Mr. Chairman and
members of the Subcommittee, I appreciate the opportunity to appear before you today to
discuss the accomplishments and challenges of the Treasury Inspector General for Tax
Administration (TIGTA) and the Internal Revenue Service (IRS).
Treasury Inspector General for Tax Administration Accomplishments and Challenges
TIGTA is fairly new to the Inspector General community. To provide effective
oversight to the IRS, TIGTA developed an organizational alignment that is best suited to
address the demands and challenges of the IRS. The Office of Audit is aligned with the
IRS’ business unit structure that allows focused audit coverage of the highest
priority tax administration issues. The Office of Investigations (OI) reports directly to
the Headquarters Office through geographically dispersed field offices. Additionally, its
Strategic Enforcement Division (SED) proactively identifies and investigates unauthorized
accesses by employees and illegal intrusions by outsiders into computerized tax data. This
Division also investigates outside attempts to interfere with the operation and security
of Treasury-owned computer networks.
One of TIGTA’s major statutory requirements is to respond to acts of violence
directed against IRS personnel and to investigate domestic terrorism. In the past 2 years,
we have conducted over 1,400 assault investigations, some of which involved
anti-government groups. Currently, we are investigating the mailings of suspicious powder
substances to IRS Service Centers as well as two fire- bombings at an IRS facility.
TIGTA has achieved good accomplishments in its first full year of operations. TIGTA
management and personnel have placed great emphasis on adding value through the timely
delivery of high-quality audits and investigations. As a result, TIGTA’s financial
accomplishments totaled over $1.5 billion in Fiscal Year (FY) 2000. Thus, TIGTA returned
almost $14 for every budget dollar appropriated, 5 times more than in FY 1999.
In FY 2000, OI special agents closed 43 percent more investigations than in the prior
year. The number of criminal referrals accepted for prosecution during FY 2000 increased
by 6 percent over FY 1999. The Office of Audit issued 162 audit reports in FY 2000, a 119
percent increase over FY 1999. These reports accounted for almost all of TIGTA’s $1.5
billion financial accomplishments claimed. Audit reports contained recommendations that
improved tax administration involving almost 11.4 million taxpayer accounts, a 25 percent
increase from FY 1999.
Since 1997, TIGTA has initiated over 1,300 unauthorized access investigations,
resulting in the removal or resignation of 373 IRS employees, which include 65 successful
criminal prosecutions. Overall, 20 percent of the unauthorized access investigations also
identified evidence of other criminal violations.
Internal Revenue Service Accomplishments and Challenges
The IRS is experiencing success in its administration of the nation’s tax
system. For the first time, the General Accounting Office (GAO) has issued an unqualified
or "clean" opinion on all of the IRS’ financial statements. In addition,
the IRS is currently experiencing a successful filing season. As of February 23, 2001, the
number of returns filed electronically has increased by about 7 percent. In addition, the
IRS continues to increase the number of tax forms that taxpayers can file electronically.
Approximately 23 new forms (for electronic filing) were added in 2001 with an additional
40 to be added in 2002. The IRS has also developed a website that provides taxpayers with
convenient access to tax forms and information. Despite its success in these areas, the
IRS recognizes improvements in its operations are necessary.
To address its need to improve, the IRS is in the midst of a number of complex and
interrelated reform and restructuring initiatives. There is a broad consensus for the
IRS’ plan to transform itself as a more customer-focused organization and to
modernize its computer systems, while continuing to implement tax law changes and collect
approximately $1.9 trillion in tax revenue.
In response to the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS is
transforming itself so that it will operate better and service its customers more
efficiently. It has successfully initiated the process of restructuring the organization
into four new customer-focused business units. Even though changes have been made toward a
restructured IRS, it must continue to address the management and operational issues that
surface to provide first-rate customer service and ensure compliance with the tax laws.
