Tax Administration: The Internal Revenue Service Can Improve Its 
Management of Paper Case Files (28-SEP-07, GAO-07-1160).	 
                                                                 
Proper paper case file management is a significant issue for the 
Internal Revenue Service (IRS) because its staff investigate and 
close millions of case files every year. In addition, IRS	 
employees depend heavily on case files when pursuing enforcement 
actions. GAO was asked to review IRS's case file storage,	 
tracking, and documentation processes to determine whether IRS	 
has (1) an effective process to ensure that paper case files can 
be located timely and (2) sufficient data to assess the 	 
performance of its paper case file processes. To review these	 
processes, GAO interviewed staff who request case files and case 
file managers.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1160					        
    ACCNO:   A76888						        
  TITLE:     Tax Administration: The Internal Revenue Service Can     
Improve Its Management of Paper Case Files			 
     DATE:   09/28/2007 
  SUBJECT:   Documentation					 
	     Financial records					 
	     Information access 				 
	     Information security				 
	     Information storage and retrieval			 
	     Internal controls					 
	     Program management 				 
	     Records						 
	     Records management 				 
	     Tax administration 				 
	     Tax administration systems 			 
	     IRS Integrated Data Retrieval System		 

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GAO-07-1160

   

     * [1]Results in Brief
     * [2]Background
     * [3]IRS Does Not Have an Effective Process to Ensure That Paper

          * [4]IRS Has Lost Revenue in Court Proceedings
          * [5]IRS Incurs Cost and Some Taxpayers May Experience Unnecessar
          * [6]Case Files May Be Unavailable for Other Units
          * [7]Congressional Oversight May Be Hindered

     * [8]Lacking Data, IRS Cannot Assess Case Management Performance

          * [9]IRS Does Not Track Whether Case Files Are Located or Receive
          * [10]Performance Information Could Assist IRS in Determining How
          * [11]IRS Cannot Determine Whether Actions for Improvement Are Nee

     * [12]Conclusions
     * [13]Recommendations for Executive Action
     * [14]Agency Comments
     * [15]GAO Contact
     * [16]Acknowledgments
     * [17]GAO's Mission
     * [18]Obtaining Copies of GAO Reports and Testimony

          * [19]Order by Mail or Phone

     * [20]To Report Fraud, Waste, and Abuse in Federal Programs
     * [21]Congressional Relations
     * [22]Public Affairs
     * [23]PDF6-Ordering Information.pdf

          * [24]Order by Mail or Phone

Report to the Committee on Finance, U.S. Senate

United States Government Accountability Office

GAO

September 2007

TAX ADMINISTRATION

The Internal Revenue Service Can Improve Its Management of Paper Case
Files

GAO-07-1160

Contents

Letter 1

Results in Brief 2
Background 4
IRS Does Not Have an Effective Process to Ensure That Paper Case Files Can
Be Located Timely 7
Lacking Data, IRS Cannot Assess Case Management Performance and Develop
Plans for Improvement 11
Conclusions 18
Recommendations for Executive Action 18
Agency Comments 19
Appendix I Objectives, Scope, and Methodology 21
Appendix II Comments from the Internal Revenue Service 22
Appendix III GAO Contact and Staff Acknowledgments 24

Figures

Figure 1: Locations of Submission Processing Centers, Area Records
Managers, and Federal Records Centers 6
Figure 2: Errors That Can Occur in the Process of Requesting, Locating,
and Sending Paper Case Files 12

Abbreviations

ACS Automated Collection System
ARM Area Records Manager
AWSS Agency-Wide Shared Services
CCP Centralized Case Processing
CDP Collection Due Process
COVERS Control of Veterans Records System
DLN Document Locator Number
FRA Federal Records Act
FRC Federal Records Center
IDRS Integrated Data Retrieval System
IRC Information Resource Coordinator
IRM  Internal Revenue Manual
IRS Internal Revenue Service
LMSB Large and Mid-size Business Division
NRP National Research Project
PWS Performance Work Statement
SB/SE Small Business/Self-Employed Division
SPC Submission Processing Center
TE/GE Tax-Exempt and Government Entities Division
TFRP Trust Fund Recovery Penalty
TIGTA Treasury Inspector General for Tax Administration
VA Department of Veterans Affairs
W&I Wage and Investment Division

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office
Washington, DC 20548

September 28, 2007

The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate

Under the Federal Records Act (FRA) of 1950,1 the Internal Revenue Service
(IRS) is required to maintain an active, continuing program for the
economical and efficient management of the records of the agency. The
program should provide for effective controls over the creation,
maintenance, and use of records in the conduct of current business,
including case files.2 In addition, in accordance with internal control
standards, IRS case files should be readily available for examination and
properly managed and maintained to ensure that management's directives are
carried out.3 Proper case file management is a particularly significant
issue for IRS because its staff investigate and close millions of case
files every year. In addition, IRS case files contain sensitive taxpayer
information that, by law, must be properly protected from inadvertent
disclosure. Moreover, according to collection managers, IRS employees
depend heavily on case files when pursuing enforcement actions, such as
litigating court cases. Paper case files are also important for internal
IRS reviews, such as those performed by its research and quality review
groups.

