Treasury Inspector General for Tax Administration

 

“Taxes are what we pay for a civilized society”

–        Oliver Wendell Holmes

–         

Semiannual Report to the Congress

 

October 1, 1998 – March 31, 1999

…the 105th Congress created a statutory Inspector General, specifically for oversight of the Internal Revenue Service

 

“The Treasury Inspector General for Tax Administration

shall exercise all duties and responsibilities of an Inspector

General of an establishment with respect to the Department

of the Treasury and the Secretary of the Treasury on all

matters relating to the Internal Revenue Service. The

Treasury Inspector General for Tax Administration shall

have sole authority under this Act to conduct an audit or

investigation of the Internal Revenue Service Oversight

Board and the Chief Counsel for the Internal Revenue

Service.”

 

…Section 1103 of Public Law 105-206, The Internal Revenue Ser vice Restructuring and Reform Act of 1998, enacted July 22, 1998…

 

April 30, 1999

MEMORANDUM FOR SECRETARY RUBIN

FROM:

Lawrence W. Rogers

 

Acting Treasury Inspector General for Tax Administration

SUBJECT:

Treasury Inspector General for Tax Administration Semiannual

 

Report to the Congress

 

It was an honor to serve as the Treasury Department's Transition team leader, and recently as Acting Treasury Inspector General, to establish the new Office of the Inspector General for Tax Administration (TIGTA). I want to acknowledge the highly dedicated and professional people of the former Internal Revenue Service (IRS) Office of Chief Inspector. Since the Inspection Service was created in 1952, they have served with honor and distinction in their contributions to the IRS, the Department and the taxpayers. They also demonstrated that same commitment and dedication to duty during the recent transition to the newest statutory Office of Inspector General.

 

I also would like to thank Nancy Killefer, Assistant Secretary for Management and Chief Financial Officer, and Charles O. Rossotti, Commissioner of the IRS, for their assistance and stewardship in completing the transition to begin business as the Office of Treasury Inspector General for Tax Administration on January 18, 1999.

 

The executives, managers and staff of the TIGTA faced great challenges in making vast changes in independence, organization, procedures, and restructuring in a short time. A significant amount of senior management and staff were diverted from their usual work conducting audits and investigations to implementing the legislative requirements of the IRS Restructuring and Reform Act of 1998. The result was the newest and third largest Inspector General in the Federal Government.

 

I am pleased and proud to provide our first Semiannual Report for you to transmit to the Congress. This report includes the accomplishments of the TIGTA since January 18, and the IRS Inspection Service from October 1, 1998, through January 17, 1999.

 

I can report that the entire staff of the TIGTA looks forward to working with you and the Departmental Officials to insure the highest degree of independence while working closely with the IRS as we watch over the nation’s tax administration system.

 

Attachment

Office of The Treasury Inspector General for Tax Administration

Table of Contents

General Information Page 1

Office of Audit Page 9

Office of Investigations Page 23

National Integrity Program Page 31

Statistical Reports - Audit Appendix I

• Questioned Costs

• Funds Put to Better Use

• Additional Quantifiable Impacts on Tax Administration

 

Statistical Reports - Investigations Appendix II

• Investigations

• Opened/Closed

• Financial Accomplishments

• Status of Closed Criminal Investigations

• Criminal Dispositions
• Complaints/Allegations Received –

• TIGTA

• IRS

• Administrative Status and Dispositions

 

Statistical Reports - Other Appendix III

• Unimplemented Corrective Actions

• Access to Information

• Prior Reporting Period – No Management Response

• Revised Management Decisions

• Disputed Audit Recommendations

• Review of Legislation and Regulations

 

Audit Report Listing – October 1, 1998 through March 31, 1999 Appendix IV

RRA98 Section 1203 Standards Appendix V

RRA98/IRC/Other Mandated TIGTA Reporting Requirements Appendix VI

Organizational Chart Appendix VII

Acronyms Appendix VIII

Report Cross-Reference - IG Act/RRA98/Other Reporting Appendix IX Requirements

March 31, 1999


 

Office of The Treasury Inspector General for Tax Administration

Recent Legislation Created the Newest Statutory Inspector General

In July 1998, the Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98), and created the newest


 

Information About The Treasury Inspector General for Tax Administration

The TIGTA is organizationally placed within the Department of the Treasury, but is independent of the Department and all other

statutory Office of Inspector General, the Treasury Inspector General for Tax Admin­istration (TIGTA).

This latest amendment to the Inspector General (IG) Act of 1978 added the TIGTA to execute all duties and respon­sibilities of an Inspector

and agencies within the Department.

Under super­vision of the TIGTA are a Deputy, three Assistant Inspect­ors General (Audit, Investi­gations, and

the Department and the Secretary of the Treasury on all matters relating to the Internal Revenue Service (IRS), including those of the IRS Oversight Board and the IRS Office of Chief Counsel.

This change in the IG Act, effective January 18, 1999, transferred to TIGTA, all the powers and responsibilities of the former IRS Office of Chief Inspector, except for conducting background checks of and providing physical security to IRS employees.

Treasury Order 115-01, dated January 14, 1999, delineates the specifics of the authorities granted to the TIGTA by law and those delegated by the Secretary of the Treasury. Treasury Directive 27-14, dated January 15, 1999, describes the organization and functions of the TIGTA. A TIGTA organizational chart is appended to this report.

Services), an Office of Counsel and an immediate staff.

The TIGTA provides leadership and coordination and recommends policy for activities designed to:

•           promote economy, efficiency, and effectiveness in the administration of the internal revenue laws; and,

•           prevent and detect fraud and abuse in the programs and operations of the IRS and related entities.

 

The TIGTA is responsible for:

•           conducting and supervising independent and objective audits and investigations relating to IRS programs and operations;

•           protecting the IRS against
external attempts to corrupt
or threaten its employees;

•           reviewing and making
recommendations regarding
existing and proposed
legislation and regulations
relating to the programs and
operations of the IRS;

•           recommending actions to
resolve fraud and other
serious problems, abuses
and deficiencies in the
programs and operations of
the IRS; and,

•           informing the Secretary and
the Congress of these
problems and the progress
made in resolving them.

