[Audit Report Follow-up of Recommendation Relating to Internal Revenue Taxes, Bureau of Internal Revenue, Government of the Virgin Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 2003-I-0059

Title: Audit Report ï¿½Follow-up of Recommendations Relating to Internal
       Revenue Taxes,  Bureau of Internal Revenue, Government
       of the Virgin Islandsï¿½

Date:  August 29, 2003

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	United States Department of the Interior
	
		OFFICE OF INSPECTOR GENERAL
	Eastern Regional Office
	381 Elden Street - Suite 1100
	Herndon, Virginia 20170

	August 29, 2003

Honorable Charles W. Turnbull
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802

Subject:	Audit Report ï¿½Follow-up of Recommendations Relating to Internal Revenue Taxes, 
Bureau of Internal Revenue, Government of the Virgin Islandsï¿½ (No. 2003-I-0059)

Dear Governor Turnbull:
 
      This report presents the results of our follow-up review of recommendations contained in 
the December 1997 audit report ï¿½Internal Revenue Taxes, Bureau of Internal Revenue, 
Government of the Virgin Islandsï¿½ (No. 98-I-188).
      
      The Legislation, as amended, creating the Office of Inspector General, (5 U.S.C. app. 3) 
requires that we report to the Congress semiannually on all reports issued, actions taken to 
implement our recommendations and recommendations that have not been implemented.  
Therefore, this report will be added to the next semiannual report.  In addition, the Office of 
Inspector General provides audit reports to the Congress.

      Please provide a response to this report by September 30, 2003.  The response should 
provide the information requested in Appendix 4 and should be addressed to Mr. Roger 
La Rouche, Assistant Inspector General for Audits, Office of Inspector General, U.S. Department 
of the Interior, 1849 C Street, NW (MS-5341), Washington, DC 20240; with a copy to our 
Caribbean Field Office, Ron deLugo Federal Building, Room 207, St. Thomas, VI 00802.

                                    Sincerely,
				
                                    William J. Dolan, Jr.
                                    Regional Audit Manager

cc:	Director, Virgin Islands Bureau of Internal Revenue
































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EXECUTIVE SUMMARY






Despite Improvements, 
Some Deficiencies
Still Exist in the 
Administration and 
Collection of Taxes


The Bureau of Internal Revenue (the Bureau) administers and 
collects most types of taxes in the Virgin Islands, including 
individual and corporate income, gross receipts, trade and 
excise, hotel occupancy, highway user, production, gift, 
inheritance, and fuel taxes.  In fiscal year 2001, the Bureau 
collected taxes totaling $484.1 million and in fiscal year 2002, a 
total of $476.2 million. More than 31,500 income tax refunds 
totaling $62.9 million were issued in fiscal year 2001.

We found that of the 14 recommendations made in our 
December 1997 audit report "Internal Revenue Taxes, Bureau 
of Internal Revenue, Government of the Virgin Islands," six had 
been fully implemented, seven had been partially implemented, 
and one had not been implemented.  While improvements were 
made in the Bureauï¿½s operations, some problems still existed, 
particularly issues concerning prior period tax returns.

?	The Bureau implemented a new computerized tax system, 
based on the one used in Guam, as part of a Tax 
Administration Improvement Project being undertaken with 
contract assistance from the IBM Corporation. In addition, 
the Bureau was in the process of integrating the withholding 
and hotel occupancy tax modules onto its mainframe 
computer.  However, the Bureau did not (1) integrate excise 
taxes into the new computer system in order to easily access 
and research a taxpayerï¿½s entire tax payment history, (2) 
reverse at least $308,000 in payments from taxpayer 
accounts for checks that were not honored by the banks 
from June 2001 and prior, and (3) timely resolve errors 
detected in more than 3,000 tax returns from tax years 2000 
and prior.
 
?	The Bureau hired five tax revenue clerks to address 
taxpayer inquiries and handle delinquent taxpayer accounts 
with balances of less than $15,000.  However, they did not 
(1) take action to collect $4.8 million from delinquent 
taxpayers, (2) take action to collect a total of $408,000 from 
68 delinquent accounts before the statute of limitations 
expired, (3) file liens and levies on delinquent taxpayers to 
serve as the governmentï¿½s claim against their property, and 
(4) provide required supporting documentation for tax 
penalty waivers totaling $164,000.
?	The Bureau conducted audits of casualty loss claims 
resulting from Hurricane Marilyn.  However, they did not 
(1) document supervisory changes to tax audit workpapers 
that affected the amount of taxes due, and (2) process 
statutory notices of deficiency (90-day letters) in a timely 
manner. 

