Activities of the Treasury Inspector general for Tax
Administration (27-SEP-05, GAO-05-999R).
The Department of the Treasury Inspector General for Tax
Administration (TIGTA) audits and investigates the Internal
Revenue Service's (IRS) operations to (1) promote economy and
efficiency and detect and prevent fraud and abuse and (2)
recommend actions for improvement. TIGTA was established by the
Internal Revenue Service Restructuring and Reform Act of 1998
(IRS Reform Act), which amended the Inspector General Act of 1978
(IG Act), to include an independent inspector general (IG) to
provide oversight of IRS's activities, programs, and offices.
This report responds to a Congressional request that we review
the activities of TIGTA. We are providing information regarding
(1) TIGTA's budget and staffing levels; (2) TIGTA's audit and
investigative coverage of IRS, including oversight of IRS's
offices and identified weaknesses in IRS's operations, and audit
coverage of specific requirements of the IRS Reform Act; (3)
TIGTA's audit and investigative accomplishments; (4) the quality
assurance program, including the results of peer reviews; and (5)
the audit follow-up process to track IRS's implementation of
TIGTA's audit recommendations.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-999R
ACCNO: A38361
TITLE: Activities of the Treasury Inspector general for Tax
Administration
DATE: 09/27/2005
SUBJECT: Agency missions
Auditing standards
Fraud
General management reviews
Internal audits
Internal controls
Monitoring
Quality assurance
Reporting requirements
Tax administration
Tax administration systems
Inspectors general
******************************************************************
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GAO-05-999R
United States Government Accountability Office Washington, DC 20548
September 27, 2005
The Honorable Charles E. Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate
Subject: Activities of the Treasury Inspector General for Tax
Administration
The Department of the Treasury Inspector General for Tax Administration
(TIGTA) audits and investigates the Internal Revenue Service's (IRS)
operations
to (1) promote economy and efficiency and detect and prevent fraud and
abuse and
(2) recommend actions for improvement. TIGTA was established by the
Internal
Revenue Service Restructuring and Reform Act of 19981 (IRS Reform Act),
which
amended the Inspector General Act of 19782 (IG Act), to include an
independent
inspector general (IG) to provide oversight of IRS's activities, programs,
and offices.
This report responds to your request that we review the activities of
TIGTA. As
discussed with your staff, we are providing information regarding (1)
TIGTA's budget
and staffing levels; (2) TIGTA's audit and investigative coverage of IRS,
including
oversight of IRS's offices and identified weaknesses in IRS's operations,
and audit
coverage of specific requirements of the IRS Reform Act; (3) TIGTA's audit
and
investigative accomplishments; (4) the quality assurance program,
including the
results of peer reviews; and (5) the audit follow-up process to track
IRS's
implementation of TIGTA's audit recommendations.
Results in Brief
Over the 5-year period of fiscal years 2000 through 2004, TIGTA's budget
authority increased by 14 percent while staff levels decreased by 6
percent. In fiscal year 2004, TIGTA had budget authority of about $130
million and realized authorized full-time equivalent (FTE) staff of 877.
In relation to IRS's total federal funds, the budget authority for TIGTA's
oversight has steadily declined but is comparable to such ratios for other
IG offices.
1Pub. L. No. 105-206, 112 Stat. 685, 705 (July 22, 1998).
2Pub. L. No. 95-452, 92 Stat. 1101 (Oct. 12, 1978) (codified, as amended,
at 5 U.S.C. App.).
During fiscal year 2004, TIGTA provided audit coverage of IRS through an
organizational structure that mirrors IRS's organizational structure and
through audit plans that include coverage of IRS's business units,
management challenges, and congressionally mandated work. TIGTA's audits
provided coverage of the IRS management challenges identified by TIGTA,
the high-risk areas designated by us, and mandatory coverage required by
the IRS Reform Act. Investigative coverage is provided through TIGTA's
investigative mission of addressing employees' integrity, external
attempts to corrupt tax administration, and employee and infrastructure
security.
As a result of its audit and investigative coverage, TIGTA reported that
it issued 942 audit reports, addressed 39,611 complaints and allegations,
and closed 22,350 investigations over the 5-year period of fiscal years
2000 through 2004. TIGTA claimed financial accomplishments resulting from
these audits and investigations of over $16.3 billion, and identified
additional potential financial impacts on tax administration of over $50
billion.
TIGTA's external peer reviews and internal quality reviews have concluded
that TIGTA's quality assurance program provides reasonable assurance that
audit reports meet applicable standards. The program includes internal
quality reviews of individual audits, internal quality inspections of the
Office of Audit, and an external quality peer review of the Office of
Audit every 3 years in compliance with government auditing standards.3
IRS tracks corrective actions on audit recommendations using the
Department of the Treasury's Joint Audit Management Enterprise System
(JAMES). The system includes audit recommendations from TIGTA, the
Department of the Treasury Office of Inspector General, and us. IRS
management is responsible for ensuring that corrective actions are taken
on audit recommendations that address IRS. For fiscal years 2000 through
2004, JAMES reported that as of May 2005, about 83 percent of all audit
recommendations were implemented.