Organizational Restructuring
The most significant challenge the IRS will face over the next few years is
modernization. IRS modernization includes both organizational restructuring and
implementation of new computer systems and technology. The RRA 98 mandated a restructured
IRS organization and revamped business practices. The ability to achieve the IRS’
modernization concept is largely dependent on restructuring the organization to better
meet taxpayer needs and developing new technology to correct deficient and obsolete
systems.
On October 1, 2000, the IRS achieved its first milestone toward modernization
by putting into effect (or standing up) a new organizational structure. The four major
components of the new IRS are: the Wage and Investment (W&I) Division, the Small
Business/Self Employed (SB/SE) Division, the Large and Mid-Size Business (LMSB) Division
and the Tax Exempt and Government Entities (TE/GE) Division.
The stand up of the new business unit structure was an important first step in the
IRS’ restructuring, though it is far from the last step of this long-term endeavor.
The IRS must continue to address management and operational issues such as taxpayer access
to "walk-in" and "toll-free" services; accuracy of responses provided
to taxpayers; the ability to hire, train and retain a qualified workforce; and, reversing
the decline in enforcement rates.
TIGTA audits showed that all four business units were successful in substantially
completing the five 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 were developed. However, additional actions were needed in the area of
staffing unfilled positions in the W&I Division and minimizing the inherent risks
associated with implementing the TE/GE Division’s modernization vision.
Restructuring the IRS is a long-term effort, with probably a decade remaining of
updating technology, revamping business practice, and refining balanced measures of
organizational performance. The success of the restructuring effort is interdependent with
the IRS’ ongoing systems modernization effort. For example, current systems have not
yet been reprogrammed to provide IRS executives the information they need to make
decisions in the IRS’ new operating environment, which focuses on serving distinct
taxpayer market segments. The executives rely on the information generated from its
systems to plan, execute and evaluate programs. Until this realignment of management
information is achieved, executives may not have all the data they need to effectively
manage resources and to evaluate whether taxpayers are receiving the best service
possible.
Systems Modernization
The IRS has made some significant progress towards its governance structure and
processes to support and oversee the modernization of its computer systems. The IRS has
entered into a contract with a consortium of technology and business service providers,
led by a major integrator, which will enable it to achieve its modernization goals. This
contract is commonly referred to as the PRIME contract, and is a multi-billion dollar
contract over a 15-year period.
About $400 million has been spent on systems modernization since it began about 2 years
ago. While significant progress has been made, thus far, most of the ongoing systems
modernization projects have taken longer and cost more than originally planned. As a
result, benefits to taxpayers have yet to be realized. A contributing factor is that the
IRS is in a steep learning curve in its systems modernization effort, and the roles and
responsibilities of the IRS and the PRIME contractor were inadequately defined during the
early phases of the modernization. In addition, some projects were started before the
IRS’ updated "Blueprint" for modernization was completed and detailed
business needs were clearly defined. Also, established processes have not been fully
implemented. While these growing pains are not uncommon for major systems development
projects, the result is that the goals of the restructured IRS may take longer to realize.
The IRS will continue to face risks throughout the life of its technology modernization
projects, and TIGTA will continue to assess its efforts. Thus far, TIGTA has identified
six areas of concern that could have serious implications on the success of computer
modernization, if not properly managed. These areas are:
- A lack of tangible benefits delivered to taxpayers.
- Potential funding problems.
- Problems implementing key systems development processes such as the Enterprise Life
Cycle, project management, configuration management and risk management.
- Inappropriate sequencing of projects.
- Projects being over budget and behind schedule.
- Business needs not always being well defined.
In addition, TIGTA has reported to IRS management the need for all systems development
activities to be consolidated and monitored under the Chief Information Officer (CIO).
TIGTA believes that managing systems development initiatives outside the CIO’s
organization increases the risk of inconsistent and ineffective project management
processes and fragmented systems modernization initiatives, which could lead to delays,
cost overruns and rework. Overall, there is still a steep learning curve and there are
many issues that remain to be addressed.
