Promote the Economy,
Efficiency, and Effectiveness of Tax Administration
TIGTA’s Office of Audit (OA) strives to promote
the economy, efficiency, and effectiveness of tax administration. TIGTA provides recommendations to improve IRS
systems and operations while ensuring fair and equitable treatment of
taxpayers. TIGTA’s
comprehensive, independent performance and financial audits of IRS programs and
operations primarily address mandated reviews and high-risk challenges facing
the IRS.
The IRS’s
implementation of audit recommendations results in cost savings and increased
or protected revenue, reduction of taxpayer burden, and protection of taxpayer
rights and entitlements, taxpayer privacy and security, and IRS resources.
Each year, TIGTA
identifies and addresses the major management challenges facing the IRS. TIGTA places audit emphasis on statutory
coverage required by RRA 98, and areas of concern to Congress, the Secretary of
the Treasury, the Commissioner of Internal Revenue, and other key stakeholders.
The following summaries
highlight significant audits completed in each of the above areas of emphasis
during this six-month reporting period.
Systems
Modernization of the Internal Revenue Service
The Business
Systems Modernization program is a complex effort to modernize IRS technology
and related business processes.
According to the IRS, this effort involves integrating thousands of
hardware and software components while replacing outdated technology and
maintaining the current tax system. The IRS’s goal of providing high-quality, efficient, and
responsive information services to its operating divisions is heavily dependent
on modernizing its core computer business systems while maintaining the
existing systems. It also relies on the
security of those systems, the buildings that house those systems, and the
safety of the people who operate them.
Annual
Assessment of the Business Systems Modernization Program
The IRS has achieved
success when the Modernization program followed its systems development and
management guidance. The program has
progressed more effectively with the implementation of the Enterprise Services
organization’s management components, and with the development of the
Information Technology Modernization Vision and Strategy (MVS) as a map for
future development. However, the IRS and
its contractors must overcome significant barriers to successfully implement
the program goals. The Modernization
program and processes have not progressed enough to eliminate its material
weakness designation, and further reductions in funding could jeopardize the
program’s ability to deliver planned improvements.
The IRS originally estimated that the
Modernization program would last up to 15 years and incur contractor costs of
approximately $8 billion. According to
the IRS’s original plan, the Modernization program would be past the halfway
point by Calendar Year (CY) 2008. The
program is in its tenth year and has received approximately $2.5 billion for
contractor services, plus an additional $310 million for internal IRS
costs. The IRS planned to spend $267
million to manage the Modernization program in Fiscal Year (FY) 2008.
TIGTA provided an assessment
of the Modernization program’s status and accomplishments through FY 2008 but
did not offer any recommendations. The
IRS responded that it was pleased that the annual assessment recognized the
progress in implementing Modernization projects, validating improvements in
contracting procedures affecting the Modernization program, and documenting
work to institutionalize the MVS. The
IRS also stated that it has taken additional steps to improve Modernization program
performance, including developing strategies to confront risks and issues to
future system releases, efforts to address human capital challenges and
succession planning, and developing and implementing a methodology for
quantitatively measuring and reporting on project scope.
Report Reference No. 2008-20-129
Modernized e-File System
The Modernized
e-File System replaces the current IRS tax return filing technology with a
modernized, Internet-based electronic filing platform. So far, it has successfully processed electronically filed (e-filed) tax returns for corporations, partnerships, and exempt
organizations. The number of tax returns
filed through the Modernized e-File System increased
127 percent in 2007 to approximately 2.23 million from 982,000 in 2006. This System facilitates taxpayer account
processing and also allows e-filed tax
information to be accessed for use in tax administration compliance activities
by the IRS business operating divisions.
TIGTA found that the IRS does not have a formal process for identifying,
reporting, and resolving issues related to tax returns processed by the
Modernized e-File System, nor does it have a process for submitting and
tracking issues requiring attention by the Wage and Investment Division’s
Submission Processing function and the Electronic Tax Administration office.
In addition, available front-end tax return validation
controls were not being used. These
controls can prevent unnecessary tax return processing, error resolution
activity by the Submission Processing function, and correspondence with
taxpayers.
The Modernized e-File System also makes e-filed tax return data available to the business operating
divisions and allows authorized users to access, print, and download
tax return information. However, because
of system limitations, the Large and Mid-Size Business Division and the Tax
Exempt and Government Entities Division use their own applications to access Modernized e-File System filed tax return data. The Small Business/Self-Employed Division
does not use the Modernized e-File System for tax return control, delivery, or
examination processes, nor does it capture cost data for printing, shipping, and handling of tax
returns filed using the Modernized e-File System.
TIGTA
recommended that the IRS:
1)
Develop
a formal process for identifying, reporting, and resolving Modernized e-File
System application processing issues that require subsequent tax return and
account adjustment activity;
2)
Perfect
the validation controls in the Modernized e-File System to verify that
taxpayers file the correct tax form based on their established filing election;
and
3) Coordinate the
capabilities of the Enterprise
Return Retrieval System and the Small
Business/Self-Employed Division’s Technology and Data Integration Plan into the
Information Technology MVS.
IRS management agreed with the recommendations and has planned
appropriate corrective actions.
Report Reference No.
2008-20-122
Customer
Account Data Engine Project Management Practices
The IRS has developed
a strategy for a phased replacement of its computer systems to better support
today’s tax laws, tax policies, and taxpayer needs. As the centerpiece of the IRS’s Modernization
program, the CADE is an essential project in this strategy. The modernized CADE database will allow the
IRS to update taxpayer accounts, support account settlement and maintenance,
and process refunds daily, which will contribute to improved service to
taxpayers. However, long-term objectives and the ability to adjust for unplanned
initiatives have challenged the IRS’s ability to meet the goal of having the
CADE perform as the Modernization program’s centerpiece.
Although the
project team has made progress to ensure that CADE releases contain a
reasonable scope of work and sufficient staffing, long-term issues continue to
challenge the CADE project. The CADE’s ability to access historical taxpayer account
information currently residing on the Individual Master File must be resolved
to enable requirements for soon-to-be- developed releases. Additionally, with the expectation of
significant increases in the CADE taxpayer population, processing capacity and
data storage meeting the future operational requirements need to be considered.
The processing
of payments related to the Economic
Stimulus Act of 2008 put the CADE Release 4 Project Schedule
at risk. In January 2008, the IRS
engaged the PRIME contractor to conduct an impact analysis and
develop a preliminary design assessment for the work needed for the CADE to
process economic stimulus payment checks.
The project team included the work related to this effort in the scope
of Release 4 with a task order modification.
However, the IRS did not have funds appropriated for this work until the
effort was already underway.
TIGTA
recommended that the IRS:
1)
Ensure
that a Historical Data Conversion solution is in place to enable the CADE to
process transactions related to issues such as balance-due conditions;
2)
Develop
an updated estimate of the processing and storage requirements (including the
related costs) to support the long-term objectives and goals of CADE
operations; and
3)
Use
a standardized process, including measurement and reporting to appropriate
parties, to determine the effect on the CADE project’s scope, cost, and
delivery schedules when unplanned initiatives are mandated for implementation.
IRS management agreed with the recommendations and has planned
appropriate corrective actions.
Report Reference No. 2008-20-151
Tax
Compliance Initiatives
Tax compliance initiatives include administering tax regulations,
collecting the correct amount of tax for businesses and individuals, and
overseeing tax-exempt and government entities for compliance. Increasing voluntary compliance and reducing
the Tax Gap are currently the focus of IRS initiatives. Nevertheless, the IRS is facing significant
challenges in obtaining complete and timely data, as well as developing the
methods necessary for interpreting the data.
The IRS must continue to seek accurate measures for the various
components of the Tax Gap and the effectiveness of the actions taken to reduce
it.
The Department of
the Treasury and the IRS developed a multiyear strategy for improving
compliance and reducing the Tax Gap.
However, the strategy is dependent on overcoming several high-risk
challenges. The strategy is
significantly more comprehensive and detailed than previous efforts. The strategy identifies seven components that
support a multifaceted approach to reducing the Tax Gap: reducing opportunities for evasion; making a
multiyear commitment to research; continuing improvements in information technology; improving compliance activities;
enhancing taxpayer service; reforming and simplifying the tax law; and
coordinating with partners and stakeholders.
The long-term success of the strategy will, in large part, be dependent
on addressing several risk factors, some of which are beyond the control of the
IRS. As a result, broader strategies and
better research may be needed to determine what actions are most effective in
addressing noncompliance.
IRS
Compliance Trends
During FY 2007, many of the IRS’s
compliance activities increased, resulting in improved collections. Since FY 2000, the IRS has reversed
numerous downward trends in compliance activities that had occurred in prior
years. Some of the positive changes
might be attributable to management emphasis on Collection and Examination
function programs. Over the last few
years, the Small Business/Self-Employed Division has implemented reengineering
and organizational changes, and both the Collection and Examination functions
continue to study ways to improve their workload selection.
The level of
compliance activities and the results obtained in many Collection functional
areas showed a continued increase. Use
of collection enforcement tools was greater and enforcement revenue collected
continued to increase (to $59.2 billion), but the total dollar amount of
uncollected liabilities increased to $290 billion. By the end of FY 2007, the gap between new
delinquent account receipts and closures had widened by 63 percent.