Based on your request, we reviewed IRS's case file storage, tracking, and
documentation processes to determine whether (1) IRS has an effective
process to ensure that paper case files can be located timely and (2) IRS
has sufficient data to assess the performance of its paper case file
processes. To make determinations in both areas, we interviewed officials
from the following IRS entities or programs: the Office of Agency-Wide
Shared Services (AWSS),4 the Small Business/Self-Employed Division
(SB/SE), the Wage and Investment Division (W&I), the Office of Appeals,
the Automated Collection System (ACS), and the National Research Program
(NRP). We did not interview officials from the Large and Mid-Size Business
Division (LMSB) or the Tax-Exempt and Government Entities Division (TE/GE)
since only a very small percentage of Appeals' cases that are docketed for
Tax Court where paper case files are very important originate from these
divisions according to Appeals officials. We also reviewed IRS's policies
and procedures. To determine whether IRS has an effective process to
ensure that paper case files can be located timely, we compared IRS's
process to the requirements of the FRA and our standards for internal
control in the federal government. Further, we interviewed officials from
other organizations to identify key practices in managing case files.
These organizations included the Department of Education, the Department
of Veterans Affairs, the Social Security Administration, and the
California Franchise Tax Board. We conducted our work from August 2006
through July 2007 in accordance with generally accepted government
auditing standards. Detailed information on our scope and methodology
appears in appendix I.

144 U.S.C. S 3102.

2Records are evidence of the agency's organization, functions, policies,
decisions, procedures, operations, or other activities. Case files are
records kept as a unit documenting a specific action, event, person, or
project; they present a complete history of a specific transaction.
Internal Revenue Manual section 1.15.7.1.3.

3GAO, Standards for Internal Control in the Federal Government,
[25]GAO/AIMD-00-21 .3.1 (Washington, D.C.: November 1999).

Results in Brief

IRS does not have an effective process to ensure that paper case files can
be located within the requesters' time frames. This can hamper IRS's
efforts to pursue taxpayers with delinquent taxes. Missing case files can
result in lost revenue, create unnecessary taxpayer burden, and make case
files unavailable for other units such as quality review groups or
advisory groups.5 For example, according to advisory group staff, in
several District Court cases IRS lost over $40,000 in revenue in each case
because it could not locate the case file. IRS has acknowledged its
historic difficulties in locating and retrieving case files and has stated
that this can result in a number of motions to extend the time of some Tax
Court cases. When IRS cannot locate paper case files, it may attempt to
re-create them by requesting information from taxpayers, which can result
in unnecessary taxpayer burden. Although IRS performs quality reviews on
its case files, for some collection cases the number of case files
requested is double the number needed to allow for cases that cannot be
located. Difficulties in locating case files can also hinder congressional
oversight. When we requested case files in two prior GAO audits,6 IRS
could not locate 10 to 14 percent of the case files requested.7 IRS has
also had difficulty providing case files to the Treasury Inspector General
for Tax Administration (TIGTA). For example, in one TIGTA audit,8 TIGTA
requested a random sample of tax records, but IRS could not provide about
19 percent of the case files.

4AWSS plans, develops, promotes, and establishes agencywide policy,
standards and procedures, and guidelines on records management.

5According to IRS officials, quality review groups review case files to
assess whether cases are properly developed, processed, and documented.
Advisory groups analyze and develop field collection cases for IRS's Chief
Counsel for cases that may be litigated in District Court.

IRS does not have sufficient data to assess the performance of its paper
case file management processes. Having such data would enable IRS to
assess whether its case management processes are in accordance with FRA
and internal control standards. IRS does not track whether all of the case
files it requests are located or received timely, or the reasons why case
files cannot be located. If IRS developed this type of data, officials
could use this data to identify problems in existing programs, to try to
identify the causes of problems, and/or to develop corrective actions.
AWSS has recently instituted some performance measures, but these measures
do not specifically address paper case files. IRS program managers also
have not developed performance measures or data to determine how well
paper case files are managed to achieve performance targets. Program
managers do not know who has overall responsibility for case file
management so performance information cannot be developed across IRS's
compliance programs. We have identified some potential improvements that
IRS can consider, but IRS will need to determine which improvements are
the most cost effective.

6GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost
Basis Would Improve Compliance if Related Challenges Are Addressed,
[26]GAO-06-603 (Washington, D.C.: June 13, 2006), and Tax Administration:
Little Evidence of Procedural Errors in Collection Due Process Appeal
Cases but Opportunities Exist to Improve the Program, [27]GAO-07-112
(Washington, D.C.: Oct. 6, 2006).

7Under GAO's financial audit methodology, we generally use a 3 percent
materiality threshold to test internal controls for mission-critical
activities. We consider the storage and retrieval of paper case files to
be mission-critical to IRS. In another GAO audit, GAO, Tax Administration:
Opportunities to Improve Compliance Decisions and Service to Taxpayers
through Enhancements to Appeals' Feedback Project, [28]GAO-06-396
(Washington, D.C.: Mar. 24, 2006), IRS was unable to locate all case files
requested but the percentage did not exceed our materiality threshold.

8Treasury Inspector General for Tax Administration, Better Procedures Are
Needed to Locate, Retrieve, and Control Tax Records, TIGTA 2004-10-186
(Washington, D.C.: September 2004).

We recommend that IRS (1) ensure that case files are managed in accordance
with FRA and internal control standards, including tracking the number of
paper case files that cannot be located or are received untimely and the
reasons why, and developing performance measures to monitor the
effectiveness of the paper case file process to assist in determining
which options for improving paper case file management are the most
beneficial for IRS; (2) ensure that case file performance is monitored
across IRS's compliance programs by clearly defining responsibility for
doing so; (3) establish clearer responsibility for coordinating large
samples of case files to provide specific reasons why case files cannot be
located; (4) reiterate to staff who the coordinators are for requesting
paper case files; and (5) ensure that paper case files are sent to storage
areas as soon as cases are closed, document whether case files are sent to
storage, and track the number and location of paper case files that have
not been sent to storage.

