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

…the 105^th 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 Service Restructuring and Reform Act of 1998, enacted July 22, 1998…

WASHINGTON, D.C. 20220

INSPECTOR GENERAL
for TAX
ADMINISTRATION

October 29, 1999

The Honorable Lawrence H. Summers
Secretary of the Treasury
Washington, D.C. 20220

Dear Mr. Secretary:

I am forwarding to you the Treasury Inspector General for Tax Administration’s (TIGTA) Semiannual Report to the Congress for the six-month period ending September 30, 1999. I am pleased to report that we have successfully completed our transition period and our new processes have stabilized. We are well positioned to devote our full attention and focus to the complex issues that face the Internal Revenue Service (IRS).

During this period, our organization delivered audit reports and investigative services that promote economy, efficiency and the highest level of integrity within the IRS organization. We issued 47 final audit reports that included $169 million in financial accomplishments. We also closed over 1,600 investigations of alleged criminal wrongdoing and administrative misconduct. Court ordered fines and restitution totaled almost $13 million.

In the Office of Audit, significant resources were devoted to fulfilling the requirements imposed by the IRS Restructuring and Reform Act of 1998 (RRA 98). We issued 16 audit reports to meet our RRA 98 statutory requirements, including reports on IRS’ compliance with new seizure, lien and levy procedures, prohibitions on the use of enforcement statistics and the adequacy and security of information technology. Audits were also completed on other taxpayer protection and rights issues, such as treatment of taxpayers during office audits and selecting returns for examination, and on IRS’ Year 2000 compliance efforts.

TIGTA’s investigative activities also focused on RRA 98 requirements including developing procedures to process Section 1203 misconduct allegations, implementing a new system to track complaints and referrals, and providing guidance to IRS on establishing a compatible IRS complaint tracking system. Investigative efforts also included significant work with the Unauthorized Access to Taxpayer Accounts (UNAX) Detection Project which identified 478 leads of potential illegal access of taxpayer accounts.

I look forward to working with you in addressing the many challenges of overseeing the nation’s tax administration system.

Sincerely,

David C. Williams Inspector General Enclosure

Table of Contents

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

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

Major Issues Facing the IRS......................................................................................... 2

Office of Audit ............................................................................................................... 7

Office of Investigations .............................................................................................. 23

Appendix I

Statistical Reports for the Office of Audit................................................................... 37
Questioned Costs, Funds Put to Better Use, Additional Quantifiable Impact on Tax
Administration

Appendix II

Statistical Reports for the Office of Investigations ..................................................... 41
Investigative Results, Complaints/Allegations Received by TIGTA and IRS,
Administrative Status and Dispositions on Closed TIGTA Investigations

Appendix III

Statistical Reports—Other........................................................................................ 45
Audit Reports With Unimplemented Corrective Actions, Access to Information,
Audit Reports Issued in Prior Reporting Period With No Management Response,
Revised Management Decisions, Disputed Audit Recommendations,
Review of Legislation and Regulations

Appendix IV

TIGTA Audit Report Listing ...................................................................................... 53

Appendix V

Section 1203 Standards........................................................................................... 57

Appendix VI

Statutory TIGTA Reporting Requirements................................................................ 59

Appendix VII

Acronyms................................................................................................................. 65

Appendix VIII

Organization Chart ................................................................................................... 67

Appendix VIII

Treasury Inspector General for Tax Administration September 30, 1999

RRA 98

TIGTA is required to report on IRS’ compliance with various provisions of RRA 98. This semiannual report contains the results of the Office of Audit’s reviews to determine whether the IRS is complying with these provisions and protecting taxpayer rights while it carries out tax administration activities. RRA 98 also requires TIGTA to assess the adequacy and security of IRS’ information technology systems.