During FY 2007,
the overall percentage of tax returns examined increased by almost
9 percent, even though the number of field examiners decreased by just
over 4 percent. In addition, the
overall percentage of tax returns examined was 2 percent higher than in
FY 1998. The number of individual
tax returns examined increased. However,
83 percent were conducted via
correspondence examinations, which are usually not as comprehensive as face‑to‑face
examinations. Also in FY 2007, the
number of corporate tax returns that were examined increased by just over
4 percent, after decreasing 1 percent in FY 2006. However, this number has decreased almost
45 percent since FY 1998.
Due to the nature
of this review, TIGTA made no recommendations in the report. However, key IRS management officials
reviewed the report prior to issuance and agreed with the facts and
conclusions.
Report Reference No. 2008-30-095
IRS
Enforcement Trends
Results of several
key performance measures that had declined in prior years improved during FY
2007. For example, the number of subject
investigations initiated increased 7.8 percent, the number of subject
investigations recommended for prosecution increased 4.3 percent, and the
numbers of subjects convicted and sentenced increased 6.7 percent and 5.1
percent, respectively. In addition, the
Department of Justice acceptance rate for the Criminal Investigation Division’s
(CID’s) prosecution cases increased to 94.6 percent from 92.2 percent in FY
2006. Similarly, the acceptance rate by
U.S. Attorney Offices for the CID’s prosecution cases increased to 90.2 percent
from 88.3 percent in FY 2006.
Continued
progress
in enforcement of the tax laws and prosecution of
criminal tax violations is important to enhancing voluntary compliance by taxpayers
and fostering confidence in the integrity of the tax system.
Due to the nature of this review,
TIGTA made no recommendations in the report.
However, key IRS management officials reviewed the report prior to
issuance and agreed with the facts and conclusions.
Report Reference No. 2008-10-133
Use
of Penalties to Encourage Compliance
According to the
Internal Revenue Manual, penalties exist to encourage voluntary compliance by
supporting the standards of behavior expected by the I.R.C. Penalties encourage voluntary compliance by:
- Defining standards of compliant behavior;
- Defining remedial consequences for noncompliance; and
- Providing monetary sanctions against taxpayers who do
not meet the standards.
However,
penalties are not consistently used.
TIGTA evaluated the IRS’s actions to address underwithholding
of taxes on wages. Not only has the IRS
not taken enforcement actions against employers who do not comply with notices
(known as lock-in letters), it also generally does not penalize taxpayers for
making false statements on the Employee’s Withholding Allowance Certificate
(Form W-4) that result in the underwithholding of
taxes. The I.R.C. and related tax regulations allow
assessment of a $500 civil penalty for furnishing a false statement on the Form
W-4 if:
1)
The
statement made on the Form W-4 results in less income tax withheld than what
would have been withheld if the Form W-4 had been correctly completed; and
2)
There
was no reasonable basis for such a statement.
The IRS is not
following its own procedures to consider penalties for taxpayers referred from
other IRS functions for underwithholding. If the IRS had been following its procedures,
it could have assessed potentially $11 million in civil penalties. The following table shows the number of
lock-in letters issued and the number of penalties assessed:
Figure 1: Taxpayers Issued Lock-in Letters Compared to
Form W-4 Civil Penalties Assessed in FYs 2006 and 2007
|
Fiscal
Year
|
Taxpayers
Issued Lock-in Letters
|
Referred
Taxpayers Issued Lock-in Letters
|
Penalties
Assessed
|
Total
Penalty Amount
|
|
2006
|
122,140
|
9,182
|
29
|
$14,500
|
|
2007
|
131,803
|
12,786
|
0
|
$0
|
Source: IRS
Withholding Compliance Program management and TIGTA analysis of Individual
Master File data.
TIGTA made
several recommendations that included:
1)
Developing
a process to identify employers who do not adequately withhold taxes after
receiving a lock-in letter;
2)
Developing
criteria that will expand the use of the Form W-4 civil penalty beyond the
current limited use; and
3)
Providing
related guidance and training to ensure consistent application of the criteria.
IRS management
agreed with the recommendations and has planned appropriate corrective actions.
Report Reference No.
2008-40-167
Accuracy
of Notices
The IRS Oversight
Board expressed concern about the accuracy of notices sent to taxpayers when
there is a discrepancy between the income reported by the taxpayer and the
amount reported by the payor. The CP 2000 notice is the primary notice that the IRS
issues to taxpayers as a result of underreporting discrepancies. From the approximately 1.3 million cases
closed in FY 2007 (related to Tax Year (TY) 2005 returns), TIGTA reviewed a
sample of CP 2000 notices sent to 138 taxpayers for accuracy and found that
7 (5.1 percent) taxpayers had inaccurate assessments. Employee errors on the CP 2000 notices
resulted in some taxpayers being overassessed a total
of $18,968 and others being underassessed a total of
$1,146 in tax.
While errors
identified were a result of employee mistakes, TIGTA believed that the
complexity of the CP 2000 notices might also be a contributing factor in
taxpayers agreeing to incorrect assessments.
During FY 2007, customer satisfaction surveys for the Automated Underreporter Program (Program) indicated that, depending
on the survey quarter, 24 to 32 percent of the taxpayers who responded stated
that their primary reason for calling the IRS was to have someone explain the
CP 2000 notice to them.
TIGTA
recommended that the IRS:
1)
Ensure
that management incorporates additional information on notice review procedures
and quality service expectations into its refresher training for Program
employees;
2)
Simplify
the CP 2000 notices issued by the Program; and
3)
Ensure
that Program management monitors site compliance with requirements to submit
and implement corrective action plans when notice review error rates exceed 10
percent.
IRS management
agreed with the recommendations and has planned appropriate corrective actions.
Report Reference No.
2008-40-180
Security
of the Internal Revenue Service
Millions of
taxpayers entrust the IRS with sensitive financial and personal data stored and
processed by IRS computer systems.
Recent reports of identity theft from both the private and public
sectors have heightened awareness of the need to protect this data. The risks that sensitive data could be
compromised and that computer operations could be disrupted continue to
increase. These risks are due to
internal factors such as the increased connectivity of the computer systems and
the increased use of laptop computers, and external factors such as the
volatile threat environment resulting from increased terrorist and hacker
activity.
To
maintain adequate security over sensitive taxpayer data, the IRS must implement
controls at all levels of its computer environment to guard against external
intruders as well as malicious employees and contractors who have been given
access to IRS systems to carry out their responsibilities. For example, controls are needed at the
perimeter to keep unauthorized persons from intruding into IRS systems, the
network architecture used to transmit data back and forth, and the applications
and databases used to store taxpayer data.
Control Weaknesses at IRS Internet
Connections
The IRS has three
primary Internet gateways that make it possible for employees to communicate
with outside partners and carry out other tax administration duties. However, audit logs were not adequately saved
and reviewed, and the gateways had weak security configuration settings. These weaknesses increase the likelihood that
intruders from the Internet could gain access to sensitive taxpayer data
residing on the IRS network without being detected.
To strengthen
security controls over audit logs, TIGTA recommended that the IRS ensure
that:
1)
Someone
other than the database or system administrator reviews the logs;
2)
Audit
log data are transmitted to two separate servers; and
3)
Audit
logs are configured to show time stamps for events using the Coordinated
Universal Time.
To ensure that
security configuration settings on routers and firewalls are adequate and
consistent, the IRS should require that the Enterprise Networks and the Cybersecurity organizations develop standard security
configurations and that the Enterprise Networks organization regularly tests
the firewalls and routers to ensure compliance with the configurations.
The IRS agreed
with the recommendations and has planned to take appropriate corrective
action.
Report Reference No.
2008-20-143 (Sensitive But Unclassified)
Unauthorized
Internal Web Servers
A
Web server is a computer that contains the software necessary for a Web site to
operate.
During the time
of TIGTA’s review, 1,811 internal Web servers on the
IRS network had not been approved to connect to the network, and 2,093 internal
Web servers connected to the network had at least one
security vulnerability. These
unauthorized and insecure Web servers placed both the computers and the entire
IRS network at risk of unauthorized access to taxpayer and personally
identifiable information.
TIGTA
recommended that the IRS:
1)
Establish
official ownership and responsibility for the Web registration program;
2)
Enforce
IRS procedures to block unauthorized Web servers from providing data over the
IRS network; and
3)
Require
an annual scan of Web servers and compare the Web server to the Web
registration database to identify unauthorized Web servers.
Unauthorized Web
servers should be immediately disconnected from the IRS network, and inappropriate
Web sites should be referred to the TIGTA Office of Investigations. In addition, the IRS should require quarterly
network scans of Web servers to measure compliance with security requirements.
IRS management
agreed with the recommendations and has planned appropriate corrective actions.
Report Reference No.
2008-20-159
IRS
Modernized Systems Have Known Security Vulnerabilities
The
CADE system will provide the foundation for managing all taxpayer accounts and
will replace existing tax processing systems.
The AMS will interface with the CADE and provide IRS employees faster
and improved access to taxpayer account data.
