IRS' Efforts to Evaluate the Section 1203 Process for Employee	 
Misconduct and Measure Its Impacts on Tax Administration	 
(27-SEP-04, GAO-04-1039R).					 
                                                                 
Congress has long stressed the importance of proper treatment of 
taxpayers by the Internal Revenue Service (IRS). This emphasis	 
was a major impetus for the IRS Restructuring and Reform Act of  
1998, which included numerous additional protections for	 
taxpayers. Among these was Section 1203, which defines 10 acts or
omissions for which an IRS employee is to be fired. Most, but not
all, of the acts or omissions involve mistreatment of taxpayers, 
such as by falsifying information or by harassing them. At the	 
same time, Congress has been concerned about IRS's ability to	 
administer the tax laws, including whether the Section 1203	 
provisions could hamper IRS's enforcement efforts by having a	 
"chilling effect" on IRS employees' willingness to take 	 
appropriate enforcement actions against noncompliant taxpayers.  
Related concerns are whether the IRS and the Treasury Inspector  
General for Tax Administration (TIGTA) process for reviewing	 
allegations made against employees is too time consuming and	 
inconsistent, and whether all the Section 1203 provisions should 
be retained. In February 2003, we recommended that IRS evaluate  
the effectiveness of changes it made to speed up and otherwise	 
improve the review of Section 1203 allegations. Congress is now  
considering legislation that would amend Section 1203 by, for	 
example, deleting the requirement that IRS employees be fired for
failing to file a tax return on time when they are owed a refund.
This report responds to a Congressional request for information  
on IRS's Section 1203 process. Specifically, Congress asked for  
the (1) statistics on Section 1203 allegations and related	 
actions taken; (2) status of any changes to the Section 1203	 
process and actions taken on our previous recommendation to	 
evaluate the process; and (3) actions taken and data collected to
measure the effects of Section 1203 on tax administration,	 
particularly IRS's enforcement programs.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-1039R					        
    ACCNO:   A12795						        
  TITLE:     IRS' Efforts to Evaluate the Section 1203 Process for    
Employee Misconduct and Measure Its Impacts on Tax Administration
     DATE:   09/27/2004 
  SUBJECT:   Evaluation methods 				 
	     Federal employees					 
	     Internal controls					 
	     Malfeasance					 
	     Performance measures				 
	     Personnel evaluation				 
	     Statistical data					 
	     Surveys						 
	     Tax administration 				 
	     Taxpayers						 

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GAO-04-1039R

United States Government Accountability Office Washington, DC 20548

September 27, 2004

The Honorable Bill Thomas
Chairman, Committee on Ways and Means
House of Representatives

The Honorable Amo Houghton
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Subject: IRS' Efforts to Evaluate the Section 1203 Process for Employee
Misconduct and Measure Its Impacts on Tax Administration

Congress has long stressed the importance of proper treatment of taxpayers
by the Internal Revenue Service (IRS). This emphasis was a major impetus
for the IRS Restructuring and Reform Act of 1998,1 which included numerous
additional protections for taxpayers. Among these was Section 1203, which
defines 10 acts or omissions for which an IRS employee is to be fired.2
Most, but not all, of the acts or omissions involve mistreatment of
taxpayers, such as by falsifying information or by

3

harassing them.

At the same time, Congress has been concerned about IRS's ability to
administer the tax laws, including whether the Section 1203 provisions
could hamper IRS's enforcement efforts by having a "chilling effect" on
IRS employees' willingness to take appropriate enforcement actions against
noncompliant taxpayers. Related concerns are whether the IRS and the
Treasury Inspector General for Tax Administration (TIGTA) process for
reviewing allegations made against employees is too time consuming and
inconsistent,4 and whether all the Section 1203 provisions should be
retained. In February 2003, we recommended that IRS evaluate the
effectiveness of changes it made to speed up and otherwise improve the
review of Section 1203 allegations. Congress is now considering
legislation that would amend

1 P.L. 105-206, July 22, 1998.
2 The IRS Commissioner has statutory discretion to mitigate the penalty by
imposing some other
disciplinary outcome other than firing the employee who committed a
Section 1203 violation.
3 The 10 acts or omissions under Section 1203 can be broken into two
types-eight relate to employee
and taxpayer rights--such as the right not to be harassed or not to be
discriminated against--and two
relate to IRS employee noncompliance with tax laws--such as not filing a
required tax return on time.
4 TIGTA's role in the process is to investigate most types of Section 1203
allegations, excluding
allegations involving employees' tax noncompliance and discrimination.