In commenting on a draft of this report, the Acting Commissioner of
Internal Revenue agreed that IRS needs to review its Records Management
Program. However, instead of commenting on our specific recommendations,
the Acting Commissioner stated that IRS will form a cross-functional
working group to review the Records Management Program and develop
corrective action, taking into account our recommendations. IRS's planned
review and development of corrective actions is responsive to our
recommendations and we look forward to its consideration of our
recommendations in this review as well as to the benefits to taxpayers and
IRS of a more effective program.

Background

In keeping with the FRA, IRS established a Records Management Program. The
program provides for the application of management practices in the
creation, maintenance, retrieval, preservation, and disposition of
records. Although the mission of the Records Management Program is to
document, protect, and efficiently manage all IRS records until final
disposition, actual day-to-day management of case files is left to each
IRS program. According to an IRS official, program managers establish
policies and procedures for the management of paper and electronic case
files and have overall responsibility for case file management in their
program. In addition, each program develops its own policies and
procedures, which are documented in IRS's Internal Revenue Manual (IRM).

Case files can be paper, automated, or a combination of both. For example,
when IRS examines a tax return, the documents completed by the examiner
can be automated (electronically maintained within their system) or paper
(placed in physical case files). Case files may include income tax
returns, audits, investigations, or claims. According to W&I and SB/SE
officials, in fiscal year 2006 they closed over 13 million and 9 million
cases, respectively.9 When cases are closed, IRS units perform managerial
and quality reviews to ensure cases were handled correctly and the case
files are complete and meet their quality standards. For example, in
fiscal year 2006, the SB/SE field collection quality review group found
that over 96 percent of the case files they reviewed were complete.

Paper case files can be stored in the files area of Submission Processing
Center (SPC) campuses or field offices which are spread throughout the
country.10 These case files are then transferred to Federal Records
Centers (FRC)11 by filing coordinators located at the SPC or by
information resource coordinators in the field. Once the specified
retention period has expired at the FRC, the case files are destroyed. The
locations of Submission Processing Centers, Area Records Managers, and
Federal Records Centers are illustrated in figure 1.

9We were unable to determine how many cases were paper or automated since
W&I and SB/SE do not track this information.

10The campuses are the data processing arm of IRS. They process paper and
electronic submissions, correct errors, and forward data to the Computing
Centers for analysis and posting to taxpayer accounts. Field offices
perform tasks such as examining taxpayer records and collecting delinquent
taxpayer accounts.

11FRCs are located throughout the nation and provide long-term storage for
the IRS and other Federal Government agencies.

Figure 1: Locations of Submission Processing Centers, Area Records
Managers, and Federal Records Centers

According to an IRS official, the agency is in the process of automating
some of its paper case files. IRS is developing scanning capability to
convert documents from paper to electronic. However, this official stated
that IRS is initially developing this scanning capability for its campuses
and not its field offices. Furthermore, the agency does not have a plan or
time frame for when all of its case files will be automated. As a result,
IRS will be relying on paper case files for some years.

IRS Does Not Have an Effective Process to Ensure That Paper Case Files Can Be
Located Timely

Case files should be readily available for examination. However, IRS does
not know whether it locates all of the paper case files it requests. In
the absence of data on IRS's success in retrieving paper case files,
several sources of anecdotal information give some indication of the
potential extent of problems in locating case files. Missing case files
can result in lost revenue, create unnecessary taxpayer burden, make cases
unavailable for other units such as quality review groups or advisory
groups, and hinder congressional oversight.

IRS Has Lost Revenue in Court Proceedings

Paper case files are crucial for cases scheduled for Tax Court or District
Court. Without complete case files, IRS can lose those cases. For example,
advisory staff informed us of several instances where IRS lost revenue in
District Court cases because a case file could not be located. In one
case, IRS obtained approval to file a nominee lien against a taxpayer
because the taxpayer had transferred an asset to another person.12 IRS
pursued collection action, but the taxpayer challenged IRS in District
Court asserting that IRS needed to prove that the taxpayer had use and
control of the asset that was transferred. IRS was unable to locate the
case file for the trial. As a result, IRS lost about $45,000. In another
case, a taxpayer commingled individual assets with corporate assets. IRS
levied the funds in the bank account of an individual who controlled the
corporation to pay the tax debt owed by the corporation. IRS collected the
money owed, but the taxpayer filed a claim that IRS needed to prove the
money in the individual account belonged to the corporation. IRS had this
information in the case file, but could not locate it. Therefore, IRS had
to return the levied money, which amounted to about $40,000.

IRS has acknowledged its historic difficulties in locating and retrieving
case files. In September 2006, the Tax Court proposed a requirement that
IRS file answers in all small tax cases ($50,000 or less). An answer
includes admissions, qualifications, and denials by IRS of each material
fact alleged in the Tax Court petition filed by the taxpayer. In
preparation of the answer, IRS generally examines and relies on the
information in the case file. When IRS responded to this tax court
proposal, IRS stated that due to difficulties in locating and retrieving
case files, the requirement to answer all small tax case petitions may
lead to a number of motions to extend time in which to answer.