The Office of Audit focused significant audit resources in this area during FY 1999. Sixteen audit reports related to the RRA 98 provisions were issued during the reporting period. This includes eight reports on IRS’ information technology systems. Two additional reports will be issued in the next reporting period and one of the provisions will not be reviewed until its effective date in January 2000. In addition, nine audit reports were issued regarding other taxpayer protection and rights issues. Appendix VI provides an explanation of the specific RRA 98 provisions and a list of the reviews conducted in these areas.

Treasury Inspector General for Tax Administration September 30, 1999

Statutory Requirements

Highlighted final audit reports for the RRA 98 statutory provisions include:

The Internal Revenue Service Should Continue Its Efforts to Achieve Full Compliance with Restrictions on the Use of Enforcement Statistics (Report No. 199910073)

In September 1997, the Senate Finance Committee ascertained that in certain IRS offices, employee performance was evaluated in a manner resulting in a work environment driven by statistical accomplishments. This placed both taxpayer rights and the employee evaluation system at risk. As a result, Section 1204, Basis for Evaluation of Internal Revenue Service Employees, was included in RRA 98. This Section prohibits IRS management from using records of tax enforcement results to evaluate employees, or to impose or suggest production quotas or goals for such employees. Instead, one of the standards for evaluating employee performance must be the fair and equitable treatment of taxpayers.

The IRS adopted certification procedures to identify violations of Section 1204. The certification is performed quarterly by first-line managers, and then cross-functional management teams perform an annual independent review. These reviews must include an assessment of the employee performance files and employee evaluations. They may also review documents such as award narratives, minutes of meetings, case reviews, or local memoranda.

The auditors determined the IRS is currently not in full compliance with Section 1204 and some employees still believe IRS managers use records of tax enforcement results inappropriately. The auditors noted the following:

• In 28 IRS offices reviewed, 96 Section 1204 violations were identified.

• Based on questionnaires, 124 (27 percent) of 456 managers and employees perceived records of tax enforcement results had been considered when their last performance evaluations were prepared and communicated to them, or were used as performance expectations or goals.

• During its quarterly certifications and independent reviews, IRS management identified approximately 525 violations.

The Office of Audit did not present recommendations for corrective action beyond IRS management’s proposed regulations for a balanced system of business measures. This system appears to be an appropriate first step in resolving these problems.

In FY 2000, the Office of Audit will assess the effectiveness of the progress and implementation of the balanced system of business measures as it relates to the use of enforcement statistics. In addition, the auditors will evaluate the results of IRS management’s review of the violations identified in this report.

In response to the audit report, IRS management generally agreed with the conditions identified, and stated that they will take whatever steps are necessary to eliminate violations.

The Internal Revenue Service Should Improve Its Federal Tax Lien Procedures (Report No. 199910074)

A federal tax lien (FTL) protects the government’s interest by attaching a claim to the taxpayer’s assets for the amount of unpaid tax liabilities. RRA 98 and I.R.C. Section 6320 require the IRS to notify taxpayers that a FTL has been filed. Taxpayers may request a hearing with the IRS if they believe the FTL is not appropriate. These new requirements became effective for liens filed after January 18, 1999.

Treasury Inspector General for Tax Administration September 30, 1999

During the initial implementation period, IRS management was not consistently implementing the FTL provisions of RRA 98. Taxpayers and their representatives were not always informed of the taxpayers’ right to a hearing once a FTL was filed.

The auditors reviewed 473 cases, of which 157 cases (33 percent) involved 176 potential violations of legislative or procedural requirements (some cases had multiple violations). The auditors’ sample was not statistically valid; therefore, the results may not be representative of cases nationwide. The following are examples of the apparent noncompliance with the provisions of RRA 98 or IRS’ procedures contained in the Internal Revenue Manual:

• Taxpayer representatives (e.g., attorney, accountant, etc.) were not sent a lien notice.

• Lien notices were not mailed to taxpayers within five business days of the FTL filing.

• Taxpayers were not given a full 30 calendar days to request a hearing.

• Undelivered lien notices were not re-sent when another address was available.