Security weaknesses in the controls over sensitive data protection,
system access, monitoring of system access, and disaster recovery have
continued to exist, although key phases of the CADE and the AMS have been
deployed. As a result, the IRS is
jeopardizing the confidentiality, integrity, and availability of an increasing
volume of tax information for millions of taxpayers as application releases are
put into operation.
TIGTA
recommended that the IRS consider all vulnerabilities that affect the overall
security of the CADE and the AMS before approving unconditional milestone
exits. In addition, the CADE and AMS
Project Managers should place more emphasis on preventing and resolving
security vulnerabilities identified during Enterprise Life Cycle
processes. TIGTA also recommended that
the IRS recommend and approve interim authorities to operate when significant
security vulnerabilities exist in system environments, and continue efforts to
improve the accuracy and completeness of risk information in the security
assessment reports. The IRS should also
approve interim authorities to operate when significant security control weaknesses
exist in system environments.
IRS management
agreed with the recommendations and has planned appropriate corrective actions.
Report Reference No.
2008-20-163
Providing
Quality Taxpayer Service Operations
Since the 1990s,
the IRS has improved its delivery of quality customer service to
taxpayers. In fact, in its current
strategic plan, the IRS’s first goal is to improve taxpayer service. However, since the late 1990s, the IRS has
allocated more resources to its collection, examination, and criminal
investigation functions and fewer resources to taxpayer service functions. As a result of this resource shift and other
factors, in July 2005, Congress requested that the IRS develop a five-year
plan, including an outline of which services the IRS should provide and how it
would improve services for taxpayers. In
response, the IRS developed the Taxpayer Assistance Blueprint to help it focus
on providing the appropriate types and amounts of service. However, the IRS is
already facing challenges with the Blueprint.
As the IRS moves forward, inaccuracies and inconsistencies will put the
Blueprint at risk of improperly aligning service content, delivery, and
resources with taxpayer and partner expectations.
Rejected
Electronic Tax Returns
The IRS rejected
more than 6.8 million (8.5 percent) of the nearly 80 million electronically
filed (e-filed) tax returns it
received for TY 2006. More than 5.4
million of these returns were corrected and successfully e-filed. The methods currently
used to assist customers with rejected e-filed
returns are burdensome for the customer and create unnecessary expenses for the
IRS, and resulted in the IRS maintaining redundant information in multiple
systems. Providing a self-assistance
option would help the IRS ensure that it continues to deliver a high level of
service and support to customers who participate in electronic filing (e-file).
TIGTA
recommended that the IRS:
1)
Develop a self‑assistance option on IRS.gov (the public IRS
website) that allows customers to obtain detailed explanations of e-file reject conditions, including the
steps to resolve them; and
2) Develop a business case for
determining the feasibility of providing in the e-file acknowledgement file the information that would allow
customers to resolve their reject conditions once individual tax returns are
transitioned to the Modernized e-File System.
IRS
management agreed with the first recommendation and disagreed with the
second. With regard to the first, for the
13 most common reject codes, a self‑assistance option providing
descriptions and suggested solutions was added to IRS.gov. IRS management also plans to study the
feasibility of adding a more comprehensive self-assistance option to IRS.gov. IRS management disagreed that a business case to
determine the feasibility of providing information in the e-file acknowledgement file for customers to resolve their reject
conditions is necessary. As the IRS
transitions to the Modernized e-File System, customers will be provided reject codes that contain
a clear and concise explanation of the reject conditions. This transition is scheduled for
implementation by September 2009.
TIGTA agreed that the Modernized e-File System should provide customers with
explanations of error reject codes.
However, error explanations alone, no matter how clear and concise, will
not consistently communicate the steps required to correct the errors.
Report Reference No. 2008-40-128
Economic
Stimulus Payments
The Economic Stimulus Act of 2008 was passed
February 13, 2008, to energize the national economy. The first payments were issued May 2,
2008. Most of the IRS’s planning and
implementation activities had to take place during the IRS’s busiest time of
the year, the tax filing season. In
addition, individuals must have filed a 2007 tax return to receive a stimulus
payment. The IRS estimated that an
additional 20 million individuals who do not normally need to file a tax return
would file. The IRS expected to issue
more than $100 billion in stimulus payments to more than 130 million
households.
Following are
examples of reviews completed by TIGTA to date.
TIGTA will continue to evaluate the IRS’s
efforts to ensure that all eligible individuals receive a stimulus
payment. Because of the
significance and potential risks associated with the planning and issuance of
economic stimulus payments, TIGTA planned to conduct its audit work in four
phases. The first two phases, which
evaluated the planning, computation, and the issuance of the checks as well as
an evaluation of the controls to prevent erroneous or improper checks, are
completed. This required rapid planning
and coordination to evaluate the IRS’s efforts to provide real-time feedback
and recommendations.
Planning Efforts for the Issuance of Economic Stimulus Payments
The most
significant part of the Economic Stimulus
Act of 2008 was the individual stimulus payment. The economic stimulus payment is a credit
for TY 2008. However, the payments were
estimated using income figures reported on TY 2007 tax returns and were issued
in 2008, so individuals can benefit from the payments as soon as possible.
Recognizing that
the stimulus payments would affect millions of individuals, the IRS designed a
wide-reaching media campaign focused on educating individuals on the
requirements to receive the stimulus payment along with ways to receive
assistance. A number of methods were
used to inform and notify all eligible individuals and households about the
stimulus payments. This included media
contacts, public service announcements, information on the IRS Web site,
issuance of advance notices, and partnering with other Federal Government
agencies and organizations. The IRS also
established tools to provide assistance to the anticipated thousands of
individuals who would contact the IRS with stimulus payment questions. This assistance had to be provided without
harming service to taxpayers who were in the process of filing their annual income
tax returns.
Although the IRS’s planning for the
stimulus payments was generally sufficient, TIGTA noted areas where
improvements were needed. The IRS
addressed these concerns as they were brought to management’s attention. Addressing these concerns in a timely manner
helped ensure that accurate and consistent information was provided to millions
of individuals regarding requirements for receiving the payment, and helped
reduce the risk of errors when stimulus-only returns were processed and
payments were issued.
Report Reference No. 2008-40-149
Evaluation of the Computation of Economic Stimulus Payments
In preparing for
computing the amount individuals would receive for an economic stimulus
payment, the IRS was required to take a number of actions. These included:
·
Coordinating
with the Department of the Treasury to ensure correct interpretation of the
law;
·
Obtaining
and reviewing the specific statutory language to identify requirements that
must be met to qualify for an economic stimulus payment;
·
Developing
computer programming to identify characteristics included on a tax return that
result in an individual not qualifying for an economic stimulus payment;
and
·
Developing
computer programming to identify characteristics included on a tax return to be
used to calculate the economic stimulus payment.
The IRS
correctly calculated 99.6 percent of the 129.1 million economic stimulus
payments TIGTA reviewed. In addition,
IRS programs ensured that payments were not issued to individuals who were not
entitled to receive an economic stimulus payment. These included individuals who:
1)
Did
not have a valid Social Security Number;
2)
Did
not meet qualifying income, gross income, and net tax liability requirements;
3)
Had
income that exceeded requirements; and
4)
Indicated
that they can be claimed by someone else on a tax return.
Although the
accuracy rate for economic stimulus payments was very high, TIGTA identified
539,550 returns (0.4 percent) for which its calculation of the payment and the
IRS’s calculation did not agree. Most of
the differences identified resulted from business decisions made by the IRS in
concurrence with the Department of the Treasury, taxpayer errors, and/or tax
software errors.
TIGTA made no
recommendation in this report. However,
IRS management agreed that the accuracy rate for the economic stimulus payments
was very high.
Report Reference No. 2008-40-174
Increased Call Volume Associated With Economic Stimulus Payments
Each year, millions of taxpayers contact the IRS by calling the various
toll-free telephone assistance lines to seek help in understanding tax laws and
meeting their tax obligations. The IRS had planned to achieve an 81.1
percent Level of Service and a 270-second Average Speed of Answer for the 2008
Filing Season. However, because of the large volume of calls
related to the economic stimulus payments, it instead achieved a
77.4 percent Level of Service and a 347‑second Average Speed of
Answer, indicating that the ability of taxpayers to access the toll‑free
telephone lines was lower than that in prior years.
Due
to the anticipated volume of calls about the rebates, the IRS implemented a
series of automated messages to address rebate questions during the 2008 Filing
Season. Management decided not to route
callers back to the main menu because the IRS assumed that once the caller had
heard the rebate message, the caller would require no further information or
would go to the IRS’s Web site, IRS.gov.
TIGTA’s recommendations included ensuring that
callers had the option of returning to the main menu when the IRS used a
recorded message to provide information to taxpayers. The IRS disagreed with this recommendation.
Report
Reference No. 2008-40-168
Human
Capital
The Federal
workforce is aging, and agencies are faced not only with retirements and staff
turnover, but also with the unique challenges of the 21st
Century. The IRS recognizes that it must
be prepared to respond to a growing and more demanding population, a more
global and multilingual environment, and an increasing number of taxpayers who
have complex financial holdings, and the means and motives to resist paying
their taxes.
In addition, the IRS, along with other Federal agencies, is slowly
moving toward changing pay, classification, and performance management systems
to transition to a more market-based and performance-oriented culture.