Scope and Methodology
We obtained the actual budget authority and the staffing levels at TIGTA,4
and the total federal funds and FTEs at IRS,5 for fiscal years 2000
through 2004, as reported in the Budget of the United States Government.
We used this information to identify trends over this period and to
compare TIGTA's resources with overall IRS resources. In addition, we
compared the ratio of IG budget authority with agency budgetary resources6
in fiscal year 2004 for all IG offices for which an IG is appointed by the
President and confirmed by the Senate. For fiscal year 2004 agency
budgetary
3GAO, Government Auditing Standards, GAO-03-673G (Washington, D.C.: June
2003).
4Office of Management and Budget, Budget of the United States Government,
Appendix (Washington,
D.C.: Government Printing Office) Fiscal Years 2002-2006.
5Office of Management and Budget, Budget of the United States Government,
Analytical Perspectives
(Washington, D.C.: Government Printing Office) Fiscal Years 2002-2006.
6Agency budgetary resources are those amounts available to enter into new
obligations and to liquidate
them, and are made up of new budget authority (including direct spending
authority provided in
existing statute and obligation limitations) and unobligated balances of
budget authority provided in
previous years.
resources, we used information from the Statement of Budgetary Resources
for each
7
agency reported in the Fiscal Year 2006 Budget of the United States
Government. We did not audit or otherwise verify the budget amounts.
To analyze TIGTA's audit coverage of IRS, we compared the organizational
structures of TIGTA and IRS to analyze coverage of IRS's offices and
missions, obtained copies of completed audits, and reviewed all audit
reports issued by TIGTA during fiscal year 2004. We compared the subjects
and contents of these audit reports with weaknesses at IRS previously
identified by TIGTA and us to determine the extent to which the known
weaknesses were being covered through TIGTA's audits. In addition, we
compared the audit reports with TIGTA's statutorily mandated coverage of
IRS's administration of specific provisions of the IRS Reform Act. To
illustrate the investigative coverage of IRS, we obtained the number of
investigative cases that addressed the mission areas of TIGTA's Office of
Investigations during fiscal year 2004.
We identified the audit and investigative accomplishments reported by
TIGTA in semiannual reports to the Congress for fiscal years 2000 through
2004, and obtained examples of individual reports to illustrate. We did
not audit or otherwise verify the dollar amount of financial
accomplishments reported by TIGTA.
Regarding quality control, we interviewed TIGTA staff and obtained
documentation of TIGTA's quality control process, including the reports on
quality control, internal quality inspections, and external peer review
reports of TIGTA's audit operations. We also interviewed TIGTA staff
regarding the tracking of audit recommendations and obtained JAMES
documentation for audit follow-up, including information about the
percentage of recommendations implemented by IRS.
We performed our audit from March 2005 through August 2005, in accordance
with U.S. generally accepted government auditing standards. We requested
comments on a draft of this report from the Treasury Inspector General for
Tax Administration or his designee. We received written comments from the
Treasury Inspector General for Tax Administration, which we have reprinted
in enclosure IV. We also received several oral comments offering technical
suggestions, which we have incorporated as appropriate.
Background
IRS administers America's tax laws and collects the revenues that fund
most government operations and public services. Each year IRS employees
make millions of contacts with American taxpayers and businesses. To
accomplish its mission, IRS focuses its efforts on achieving three key
goals: (1) improving taxpayer service; (2) enhancing enforcement of the
tax law; and (3) modernizing IRS through people, processes, and
technology. For the fiscal year 2004 filing season, IRS reported that it
collected over $2 trillion, processed over 131 million individual returns,
and issued approximately 100 million refunds totaling about $208 billion.
7Office of Management and Budget, Budget of the United States Government,
Supplemental Information (Washington, D.C.: Government Printing Office)
Fiscal Year 2006.
TIGTA is responsible for the independent oversight of IRS at the
Department of the Treasury. Formed in January 1999 as a result of the IRS
Reform Act, TIGTA is an oversight organization within the Department of
the Treasury in addition to, and independent of, the Department of the
Treasury Office of Inspector General, which was established by the IG Act
Amendments of 1988.8 Both IGs report directly to the Secretary of the
Treasury; however, TIGTA provides oversight of IRS, and the Treasury IG
provides oversight of the remaining offices at the Department of the
Treasury.
Prior to the IRS Reform Act, IRS oversight was provided by the Treasury IG
and the IRS Office of Chief Inspector, also known as the Inspection
Service. Established on October 1, 1951, the Inspection Service was
responsible for carrying out internal audits and investigations to (1)
promote the economic, efficient, and effective administration of the
nation's tax laws; (2) detect and deter fraud and abuse in IRS's programs
and operations; and (3) protect IRS from external attempts to corrupt or
threaten its employees. The Chief Inspector reported to IRS's Commissioner
and Deputy Commissioner and provided information to the Treasury IG, who
included the results of Inspection Service activities in the Treasury IG's
semiannual reports to the Congress.