• Sufficient documentation was not retained to prove that lien notices were sent to taxpayers or were sent timely.

• Responsible spouses or individual partners in a partnership were not sent a copy of the lien notice.

The Office of Audit recommended that the IRS:

• Change systems to automate the mailing and re-issuance of undeliverable lien notices to all responsible taxpayers.

• Revise procedures to ensure that: (1) the government’s interest is protected,

(2) returned mail is researched completely and processed efficiently, (3) adequate documentation is maintained, and

(4) management information systems

measure compliance with the new FTL

notification requirements.

IRS management agreed with the findings and recommendations and will take corrective action.

The Internal Revenue Service Needs to Improve Compliance with Legal and Internal Guidelines When Taking Taxpayers’ Property for Unpaid Taxes (Report No. 199910072)

IRS procedures and provisions in I.R.C. Sections 6331 through 6344 (1986) are specific as to how to seize taxpayer property. If seizure procedures are followed correctly, taxpayers’ rights and the government’s interest will be protected. RRA 98 places particular emphasis on taxpayer rights and it contains several new provisions for conducting seizures (e.g., approval levels for seizing business assets, exemption of personal residences from seizures if the tax liability is $5,000 or less, etc.).

The Office of Audit evaluated whether the IRS conducted seizures according to legal and internal guidelines. The auditors reviewed all 124 seizures (involving 92 taxpayers) conducted by the IRS during a six-month period beginning July 22, 1998, the date RRA 98 became law.

The IRS did not follow all legal and internal guidelines when conducting seizures in 33 (36 percent) of the 92 taxpayer cases reviewed and 32 of those cases potentially impacted the rights of the taxpayer. The auditors concluded further action is needed to ensure that all guidelines are consistently followed.

Legal seizure provisions were not followed in 19 (21 percent) of the 92 cases. Examples included:

• The IRS did not thoroughly investigate the status of the property before seizing property with little or no value, or did not consider alternatives to the seizure.

Treasury Inspector General for Tax Administration September 30, 1999

• Business property was seized without obtaining the required approvals.

• A notice advising the taxpayer of enforcement action was not provided on all tax periods before the IRS seized the taxpayer’s property.

IRS procedures were not followed in 21 (23 percent) of the 92 cases. Examples included:

• Case histories were not documented to indicate Publication 1, Your Rights As A Taxpayer, was provided to the taxpayer.

• Taxpayers were not personally warned before the seizure action occurred.

• Expenses of the seizures were not added to the taxpayers’ tax liabilities when the property was released.

The Office of Audit recommended that IRS management should:

• Emphasize the need to use the appropriate checklists for all seizures conducted.

• Request an opinion from the IRS Office of Chief Counsel on those seizures that did not follow legal guidelines to determine if the IRS should make restitution to those taxpayers.

IRS management agreed to complete the checklists and to review the applicable seizure cases to determine if any monies should be returned to the taxpayer as a result of an inappropriate seizure.

The Internal Revenue Service Has Not Fully Implemented Procedures to Notify Taxpayers Before Taking Their Funds for Payment of Tax (Report No. 199910071)

Effective in January 1999, the I.R.C. Section 6330 (1986) requires the IRS to advise taxpayers of their right to have their case heard by the Appeals Office, and potentially a court, prior to the IRS taking money from taxpayers’ bank accounts, employers or other parties to pay delinquent taxes. The IRS must wait at least 30 calendar days from the date the taxpayer is notified of the intent to levy and of the taxpayer’s appeal rights before issuing a levy.

The auditors reviewed 284 taxpayer accounts, involving 291 levies requested between mid-January and mid-April 1999, to determine if the IRS was in compliance with the new levy provisions, as well as its own internal levy procedures. In the nine offices tested, the auditors reported that the new procedures have not been effectively implemented. The IRS did not consistently notify taxpayers of the intent to levy and of their appeal rights. As a result, the rights of 204 taxpayers were impacted which could result in the IRS having to make restitution to some of the taxpayers.