Strategic
Human Capital Management
The IRS has not
made substantial progress in developing and implementing an agency-wide process
that will consistently and accurately project future human resource needs. If accurate projections are not made, the IRS
might struggle to fill unforeseen vacancies, which could affect overall service
to taxpayers. The potential loss of a
large number of employees increases the importance of the IRS having a process
in place to fill anticipated vacancies quickly and effectively.
The IRS has
recognized this and has acted to identify potential qualified leaders to ensure
continuity and stability, and it has established some key parts of a workforce
planning foundation. Additional actions
are necessary to ensure that the IRS can fully identify qualified candidates
for future leadership positions and assess its efforts. If these actions are not taken, it will be
difficult for the IRS to assess the progress of its leadership succession
efforts, and more importantly, it will be difficult for the IRS to determine
whether it can in a timely manner identify potential future leaders with the
skills to address future challenges.
TIGTA
recommended that the IRS develop a written strategic leadership succession plan
and establish
a more collaborative, integrative process to implement agency-wide roles and responsibilities
for effectively creating, refining, and using projections of future human
resource needs. In addition, TIGTA
recommended that the IRS:
1)
Prepare
a plan specifying the key activities that should be completed in the short term
to ensure that the leadership succession program continues to move forward; and
2)
Revise
written guidance and develop agency-wide templates for more consistent
projections of future human resource needs.
IRS management
agreed with the recommendations and has planned appropriate corrective actions.
Report
Reference Nos. 2008-10-132 and 2008-10-169
Erroneous
and Improper Payments
As
defined by the Improper Payments
Information Act of 2002, an improper payment is any payment that should not have been made or that was made
in an incorrect amount (including overpayments and underpayments) under
statutory, contractual, administrative, or other legally applicable
requirements. It includes any payment to
an ineligible recipient, any payment for an ineligible service, any duplicate
payment, payments for services not received, and any payment that does not
account for credit for applicable discounts. For the IRS, improper and erroneous payments
generally involve improperly paid refunds, tax return filing fraud, or
overpayments to vendors or contractors.
An Estimated $1.6
Billion in Fraudulent Refunds Was Issued During the 2006 and 2007 Filing
Seasons
The
IRS’s CID Questionable Refund Program is a nationwide, multifunctional program
designed to detect and stop fraudulent claims for refunds on income tax
returns. TIGTA estimated that the number
of potentially fraudulent returns that would have been identified without
threshold restrictions rose by an alarming 70 percent between PYs 2006 and 2007.
As a result, the IRS worked only 48.7 percent of these returns,
potentially allowing $742 million in fraudulent refunds to be issued. If this trend
continues over the next few years, the IRS might issue an even greater number
of fraudulent refunds, possibly resulting in a significant annual revenue loss
to the Federal Government. As a result,
additional burden is placed on honest taxpayers whose tax dollars are being
used to support this criminal activity.
TIGTA made
several recommendations, including that the IRS:
1)
Develop
a more urgent approach to achieving the legislative change that will exempt the
IRS from having to issue statutory notices of deficiency on fraudulent returns;
2)
Develop
a long-term, strategic approach to balancing available resources with the
growth in refund fraud;
3)
Review
potentially fraudulent prisoner returns identified during PY 2006 and pursue
recovery or offset through future non-fraudulent refunds;
4)
Identify
all fraudulent PY 2006 tax returns for which the PY 2007 return was verified as
being false; and
5)
Implement
procedures to ensure that
suspicious tax returns filed with an attached U.S. Individual Income Tax Return
(Form 1040) Profit or Loss From Business (Schedule C) are identified by the
fraud detection system during future processing years.
IRS management
agreed with most of the recommendations and has planned to take appropriate
corrective actions. However, IRS
management disagreed with the recommendation to pursue recovery or offsets of
payments associated with the PY 2006 fraudulent prisoner returns.
TIGTA continues to
believe that several of the corrective actions to the recommendations will not
fully address the reported concerns.
These recommendations need to be reconsidered as part of the Pre-Refund
Program Office’s long-term strategy.
Report Reference No.
2008-10-172
Accuracy
of Tax Refund Direct Deposits
The IRS states
that having direct deposit provides taxpayers with a faster, more secure, more
convenient means by which to receive their tax refunds. However, the IRS has not developed processes
to ensure that the tax refunds were deposited only to an account in the name of
the filer. Analysis of IRS direct
deposit data identified bank accounts receiving multiple (three or more) tax
refunds. For CY 2007, over 700,000 bank
accounts received three or more tax refunds, totaling approximately $8.14
billion. Twelve bank accounts received
over 1,000 direct deposit tax refunds with one receiving over 58,000
refunds.
Taxpayer refunds
can be deposited into a wrong bank account as a result of an error. When direct deposits are made to the wrong
account, the assistance provided to taxpayers is inconsistent. Specifically, the IRS has not established a
consistent process to assist taxpayers in recovering their tax refunds when
erroneously deposited. The inability of
the IRS to ensure the accuracy of direct deposit account information increases
fraud potential and taxpayer burden.
TIGTA
recommended that the IRS:
1)
Coordinate
with responsible Federal agencies and banking institutions to develop a process
to ensure that direct deposit payments are made only to a deposit account in
the name of the recipient, and until a process is in place, should limit the
number of direct deposits being sent to the same account;
2)
Develop
an education campaign to clearly alert taxpayers and tax return preparers of
the requirement that direct deposits be made only to accounts in the name of a
recipient; and
3)
Improve
procedures for assisting taxpayers in recovering their erroneously deposited
tax refunds.
IRS management
disagreed with most of the first recommendation but agreed with the second and
third recommendations. Although IRS
management agreed that coordination between responsible Federal agencies and
banking institutions is necessary to develop a direct deposit process, IRS
officials do not believe they should initiate this coordination. In addition, the IRS disagreed with the
recommendation to limit the number of direct deposits to the same account,
but offered no
alternative actions to reduce the potential fraud associated with multiple
direct deposits to the same account.
Report Reference No.
2008-40-182
Taxpayer
Protection and Rights
The IRS
continues to place increased emphasis on tax compliance activities, such as
better identifying corporations and individuals who fail to report or do not
pay what they owe. However, all
collection efforts must be balanced against the rights of taxpayers to receive
fair and equitable treatment, both in the assessment of taxes and in all
initiatives undertaken to collect open account balances. In summary, all collection efforts must
ensure that
taxpayer rights are protected.
Private
Debt Collection Program
The I.R.C. authorizes the IRS to enter into contracts with private
collection agencies to assist
in the collection of delinquent Federal taxes. Although many of the Private Debt Collection
program procedures were being followed, improvements can be made in how a
taxpayer’s identity is authenticated, how contractors handle taxpayer requests
to opt out of the program, the quality control system, and case
processing. These improvements will help
to ensure that taxpayer rights are protected during the collection process.
TIGTA made
several recommendations including that the IRS:
1)
Continue
to monitor the contractors’ authentication process and implement improvements
as necessary to assist contractors in increasing the number of authenticated
taxpayer contacts;
2)
Ensure
that the Quality Unit provides statistically valid, weighted estimates of
quality, conducts the required number of case action reviews, and that it has
the quality analysts meet with the Statistics of Income Division staff
semiannually; and
3)
Ensure
that the Quality Unit establishes a procedure for backup quality analysts to
conduct telephone monitoring and case action reviews as needed.
IRS management
agreed with the recommendations and has taken or has planned appropriate
corrective actions.
Report Reference No.
2008-30-157
Processing
Returns and Implementing Tax Law Changes During the Tax
Filing Season
Each filing
season tests the IRS’s ability to implement tax law changes made by
Congress. It is during the filing season
that most individuals file their income tax returns and call the IRS with
questions about specific tax laws or filing procedures. Correctly implementing tax law changes is a
continuing challenge, because the IRS must identify the tax law changes, revise
the various tax forms, instructions, and publications, and reprogram the computer
systems used for processing returns.
Changes to the tax laws have a major effect on how the IRS conducts its
activities, what resources are required, and how much progress can be made on
strategic goals. Congress frequently
changes the tax laws; thus, some level of change is a normal part of the IRS
environment. However, certain types of
changes can significantly impact the IRS in terms of its quality and
effectiveness of service and in how taxpayers perceive the IRS.
Alternative
Minimum Tax Discrepancies
The number of
taxpayers affected by the Alternative Minimum Tax (AMT) is expected to grow
significantly in the next ten years if Congress does not continue to increase
exemption amounts. AMT revenue increased
from $16.7 billion for TY 2005 to $21.4 billion for TY 2006. Determining whether the AMT is owed is
complex and time-consuming, and the complexity causes taxpayer errors. Recognizing the complexity of the AMT, the IRS
provides taxpayers with tools to determine whether they will have to prepare an
Alternative Minimum Tax–Individuals (Form 6251) to determine their AMT
liabilities.
In
CY 2006, computer checks identified about 226,000 discrepancies between the AMT
figures reported, or not reported, by the taxpayers and the amounts computed by
the IRS. TIGTA reviewed a random sample of
52 tax returns filed in CY 2006 on which IRS computers identified a
discrepancy. For all 52 cases, computer
checks correctly identified that there was a discrepancy, and the cases were
correctly sent to tax examiners for further review. However, examiners did not follow procedures
when resolving 11 (21 percent) of the 52 cases.