                                  GAO-04-1039R

Section 1203 by, for example, deleting the requirement that IRS employees
be fired for failing to file a tax return on time when they are owed a
refund.

This report responds to your request for information on IRS's Section 1203
process. Specifically, you asked for the (1) statistics on Section 1203
allegations and related actions taken; (2) status of any changes to the
Section 1203 process and actions taken on our previous recommendation5 to
evaluate the process; and (3) actions taken and data collected to measure
the effects of Section 1203 on tax administration, particularly IRS's
enforcement programs. We briefed your staff on our results on June 17,
2004, and July 27, 2004. As agreed with your staff at those briefings, we
updated our briefing slides to include additional statistics on Section
1203 allegations and the most current information on the Section 1203
process. Our updated briefing slides are enclosed.

Results

The number of Section 1203 allegations concerning taxpayer and employee
rights has declined since 2000, while the number concerning IRS employee
tax compliance has varied. After investigation, few allegations have
resulted in employee firings. While IRS and TIGTA took some actions to
implement our 2003 recommendation on evaluating the Section 1203 process,
neither agency had yet developed a balanced set of goals and measures as
we recommended. Similarly, IRS took some actions toward measuring the
effects of Section 1203 on tax administration through a survey of selected
IRS employees, but IRS had not yet committed to regularly surveying its
employees to measure these effects over time.

Statistics on Section 1203 Allegations, Investigations, and Outcomes

Since Section 1203 took effect in July 1998, the number of allegations
filed annually peaked at about 1,700 in 2000, as shown in slide 12.
However, the number of allegations regarding taxpayer and employee rights
versus those regarding IRS employee compliance with federal tax filing and
reporting laws differed over the years.

From 1998 to 2000, the number of Section 1203 allegations regarding
taxpayer and employee rights increased, particularly from 1999 to 2000.
Since 2000, most types of taxpayer and employee rights allegations have
decreased each year. For example, Section 1203 allegations related to
retaliation or harassment declined from 1,000 in 2000 to 143 in 2003. In
contrast, Section 1203 allegations related to employee noncompliance with
tax filing and reporting laws steadily increased almost each year since
1998. Partial year data for 2004 through April suggest that this trend
might continue.

5 GAO, Tax Administration: IRS and TIGTA Should Evaluate Their Processing
of Employee Misconduct under Section 1203, GAO-03-394 (Washington, D.C.:
Feb. 14, 2003).

                              Page 2 GAO-04-1039R

Although 88 percent of the allegations filed between July 1998 and April
2004 were completely investigated, 13 percent of these completed
investigations substantiated the allegation made. However, differences
exist by type of allegation in the number of completed investigations and
substantiated allegations (see slide 16). Of 2,477 completed
investigations of taxpayer and employee rights allegations, 36 (1.5
percent) were substantiated. More allegations regarding noncompliance with
federal tax laws were substantiated; of 2,986 completed investigations,
667 (22.3 percent) were substantiated.

Of the 582 substantiated allegations where penalty decisions were
complete,6 126 (21.7 percent) resulted in employee firings. Another 149
(25.6 percent) resulted in employees resigning or retiring, and 257 (44.2
percent) resulted in penalty mitigation. Another 50 cases or 8.6 percent
were closed because the employee separated for other reasons. The vast
majority of the firings and other penalties were for noncompliance with
federal tax laws, because such cases were the vast majority of
substantiated allegations. Slide 17 has details.

Status and Evaluation of the Section 1203 Process

IRS and TIGTA managers stated that the basic Section 1203 process has not
changed since 2002. However, IRS managers added that an IRS task force is
studying the part of the process that deals with the Employee Tax
Compliance (ETC) process and plans to recommend changes during November
2004. This task force is to identify ways to (1) more quickly process ETC
issues including Section 1203 allegations and (2) more effectively educate
employees about their responsibilities to comply with federal tax law.

IRS also is taking some actions to implement our previous recommendation
on evaluating the Section 1203 process, but has not yet developed a full
set of goals and measures for evaluating the process. We had recommended
that IRS and TIGTA develop an approach for evaluating the Section 1203
process, using (1) results-oriented goals, (2) balanced performance
measures to assess progress towards those goals, and (3) methods for
collecting and analyzing data related to the goals and measures. IRS
program managers stated that they are developing a data sharing system in
conjunction with TIGTA that could be used to evaluate the entire Section
1203 process. Depending on the results of pilot testing during the fall of
2004, this system could be implemented as early as December 2004.