Legal provisions were not followed in 92 (32 percent) of the 284 taxpayer accounts reviewed. Internal procedures were not followed in 88 (31 percent) of the taxpayer accounts reviewed. Examples of the provisions and procedures not followed included:

• Taxpayers were not notified of the IRS’ intent to levy and of their appeal rights before levies were issued.

• Taxpayers were notified of the IRS’ intent to levy and of their appeal rights after the levies were issued.

• Taxpayers were notified of the IRS’ intent to levy and of their appeal rights, but levies were issued by the IRS during the 30-day waiting period.

• Taxpayers did not have appropriate information added to their computer account history to show the taxpayer had been notified of the IRS’ plans to levy.

• Taxpayers did not have appropriate information added to their computer account history to show the initially requested levy had been destroyed.

Treasury Inspector General for Tax Administration September 30, 1999

The Office of Audit recommended that IRS management:

• Develop methods to ensure taxpayers are notified of the IRS’ intent to levy and of their right to a hearing before a levy is issued.

• Develop safeguards, such as a quality review system, to prevent notices from being mailed to taxpayers unless issuing a levy is the next planned case action.

• Identify all levies that were issued without properly notifying the taxpayer. Determine, with advice from the IRS Office of Chief Counsel, what steps should be taken regarding any money received as a result of improper levies.

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

Other Taxpayer Protection and Rights Issues

Other reviews on taxpayer protection and rights issues involved: selecting tax returns for audit; protecting tax return data in IRS systems; conducting employment tax examinations; and, making adjustments to taxpayers' accounts.

Highlighted final audit reports include:

The Internal Revenue Service Needs to Improve Treatment of Taxpayers During Office Audits (Report No. 093602)

Historically, the Discriminant Function (DIF) methodology has been the primary workload identification system used by the IRS to select individual tax returns for office audit examinations.

In the last several years, the IRS has migrated from using the DIF and has begun identifying innovative ways of doing business, such as using the Midwest Automated Compliance System (MACS). The MACS provides IRS district office employees the ability to use locally derived, and possibly subjective, criteria to identify and select returns for audit.

The auditors identified weaknesses in the MACS control environment and in actions taken by examiners and managers during the initiation and closing of non-DIF audits. The audit showed that IRS employees accessed over 3,600 accounts over a two-month period and the accesses were not supported by a valid business purpose. Given the extent of control breakdowns identified, the auditors could not give assurance that IRS employees selected returns for examination fairly, or that taxpayers’ personal and financial data was protected from unauthorized and improper disclosure.

The auditors also noted inappropriate actions taken by examiners and managers during the initiation and closing of audits that may have led to improper taxpayer treatment. For example, the auditors could not always find evidence that the IRS had properly informed taxpayers of their rights at the initiation of the audits. In other cases, IRS procedures were not always followed. In two districts, the IRS used discretionary enforcement powers in a way that appeared to create an unnecessary hardship and burden on taxpayers. The two districts mailed a six-page questionnaire requesting more than 80 items of information to 3,500 low-income taxpayers who claimed the Earned Income Tax Credit.

The Office of Audit recommended that the IRS:

• Improve separation of duties by locating MACS in offices other than where the audits will be worked. IRS employees that are responsible for identifying potential MACS returns for audit should not be responsible for working the audits.

• Strengthen specific controls and procedures for initiating and closing audits.

Treasury Inspector General for Tax Administration September 30, 1999

With the exception of centralizing MACS sites, the IRS management agreed to take corrective actions that are consistent with all Office of Audit recommendations. IRS management believes that the management of MACS should be centralized rather than centralizing the MACS sites. In addition, Examination personnel will review alternative approaches to separating case selection and case assignment practices.