 

As of March 27, 1999 (pay period ended date), the TIGTA staff totaled 980 as follows:


 

Authorities

The Treasury Inspector General for Tax Administration (TIGTA) has all the authorities granted under the Inspector General Act of 1978. In addition, the TIGTA has access to tax information in the performance of its responsibilities and the authority to report criminal violations directly to the Department of Justice. The TIGTA and the Commissioner of IRS have established policies and procedures delineating responsibilities to investigate offenses under the internal revenue laws.

The TIGTA provides a program of comprehensive Audit and Investigative services of IRS operations and activities. This includes a national integrity program emphasizing deterrence and detection approaches to assist IRS in ensuring the highest degree of integrity and ethics in its workforce.

Resources from the TIGTA Offices of Audit, Investigations and Information Technology are jointly utilized to:

•           inform IRS executives and managers of the importance of established internal controls both to protect Government assets and revenue from fraud and to protect IRS employees from temptations;

•           proactively identify additional violators of fraud based on profiles of existing crimes;

•           identify for investigation, suspicious instances of computer browsing through comparisons against established computerized patterns; and,

•           report to the Secretary of the Treasury, the IRS Commissioner, and the IRS Oversight Board, internal control weaknesses that resulted in fraud, along with recommendations to correct the deficiencies.

 

In addition to these duties and responsibilities, the RRA98 amended the IG Act of 1978, 5 USC, Appendix 3, Section 8D to give TIGTA statutory authority to carry firearms and enforce the provisions of Title 26, USC Section 7608(b)(2). These functions include the law enforcement authority to execute and serve search warrants, serve subpoenas, and make arrests.

The TIGTA also has responsibility for investigating allegations of misconduct on all IRS employees, including the IRS Chief  Counsel and the IRS Oversight Board. Previously, these responsibilities were split between the IRS Inspection Service and the Treasury Inspector General, generally based on the grade level of the employees.


 

Information About Our Clients, Taxpayers and the Internal Revenue Service

The Internal Revenue Service (IRS) collects over $1.7 trillion annually, or approximately 95 percent of the budget needed to fund the nation's government. This is no small achievement, since it requires the processing of over 200 million returns, issuing over 80 million refunds, distributing over 1 billion forms and publications, and servicing over 110 million taxpayers.

As of March 27, 1999 (pay period ended date), IRS employed 116,391 permanent and temporary employees as follows:

TIRS must continually strive to achieve these tasks while maintaining the highest level of integrity and assuring taxpayer privacy. The IRS must enforce tax laws to ensure that all parts of the taxpaying public pay the proper amount of tax.

In addition to these daily challenges, the IRS entered Fiscal Year (FY) 1999 facing some of the most extensive and complex legislation since the Tax Reform Act of 1986. The Taxpayer Relief Act of 1997 imposed numerous tax law changes and will require extensive reprogramming of systems, changes to forms and instructions, and training for IRS employees.

When fully implemented, the IRS Restructuring and Reform Act of 1998 (RRA98) will result in enhanced taxpayer protection and rights and organizational changes intended to achieve a more efficient and responsive IRS.

RRA98 was passed, due in part to congressional hearings which focused on the misuse of enforcement statistics and abusive treatment of taxpayers. Several taxpayers testified to unfair and unreasonable treatment by IRS employees. The new legislation also mandates a change in the basic way the IRS does business.

Commissioner Rossotti describes the changes as serving taxpayers better by building a new IRS. In the months since passage of RRA98, the Commissioner has been moving to make major changes to modernize the IRS. The concept for modernizing the Internal Revenue Service is much more than changing the organization structure. It is a complete change in how the IRS does business. The IRS must shift its focus from internal operations to the taxpayer's point of view.

It is important to recognize the unparalleled enormity of what the IRS will undergo as a result of this legislation. The five major efforts involved in implementing the concept are to:

•           reorganize around the needs of its customers, the taxpayers;

•           improve business practices from customer education to filing assistance to collection;

•           establish clear responsibilities and management roles for each division with accountability for meeting the needs of that group of taxpayers;

•           establish necessary measures for organizational performance that balances business results, customer satisfaction, and employee satisfaction and productivity; and,

•           replace outdated computer systems with new systems that will support the new mission and goals.

 

Further complicating IRS' tax administration duties is the upcoming century date change and how it will affect IRS computer systems. Like the rest of private industry and government, IRS is preparing its systems for the Year 2000 (Y2K).

Every aspect of tax administration could be affected by the century date change since all IRS functions rely to some degree on automated computer processes.

To assist the IRS in meeting these challenges, as well as many other crucial tax administration initiatives, TIGTA has developed comprehensive Audit and Investigation programs for FY 1999.


 

The TIGTA Audit Program

The Assistant Inspector General for Audit heads the TIGTA Office of Audit and has established a comprehensive method of strategic evaluation of IRS programs, activities and functions to expend TIGTA’s Audit function resources in the areas of highest vulnerability to the nation’s tax system.

The Office of Audit promotes the sound administration of the nation's tax laws by conducting a number of comprehensive, independent performance and financial audits of IRS programs, operations, and activities to:

•           assess efficiency, economy, effectiveness and program accomplishments;

•           ensure compliance with applicable laws and regulations; and,

•           prevent, detect, and deter fraud, waste, and abuse.

 

In a January 20, 1999, letter, the Office of Audit advised the Chairman, Subcommittee on Oversight of the House of Representatives Committee on Ways and Means, of the most serious management issues facing IRS.

The TIGTA reported that the greatest collective risks to tax administration are the 1999 and 2000 income tax filing seasons due to several convergent factors. During that period, the IRS must address the year 2000 date change challenge, major changes in the tax law, and replacement of major components of the tax processing system.

In addition, the IRS will face the challenge of the consolidation of the mainframe computer operations of its 10 current processing service centers nationwide (methodologies that began in 1961) into two computing centers. The most significant management issues facing the IRS include:

•           processing returns and implementing tax law changes during the tax filing season;

•           progressing in its Year 2000 compliance efforts;

•           implementing the IRS Restructuring and Reform Act of 1998 ­

•   Taxpayer Protection and Rights

•   Information Technology Investment Management

•   Quality Telephone and Walk-In Customer Service

•           minimizing tax filing fraud and protecting the revenue;

•           implementing the Govern­ment Performance and Results Act;

•           selecting and controlling tax returns for examination; and,

•           managing its finances.

