IRS Records: Inconsistencies Between Statutes Affects Records Appraisal
(Letter Report, 10/02/97, GAO/GGD-98-4).

Pursuant to a congressional request, GAO evaluated the Internal Revenue
Service's (IRS) records management program, focusing on how IRS: (1)
applies the restrictions of U.S. Code, title 26, section 6103, in
reviewing and inventorying its records; and (2) carries out its records
management responsibilities.

GAO noted that: (1)the National Archives and Records Administration's
(NARA) 1995 review of IRS' records program found that IRS had managed
its overall records program according to NARA requirements, except for
certain issues; (2) NARA found that certain management and policy
documents, many of which IRS maintained were subject to the disclosure
restrictions of section 6103, were not inventoried or scheduled for
disposition as required, and that some documents were stored in
unsatisfactory conditions; (3) NARA's review highlighted issues
associated with its inability to appraise certain IRS records for
historical value because of IRS' interpretation of section 6103
restrictions; (4) GAO's review confirmed that these problems existed,
but identified progress being made by IRS, and confirmed that the
controversy related to NARA's access remains unresolved; (5) certain IRS
management that documented policymaking and high-profile programs and
actions were not reviewed by NARA because IRS maintained that the
documents potentially contained taxpayer-protected data; (6) NARA and
IRS subsequently worked out a test method for appraising some of these
management records; (7) IRS and NARA engaged in a "blind" review of the
6103-protected records, whereby an IRS official described the records'
contents to the NARA records appraiser who decided on the basis of this
description whether the records had historical value; (8) the
nonprotected records were made available to NARA for appraisal; (9) GAO
observed that 59 percent of the records were designated as historical
and containing tax returns or return information, 36 percent were
designated as historical and containing no tax return information, and 5
percent were designated as nonhistorical and could be destroyed after
the applicable period; (10) at the time of NARA's and GAO's reviews, a
substantial backlog of uninventoried records has accumulated at IRS;
(11) in four of the six headquarters storage locations GAO observed in
early 1996 , records were stored in no particular order and under poor
conditions; (12) according to NARA, some of the records stored at IRS
headquarters could have been less expensively stored at a federal
records center; (13) early in 1996, IRS escalated its efforts to improve
its records management program with NARA's assistance; (14) as of May
1997, IRS' last official reporting date, NARA said that IRS had
completed action on 47 of NARA's 58 recommendations to improve records
management and was making progress on the other recommendations; and
(15) the two agencies agreed that less progress had been made on
resolving NARA's access for appraisal purposes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-98-4
     TITLE:  IRS Records: Inconsistencies Between Statutes Affects 
             Records Appraisal
      DATE:  10/02/97
   SUBJECT:  Interagency relations
             Archives
             Federal records management
             Statutory law
             Records disposition
             Tax information confidentiality
             Information disclosure

             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

October 1997

IRS RECORDS - INCONSISTENCIES
BETWEEN STATUTES AFFECT RECORDS
APPRAISAL

GAO/GGD-98-4

IRS Records

(268726)


Abbreviations
=============================================================== ABBREV

  FRA - Federal Records Act
  FRC - Federal Records Center
  IRS - Internal Revenue Service
  NARA - National Archives and Records Administration
  OLC - Office of Legal Counsel

Letter
=============================================================== LETTER


B-271700

October 2, 1997

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

The Honorable Nancy L.  Johnson
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

At any given time, the Internal Revenue Service (IRS) maintains
millions of cubic feet of federal records.  These records include
documentation of agency policies and decisions, agency operations,
and individual and corporate tax returns.  IRS records containing tax
returns and return information are protected from disclosure to any
unauthorized person by 26 U.S.C.  6103 of the Internal Revenue Code. 

The Federal Records Act (FRA)\1 requires IRS to prepare disposition
schedules for its records and to submit the schedules to the National
Archives and Records Administration (NARA) for approval.  NARA
appraises federal records for their historical value, provides
assistance to agencies in carrying out their records management and
disposition responsibilities, oversees agency records management
programs, and promulgates and administers regulations dealing with
federal records.  This report responds to your request that we
evaluate certain aspects of IRS' records management program. 
Specifically, you asked us to (1) determine how IRS applies the
restrictions of section 6103 in reviewing and inventorying its
records and (2) evaluate how IRS carries out its records management
responsibilities.  Your request was precipitated by the long-standing
issues surrounding NARA's access to IRS records for appraisal
purposes, the former IRS historian's allegations concerning IRS'
records management program, and a 1995 NARA evaluation of IRS'
records management program.\2 Because the NARA evaluation of IRS'
overall records management program was released just before the start
of our work in early 1996, we focused on the issues NARA found to be
most troublesome.  These issues also corresponded with your concerns. 

The following terms, as defined in a NARA glossary\3 and the Internal
Revenue Code, are used throughout this report: 

  -- Appraise refers to the determination of records' value and their
     final disposition. 

  -- Disposition refers to the actions taken regarding records that
     are no longer needed for current government business.  These
     actions include the transfer to agency storage facilities or
     Federal Records Centers (FRC), transfer from one federal agency
     to another, transfer of permanent records to NARA, and disposal
     of temporary records. 