Subsequent to the completion of our audit, the Bureau fully 
implemented its VITAX computerized tax system.  Based on 
information provided by Bureau officials during the 
February 18, 2003 exit conference, it appears that the VITAX 
system will provide the capabilities needed to overcome many 
of the tax administration deficiencies that have been noted in 
prior Bureau audits.  However, we believe that the Bureau still 
needs to strengthen its staffing in certain areas and make an 
effort to address deficiencies related to prior year tax returns as 
identified during this audit.





Recommendations to 
the Governor of the 
Virgin Islands


We made four recommendations which, if implemented, should 
improve the Virgin Islands administration and collection of 
taxes.  A response received from the Director of Internal 
Revenue addressed the status of the prior audit 
recommendations but did not address the four new 
recommendations made in this report.  Therefore, the four 
recommendations remain unresolved.









CONTENTS



   
INTRODUCTION



Background 	  1
Objective and Scope 	  2
Prior Audit Coverage 	  2




   
RESULTS OF AUDIT	


Overview 	  4
Computer Operations	  4
Delinquent Accounts and Returns	9
Audit Enforcement	13





RECOMMENDATIONS


	16



   
APPENDICES		

1.	Status of Prior Audit Recommendations	17
2.	Monetary Impact	22
3. 	Response to Draft Report	23
4. 	Status of Recommendations	32































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INTRODUCTION





   
BACKGROUND


The Virgin Islands Code (33 V.I.C. Chapter 20) established the 
Bureau of Internal Revenue (the Bureau) to administer and 
enforce the laws imposing individual and corporate income, 
gross receipts, trade and excise, hotel occupancy, highway user, 
production, gift, inheritance, and fuel taxes in the Virgin 
Islands.

According to Bureau records, they collected $484.1 million in 
taxes during fiscal year 2001 and $476.2 million during fiscal 
year 2002.  More than 31,500 income tax refunds totaling 
$62.9 million were issued during fiscal year 2001.

The Bureau had five major units: Directorï¿½s Office, Computer 
Operations, Processing Accounts and Returns, Delinquent 
Accounts and Returns, and Audit Enforcement.  The Bureau 
had offices located on St. Thomas and St. Croix, with a 
combined staff of about 118 employees.  Bureau personnel 
made periodic visits to St. John to assist individual and business 
taxpayers.  

During fiscal year 2000, the Director of Internal Revenue 
developed a reorganization plan to improve the Bureauï¿½s 
effectiveness and efficiency.  As part of the plan, the Director 
proposed to increase the Bureauï¿½s staff in order to conduct 
business within the time constraints provided by law.  The 
Bureau also contracted with the IBM Corporation to perform a 
detailed review of Bureau operations.  In October 2000, IBM 
issued its "Assessment & Recommendations Report for the 
Bureau of Internal Revenue, US Virgin Islands."  The report 
concluded that:

ï¿½Our overall assessment of IRB [the Bureau] indicates 
major problems arising from poorly maintained 
computer systems, the lack of a comprehensive 
understanding of tax administration, absent or obsolete 
procedures, insufficiently trained staff and most 
importantly -- the lack of a strategic plan.  These 
problems have slowly eroded IRBï¿½s ability to administer 
territorial taxes and the taxpayersï¿½ confidence in the 
system -- thus seriously compromising voluntary 
compliance.ï¿½

The report also stated, ï¿½Our analysis, along with extensive 
interviews, confirmed many findings of the 1997 Department of 
[the] Interior (DOI) Audit.ï¿½  IBM assisted the Bureau in 
implementing the new VITAX computerized tax system based 
on the system used in Guam, developing comprehensive 
standard operating procedures and making other internal 
changes to improve overall operations.




   
OBJECTIVE AND 
SCOPE


The objective of our audit was to determine whether (1) the 
Bureau of Internal Revenue implemented the recommendations 
contained in the December 1997 audit report ï¿½Internal Revenue 
Taxes, Bureau of Internal Revenue, Government of the Virgin 
Islandsï¿½ and (2) any new recommendations should be made 
based on current operations at the Bureau.