12In a nominee situation, the transfer is not intended to divest the
transferor of any rights to the property. An example of a nominee
situation is a conveyance of property to a party with the understanding
that the property will be returned to the transferor after the
transferor's creditors lose interest in collecting their claims.

Appeals informed us that they are having difficulty obtaining case files
that are docketed for Tax Court, and they are working with the Business
Units to try and determine the cause. For example, W&I recently made a
commitment to send docketed case files to Appeals within 25 days. To
assess W&I's performance, W&I requested Appeals to provide them with a
report so they could track their progress. Appeals developed a report
which showed that out of about 900 docketed cases from W&I campuses,
Appeals had been waiting over 25 days for 420, or 46 percent, of the case
files. If Appeals cannot obtain a case file prior to the scheduled court
date, IRS could lose the case and any revenue owed by the taxpayer.

IRS Incurs Cost and Some Taxpayers May Experience Unnecessary Taxpayer Burden to
Re-create Case Files

When IRS staff request paper case files, several attempts may be made to
locate them. For example, if a request is input into the Integrated Data
Retrieval System (IDRS)13 and the case file is not located, another
request may be input into IDRS. IRS may also perform special searches when
normal searches are unsuccessful. When the paper case files still cannot
be located, IRS may attempt to re-create them. This creates an additional
cost and burden to IRS, which must use its scarce resources to perform
special searches and re-create case files. To re-create case files, IRS
obtains what information it can from its own systems. If IRS needs
additional information from the taxpayer, IRS may contact the taxpayer and
request this information. This process can result in unnecessary taxpayer
burden.

Case Files May Be Unavailable for Other Units

Some paper case files should be sent from field offices to campus file
areas within a specified number of days after the case is closed. However,
campus staff said they have had difficulty receiving the case files in the
time specified. If case files are not sent to storage areas promptly,
these case files may not be available for other units, such as quality
review groups or advisory groups in performing their tasks.

13IDRS is a computer system capable of retrieving or updating stored
information; it works in conjunction with a taxpayer's account records.

In Collection Field Offices, some types of case files should be sent to
the Centralized Case Processing (CCP) Unit as soon as they are closed so
that quality review samples can be readily available for selection. CCP
has 21 days to obtain the closed case files for review. In a report
provided by quality review staff, for the first quarter of fiscal year
2007, CCP was able to obtain only 45 percent of the cases requested for
review within the 21-day period. Since collection realizes that CCP will
not be able to obtain all of the case files requested, the number of case
files requested is double the number needed to allow for cases that cannot
be located.

According to Collection officials in one field office, there are several
reasons case files are not sent to CCP in a timely manner. For example,
for Revenue Officers, sending a case file to CCP is not a top priority,
especially when their other priorities include active aged cases.14 Aged
cases take priority because the older the case is, the less likely IRS is
to recover the amounts owed. In addition, some Revenue Officers are
reluctant to let their cases leave their office. We were also informed by
these officials that the number of support staff who assist in sending the
case files to CCP has been reduced, and in one instance case files were
found in a secretary's desk drawer.

Congressional Oversight May Be Hindered

In two recent GAO audits, we asked IRS to pull random samples of paper
case files, but IRS was unable to locate all of the case files requested.
The portion of case files IRS could not locate ranged from about 10 to 14
percent. For example, in one audit, we requested examination case files
from NRP, but IRS was unable to locate about 10 percent of the case files
requested.15 NRP staff were notified that 61 of the case files we
requested had been sent to them, but NRP officials said they never
received these case files. In a second audit, we requested Collection Due
Process (CDP)16 case files where the collection action had been appealed.
IRS was unable to locate about 14 percent of these case files.17 According
to IRS staff that assisted us with these requests, they had made several
requests to obtain these case files, but IRS was still unable to locate
them.

14IRS tracks the amount of time a case is in its inventory using aging
reports. For example, IRS tracks taxpayer delinquency investigation cases
that have been in its inventory less than 6 months as well as those that
have been in its inventory for 16 months or more.

15We are 95 percent confident that the actual proportion is between 6.2
percent and 16.2 percent.

16CDP cases are cases where Appeals performs an independent review of a
proposed levy (seizure of a taxpayer's assets to satisfy a tax
delinquency) or lien (legal claim filed in accordance with state property
law that attaches to property to secure payment of a debt).

TIGTA has also requested random samples of paper case files in some of its
reviews where IRS was unable to provide all of the case files requested.
In one TIGTA review, TIGTA was to determine whether IRS had an adequate
system to ensure tax records could be located and received timely.
According to TIGTA, these records included the following types of case
files: individual and business examination cases, Earned Income Tax Credit
adjustments, and Trust Fund Recovery Penalty (TFRP) cases.18 IRS was
unable to provide about 19 percent of the case files requested by TIGTA.
In the review, TIGTA recommended that IRS:

           o Ensure the quality and timeliness of the IRS Records Management
           Program by developing a method to track specific requests for tax
           records that will assign accountability, respond to customer
           problems, and provide management information for the program.
           According to IRS, it is in the process of modifying IDRS by adding
           a tracking feature, which will allow IRS to better track requests
           and provide improved service to requesters. IRS anticipates these
           modifications will be completed by January 2008.

           o Update procedures to include instructions for requesting
           workpapers for TFRP assessments, including guidance for
           determining to which local field office a request should be sent.
           According to IRS, it has finalized procedures that address the
           retrieval of workpapers for TFRP assessments. In addition, IRS has
           developed online training for Information Resource Coordinators
           (IRC)19 and interactive records management process guides that are
           available to all IRS employees.

           o Ensure the quality and timeliness of the IRS Records Management
           Program by developing a method to track specific requests for
           workpapers for TFRP assessments that will assign accountability,
           respond to customer problems, and provide management information
           for the program. According to IRS, it modified the Automated Trust
           Fund Recovery System to provide a standardized procedure for
           locating, retrieving, and controlling TFRP workpapers.