Of these 11 cases, 3 resulted in the examiners incorrectly computing the
amount of tax owed. Correct
identification and resolution of discrepancies is essential to avoid further
increasing the burden for taxpayers subject to the AMT.
TIGTA recommended and the IRS agreed that it should provide information to tax examiners
reiterating the importance of correctly resolving AMT discrepancies and
highlighting specific issues that could lead to incorrect resolution.
Report Reference No.
2008-40-146
2008
Filing Season
The
filing season (January through April 15th) is critical for the IRS
because it is the time when most individuals file their income tax returns and
contact the IRS if they have questions about specific tax laws or filing
procedures. The 2008 Filing Season
presented additional challenges for the IRS due to the late and unexpected
enactment of two significant tax laws -- the Tax Increase Prevention Act of 2007, signed on December 26, 2007,
limiting the number of taxpayers who would be subject to the AMT for TY 2007,
and the Economic
Stimulus Act of 2008, signed on
February 13, 2008. Through May 30, 2008, the IRS had received 144.2 million
individual tax returns. Of those,
approximately 86.7 million were electronically filed and approximately 57.5
million were filed on paper.
TIGTA conducted filing season audits that addressed the IRS’s
efforts to accurately process tax returns as well as the accuracy of tax returns
prepared by unenrolled preparers
and volunteers. Following is a synopsis
of these reviews:
Late Tax Legislation
In spite of the
late and unexpected enactment of two significant tax laws, the IRS generally
had a successful 2008 Filing Season.
Most
key tax law and administrative changes were correctly implemented, and the IRS
completed processing returns on schedule and issued refunds within the
required 45 calendar days of the April 15, 2008 due date. While the IRS was able to meet the challenges
of late and unexpected enacted legislation and accurately process most returns
in a timely manner, TIGTA identified the following opportunities to improve the
processing of some tax deductions:
·
Taxpayers
improperly claimed the Qualified Mortgage Insurance Premiums deduction;
·
Taxpayers
age 70½ or older improperly claimed the Individual Retirement Account
deduction;
·
Taxpayers
did not claim the sales tax deduction; and
·
Taxpayers
who improperly claimed a “dual benefit” for both the tuition and fees deduction
and the Education Credit are not receiving the dual benefit. However, improvements still need to be made
in processing these returns.
TIGTA
recommended that the IRS:
1)
Ensure
that the computer systems are programmed to identify taxpayer returns claiming the
Qualified Mortgage Insurance Premiums deduction with Adjusted Gross Income that
exceeds the maximum phase-out limitations;
2)
Ensure
that the computer systems are programmed to identify taxpayer returns claiming
Individual Retirement Account (IRA) deductions for taxpayers age 70½ or older;
3)
Continue
to inform taxpayers that they are eligible for a sales tax deduction if they
itemize and do not claim a State income tax deduction, if the sales tax
deduction is extended beyond TY 2007.
The possibility of calculating the sales tax deduction for taxpayers if
it is not claimed or sending a notice to the affected taxpayers should be
considered; and
4)
Revise
or verify the computer programming to ensure that all taxpayers claiming a dual
benefit are identified if the tuition and fees deduction is extended beyond TY
2007. This should include verifying the
programming to forward paper returns with this condition to the Error
Resolution System for correction.
IRS management
fully agreed with two of the recommendations and partially agreed with one
other recommendation. They did not agree
to update computer programs to identify taxpayer returns claiming IRA
deductions for taxpayers age 70½ and older because math error authority cannot
be used for this condition. IRS management
did, however, propose an alternative approach to identify these taxpayers. In addition, IRS management agreed to
continue to inform taxpayers of eligibility for the sales tax deduction, but
did not agree to calculate the sales tax deduction for the taxpayer or to send
a notice.
Report Reference No. 2008-40-183
Most
Tax Returns Prepared by Some Unenrolled Preparers Contained Significant Errors
Although taxpayers
are ultimately responsible for the information reported on their tax returns,
millions of taxpayers rely on preparers to prepare correct tax returns. Currently, there are no national standards
that preparers are required to satisfy before selling tax preparation services
to the public. Because more than half of
all taxpayers use preparers to file their tax returns, preparers have a
significant effect on taxpayer compliance.
In CY 2007, the IRS processed approximately
83 million individual Federal income tax returns
prepared by paid preparers. In
February and March 2008, TIGTA auditors posed as taxpayers in a large
metropolitan area and paid to have 28 tax returns prepared at
12 commercial chain and 16 small independently owned tax return
preparation offices. The preparers were
unlicensed and unenrolled. That is, they were not practitioners (attorneys, Certified Public Accountants, Enrolled Agents,
or Enrolled Actuaries). Preparers
often made substantial errors when completing tax returns and correctly
prepared only 11 (39 percent) of the 28 tax returns where the tax returns
showed the correct amount of taxes owed or the refunds due. However, 17 tax returns (61 percent)
were prepared incorrectly:
·
Eleven
(65 percent) of the 17 returns contained mistakes and omissions that were
considered to have been caused by human error and/or misinterpretation of the
tax laws; and
·
Six
(35 percent) of the 17 contained misstatements and omissions that were
considered to have been caused by willful or reckless conduct.
If these incorrect
tax returns had been filed, the net effect to the Federal Government would have
been $12,828 in understated taxes (this is the net effect–there were instances
in which tax liabilities and tax refunds were both overstated and understated).
The IRS does not
have one list or database for collecting information on preparers such as the
preparer’s name, associated identifying numbers, or whether the preparer is a
practitioner or unenrolled preparer. Additionally, the IRS does not require
preparers to have a unique identification number. The IRS acknowledges that it does not know
how many paid preparers exist and cannot determine the full extent of
noncompliance and incompetence among practitioners.
TIGTA
recommended that the IRS develop and require a single identification number to
control and monitor all paid preparers.
IRS management agreed to study this issue. It plans to commission a cross-functional
team to study the feasibility and methodology associated with
requiring a single identification number to
control and monitor all paid preparers.
The IRS plans to evaluate the results of the study and consider if it is
feasible to implement.
Report Reference No.
2008-40-171
Free
Tax Preparation Services
Millions of
taxpayers borrow against all or part of their expected tax refunds to receive
their money more quickly through short-term loans called Refund Anticipation
Loans (RAL), that cost taxpayers fees and interest
payments. During the 2008 Filing Season,
almost 10 million taxpayers borrowed against all or part of their expected tax
refunds using RALs.
TIGTA conducted
a telephone survey of 350 taxpayers whose IRS TY 2007 tax accounts
contained RAL indicators. Only 250
respondents claimed to have actually received RALs.
These respondents stated that they were aware they had received RALs and obtained these loans to receive their money more
quickly to pay bills. Most respondents received their loans the same day of or within
two business days of their tax return preparation. Respondents stated that preparers made
it clear they were receiving loans.
Additionally, most respondents stated that the preparers explained the
fees and explained how long it would take for the taxpayers to receive their
tax refunds if they chose not to obtain the loans. More than one-half of the respondents already
had checking or savings accounts with financial institutions.
An analysis of taxpayer account data for the respondents showed
that 158 (63 percent) received the Earned Income Tax Credit. Additionally, the majority of all survey
respondents would have qualified for IRS’s free tax preparation assistance;
however, 81 percent (284 of 350) stated that they were unaware of these free
services. Taxpayers may visit IRS
walk-in offices called Taxpayer
Assistance Centers,
Volunteer Income Tax Assistance sites, and Tax Counseling for the Elderly
sites, or use the Free-File Program to file their tax returns for free. During the 2008 Filing Season, more than
nine million taxpayers took advantage of these services.
TIGTA
recommended and the IRS agreed to use taxpayer account data for taxpayers who
apply for RALs and Refund Anticipation Checks to
better focus the IRS’s marketing and education efforts so that more taxpayers
can make use of the available free services.
Report
Reference No. 2008-40-170
Using
Performance and Financial Information for Program and
Budget
Decisions
While the IRS
has made some progress in using performance and financial information for program
and budget decisions, this area is still a major challenge. The IRS lacks a comprehensive, integrated
system that provides accurate, relevant, and timely financial and operating
data that describes performance measures, productivity, and associated program
costs. In addition, the IRS cannot
produce timely, accurate, and useful information needed for day-to-day
decisions, which inhibits its ability to address financial management and
operational issues in order to fulfill its responsibilities. TIGTA has continued to report that various
IRS management information systems are insufficient to enable IRS management to
measure costs, determine if performance goals have been achieved, or monitor
progress in achieving program goals.
Benefits
of Performance-Based Acquisition Are Not Being Fully Realized
When
used properly, performance-based acquisition (PBA) increases performance,
innovation, and competition, and results in the Federal Government receiving
better value for its acquisitions. In
addition, PBA shifts much of the risk from the Federal Government to industry
and allows the Federal Government to focus its monitoring efforts on the
desired outcomes rather than on how the work is to be performed. This saves taxpayer dollars because
significantly fewer contract administration resources are needed.