In 1998 the Senate Committee on Finance concluded that the Office of Chief
Inspector lacked sufficient autonomy from IRS to independently provide
monitoring
9
and oversight activities. In addition, the committee believed that the
relationship between the Treasury IG and the Inspection Service did not
foster the appropriate oversight of IRS. Consequently, to improve the
quality and the credibility of IRS's oversight, TIGTA was established
within the Department of the Treasury to provide independent audits and
investigations of IRS.
In addition to the authorities and responsibilities granted under the IG
Act, the IRS Reform Act gives TIGTA the statutory authority to allow staff
to carry firearms, execute and serve search and arrest warrants, serve
subpoenas and summonses, make arrests, and seize property. The IRS Reform
Act also makes taxpayer returns and return information available for
inspection by TIGTA. TIGTA reports to and operates under the general
supervision of the Secretary of the Treasury; however, neither the
Secretary nor any other officer of the Treasury Department can prevent or
prohibit TIGTA from initiating, carrying out, or completing any audit or
investigation, or from issuing a subpoena during the course of any audit
or investigation. In addition, TIGTA is required to report to the Attorney
General whenever there are reasonable grounds to believe that there has
been a violation of federal criminal law.
Consistent with the IG Act and the IRS Reform Act, TIGTA conducts audits
and investigations of IRS's programs and operations to promote the
economic, efficient, and effective administration of the nation's tax laws
and to detect and deter fraud and abuse in IRS's programs and operations.
TIGTA's primary functional offices are the Office of Audit, the Office of
Investigations, the Office of Information Technology, the Office of
Management Services, and the Office of the Chief Counsel. As required by
the IG Act, TIGTA reports its activities and the results of audit and
investigative
8Pub. L. No. 100-504, 102 Stat. 2515 (Oct. 18, 1988). 9S. Rep. No. 105-174
(1998).
efforts in semiannual reports to the Congress for the periods ending March
31 and September 30 each year. Also, TIGTA presents specific information
in these semiannual reports about IRS's compliance with provisions of the
IRS Reform Act.
TIGTA Budgets and Staffing
The IRS Reform Act provided that all but 300 of IRS's Inspection Service
FTEs for fiscal year 1998 be transferred to TIGTA. The IRS Commissioner
was allowed to retain up to 300 FTEs to staff an internal audit function.
In addition, 21 FTEs previously transferred from the Inspection Service to
the Treasury IG for oversight of IRS pursuant to a 1990 memorandum of
understanding (MOU) were transferred to the newly formed TIGTA. As a
result, TIGTA realized 932 FTEs and had budget authority of about $114
million in fiscal year 2000, its first year of operations. In fiscal year
2004, TIGTA had budget authority of $130 million and realized 877
authorized FTEs. As of September 30, 2004, TIGTA had 874 staff on board
with 317 in the Office of Audit; 432 in the Office of Investigations; 81
in the Office of Information Technology; 23 in the Office of Management
Services, including the IG; and 21 in the Office of Chief Counsel.
From fiscal year 2000 through fiscal year 2004, TIGTA's budget authority
increased by 14 percent, from $114 million to $130 million, while TIGTA's
FTEs decreased by 6 percent, from 932 to 877. TIGTA's increased budget
authority occurred mostly in the second year of operations because of
expenses related to establishing an independent office and the effects of
full costing of federal retirements. Since fiscal year 2001, TIGTA has
operated in a relatively unchanged budget environment while absorbing
increases in costs that are largely beyond TIGTA's control, accompanied by
a corresponding reduction in FTEs. For a comparison, during fiscal years
2000 through 2004, overall IRS's total federal funds increased by 52
percent and FTEs increased by 1 percent. Therefore, even though they have
both increased in recent years, TIGTA's budget authority as a percentage
of IRS's total federal funds decreased from 0.30 percent to 0.23 percent.
(See table 1.)
Table 1: TIGTA's and IRS's Budgets and FTEs for Fiscal Years 2000 through
2004
Dollars in millions
TIGTA's IRS's total TIGTA's budget authority as
Fiscal budget federal a percentage of IRS's total TIGTA's IRS's
year authority funds federal funds FTEs FTEs
2000 $114 $37,881 0.30 932 97,799
2001 127 39,370 0.32 937 98,574
2002 130 46,658 0.28 943 100,217
2003 128 51,631 0.25 926 99,862
2004 130 57,443 0.23 877 98,735
Source: Budget of the United States Government.
The comparison of TIGTA's budget authority with IRS's total federal funds
represents the amount provided for IG oversight as it relates to the
amount of budgetary resources received by the agency that it oversees.
When this comparison is made for the other IG offices in which the IG is
appointed by the President and confirmed by the Senate, the percentages
vary depending on the size of the federal agencies, their missions, and
the oversight issues emphasized by each IG office. Such a comparison for
fiscal year 2004 budgets indicates that the ratio of TIGTA's budget
authority to IRS's total federal funds was within the range of these
percentages for other IGs and their agencies. (See enc. I.) The comparison
of IGs' budget authorities and agencies' budgetary resources ranged from
0.004 percent to 1.03 percent, whereby TIGTA's percentage of IRS resources
was at 0.23 percent, which ranks sixth of 28 agencies. This comparison at
IRS does not include the implications of IRS's main role as the nation's
tax collector and the amount of federal revenue collected by the IRS.