To accomplish our audit objective, we interviewed Bureau 
officials and reviewed applicable laws, rules, and regulations.  
We examined the Bureauï¿½s computerized database of 
delinquent accounts and returns, listings of dishonored checks, 
tax penalty waivers, and tax audit files.  The scope of the audit 
included changes in policies and procedures made to implement 
the prior audit recommendations.  The audit was conducted 
from May to October 2002.

We conducted our audit in accordance with the ï¿½Government 
Auditing Standards,ï¿½ issued by the Comptroller General of the 
United States.  Accordingly, we included such tests of records 
and other auditing procedures that were considered necessary 
under the circumstances.  

Because of the limited objective and scope of the audit, we only 
evaluated internal controls to the extent that they related to 
corrective actions taken on the prior audit recommendations.  







PRIOR AUDIT 
COVERAGE


In December 1997, the Office of Inspector General issued the 
audit report ï¿½Internal Revenue Taxes, Bureau of Internal 
Revenue, Government of the Virgin Islandsï¿½ (No. 98-I-188).  
The report disclosed deficiencies in the areas of computer 
operations, delinquent accounts and returns, and audit 
enforcement.  Specifically, the report concluded that:

?	The Bureau did not realize all potential revenue collections 
because it could not access a taxpayerï¿½s complete and 
accurate payment history for all classes of taxes from a 
single computer system.  Additionally, (1) payments were 
not reversed from taxpayer accounts for unhonored checks, 
(2) the Bureauï¿½s Code and Edit Unit (now the Error 
Resolution Section) did not correct mathematical and data 
entry errors in order to process tax returns in a timely 
manner, and (3) data produced by the Computer Operations 
Branch to detect nonfilers and filers of duplicate dependent 
claims were not made available to the Audit Enforcement 
Branch in a consistent and timely manner.

?	The Delinquent Accounts and Returns Branch did not 
effectively use collection practices and tools to enforce the 
collection of amounts owed by taxpayers.  Specifically, the 
Bureau did not (1) follow up or make reasonable efforts to 
collect amounts owed by delinquent taxpayers before the 
statute of limitations expired, (2) file liens and levies to 
serve as the governmentï¿½s claim on delinquent taxpayersï¿½ 
property, and (3) provide required supporting 
documentation for tax penalty waivers.

?	The Audit Enforcement Branch did not implement adequate 
internal controls to effectively administer its audit function. 
Specifically, the Bureau did not (1) use computer printouts 
from the Computer Operations Branch to detect and prevent 
nonfilers, (2) begin audits of the casualty loss claims filed 
as a result of Hurricane Marilyn, (3) conduct a sufficient 
number of audits of high-income taxpayers and 
corporations, (4) document changes made to revenue agent 
findings, (5) mail statutory notices (90-day letters) to 
taxpayers in a timely manner, and (6) transmit closed cases 
to the Processing Branch in a timely manner for assessment.

Report No. 98-I-188 to the Governor of the Virgin Islands 
contained 14 recommendations to address the deficiencies 
disclosed by the audit.  Based on a response received from the 
Governor in January 1998, we classified six recommendations 
as resolved and implemented, seven recommendations as 
resolved but not implemented, and one recommendation as 
unresolved.









RESULTS OF AUDIT



   
OVERVIEW


Of the 14 recommendations made in the December 1997 audit 
report, six had been fully implemented, seven had been partially 
implemented, and one had not been implemented.  (Status of 
the recommendations and corrective actions taken are presented 
in Appendix 1.)  Specifically, we found that the Bureau made 
improvements by (1) implementing the VITAX computerized 
tax system, which incorporates the processing of most types of 
taxes and has online capabilities to enhance overall tax 
administration, (2) hiring five tax revenue clerks for the 
Delinquent Account and Returns Branch to handle delinquent 
accounts of less than $15,000, (3) providing on-the-job training 
for timely processing of tax returns and formal training 
pertaining to new tax law changes and the fundamental 
principles of tax administration, and (4) maintaining master 
inventory listings and case histories for delinquent taxpayer 
accounts.

However, we found that some deficiencies disclosed in the prior 
report still existed, particularly problems that related to prior 
year tax returns.  For example, the Bureau should (1) reverse 
$308,000 in tax payments for which the checks were not 
honored by the banks, (2) resolve errors detected in more than 
3,000 tax returns being held for resolution, (3) collect accounts 
with delinquent taxes totaling $4.8 million, (4) provide 
supporting documentation for tax penalty waivers totaling 
$164,000, and (5) ensure that statutory notices of deficiency 
(90-day letters) are processed timely.