Although IRS and TIGTA have developed goals and measures on the timeliness
of certain parts of the Section 1203 process, they have not developed
other goals and measures, such as on the quality of the process or the
satisfaction of those involved in the process. Without these other goals
and measures, IRS does not have a balanced evaluation system. In other
programs, IRS relies on a balanced set of goals and measures that address
the results of the program (such as making quality decisions in a timely

6 Decisions for 121 of the 703 substantiated allegations were still being
processed when we finished our analysis.

                              Page 3 GAO-04-1039R

manner), and the satisfaction of customers and employees (such as their
views on fairness and timeliness).

Having more than one goal and measure and then balancing those goals and
measures is important to avoid adverse effects. For example, if
improvements are made in the timeliness of the process but the quality of
the decisions made during screening, investigating, and adjudicating is
poor, or if those involved in the process view the process as unfair or
incomplete, the net effect could be negative.

IRS managers explained that the Section 1203 process has been evolving
since they implemented the changes during 2002. As a result, they said
that they have not taken the time to focus on other potential goals and
measures. Even so, they stated that they believe that the process is
rigorous and subjects each allegation to multiple levels of review in an
attempt to ensure quality in making sensitive decisions about employees'
careers. They agreed, however, that other goals and measures would provide
a more balanced evaluation system and that they will consider developing
others.

Measuring the Effects of Section 1203 on Tax Administration

IRS has not yet measured the effects of Section 1203 on enforcement
programs. In light of IRS officials stating that they still believe that
Section 1203 can have a chilling effect on enforcement, measuring these
effects is important. IRS plans to measure employees' willingness to take
enforcement actions under Section 1203, using a revised version of the
survey we used for our 2003 report to identify the extent of their
willingness. According to an IRS official, IRS plans to administer the
survey by the end of calendar year 2004. For now, the survey is to be
administered to IRS enforcement employees who contact small business and
self-employed taxpayers about their tax compliance.

IRS has not yet decided how regularly to administer the survey and for
which types of employees. For example, IRS could also survey certain types
of enforcement employees who interact with individual taxpayers who do not
have business incomes and who have been subjected to Section 1203
allegations. The planned survey could be administered to more types of
employees. Further, IRS could administer the survey regularly, such as
annually or every 2 years. Having a regular measurement would give IRS
some indication of whether its employees are more or less willing to
perform their duties as assigned under the purview of Section 1203.

IRS officials said they are concerned about the time and effort of
continually doing the survey, particularly when so few allegations in
recent years have involved contacts with taxpayers. They also said that
they are considering other means for getting input on the impacts of
Section 1203 on enforcement, such as through focus groups. IRS officials
said that after the survey is completed in 2004, they will decide whether
and how often to administer the survey and whether other IRS employees
should be included.

                              Page 4 GAO-04-1039R

Concluding Observations

IRS and TIGTA have taken initial steps toward developing an approach for
evaluating the entire Section 1203 process. However, IRS and TIGTA have
not yet developed a balanced set of goals and measures, as recommended in
our 2003 report. Given our previous recommendation and because of the
ongoing development of the evaluation system for the Section 1203 process,
we are not making a new recommendation. Rather, we will continue to track
actions to meet our previous recommendation until we see the development
of a balanced set of measures.

IRS has also taken initial steps to measure the effects of Section 1203 on
tax administration by asking certain types of enforcement employees about
their willingness to enforce the tax laws given Section 1203. This survey
is important to IRS management to periodically get an indication of how
Section 1203 affects IRS employees' willingness to enforce the tax laws,
regardless of whether they have had a Section 1203 allegation. Any IRS
employee who contacts taxpayers could be subjected to a Section 1203
allegation, which could affect their willingness to take enforcement
actions. However, IRS has not yet committed to regularly surveying IRS
employees, in part because of the time and effort of doing surveys. As
stated previously, because IRS is considering such a commitment as it
continues to develop the measurement system, we are not yet making a
recommendation.

Scope and Methodology

To determine the number, type, and disposition of Section 1203
allegations, we analyzed data from IRS's Automated Labor and Employee
Relations Tracking System (ALERTS) database as of April 30, 2004. The data
included all Section 1203 cases that originated in IRS or TIGTA and were
either investigated by TIGTA or referred to IRS for investigation or
adjudication. On the basis of our review of IRS's documentation and
interviews with IRS officials, we have determined how IRS ensures the
accuracy and completeness of the ALERTS data entry and processing as well
as maintenance of data integrity. In addition, our testing of the ALERTS
database indicated that the data are sufficiently reliable for purposes of
this report.