17We are 95 percent confident that the actual proportion is between 10.9
percent and 18.5 percent.

18A TFRP is a penalty assessed against any person determined responsible
in a business operation for nonpayment of employment taxes that were
withheld from employees' wages or salaries.

19IRCs monitor filing operations in their local offices.

In another TIGTA review,20 TIGTA was to determine whether IRS complied
with the legal guidelines and procedures for the filing of a notice of
lien or a notice of intent to levy and the right of the taxpayer to
appeal. However, TIGTA could not determine whether IRS complied with legal
guidelines and required procedures because about 8 percent of the case
files requested could not be located.

Lacking Data, IRS Cannot Assess Case Management Performance and Develop Plans
for Improvement

IRS has not developed the data needed to measure the performance of its
case file processes, such as whether all of the paper case files it
requests are located or received timely. Developing such data can assist
IRS in determining how well it is complying with FRA and internal control
requirements, where the process may be breaking down, and what process
improvements to make.

IRS Does Not Track Whether Case Files Are Located or Received Timely

IRS staff request paper case files from IRS campuses and field offices and
from FRCs. According to an IRS official, the manner in which case files
are requested varies in each program. A filing coordinator told us that
when a paper case file such as an examination case file with a Document
Locator Number (DLN)21 has been closed and sent to the files area of a
campus for storage and is later requested, the requester enters
information about the case file such as the DLN into IDRS. This generates
a form which the files area receives and uses to locate the case file. The
coordinator also said that when the files area receives the form, files
staff will either search for the case file in the files area or request it
from the FRC if it has been sent for long-term storage.

20Treasury Inspector General for Tax Administration, The Office of Appeals
Should Continue to Strengthen and Reinforce Procedures for Collection Due
Process Cases, TIGTA 2006-10-123 (Washington, D.C.: September 2006).

21A DLN is a number assigned to a document which is used to identify and
locate it.

In contrast, we were told by an Area Records Manager (ARM), when a paper
case file such as a collection case file that does not contain a DLN has
been closed and sent directly to the FRC is later requested, a form is
sent to the ARM which includes the FRC accession number, box number, and
location of the case file which is needed by the FRC to locate the record.
According to AWSS and W&I officials, regardless of the method used to
request the case file, IRS does not track data on whether all of the case
files it requests are located or how long it takes to retrieve them.
Furthermore, these officials added that IRS does not track the reasons
case files cannot be located. When case files are requested by IRS staff,
errors can occur in the process of requesting, locating, and sending case
files as suggested by IRS officials in figure 2.

Figure 2: Errors That Can Occur in the Process of Requesting, Locating,
and Sending Paper Case Files

Although campuses use forms that identify some reasons case files cannot
be located, campuses do not track these reasons according to an IRS
official. IRS has hired contractors to take over the responsibility of the
files areas. Contractors are performing files activities at two campuses
and will take over responsibility for the remaining five campuses between
August and October 2007. The contractors are required to adhere to a
Performance Work Statement (PWS) which lists the contractor's duties, as
well as IRM policies and procedures that are specified in the PWS.
However, neither the PWS nor the IRM require that staff track the reasons
paper case files cannot be located. Therefore, the contractors are not
performing these tasks.

In the three previously mentioned GAO audits, we asked IRS staff who
requested our case files why the case files could not be located. IRS
staff said they requested the case files from many campuses. However,
there was no one in charge of the requests to track the progress of our
file requests and provide specific reasons why the case files could not be
located. For example, the ARMs act as liaisons with the FRCs and IRS
Business Units and can assist staff in tracking and locating case files
from the FRC. However, some staff who requested our case files did not
request assistance from their ARM either because the ARM did not handle
the case files sent to the FRC and left that up to the campus
coordinators, or the staff who requested the case files said they were not
aware they had ARMs. In addition, campus coordinators can assist in
tracking and locating case files. However, one campus coordinator told us
that many IRS staff may not know who their campus coordinators are.

As mentioned previously, IRS staff told us that no one was in charge of
our case file requests to provide information on the reasons the case
files could not be located. This lack of clear responsibility differs from
the way IRS manages document requests during our annual audit of IRS's
financial statements. According to an IRS official, IRS uses many
designated coordinators and holds meetings to ensure that documents
requested for the financial statement audit are received. If IRS had
established clearer responsibility for coordinating and tracking our case
file requests, such as it did to manage document requests during our
financial statement audit, it might have located more of the case files we
requested.

IRS staff told us that when case files cannot be located, either the files
area or FRC should annotate the request form to show the reason the case
could not be located. In our Appeals audit, an Appeals official said the
person who had requested the case files had retired so they could not
provide a reason why the case files could not be located. For the other
two audits, IRS did not always provide the reasons the case files could
not be located. In some of our cases IRS staff said:

           o No form was provided to identify why the case file could not be
           located.

           o A form was provided but it was not annotated as to why the case
           file could not be located.

           o An IDRS Transaction Record was received which does not include
           reasons why files are not found.