When
used within the IRS, PBA was performed in accordance with established
guidelines. However, the IRS’s overall
use of PBA is well below the goals established by the Federal Government. Lack of internal expertise within program
offices on how to implement PBA as an acquisition strategy, insufficient time
to complete procurements, lack of a vigorous planning phase, and the inability
of program managers to define requirements contributed to the underuse of PBA.
TIGTA
recommended that the IRS ensure that program office management develops and
implements a comprehensive plan to meet Federal Government goals for use of PBA
methods. These methods should emphasize
the collective responsibility of program offices and the procurement function
to plan, manage, and execute PBA. Furthermore, if not already included,
the insertion of PBA use as a measure in individual performance standards might
provide the necessary incentive to achieve PBA goals and advantages. In addition, program personnel involved in
writing contract requirements should be trained in PBA methods. The IRS should continue to advocate and
educate program personnel on the benefits of PBA.
IRS management
agreed with the recommendations and has planned to take appropriate corrective
actions.
Report Reference No.
2008-10-098
Improvements
in the Distribution and Design of Internal Documents
In
FY 2007, the IRS spent more than $237 million to print, process, and
distribute internal documents, tax publications, forms, and written
correspondence (including notices) to taxpayers and employees. The IRS can strengthen internal controls and
increase oversight to reduce costs for the publishing and postal budget. Taxpayers indirectly benefit when management
of tax administration is efficient and cost-effective.
TIGTA
recommended that the IRS:
1)
Establish
a control system to ensure that the level of inventory of tax products at
Taxpayer Assistance Centers is cost-effective;
2)
Ensure
that functional offices are aware of the significance of the Internal Management Document Distribution System
(IMDDS);
3)
Establish
and implement a system of internal controls to ensure that IMDDS data are
current and reliable; and
4)
Enhance
the notice improvement process to include reviews of all notices and letters to
ensure that they use the fewest possible resources.
IRS management
agreed with the recommendations and has taken or planned to take actions to
improve oversight and reduce costs.
Report Reference No.
2008-40-125
Protect the Integrity of
Tax Administration
IGTA’s Office of Investigations accomplishes
its investigative activities through the work of seven field divisions (see map
on page 36), which are geographically located throughout the United States, and have direct reporting
responsibilities to TIGTA headquarters in Washington,
DC. OI headquarters has three divisions and a forensic science laboratory that perform support functions
and provide technical and investigative assistance to the field divisions, and
one division that operates specialized programs. These headquarters offices are:
·
Operations Division – Provides oversight and guidance to OI
field and headquarters divisions, OI executives, and the Inspector
General. The division consists of the following
five teams:
¨
Complaint Management Team - Reviews and refers complaints received
in TIGTA’s hotline and maintains OI’s
investigative records.
¨
Policy Team - Prepares policy and procedures, reports
and other documents for internal and external customers, responds to
congressional inquiries, and oversees national programs.
¨
Data Analysis Team - Prepares, trends, and analyzes OI’s statistical data maintained in its management
information system, and administers OI’s national
budget.
¨
Inspection Team - Conducts internal reviews of field and
headquarters operations.
¨
Training Team - Administers training to OI criminal
investigators and support staff.
·
Strategic Enforcement Division
– Executes an aggressive, proactive program to detect computer-based fraud
in IRS operations, unauthorized accesses (UNAX) to IRS computer systems by
internal users, and attempts to interfere with the security of IRS computers by
external sources. The Strategic
Enforcement Division has also teamed with the IRS to thwart phishing
scams and minimize their impact on tax administration. One example of TIGTA and the IRS’s combined
efforts to combat phishing is the issuance of press
releases to warn taxpayers about new scams (see press release on page 37).
·
Technical and Firearms Support Division – Provides technical support,
investigative assistance, equipment, training, and other specialized services
to enhance OI’s investigative activities through
programs that include land-mobile radio, firearms and officer safety, and
electronic surveillance equipment.
·
Special Inquiries and Intelligence
Division – Conducts
sensitive investigations involving IRS senior management officials, the IRS
Oversight Board, and IRS Chief Counsel, criminal investigation, and
international employees. The division
also operates two specialized programs:
1)
A
procurement fraud program that investigates allegations concerning IRS
procurements and procurement-related misconduct by IRS employees and
contractors; and
2)
A
criminal intelligence program that provides field investigators with criminal
intelligence and coordinates criminal intelligence collection and dissemination
within TIGTA nationwide.
·
Forensic Science Laboratory – Provides crime lab services in direct support of TIGTA
investigations, including handwriting and document analysis, latent print
identification, and expert witness testimony.
OI Field Divisions
Internal
Revenue Service Employee Misconduct
IRS employee
misconduct can hinder the IRS’s ability to collect revenue for the Federal
Government. In addition to UNAX
violations, TIGTA investigates other IRS employee misconduct, such as theft,
extortion, false statements, and financial fraud. TIGTA also administers a proactive integrity
program to help detect IRS employees who might be committing fraud and other
misconduct.
The following are examples
of significant investigations TIGTA conducted during the reporting period that
involved IRS employee misconduct.
Revenue Officer Indicted in $13 Million
Securities Fraud Scheme
In
April 2008, Revenue Officer Luis Acosta-Andino was
charged in Puerto Rico with securities fraud
and aiding and abetting.
According
to the indictment, from about 2003 through about 2005, Acosta-Andino worked part-time as a promoter and sales agent in
the high-yield investment program of CIA Financial Consulting Services, Inc.
(CIA), a for-profit corporation in Puerto Rico. CIA solicited money from unsuspecting
investors in the general public by persuading them to provide money to CIA to
be invested in high-yield investment programs, and CIA guaranteed the investors
a specific monetary return. CIA was not
registered nor licensed to offer or sell investments to the general
public.
In
one program, CIA offered and sold investments through investment contracts in
which participants were solicited to invest money with the promise of a 100
percent rate of return in a short period of time. Acosta-Andino
offered and sold these investment contracts on behalf of CIA. He also gave private promotional presentations. In August 2004, Acosta-Andino
and other defendants sent and caused to be sent via mail a security, that is, an investment contract, for sale to
an investor in Hartford, Connecticut, without the required
registration statement and without being registered as brokers and dealers.
The
indictment also alleges forfeiture to the U.S. by the defendants, including
Acosta-Andino, of any property constituting or
derived from proceeds obtained directly and indirectly as the result of
securities fraud and other violations, including but not limited to $13
million.
IRS Mail Clerk Indicted for Theft of
More Than $75,000 in Taxpayer Checks
In
May 2008, Shaun Lertswan was indicted in California on six counts
of theft of government property.
According
to court documents, beginning in February 2008 through April 2008, Lertswan, a mail clerk at the IRS Fresno Service Center,
stole checks made payable to the IRS that totaled $75,385.31. Lertswan changed or
caused to be changed the checks by making them payable to his own name and
deposited them in his bank account.
IRS Employee Sentenced for False Claims
on Employee Time Reports
In
June 2008, Charles Scoville was sentenced in Kentucky on one count of
submitting false claims. He was
sentenced to six months in prison and three years of supervised release, and
was ordered to pay a $100 assessment and make restitution in the amount of
$10,098.22.
According
to court documents, Scoville, while acting as an IRS
employee at the Prestonsburg, Kentucky
post of duty, submitted numerous false, fictitious, and fraudulent employee
time reports for hours worked. Scoville was paid for working a total of 233 hours over a
span of 46 days in which he did not perform any employment-related duties. He filed false work reports to conceal the
fact that he was not performing his employment-related duties.
During
the same time frame, Scoville used his government
vehicle for personal use on a regular basis, including, but not limited
to: driving the vehicle on several trips
to visit family in Lawrenceburg, Kentucky; driving the vehicle for personal use
on weekends and holidays; and driving the vehicle to work at his second job as
a sportscaster for a local radio station.
Dallas IRS Lockbox Employee Indicted for Theft and
Embezzlement of More Than $485,000 in Taxpayer Remittance Checks
In June 2008,
Emmanuel Ekwuruke was indicted in Texas on one count of theft, embezzlement,
misapplication by a bank employee, and one count of theft of public money.
According to court documents, from February 2006 through May 2008, Ekwuruke, employed at the Dallas lockbox, embezzled approximately
$485,539.76 in taxpayer remittance checks.
IRS Chicago Employee Pleads Guilty to
Embezzlement of More Than $12,000 in Payroll Compensation
In
June 2008, Monique Steward pleaded guilty in Illinois to one count of embezzling public
funds.
According
to court documents, beginning as early as February 2004 and continuing through
about August 2007, Steward embezzled money in the form of payroll compensation from
the IRS. Steward worked as a secretary
in the Chicago
office where she entered IRS employees’ timesheets into an automated
system. She made various false entries
in the system regarding her time and attendance records and was paid for 805
hours that she had not worked for a total loss to the government of $12,657.68.
IRS
Agent Sentenced for Conspiring to Launder Drug Proceeds
In August 2008,
Evelyn Millen was sentenced in Michigan
to two counts of conspiracy to launder monetary instruments. Millen was sentenced to 30 months
imprisonment, 24 months of supervised release upon release from imprisonment,
and ordered to pay a $6,000 fine and a $100 assessment.