   
COMPUTER 
OPERATIONS 


Our December 1997 report included four recommendations 
related to the Bureauï¿½s Computer Operations Branch.  We 
found that one of those recommendations was fully 
implemented and three were partially implemented.  The 
Bureau took action to improve the processing of income tax 
returns and refunds by implementing the new VITAX 
computerized system as part of the Tax Administration 
Improvement Project being undertaken with contract assistance 
from the IBM Corporation.  However, at the time of our 
follow-up review, the Bureau had not incorporated excise tax 
information into the VITAX.  This would allow access to a 
taxpayerï¿½s entire tax payment history.  In addition, tax payment 
checks totaling at least $308,000, which were not honored by 
the banks, had not been reversed from taxpayer accounts.  
Further, the Bureau had more than 3,000 prior year tax returns 
that were being withheld from processing because of errors.






Information on All Types of 
Taxes Was Not  Integrated 
into One Computer System


As of July 2002, the Bureauï¿½s new VITAX computerized tax 
system, based on the Guam tax system, contained only 
information on individual and corporate income tax returns for 
tax year 2001.  Tax information on withholding, hotel 
occupancy, excise, and gross receipts had to be accessed from 
separate stand-alone computers that did not interact with the 
new computerized system.  The Bureau had an initial target date 
of September 1998 for integrating all taxes on one system to 
allow easy access to a taxpayers entire tax history.  However, 
this date was not met and, according to a Bureau official, the 
initial integration plans were abandoned because all efforts were 
being focused on implementation of the new tax system and 
compliance with Y2K requirements.  A Bureau official told us 
that September 2002 is the new target date for placing all taxes 
on the new system.  However, as of October 2002, this had not 
been accomplished.

IBMï¿½s ï¿½Assessment & Recommendations Reportï¿½ confirmed 
our prior reportï¿½s conclusion that the Bureau had a number of 
tax applications in place to support the administration of 
multiple taxes, but that a different stand-alone system was used 
for each of the major types of taxes.  Additionally, the IBM 
report stated that there was little or no sharing of information 
across these systems and that the systems were implemented on 
different hardware and software platforms, using a variety of 
programming languages.  The IBM report further stated that 
each of the systems was operating at less than full capacity or 
was inoperable in certain instances.  IBM concluded that, 
without all classes of taxes on one system, the withholding tax 
administration was virtually nonexistent on St. Thomas.  In 
addition, the Stop Tax Evasion Program (STEP) was not 
effective because of the inability to easily verify withholding 
tax compliance.

Seven months after release of the ï¿½Assessment & 
Recommendations Report,ï¿½ the Bureau entered into a 2-year 
contract with IBM, at a cost of $7.8 million plus travel expenses 
not to exceed $1.2 million, to improve the Bureauï¿½s customer 
service and revenue collection operations and to provide a 
framework for a customer-focused, ï¿½e-governmentï¿½ approach to 
processing taxes.  At the time of our review, this project was 
still in progress.
Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials told us that subsequent to 
completion of the audit, processing of all types of taxes had 
been incorporated into the new VITAX system, with the 
exception of excise taxes.  They stated that a stand-alone 
application based on the Microsoft Access software had been 
developed to process excise taxes.  They said the decision to 
keep excise tax processing as a separate application was made 
because of the high volume of low dollar value transactions 
involved.  However, Bureau officials noted that they were 
reevaluating the decision.  






Taxpayers Accounts Were 
Not Adjusted for 
Dishonored Checks 
Returned by Banks


The Bureau maintained two different lists of taxpayers whose 
payment checks were not honored by the banks.  Both lists were 
maintained on PC-based systems, one with Professional File 
software and the other with Microsoft Excel software.  The 
systems were not able to interact with each other or with the 
Bureauï¿½s mainframe computer.  Further, during the time of our 
review, Bureau personnel were unable to access the 
Professional File system and submitted a previously printed 
register of dishonored checks.  The register showed that, during 
the period of September 1990 to June 2001, the Bureau received 
1,016 checks, originally valued at $1.5 million, which were not 
honored by the banks.  These checks still had outstanding 
balances totaling about $1.2 million.  