According to a files coordinator, when an examination of a tax return is
performed and an assessment is made, an IDRS Transaction Record is
generated, which is a printout of the transaction. The files area should
receive the transaction record, associate it with the case file, and then
file them together in the files area according to their DLN. However, if
the case file is not received, the Transaction Record is placed in the
file by itself with no indication that the case file was not received.
Therefore, when the files area later tries to fill a request for that case
file, the files area does not know why the case file is not there. The
case file may not be there because it was not received or was misfiled. If
documentation were placed with the Transaction Record indicating the case
file was not received, the files area could provide that information to
the requester.

TIGTA experienced similar problems during one of its reviews mentioned
previously.22 TIGTA requested a statistical sample of tax records which
included about 1,000 case files, of which about 190 were not provided. In
64 percent of the cases that were not provided, IRS did not provide a form
to identify why the case file could not be located. In 5 percent of the
cases, IRS provided an incomplete response. In 26 percent of the cases,
the case files were not found because the information in the request did
not match the information in the files area of the campus or at the FRC.
In 5 percent of the cases, IRS provided the wrong case file.

Performance Information Could Assist IRS in Determining How Well Its Case File
Management Process Complies with FRA and Internal Control Requirements

IRS could use performance information to assess whether its agencywide
case file management meets FRA and internal control standards requiring an
economic and efficient management of records and that files be readily
available for examination. Managers can use performance information to
identify problems in existing programs, to try to identify the causes of
problems, and/or to develop corrective actions.

An important part of establishing performance measures is to identify
which programs are to be measured (e.g., determining which IRS programs
create a significant number of paper case files since some programs
primarily create automated case files) and which aspects of program
performance are the most important to measure (e.g., tracking the reasons
paper case files cannot be located). Data collected for performance
measures should be complete, accurate, and consistent enough to document
performance and support decision making.23

22TIGTA 2004-10-186.

The offices that have responsibility for making programs work should be
responsible for developing performance measures. A clear connection
between performance measures and program offices helps to both reinforce
accountability and ensure that, in their day-to-day activities, managers
keep in mind the outcomes their organization is striving to achieve.

According to an AWSS official, AWSS has overall responsibility for the
Records Management Program, but its focus is on record retention and
coordination with FRCs, while case file management is left to the program
managers. AWSS has developed some performance measures which have been
recently instituted, such as cycle time and the number of records that
could not be located at the FRC. However, AWSS is unable to separately
track paper case file results.

According to the same official, program managers have day-to-day
responsibility for case file management within their programs. However,
program managers such as those in W&I have said they have not developed
performance information to measure how well the programs are managing
their case files. When we asked program managers who had overall
responsibility for case file management across IRS's compliance programs,
the program managers said they did not know. Without overall
responsibility for case file management being clearly defined, IRS may not
be able to develop performance information across all of its programs to
determine how well paper case files are managed to achieve performance
targets and whether its case file management processes are in accordance
with FRA and internal control standards.

23GAO, Executive Guide: Effectively Implementing the Government
Performance and Results Act, [29]GAO/GGD-96-118 (Washington, D.C.: June
1996).

IRS Cannot Determine Whether Actions for Improvement Are Needed

IRS has options available that may improve the management of case files.
However, IRS does not have data to determine which of the improvements are
the most cost effective for IRS. Improving case file management may result
in additional costs to IRS once the agency determines which actions to
take. Improvements may also result in cost savings by reducing the amount
of resources used to locate case files when multiple requests are made or
case files need to be re-created.

Improvements to case file management could include additional training and
guidance. For example, IRS could provide training to IRS staff on
providing the correct DLN when requesting paper case files. In addition,
IRS could provide additional guidance to files coordinators on managing
case files as contractors take over responsibility for the campus file
areas.

Another option for IRS could be to expand one of its closed case file
tracking systems to track more case files and more complete information
about their location. IRS managers have said that the agency does not have
one centralized system to track paper case files. Instead, IRS uses many
systems in its enforcement process to track open case files. However,
these systems generally do not contain information on the location of case
files at the FRC once they are sent there. Instead, this information is
maintained manually throughout IRS. This can make it difficult to quickly
locate files. For example, according to an IRS official, when Revenue
Agents need a case file from outside their office, they have to determine
the state and office the case was worked in and the year it was closed.
Once they have identified this information, they have to go through that
office to locate the FRC paperwork including the accession number, box
number, and location. This information is needed to request the case file
from the FRC. IRS does not know whether staff, such as Revenue Agents, are
having difficulty obtaining paper case files when they use this process to
locate them.

To automate the location of paper case files sent to the FRC, SB/SE
Collection officials said they enter FRC information along with other case
information into its Junior system. Junior has been designed as a case
processing, closed files inventory tracking system for cases that are
being sent to the FRC. While IRS officials told us this system has
improved IRS's ability to locate paper case files, they provided no data
to support this conclusion. In addition, the Junior system is only used by
SB/SE Collection for specific types of cases (taxpayer delinquency
investigations, taxpayer delinquency accounts, and installment
agreements24). However, an AWSS official suggested that use of Junior by
other programs and operating divisions could improve locating closed paper
case files.