Computer Security
The IRS maintains a significant amount of valuable and sensitive information. As
such, computer security will continue to be a risk for the IRS. The IRS faces external
threats and risks from within as unethical employees have improperly viewed and
manipulated taxpayer records. In response to these risks, TIGTA maintains an approach to
overseeing the IRS’ computer security efforts that address detection and prevention
activities.
In 1997, the IRS initiated a major education program to alert all employees to the
Taxpayer Browsing Protection Act of 1997 and to the IRS’ policy of "Zero
Tolerance" for unauthorized access to, and inspection of, taxpayer records. The
IRS’ objective is to eliminate unauthorized access. The IRS conducts annual awareness
programs to reinforce this policy and requires all employees to acknowledge, in writing,
that they attended and understood the presentations.
To address unauthorized access to taxpayer information by employees, TIGTA uses
detection criteria that search the IRS’ tax administration files. The SED uses
computer technology and forensic data analysis techniques to investigate unauthorized
access leads identified by the criteria and complaints received by field special agents.
Over the past several years, TIGTA has recommended that the IRS
improve controls in its computer
systems to protect confidential taxpayer information from unauthorized employee accesses
because the IRS continues to have difficulty protecting such information from misuse.
Recent TIGTA audits have identified significant security weaknesses in other areas such
as:
- Intrusion detection.
- Disaster recovery.
- Physical security of facilities and systems.
- Certification of security controls for sensitive systems.
TIGTA is also working closely with the IRS to develop a cadre of dedicated computer
specialists and criminal investigators who will rapidly respond to computer intrusion
incidents, investigate IRS network problems when indicators of intentional disruption are
present, and conduct recurring systems penetration tests to detect new vulnerabilities.
Financial Management
As mentioned earlier, the GAO has given the IRS an unqualified (clean) opinion on
its financial statements, which is an improvement over FY 1999. However, the GAO continues
to report that internal controls at the IRS are not effective, and that the IRS’
financial management systems lack substantial compliance with the Federal Financial
Management Improvement Act.
While the IRS was able to produce financial statements that were fairly stated in all
material respects using compensating processes, this approach does not produce the
reliable, useful, and timely financial and performance information the IRS needs for
decision-making on an ongoing basis.
Tax Law Changes
The filing season impacts every American taxpayer and is, therefore, always a
highly critical program for the IRS. Many programs, activities, and resources have to be
planned and managed effectively for the filing season to be successful. For example, more
than 250 computer-programming changes were required for the 2000 Filing Season. These
were further complicated by the IRS’ modernization efforts to update and replace its
core tax processing systems.
The IRS must confront the challenge of ensuring that telecommunications and system
capacity will accommodate the new electronic filing requirements to ensure the accuracy
and utility of information received and processed. The IRS had initially planned to
validate all secondary Social Security Numbers (SSN) processed during the 2000 Filing
Season. However, the IRS subsequently approved computer-programming changes to bypass the
validation based on the early volume of returns received.
The IRS also lost $211 million in revenue by failing to stop taxpayers from claiming
erroneous child credits for 1998 and 1999. The IRS had not programmed its computer system
to properly process changes related to the Child Tax Credit and the Additional Child Tax
Credit.
The IRS needs additional procedural and organizational changes to further reduce tax
form complexity and taxpayer burden. The IRS currently does not have a toll-free telephone
number that would provide individual taxpayers with a convenient method to provide the IRS
with tax form improvement comments. In addition, the IRS should strengthen the system of
controls over the tax form development process to ensure compliance with Federal internal
control standards.
Customer Service and Tax Compliance Initiatives
The IRS has embarked on a course to re-engineer its business processes and
technology to focus on providing world-class service to taxpayers. The theory is that the
overall rate of voluntary compliance with the tax laws will increase if the IRS provides
the right mix of education and support to taxpayers.
Revenue receipts processed by the IRS increased from $1.5 trillion in FY 1996 to
$1.9 trillion in FY 1999. However, revenue collected as a result of compliance
activity decreased by $5 billion and gross accounts receivable increased by $41
billion during this same period. IRS management and many stakeholders have been concerned
about the reduction in resources allocated to compliance activities and the related
decrease in business results. To help address this issue, Treasury’s FY 2001
budget submission included a request for 2,800 new positions over the next 2 fiscal years.