  -- Inventory refers to a survey of agency records and nonrecord
     materials that is conducted primarily to develop records
     schedules and also to identify various records management
     problems. 

  -- Schedule refers to a document that provides mandatory
     instructions for what to do with records and nonrecord materials
     no longer needed for current government business. 

  -- Tax return refers to any tax or information return, declaration
     of estimated taxes, or claim for refund that is filed with IRS
     by, on behalf of, or with respect to any person.  This term also
     includes any amendment or supplement to such document, including
     supporting schedules, attachments, or lists that are
     supplemental to, or part of, the filed return. 

  -- Return information means the taxpayer's identity; the nature,
     source, or amount of his or her income, payments, receipts,
     deductions, exemptions, credits, assets, liabilities, net worth,
     tax liability, tax withheld, deficiencies, overassessments, or
     tax payments; whether the taxpayer's return was, is being, or
     will be examined or subject to other investigation or
     processing; or any other data received, recorded, prepared, and
     collected by or furnished to the Secretary of the Treasury with
     respect to a return or to the determination of the existence, or
     possible existence, of liability (or the amount thereof) of any
     person for any tax, penalty, interest, fine, forfeiture, or any
     other imposition or offense.  This term does not include data in
     a form that cannot be associated with, or otherwise directly or
     indirectly identify, a particular taxpayer. 


--------------------
\1 44 U.S.C.  Chapters 21, 29, 31, and 33. 

\2 A NARA Evaluation:  Records Management in the Internal Revenue
Service, Department of the Treasury, December 14, 1995. 

\3 A Federal Records Management Glossary, NARA, 1993, Second Edition. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

NARA's 1995 review of IRS' records management program found that IRS
had managed its overall records program according to NARA
requirements, except for certain issues.  Specifically, NARA found
that certain management and policy documents, many of which IRS
maintained were subject to the disclosure restrictions of section
6103, were not inventoried or scheduled for disposition as required,
and that some documents were stored in unsatisfactory conditions. 
NARA's review highlighted issues associated with its inability to
appraise certain IRS records for historical value because of IRS'
interpretation of restrictions contained in section 6103.  Our review
confirmed that these records management problems existed but also
identified progress being made by IRS in resolving deficiencies in
its records management program.  We also confirmed that the
controversy related to NARA's access for appraisal purposes to
records containing tax returns or return information remains
unresolved. 

At the time of NARA's review, certain IRS management records that
documented policymaking and high-profile programs and actions by
former commissioners and other top executives were not reviewed by
NARA because IRS maintained that the documents potentially contained
taxpayer-protected data and, historically, the two agencies could not
work out a mutually agreeable process for reviewing records given
section 6103 restrictions on access to records containing tax returns
or return information. 

NARA and IRS subsequently worked out a test method for appraising
some of these management records.  For the records of former IRS
commissioners and the former executive secretariat, IRS grouped
records into section 6103-protected and section 6103-nonprotected
records.  IRS and NARA engaged in a "blind" review of the
6103-protected records, whereby an IRS official described the
records' contents to the NARA records appraiser who decided on the
basis of this description whether the records had historical value.\4
The nonprotected records were made available to NARA for appraisal. 
After the review, IRS prepared a records control schedule for the
records.  We reviewed this schedule to ascertain the volume of
protected and nonprotected records on that schedule.  We observed
that 59 percent of the records were designated as historical and
containing tax returns or return information, 36 percent were
designated as historical and containing no tax return information,
and 5 percent were designated as nonhistorical and could be destroyed
after the applicable period. 

At the time of NARA's and our reviews, a substantial backlog of
uninventoried records had accumulated at IRS.  Also, in four of the
six headquarters storage locations we observed in early 1996, records
were stored in no particular order and under poor conditions. 
According to NARA, some of the records stored at IRS headquarters
could have been less expensively stored at an FRC. 

IRS acknowledged its records management problems.  Early in 1996, IRS
escalated its efforts to improve its records management program with
NARA's assistance.  As of May 1997, IRS' last official reporting
date, NARA said that IRS had completed action on 47 of NARA's 58
recommendations to improve records management and was making progress
on the other recommendations.  The two agencies agreed that less
progress had been made on resolving NARA's access for appraisal
purposes to records containing tax return information.  NARA is still
precluded from doing independent reviews of IRS records that possibly
contain tax returns or return information.  According to NARA, this
lack of access did not hinder its ability to make an overall
evaluation of IRS' records management program, but did preclude it
from independently appraising IRS records to determine their
historical value. 


--------------------
\4 According to NARA officials, this blind method of reviewing
records only worked for these particular records because the
historical value of the records was apparent and easily determined. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The law protecting taxpayers' rights to privacy--codified in 26
U.S.C.  6103--is a critical underpinning of our voluntary tax system. 
Under this law, access to tax returns or return information is
limited to certain federal employees working on tax issues and
certain other authorized persons.  Such information is not to be
released to the public or to other unauthorized government officials. 
Congress considered these protections, which are enforced by civil
and criminal penalties, necessary to encourage taxpayers to
voluntarily file accurate information about their taxes and to
prevent inappropriate use of tax returns or return information. 