The New Jersey District Needs to Execute Levy Actions Consistent With Sound Tax Administration and Concern for Taxpayer Treatment (Report No. 199930069)

The IRS has a legitimate need to use levy action as an administrative means to enforce the collection of taxes. However, when levying taxpayers, the IRS must ensure that appropriate legal and procedural requirements are followed and taxpayers are treated properly.

The Office of Audit conducted a review of levy actions initiated by the New Jersey Collection Division. The review was a follow-up review of two FY 1998 audits which showed significant problems in the district’s use of performance measures and statistics, and in the use of seizure authority.

The Office of Audit reported that the New Jersey District violated IRS policy and procedural requirements in its use of levy authority. These procedures are designed to assess a taxpayer’s ability to pay, and ensure both that the levy is the proper course of action and that taxpayers are notified prior to levy action.

The auditors noted that procedures were not followed in 92 percent of the 264 levies reviewed. Also, taxpayers were not afforded their right to legal notification prior to the levy issuance for five percent of the levies.

The auditors also reviewed the levy case files and noted that 35 levies were issued to taxpayers who were deceased, experiencing medical or financial hardships, not liable for the tax or under audit in the Examination Division.

The district’s practice of levying, as the first action on a taxpayer case without attempting to contact taxpayers, conducting initial analyses, or researching case histories was prevalent in most cases reviewed. This practice was most prevalent in the Department of Labor (DOL) Project, where levies were generally issued as the first action in an effort to close taxpayer cases quickly and help meet statistical goals. The auditors concluded that about 56,000 taxpayers were potentially at risk for improper levy actions.

Although the district’s “Best Practice” documentation indicated that the basis for the DOL initiative was to identify “uncooperative” and delinquent taxpayers for enforcement action, there was virtually no attempt to assess taxpayers’ willingness to cooperate and/or their ability to pay prior to the levy actions.

The Office of Audit recommended that:

• Emphasis be placed on policy and procedural requirements regarding the use of levy authority.

• The district review levy actions taken during the past nine months to identify instances that meet criteria requiring remedies to taxpayers.

IRS management agreed with the auditors' findings and recommendations and implemented corrective actions to ensure at least one attempt to contact the taxpayer is made prior to the levy action.

The Examination Returns Control and Integrated Data Retrieval Systems Can Be Improved to Protect Taxpayer Rights During the Audit Process (Report No. 094206)

The Office of Audit initiated a follow-up review of its October 1996 report (Report No. 070106), which identified control

Treasury Inspector General for Tax Administration September 30, 1999

weaknesses in the Examination Returns Control System (ERCS) and the Integrated Data Retrieval System (IDRS). The Examination Division uses these systems to select cases for audit, and to control and dispose of each case. These control weaknesses could adversely impact the public’s confidence in IRS’ ability to protect the privacy and security of taxpayers’ personal and financial information.

While IRS management had made improvements to enhance ERCS and IDRS controls since the prior audit, the auditors noted that the IRS needed to take additional actions to enhance the effectiveness of Examination controls and to provide further protection of taxpayer rights and tax return information.

The Office of Audit recommended that IRS management:

• Improve ERCS audit trail functionality to include a process for reviewing user activities and providing data to users of the audit trail.

• Improve ERCS controls to eliminate acting managers from having the ability to approve any changes to their inventory.

• Provide more effective oversight over examiners’ capabilities to order tax returns and establish, update, and close Examination records.

• Report the results of Examination management’s analyses of case closures due to errors or unlocatable returns.

IRS management agreed with the facts and recommendations and has agreed to take corrective action.

Internal Revenue Service Procedures Were Not Consistently Followed When North Florida District Revenue Officers Attempted to Improve Tax Compliance in the Construction Trades Industry (Report No. 190303)

The IRS Southeast Regional Commissioner requested that the Office of Audit evaluate complaints made by a former employee regarding the treatment of taxpayers during a Regional Compliance Program (RCP). Revenue officers were alleged to have used unauthorized techniques to work RCP leads on employment tax issues in the construction trades industry project.