Audit Coverage of IRS
In fiscal year 2004, TIGTA issued 189 audit reports, which provided audit
coverage of IRS's operating divisions and other units (see enc. II), as
well as the high-risk areas identified by us, management challenges
identified by TIGTA, and audits of IRS's activities mandated by the IRS
Reform Act. This is accomplished through TIGTA's organizational structure,
which has four business units reporting to the Deputy IG for Audit that
are aligned with IRS's operating divisions and other units, and provide
audits of identified risks and congressionally mandated IRS requirements.
(See fig. 1.)
Figure 1: TIGTA Organization Chart
For example, in fiscal year 2004, TIGTA's Wage and Investment Income
business unit issued 40 audit reports that addressed the IRS Wage and
Investment Division's mission to serve tax filers with wage and investment
income and to help taxpayers understand the tax laws. The work of this
division includes IRS's enforcement of the tax laws, the processing of
taxpayers' returns, and the administration of the Earned Income Tax Credit
and Advanced Earned Income Tax Credit while minimizing the burden on
taxpayers and protecting their privacy.
Also, in fiscal year 2004, TIGTA's Small Business and Corporate Programs
business unit issued 37 audit reports to cover IRS's Small Business and
Self-Employed Division, which serves self-employed individuals; individual
filers with income from rents, royalties, pensions, annuities,
partnerships, estates, and trusts; and small businesses with assets of up
to $10 million. These audits also included coverage of IRS's Large and
Mid-Size Business Division, which serves businesses with assets of more
than $10 million. During fiscal year 2004, TIGTA's audits concentrated on
assessing IRS's efforts to provide quality service while helping taxpayers
understand the tax laws, processing the tax returns, and enforcing
compliance with the tax laws.
TIGTA's Headquarters Operations and Exempt Organizations business unit
issued 82 audit reports in fiscal year 2004 to provide coverage of IRS's
Tax-Exempt and Government Entities Division, which serves a wide range of
customers, including small local community organizations, municipalities,
major universities, pension funds, state governments, Indian tribal
governments, and tax-exempt bond issuers. These audits also provide
coverage of IRS's Financial Management and Operations, IRS's activities in
compliance with the Government Performance and Results Act of 1993,10 the
Criminal Investigation function, and agencywide shared services.
TIGTA's Information Systems business unit issued 30 audit reports to cover
IRS efforts to modernize its core business systems and to provide
high-quality, efficient, and responsible information services for its
operating divisions. In addition, through these audits, TIGTA oversees the
security of information systems, the buildings that house the systems, and
the people who operate them, and assesses IRS's efforts to manage risks
and vulnerabilities throughout its technology modernization projects.
Audit Coverage of Risks and Mandates
While TIGTA is organized to provide audits that address IRS's operating
divisions and other units, emphasis is also placed on high-risk areas
identified by us, IRS's management challenges identified by TIGTA, and
mandatory coverage required by the IRS Reform Act. Since 1990, we have
periodically reported on government operations that we have designated as
high risk because of their greater vulnerabilities to fraud, waste, abuse,
and mismanagement. We also identify high-risk areas to focus on the need
for broad-based transformations to address major challenges to economy,
efficiency, or effectiveness.
10Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).
In January 2003 we identified 25 high-risk areas across government and
added a 26th high-risk area in July 2003. These areas included IRS's
multibillion-dollar Business Systems Modernization program, financial
management, collection of unpaid taxes, and earned income tax credit
noncompliance. In January 2005 we combined the financial management area
with the systems modernization area into a category titled "Business
Systems Modernization," and combined the earned income credit
noncompliance with the collection of unpaid taxes into a category titled
"Enforcement of Tax Laws."
The management challenges identified by TIGTA at the beginning of fiscal
year 2004 include the high-risk areas identified by us; therefore, TIGTA'a
audits of management challenges provide coverage of our identified
high-risk areas at IRS.11 (See enc. III.) The identification of management
challenges by the IGs began in 1997 when the IGs were asked by
congressional leaders to identify the 10 most serious management problems
in their respective agencies. This request began a yearly process that
continues as a result of the Reports Consolidation Act of 2000.12 This act
called for executive agencies, including IRS, to include their IGs' lists
of significant management challenges in their annual performance and
accountability reports to the President, the Office of Management and
Budget (OMB), and the Congress.
Efforts to modernize IRS's systems, mandated by the IRS Reform Act, began
in fiscal year 1999. IRS expects that it will take 10 to 15 years at a
cost of $7 billion to $10 billion. We have recognized the modernization of
IRS's systems as a high-risk area, and TIGTA has identified this as a
management challenge that will require attention for years to come. TIGTA
has also recognized that the integration of IRS's financial management and
performance are management challenges at IRS by citing the weaknesses we
reported in our audits of IRS's financial statements. These challenges
include serious deficiencies in financial systems, including control
weaknesses and system deficiencies affecting financial reporting, unpaid
tax assessments, tax revenue and refunds, and computer security. In fiscal
year 2004, TIGTA completed 15 audits that addressed IRS's systems
modernization and 13 audits that addressed IRS's financial management and
performance.