According to a
DOJ press release, in June 2003, Millen, an IRS Agent, conspired with another
individual to purchase a $65,000 BMW 745i with drug trafficking proceeds. The BMW was titled to Millen in order to
conceal that the other individual was the true owner. Both individuals conspired to pay off the
balance on the BMW with five cashier’s checks that were purchased from five
different banks on July 6, 2005, and four money orders that were all purchased
on the same day, all totaling $40,000.
The payment was structured in a manner to avoid Federal bank reporting
requirements for cash transactions over $10,000.
Unauthorized
Accesses
The protection
of confidential taxpayer information is of critical importance to America’s
taxpayers. Unauthorized access of tax
information undermines the taxpaying public’s trust in the Federal tax system
to safeguard confidential tax information in its custody. To protect sensitive taxpayer information
from being jeopardized, TIGTA’s Strategic Enforcement
Division proactively identifies IRS employees who access and/or disclose
private taxpayer information. UNAX
violations are usually the initial phase of IRS employee misconduct and often
lead to investigation of other criminal violations. IRS employees who are found to have committed
UNAX violations are subject to Federal prosecution, termination of employment,
or other disciplinary action. For the
period April 1, 2008 through September 30, 2008, the IRS issued more than 200 adverse and
disciplinary actions against its employees for UNAX violations.
The following are examples
of significant investigations TIGTA conducted during the reporting period that
involved UNAX.
Two IRS Employees Sentenced for
Unauthorized Inspection of Tax Return Information
In
August 2008, in two separate cases filed in California, Corina
Yepez and Melissa Moisa
were each charged with one count of unauthorized inspection of tax return
information and one count of fraud and related activity in connection with
computers. Yepez
was sentenced to one year of unsupervised probation, 150 hours of unpaid
community service, and was ordered to pay a $25 assessment. Moisa was sentenced
to one year of unsupervised probation, 50 hours of unpaid community service,
and was ordered to pay a $500 fine and $25 assessment.
According
to court documents, Yepez and Moisa,
as IRS employees, unlawfully and without authorization accessed and inspected
the tax return information of private individuals and intentionally exceeded
their authorized access to a computer to do so.
Melody Woods Sentenced for Intentionally
Accessing IRS Computer Without Authorization
In
June 2008, Melody Woods was sentenced in New York
on one count of intentionally accessing a computer without authorization and
exceeding authorization to obtain information from an agency of the U.S. She was sentenced to two years probation and
was ordered to pay a $25 assessment.
According
to court documents, Woods intentionally and knowingly accessed a computer
system maintained by the U.S. Department of Treasury without
authorization. Woods exceeded her
authorized access in order to access and obtain information from the Internal
Revenue Service concerning at least six individuals.
Assaults
and Threats
IRS employees
routinely interact with taxpayers in the performance of their official
duties. Sometimes these contacts can become
volatile and a taxpayer might resort to violence, such as making threats
against or physically assaulting the employee.
TIGTA’s highest priority complaints are those
involving threats and assaults. TIGTA
works aggressively and takes swift action to protect IRS employees. During this six-month reporting period, TIGTA
investigated 211 threat and assault complaints.
The following is an example
of a significant investigation TIGTA conducted during the reporting period that
involved a threat.
Donita Williams Sentenced for Threatening TIGTA
Agent with Bodily Harm
In July 2008, Donita Williams was sentenced in Michigan on one count of obstruction of
justice by threat of force. She was sentenced to probation for one year and
ordered to pay a $25 fine.
According to court documents, in March 2007, Williams had her return prepared
by a volunteer at a Volunteer Income Tax Assistance (VITA) site. In April 2007,
an employee sent a letter to Williams explaining that her return was rejected
because someone else claimed her as a dependent on their return.
Subsequently, Williams left a threatening voicemail message and, during a phone
call to Williams, a TIGTA special agent was threatened by Williams.
Contract
Fraud
TIGTA is
committed to conducting procurement investigations that ensure the highest
degree of integrity, economy, and efficiency in IRS contracts. This includes ensuring that improper contract
activities or illegal acts are effectively identified and pursued in a timely
manner. TIGTA special agents conduct
independent reviews of contractor invoicing to ensure that the IRS is complying
with the contract terms and conditions.
They also conduct reactive and proactive investigations to detect and
deter criminal activity by contractors. TIGTA’s contract investigations have produced significant
results in the form of criminal indictments, civil penalties, and
debarments.
The following is an example
of a significant investigation TIGTA conducted during the reporting period that
involved contract fraud.
Former GSA Employee Sentenced for
Bribery in Scheme Involving Security for IRS Locations
In
July 2008, Dessie Ruth Nelson was sentenced in Maryland to one count of
bribery and one count of income tax evasion.
Nelson was sentenced to 60 months in prison followed by three years of
supervised release, and was ordered to pay a $200 assessment, a $25 processing
fee, $38,780 in restitution to the IRS, and to forfeit $138,500.
According
to court documents, Nelson, a long-time employee of the General Services
Administration (GSA), was responsible for contracting on GSA’s behalf with
private companies to assist in providing security to GSA-managed
buildings. GSA’s Public Buildings
Service (PBS) was responsible for acquiring and managing real estate for other
civilian branches of the Federal Government.
PBS in turn leased the space to Federal customer agencies, including the
IRS.
Former Montgomery
County police officer
Michael Holiday was the Chief Executive Officer and sole shareholder of Holiday
International Security (HIS). This
company provided physical security to Federal installations. Between 2000 and 2003, Holiday
provided Nelson with cash, vacations, and other benefits in exchange for her
assistance in awarding multi-million dollar contracts to HIS. Holiday arranged and paid more than $7,000
for Nelson’s passage on a Caribbean cruise,
gave Nelson a shopping bag containing approximately $35,000 in cash, and an
envelope containing $10,000 in cash.
Bribery
IRS employees
have frequent contact with taxpayers, which make them potential targets for
bribes. Bribery is an act of corruptly giving, offering, or
promising anything of value to a public official to influence the person to commit or
allow fraud against the U.S. TIGTA educates IRS employees on how to
recognize bribe overtures and their responsibility to report bribery attempts
to TIGTA. During this reporting period,
TIGTA initiated 26 bribery investigations.
The following are examples
of significant investigations TIGTA conducted during the reporting period that
involved bribery.
Victor
John Indicted for Bribery of IRS Auditor
In April 2008,
Victor John was indicted in California
on one count of bribery of a public official.
According to court
documents, between about March 24, 2008 and April 3, 2008, John corruptly gave
$4,900 to an auditor employed by the IRS to influence a pending assessment of
tax due and owed by John.
Edward Sobczewski Indicted for Bribery of Revenue Agent with Colorado Rockies Tickets
In July 2008, Edward Sobczewski
was indicted in Colorado
on four counts of bribery of a public official.
According to
court documents, in April and May 2008, Sobczewski
offered and promised Colorado Rockies tickets to a Revenue Agent (RA) if the RA
changed audit results of Sobczewski’s 2006 personal
income tax return. Later in May 2008, Sobczewski gave
season tickets for the Colorado Rockies in exchange for changed audit results
of his 2006 personal income tax return.
Former
IRS Employee Pleads Guilty to Soliciting Bribe
In June 2008,
former IRS employee Robert Rosner pleaded guilty in New York to
bribery.
According to
court documents, from August 2004 to December 2006, Rosner
served as an Internal Revenue Agent with the IRS and was responsible for
conducting taxpayer audits. From July
2006 through early December 2006, Rosner solicited a
$5,000 cash payment in order to close and not further pursue an audit of a
taxpayer.
Rosner sent a letter to a small business in New York advising the
company that the IRS had selected its Federal tax returns for an audit. During meetings with the head of the company,
Rosner requested that the company head treat him to
lunch, and during one meeting, he told the company head that he would terminate
the IRS audit of the company if the company head would pay him $5,000. Rosner submitted
internal paperwork at the IRS recommending that no change be made to the
company’s tax returns, which ended the IRS audit of the company.
Other
External Investigations
TIGTA is
statutorily mandated to investigate external attempts to corrupt tax
administration, which includes criminal misconduct by non-employees, such as
impersonation, interference with the administration of internal revenue laws,
misuse of Treasury names, symbols, etc., and tax practitioner fraud relating to
the theft of remittances intended for the IRS and the theft of taxpayer
refunds. TIGTA is committed to
protecting the IRS’s ability to collect revenue by investigating individuals
who interfere with tax administration.
During this reporting period, TIGTA received 2,253 complaints regarding
improprieties by tax practitioners and other non-employees.
The following are examples
of significant investigations TIGTA conducted during the reporting period that
involved non-employees.
Superseding Indictment Charges
Conspiracy and Interfering With Administration of Federal Internal Revenue Laws
A
superseding indictment was issued in April 2008 in Ohio based on evidence developed during a
joint investigation by TIGTA and the IRS Criminal Investigation Division. The indictment charges Winfield Thomas and
Jeanne Herrington with conspiracy to defraud the U.S. in violation of 18 U.S.C. §
371, and also charges Herrington with interference with the administration of
the internal revenue laws in violation of 26 U.S.C. § 7212(a).