 

The Office of Audit's program supports initiatives involving information technology programs, Year 2000 conversion plans, financial reviews, tax filing season activities, Government Performance and Results Act (GPRA) implementation, taxpayer protection and rights, and other critical IRS activities.

Details of these and other program activities can be found in the Office of Audit section of this report (begins on page 9).


 

The TIGTA Investigation Program

The Assistant Inspector General for Investigations heads the TIGTA Office of Investigations and conducts investigations and probes to provide IRS and Treasury management with independent investigative products that:

•           protect IRS employees against external attempts to corrupt or threaten its employees;

•           promote the efficient and effective administration of the tax laws; and,

•           detect and deter fraud and abuse in IRS programs and operations.

 

The Office of Investigations is committed to ensuring that complaints or allegations of criminal misconduct and serious administrative wrongdoing are independently and objectively investigated.

Investigations that result in administrative violations are referred to IRS management officials for appropriate action. Investigations involving apparent criminal offenses are presented to U.S. Attorney offices for prosecutive merit and determination.

The Office of Investigations program activities are designed to protect the integrity of the IRS. The Office of Investigations discharges this responsibility through proactive and reactive investigative programs.

In addition, the Office of Investigations is committed to providing the highest priority in terms of the responsiveness in investigating threats and assaults against IRS employees.

The Office of Investigations has placed increased emphasis on investigating allegations of serious administrative misconduct involving IRS employees. Section 1203 of RRA98 established a mandatory penalty of removal for IRS employees who commit certain acts or omissions in the performance of the employee’s official duties. Included in the list of standards are falsifying or destroying documents to conceal mistakes; willful failure to obtain required approvals authorizing seizure of taxpayer assets, making false statements under oath, etc. For a complete list

of

the

Section

1203

violations,

see

Appendix V.

 

 

 

 

 

The

Office

of

Investigations

reviews

 

allegations of taxpayer abuse received by TIGTA and makes a determination whether there is sufficient information to warrant the initiation of an investigation. To ensure that discipline relative to violations of the new law is consistent at all levels within the IRS, an IRS Review Board was established to review all cases where there has been a determination that a violation of Section 1203 has occurred.

In addition, the Office of Investigations investigates other prohibited activities specified in RRA98 and the IG Act, including those relating to the use of enforcement statistics for performance evaluations and the setting of performance goals by IRS management officials.

Details of these and other TIGTA investigative program activities are located in the Office of Investigations section of this report (begins on page 23).


 

The TIGTA National Integrity Program

The TIGTA National Integrity Program is managed by the Office of Investigations, with support from the Office of Audit and TIGTA’s Office of Information Technology.

The National Integrity Program was established in 1994, to aggressively detect wrongdoing within the IRS. Established on the premise that a proactive approach would identify areas of fraud that would otherwise go undetected, the first segment of the

National Integrity Program involves sharing with IRS executives and managers identified areas of weak internal controls and the resulting employee fraud that occurred.

One goal is to foster an understanding of the importance of established internal control systems, both to protect the Government from losses, and employees from temptations.

The second segment of the proactive National Integrity Program involves two avenues:

•           evaluating actual instances of criminal activity, developing a computer "profile" of the improper transactions, and matching that profile against massive volumes of other account transactions to identify other violators; and,

•           matching predefined scenarios of computer browsing activities against the IRS' millions of audit trail transactions recorded on its Integrated Data Retrieval System and other computer databases.

 

These national integrity projects were included in Computer Matching Act agreements approved by the Treasury Department's Data Integrity Board and announced in the Federal Register.

In addition, internal control weaknesses that permitted the employee fraud to go undetected are reported to IRS executive management with recommendations for corrective actions.

Details of these and other program activities can be found in the National Integrity Program section of this report (begins on page 31).

 

Treasury Inspector General for Tax Administration Office of Audit

In addition, the Office

of Audit works with The Assistant Inspector

INTRODUCTION

the Office of Investi-General for Audit

gations, as appropriate, (AIGA) is under the

in response to allega­general supervision of

tions of misconduct, the TIGTA. The AIGA

fraudulent activities, oversees the Office of

waste, and abuse. Audit and is respon-

The Office of Audit

sible for the develop-

also participates with

ment and execution of

the Office of Investi­

the nationwide audit

gations in the TIGTA

program for Internal

National Integrity

Revenue Service (IRS)

activities and opera-tions, including the Program. (See the National Integrity Program activities of the IRS’ Oversight Board and section of this report for information on joint audit and investigations efforts involving

Office of Chief Counsel.

proactive integrity projects.) The mission of the Office of Audit is to promote the sound administration of the nation’s tax laws by conducting AUDIT PLANNING comprehensive, independent performance and

financial audits of IRS programs and To accomplish its mission, the Office of Audit operations to: developed and published an annual audit plan,

•           assess efficiency, economy, effectiveness and program accomplishments;

which describes the audit focus and direction

for FY 1999.  The FY 1999 plan includes both

mandatory audits required by Federal statute

or regulation and discretionary audit work

•           ensure compliance with appli-approved by the AIGA. cable laws and regulations; and,

Mandatory Audit Coverage

•           prevent, detect, and deter fraud, waste and abuse. Mandatory audit coverage includes

information technology, taxpayer protectionAudit recommendations are made to: and rights, contracting and the Government

•               improve tax administration Performance and Results Act (GPRA). See

services;     Appendix VI for a listing of mandatory audit requirements and TIGTA’s status of work on

•           strengthen controls over IRS these audits. programs and operations; and,

Additionally, the Office of Audit is planning

•           timely report on program and to implement a multi-year audit approach to

 

operational deficiencies. reviewing IRS’ implementation of GPRA. This Act is intended to improve the quality and delivery of government services. The Act also holds federal agencies accountable for program results by emphasizing goal setting, customer satisfaction, and results measurement.

For FY 1999, the Office of Audit plans to perform high level assessments in the areas of IRS’ strategic planning process, GPRA communication and training process, and performance measure validity (customer satisfaction, employee satisfaction, and business results). The results of these assessments will be used to determine the number of individual audits needed to thoroughly evaluate IRS’ implementation of GPRA.