IRS's administration of tax compliance initiatives and taxpayer protection
and rights are also designated by TIGTA as management challenges. Both of
these challenges include the collection of taxes, which is also a GAO
high-risk area. In addition, TIGTA has recognized improper payments at IRS
as a management challenge that includes taxpayers' noncompliance with the
earned income tax credit. To provide audit coverage of these areas in
fiscal year 2004, TIGTA completed 29 audits of tax compliance initiatives
along with 17 audits of taxpayers' protection and rights, which included
the collection of unpaid taxes, and 5 audits that addressed erroneous and
improper payments, which included taxpayers' noncompliance with the earned
income tax credit.
11GAO and TIGTA maintain ongoing coordination of high-risk audit efforts.
12Pub. L. No. 106-531, 114 Stat. 2537 (Nov. 22, 2000).
TIGTA's fiscal year 2004 audits also covered the statutorily mandated
audits specified in the IRS Reform Act, which requires TIGTA to review
IRS's actions taken to improve service to taxpayers. TIGTA's audit reports
covered the following areas:
o restrictions on the use of enforcement statistics to evaluate IRS
employees,
o any termination or mitigation under section 1203 of the IRS Reform
Act,13
o information regarding the improper denial of requests for information
from IRS,
o restrictions on directly contacting taxpayers who have indicated they
prefer their representatives be contacted,
o procedures on the filing of a notice of a lien,
o procedures for seizure of property,
o certification that the Treasury Secretary complied with certain
disclosures,
o extensions of the statute of limitations for the assessment and
collection of taxes,
o adequacy and security of IRS technology,
o restrictions on the designation of taxpayers as illegal tax protesters,
and
o actions with respect to violations of the fair-debt-collection
provisions.
To satisfy additional statutory provisions, TIGTA reported in each fiscal
year 2004 semiannual report the number of taxpayer complaints during the
period and the number of employee misconduct and taxpayer abuse
allegations received by IRS or the IG during the period from taxpayers,
IRS employees, and other sources. In addition, the semiannual reports
included a required summary of the status of such complaints and
allegations as well as their disposition, including any action by the
Department of Justice and any moneys paid as a settlement.
Investigative Coverage
As was the case with the audit function, the IRS Reform Act also
transferred the statutory law enforcement authority of the former IRS
Inspection Service to TIGTA and its Office of Investigations. TIGTA has
responsibility for enforcing criminal law related to internal revenue and
focuses investigations on three main areas of concern: (1) allegations of
criminal violations and serious administrative misconduct by IRS
employees; (2) external attempts to corrupt tax administration; and (3)
issues of employee infrastructure and security. (See fig. 2.) The Office
of Investigations' authority includes executing and serving search and
arrest warrants, serving subpoenas and summonses, making arrests without
warrant for any offense against the United States related to internal
revenue laws, and seizing property subject to foreclosure under IRS laws.
13In general, the IRS Commissioner shall terminate the employment of any
IRS employee if there is a final administrative or judicial determination
that in the performance of official duties, such employee committed any
misconduct violations outlined in the act.
Figure 2: TIGTA's Office of Investigations Closed Investigations by
Investigative Area Reported by TIGTA in Fiscal Year 2004
The investigative responsibilities of TIGTA's Office of Investigations are
coordinated with the IRS Criminal Investigation office through an MOU
between TIGTA and the Chief of IRS Criminal Investigation signed in August
2000. The MOU specifies that IRS Criminal Investigation will investigate
violations of the Internal Revenue Code's substantive criminal tax
provisions, such as attempted evasion, failure to file or pay, the
subscription of false documents, and corrupt endeavors to obstruct or
impede the administration of the tax code. TIGTA has responsibility to
protect IRS against external attempts to corrupt or threaten IRS
employees, including investigations of allegations of IRS employee conduct
violations and other allegations regarding employee integrity.
During fiscal year 2004, TIGTA reported that it closed 3,900 investigative
cases.14 Of these, 1,695 investigations, or 43 percent, addressed employee
integrity cases, such as misconduct, extortion, theft, taxpayer abuses,
false statements, and financial and contractor fraud. For example, because
of these investigations, two IRS employees were indicted for diverting tax
refunds to their own accounts, an employee pleaded guilty to filing
fabricated income tax returns to obtain tax refund payments, and an
employee pleaded guilty to stealing checks payable to IRS and altering
them for personal use.
TIGTA reported that 32 percent of closed investigations during fiscal year
2004, or 1,231 investigations with final referrals, addressed external
attempts to corrupt or interfere with the administration of internal
revenue laws. These external attempts to corrupt or interfere include
bribes offered by taxpayers to compromise IRS employees, the manipulation
of IRS's systems and programs, the use of fraudulent IRS documentation,
and impersonation of IRS officials. Specifically, TIGTA reported that the
Office of Investigations conducted 56 investigations into bribery
allegations
14TIGTA recognizes investigative cases as closed after they are referred
for final action. This may include referrals to the Department of Justice,
state or local jurisdictions, or IRS.
involving taxpayers, 280 investigations of attempts to manipulate IRS's
systems and operations, and 895 investigations into nontax fraud and other
related activities. To illustrate, as a result of TIGTA's investigations,
an individual was sentenced for mail fraud because this individual
directed clients to deposit funds for tax purposes into a fund used for
the individual's personal purposes. In addition, individuals were
sentenced for bribing IRS employees and for impersonating IRS employees.