In responding to members of the Congress about these complaints, IRS Collection management stated the revenue officers in the RCP group had acted in accordance with IRS policies and procedures. However, the opinions and conclusions of the auditors differed from those offered by Collection management.

The auditors reviewed case files and concluded that taxpayers were treated inconsistently because of how RCP employment tax leads were worked. This occurred because management did not ensure revenue officers working the RCP cases received adequate training, followed appropriate procedures when expanding the leads into examinations and followed Internal Revenue Manual procedures when conducting audits.

IRS management agreed that insufficient training was provided to the revenue officers assigned to the project and that different procedures were used. IRS management also agreed to conduct an independent review of the cases the auditors questioned to determine if Examination audits were conducted instead of the less intrusive compliance checks. IRS management will ask its Chief Counsel to determine any remedial actions that must take place for affected taxpayers.

Treasury Inspector General for Tax Administration September 30, 1999

Information Technology

The Office of Audit evaluates the adequacy and security of IRS technology on an ongoing basis. Reviews focused on assessing the IRS’ progress in implementing its modernization initiatives and the security and adequacy of selected IRS tax processing systems.

Highlighted final audit reports include:

The Service Center Mainframe Consolidation Project Has Made Significant Progress, But Project Execution and Administration Risks Remain (Report No. 199920068)

The Service Center Mainframe Consolidation (SCMC) Project’s goal of consolidating the mainframe processing at ten service centers into two computing centers is a very complex task and requires extensive coordination and effort by several contractors and IRS functions.

While the Project is making significant progress toward its goal, the IRS needs to ensure that future service center consolidations, technical contract administration, and budget accounting are improved. The auditors noted that the IRS had taken actions to define delivery orders that resulted in cost savings of $19 million. However, several procurements, estimated at $7 million, were made without following proper procurement procedures. In addition, the complete cost of the consolidation was not being effectively budgeted, captured and reported by the SCMC Project Office. The auditors estimated that there were approximately $1.07 million in unreported staffing costs in FY 1998 for the three sites tested.

The Office of Audit recommended that IRS management ensure:

• All critical operational and technical aspects of consolidation at computing centers and service centers are standardized, thoroughly tested, appropriately documented and included in employee training.

• Computing centers are adequately staffed.

• Contract requirements were defined by June 1999 and proper procurement procedures were followed to obtain goods and services.

• All consolidation costs were accurately budgeted and reported.

IRS management provided an adequate, detailed response to the first summarized recommendation which was included in a memorandum issued during the audit. However, IRS management did not provide an official response to the draft report that included the remaining recommendations.

The General Controls Environment Over the Internal Revenue Service’s Unisys 2200 Systems Can Be Improved (Report No. 199920063)

The Unisys 2200 mainframe computers are an integral part of IRS’ tax processing system. Virtually all transactions affecting a taxpayer’s account are processed through these systems. They house databases for on-line retrieval of taxpayer information; therefore, it is critical for the systems to have an effective general controls environment.

The Office of Audit reviewed the general controls over IRS’ Unisys 2200 Operating System Environment and concluded that the general controls are adequate to protect sensitive data. However, there are several areas in which controls could be adhered to more uniformly, and where procedures should be established to provide improved system control, security, and standardization.

The auditors recommended several ways to improve controls over taxpayer data files and the common system and database files. In addition, the auditors recommended:

• Modification of the control settings for files that may potentially complicate the mainframe consolidation process.

Treasury Inspector General for Tax Administration September 30, 1999

• Development of a process that will improve the accountability of individuals using the system security user identification.

• Re-issuance of the policy for accounting for deviations of user access profiles from IRS standards.

• Development of C2-level security documentation, security policies, and documentation of risk factors for the Unisys consolidated mainframe environment.