We selected for detailed review a sample of 25 taxpayers who 
wrote 42 dishonored checks with a total value of $308,000.  We 
found that the Bureau attempted to collect delinquent funds by 
sending computer-generated letters reminding taxpayers of their 
obligation to pay -- requesting payment of the original amount, 
plus a $15 insufficient funds fee and calculated interest.  We 
identified four instances where the Bureau collected on 
dishonored checks.  However, taxpayer accounts had been 
adjusted to show that the original tax amounts were still owed.  
As a result, at least $308,000 in tax revenues shown on the 
Bureauï¿½s mainframe computer actually had not been collected.  
For example:

?	On January 13, 2000, a construction company issued two 
checks of $35,000 each for payment of delinquent taxes.  
The payments were posted on the Bureauï¿½s mainframe 
computer, but the revenue officer did not indicate on the 
case history sheet the tax periods or types of taxes for the 
$70,000.  The checks were later returned by the bank for 
insufficient funds.  Although the Bureau sent the taxpayer 
two notices demanding payment, the original payment 
transactions were not reversed from the taxpayer account 
because the Bureau could not determine how the $70,000 
payment had originally been applied.  

The Bureauï¿½s Chief of Processing Accounts and Returns stated 
that dishonored checks received for payment of withholding, 
gross receipts, and excise taxes were not reversed.  However, 
The Chief stated that dishonored checks for income tax 
payments were reversed.  We attempted to verify the Chiefï¿½s 
statement by reviewing the Bureauï¿½s debit advices for income 
taxes as far back as 1988, but did not find a single example of 
income tax payments being reversed as a result of dishonored 
checks.

We believe that the new computerized tax system should record 
all transactions having to do with dishonored checks so account 
balances are accurate.  The IBM report concurred that this was 
an important issue.  The report stated that when dishonored 
check payments are not reversed, ï¿½a fragmented business 
process exists that compromises effectiveness of tax 
administration. . . . This fragmented business process is totally 
inadequate, because it fails to restore a taxpayerï¿½s account to the 
balance that existed prior to the NSF [non-sufficient funds] 
payment so that the appropriate penalties or fees can be posted 
and collected.ï¿½

Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials told us that the new VITAX system 
incorporates the processing of dishonored checks.  They stated 
that once the Bureau receives notification from the Department 
of Finance that a dishonored check has been returned by the 
bank, a bad check penalty will be assessed by the system.  
Further, the system will automatically create a document (Form 
1331) to reverse the dishonored payment and will prepare a 
notice to inform the taxpayer of the dishonored check amount 
and the applicable bad check penalty.






Tax Returns Were Being 
Held Pending Correction of 
Errors or Receipt of 
Missing Information


The Bureauï¿½s Error Resolution Section (formerly the Code and 
Edit Unit) was responsible for ensuring that tax returns and 
accompanying forms were accurate and complete. If errors were 
found, the tax return was held until the taxpayer responded to a 
computer-generated letter requesting the needed tax 
information.  At the time of our review, the Bureau was holding 
a total of 3,046 tax returns from tax years 1990 to 2000 because 
of either mathematical errors or missing information.  However, 
the Error Resolution Section was not effectively staffed to 
handle the workload.

A temporary employee was hired and five employees (three 
from the Audit Enforcement Branch and two from the 
Delinquent Accounts and Returns Branch) were temporarily 
reassigned to the Error Resolution Division.  These employees 
received on-the-job training for their new duties but were 
assigned to process only tax year 2001 returns.  This still leaves 
all of the 3,046 tax returns from tax years 1990 to 2000 to be 
processed which we believe will still require a massive effort.   

We selected a sample of 30 tax returns from the Bureauï¿½s 
current error registers to determine whether delays were still 
occurring in clearing the registers.  However, we were unable to 
determine the actual status of 26 of these returns.  The Bureau 
could not locate 18 of the 26 returns and 8 other tax returns 
contained no indication as to why they were being held.  As a 
result, we could not determine if the returns were reviewed for 
processing or not. We found that the four remaining tax returns 
selected in our review were quickly cleared from the register.
  
Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that candidates were being 
interviewed for vacant positions in the Error Resolution Section 
and that all current Section staff had online access to the 
VITAX system in order to expeditiously process tax returns.  In 
addition, we were given a live demonstration of how existing 
staff use the VITAX system to review and resolve tax return 
errors online.  For errors requiring additional information, the 
system can generate the necessary notices to be sent to the 
taxpayers.