Using other technologies is another option IRS could consider to assist it
in capturing real-time information on the location of paper case files.
For example, field and headquarters officials from the Department of
Veterans Affairs (VA) provided the following description of how it uses
barcoding to track its benefit folders through its Control of Veterans
Records System (COVERS). The Veterans Benefits Administration tracks its
benefit folders by placing a barcode on each folder. Employees in the
benefit office use a barcode scanner and printer. As the folders are
moved, they are scanned and the location is automatically changed in VA's
record tracking system. VA's tracking system includes information on the
claim number, veteran's name, and the current and previous locations of
the case. The system not only tracks the location of benefit folders; it
also assists in the management of these folders throughout the claims
processing cycle. For example, reports can be run, such as aging reports
which show how long a VA staff member has had a case. The VA officials
also described the following benefits realized in barcoding benefit
folders although they have no data to support this conclusion. Benefits of
barcoding include the ability to scan the location of a benefit folder
into their tracking system instead of entering it manually, which saves
time and provides improved folder tracking accuracy. COVERS has also
improved the files management activity in two additional ways: first,
folder retirement was transformed from the previous manual IBM card-based
process to the current automated process; second, the sequence checking of
files in cabinets has been expedited while improving accuracy.

An IRS Appeals official told us that Business Units receive listings of
cases docketed for Tax Court and it is their responsibility to review the
listings and send any docketed cases directly to Appeals. If the Business
Units do not send the case files to Appeals and send them to storage areas
instead (e.g., Files Area), this can result in long delays in receiving
case files and potential Tax Court losses. According to Appeals officials,
Appeals and W&I are tracking the number of days Appeals is waiting for
docketed cases. This is a good first step in tracking whether case files
are received timely. However, an IRS official said that IRS overall does
not track the timeliness of case file receipt. Therefore, IRS lacks
information that would be useful in determining whether implementing a
barcoding system to capture real-time information on the location of case
files would be beneficial.

24Installment agreements allow taxpayers to pay their tax liabilities over
a period of time.

Conclusions

IRS does not have an effective process to ensure that paper case files can
be located and made readily available for examination. Further, IRS has
acknowledged its historic difficulties in locating and retrieving case
files. IRS has lost revenue when it could not locate cases for District
Court. IRS also could not provide a significant percentage of the cases
requested in GAO and TIGTA audits. Failure to locate case files can create
unnecessary taxpayer burden and make case files unavailable for other
units in performing their tasks.

IRS has not developed performance measures or the data needed to measure
the performance of its case file processes, such as whether all of the
paper case files it requests are located or received timely. Instituting
and monitoring performance measures across all of IRS's compliance
programs could assist the agency in (1) determining how well IRS is
complying with FRA and internal control requirements, (2) identifying
problems and the causes in existing programs, and/or (3) developing
corrective actions. To improve IRS's paper case file processes, the agency
may incur additional costs once the agency determines which improvements
it will make. However, the agency may also realize cost savings by
reducing the amount of resources used to locate case files when multiple
requests are made or case files need to be re-created. Developing
performance measures may take IRS some time. However, IRS has some
opportunities to improve case file management that can be performed more
expeditiously, such as improving the coordination of large samples of case
files, providing information to staff on who to contact when case files
cannot be located, and ensuring case files are sent to storage areas as
soon as they are closed.

Recommendations for Executive Action

We are making recommendations to the Acting Commissioner of Internal
Revenue to ensure that paper case files are readily available for
examination. Specifically, we recommend that the Acting Commissioner:

           o Ensure that case files are managed in accordance with FRA and
           internal control standards, including:

                        o tracking the number of paper case files that cannot
                        be located or are received untimely and the reasons
                        why and
                        o developing performance measures to monitor the
                        effectiveness of the paper case file process to
                        assist in determining which options for improving
                        paper case file management are the most beneficial
                        for IRS.

           o Ensure that case file performance is monitored across IRS's
           compliance programs by clearly defining responsibility for doing
           so.

           o Establish clearer responsibility for coordinating large samples
           of case files to provide specific reasons why case files cannot be
           located.

           o Reiterate to staff who the campus coordinators and Area Records
           Managers are for requesting paper case files.

           o Ensure that paper case files are sent to storage areas as soon
           as the cases are closed; include with the IDRS Transaction Record
           documentation that indicates whether a case file was sent to
           storage; and track the number and location of paper case files
           that have not been sent to storage.

Agency Comments

The Acting Commissioner of Internal Revenue provided written comments on a
draft of this report in a September 18, 2007, letter, which is reprinted
in appendix II. The Acting Commissioner agreed that staff often need paper
case files to fulfill mission-critical requirements and that the failure
to locate specific case files can affect tax administration and customer
service.

The Acting Commissioner agreed that IRS needs to review its Records
Management Program. However, instead of commenting on our specific
recommendations, the Acting Commissioner stated that IRS will form a
cross-functional working group to review the Records Management Program
and develop corrective action, taking into account our recommendations.
The Acting Commissioner also described some systemic enhancements
undertaken by W&I to facilitate requests for tax returns and associated
records.

IRS's planned review and development of corrective actions is responsive
to our recommendations, and we look forward to its consideration of our
recommendations in this review as well as to the benefits to taxpayers and
IRS of a more effective program.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies of this report to appropriate
congressional committees and the Acting Commissioner of Internal Revenue.
We also will make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staff have any questions concerning this report, please
contact me at (202) 512-9110 or at [email protected]. Contact points for
our Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix III.