These additional resources would be dedicated to enforcing tax laws and improving service
to taxpayers.
Decreased enforcement has also been attributed to IRS employees’ concerns over the
mandatory termination provision in Section 1203 of the RRA 98. To help address these
concerns, TIGTA has continued to brief the IRS staff on investigations related to
Section 1203 violations. In addition, TIGTA continues to be dedicated and involved in
the IRS’ efforts to comply with the legislative changes required by the RRA 98
through representation on an IRS task force with the focus on Section 1203 processes.
Customer Service
Providing a quality customer service operation remains a top priority for the IRS.
Telephone and Internet technology, in particular, afford the IRS many opportunities to
dramatically improve its customer service. The IRS has made some strides in its use of
such technology. However, inadequate systems design and planning hinder some of these
efforts, and put some of them at risk of not being completed when promised.
For example, the IRS has been planning to implement an Internet-based refund status
application since 1996 and currently intends to have it available by the 2002 Filing
Season as part of its overall business systems modernization efforts. While we observed
some general planning and analysis had been accomplished, detailed design and development
was still needed. To be postured for the 2002 Filing Season, the IRS must define and
complete a substantial amount of critical design requirements and development work,
including analyzing and defining the business and functional requirements of the refund
application, ensuring the application meets all security and privacy requirements, and
integrating/ interfacing the web application with the modernized or legacy computer
systems.
The Electronic Tax Law Administration (ETLA) Program is a program that is intended to
revolutionize how taxpayers transact and communicate with the IRS. However, significant
improvements are needed to raise the quality of answers. The IRS responded correctly to
only 54 percent of the SB/SE Division questions TIGTA submitted through the Digital
Daily. Commercial web sites offering free tax advice provided correct answers only 47
percent of the time. Our analysis of response times showed that the commercial web sites
provide responses faster than the IRS, but taxpayers were generally satisfied with the
IRS’ response times.
Also, during a current review of the Tax Assistance Centers, 90 contacts were made with
IRS representatives. In seven of these instances, service was denied to our reviewers
(i.e., reviewers were merely provided forms or instructions, but not given the opportunity
to speak with an assistor). When service was provided, inaccurate answers were received 48
percent of the time.
Revenue Protection
The IRS must continually seek opportunities to protect revenue and minimize
tax-filing fraud in its programs and operations. A highly visible area of concern and
potential fraud is in the Earned Income Credit (EIC) Program. An August 2000 IRS EIC
compliance study reported that the amount of overclaims submitted was approximately 31
percent of the amount claimed. The IRS’ weaknesses related to the EIC are in three
primary areas:
- Achieving full participation by eligible taxpayers.
- Ensuring compliance through verification of taxpayers’ eligibility.
- Reducing inherent vulnerabilities (multiple use of dependent SSNs).
The IRS has launched promising new compliance initiatives. For example, partnerships
with the Department of Health and Human Services and the Social Security Administration
(SSA) will permit the IRS to cross-check information regarding how the child is related to
the taxpayer, the age of the child, and whether the taxpayer is the child’s custodial
parent. In 2001, the IRS began checking all secondary SSNs in addition to primary and
qualifying child SSNs on EIC returns. The IRS is rejecting returns if the names and
numbers do not match Social Security records. Another initiative that improves the
detection and prevention of erroneous EIC claims before tax refunds are paid allows the
IRS to deny EIC claims when a return is first received if the taxpayer’s EIC claim
was denied the previous year and the taxpayer did not follow recertification requirements
that were enacted in 1997.
Despite extensive IRS programs and efforts it has made to detect and
stop fraudulent claims, relatively little effort has been made to systematically identify
refund schemes involving business returns and associated credits. A few business schemes
have been identified but it has generally been through labor intensive manual procedures.