The remaining 25 percent of closed investigations, or 974 investigative
cases with final referrals reported by TIGTA, addressed employee and
infrastructure security to ensure IRS's ability to collect taxes.
Specifically, this includes activities by the Office of Investigations to
identify threats against IRS personnel and facilities and to notify IRS
management of the potential for harm. In addition, TIGTA also investigates
threats and assaults directed at facilities and employees, which include
arresting individuals who direct threatening letters and statements to IRS
employees. Consequently, as reported, TIGTA issued 64 advisories notifying
IRS management of potential threats and completed 910 investigations of
threats and assaults directed at IRS facilities and employees.
TIGTA's Accomplishments
Statutory IGs, including TIGTA, are required by the IG Act to report
specific financial accomplishments in their semiannual reports provided
for the Congress. As required, TIGTA's semiannual reports for fiscal years
2000 through 2004 included the number of audit reports issued and the
questioned costs, unsupported costs, and funds to be put to better use
identified by the audits. As defined by the IG Act, questioned costs
include either alleged violations of laws, regulations, contracts, grants,
or agreements; costs not supported by adequate documentation; or the
expenditure of funds for an intended purpose that was unnecessary or
unreasonable. In addition, unsupported costs are defined as costs that do
not have adequate documentation, and funds to be put to better use are
inefficiencies identified by the IG in the use of agency funds. For the
5-year period, TIGTA issued 942 audit reports and reported $16.1 million
in questioned costs, $3.1 million in unsupported costs, and $16.2 billion
in funds to be put to better use.
In an example of questioned costs, TIGTA's follow-up audit of controls
over IRS's telecommunications costs found that about $2.2 million of
questioned costs had been identified by IRS based on TIGTA's prior
findings of ineffective controls. In an example of unsupported costs,
TIGTA audited four invoices from the IRS business systems modernization
contract and found approximately $9.5 million of these costs unsupported
by documentation from the contractor. After TIGTA's audit report draft was
issued, the contractor provided documentation to support all but
approximately $52,000 of the $9.5 million originally questioned. In an
example of funds to be put to better use, TIGTA recommended that IRS
reduce the amount of underused office space, which could save about $84
million per year.
In addition to the audit accomplishments, during the same 5-year period,
TIGTA reported that 39,611 complaints and allegations were addressed and
that 22,350 investigative cases were closed. This activity resulted in the
reported recovery of about $17.5 million of embezzled or stolen funds and
almost $80 million in courtordered fines, penalties, and restitutions. In
addition, reported nonmonetary
investigative accomplishments included almost 10,000 criminal referrals-of
which about 1,700 were accepted for prosecution by the Department of
Justice or state or local authorities-and administrative dispositions on
3,805 investigations, which included removal, termination of employment or
suspension, reduction in grade, written or oral reprimand, or resignation
of the employee. The combined financial accomplishments from audits and
investigations reported by TIGTA over the 5-year period totaled about
$16.3 billion.
In addition to the audit information required by the IG Act, TIGTA's
Office of Audit has identified measures that demonstrate additional
potential financial impact on tax administration. These accomplishments
are intended to provide further insights into the value and potential
impact of TIGTA's audits and include increases in the collection of
additional taxes, improvements to revenue protection and taxpayer privacy,
correction of inefficient uses of resources, needed protections of human
and capital assets, and correction of problems with the reliability of
management information. To illustrate, TIGTA estimated that by improving
the controls to ensure that tax returns with potential transfer pricing15
issues are referred to international examiners for consideration, federal
revenue could increase by approximately $32.3 million annually, provided
that IRS has the additional resources to examine the returns. For the
5-year period we reviewed, TIGTA reported over $50 billion of these
additional potential financial impacts.
TIGTA Quality Assurance Program
TIGTA's quality assurance program includes a quality review of individual
audit reports, internal quality inspections to monitor the quality of
audits, and external quality peer reviews. Specifically, the IG Act
requires federal IGs to follow Government Auditing Standards, which
requires an appropriate internal quality control system and an external
peer review every 3 years. These standards specify that quality control
systems should include procedures for monitoring, on an ongoing basis,
whether the policies and procedures related to the standards are suitably
designed and are being effectively applied.
To comply with the quality assurance standard, TIGTA's Office of
Management and Policy uses a standardized checklist to review all draft
audit reports prior to issuance. This review addresses audit scope,
finding attributes, the sufficiency and relevancy of findings in
comparison to the audit objectives, the adequacy of recommendations to
address identified causes, audit sampling methodology, and quantifiable
outcome measures. In addition, the review provides assurance of general
compliance with professional auditing standards; conformance with TIGTA
report format; clarity of information; and conformance with rules for
grammar, punctuation, and style.