Government records management and retention laws have a different
purpose.  FRA requires agencies to "make and preserve records
containing adequate and proper documentation of the organization,
functions, policies, decisions, procedures, and essential
transactions of the
agency .  .  .  ." The objectives of records management include the
maintenance of accurate and complete documentation of the policies
and transactions of the federal government, the establishment and
maintenance of control mechanisms to prevent the unnecessary creation
of records, and judicious preservation and disposal of records. 


      STATUTORY INCONSISTENCIES
---------------------------------------------------------- Letter :2.1

Both NARA and IRS agree that there are inconsistencies between the
access restrictions of section 6103 and the provisions of FRA that
require NARA to appraise federal records.  The legislative history of
the National Archives and Records Administration Act of 1984, while
acknowledging the conflict, does not resolve it.  In 1984, the
Department of the Treasury (Treasury) determined that certain
provisions of the draft legislation\5 to make NARA an independent
agency would allow NARA to review management records that might
contain tax returns or return information.  Treasury expressed
opposition to any overriding of the access restrictions of section
6103, stating that it would endanger taxpayer compliance if NARA were
given access to tax returns that were filed with the expectation of
confidentiality.  Accordingly, the Senate bill was amended to provide
that, notwithstanding any provision of the act, no tax returns or
return information as defined in section 6103 may be disclosed,
except as authorized by that title.  The conference report\6 stated
that the concern for the confidentiality of tax returns and return
information was a legitimate issue that deserved consideration as a
separate matter.  The report also noted that the conferees were
sensitive to the need to protect (1) the confidentiality of tax
returns and return information while also protecting the permanent
historical records of our government's actions and (2) the public's
right to know about those actions at some future time.  Consequently,
the conferees urged NARA, IRS, and other affected agencies to devise
a cooperative means to address the issue. 

The inconsistencies between the laws have resulted in a number of
controversies.  For example, the Department of Justice's Office of
Legal Counsel (OLC), which provides advice to resolve inconsistencies
that arise within the executive branch from differing interpretations
of federal statutes, has issued at least three memorandums addressing
the section 6103 issue and the transfer of records containing tax
returns or return information to NARA.\7

OLC concluded in 1986--its most recent memorandum--that the statutory
provisions generally empowering NARA to obtain and open 30-year-old
records that are subject to statutory restrictions in 44 U.S.C.  2107
and 2108 do not apply to tax returns and return information, which
are strictly protected by section 6103.  Title 44 U.S.C.  2107(2)
provides that when it appears to the Archivist to be in the public
interest, he may direct the transfer to the National Archives federal
agency records that (1) have been in existence for more than 30 years
and (2) have been determined by the Archivist to have sufficient
historical value to warrant their continued preservation.  Title 44
U.S.C.  2108 in turn provides that the Archivist is responsible for
the custody, use, and withdrawal of records transferred to him, and
that such records are subject to the same statutory limitations and
restrictions with respect to their examination and use as were
applicable to the agency from which the records were transferred. 
Section 2108 provides further that statutory and other restrictions
shall remain in force until the records have been in existence for 30
years, unless the Archivist, by order, having consulted with the head
of the transferring agency, determines that for reasons consistent
with standards established in relevant statutory laws, such
restrictions shall remain in force for a longer period. 

Referring to its two previous memorandums, OLC advised that section
6103 and its legislative history indicated that such tax records are
not to be transferred to NARA.  OLC reasoned that the legislative
history of section 6103 made it clear that Congress intended no
disclosure of tax returns or return information, except in the
carefully limited exceptions found in section 6103. 

Recent concerns raised about IRS' records management program, as well
as allegations that IRS was using the access restrictions of section
6103 to avoid making public records that could be embarrassing to the
agency, led Congress to reopen this access issue last year.  The
conference report accompanying IRS' 1997 budget directed the two
agencies to submit a report to the cognizant committees by March 1,
1997.  The report was to include an analysis of outstanding issues
and recommendations as to how the disposition of certain IRS records
should proceed.  NARA and IRS submitted a report on March 17, 1997;
however, because of a pending lawsuit\8 the agencies did not provide
specific recommendations in their report.  The two agencies remained
unable to reach agreement on the long-standing issue of access.  In
an attempt to end the long-standing access to IRS records issue,
identical bills were introduced in both the Senate and the House of
Representatives in July 1997 as part of the congressional effort to
restructure IRS.  Both bills provide the Archivist of the United
States access to "all records of the Internal Revenue Service for
purposes of scheduling such records for destruction or for retention
in the National Archives."


--------------------
\5 S.  905, 98th Cong., section 2105 (1983). 

\6 H.R.  Conf.  Rep.  No.  98-1124, at 30 (1984). 

\7 See U.S.  Department of Justice Legal Counsel Memos:  (1)
"Transfer of Watergate Special Prosecution Force Records to the
National Archives-Income Tax Information-26 U.S.C.  6103(a)" (Sept. 
27, 1977); (2) "Applicability of the Non-disclosure Provisions of the
Tax Reform Act" (Nov.  7, 1980); and (3) "Authority of the FBI to
Transfer Restricted Records to the National Archives and Records
Administration" (Feb.  27, 1986). 

