develop and deliver an educational/ information package to a much larger number of covered businesses; 3) improve field manager accountability for AML Program objectives; 4) establish measurable performance indicators; 5) improve the tracking of results; 6)ensure more full-time employees are assigned in local offices: and,

7) ensure AML Program examiners nationwide receive sufficient training. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) managers advised us that they are already in the process of working with the IRS to strengthen the program.

IRS management agreed with the audit recommendations and has initiated corrective action.

Improvements Are Needed in the Earned Income Credit Recertification Program (Reference No. 2001-40-030)

Historically, the EIC has been subject to abuse by taxpayers claiming credits they are not entitled to receive. As a result, Congress passed legislation in 1997 requiring taxpayers whose EIC was denied during audits to prove their eligibility for the credit before they can receive the EIC again. In response to this legislation, the IRS implemented the EIC Recertification Program in January 1999.

The EIC Recertification Program should reduce the amount of incorrect EIC allowed by the IRS. The Office of Audit estimates that, as of September 30, 1999, the IRS properly placed recertification indicators on 336,000 taxpayer accounts while denying, during audits, an estimated $620 million in EIC claims.

The Office of Audit identified the following conditions that adversely affected the IRS’ ability to safeguard revenue and ensure taxpayer rights with the least amount of burden to taxpayers: recertification indicators

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were not always removed accurately; some suspended refunds were not released timely; recertification audits were not always timely processed; not all recertification determinations were accurate; and, taxpayer correspondence could be improved.

The Office of Audit recommended that IRS management should ensure that employees process recertification cases accurately and timely. In addition, IRS management should ensure its quality review process accurately assesses the Program’s performance and should consider modifying the Program to ensure that taxpayers are recertified for the reasons for which their EIC was originally denied.

IRS management agreed with 10 of 12 recommendations. It did not agree with the recommendation to improve its quality review process, and IRS Counsel will address the recommendation to increase revenue protection in a separate report.

Duplicate Dependent and Qualifying Child Overclaims Result in Substantial Losses of Tax Revenue Each Year (Reference No. 2001-40-059)

Each year the IRS identifies an average of 1.6 million taxpayers who incorrectly claim dependents that are also claimed on someone else’s tax return (commonly called “duplicate dependent overclaims”). Approximately $700 million in tax revenue is lost each year due to these overclaims. However, the IRS does not identify these duplicate dependent overclaims until several months after the erroneous refunds are issued.

For Tax Years 1995 through 1998, taxes owed were reduced and erroneous refunds were processed totaling approximately $2.8 billion relating to 4.4 million overclaims. The IRS has attempted to recover (through correspondence examinations and voluntary amended tax return filings) only $630 million (23 percent) of the tax benefits erroneously provided to individuals. The funds actually recovered, though, fall significantly short of the $630 million because the vast majority of attempts to recover overclaims come several months after the taxpayers have received the related tax benefits. Many of the assessments, including most associated with the EIC, may never be recovered. Conversely, the current process causes some entitled taxpayers to receive notices and have their tax returns and personal records examined unnecessarily.

The Office of Audit recommended that the IRS needs to improve its process for the detection and deterrence of duplicate dependent overclaims to ensure the protection of tax revenue. Specifically, the IRS needs to ensure complete data are used in its duplicate dependent detection process, improve its efforts to deter noncompliance, and strengthen its oversight and strategy for the detection and deterrence of duplicate dependent overclaims.

IRS management generally agreed with the recommendations and has initiated corrective actions.

Additional Efforts Are Needed for Improving Revenue Protection (Reference No. 2001-40-021)

In 1993, the IRS acknowledged the problem of filing fraud and estimated tax fraud and abuse to be in the millions of dollars. To combat tax filing fraud and abuse, the IRS implemented the Revenue Protection Strategy (RPS), comprised of individual initiatives to improve taxpayer compliance and, in April 1994, established the Office of Refund Fraud (ORF) to lead those efforts.

In 1997, the Congress appropriated over $700 million during a five-year year period to fund initiatives to improve EIC compliance. In 1998, the IRS established the EIC Program Office to oversee and coordinate the IRS’ EIC Program. The establishment of this appropriation and office caused a major shift in focus from the ORF to the new EIC Program Office; however, the ORF continued to address filing fraud and abuse issues,

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including the EIC. As a result of the RPS, the IRS implemented additional checks in its return processing procedures to improve taxpayer compliance. These processing checks resulted in increased revenue protection by detecting tax filing schemes and abuse and by preventing the IRS from issuing many erroneous refunds.

In January 2001, the GAO identified “Noncompliance with the Earned Income Credit” as a high-risk area for the IRS. The GAO reported that noncompliance with the EIC exposes the federal government to billions of dollars of risk.

The Office of Audit agrees with GAO’s assessment that noncompliance with the EIC is a high risk for the IRS. However, the Office of Audit believes the high risk to the IRS is in its overall efforts to protect revenue, and that noncompliance with the EIC is just one piece in improving revenue protection.

The Office of Audit noted that the establishment of the EIC funding and creation of the EIC Program Office caused a shift in IRS’ focus; from revenue protection to noncompliance with the EIC. Management of RPS initiatives has been fragmented. Each functional area has its own results measure, and there is no overall goal and performance measure to gauge the impact of these initiatives on reducing noncompliance. The individual initiatives alone are not enough to ensure the IRS is effectively addressing filing fraud and abuse.