The Office of Audit is also responsible for conducting reviews on the financial operations of the IRS. In FY 1999, the Office of Audit staff will perform audit tests in support of the audit of IRS financial statements. This assignment is part of a training effort with the General Accounting Office (GAO), which has exercised its authority to conduct the audit and opine on the IRS financial statements for FY 1999. Involvement will better position the Office of Audit to eventually assume responsibility from GAO for auditing the IRS financial statements. In addition, at the request of the Department’s Assistant Secretary for Management/Chief Financial Officer, the Office of Audit is separately assessing the design of and monitoring progress on the IRS action plan that is addressing IRS’ long-standing problems with financial management.

Discretionary Audit Coverage

Discretionary audit work is dependent on the resources remaining after staff has been assigned to accomplish the mandatory audit requirements. The Office of Audit’s planned discretionary work was identified through a comprehensive, high-level risk assessment process, which was designed to prioritize workload by focusing on the areas of greatest risk to IRS.

Each year, the Office of Audit solicits input and suggestions for audit coverage from the Commissioner and IRS executives. Those suggestions are then incorporated into the audit plan development process. In the future, audit requests also may originate from the Congress and the IRS Oversight Board.

This process applies risk factors to key audit areas in IRS, and documents and summarizes results to aid the Office of Audit management in selecting areas for coverage. Risk factors are the criteria used to identify the relative significance of, and the likelihood that, conditions or events may occur that adversely affect the organization. Some of the factors used in evaluating the risks associated with IRS' auditable areas include: impact of new programs; tax law changes; adequacy and effectiveness of internal controls; prior audit findings; and, stakeholder concerns.

Follow-up on Audit Reports with Unimplemented Corrective Actions

Due to the large number of previously issued audit reports with unimplemented corrective actions (See Appendix III), we are developing a strategic approach in our Fiscal Year 2000 audit plan to review the status of each of these recommendations to determine if:

•           the time frame for implemen-
tation of the corrective action
seems reasonable;

•           the pending corrective action item should be closed due to changing conditions that have mitigated the need for additional action; or,

•           a follow-up audit is warranted to assess the status of IRS’ implementation of the corrective action.

 

 

SIGNIFICANT AUDIT RESULTS

During this reporting period, the Office of Audit initiated the majority of its in-process audits after formulating an annual audit plan which was based largely on the recently developed risk assessment process. The majority of those final audit reports will be issued in the remaining six months of FY 1999.

The Office of Audit also lost the availability of some of its senior management and staff from time normally expended on managing and conducting audits, to activity involving the legislative requirements of RRA98, including planning and preparation for the new TIGTA mandated annual reviews and the IRS’ preparations for implementing the many provisions of RRA98.

With the remaining direct staff resources available, the Office of Audit issued 27 audit reports covering topics such as Year 2000 Conversion, Filing Season Readiness, and Information Technology.

Audit resources were focused in the areas having the most significant and inherent risks to IRS. The results of the most significant reviews are discussed in the following sections.

Year 2000 (Y2K) Compliance Progress

December 1999
 Su Mo Tu We Th Fr Sa

 1 2 3 4
5 6 7 8

January 2000

12 13 14 15


 

Su Mo Tu We Th Fr Sa

19 20 21 22

1

26 27 28 29

2 3 4 5 6 7 8

 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

The Y2K century date change (CDC) is one of the most critical problems facing business and government data processing organizations. The Y2K problem is extremely critical for IRS, because the CDC could affect every aspect of tax administration. Virtually all IRS functions, to some degree, rely on automated computer processes.

To maximize system-processing capabilities and to preserve data storage space, many date fields in IRS’ system programs and applications have been limited to a two-digit representation (i.e., 98 for 1998).

IRS estimates the cost for Y2K changes will be approximately $850 million through FY 1999. These costs include updating and testing over 80 mainframe computers (Tier I computers), 75,000 computer application programs, 1,400 minicomputers (Tier II computers), and 100,000 desktop computers (Tier III computers), as well as data communications networks comprising more than 50,000 individual product components.

IRS management estimates 50 million lines of programming code need to be reviewed for possible changes. If mission critical code is not Y2K compliant, IRS systems may not run, causing the processing of tax returns to slow down or stop.

As a result, taxpayers may not receive timely refunds or notices, and account adjustments may not be processed. As the Year 2000 approaches, it is imperative that all major tax-processing systems be Y2K compliant to avoid processing shutdowns.

The Office of Audit has conducted several reviews to assess IRS efforts for ensuring that all IRS systems (Tier I, II, and III) and programs are Y2K compliant, including project management, inventory and tracking, and software and hardware issues.

 

In-process reviews include:

•           Preparation of Tier II Systems (minicomputer) for CDC;

•           Management Controls for Oversight of IRS CDC;

•           Y2K Conversion Efforts – Tier III (desktop computers);

•           Y2K End-to-End Systems Integration Test II and III;

•           Effectiveness of Y2K Testing Efforts; and,

•           Y2K External Trading Partner Issues – Phase II.

 

Highlighted final audit reports include:

Follow-Up Review of Corrective Actions Resulting from Audit’s Phase III Code Review (Report No. 090102)

TIGTA auditors conducted an on-line review of IRS’ Y2K conversion and testing to determine the effectiveness of efforts in converting those application components that comprise the bulk of the tax processing systems. (Report No. 083605). As the Y2K situation is extremely critical, this follow-up audit was completed in October 1998 to determine if the corrective actions, identified in the June review, were completed.

During the follow-up review, the Office of Audit analyzed 32 corrective actions that were identified in the previous report, and identified three significant areas warranting additional attention.

The original audit identified 42 components where the date field was defined as a character rather than as a numeric field. IRS was advised that greater adherence and

clarification were needed to IRS programming standards to avoid any risk that this programming error could affect future IRS processing.

At the time of the October 1998 follow-up review, the CDC Project Office had not implemented a change in IRS’ programming standards.

The Office of Audit's report noted two additional areas requiring further IRS action. Specifically, the CDC Project Office should:

•           coordinate the development and
issuance of documented
procedures for recompiling all
IRS programs after the related
system macros are modified; and,

•           develop a more aggressive schedule for ensuring the development of test deliverables for all commercial-off-the-shelf (COTS) products.

 

The Office of Audit recommended that the CDC Project Office review the original recommendations and coordinate the development and issuance of all documented procedures for recompiling all IRS programs after related system macros are modified.