To describe the status of any changes to the Section 1203 process, our
previous recommendation on evaluating the process, and actions taken and
data collected to measure the effects of Section 1203 on IRS's enforcement
programs, we interviewed IRS's Employee Conduct and Compliance Office
staff. We also collected information from IRS offices responsible for
handling allegations on employee tax compliance and discrimination, which
used variations of the basic Section 1203 process. Although our previous
recommendation covered all parts of the Section 1203 process, our briefing
slides focused on the basic Section 1203 process that involved allegations
on the treatment of taxpayers rather than on misconduct internal to IRS.

We supplemented this work with interviews of TIGTA and IRS's Office of
Program Evaluation and Risk Analysis (OPERA) staff. We also reviewed
various IRS documents on the timeliness of processing Section 1203
allegations. Finally, we obtained information from staff of IRS's Wage and
Income Division as well as the Small Business/Self Employed Division on
training provided to the employees of

                              Page 5 GAO-04-1039R

these divisions about Section 1203. We conducted our work from April 2004
through July 2004 in accordance with generally accepted government
auditing standards.

Agency Comments and Our Evaluation

We asked IRS and TIGTA to provide us comments on a draft of this report.
The IRS Commissioner responded on September 15, 2004, saying that IRS is
continuing to develop balanced goals and measures for evaluating the
Section 1203 process (see app. I). He referred to timeliness goals and
measures and to a 100 percent review of all Section 1203 cases as a
measure of quality. He also referred to plans to revise our 2002 survey
and administer it to selected IRS enforcement employees to measure, among
other things, the extent to which they are willing to take specific
enforcement actions given Section 1203 and the extent to which they think
that a Section 1203 allegation will be handled timely and fairly as a
measure of employee satisfaction.

We view these steps as progress. However, unless the 100-percent review
for quality has a clear definition of quality as well as specific measures
and goals to track quality--as we recommended in our 2003 report--the
results will be difficult to interpret. Similarly, IRS has not made
decisions on the specific goals and measures for the satisfaction of
employees engaged in the Section 1203 process or affected by the process.

On September 13, 2004, the Acting Inspector General for TIGTA acknowledged
our findings and decision to track progress in meeting our 2003
recommendation rather than make a new one (see app. II). She referred to
the challenge in developing a coordinated evaluation system for the
Section 1203 process because of TIGTA's independence in overseeing IRS.
She said TIGTA has its own set of goals, measures, and performance data
for evaluating TIGTA's processing of all complaints and investigations,
including those involving Section 1203. She also pointed to workload
indicators such as timeliness to ensure quality performance, and to
meetings with IRS employees to solicit input on their satisfaction.

We acknowledged TIGTA's concern with independence in our 2003 report,
discussing why coordination with IRS on how each agency will evaluate its
part of the Section 1203 process need not jeopardize TIGTA's independence.
Our issue now is whether each agency has produced a balanced evaluation
system for its part of the process. While TIGTA has made progress, its
goals and measures for employee satisfaction do not specifically tie to
Section 1203 investigations, and it has no goals and measures for customer
satisfaction with the Section 1203 process. As a result, determining
whether employee or customer satisfaction with the process is increasing
or decreasing is not possible.

We recognize that costs would be associated with producing goals and
measures. However, the attention given the Section 1203 process by
taxpayers, IRS employees, and the Congress shows the importance of having
balanced goals and measures for reliable monitoring of how well the
process works.

                                     -----

                              Page 6 GAO-04-1039R

We are sending copies of this report to the Commissioner of Internal
Revenue and other interested parties. We will make copies available to
others upon request. This report will also be available at no charge on
GAO's Web site at http://www.gao.gov.

This report was prepared under the direction of Tom Short, Assistant
Director. Other major contributors included Perry Datwyler, MacDonald
Phillips, Jeff Schmerling, Brenda Rabinowitz, Evan Gilman, Shirley Jones,
and Michael Rose. If you have any questions about this report, please
contact me at [email protected] or Tom Short at [email protected] or either of
us at (202) 512-9110.