The Office of Audit recommended that the IRS develop a comprehensive RPS with established measurable goals and objectives to evaluate the effectiveness of the Strategy. Until the RPS is developed and implemented, the IRS should develop a process to measure the effectiveness of individual initiatives on reducing noncompliance. Once developed, the RPS should also contain provisions for measuring the effect of its components on reducing noncompliance.

IRS management agreed with the audit recommendations and has initiated corrective action.

Protecting Taxpayer Rights

Improved Case Monitoring and
Taxpayer Awareness Activities Can
Enhance the Effectiveness of the Tax
Practitioner Disciplinary Proceedings
Program
(Reference No. 2001-10-027)

The success of the disciplinary proceedings program is dependent on the IRS timely identifying and initiating corrective action against incompetent or disreputable tax practitioners to protect the public from further harm. A lack of adequate staffing in the Director of Practice’s Office resulted in delays in assigning and processing tax practitioner complaints.

To help relieve the backlog of work, the Deputy Commissioner Operations assigned five additional attorneys to the Director of Practice in April 2000. It will be difficult to determine whether the additional resources will reduce the processing times because the Office does not maintain information necessary for monitoring case activity and tracking resource expenditures.

Although the current automated case tracking system has the capacity to generate reports to assist in monitoring cases and resources, the needed programming has not been completed. Also, the system was not always updated or accurate, and an inventory reconciliation had not been conducted since the system was established in 1998.

Additionally, information was not readily available to the taxpaying public regarding how to report violations by tax practitioners. The IRS web site, publications, and forms did not provide information on how to report allegations of tax practitioner violations. Customer Service and National Taxpayer Advocate employees assisting taxpayers on

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the telephone did not have information on how to report allegations of tax practitioner violations.

The Office of Audit recommended that the automated case tracking system should be upgraded to provide reliable data to monitor case activities and resource requirements. Also, the IRS web site and publications should include information on how to report practitioner violations.

IRS management agreed with the recommendations and is taking appropriate corrective action.

The National Taxpayer Advocate Can
Improve the Service Provided to
Taxpayers
(Reference No. 2001-10-001)

In the cases reviewed by the Office of Audit, National Taxpayer Advocate caseworkers did not always address taxpayers’ problems accurately and timely, or effectively communicate with taxpayers. The Taxpayer Advocate offices also experienced delays in working cases, sometimes in excess of 30 calendar days. Moreover, caseworkers did not always ensure that other IRS employees stopped contacting taxpayers or that the IRS stopped issuing collection notices while the taxpayers’ problems were being resolved. In addition, there were several instances where caseworkers had communicated with third parties, but the case files and the IRS records did not document the taxpayers’ authorizations to do so. The Taxpayer Advocate’s Centralized Quality Review staffs had also outlined trends in caseworkers not meeting quality standards.

The Office of Audit further reported that caseworkers had complied with some of the quality standards for accuracy, timeliness and communication. For example, caseworkers had given taxpayers reasonable due dates for providing case information and provided the necessary caseworker identification on correspondence. When caseworkers needed to request the taxpayer’s information a second time, they made the request for information in writing and provided the taxpayer an explanation of the consequences of not providing the needed information.

In almost half of the cases, problems were not resolved to taxpayers’ satisfaction. In a majority of these cases, the IRS was not able to accommodate the taxpayer because of I.R.C. requirements or because the taxpayers did not respond to the caseworkers’ requests for additional information or documents.

The Office of Audit recommended that the National Taxpayer Advocate use quality review results to identify national training needs and emphasis areas, and require local Advocates to report quarterly on actions taken to address areas warranting improvement. The Office of Audit also recommended that the National Taxpayer Advocate reinstate, as a quality review standard, the authorized disclosure of taxpayer information, and require front-line managers to evaluate compliance with this standard.

The IRS Commissioner responded that the report findings were based on cases completed by Problem Resolution Program caseworkers who were assigned to functional divisions prior to the stand up of the Taxpayer Advocate Service on March 12, 2000. While corrective actions stated in the management response addressed most audit findings, the IRS Commissioner stated that Local Taxpayer Advocates would not be required to report quarterly on actions to address quality standards. Also, rather than reinstating the quality review standard, group managers would evaluate, during case reviews, adherence to the requirements for disclosure of taxpayer information to third parties.

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The Treasury Inspector General for
Tax Administration Can Rely Upon
Data on the Electronic Disclosure
Information Management System for
Its Statutory Review
(Reference No. 2001-10-051)

FOIA and I.R.C. Section 6103 are used by taxpayers to request information from the IRS. FOIA requires that records of the federal government generally be available to the public upon request, unless specifically exempted. Section 6103 regulates the release of tax returns and tax return information to taxpayers or their designees. The IRS uses the Electronic Disclosure Information Management System (E-DIMS) to track written requests for information.

RRA 98 requires the Office of Audit to perform periodic reviews of the appropriateness of the IRS’ denials of taxpayers’ written requests for information on the basis of I.R.C.

Section 6103 or the FOIA exemption (b)(7)¹⁰. The Office of Audit concluded that it can rely on information contained in the E-DIMS when performing its statutory audit. The limited audit tests provided reasonable assurance that selected information on the E-DIMS was accurate and complete. For example, the system was 95 percent accurate for the information the Office of Audit will use when performing its review of denied requests and 100 percent complete for the cases reviewed.