The IRS is concerned that fraudulent refund claims may be expanding to include business
returns and that scheme perpetrators continue to develop new methods to defraud the
system.
Taxpayer Protection and Rights
The IRS is making progress in its implementation of the RRA 98 provisions. As of
September 30, 2000, the IRS had improved its compliance with some of the RRA 98 provisions
that TIGTA has reviewed. However, the IRS needs to continue to focus its efforts on
several additional taxpayers’ rights provisions. These provisions include:
- Restricting the use of enforcement statistics to evaluate IRS employees.
- Not designating taxpayers as illegal tax protesters.
- Providing proper and timely notice that a federal tax lien has been filed.
- Not withholding information in response to taxpayers’ written requests for
information under the Freedom of Information Act of 1988 or the Privacy Act of 1974.
TIGTA assists in the protection of taxpayers and their rights by investigating
allegations of misconduct by IRS employees. Since the passage of the RRA 98, over 2,700
complaints alleging Section 1203 violations have been received. Shortly after the passage
of Section 1203, there was an initial surge in what both the public and IRS employees
thought were valid Section 1203 violations. TIGTA is currently receiving about half of the
complaints it initially received.
Consistently, since the enactment of the statute almost 3 years ago, the vast majority
of Section 1203 complaints received by TIGTA have alleged an IRS employee violated a
provision of the IRS Manual or Internal Revenue Code in order to retaliate against, or
harass someone. Approximately 35 percent of these complaints were made by IRS employees
against other IRS employees or supervisors. The second category, by volume, concerns
constitutional and civil rights/Equal Employment Opportunity (EEO) violations. Again, many
of the civil rights/EEO complaints were made by IRS employees against other IRS employees
or supervisors.
Implementation of the Government Performance and Results Act of 1993
Within the last 2 years, the IRS has developed a Strategic Plan and provided budget
justifications that include the Annual Performance Plan(s). Collectively, these documents
satisfy major requirements of the Government Performance and Results Act of 1993 (GPRA) by
identifying the IRS’ mission, strategic objectives, goals, and strategies. The
documents also describe the IRS’ priorities for the next 6 years and the key
performance indicators (measures) used in assessing achievement of those goals.
The IRS Commissioner has indicated that it will take years to achieve a fully
acceptable set of balanced measures that can be used at all levels of the organization.
While the new operating units concentrate on implementing the new organizational
structure, performance measures may not be a high priority. Based on our audits to date,
TIGTA believes that the IRS can improve its measures, the data quality of its
measures, and its reporting of annual accomplishments.
As part of a balanced measurement system, the IRS conducts surveys of taxpayers to
gauge their satisfaction with IRS customer services. The results of these surveys are also
used for GPRA reporting purposes. The IRS conducted surveys in various functions,
including the toll-free telephone, walk-in, collection, examination, and appeals
operations. Our reviews of the controls and processes used in conducting these surveys
indicated that survey data may not be statistically reliable. Specifically, the surveys
did not always include all taxpayer interactions, the sampling methodologies did not
ensure equal and unbiased opportunities for taxpayer participation, and the survey
response rates were too low, thereby increasing the risk that the results may not be
representative of the overall population.
Impact of the Global Economy on Tax Administration
The GAO and TIGTA have previously reported serious internal control and systemic
weaknesses in the IRS’ administration of its international programs. The IRS
continues to struggle to increase compliance in an ever-growing international economy.
Significant improvements are needed in international compliance programs to focus on
nonfiling, transfers of assets by United States citizens to foreign trusts, foreign tax
credit claims, and foreign-sourced income.
A recent TIGTA audit found that the IRS is in no better position today to determine
taxpayers’ compliance levels in reporting foreign-sourced income than it was in 1997.
Despite the foreign-sourced income information that tax treaty partners provide, the
IRS’ processes to measure compliance and identify non-compliance are inadequate.
In closing, the IRS is working intensely to address these vulnerabilities and concerns
in order to ensure that its efforts to reform and restructure are successful.