Also, the testing and certification of all COTS products should be made a priority because of the potential impact these products could have on the comprehensive testing effort currently underway.

IRS management agreed with the recommendations and has completed the corrective action on all reported audit issues. One action included hiring an outside consultant to review 100 percent of the programming code questioned.

 

Evaluation of the Service’s Efforts to Implement Year 2000 Compliance for External Trading Partners (Report No. 091303)

In 1996, IRS established the CDC Project Office with an objective to ensure that all systems are Y2K compliant. This requires close coordination with many External Trading Partners (ETPs)—organizations that exchange data with IRS—including state, local, and foreign governments; banks; and other Federal agencies. The CDC Project Office has encountered delays in completing several ETP activities.

The Office of Audit evaluated IRS’ efforts to implement Y2K compliance of the external data exchanges. The Office of Audit reported the CDC Project Office has made considerable progress in completing an inventory of external data exchanges and communicating IRS’ Y2K format changes with ETPs.

The Office of Audit recommended that IRS management continue its efforts to ensure that IRS systems meet Y2K compliant standards and that discrepancies in the inventory of externally exchanged data files and data exchanges are corrected.

IRS management was responsive to the findings during this on-line review and has initiated corrective action.

Review of Phase 4 Year 2000 Conversion and Testing (Report No. 090403)

Based on prior audit recommendations (Report No. 083605), IRS initiated actions to improve its Y2K certification efforts and improve the accuracy of its Applications Program Registry (APR) data. The APR contains inventory data on the phase, number and status of Y2K programs by linking the standardized project name and phase with IRS’ Integrated Network and Operations Management System (INOMS). INOMS tracks Automated Data Processing equipment used throughout IRS.

IRS also is working toward being classified as a Capability Maturity Model Level organization to institutionalize effective management processes for software projects, which will allow for repetition of successful practices developed on earlier projects.

The Office of Audit reported that IRS needs to continue with its efforts to improve the accuracy of the APR, ensure developers and testers document test activities and give greater consideration to how Y2K programming changes will affect hardware capacity and system performance.

In addition, the Office of Audit noted the CDC Project Office has not established controls to verify the accuracy of Y2K compliance certifications. Since these certifications are not validated, the CDC Project Office is unable to fully assess the risk that exists for programs that are not Y2K compliant. IRS management agreed with the findings and has initiated corrective action.

Review of the Service’s Year 2000 Non-Information Technology Project (Report No. 090503)

Although Y2K conversion efforts primarily focus on information systems, there are numerous facility systems and personal property items that use microchips, software, firmware, or other mechanisms for controlling time and date logic that could be impacted by the CDC. These systems comprise the Non-Information Technology (Non-IT) environment.

The Office of Audit reported that IRS has initiated steps to prepare its Non-IT environment for Y2K. However, a significant amount of work must still be completed to ensure Non-IT equipment becomes Y2K compliant. In addition, the CDC Project Office needs to enhance its program management efforts to better direct and coordinate Non-IT conversion activities.

The Office of Audit recommended that the CDC Project Office define and document the requirements for all phases of IRS’ Non-IT conversion process; require supporting functions to provide detailed work breakdown schedules; and, determine whether the process used to certify investigative equipment was appropriate.

Also, IRS’ Office of Management and Finance, in conjunction with the functional area chiefs, should ensure all IRS occupied buildings are prioritized for conversion. IRS management agreed with the findings and has initiated corrective action.

Review of the Service’s Efforts to Prepare Its Tier II Infrastructure for the Year 2000 (Report No. 091206)

This report included the results of the Office of Audit's review of IRS’ efforts to prepare its Tier II (minicomputer) infrastructure for the CDC.

Although the majority of IRS’ tax processing occurs at the Tier I (mainframe computer) level, there is a significant amount of processing at the minicomputer level. As a result, some minicomputer systems feed data to the mainframe computer systems.

The report recommended that IRS better focus, manage, and control its CDC effort to assure business continuity. Critical improvements are needed for: planning and coordination of the conversion effort; inventory management; and, contingency planning. In addition, IRS management needs to ensure consistency between Y2K needs and the INOMS instructions to improve the accuracy and completeness of the inventory.

The Office of Audit identified that the platform inventory is complete, but nearly half of the 837 platforms reviewed were recorded inaccurately. The COTS software inventory also was incomplete and inaccurate. Approximately 28 percent of the 411 products were not recorded on INOMS, and 22 percent were recorded with the incorrect version.

During the audit, IRS management addressed the issues that the Office of Audit presented. However, the final report was issued without IRS management’s response to all reported issues.

Subsequent to the issuance of the final report, IRS management provided a response and has initiated corrective action on all reported audit issues.

Review of the Internal Revenue Service’s Effectiveness in the Monitoring and Reporting of Year 2000 Funds (Report No. 092204)

The CDC Project Office established a Budget Office to obtain, distribute and manage Y2K appropriated funds. The Budget Office is responsible for managing Information Systems (IS) and non-IS funds for the CDC project and to track budgetary information for the CDC Project Office, IRS executives, and other internal and external stakeholders.

The Budget Office also is responsible for monitoring and reporting the availability and use of congressionally mandated funds; unobligated funds transferred from expired IRS accounts; and, supplemental full time equivalents (FTEs) from within IRS' operational budget.

IRS has been effective in accounting for its Y2K funds. However, more attention is needed in the identification of decreased funding requirements and the recording of Y2K payroll expenditures. While the Budget Office uses a working budget report and biweekly budget meetings for monitoring and assessing additional budget needs, IRS management must become more proactive in identifying unused funds.

In addition, IRS needs to ensure that complete and accurate information is recorded and reported for Information Systems’ FTEs expended on Y2K efforts. Further, time charges to the Y2K Project Cost Accounting Subsystem (PCAS) codes are not complete, accurate, or properly classified.

The Office of Audit recommended that IRS improve its monitoring procedures of available funds and ensure that appropriate PCAS codes are used and that time charges are accurately and completely reported. IRS agreed with the findings and has initiated corrective action.

Review of the Internal Revenue Service’s Year 2000 Efforts to Inventory Telecommunications and Commercial Off-the-Shelf Products (Report No. 092402)

The CDC Project Office has the responsibility for controlling IRS’ Y2K effort to inventory, convert, upgrade, or replace computer-related equipment and software so that all automated data processing functions continue uninterrupted into Y2K.