However, corrective action is needed to ensure that revised response dates are accurately input to the E-DIMS. Inaccurate revised response dates could result in the IRS not responding to a requester within the time period allowed by law. For the audit period, the Office of Audit estimated that as many as 1,265 cases with voluntary extensions could have inaccurate revised response dates on the E-DIMS. While this issue does not affect the Office of Audit’s reliance on the system, clear guidance on establishing revised response

¹⁰5 U.S.C. Section 552(b)(7) (1996)

dates could better protect a taxpayer’s right to a timely response.

The Office of Audit recommended that IRS Disclosure management change their current procedures to require Disclosure personnel to state the actual response date in voluntary extension letters, instead of the number of additional calendar days they are requesting. The exact response date cited in the voluntary extension letter could then be input to the E-DIMS as the revised response date.

IRS management agreed with the recommendation and is taking appropriate corrective action.

The Tax Exempt and Government Entities Division Needs to Improve the Oversight Process for Compliance Project Examination Activities (Reference No. 2001-10-028)

The examination selection process for the TE/GE Division has been the subject of a number of news reports. Many of the reports raised questions on whether the process fairly selected exempt organizations for examination. The TE/GE Division primarily uses compliance projects to identify and select cases for examination through a process that researches information on the Returns Inventory Classification System (RICS).

The Office of Audit concluded that the TE/GE Division had controls in place to effectively administer the process of identifying and selecting exempt organization returns for examination. However, the TE/GE Division needs to improve compliance with its operating procedures that require justification for initiating a project and management approval for examinations. IRS managers should also ensure that projects are consistent with the strategies in the annual work plan. In addition, procedures are needed to ensure that the managers in the Review and Classification function approve non-examined closures and that the reasons for these actions are documented in the case files.

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IRS management agreed with the audit recommendations and is taking appropriate corrective action.

Managing Finances

Controls Over Criminal Investigation
Investigative Imprest Funds Should Be
Strengthened
(Reference No. 2001-10-040)

The Office of Audit reviewed four selected CI Imprest Funds and determined that, in general, the funds were accurately accounted for and adequately safeguarded, and related fund transactions were authorized, approved, and accurately recorded.

However, the Office of Audit reported that unannounced, independent quarterly account verifications were not consistently and properly performed. In addition, the authorized dollar amounts for the funds, totaling $960,000, exceeded actual needs by almost $750,000, which resulted in a potential interest lost of approximately $49,000 per year. Also, 61 percent of the monthly accountability reports were not timely prepared and submitted.

The Office of Audit recommended that IRS management ensure that required quarterly imprest fund verifications are performed consistently and in accordance with IRS requirements. IRS management should also establish procedures requiring the authorized dollar amounts of imprest funds be periodically monitored to determine actual needs, and that oversight reviews be conducted to ensure the timely submission of accountability reports.

IRS management agreed with the recommendations.

Letter Report: Attestation Review of
the Internal Revenue Service’s Fiscal
Years 1999 and 2000 Office of National
Drug Control Policy Accounting
Submissions
(Reference No. 2001-10-044)

National Drug Control Program agencies are required to submit to the Director of the Office of National Drug Control Policy (ONDCP) a detailed accounting of all funds expended during the previous fiscal year on program activities. Further, agency IGs are required to authenticate such accounting prior to its submission.

The IRS is one of the agencies participating in this program. The Office of Audit reviewed the IRS Detailed Accounting Submissions for FY 1999 and 2000. These submissions, including the assertions that the methodology used is reasonable and accurate, and the obligations presented are associated with a financial plan, are the responsibility of the IRS.

For FY 1999, the IRS could not provide original documentation supporting total CI obligations that are extracted from the Automated Financial System/Budget Formulation System. The Office of Audit was able, however, to obtain other documentation used in the IRS methodology.

With the exception of the item described above, the auditors did not identify any other item that would cause the Office of Audit to believe that the IRS’ FY 1999 and 2000 Detailed Accounting Submission assertions are not presented, in all material respects, in accordance with ONDCP-established criteria.

IRS management agreed with the results of this attestation review.

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Letter Report: Improvements at the Lockbox Bank in Atlanta Are Needed to Better Protect Taxpayer Payments and Minimize Processing Costs (Reference No. 2001-40-048)

The IRS lockbox program consists of commercial banks that have contracted to process tax payments. This program was designed to accelerate the deposit of tax payments by having taxpayers send their payments to the banks rather than to the IRS. From January through April 2000, the Atlanta lockbox bank processed over 3.4 million tax payments totaling over $17 billion and received over 1 million tax returns.

The bank timely deposited all 150 tax payments reviewed by the Office of Audit. Ninety-nine percent of those payments also posted correctly to taxpayers’ accounts. While these are significant accomplishments, opportunities exist to improve bank security and accurate sorting of tax returns.

The Office of Audit identified several security risks at the bank, including: the untimely deposit of 14 checks from 12 taxpayers totaling over $5.6 million found by a bank manager conducting an unannounced desk check; terminated employees who had continued access to the bank computer system for extended periods of time after termination; two individuals allowed in restricted areas without an identification badge and unchallenged by security personnel or bank managers; checks not made payable to or stamped with “United States Treasury” (two previous thefts from the bank both involved money orders that were not stamped); and, a bank manager giving a deposit to a bank courier who did not have proper identification. Inadequate security over personnel, tax returns, and tax payments can lead to embezzlement and/or unauthorized disclosure of taxpayer information.