TIGTA also performs quality assurance through internal quality inspections
of each of its four business units once every 3 years. In these
inspections, each business unit is assigned responsibility for conducting
the inspection of another business unit and reporting to the Deputy IG for
Audit on the results. The checklist used in this review
15Transfer pricing is a term commonly used to describe pricing
arrangements for exchanging goods, services, and other property between
related entities or affiliates of multinational businesses with operations
in the United States and other countries.
includes steps derived from the quality assurance process of the
President's Council on Integrity and Efficiency (PCIE)16 and guidance from
Government Auditing Standards. The checklist has questions that address
staff qualifications, independence, professional judgment, independent
referencing, audit planning, sampling plans, supervision, evidence, work
papers, internal controls, illegal acts, noncompliance, abuse, and
reporting.
Two internal inspections of TIGTA's business units have been completed,
and two are planned for the audit activities covering fiscal years 2004
and 2005. The reviews of the Headquarters Operations and Exempt
Organizations unit and the Wage and Investment Income unit found that the
audits conducted by these business units were completed in compliance with
U.S. generally accepted government auditing standards. In addition, the
reports concluded that audit staff generally complied with Office of Audit
policies and procedures. The review did find instances in which the audit
teams could more closely follow policies and procedures and reported
TIGTA's planned actions to address the review's conclusions.
TIGTA has obtained two external peer reviews from other IG offices since
fiscal year 2000 and obtained an unqualified opinion in each review. These
external quality control reviews provide TIGTA with an independent opinion
on the quality control system, whether the system is in place and
operating effectively, and whether the policies and applicable audit
standards are being followed. The Transportation IG performed the most
recent external peer review of TIGTA. The peer review report, dated
January 22, 2004, concluded that the quality control system for the audit
function had been designed in accordance with quality standards
established by PCIE. The peer review report further states that TIGTA's
quality control system provides reasonable assurance of material
compliance with professional auditing standards in conducting its audits.
The report also identifies opportunities for TIGTA to strengthen
compliance with its quality control system for the conduct of audits. The
peer review observations include aspects of continuing professional
education, quality control, audit planning, evidence and work papers, the
assessment of management controls, and audit reporting.
Audit Follow-up
The Department of the Treasury tracks audit recommendations through the
JAMES. JAMES includes all audit recommendations from TIGTA, the Treasury
IG, and us on the basis of information provided by the auditors, and
tracks the status of management's response and implementation. Treasury's
process for tracking audit recommendations is consistent with OMB Circular
No. A-50, Audit Follow Up, which states that audit follow-up on
recommendations contained in audit reports is an integral part of good
management and is a shared responsibility of agency management officials
and auditors. In addition, each agency is required to establish a system
to ensure the prompt and proper resolution and implementation of audit
recommendations.
16PCIE is an interagency council composed principally of the
presidentially appointed and Senateconfirmed IGs, which is governed by
Executive Order No. 12805 of May 11, 1992, to coordinate and enhance the
work of the IGs.
The IG Act also requires that semiannual reports prepared by the IGs,
including those of TIGTA, provide an identification of each significant
recommendation described in previous semiannual reports for which
corrective action has not been completed. In addition, Government Auditing
Standards requires that audit plans include a consideration of the results
of previous audits that could affect the current audit objectives and
follow-up on known significant findings and recommendations.
Under OMB Circular No. A-50, IRS management is responsible for completing
plans for corrective actions to address audit recommendations and for
ensuring that corrective action is taken in response to each audit report.
Each TIGTA business unit has a staff member who is a JAMES user with the
ability to query the system and provide feedback on the status of
individual open or closed audit report recommendations. TIGTA's semiannual
reports include the status of prior audit recommendations as required by
the IG Act. Moreover, in compliance with government auditing standards,
TIGTA officials stated that subsequent audits follow up on prior audit
recommendations. During fiscal years 2000 through 2004, JAMES reported
that of 2,912 corrective actions planned by IRS management to address
TIGTA's audit recommendations, 2,625, or approximately 90 percent, were
closed because IRS agreed to adopt the recommendations. Of these closed
recommendations, JAMES reported that about 83 percent have been fully
implemented.
Agency Comments
In written comments on a draft of this report, the Treasury Inspector
General for Tax Administration generally concurred with the report
contents. TIGTA staff separately offered several oral comments for
clarification purposes. We considered each of the suggestions and
incorporated changes as appropriate.
As agreed with your offices, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days after its date.
At that time, we will send copies to the Secretary of the Treasury, the
Commissioner of Internal Revenue, the Treasury Inspector General for Tax
Administration, the Deputy Director for Management of the Office of
Management and Budget, other congressional committees, and interested
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If you have any questions or would like to discuss this report, please
contact me at (202) 512-9471 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. Key contributors to this report were Jackson W.
Hufnagle, Assistant Director, and Clarence Whitt.