The Office of Audit review was conducted to provide a preliminary assessment of the adequacy of IRS efforts in two areas: the inventory of telecommunications equipment; and, the inventory of system software and COTS products. Technical expertise for this review was acquired under contract.

The review by the Office of Audit indicated that CDC still has significant work to accomplish to complete the telecommunications inventory and to reexamine the completeness of the COTS product inventory.

To minimize risks associated with inaccurate or incomplete inventories, the Office of Audit recommended that CDC Project Office management improve its guidance on how these products are to be reported in the inventory and to re-examine the completeness of its COTS inventory. In addition, an independent verification of the INOMS inventory of COTS products should be conducted for all Tier I (mainframe) computer systems. IRS management agreed with the recommendations and initiated appropriate corrective actions.

Review of the Internal Revenue Service’s Year 2000 Contingency Planning Efforts (Report No. 092705)

The Y2K problem is complicated by the size, complexity, and interdependencies of the IRS’ computer systems. The consequences of system failures and the absolute deadline make it a critical task for an organization as large and as reliant on computers as the IRS. Because of the enormity of the task, there is risk that all systems will not be converted in time.

The Office of Audit’s review of IRS’ contingency plans indicated that IRS has not devoted sufficient emphasis to Y2K contingency planning. The database used for tracking the conversion process was inaccurate and has not improved. The unreliable data hinders IRS management’s ability to monitor conversion progress and prepare contingency plans for systems at risk of not meeting the conversion deadlines. Even when the data did identify systems at risk, IRS management did not follow its own processes and did not ensure that contingency plans were timely developed. In addition, IRS had not properly coordinated the Y2K contingency planning efforts with its overall contingency planning efforts for disasters and other types of failures.

The Office of Audit recommended the following corrective actions:

•           review Y2K inventory files on a recurring basis;

•           establish validity checks;

•           establish procedures to identify and monitor components and systems that have not completed the Y2K milestones;

•           establish procedures to identify “at risk” systems during the certification process;

•           adhere to the formal Contingency Request Memorandum process;

•           assign responsibility for the IRS’ overall contingency management strategy; and,

•           consider monitoring the status of contingency planning as part of the Y2K report.

 

The Office of Audit did not agree that IRS management’s response adequately addressed the problems and corrective actions and included “auditor comments” in the final report transmittal to the Commissioner.

Filing Season Readiness

IRS’ 1999 and 2000 filing seasons will be impacted by numerous organizational and legislative changes. Legislation enacted in 1997 and 1998 in the Taxpayer Relief Act, Balanced Budget Act, and RRA98 is the most extensive and complicated legislation IRS has faced since the Tax Reform Act of 1986.

The 1999 and 2000 filing seasons will be further complicated by ongoing efforts to meet Y2K deadlines, consolidate IRS mainframe processing to two sites, and implement National Performance Review recommendations.

In light of these changes, the Office of Audit conducted reviews to assess IRS’ ability to timely and effectively process returns, issue refunds, and answer taxpayer questions.

In-process reviews include:

•           Information Systems’ Quality Assurance Over Key Tax Laws for 1999 Filing Season;

•           Walk-In Assistance On-Line ­1999 Filing Season;

•           Toll-Free Services During the 1999 Filing Season;

•           Early Implementation of Tax Laws – 1999 Filing Season;

•           1999 Filing Season Readiness – Individual Master File;

•           Taxpayer Assistance on Key Tax Laws – 1999 Filing Season; and,

•           Implementation of Legislative Provisions – Year 2000 Filing Season, Individual Master File/Non-Individual Master File.

 

Highlighted final audit reports include:

Executive Compilation and Interpretation of the 1998 Filing Season (Report No. 091903)

The Office of Audit evaluated the 1998 filing season in terms of the progress IRS was making to become a “customer focused” organization based on the IRS Commissioner’s concept for modernizing IRS and on IRS' Customer Service Task Force report, “Reinventing Service at the IRS.”

Success of the 1998 filing season was determined by how IRS prepared for and met the needs of taxpayers in the areas of: processing tax returns (both paper and electronic individual tax returns); issuing timely refunds; providing customer assistance at walk-in sites; and, through the expansion of toll-free telephone service.

The review showed that IRS had a successful 1998 filing season. This success included significant increases in the number of returns filed electronically, implementation of a number of tax law changes, and significant improvements in customer service through the expansion of toll-free telephone service and the introduction of Saturday walk-in service. In addition, IRS was able to process returns accurately and issue refunds timely.

The number of electronic returns filed far surpassed the 1998 goals, which can be attributed to the extensive efforts by IRS to encourage taxpayers to file electronically.

These accomplishments proved to be significant in meeting taxpayer needs and improving customer service to meet the IRS Commissioner’s goal of providing first-rate service to taxpayers. However, the audit results indicated that improvements can be made in electronic filing, simplification of return filing, improving customer service and in meeting the challenges for the 1999 filing season.

The RRA98 goal of 80 percent of tax returns to be electronically filed by the year 2007 poses a difficult challenge and will require elimination of barriers, such as the additional costs to electronically file and the requirements to mail in signature documents and Form W-2 statements.

In response to the Office of Audit’s report, IRS agreed to explore: the possibility of providing a simpler tax form for millions of taxpayers; raising the dollar tolerance on interest and dividends for submitting a separate schedule; and, establishing a taxpayer profile database. The IRS responded that unless it gets Congressional approval, it could not implement the Office of Audit’s recommendation to use “whole dollars only” for all tax return entries to reduce processing errors and taxpayer burden. The Office of Audit added an "auditor comment" to the final

report recommending IRS seek the legislative approval necessary for the change.

Although IRS is taking several actions next filing season to enhance electronic filing, IRS management did not agree that the Office of Audit’s recommendation to encourage increased Telefile usage would provide a strong incentive for more taxpayers to use the System.

Also, the Commissioner did not agree that the IRS should implement a structured process to quickly identify and react during the filing season to taxpayer and IRS processing problems. The Office of Audit remains concerned that IRS does not have an adequate process to quickly identify and react to processing problems during the filing season.

Information Technology

Modernization of IRS’ computer systems and security of taxpayer information have been major concerns over the past several years. Prior efforts to modernize antiquated tax systems fell short of what is required to prepare IRS for the next century.