In addition, bank employees did not correctly sort 38 percent of the tax returns sampled. When returns are not properly sorted, the IRS must spend additional resources to correctly sort them, which could result in processing delays. From January through April 2000, this bank was paid $842,000 to sort over one million tax returns.

The Office of Audit recommended that the IRS ensure all required security measures are implemented and enforced and tax returns are sorted correctly.

IRS agreed with the recommendations and has initiated corrective actions.

Strategic Enforcement Division

The Strategic Enforcement Division (SED) is responsible for executing a proactive program to detect fraud in IRS operations,

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unauthorized accesses to IRS computer systems by internal users, and attempts to interfere with the security of IRS computers by external sources. SED combines the talents of auditors, special agents, and computer programmers into an investigative team to accomplish its mission. Recommendations to improve system security weaknesses identified during the course of SED analyses related to internal fraud and UNAX violations are forwarded to the IRS.

SED also provides extensive investigative and forensic data analyses to field special agents for their investigations. Additionally, SED’s computer investigative specialists assist special agents in seizing computers, analyzing computer-related evidence, and conducting searches on the Internet.

National Investigative Initiatives

A principal component of SED’s operation involves national investigative initiatives. These initiatives start with information developed during successful investigations. The methodology of the crime is used to develop computer database applications that will identify other individuals who may be perpetrating the same crime. Computer matching is used in proactive initiatives. These initiatives are included in Computer Matching Act¹²agreements approved by the Department of the Treasury’s Data Integrity Board and published in the Federal Register. There are 7 ongoing initiatives which have resulted in 15 criminal referrals to field special agents for investigation.

UNAX Detection Project

The IRS Audit Trail Lead Analysis System (ATLAS) identifies potential unauthorized accesses to electronic taxpayer information on

¹² Pub. L. No. 101-56, 103 Stat. 149 (1989)

computer systems by IRS employees. During this reporting period, SED identified and analyzed 358 leads of potential unauthorized accesses using ATLAS and other sources. This resulted in 163 referrals to field special agents for investigation of violations of the Taxpayer Browsing Protection Act of 1997¹³.

In addition, investigations of other violations identify unauthorized accesses to tax information. During this reporting period, there have been a total of 9 successful prosecutions and 95 adverse administrative actions against IRS employees involved in unauthorized access to taxpayer information. An additional 18 IRS employees resigned during TIGTA’s investigation.

SED provided assistance in a number of cases, including:

_•A former IRS employee was arrested after the return of an 11-count indictment of unauthorized accesses and disclosure of tax information. In September 2000, the employee pled guilty to 2 counts of the 11-count indictment. SED identified questionable computer accesses to 16 taxpayer accounts. The employee was also the treasurer of an association that raised money to support residents of a foreign country. The employee allegedly gathered and recorded income and personal information on alien taxpayers and publicly bragged about the illegal

accesses.

The employee had been terminated based on a previous TIGTA investigation. In December 2000, the employee was remanded back to the county jail to serve one year for violation of parole. Following release, the employee is to

serve 3 months under house arrest,

¹³ Pub. L. No. 105-34, 111 Stat. 1104 (1997)

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3 years probation, and in lieu of a fine, was ordered to perform 100 hours of community service.

_•In January 2001, a couple pled guilty to a 21-count indictment of conspiracy, wire fraud, and money laundering for operating a credit repair scheme. The scheme involved the use of IRS Employer Identification Numbers (EIN) to create new credit files. Analysis of seized business records disclosed that the couple also operated an illegal credit card scheme.

The credit repair scheme generated at least $81,684 from 2,939 clients. The couple charged a fee for information on establishing a new credit history. The illegal credit card scheme generated at least $89,257 in fees from 2,641 clients who thought they were obtaining unsecured major credit cards. Instead, clients were mailed a list of financial institutions that offered unsecured credit cards.

Disclosure and Improper Computer Access Investigations

The following investigations resulted from national investigative initiatives (including the UNAX Detection Project), investigative strategies involving abuse of IRS computer systems, and disclosure of confidential taxpayer records by IRS employees.

Former IRS Employee Indicted for Unauthorized Computer Accesses

In October 2000, a federal grand jury returned an eight count indictment charging a former IRS employee with unauthorized computer accesses. The investigation was initiated after a parent alleged that the employee might have used confidential IRS records to stalk the parent’s teenager. The employee was previously prosecuted and convicted of stalking the teenager. TIGTA’s investigation disclosed that the employee accessed the tax accounts of the parents during the time frame that the teenager was stalked. The investigation also disclosed that the employee accessed the tax account of the employee’s attorney. The employee accessed the attorney’s tax account two days after being notified that the attorney had been granted a civil judgement against the employee for failing to pay attorney fees.

IRS Employee Pled Guilty to Illegally Accessing Taxpayer Accounts

SED identified numerous unauthorized accesses made to taxpayer accounts by an IRS employee. The investigation further revealed

that each of the accounts accessed involved taxpayers that had some personal or business involvement with the employee. When interviewed by TIGTA special agents, the IRS employee admitted knowing the taxpayers and illegally accessing the accounts to obtain personal information about the individuals. The employee subsequently resigned. In January 2001, the IRS employee pled guilty to fraud and related activity in connection with computers.