Michael Brostek
Director, Tax Issues
Strategic Issues Team

Appendix I: Objectives, Scope, and Methodology

The objectives of this assignment were to review the Internal Revenue
Service's (IRS) case file storage, tracking, and documentation process to
determine whether IRS has (1) an effective process to ensure that paper
case files can be located timely and (2) sufficient data to assess the
performance of its paper case file processes.

To make determinations in both areas, we interviewed over 50 program
executives, managers, and staff from the Office of Agency-Wide Shared
Services, the Small Business/Self-Employed Division, the Wage and
Investment Division, the Office of Appeals, the Automated Collection
System (ACS), and the National Research Program (NRP) to gain an
understanding of the case file storage, tracking, and documentation
process. We also visited one campus and one field office to gain an
understanding of the processes they use to store, track, and document case
files. We observed and inquired into the internal controls used by IRS in
these processes. We did not interview officials from the Large and
Mid-Size Business Division or the Tax-Exempt and Government Entities
Division since only a very small percentage of Appeals' cases that are
docketed for Tax Court where paper case files are very important originate
from these divisions. We also reviewed IRS's policies and procedures.

To determine whether IRS has an effective process to ensure that paper
case files can be located timely, we compared IRS's process to the
requirements of the Federal Records Act and our standards for internal
control in the federal government. We interviewed officials from Appeals,
ACS, and NRP to identify the reasons IRS was unable to locate all of the
case files we requested. We also spoke to Treasury Inspector General for
Tax Administration (TIGTA) officials and reviewed prior TIGTA reports to
determine whether IRS was able to provide all case files requested by
TIGTA. Further, we interviewed officials from other organizations to
identify key practices in managing case files. These organizations
included the Department of Education, the Department of Veterans Affairs,
the Social Security Administration, and the California Franchise Tax
Board.

We conducted our work in Washington, D.C., and one campus and field office
from August 2006 through July 2007 in accordance with generally accepted
government auditing standards.

Appendix II: Comments from the Internal Revenue Service

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Michael Brostek, (202) 512-9110 or [email protected]

Acknowledgments

In addition to the contact person named above, Jonda Van Pelt, Assistant
Director; Carl Barden; Wilfred Holloway; Laurie King; Donna Miller; Cheryl
Peterson; and Sam Scrutchins made key contributions to this report.

(450504)

To view the full product, including the scope
and methodology, click on [30]GAO-07-1160 .

For more information, contact Michael Brostek at (202) 512-9110 or
[email protected].

Highlights of [31]GAO-07-1160 , a report to the Committee on Finance, U.S.
Senate

September 2007

TAX ADMINISTRATION

The Internal Revenue Service Can Improve Its Management of Paper Case
Files

Proper paper case file management is a significant issue for the Internal
Revenue Service (IRS) because its staff investigate and close millions of
case files every year. In addition, IRS employees depend heavily on case
files when pursuing enforcement actions.

GAO was asked to review IRS's case file storage, tracking, and
documentation processes to determine whether IRS has (1) an effective
process to ensure that paper case files can be located timely and (2)
sufficient data to assess the performance of its paper case file
processes. To review these processes, GAO interviewed staff who request
case files and case file managers.

[32]What GAO Recommends

GAO recommends that IRS (1) ensure that paper case files are managed in
accordance with Federal Records Act (FRA) and internal control standards,
including tracking the number of files that cannot be located or are
received untimely and the reasons why, and developing performance measures
to determine if improvements are needed and (2) ensure that case file
performance is monitored across IRS's compliance programs. GAO also makes
other recommendations to improve the case file management process. IRS
agreed it needs to review its program and will form a cross-functional
group to identify improvements and consider GAO's recommendations. This
proposed action is responsive to GAO's recommendations.

IRS does not have an effective process to ensure that paper case files can
be located within the requesters' time frames. Missing case files can
result in lost revenue, create unnecessary taxpayer burden, and make case
files unavailable for other units such as quality review groups or
advisory groups. IRS has acknowledged its historic difficulties in
locating and retrieving case files. When IRS cannot locate paper case
files, it may attempt to re-create them by requesting information from
taxpayers, which can result in unnecessary taxpayer burden. Difficulties
in locating case files can also hinder congressional oversight. When GAO
requested case files in two prior audits, IRS could not locate all of the
case files requested.

IRS does not have sufficient data to assess the performance of its paper
case file management processes. Having such data would enable IRS to
assess whether its case management processes are in accordance with FRA
and internal control standards. IRS does not track whether all of the case
files it requests are located or received timely, or the reasons why case
files cannot be located. If IRS developed this type of data, officials
could use this data to identify problems in existing programs, to try to
identify the causes of problems, and/or to develop corrective actions.
Records management officials have recently instituted some performance
measures, but these measures do not specifically address paper case files.
IRS program managers also have not developed performance measures or data
to determine how well paper case files are managed to achieve performance
targets. Program managers do not know who has overall responsibility for
case file management so performance information cannot be developed across
IRS's compliance programs. GAO identified some potential improvements that
IRS can consider, but IRS will need to determine which improvements are
the most cost effective.

Errors That Can Occur in the Process of Requesting, Locating, and Sending
Paper Case Files

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References

Visible links
  25. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-06-603
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-112
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-396
  29. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-96-118
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1160
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1160
  33. http://www.gao.gov/
  34. http://www.gao.gov/
  35. http://www.gao.gov/fraudnet/fraudnet.htm
  36. mailto:[email protected]
  37. mailto:[email protected]
  38. mailto:[email protected]
*** End of document. ***