\8 Tax Analysts, et.  al., v.  IRS and NARA, United States District
Court for the District of Columbia (Feb.  7, 1997).  The four
plaintiffs in the lawsuit alleged that IRS had violated the FRA and
NARA regulations.  Among other things, they argued that IRS had not
scheduled many of its records, had not maintained an up-to-date
records management program, and had denied NARA access to its records
as provided by law.  The plaintiffs further alleged that NARA had
failed to take action to compel IRS compliance with the FRA and NARA
regulations. 


      FEDERAL RECORDS MANAGEMENT
      PROGRAMS
---------------------------------------------------------- Letter :2.2

Title 44 of the U.S.  Code establishes standards and procedures for
the creation, management, preservation, and destruction of federal
records.  These records management standards and procedures are
intended to ensure (1) accurate and complete documentation of the
policies and transactions of the federal government, (2) control of
the quantity and quality of records produced by the federal
government, (3) the establishment and maintenance of control
mechanisms to prevent the unnecessary creation of records, and (4)
the judicious preservation and disposal of records.\9

Under title 44, each federal agency, including IRS, is to make and
preserve records containing adequate and proper documentation of the
organization, functions, policies, decisions, procedures, and
essential transactions of the agency.  Such records are to be
designed to furnish the information necessary to protect the legal
and financial rights of the government and of persons directly
affected by the agency's activities.\10

To do this, each agency is to establish and maintain an active,
continuous records management program that provides effective
controls over the creation, maintenance, and use of agency records
that are sufficient to (1) document the persons, places, things, or
matters dealt with by the agency; (2) facilitate action by agency
officials and their successors in office; (3) make possible a proper
scrutiny by Congress or other authorized agencies of the government;
(4) protect the financial, legal, and other rights of the government
and other affected persons; (5) document the formulation of agency
policies and decisions; and (6) document important board, committee,
or staff meetings.\11

Title 44 also authorizes NARA to provide advice and assistance to
federal agencies with respect to ensuring adequate and proper
documentation of the policies and transactions of the federal
government, proper records disposition, and economical and effective
records management.  To fulfill this responsibility, NARA is
authorized to inspect the records or records management practices and
programs of any federal agency for the purpose of making
recommendations for the improvement of the agency's records
management practices and programs.  Under 44 U.S.C.  2904, NARA is to
report to the appropriate oversight and appropriations committees of
Congress on the results of inspections, the responses by agencies to
NARA evaluation recommendations, and the estimates of the costs to
the federal government resulting from the failure of agencies to
implement such recommendations. 

NARA views the appraisal of federal records as its most important
responsibility under title 44.  Under 44 U.S.C.  sections 3303-3303a
and 3314, agency records may only be destroyed pursuant to a records
schedule that has been approved by NARA.  Accordingly, the head of
each agency is to submit to NARA schedules of agency records
proposing the time for disposal of those records that do not have
sufficient administrative, legal, research, or other value to warrant
further preservation.  Under section 2107, NARA may direct and effect
the transfer to the National Archives of the United States those
records that have been in existence for more than 30 years and that
the Archivist has determined to have sufficient historical value to
warrant their continued preservation.  Pursuant to its
regulations,\12 NARA is to appraise the records listed on agency
schedules to determine which records have sufficient historical value
to warrant preservation and transfer to its National Archives and is
to approve the disposal of records having only temporary value. 

Historical records are defined by NARA as those that, among other
things, (1) document agency policies, procedures, and decisionmaking;
(2) generate widespread attention from the news media; (3) provide
information about an agency's mission, organization, and history;
and/or (4) document persons, places, things, or matters dealt with by
an agency that contain information with significant research or
reference value.\13 It is important to note that NARA's appraisal
process does not equate to public disclosure of federal records.  The
process of "appraising records" deals with the act of determining the
value of records, which is an act involving NARA appraisers and the
federal agencies, rather than the separate issue of public disclosure
of the records. 

Organizationally, IRS maintains two records management groups. 
First, located within the Real Estate Planning and Management
Division are the IRS Records Officer and Servicewide records
management staff.  They are responsible for planning, developing, and
establishing standards and guidelines for the agency's records
management program.  They also coordinate with NARA and IRS field
offices and headquarters.  The second group is located within the
Support Services Division and includes the headquarters records
staff, which are responsible for IRS headquarters' records management
program and serve as the liaison to NARA's Washington National
Records Center staff.  In addition, records management staff are
designated in IRS' field offices to perform functions similar to
those of the headquarters records management staff. 


--------------------
\9 44 U.S.C.  section 2902. 

\10 44 U.S.C.  section 3101. 

\11 44 U.S.C.  section 3102 and 36 C.F.R.  section 1222.38. 

\12 36 C.F.R.  section 1228.182. 

\13 National Archives and Records Administration Records Management
Handbook, Disposition of Federal Records, pp.  IV-5 and C-1 through
C-4. 


      SECTION 6103
---------------------------------------------------------- Letter :2.3

Before 1976, tax returns were described as "public records" and were
generally open to inspection, although only with the approval of the
president or under presidential order.  Section 6103 was amended in
1976 to prohibit the release of tax returns or return information to
unauthorized persons; the prohibition was retroactive and thus
encompassed information generated before 1976.  Before the 1976
amendment, questions had been raised and substantial controversy
created as to whether the extent of actual and potential disclosure
of tax returns or return information breached the taxpayer's
expectation of privacy.  This issue in turn raised the question of
whether the public's reaction to this possible abuse of taxpayer
privacy would seriously impair the country's system of voluntary tax
compliance.  Access is currently limited, on a case-by-case basis, to
government staff working specifically on taxpayer issues and to
certain other authorized persons.  Access is specifically granted by
statute and may carry with it civil and criminal penalties for
unauthorized release of tax returns or return information. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to (1) determine how IRS applies the restrictions
of section 6103 in reviewing and inventorying its records and (2)
evaluate how IRS carries out its records management responsibilities. 