IRS Employee Pled Guilty to Unauthorized Inspection of Tax Return Information

In December 2000, a former IRS employee entered a guilty plea to 2 counts of a 12-count indictment charging unauthorized inspection of tax return information. The investigation disclosed accesses to the computerized tax accounts of the employee’s neighbor, in-law, and an employment reference. These accesses were not in conjunction with the employee’s official duties. The employee resigned in lieu of termination. In March 2001, the employee received 3 years probation for each count to run concurrently, 200 hours of community service, and was ordered to pay a special

assessment.

IRS Employee and Spouse Arrested in Credit Card Scheme

In January 2001, TIGTA special agents arrested an IRS employee and spouse on federal charges for misusing a government computer in connection with a credit card fraud scheme. From 1992 to 1997, the spouse requested the employee use the IRS’ computer system to obtain SSN and dates of birth for specific individuals. The employee obtained the confidential information for the spouse, who provided the information to third parties.

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The information was used to activate stolen credit cards or apply for new credit cards in the individuals’ names. Subsequently, the credit cards were used fraudulently. In February 2001, the IRS employee and spouse were indicted for fraud and related activity in connection with computers.

Former IRS Employee Pled Guilty to False Statements

In October 2000, a former IRS employee was sentenced to two years probation after having pled guilty to one count of a false statement. The TIGTA investigation was based on information that the employee disclosed confidential taxpayer information to an unauthorized third party. TIGTA determined that the employee mailed a copy of a taxpayer’s offer-in-compromise letter as a means of advertising the employee’s ability to work with the IRS. The employee admitted to the disclosure, but claimed it was not intentional. Additional information was developed that the employee also falsely claimed to be an enrolled agent, a certified public accountant (CPA), and an attorney on official documents filed with the IRS.

IRS Employee Pled Guilty to Misusing the IRS Computer and Preparing False Tax Returns

It was reported that an IRS employee illegally accessed the tax account of a dependent listed on the employee’s federal income tax return. TIGTA determined that the dependent, whose account was accessed, was deceased and that the employee illegally claimed dependents on the employee’s tax returns. The employee admitted to illegally using the IRS computer files to determine whether a death indicator appeared on the system for the dependent and to illegally claiming dependents on the employee’s income tax returns. The employee resigned from the IRS, and in January 2001, pled guilty to unlawful computer access and preparation of false tax returns.

Theft, Embezzlement and Fraud Investigations

TIGTA investigates incidents of theft, embezzlement, and fraud committed by both internal and external sources. TIGTA also investigates incidents of impersonation where individuals attempt to defraud taxpayers.

Four Indicted in Money Laundering Conspiracy

In February 2001, 4 individuals were indicted on 39 counts of money laundering. The indictment charged the individuals with facilitating the concealment of illegal funds sent by victims of a telemarketing network. The victims were elderly persons living throughout the U.S. who were contacted by telephone and convinced they had won large cash prizes and/or recoveries. The prizes were payable upon the victims’ prepayment of various fees and alleged taxes, ranging from $2,000 to $20,000. The leader of the telemarketing network is currently serving a six-year federal prison sentence.

Two Individuals Convicted for Conspiring to Impede and Obstruct an IRS Audit

An IRS employee reported that an individual had mailed fictitious IRS “Summons Termination” forms terminating valid IRS summonses issued to third party witnesses. There are no "Summons Termination" forms; however, the notice bore the IRS seal and contained information which would lead people to believe it came from the IRS. The notices were mailed in counterfeit IRS envelopes. In addition, threatening letters were sent to summons recipients and to IRS employees, warning them to “cease and desist” their conduct in connection with the IRS audit, as well as other threatening statements.

A search warrant was executed at the individual’s business that resulted in evidence of a co-conspirator. A search warrant was executed on the co-conspirator’s business and a computer file of the fictitious IRS forms and counterfeit envelopes were seized.

The individual and co-conspirator were indicted for conspiring to impede and obstruct an IRS audit and for counterfeiting the IRS seal. In addition, the co-conspirator was indicted for obstruction of grand jury proceedings.

In May 2000, the co-conspirator pled guilty and was subsequently sentenced to 15 months imprisonment, 3 years supervised release, and ordered to pay a $4,000 fine. In June 2000, the individual went to trial and was convicted on 1 count of conspiring to impede and obstruct an IRS audit and 3 counts of counterfeiting the IRS seal. In November 2000, the individual was sentenced to 15 months imprisonment, 3 years supervised

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release, and ordered to pay a $30,000 fine. This matter was investigated jointly by TIGTA and IRS CI special agents.

Four Individuals Convicted for Conspiring to Negotiate a Stolen Check Intended for the IRS

A taxpayer reported that a check for $240,000 mailed to an IRS lockbox had been stolen and counterfeited. An individual admitted depositing the check in a bank account and withdrawing $240,000 in cash. After failing polygraph examinations, two additional individuals confessed to their involvement and cooperated with the investigation. A seizure warrant was executed and $28,100 in cash was seized. An additional $24,000 was recovered from one of the individuals. During the investigation, three additional stolen IRS remittance checks totaling $98,000 were identified, and a fourth individual was implicated in the conspiracy.