Information Was Not 
Produced for Tax 
Enforcement Purposes


The Computer Operations Branch did not produce 
computerized reports that could be used by the Audit 
Enforcement Branch in identifying nonfilers, taxpayers who 
under-reported their income, and filers of duplicate dependent 
claims because it had not captured the Form 1099-MISC 
(miscellaneous income) and Form W-2 (wage and tax 
statement) information for tax years 1997 through 2001.  In 
addition, the Computer Operations Branch could not easily 
prepare reports comparing gross sales amounts reported in 
business income tax returns with gross receipts reported on 
business gross receipts tax returns because the two types of 
information were maintained on separate computer systems.   
As a result, important information that would have allowed the 
Audit Enforcement Branch to identify nonfilers, filers of 
duplicate dependent claims, and taxpayers who under-reported 
their income was not available.

The IBM assessment report confirmed our audit finding and 
stated, ï¿½The annual withholding transmittal documents, Forms 
W-2/W-3 and Form 1099 information are never processed, even 
though the law requires they be filed.  This information is never 
reconciled against the individual income tax withholding credits 
claimed, so the bureau has an additional fraud exposure.ï¿½  The 
report also stated that ï¿½the IRB lacks the capability to cross 
check information filed on information returns and that filed on 
tax returns.ï¿½

Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that there was no longer a 
need for the Computer Operations Branch to produce special 
reports for the Audit Enforcement Branch because the new 
VITAX system has flexible online query capabilities.  They said 
that the Audit Enforcement Branch has developed detailed audit 
selection criteria, which can be used to query the tax database.  
Examples given were queries based on gross receipts taxes paid, 
withholding taxes paid, or tax credits claimed, among other 
criteria.  Bureau officials also noted that the identification of 
duplicate dependent claims was an integral part of VITAX 
processing of income tax returns and that the system had 
identified more than 2,000 cases of duplicate dependent claims 
for tax year 2001 returns.  In these cases, prior year tax returns 
were also reviewed for similar duplicate dependent claims.	






DELINQUENT 
ACCOUNTS AND 
RETURNS


Our December 1997 report included five recommendations 
related to the Delinquent Accounts and Returns Branch.  We 
found that two of those recommendations were fully 
implemented and three were partially implemented.  The 
Bureau hired five tax revenue clerks in April 1998 to handle 
delinquent taxpayer accounts with balances of less than $15,000 
and to address taxpayer inquiries.  However, the Bureau did not 
effectively perform collection enforcement activities, including 
the use of liens and levies, for taxpayers whose accounts were 
delinquent nor did they make reasonable efforts to protect the 
governmentï¿½s interests before the statute of limitations expired. 
Additionally, the Bureau did not maintain required supporting 
documentation for tax penalty waivers.






Collection Enforcement 
for Delinquent Accounts 
Was Ineffective


The Delinquent Accounts and Returns Branch was responsible 
for collecting unpaid taxes administered by the Bureau.  We 
found, however, that for the majority of taxpayer cases 
reviewed, revenue officers did not enforce or follow up on the 
collection of taxes owed.  We reviewed 40 taxpayer case files 
containing 540 taxpayer delinquent accounts with outstanding 
taxes totaling $5.9 million.  We found that, for 33 taxpayers 
with 214 taxpayer delinquent accounts totaling $4.8 million, 
there was little or no collection effort undertaken by revenue 
officers in the form of liens, levies, or follow-up on defaulted 
taxpayer installment agreements.  For example:

?	For a taxpayer who owed income taxes for 1998 totaling 
about $33,000, the case file showed that the assigned 
revenue officer did not make any collection efforts.

?	For an air conditioning firm that owed income taxes for 
1996, 1998, 1999, and 2000 totaling about $37,000, the case 
file also showed that no collection efforts were made by the 
assigned revenue officer.

?	For a restaurant owner who owed various taxes totaling 
more than $18,000, the case file showed that no collection 
efforts were made by the assigned revenue officer during 
the period of November 16, 1999 to June 27, 2002.

?	For another restaurant owner who owed gross receipts taxes 
for 1994 through 2000 and income taxes for 1999 totaling 
about $75,000, the case file showed that the only collection 
efforts made by the assigned revenue officer were to 
execute two installment agreements, both of which were 
now in default.  No further efforts were made to bring the 
defaulted agreements into compliance.

?	For an engineering company that owed gross receipts and 
withholding taxes for 1996 through 2001 totaling about 
$252,000, the case file showed that the only collection 
effort made by the assigned revenue officer was a 1996 
installment agreement, which also was now in default.  No 
further efforts were made to bring the defaulted agreement 
into compliance.