Jeanette M. Franzel
Director
Financial Management and Assurance
Enclosures - 4
Enclosure I
A Comparison of Inspectors General's Budget Authority and
Agencies' Budgetary Resources,
Fiscal Year 2004
Dollars in millions
IG budget Agency total IG budget authority as a
authority budgetary percentage of agency
No. Federal agency resources budgetary resources
1 Nuclear Regulatory $7 $682 1.03
Commission
2 Federal Deposit 26 0.95
Insurance Corporation 2,728
Corporation for
3 National and 6 935a 0.64
Community Service
4 Environmental 51 0.39
Protection Agency 13,152
Agency for
5 International 37 0.25
Development 14,633
Treasury Inspector
6 General for Tax 130 57,443b 0.23
Administration
7 Department of 21 0.21
Commerce 9,823
8 Department of Justice 74 37,415 0.20
9 Department of 93 0.17
Homeland Security 53,879
10 Department of the 42 0.17
Interior 25,109
11 Department of State 32 21,332 0.15
National Aeronautics
12 and Space 27 0.14
Administration 19,187
13 General Services 40 0.14
Administration 28,732
14 Tennessee Valley 9c 7,341d 0.12
Authority (TVA)
15 Department of Energy 39 36,523 0.11
16 Small Business 14 0.10
Administration 14,025
17 Department of Labor 66 67,890e 0.10
18 Department of Housing 101 0.09
and Urban Development 111,556
19 Department of 65 0.07
Veterans Affairs 94,564
20 Railroad Retirement 7 10,461f 0.07
Board
21 Department of 63 0.06
Transportation 106,442
22 Department of 81 0.06
Agriculture 142,890
23 Department of 46 0.03
Education 131,766
24 Department of Health 223g 0.03
and Human Services 721,084
25 Department of Defense 179 1,014,878 0.02
26 Social Security 88 0.02
Administration 562,912
27 Office of Personnel 16 0.01
Management 126,269
28 Department of the 14 373,254h 0.004
Treasury
29 Central Intelligence nai nai nai
Agency
Source: Budget of the United States Government, Fiscal Year 2006.
aCorporation for National and Community Service's fiscal year 2006
congressional budget justification.
bIRS's total federal funds.
cAmounts for the TVA Inspector General are fiscal year 2005 estimates.
dGross Fund Authority.
eDepartment of Labor totals exclude Pension Benefit Guaranty Corporation.
fRailroad Retirement Board fiscal year 2004 Performance and Accountability
Report.
gIncludes budget authority to combat Medicare fraud.
hTreasury's agency budgetary resources exclude IRS and include interest on
Treasury debt securities.
iCentral Intelligence Agency and IG budgets are not available.
Enclosure II
Internal Revenue Service Organization
The Internal Revenue Service's (IRS) four business divisions have missions
directed at groups of taxpayers. (See fig. 3.) The Wage and Investment
Division serves filers with wage and investment income; (2) the Small
Business and Self-Employed Division serves self-employed individuals,
individual filers with income from rents, royalties, pensions, annuities,
partnerships, estates, and trusts, and small businesses with assets up to
$10 million; (3) the Large and Mid-Size Business Division serves
businesses with assets of more than $10 million; and (4) the Tax-Exempt
and Government Entities Division serves small local community
organizations, municipalities, major universities, pension funds, state
governments, Indian tribal governments, and tax-exempt bond issuers. Along
with the Criminal Investigation unit, these divisions report to the Deputy
Commissioner for Services and Enforcement.
Figure 3: IRS Organization
Additional IRS offices report to the IRS Commissioner, including the
Office of Appeals, which resolves tax controversies between taxpayers and
IRS without litigation; the Taxpayer Advocate Service, headed by the
National Taxpayer Advocate, which helps taxpayers resolve problems that
have not been resolved through normal IRS channels and recommends changes
to the Congress to improve the tax system; and Operations Support and
other offices that support IRS activities.
Enclosure III
Coverage of High-Risk Areas and Management Challenges in Fiscal Year 2004 TIGTA
Audit Reports
Management Fiscal
GAO 2005a GAO 2003b challenges year 2004
high-risk areas high-risk areas identified by TIGTA
TIGTA in 2004c audit
reports
Systems Systems 15
modernization modernization
Systems Integrating
modernization performance and 13
Financial financial
management management
Tax compliance 29
Collection of initiatives
unpaid taxes Taxpayer
Enforcement of protection and 17
Areas tax laws rights
addressed by Earned income
TIGTAd audits tax credit Erroneous and 5
noncompliance improper payments
Quality customer 26
service operations
Security of IRS 18
Processing returns
and implementing 10
tax law changes
Complexity of the 2
tax law
Human capital 1
Audits of
management 136
challenges
Other audits 3
Total TIGTA 139
audits
Contract 50
auditse
Total audits 189
Sources: GAO's 2003 and 2005 High Risk Series, and TIGTA's fiscal year
2004 audit reports.
aGAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).
bGAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January
2003).
cDepartment of the Treasury, Performance and Accountability Report FY
2004.
d The Department of the Treasury Inspector General for Tax Administration.
eContract audits performed for TIGTA by the Defense Contract Audit Agency.
Enclosure IV
Comments from the Department of the Treasury
(194504)
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