A federal grand jury indicted the four individuals for bank fraud, conspiracy to launder money, and engaging in monetary transactions in property derived from specified unlawful activity. In addition, one of the individuals was indicted for laundering of monetary instruments-concealment. All four individuals pled guilty. In December 2000 and January 2001, the 4 individuals were sentenced to imprisonment ranging from 8 to 57 months. Each of the four individuals was ordered to pay $240,000 in restitution and court costs ranging from $100 to $200.

Former IRS Employees Pled Guilty to Conspiracy and Tax Fraud

An investigation determined that a tax preparer who was a former IRS employee, in collaboration with a co-conspirator, prepared fraudulent tax returns in support of 35 mortgage applications. Two of the mortgages were for the former employee.

After substantiating the mortgage fraud, a joint investigation with IRS CI was initiated to pursue a tax investigation against the former employee. The tax investigation determined that the former employee understated income on tax returns and several tax returns were delinquent.

During an interview, the former employee admitting preparing false tax returns in support of approximately 40 mortgage applications in collaboration with the co-conspirator. The former employee also admitted submitting two fraudulent personal mortgage applications and filing five false personal tax returns. In November 2000, the former employee pled guilty to one count of conspiracy to commit bank fraud and one count of a false income tax return.

Four IRS Employees Indicted for Conspiracy and Theft

In January 2001, an IRS employee pled guilty in a plea agreement to one count of conspiracy to defraud the U.S. government and was ordered to make restitution for the thefts of taxpayer remittances. In April 2000, local police reported to TIGTA that the employee had been arrested on an unrelated incident. During the arrest, an altered check and money order originally made payable to the IRS were found in the employee’s possession.

The TIGTA investigation found 12 additional remittances totaling $16,155. The employee stole checks and altered the payee line to the name of three co-conspirators, who then negotiated the check or money order. The IRS employee was terminated in April 2000 and arrested in November 2000. The three co-conspirators were also IRS employees.

In June 2000, the U.S. Attorney filed a complaint against the first co-conspirator who was arrested, terminated, indicted, and pled not guilty. In March 2001, in a plea

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agreement, the first co-conspirator pled guilty to three counts of theft and was ordered to pay restitution.

In November 2000, the second and third co-conspirators pled not guilty. In March 2001, in a plea agreement, the second coconspirator entered a guilty plea of misdemeanor theft, was ordered to pay restitution, and was terminated in July 2000. The third co-conspirator resigned in April 2000 and is awaiting trial.

In November 2000, all four conspirators were indicted in a superceding indictment for conspiracy, theft, and aiding and abetting.

Individual Indicted After Submitting Fraudulent Offer in Compromise

In January 2001, an individual was indicted on three counts of bank fraud and one count of false statements. A TIGTA investigation confirmed the individual had submitted a fraudulent offer in compromise acceptance letter to a financial institution. The document, which was allegedly falsified by the individual, purported to clear the individual from a $51,000 IRS liability and contained a forged signature of an IRS official.

IRS Employee Terminated and Charged Along with Friend for Larceny of Tax Remittance

In January 2001, TIGTA special agents filed a state criminal complaint charging a former IRS employee and a friend with two counts of larceny each. The employee stole tax remittances from the employee's workflow. The employee was terminated. In March 2001 the former IRS employee was sentenced to pretrial diversion and ordered to pay $640 in restitution.

Individual Arrested for Stealing Tax Remittance from Lockbox

A taxpayer reported that a tax remittance submitted to a lockbox had been stolen and the check negotiated. An investigation disclosed the $450 tax remittance had been endorsed and cashed by an individual. In January 2001, the individual was arrested on felony forgery charges and was indicted a month later.

Former IRS Employee Arrested

In January 2001, a former IRS employee was arrested after being indicted on 12 counts of submitting false statements, 2 counts of mail fraud, and 1 count of interference with the functioning of the IRS. The investigation began when the IRS reported that the former employee’s CPA license had been revoked. Despite losing the CPA license and IRS privileges, the employee continued representing clients before the IRS by posing as another CPA.

Individual Changes Plea to Guilty At Trial

In March 2000, an individual was indicted and pled not guilty to 26 counts of mail fraud. The individual advised clients that a portion of the money collected had been paid as payroll tax deposits to the IRS. Instead, the individual stole approximately $95,700 paid by the clients. After the testimony of 8 of the government’s 20 witnesses, the individual entered a plea of guilty. In November 2000, the individual was sentenced to 24 months incarceration, 3 years supervised release, and a $2,350 special assessment. In a February 2001 hearing, the individual was ordered to pay restitution in the amount of $64,040. The individual’s former business partner had previously repaid some of the clients.

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Semiannual Report to the Congress

Individual Pled Guilty to an Identity Theft Scheme to Defraud the Government

In October 1999, an individual used a fictitious state driver’s license and fictitious IRS identification to open a private mailbox address. The investigation revealed that the individual was involved in numerous schemes to defraud the government, which led to a joint investigation involving TIGTA, IRS CI, the Postal Service, and the Secret Service. In October 2000, a federal grand jury indicted the individual on 33 counts of identity theft and fraud activities. In February 2001, the individual pled guilty to fraud in connection with identification documents and access devices, false claims, forgery, theft of stolen mail, and laundering of monetary devices. The individual is incarcerated on a prior indictment and awaits sentencing.