The revenue officers told us that liens or levies could not be 
used without knowing the specific assessment dates, which 
should be documented on computer-generated taxpayer 
delinquent account forms (forms).  These forms contain 
information detailing the types of tax returns filed, the taxes, 
penalties, and interest that were assessed, and the payments 
received.  Using this information, liens and/or levies can be 
made and later documented on the forms.  However, if the 
forms are not prepared, the revenue officers are unaware of any 
outstanding delinquent amounts.  Despite the importance of the 
forms, the case files for 214 of the 540 taxpayer delinquent 
accounts reviewed did not have a form.  A revenue officer told 
us that, in the majority of cases, they were not aware of the 
amount of delinquent taxes until taxpayers called to inquire 
about the status of their accounts.

We also found that the Bureau would be unable to collect on 
68 of the 540 taxpayer delinquent accounts reviewed because 
the statute of limitations had expired.  As a result, the Bureau 
lost the opportunity to collect about $408,000 in delinquent 
taxes.  In 41 of the 68 instances where the statute of limitations 
had expired, the revenue officers did not make any notations on 
the case history sheets or report to the Assistant Chief of 
Delinquent Accounts and Returns by means of Form 53D 
(Report of Currently Not Collectible Taxes) that the statute of 
limitations was about to expire.  Moreover, the revenue officers 
did not maintain case history sheets to show if any collection 
activity was undertaken for 7 of the 40 taxpayer case files 
reviewed and did not adequately document collection activities 
for 24 other case files.

According to the Assistant Chief of the Delinquent Accounts 
and Returns Branch, although there were technically four 
revenue officers assigned to handle delinquent taxpayer 
accounts with balances of more than $15,000, two of the 
revenue officers were currently on loan to the Bureauï¿½s Error 
Resolution Division and three revenue officers had previously 
been on loan to the Processing Accounts and Returns Branch 
for a period of 1 year.  As a result, the Delinquent Accounts and 
Returns Branch was hampered in its collection efforts because 
the workload was too great to be handled effectively by the 
remaining staff.




The IBM report stated that one of the reasons it was nearly 
impossible for the Bureau to adequately administer taxes was 
that ï¿½the Audit and Collection functions have tremendous 
clerical responsibilities, poor data quality, and misguided 
priorities.ï¿½  We agree with this assessment and believe that the 
Bureau should place greater emphasis on the collection of 
delinquent taxes in the Virgin Islands.

Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that the Delinquent 
Accounts and Returns Branch continues to be short-staffed.  For 
example, they pointed out that that there are 5 vacant positions 
out of 11 in the St. Thomas office and 5 vacant out of 6 in the 
St. Croix office.  They also said that, despite the staffing 
problems, since 2002 the Branchï¿½s revenue officers and revenue 
representatives have been instructed to promptly follow-up with 
delinquent taxpayers.

Bureau officials also stated that the Delinquent Accounts and 
Returns Branch developed a Microsoft Access application, 
which includes the data elements recommended in the 1997 
report, to maintain a master inventory of taxpayer accounts 
assigned to the revenue officers.

Further, Bureau officials said that liens and levies are being 
used as part of the collection enforcement process to the extent 
deemed necessary and appropriate by the revenue officers and 
their supervisors.





Tax Penalty Waivers Were 
Not Always Properly 
Documented


The Bureau did not maintain a listing of tax penalty waivers 
granted to delinquent taxpayers.  Therefore, they provided us 
with two boxes containing waivers issued during 1998 to 2000, 
which were being held in storage.  We found that during the 
3-year period, the Bureau issued 396 tax penalty waivers 
totaling more than $815,000.  Of the 396 waivers issued, 263 
were processed by the Delinquent Accounts and Returns 
Branch, 57 by the Processing Accounts and Returns Branch, 
31 by the Director, 28 by the Legal Counsel, 12 by the Federal 
Disclosure Officer, 3 by the Audit Enforcement Branch, and 
2 by the Deputy Director.  Our review also disclosed that 
although taxpayers were required to submit to the Bureau 
written requests for waiver of tax penalties, 177 of the 396 tax 
penalty waivers, totaling about $164,000, were processed 
without written decisions by the Bureau to support the waivers. 
Therefore, there was no assurance that the penalty waivers were 
issued in accordance with applicable regulations.
Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that the new VITAX system 
produces a Form 1331 that is used to capture and document the 
reason for penalty waivers.  They also pointed out that recent 
changes to the Internal Revenue Code no longer require that 
taxpayers submit requests for penalty waivers in writing.  
Telephonic requests are now also accepted.