To determine how section 6103 might affect the appraisal of records
containing tax return information, we reviewed laws governing the
appraisal of records and taxpayer privacy under section 6103 and
discussed these laws with IRS and NARA officials.  Additionally, we
reviewed OLC memorandums on disclosure of records containing tax
returns or return information to NARA.  We also reviewed Treasury,
Justice, congressional, and NARA memorandums, letters, and draft
legislation on the restrictions of section 6103 and NARA's appraisal
responsibilities. 

Our work focused on certain IRS management records, which were those
records addressing agency policies, decisions, and operations.  We
did not review how tax returns and return information were managed at
FRCs.  Federal tax returns and criminal case files are currently
stored in FRCs and at IRS for retrieval and use by IRS staff as
needed.  According to NARA officials, tax returns are inventoried and
stored according to IRS and NARA regulations.  We did not review IRS'
field office records management operations because NARA reviewed
field operations as part of its comprehensive 1995 review of IRS'
records program and found that the agency had generally handled and
maintained tax returns and return information correctly.  As part of
NARA's review, it visited 11 IRS field locations, including district
offices, a regional office, a data center, a computer center, and
service centers.  We reviewed NARA's workpapers from its site visits
and all of its IRS headquarters work. 

To gain an understanding of government records management programs,
we used NARA's criteria from some of its publications, including a
guide on agency recordkeeping requirements, a recordkeeping
self-evaluation checklist, and a records management handbook.  We
supplemented this work with interviews of NARA officials.  We also
reviewed IRS' guidance for records management, including its
procedures for inventorying and scheduling records. 

At IRS, we interviewed (1) the IRS Records Officer and the
Servicewide records management staff located in the Real Estate
Planning and Management Division; (2) headquarters records staff
located in the Support Services Division; and (3) officials in the
Office of Chief Counsel and the Office of Disclosure.  We also
interviewed the former IRS historian to obtain additional information
about allegations she had made that were critical of the agency's
records management program.  We toured IRS' headquarters storage
facilities, which contained about 2,300 cubic feet of records, to
observe how these records were stored, the types of records stored,
and the physical characteristics of the storage facilities.  We also
reviewed IRS documents, including appropriate sections of the
Internal Revenue Manual and the agency's guidance and training
materials on records management, to determine whether it was in
compliance with internal guidance on records management at the
locations NARA visited. 

Additionally, we reviewed IRS' record control schedule for records of
the former office of the executive secretariat and former
commissioners.  These records had been scheduled by IRS and appraised
by NARA. 

We did our work between March 1996 and August 1997 in accordance with
generally accepted government auditing standards.  We requested
comments on a draft of this report from the Commissioner of Internal
Revenue and the Archivist of the United States or their designees. 
Their written comments are addressed at the end of this report. 


   NARA FOUND RECORDKEEPING
   PROBLEMS IN IRS' RECORDS
   MANAGEMENT PROGRAM
------------------------------------------------------------ Letter :4

NARA found in its review that, while IRS had many elements of an
acceptable records management program, it also had serious
deficiencies that needed correction.  NARA noted that IRS had
extensive recordkeeping requirements in its Internal Revenue Manual
and was developing a vital records program, and that the agency's
tax-processing records were well-managed and handled in accordance
with approved disposition schedules.  NARA also noted that electronic
records systems were well-maintained and had been scheduled for
disposition. 

However, NARA noted that IRS had not conducted a comprehensive
records inventory or a complete review of its records control
schedules in several years.  NARA found that there was no consistency
in how records that documented the development of IRS policy were
scheduled, that a number of important agency records were
unscheduled, and that IRS records control schedules had not been
updated to reflect agency reorganizations.  According to NARA, these
records included those that documented important IRS programs and
initiatives. 

NARA made 58 recommendations to address the problems it found in IRS'
records management practices.  According to a NARA official, as of
May 1997, IRS had successfully completed 47 of these recommendations. 
At the time that we completed our audit work, IRS expected that the
remainder of the recommendations would be completed by September 30,
1997. 

In addition, NARA noted that there were a number of backlogged
headquarters records stored on-site or at FRCs that could not be
scheduled for disposition because IRS, on the basis of the access
restrictions of section 6103, did not allow NARA to appraise the
records' contents.  These backlogged headquarters records included
the historical office files of the former IRS commissioners, criminal
investigative case files, corporate tax returns for 1909 through
1919, and records of the Special Services Staff (created during the
Watergate era to review certain tax returns).  In early 1996, NARA
and IRS formed an interagency working group to try to find a mutually
acceptable way to allow NARA to appraise IRS records. 