According
to the indictment, from about 1993 and continuing thereafter up to and
including the date of this indictment, Thomas, Herrington, and others willfully
and knowingly conspired and agreed to defraud the U.S. for the purpose of
impeding, obstructing, and defeating the lawful functions of the IRS in the
computation, assessment, and collection of revenue. Thomas and Herrington advanced their
conspiracy by promoting and selling abusive trusts, preparing and advocating
the preparation of false Federal income tax returns, submitting and/or
assisting in the submission of false and fraudulent documentation to the IRS in
an effort to eliminate tax liabilities and harass IRS employees, and
organizing/attending meetings to discuss methods of tax evasion and evading the
payment of tax liabilities with fictitious financial instruments.
The
indictment also charges that Herrington prepared and submitted to the IRS
fraudulent Forms 1099, which falsely reported that IRS employees associated
with the Federal criminal investigation against her had failed to report
personal income in excess of $2 million, in an attempt to harass them.
Individual Indicted for Impersonating an
IRS Employee and Preparing Fraudulent Tax Returns
Morgan
Taylor Mayfaire pleaded guilty in August 2008 in Florida to preparing a
fraudulent tax return.
According
to court documents, Mayfaire prepared tax returns for
taxpayer clients, and in return, her clients paid tax return preparation fees
to her in the amount of ten percent of the amount of the refund claimed on
their Federal tax returns. Mayfaire caused approximately $472,904 to be fraudulently
refunded by the IRS to her clients based on false deductions she included on
the clients’ tax returns. She did so by
willfully aiding and assisting in the preparation of Forms 1040 and 1040X, U.S.
Individual Income Tax Return and Amended U.S. Individual Income Tax Return that
included Schedule A, Itemized Deductions, with
fictitious and/or inflated deductions that Mayfaire
knew the taxpayers were not entitled to claim.
In
furtherance of the scheme, Mayfaire pretended to be
an IRS employee by falsely representing to taxpayers that, as an IRS employee,
she had ways of increasing taxpayer deductions on tax returns that no other
person would know. She thereby induced
taxpayers to hire her to prepare their taxes, file false tax returns, collect
improper tax refunds, and to pay her fees totaling approximately $13,478.
Taxpayer Pleads Guilty to Theft of
Public Money
In
August 2008, Peter Kurhan Jr. pleaded guilty in Pennsylvania to six
counts of theft of public money.
According
to court documents, Kurhan Jr. owed money to the IRS
based on his failure to pay Federal taxes.
From about May 2003 through about July 2005, Kurhan
Jr. sent more than eighty payment checks to the IRS in amounts exceeding his
tax debt. The checks were drawn on
closed, unfunded and non-existent bank accounts. Because the amounts on the checks exceeded
his tax debt, the IRS sent refund checks before the agency discovered that his
checks were fraudulent and unfunded. Kurhan Jr. cashed the IRS refund checks, knowing that he
was not entitled to do so. He knowingly
stole U.S. Treasury checks in an aggregate sum of $83,996.61.
Congressional
Testimony
During this
reporting period, Inspector General J. Russell George testified before Congress
on three occasions.
The Growing Problem of the Threat Identity Theft Poses to the
Administration of our Nation’s Tax System
On April 10,
2008, Mr. George testified before the Senate Committee on Finance regarding
identity theft and the 2008 Filing Season.
Mr. George noted that the IRS has placed only limited emphasis on
employment-related and tax fraud identity theft. Although the Internal Revenue Code currently
permits the referral of tax information to certain Federal law enforcement
agencies, the IRS does not appear to be fully utilizing this authority, he
said. The IRS Criminal Investigation
Division investigates identity theft crimes only if they are committed in
conjunction with other criminal offenses having a large tax effect. As a result, the IRS has mainly focused on
combating identity theft through public outreach. In addition, Mr. George noted that current
processes have been inadequate in reducing burden for taxpayers victimized by
identity theft. The IRS still lacks the
comprehensive data needed to determine the impact identity theft is having on
tax administration, he said.
Mr. George also
noted that TIGTA is concerned about the proliferation of phishing
scams that attempt to trick taxpayers into providing sensitive tax
information. Insider attacks by IRS employees
and contractors remain a concern, he said.
Because of their familiarity with the IRS network, they can potentially
do more harm than outsiders. Whether the
attacks come from outside intruders or inside the IRS, the target is personal
and financial information. However, he
said, while the IRS relies on its Questionable Refund Program (QRP) to identify
fraudulent refund claims and prevent them from being paid, TIGTA is concerned
that the QRP is becoming increasingly unmanageable due to the growing number of
fraudulent claims and the IRS’s lack of resources to combat the fraud.
Mr. George said
that overall, the 2008 Filing Season appeared to be progressing without major
problems. The IRS had taken positive
actions to prepare for the issuing of over $100 billion in stimulus payments
beginning in May. In addition, the IRS
improved the quality of customer service by creating a strategic plan to focus
on service improvement and performance measures.
Internal Revenue Service Fiscal Year 2009 Budget Request
On April 16,
2008, Mr. George testified before the Senate Appropriations Committee’s
Subcommittee on Financial Services and General Government on the IRS’s Fiscal
Year 2009 budget request.
Mr. George said
that the IRS’s request of approximately $11.4 billion includes funding for
programs that pose long and short-term challenges for the Service, including
enhancing enforcement of the tax laws and business systems modernization
efforts, and improving taxpayer service, all while attempting to ensure their
security.
Mr. George noted
that the IRS’s budget request for systems modernization is $40 million less
than the Fiscal Year 2008 enacted amount.
The IRS did not specify which programs will absorb the cuts, although it
stated that the requested amount will allow continued progress on key
modernization projects, including the Customer Account Data Engine, Accounts
Management Services and Modernized e-File, he said. Furthermore, TIGTA continues to be concerned
that the IRS is developing its modernized systems and bringing them online
without adequately contemplating the security implications.
The Economic Stimulus Act of 2008
On June 19,
2008, Mr. George testified before the House Committee on Ways and Means, Subcommittee
on Oversight and Social Security regarding TIGTA’s
audit and investigative actions pertaining to the Economic Stimulus Act of 2008, which was signed on February 13,
2008, and enacted to energize the national economy.
Mr. George said
that the IRS issued approximately 76.5 million stimulus payment as of June 13,
2008, totaling approximately $63.9 billion, and that the IRS plans to issue
stimulus payments through December 2008 for those tax returns filed by October
15th. TIGTA determined that the IRS is
correctly calculating the stimulus payment for approximately 99.6 percent of
the returns, he said. However, TIGTA
identified approximately 385,000 stimulus payments in which our calculation of
the payment does not agree with the IRS’s payment calculation.
Mr. George also
said that TIGTA has initiated 12 complaints involving economic stimulus
payments. One case involves an alleged return preparer scheme, two cases
involved allegations of false impersonators requesting bank information, and
nine cases involve phishing e-mails. TIGTA will continue to closely monitor the
issuance of the economic stimulus payments and to promptly alert the IRS of any
problems or emerging issues, he said.
Awards and Special
Achievements
Executive Development Program Graduates
On August 8,
2008, a graduation ceremony was held for the participants in the Summer 2008 Executive Development (XD) Program. The XD Program is the formal training phase
of the Senior Executive Service Candidate Development Program. TIGTA participated in this program as a
partner with the IRS. Its purpose is to identify outstanding employees with
demonstrated leadership competencies, to help participants better understand
the strategic vision of the Department of the Treasury as it relates to their
future role as an executive, and to prepare them for senior executive
positions. Damon Plummer (middle row,
far right) and Kenneth Casey (third row, third from right) graduated and are
two of the six TIGTA managers who participated in the program. Four TIGTA managers attended the Winter 2008 XD Program that ended in March 2008.
TIGTA
Recognized by the President’s Council on
Integrity
and Efficiency
The President’s Council
on Integrity and Efficiency 2008 Awards Committee presented an Award of
Excellence to a team within TIGTA’s Office of Audit.
The Identity Theft
Audit Team was recognized for its outstanding achievement in
identifying and reporting employment-related and tax fraud identity theft
issues. The audit team members included
Marybeth Schumann, Director, Compliance; Bryce Kisler,
Acting Director; Alan Lund, Acting Audit Manager; Julia Tai, Lead Auditor; and
Jean Kao, Auditor.
TIGTA
Recognized by United States
Attorney
On
April 10, 2008, Chuck Rosenberg, U.S. Attorney for the Eastern District of
Virginia (far right), presented TIGTA Special Agent Charles Venini
(far left), TIGTA Forensic Data Analyst James Avery Jr. (second from left), and
TIGTA Special Agent Brendan Soden (second from right)
with an award for their outstanding work on an investigation involving
unauthorized access and disclosure of tax records by an IRS employee. The case was prosecuted by Assistant U.S.
Attorney Sally Chase (middle).
Audit Statistical Reports
Reports with
Questioned Costs
TIGTA provides independent oversight of Treasury Department
matters involving IRS activities, the IRS Oversight Board, and the IRS Office
of Chief Counsel. Although TIGTA is
placed organizationally in the Treasury Departmental Offices and reports to the
Secretary of the Treasury and to Congress, TIGTA functions independently from
the Departmental Offices and all other offices and bureaus within the
Department. 