IRS Employee Convicted of Grand Theft for Misuse of Government Credit Cards

In October 1999, it was reported that an IRS employee embezzled $1,192 by misusing government-issued credit cards. When interviewed by TIGTA special agents, the employee provided a written confession and resigned in lieu of removal. In February 2001, the employee pled guilty to 1count of grand theft from the IRS, and was sentenced to 2 years probation, ordered to perform 45 days of work for the state Department of Transportation, pay $1,192 in restitution to the U.S. Department of the Treasury, and pay a $100 fine to the court.

Four Individuals Pled Guilty to Identity Theft

An individual purporting to be an IRS employee fraudulently obtained a sports utility vehicle. The investigation identified the individual who completed the lease application and four other individuals who were using false identities to illegally obtain products.

Four of the individuals were indicted for fraud and related activity in connection with documents and information and official certificates or writings. In August 2000, two of the four pled guilty to identity theft. In January 2001, both were sentenced to four months house arrest, three years probation, and $100 in court costs. One individual was ordered to pay $4,500 in restitution, and the other individual was ordered to pay $48,000 in restitution.

In September 2000 and January 2001, the third and fourth individuals pled guilty to identity theft. In February 2001, the fifth individual was indicted and arrested for identity theft.

Individual Pled Guilty To Mail Fraud

In November 2000, an individual pled guilty to one count of mail fraud for providing the IRS with several fraudulent forms. TIGTA investigated this matter concurrently with the Defense Criminal Investigative Service. The individual fraudulently obtained money from several victims by falsely claiming to be a CPA who was authorized to appear before the IRS. Fees paid to this individual ranged from $750 to over $2,600.

Individual Pled Guilty to Submitting A False Levy Release

In December 2000, an individual was sentenced to one year imprisonment, one year supervised release, and a special assessment fine following a guilty plea regarding the misuse of Department of the Treasury names and symbols. A falsified notice of levy was sent to the individual’s employer to satisfy a tax liability. The employer, suspicious of the levy release, contacted TIGTA. Review of the levy release determined it was a

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

fraudulent document. When interviewed, the individual admitted to falsifying the levy notice and providing it to the employer.

Lockbox Bank Employee Pled Guilty to Theft and Mail Fraud

In November 2000, a lockbox bank employee pled guilty to one count of mail fraud and one count of aiding and abetting the theft and embezzlement of an IRS remittance check. In February 2001, the bank employee was sentenced to six months home confinement with electronic monitoring, five years supervised probation, a $2,000 fine, and a $100 special assessment.

The investigation disclosed that the bank employee manipulated the payment process to falsely credit the accounts of friends. The bank employee prepared and processed false posting documents and remittances to credit $22,339 to these accounts. These payments satisfied a friend’s tax liabilities and generated tax refunds totaling $8,233. The bank employee received approximately $3,500 of the fraudulent refund proceeds. Approximately six months later, the IRS reversed the false payments and initiated collection actions against the individuals.

Nine Individuals and a Business Indicted in a Scheme to Defraud Banks Out of $58.3 Million

In December 2000, a federal grand jury charged 9 individuals and a business in a 116-count indictment with conspiracy, mortgage fraud, mail fraud, and operation of a criminal business. TIGTA joined the multi-agency investigation when information was developed that EINs and tax documents were fraudulently used on numerous mortgage applications.

From July 1994 through January 2000, individuals conspired to defraud federally insured banks and private lenders in excess of $58.3 million in mortgage loan proceeds in connection with the sale and resale of over 170 properties. The object of the conspiracy was to obtain mortgages by submitting false documents that deceived the lenders into providing moneys to unqualified purchasers at inflated amounts, which substantially exceeded the true value of the homes. The mortgage files relating to these transactions revealed numerous false items on applications and false documents provided to substantiate down payments and the ability to pay.

In January 2001, one of the individuals pled guilty to 14 felony counts including conspiracy, mortgage fraud, mail fraud, and tax evasion. In March 2001, another individual pled guilty to conspiracy to commit mortgage fraud and mail fraud.

Two Arrested in Stolen Treasury Check Scheme

In February 2001, arrest warrants were issued for three individuals involved in a scheme to cash $180,000 of stolen IRS tax refund checks. These cases originated when an individual fraudulently reported that a 1998 refund check had not been received 14 months after issuance of the original refund. Another individual solicited the assistance of a third individual to negotiate the stolen checks. All three individuals received compensation for their roles in the scheme. TIGTA and Secret Service special agents and postal inspectors arrested two of the individuals. The third suspect has not been located.

Individual Arrested for Theft of IRS Refund Checks

In November 2000, an individual was arrested by TIGTA for bank fraud in connection with the negotiation of over $450,000 in stolen checks. Twenty-one of the stolen checks were IRS tax refund checks totaling $56,087.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

The individual admitted negotiating the checks. While released on bail under a cooperation agreement with the U.S. Attorney’s Office, the individual fled and remains a fugitive.

Individual Jailed for Impersonating IRS Agent to Locate Ex-Spouse

An individual impersonating an IRS agent made a telephone call to a taxpayer demanding the address and other information about the taxpayer’s sibling. The taxpayer requested the caller’s IRS identification number. When the individual refused to provide the information, the taxpayer declined to provide any information about the sibling. The individual threatened to have the taxpayer jailed if the information was not provided.