IRS and NARA devised a test method for appraising some of the
backlogged headquarters records, beginning in early 1996 with about
198 cubic feet of records from the former office of the executive
secretariat and from former commissioners.\14 The test method
involved separating the records into two groups--section
6103-protected and 6103-nonprotected records.  IRS and NARA engaged
in a blind review of the 6103-protected records, whereby an IRS
disclosure officer described the records' contents to the NARA
records appraiser who decided on the basis of this description
whether the records had historical value.  The 6103-nonprotected
records were made available to NARA for appraisal. 

After the appraisal of the protected and nonprotected records was
completed, IRS staff prepared a records control schedule for records
disposition.  The schedule separated the records into three
categories--those that had historical value and did not contain tax
returns or return information; those that had historical value and
contained tax returns or return information, and those that were
temporary, nonhistorical records that could be destroyed.  We
observed that 36 percent of the records were in the first category,
59 percent were in the second category, and 5 percent were in the
third category. 

NARA officials told us that although this process worked for some
records, it could be problematic for others because of the potential
to either inadvertently destroy records that should be kept or to
unnecessarily retain records that should be destroyed.  As an
alternative, IRS officials said that they offered to regroup the
individual 6103-protected files into restricted and nonrestricted
stacks and to redact (block out restricted material), where
necessary, to expedite NARA's review.  According to IRS officials,
NARA officials declined, preferring to keep the files in the order
they were filed so that the context of each record could be
understood by a records appraiser. 

In a March 1997 report to the Congress, NARA officials indicated that
the blind review process worked well for this group of records
because their historical value was readily apparent.  However, they
said that for some groups of records, such as criminal investigative
case files, this method will not work because the historical value
may not be apparent. 


--------------------
\14 Our review of these records found that they contained a wide
variety of material, including regional office reports, official
executive calendars, records of former IRS commissioners, and
taxpayer letters with agency responses.  The records varied in size
from a few inches to many feet of paper material. 


   WE FOUND SEVERAL PROBLEMS IN
   IRS' RECORDS MANAGEMENT PROGRAM
------------------------------------------------------------ Letter :5

Our review of IRS' records management program indicated several
problems.  The most significant problem was IRS' records backlog that
had been allowed to accumulate over many years.  IRS' records
management staff had not followed their own or NARA's requirements
for managing these records; thus, the backlog grew.  IRS allowed
records to accumulate in basement storage areas and in program
offices because there was no pressing need to dispose of them and
there was an apparent abundance of storage space.  We observed about
2,300 cubic feet of documents in the six locations we toured in April
1996 and August 1997, as shown in table 1. 



                                Table 1
                
                 IRS Records Storage Locations Reviewed
                 by GAO as of April 1996 and the Status
                           as of August 1997

                                            Approximate
                                              volume in  Status as of
Locations visited\a        Description       cubic feet  August 1997
-------------------------  -------------  -------------  -------------
Location 1: IRS basement   Former office            235  All 235 cubic
storage (room G560)        of the                        feet were (1)
                           executive                     inventoried
                           secretariat's                 and scheduled
                           records and                   by IRS and
                           former                        (2) appraised
                           commissioners                 by NARA.
                           ' records
                           (1970-1993)

Location 2: Former         Various                  318  The former
historian's records (room  records,                      historian's
4547)                      including Tax                 records were
                           Systems                       consolidated
                           Modernization                 and are
Location 3: Former                                       located in
historian's records (room  Various                       room G717.
B-141, 1201 Constitution   records,                      All 318 cubic
Ave.)                      including                     feet were
                           Service                       inventoried
                           Center                        and scheduled
                           reorganizatio                 by IRS and
                           n board                       were awaiting
                           minutes                       NARA's
                                                         appraisal for
                                                         final
                                                         disposition.

Location 4: IRS vault and  Special                  140  All 140 cubic
adjoining conference room  Services                      feet were
(room 5120)                Staff's                       inventoried
                           records                       and scheduled
                                                         by IRS and
                                                         were awaiting
                                                         NARA's
                                                         appraisal for
                                                         final
                                                         disposition.

Location 5: Office of the  Chief Counsel          1,639  807 cubic
Chief Counsel storage      records                       feet were (1)
(room G511)                                              inventoried
                                                         and scheduled
                                                         by IRS and
                                                         (2) appraised
                                                         by NARA for
                                                         final
                                                         disposition.
                                                         According to
                                                         IRS, the
                                                         remaining 832
                                                         cubic feet
                                                         will be
                                                         completed by
                                                         September 30,
                                                         1997.

Location 6: IRS safe       Presidential,              5  All 5 cubic
(room 3014)                vice-                         feet were (1)
                           presidential                  inventoried
                           tax returns                   and scheduled
                                                         by IRS and
                                                         (2) appraised
                                                         by NARA.
----------------------------------------------------------------------
\a All locations were in IRS' main headquarters building, except
where noted. 

During our April 1996 tour, we found at location 3, a basement
storage room across the street from IRS headquarters, documents in
file cabinets and other documents piled around the room.  In
addition, we found banners, maps, pictures, reports, furniture, and
supplies.  There were no inventories to assist staff in finding
documents, and records were strewn throughout the room.  Records in
this location appeared to be undamaged. 