[IMG]

James R. White Director, Tax Issues

Enclosure

                              Page 7 GAO-04-1039R

                                   Enclosure

                              Page 8 GAO-04-1039R

          Problem identified                      Actions taken               
Section 1203 cases changed hands      IRS created a Board of Employee      
frequently within IRS and TIGTA,   Professional Responsibility (BEPR) to   
which added to long case             screen the investigative merit of     
processing times.                        allegations it receives.          
                                      IRS and TIGTA acted to streamline the   
     The Section 1203 process had         process by clarifying TIGTA's       
        multiple, inconsistent         responsibility for conducting most     
             procedures.             investigations and by eliminating some   
                                      criteria on making various decisions    
                                               (e.g., mitigation).            
        IRS and TIGTA lacked a      IRS and TIGTA were developing a system,   
centralized database for Section rather than a centralized database, to    
           1203 case data.          share Section 1203 data.                  
IRS managers could investigate                                             
employees, but they were not     TIGTA was made responsible for conducting 
trained to be investigators and            most investigations.
doing so created conflicts of    
interest.                        

Source of complaint                       Fiscal year
                        2001 (from July)  2002 2003  2004 (as of April) Total 
         Taxpayer              41         115   115          56          327  
         Employee              40         149   112          79          380  
       IRS Systema             70         494  1,053        642         2,259 
         Other b               20          39   45           33          137  
         Missing                0          0     0           3            3   
          Total                171        797  1,325        813         3,106 

                              Investigations Investigations  Allegations      
      Type of Section 1203    started on the completed on    substantiated by 
           allegation         allegations    the allegations completed        
                                                             investigations   
     Taxpayer and employee                                   
             rights                                          
    Seizure without approval        23             23               1         
False statement under oath       24             24               1         
             Civil                                                            
     rights/constitutional         336             327              1
             rights                                          
    Falsifying or destroying        98             87               12        
           documents                                         
       Assault or battery           13             12               1         
Retaliation or harassment      1,913           1,904             7         
Misuse of Section 6103 to                                                  
conceal information from         3               3               0
Congress                                                  
      Threat to audit for          101             97               13        
         personal gain                                       
            Subtotal              2,511           2,477             36        
    Compliance with federal                                  
            tax laws                                         
    Failure to timely file a      1,566           1,395            516        
         federal return                                      
Understatement of federal      1,869           1,591            151        
         tax liability                                       
            Subtotal              3,435           2,986            667        
             Total                5,946           5,463            703        

                                                      Fiscal year
Type of enforcement contact            1998  1999  2000  2001  2002  2003  
               Audit contacts                                           
             Individual audits            1,193 1,100  618   732   744   849  
            Collection contacts                                         
Notice of federal tax lien filed         383  168   288   426   483   549  
      Notice of levy served upon third    2,503  504   220   674  1,284 1,681 
                  parties                                               
                  Seizures                    2   0.2   0.1   0.2   0.3   0.4 
                   Total                  4,081 1,772 1,126 1,832 2,511 3,079 

                                            Fiscal year
      Personnel type     1998     1999     2000     2001     2002     2003   
      Revenue agents    13,491   13,022   12,828   12,371   11,816   11,513  
     Revenue officers   6,664    6,399    6,028    5,879    5,347    5,004   
          Total         20,155   19,421  18,856   18,250   17,163    16,517  

            Timeliness measure                     Timeliness goal            
                                             Within 90 days of receiving      
       IRS: Issue employee letter a                   allegation              
                                         Close 80 percent of all cases within 
        IRS: Overage case inventory                    120 days               
       Discrimination: Complete case         Within 60 days of receiving      
                 analysis                             complaint               
Discrimination: Complete case fact       Within 180 days of initiating     
finding                                          investigation             
                                            Within 180 days of entry into     
       ETC: Complete case resolution               tracking system            
                                             Within 30 days of receiving      
TIGTA: Complete complaint evaluation               complaint               
      TIGTA: Respond to congressional                                         
                  inquiry                 Within15 days on receiving inquiry
       TIGTA: Interview complainant      Within15 days of receiving complaint 
          TIGTA: Referral to IRS             Within 30 days of receiving      
                                                      complaint               
    TIGTA: Followup on referral to IRS      180 days after referral to IRS    
    TIGTA: Evaluate complaint from IRS   Within 5 days of receiving complaint 
                                             Within 10 days of initiating     
         TIGTA: Complete case plan                  investigation             
       TIGTA: Evaluate investigative         Within 90 days of initiating     
                 potential                          investigation             
                                            Every 90 days from initiating     
     TIGTA: Review investigation case               investigation             
     TIGTA: Review for case extension          120 days from initiating       
                                                    investigation             
                                           45 days after last investigative   
    TIGTA: Investigation results to IRS                  lead                 

             Appendix I: Comments from the Internal Revenue Service

Appendix II: Comments from the Treasury Inspector General for Tax
Administration

(450320)

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