TIGTA was notified and the investigation determined the individual to be the former spouse of the sibling. In November 2000, the individual was indicted by a federal grand jury for impersonation. TIGTA special agents arrested the individual. In January 2001, pursuant to a plea agreement, the individual pled guilty to one count of misuse of the Department of the Treasury name or symbol. The individual was sentenced to one year of probation, mental counseling, and no contact with the victim. The individual also was fined $1,000 and ordered to pay a court fee.

IRS Employee Pled Guilty to Theft of Government Property

In October 2000, an IRS employee pled guilty to falsely claiming overtime and holiday pay over a three-year period. The false claims totaled $32,547 in payments to the employee. It was reported that a review of the employee’s time sheets showed a discrepancy between what was reported and what was actually worked. An investigation determined that the employee forged authorizing signatures on payroll and overtime documents and that the employee subsequently altered the documents to conceal the unauthorized payments. The employee was removed from the IRS. In January 2001, the employee was sentenced to one year incarceration, suspended to six months of electronic home detention, and five years probation. Additionally, the employee was ordered to make full restitution, and to pay for the electronic detention and court costs.

Threat, Assault, and Harassment Investigations

IRS employees face a difficult and challenging mission in serving taxpayers. While incidents and threats of violence and harassment are rare, sometimes individuals do resort to violent acts. The Office of Investigations considers responding to and investigating threats and assaults against IRS employees one of its highest priorities. This Office also investigates incidents of harassment by individuals who attempt to undermine IRS employees as they carry out their duties. During this six-month period, the Office of Investigations completed 271 threat, assault or harassment investigations. The Office of Investigations also investigates alleged misconduct by IRS employees involving sexual battery and inappropriate behavior.

Individual Charged After Attempting to Harass and Intimidate IRS Employees

In January 2001, a federal grand jury returned a multi-count indictment charging an individual with fraudulent financial instruments, bankruptcy fraud, fraud and false statements, and felon in possession of a firearm. TIGTA initiated an investigation after an IRS employee reported receiving a copy of a fraudulent CTR in the employee’s name.

The investigation determined that the individual filed 105 fraudulent CTRs in the names of current and former IRS employees, U.S. federal judges, U.S. attorneys, local law enforcement officials, and private citizens. The forms alleged multi-million dollar cash transactions with these individuals. The investigation also revealed that the individual presented several fraudulent Bills of Exchange to various government agencies to satisfy outstanding debts.

The investigation determined that the individual is an active member of two anti-government extremist groups that advocate non-compliance with all state and federal authorities and promoted the fraudulent redemption scheme. This case expanded into a multi-agency investigation that included IRS CI, Bureau of Alcohol, Tobacco and Firearms, the Park Service, and a state police agency.

Workplace Violence Averted

An IRS employee was convicted of possessing a firearm in a federal facility. TIGTA initiated an investigation based on an allegation that a possible violent workplace situation existed when a furloughed IRS employee returned to work. It was reported that the employee purchased a gun for protection from the furloughed co-worker. Initially, the employee denied having the weapon and stated the relationship with the furloughed co-worker was good.

During a consent search of the employee’s workspace, a loaded automatic handgun was found. The employee subsequently admitted to being fearful of the furloughed co-worker.

In October 2000, the employee resigned. In February 2001, the employee pled guilty to possessing a firearm in a federal facility and was fined $400 and ordered to pay a special assessment.

Individual Convicted of Threatening TIGTA Special Agent

In February 2001, an individual was found guilty of threatening to assault a TIGTA special agent in the performance of the agent’s duties. There was a history of contacting various IRS officials to discuss perceived problems with the individual’s taxes or the taxes of others. The individual called IRS offices up to 10 times a day harassing and threatening lawsuits. Because

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

of the extensive and harassing nature of the calls, they were eventually diverted to TIGTA. When this occurred, the individual threatened to assault the special agent assigned to answer the calls.

Inmate Indicted for Assaulting TIGTA Special Agent and IRS General Investigator

In December 2000, a federal grand jury indicted a county detention facility inmate on three counts of assaulting federal officers. The indictment charged that the inmate, while attempting to escape custody of a county sheriff’s deputy, assaulted a TIGTA special agent and IRS general investigator, who came to the assistance of the deputy. The inmate entered a TIGTA office and engaged in a violent struggle with the deputy. The TIGTA special agent heard the struggle and came to the assistance of the deputy. While assisting the deputy, the inmate bit the special agent and sprayed the special agent in the eyes with oleoresin capsicum spray that the inmate wrestled from the deputy. The inmate also sprayed the general investigator who assisted in the apprehension. The inmate had been in a local detention facility awaiting trial for other alleged crimes.

Treasury Inspector General for Tax Administration March 31, 2001

Semiannual Report to the Congress

Appendix I Statistical Reports for the Office of Audit

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.

	Administrative 1	Case Type Employee Tax Matter 2	Total
Inventory on October 1, 2000	1,323	1,240	2,563
Add: Cases Received	3,064	1,607	4,671
Less: Cases Closed	(2,929)	(1,539)	(4,468)
Duplicates	(39)	(146)	(185)
Not Misconduct	(57)	0	(57)
Total Closures	(3,025)	(1,685)	(4,710)
Inventory on March 31, 2001	1,362	1,162	2,524