Many of IRS' Chief Counsel documents were kept in the Chief Counsel
file room in an IRS building basement storage facility.  The room
itself was large--about 25 by 130 feet--and contained about 1,639
cubic feet of documents.  Records in this room were generally
categorized by calendar year, and some records had already been
scheduled for disposition.  However, we observed in April 1996 that
many boxes of records were piled in corners and on the tops of file
cabinets.  We also observed some records lying in unprotected boxes
exposed to environmental conditions not recommended by NARA for paper
files (i.e., no temperature or humidity control).  The NARA
evaluation mentioned that the room had poor air quality--staff
working in this area for extended periods were given masks to
wear--and there was danger from loose and hanging ceiling tiles.  We
found evidence of insect infestation and observed records that had
been damaged by water during a basement flood.  There were Christmas
decorations, boxes containing ketchup packages, and boxes containing
office equipment--such as lamp shades--in the room.  These items were
located throughout the room, intermingled with the records
themselves, thus making it difficult to locate particular files. 

According to NARA, if the records in the Chief Counsel file room had
been managed appropriately, they could have been stored at FRCs at
less cost.  According to a NARA computation, which we did not
examine, storing these records cost IRS about $12,600 annually,
whereas the cost of storing the records at an FRC would cost only
about $900 annually. 

IRS' permanent records stored in the National Archives total about
3,000 cubic feet.  Compared to other federal agencies, this amount is
small.  For example, as of October 1, 1994, the Department of
Transportation had over 16,000 cubic feet of records in the National
Archives; Justice had 43,000 cubic feet; the Department of
Agriculture had 57,000 cubic feet; and the U.S.  Bureau of Mines had
about 5,000 cubic feet. 

Not all IRS records were stored in poor conditions.  IRS had, in a
locked safe, presidential and some vice-presidential tax returns
dating back to the first federal income tax in 1913.  These tax
returns were stored in alphabetical order, and most were kept in
special file folders designed to protect the paper over time.  There
were about 5 cubic feet of records containing the tax returns and
return information. 

In August 1997, we toured IRS' headquarters storage facilities again
and found that progress in inventorying and scheduling these
documents had been made.  IRS had consolidated the records of the
former historian (locations 2 and 3) into one location in the main
IRS building.  All of these documents had been inventoried and
scheduled by IRS and were awaiting NARA appraisal.  Additionally, all
of the Special Services Staff's records (location 4) had been
inventoried and scheduled and were awaiting NARA appraisal. 

The Office of the Chief Counsel had made progress in inventorying and
scheduling its 1,639 cubic feet of records.  IRS records managers
said that they had a commitment from the Office of the Chief Counsel
to complete this task by September 30, 1997.  IRS officials also said
that the storage room had been cleaned and that improvements were
made to ensure that environmental, health, and safety requirements
were met.  Additionally, exterminations to control insect
infestations had been done twice.  We observed that the room appeared
cleaner, new air vent systems were in place, and repairs had been
made to the damaged ceiling tiles. 


   DECISIONMAKING DOCUMENTATION
   WAS NOT READILY IDENTIFIABLE
------------------------------------------------------------ Letter :6

NARA found that decisionmaking documentation was not readily
identifiable in IRS.  NARA was concerned that decisionmaking
documentation was not maintained for the former IRS commissioners and
with intervening reorganizations, such records may have become
unidentifiable.  Also, IRS commissioners have received various
intra-agency committees' and units' input, recommendations, and
alternatives that the agency has used to make policy decisions.  NARA
found that these types of records with the potential to influence
decisionmaking are returned to the program areas, rather than being
centrally filed and archived for preservation.  NARA and IRS were
unable to determine the extent of these records that were kept by
individual staff members in personal or program area records.  NARA
recommended that IRS determine the most efficient way to maintain
these types of records.  IRS stated in its November 1996 response to
the NARA recommendation that it had located and identified policy
records in the program areas and that inventorying was under way. 


   IRS HAS MADE IMPROVEMENTS TO
   ITS RECORDS MANAGEMENT PROGRAM
------------------------------------------------------------ Letter :7

IRS acknowledged having some records management program problems.  In
addressing concerns raised in the NARA evaluation, IRS launched a
records management cleanup effort.  IRS plans to complete the
relocation of many of its headquarters staff to new facilities in New
Carrollton, MD, by 1998.  This move, according to IRS officials,
presented a good opportunity for staff to review existing records and
improve overall recordkeeping practices.  Among other efforts, IRS'
records management staff has distributed memorandums, guidelines, and
brochures to agency staff on working with them and on the importance
of maintaining adequate records.  Additionally, each program area at
IRS headquarters designated an information resource coordinator who
is responsible for the group's records.  The information resource
coordinator also acts as a focal point for records management in that
group. 

IRS records managers, trained by NARA staff, held training classes
for IRS headquarters staff.  IRS records managers developed guidance
for the training session and made this available to all staff.  The
guidance describes the legal requirements for federal recordkeeping,
defines the respective roles and responsibilities of IRS and NARA
staff, defines the various types of records maintained in IRS, and
provides guidelines on how staff should dispose of and save
documents. 