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

Review of the Electronic Fraud Detection System (Report No. 093009)

The number of electronically filed tax returns claiming fraudulent refunds has risen dramatically since electronic filing began in 1986. As a result, the Electronic Fraud Detection System (EFDS) was developed to automate the screening process and identify and review returns with the highest potential for fraud. EFDS improves the detection of fraud by increasing data sources and enhancing scheme development for referral to the districts for criminal prosecution.

The auditors concluded that while EFDS is a significant improvement over the manual procedures previously used, there are still changes that can be made to further improve and manage EFDS. The auditors also found discrepancies in the accounting records that amounted to $22.3 million in understated total costs. The Office of Audit recommended IRS management should:

• Strengthen existing security controls.

• Develop all EFDS applications and ensure the applications are properly functioning.

• Implement controls to maintain accurate and complete cost data for EFDS.

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

Limitations of the Automated Non-Masterfile and the Impact on the Internal Revenue Service (Report No. 093103)

The IRS uses the Automated Non-Masterfile (ANMF) computer system to process tax returns and transactions that cannot be processed on its primary Masterfile computer system. Each of the ten IRS service centers has a separate ANMF database that is not connected with any other ANMF system, or other IRS computer system.

As of September 30, 1997, the ANMF contained 101,216 balance due accounts totaling over $14 billion. The auditors concluded that, overall, the transactions were accurately input to the ANMF and to the accounting system. However, inherent processing problems resulted in the IRS not mailing annual reminder notices of balance due accounts to taxpayers in violation of the Taxpayer Bill of Rights 2 (TBOR2). The accounts also contained incorrect interest and penalty computations. The processing inefficiencies and errors resulted in undue taxpayer burden, increased operating costs, and lost revenue.

The auditors also reported:

• The ANMF contained many old accounts. Over 6,700 accounts were over 10 years old and 220 were over 20 years old. The 6,700 balance due accounts exceeded $750 million in tax, penalty and interest.

• The IRS did not establish the required “freeze” code (used to prevent the issuance of refunds) on the related Masterfile accounts on 21,700 (34 percent) of the 64,000 individual accounts on the ANMF.

• The IRS did not issue a Statement for Recipients of Interest Income,

Treasury Inspector General for Tax Administration September 30, 1999

15 Form 1099-INT, as required by law, to

report interest paid to taxpayers in

27 percent of the 142 cases reviewed.

During the first nine months of FY 1997,

the IRS issued approximately 1,500

refunds in which a Form 1099-INT

should have been issued.

The Office of Audit recommended that the IRS:

• Expedite changes to allow the processing of ANMF accounts on the Masterfile.

• Consolidate the existing ANMFs.

IRS management agreed with the findings and recommendations and prepared requests for computer programs. These include programs to: correct programming errors in penalty and interest computations; identify address changes; and, freeze the refund on Masterfile accounts where there is a related liability on the ANMF. In addition, the IRS plans to conduct a massive cleanup of old accounts on the ANMF to determine if the accounts are valid. The IRS also will generate annual reminder notices in Calendar Year 1999.

With these changes, the IRS will be in compliance with the law by issuing TBOR2 notices and Forms 1099-INT. In addition, receiving these notices will reduce taxpayer burden and could increase taxpayer compliance in reporting interest income.

Century Date Change

The Office of Audit has conducted several reviews to assess IRS’ efforts in ensuring all systems and programs are Y2K compliant. Reviews focused on project management and oversight, testing efforts and exchanging data with outside parties.

Highlighted final audit reports include:

Increased Validation and Oversight of Year 2000 Minicomputer Conversion Efforts Are Needed to Strengthen Testing and to Avoid Further Delays (Report No. 199920054)

The Office of Audit assessed IRS’ efforts to prepare its minicomputer systems for the century date change (CDC) and concluded that the IRS has improved its management of the minicomputer conversion effort. Increased involvement by the CDC Project Office has resulted in assignment of monitoring responsibility, identifying sites where systems are located, issuance of guidance for converting systems, and development of conversion schedules.