RRA98 requires TIGTA to evaluate the adequacy and security of IRS technology on an ongoing basis.

Reviews performed in this area focused on assessing IRS’ progress in implementing its

modernization

initiatives,

 

including

procurement

practices

 

to

support

modernization

efforts,

and

evaluating

 

Information Systems’ success in meeting the business needs of operational functions.

In-process reviews include:

•           Integrated Submission and Remittance Processing (ISRP) System – Phase III;

•           Readiness for Service Center Mainframe Consolidation;

•           Telecommunications Costs and Capacities for Mainframe Consolidation;

•           Office of Systems Standards and Evaluation;

•           Operational Security Controls;

•           Logical Access and Security Controls; and,

•           Telecommunications Security of IRS Computer Systems.

 

Highlighted final audit reports include:

Review of the Integrated Submission and Remittance Processing (ISRP) System Software Development and Pilot Activities (Report No. 090903)

The Integrated Submission and Remittance Processing (ISRP) System will replace IRS’ primary data input systems for processing paper tax returns and remittance processing— the Distributed Input System and the Remittance Processing System. This replacement is critical because IRS' existing computer systems are 13 and 20 years old, respectively, and neither is capable of processing dates beyond the year 1999.

The ISRP systems development project is one of four critical Information Systems’ projects monitored monthly by the Commissioner’s Year 2000 Executive Steering Committee. This review focused on IRS' mission-critical need for Y2K compliant systems to process taxpayers’ paper tax returns.

In January 1998, the Office of Audit issued a report on the Initial System Development Activities of the ISRP System (Report No. 082204). This report identified IRS’ aggressive rollout schedule, the absence of contingency plans, and increased development risks for the Residual Remittance Processing System (RRPS) functionality.

The primary objective of this review was to determine if the decisions and activities regarding the design, development, and installation of the ISRP pilot systems were complete and reliable.

The Office of Audit reported mixed results on the pilot system, and risks remain for successful implementation of a nationwide production system. Specifically, the RRPS demonstrated inconsistent reliability as a production system, and neither ISRP subsystem conclusively demonstrated anticipated productivity gains.

There are additional system design, project scheduling and resource allocation risks, which management must continue to monitor and address to ensure successful nationwide implementation before January 1, 2000.

The Office of Audit findings and recommendations were presented to IRS management during the progress of this on­line review. Any recommendations that were not immediately addressed by IRS management during the review were subsequently resolved or acknowledged by IRS management during pilot operations.

Management Oversight Should Be Strengthened to Improve Administration of the Treasury Information Processing Support Service (TIPSS) Contract (Report No. 090205)

The Treasury Information Processing Support Services (TIPSS) contract consists of multiple contracts to support IRS’ tax system modernization efforts.

While TIPSS is assisting IRS in acquiring information technology services, there is minimum incentive for the contractor to control costs because TIPSS is a cost-plus-fixed-fee contract. Therefore, it is imperative that the contract be effectively administered to allow the Service to monitor and evaluate the contractor’s progress.

The Office of Audit reported that not all controls were effective to ensure services were received in accordance with contract provisions.

In particular the auditors noted that:

•           84 percent of contractor task orders were issued without defining the contractor’s cost, which may lessen the contractor’s motivation to perform the task order as efficiently as possible;

•           contractor performance is not being timely evaluated each quarter by the Contracting Officer Technical Representatives; and,

•           contractors were invoicing IRS for significantly fewer hours than were originally contracted for under a term contract.

 

Under a term contract there is an opportunity to renegotiate the contract when it appears the full number of hours will not be needed.

However, the report noted that for eight completed term-type task orders, the contractors invoiced IRS for fewer hours than contracted. This process allowed approximately $490,000 in fixed fees associated with the original contract costs to remain obligated to the contract. Approximately $3,517,000 had not been deobligated on 28 task orders that had been completed for over one year.

Management agreed with the findings and has initiated corrective action.

Evaluation of the Service’s Efforts to Acquire a new Federally Funded Research and Development Center (FFRDC) Contractor (Report No. 091502)

IRS has undertaken a complete redesign and modernization of its computer-based information processing system. To assist with the modernization efforts, IRS is soliciting a prime systems integration (PRIME) contractor and another Federally Funded Research and Development Center (FFRDC) contractor to manage the overall modernization efforts. By establishing a FFRDC, IRS can obtain technical assistance without any organizational conflicts of interest, either real or apparent.

The PRIME contract and the new FFRDC contract will be used in conjunction with several other contracts to implement the planned modernization. The PRIME contractor will implement the modernization blueprint, and the new FFRDC contractor will validate the approach of the PRIME contractor to ensure it is consistent with the modernization blueprint.

The report noted that although IRS is soliciting contractors to assist with its modernization efforts, additional emphasis is needed to define the interrelated roles of the various contractors to ensure all contractors remain free from potential conflicts of interest. To do so, IRS needs to clearly define the responsibilities of all contractors involved in the modernization efforts.

In addition, procurement personnel need to take action to ensure the FFRDC will be free from organizational conflicts of interest.

Management agreed with the findings and has initiated corrective action.

 

Taxpayer Protection and Rights

RRA98 will result in enhanced taxpayer protection and rights, as well as organizational changes intended to achieve a more efficient and responsive IRS.

In-process reviews include:

•           Impact of Examination Quality on Taxpayer Rights and Burden; and,

•           Protecting the Privacy of Tax Account Disclosures.

 

Highlighted final audit reports include:

Review of Taxpayer Requests for Disclosure of Tax Information (Report No. 090804)

In FY 1997, IRS received over 1.1 million requests for tax return information from the public. Requests were made for photocopies of tax returns or for transcripts of tax return information.

Beginning in October 1994, IRS offered to provide taxpayers with transcripts of return information free of charge as an alternative to providing photocopies of returns at a cost to the taxpayer of $14. However, providing transcripts of return information has made IRS extremely vulnerable to unauthorized disclosure of tax return information.

The Office of Audit recommended that IRS implement the following corrective actions:

•           processing controls need to be improved;

•           requirements for the release of tax return transcripts need strengthening; and,

•           written requests from taxpayers need to be properly maintained.

 

Management agreed with the findings and has initiated corrective actions.

IRS Employee Outside Employment Requests (Report No. 091804)

The Office of Audit presented control issues that were identified during separate integrity reviews in two regions.