   OBSERVATIONS
------------------------------------------------------------ Letter :8

The continuing debate over how NARA should carry out its
responsibilities at IRS highlights a fundamental inconsistency
between two important laws.  NARA's authorizing legislation requires
it, among other things, to (1) appraise agency records to determine
their historical value so that the appropriate retention, storage,
and accessibility of those historical records will be systematically
ensured and (2) establish regulations and ensure agency
accountability for the proper handling of public records.  Congress
determined that a national interest exists in supporting the
voluntary tax system through strong assurances of taxpayer privacy. 
To this end, section 6103 provides that tax returns and return
information be safeguarded and not disclosed to unauthorized persons. 
Citing the section 6103 provisions, IRS prevented NARA from
appraising records that IRS believed contained protected tax returns
or return information. 

In the draft of this report, which was sent to IRS and NARA for
comment, we identified several options for consideration as potential
solutions to the inconsistency between the two agencies'
responsibilities.  However, upon further reflection, including our
consideration of IRS and NARA comments on the options discussed in
our draft report, we have come to believe that consideration of such
options may be premature in light of the lawsuit (Tax Analysts, et. 
al., v.  IRS and NARA) that was pending at the time of our review. 
The lawsuit explicitly sought the court's resolution of the
inconsistency between IRS' and NARA's responsibilities.  Accordingly,
we have deleted the discussion of the options from this report.\15


--------------------
\15 As this report was in final preparation for printing, a U.S. 
district court judge granted IRS' motion to dismiss this case and
noted that (1) the Internal Revenue Code and case law prevented IRS
from providing NARA access to documents protected under section 6103
and (2) the remaining issues were not ripe for judicial review
because the collaborative process between IRS and NARA had not been
completed.  Subsequently, the plaintiffs filed a motion requesting
the court to alter or amend the decision to dismiss the case. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

We provided drafts of this report to the heads of NARA and IRS for
their comments.  Both agencies provided written comments, which are
discussed in the following sections, and technical corrections, which
we incorporated in this report where appropriate. 


      NARA'S COMMENTS
---------------------------------------------------------- Letter :9.1

NARA's comments centered on two major points.  First, while the
Archivist has the statutory responsibility to approve the disposition
of records and to select records for permanent retention, NARA
believes that it is currently unable to fulfill this responsibility
for all IRS records because it lacks access to the records.  NARA
notes, as we do in this report, that the process by which it
appraises and approves the disposition of agency records is, by law,
the official procedure.  In line with NARA's comments on this point,
we sought to emphasize in this report the statutory basis for NARA's
oversight of federal records management.  At the same time, we
continued to highlight the conflict between NARA's statutory
responsibilities and the disclosure provisions of section 6103. 

Second, NARA discussed the legal interpretation of section 6103 and
the policy questions it raises for both agencies.  NARA stressed that
although NARA employees in the FRCs are involved in the retrieval,
refiling, and eventual destruction of individual tax returns on an
ongoing basis, they do not have similar access to records containing
tax returns or return information for appraisal and disposition
purposes.  IRS' comments, which we discuss in more detail below,
noted that tax returns may be stored at FRCs for retrieval and use by
the agency pursuant to section 6103.  However, IRS does not believe
that section 6103 would allow NARA access to tax returns or return
information for appraisal purposes.  IRS has interpreted section 6103
as allowing the disclosure of tax returns and return information for
purposes of tax administration to the extent necessary in connection
with the processing, storage, transmission, and reproduction of such
information; the programming, maintenance, repair, testing, and
procurement of equipment; and the providing of other services.  The
one court that has specifically examined this issue agreed with IRS'
interpretation.\16


--------------------
\16 American Friends Service Committee v.  Webster, 720 F.  2d 29
(D.C.  Cir.  1983). 


      IRS' COMMENTS
---------------------------------------------------------- Letter :9.2

IRS explained that Congress has put very tight restrictions on access
to tax returns and return information and that its interpretation of
section 6103 precludes any access that has not been expressly granted
by legislation.  As previously mentioned, H.R.  2292 and S.  1096,
introduced July 30 and 31, 1997, respectively, each include a section
that would provide a statutory mechanism for NARA access to IRS
records. 

IRS also commented that its relationship with NARA, except for the
section 6103 issue, has been satisfactory over the years.  IRS
described, as examples of the agencies' satisfactory working
relationship, the routine management and disposition of its huge
volume of individual tax returns and its efforts in addressing the 58
recommendations made by NARA in its evaluation of IRS' records
management program.  We mentioned in this report that IRS and NARA
had worked together on several occasions and accomplished various
tasks. 


---------------------------------------------------------- Letter :9.3

We are sending copies of this report to the Ranking Minority Member
of the House Committee on Ways and Means, the Chairman and Ranking
Minority Member of the Senate Committee on Finance, other interested
congressional committees, the Secretary of the Treasury, and other
interested parties.  We will also make copies available to others
upon request. 

Major contributors to this report are listed in the appendix.  If you
or your staff have any questions concerning this report, please call
me on (202) 512-9110. 

Lynda D.  Willis
Director, Tax Policy and
 Administration Issues


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Harriet C.  Ganson, Assistant Director
Kelsey M.  Bright, Evaluator-in-Charge
Rodney F.  Hobbs, Senior Evaluator
James M.  Fields, Social Science Analyst


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:2

M.  Rachel DeMarcus, Assistant General Counsel
Shirley A.  Jones, Senior Attorney

*** End of document. ***