However, initial monitoring of the conversion progress was based on self-reporting of critical conversion data, with minimal on-line validation. As a result, the Office of Audit identified weaknesses in systems testing and unmet target dates.

The Office of Audit recommended that:

• The IRS properly classify the risk level for minicomputer systems that did not meet the January 1999 target conversion date.

• The CDC Project Office representatives should independently validate:

(1) conversion dates for systems that did not meet the target, (2) testing performed on each mission critical minicomputer system, and (3) contingency procedures for all systems that were not compliant by March 31, 1999.

The audit resulted in increased oversight of the minicomputer conversion effort. In addition, the audit identified weaknesses that management is addressing to ensure that minicomputer systems that process electronically filed tax returns, answer incoming taxpayer telephone calls, and

Treasury Inspector General for Tax Administration September 30, 1999

process employee payroll will run in the next century.

IRS management has agreed to all recommendations and will initiate corrective actions.

Review of the Internal Revenue Service’s Year 2000 End-to-End System Integration Test Efforts – Overall Planning and Execution of Test 1 (Report No. 094002)

IRS created an off-line test environment to replicate its tax processing environment. The purpose of this test environment is to serve as a final phase for assessing Y2K compliance of IRS’ tax processing software, hardware and communications capabilities. The Information Systems’ Product Assurance function controls this test along with significant levels of contractor support.

Despite initial delays in planning and conducting the End-to-End System Integration Test activities, IRS’ Information Systems Division made significant progress in preparing an overall approach to conducting the test. The auditors noted that the End-to-End System Integration Test Team met their limited objectives for executing Test 1. However, the Office of Audit identified the need for the IRS to prepare a systematic risk analysis of its systems and provide improved oversight over key support systems that will not be included in the nationwide End-to-End test. They also identified the need for the IRS to better coordinate its planning efforts for the End-to-End System Integration Test.

To improve the End-to-End testing, auditors recommended that IRS management:

• Perform a detailed analysis of the IRS systems inventory to assess the business value and potential risk exposure of all its major systems and establish a priority ranking.

• Identify all key operations support systems not selected for the nationally coordinated End-to-End System Integration Test.

• Establish centralized oversight and control over the testing of key support systems within the operations functions.

• Mandate that key operations systems owners use the Product Assurance test bed to perform their Y2K compliance testing.

IRS management agreed to two of the recommendations and has taken corrective action. However, IRS management did not agree to perform a detailed analysis of the business value and potential risk exposure of all major systems because all IRS systems will be end-to-end tested. They also did not agree that the use of the Product Assurance

Treasury Inspector General for Tax Administration September 30, 1999

test bed should be mandated.

Opportunities Remain for the Internal Revenue Service to Further Minimize the Risks Associated With Implementing Year 2000 Compliance for External Trading Partners (Report No. 095202)

In 1996, IRS established the CDC Project Office with an objective to ensure that all systems are Y2K compliant by January 1, 2000. This requires close coordination with many External Trading Partners (ETPs). ETPs are organizations that exchange data with IRS, such as: state, local, and foreign governments, banks, and other federal agencies.

This review was a follow-up audit to a report issued in November 1998 (Report No. 091303). During the current audit, the auditors noted that the CDC Project Office has made considerable progress in identifying ETPs and communicating the IRS’ Y2K standards to them. The Office of Audit recommended continued emphasis in the following areas:

• Implementation of an oversight process to ensure accurate ETP information. One audit test showed that 22 percent of exchange files sampled contained inaccurate dates.

• Delayed project milestones should be completed prior to the final phase of the End-to-End system testing. One audit test showed that approximately 12 percent of the files remain untested.

Reliable management information is needed to assure that IRS’ tax systems will accurately and timely process returns and collect revenue after December 31, 1999. Taxpayer burden will increase if the IRS’ tax systems are not timely prepared to process returns and collect revenue.

IRS management concurred with the facts in the report and has agreed to take corrective action.