Not all employee requests for permission to engage in employment outside the IRS were properly received, approved, and/or monitored by IRS management as required to prevent conflicts of interest between the IRS employees’ official duties and their outside employment. Also, abuses of outside employment authorizations were not detected.

The Office of Audit identified one IRS employee who was preparing tax returns for compensation and referred 56 other IRS employees to the Office of Investigations as possible browsers of tax records for either their outside employers or their spouses’ employers. Based on these referrals, two employees resigned, and IRS management removed one employee and took other disciplinary action on other employees.

To improve the internal control weaknesses, the Office of Audit recommended that:

•           national guidelines be updated and clarified;

•           a one-time resubmission of all outside employment requests be made to enable a national clean­up of Labor Relations’ and managers’ records;

•           employees be reminded that unauthorized research of the tax records of their outside employers, or the tax records of their spouses’ employers, will subject them to disciplinary action; and,

•           the Totally Automated Personnel System and Outside Employment System be implemented in each Labor Relations office that has these systems.

Management agreed with the recommendations and has initiated corrective actions.

Follow Up Review of Parent and Dependent Duplicate Exemption Claims (Report No. 091000)

The Office of Audit issued an audit report in 1996 (Report No. 063502) advising IRS management that action was needed to reverse the continuous and costly problem of duplicate use of Social Security Numbers (SSNs).

IRS management agreed with the auditors’ recommendations to minimize both taxpayer burden and the impact on IRS’ resources, and to segment the condition for control and aggressive management. As a result, IRS management placed the Duplicate Dependents Project in its FY 1996 Research Plan.

Since the date this issue was reported, IRS management efforts have shown some positive results in identifying potential solutions for the duplicate SSN problem. However, the initial results are not complete, and IRS management intends to continue testing.

One test IRS management conducted was correspondence examinations on a nationwide sample of repeat taxpayers (those in both the Tax Year 1995 and 1994 duplicate SSN populations). These examinations resulted in approximately $3.2 million in adjustments to taxpayers’ accounts.

IRS management agreed with the facts presented in this follow-up report.

Review of Special Projects in the New Jersey District Collection Division (Report No. 093307)

In FY 1998, the Office of Audit performed two audits in the New Jersey Collection Division that focused on the use of Collection performance measures, statistics, and the use of seizure authority. The Office of Audit concluded that the focus on collection productivity, from a national perspective, had created an overall climate that potentially sets the stage for miscommunications to employees and managers at all levels of the organization.

The reports also indicated that the New Jersey District’s strong focus on achieving organization productivity goals created an atmosphere that impacted front-line collection operations in a manner that placed taxpayers’ rights at risk. Facts identified in the Liquor License Project contributed to this conclusion.

Based on the results of the two audits, the Office of Audit conducted this review of special projects in the Collection Division. The objective was to determine whether projects were established based on sound evidence and support, controlled to ensure that project objectives were achieved, and monitored to ensure that taxpayers’ rights were protected.

IRS has a legitimate need to assist taxpayers in voluntarily meeting their tax obligations by tailoring efforts to the needs of market groups, as well as developing methods to enforce payment when other alternatives are unsuccessful.

The Office of Audit reported that special projects were used to help the New Jersey District Collection Division achieve statistical goals, while resulting in mistreatment of taxpayers. During the audit, the Acting District Director suspended activity on all Collection Division special projects. All special projects have now been closed and the TIGTA Office of Investigations is conducting inquiries into some of the report findings.

To strengthen the use of special projects in a manner consistent with both sound tax administration and concern for taxpayers, the Office of Audit recommended that the District Director approve all levy and seizure actions on special project cases. The Office of Audit also recommended that Collection management certify that all legal and procedural requirements are met prior to seizure or levy.

IRS management also should ensure that enforcement actions taken on special project cases:

•           are consistent with enforcement actions taken on non-project cases;

•           have a sound basis for initiation; and,

•           are properly reauthorized when there are changes in objectives, scope, or project duration.

 

Finally, special projects should be adequately documented, and District Counsel should review and approve all locally developed notices used on special projects.

IRS management agreed with the findings and has initiated corrective action.

 

Semiannual Report to the Congress




 

Treasury Inspector General for Tax Administration Office of Investigations

INTRODUCTION       INVESTIGATIVE ACTIVITIES

The TIGTA Office of Investigations is responsible for the development and execution of the nationwide investi­gative programs relating to oversight of activities of the Internal Revenue Service (IRS) and its operations.

The Office of Investigations is responsible for protecting the integrity of the IRS and for protecting employees of the IRS and related entities against external attempts to corrupt or threaten them when carrying out their responsibilities. This includes investigating allegations of criminal wrongdoing and serious administrative misconduct by IRS employees.

Other areas of responsibility include:

•           administering programs to protect IRS employees from violence;

•           operating a national complaints center, including a hotline, to receive and process allegations of fraud, waste or abuse; and

•           providing forensic examination of documentary evidence.

 

The Office of

Investigations focuses

on investigating alle­

gations of serious

administrative or crim­

inal misconduct which

may involve IRS

employees, such as

bribery, financial

fraud, false statements,

computer violations, disclosure of tax information, and abuse of taxpayer rights. During this reporting period, the Office completed 438 employee misconduct investigations.

The Office of Investigations also investigates individuals who attempt to interfere with or corrupt the administration of the federal income tax system, to include investigations of bribery, assault, threat, theft, and embezzlement. During this six-month reporting period the Office of Investigations completed 859 investigations involving these types of allegations.

TIGTA special agents routinely conduct integrity awareness presentations for IRS employees and various professional organizations. These presentations are designed to heighten awareness of integrity and to provide a deterrent effect against fraud and abuse involving IRS programs and operations. During this six-month period the Office of Investigations conducted 409 presentations for 13,241 individuals.

 

Taxpayer Rights and Protection

The IRS Restructuring and Reform Act of 1998 (RRA98) created new and important taxpayer rights and protections and also provided for mandatory termination of employment for certain acts or omissions by IRS employees. During this reporting period all IRS employees received mandatory training on the RRA98, Section 1203, conduct provisions.

There were no terminations under Section 1203 during this reporting period. See Appendix V for a summary of Section 1203 standards. During this six-month reporting pe