   
AUDIT ENFORCEMENT


Our December 1997 report included five recommendations 
related to the Audit Enforcement Branch.  We found that three 
of those recommendations were fully implemented, one was 
partially implemented, and one was not implemented.  The 
Bureau conducted audits of casualty loss claims resulting from 
Hurricane Marilyn, but (1) had not hired senior revenue agents 
to handle complex tax cases and (2) did not process statutory 
notices of deficiency (90-day letters) in a timely manner.






Complex Tax Returns Were 
Not Routinely Reviewed for 
Possible Audit Issues


As had been the case during our prior audit, we found that the 
Audit Enforcement Branch continued to allocate most of its 
resources to auditing tax returns that claimed the earned income 
credit.  A Bureau official explained that they focused their 
resources in this area because they felt they would be unable to 
recoup funds from low income taxpayers who had abused the 
credit but had already received a tax refund.  However, complex 
tax returns were generally not reviewed to the same extent.  For 
example, our review of the tax case inventory of the Bureauï¿½s 
revenue agents on St. Thomas and St. Croix showed that they 
had a total of 173 complex tax returns pending to be audited.  
However, of the 173 returns, 93 were for tax years1990 through 
1997.   Therefore, the   3-year statute of limitations   for making 
tax assessments on a filed income tax return had expired in all 
93 cases.

As stated in our December 1997 report, we believe that a 
program of randomly selected tax returns for audit (for 
example, from business professionals, construction contractors, 
business license applicants, or regular taxpayers) would help to 
promote voluntary tax compliance.

Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that, based on available staff 
resources, the Audit Enforcement Branch had audited casualty 
loss claims related to Hurricane Marilyn on a random sample 
basis.  Additionally, revenue agents had recently completed IRS 
training in the states, and the Bureau was planning to hire a 
retired IRS employee as a senior revenue agent next year.

Bureau officials also stated that the Audit Enforcement Branch 
had performed audits of taxpayers in several professional 
categories, including doctors, attorneys, contractors, and 
service-station owners.  Further, the new VITAX system gave 
the Audit Enforcement Branch the capability to establish 
specific criteria for selection of tax returns for audit.  Bureau 
officials also said that during the summer the reviewer/conferee 
conducted a review of taxpayers based on 1099-MISC forms 
filed with the Bureau.






Changes to Tax Audit 
Workpapers Were Not 
Always Approved by a 
Supervisor


According to a computerized worksheet of closed cases 
provided by the Audit Enforcement Branch, 13,605 audit cases 
were closed during calendar years 1998 to 2001.  We selected a 
judgmental sample of 50 case files for review, but 5 files could 
not be located by the Bureau. Of the 45 case files reviewed, we 
found eight instances in which the tax due amounts shown in 
the revenue agentsï¿½ audit workpapers were changed by a total of 
$100,594, but there were no supervisory approvals of the 
changes.  We believe that all changes to the tax audit 
workpapers should be approved by a supervisor to ensure that 
the changes are legitimate.

We also attempted to determine the average time it took for 
revenue agents to process assigned taxpayer cases, but were 
unable to make that determination because assignment dates 
were not recorded.  The Audit Enforcement Branchï¿½s group 
supervisor told us that knowing the assignment dates was 
"immaterial."  However, we believe that such information is 
important because the Bureau has to make assessments within 
the 3-year statute of limitations.  Therefore, tax return audits 
must be completed in sufficient time to meet the statutory 
limitation.  

Of the 45 case files reviewed, 41 files did not indicate the date 
the return was assigned to a revenue agent, the date the review 
was completed by the revenue agent, nor the date the supervisor 
approved the case for closure.  For the remaining four cases, it 
took from 17 to 99 working days for the cases to be processed 
and closed.



Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that documentation was now 
required for supervisory approvals of tax audit changes.




Statutory Notices of Tax 
Deficiency Were Not 
Issued Timely


Statutory notices of deficiency (90-day letter) are issued to 
taxpayers in audit cases where agreement on tax matters is not 
reached.  Of the 45 cases reviewed, we found that 11 90-day 
letters were issued to the taxpayers.  A taxpayer who receives a 
90-day letter can either file a petition with the District Court of 
the Virgin Islands requesting a waiver for immediate 
assessment or wait for the deficiency to be assessed when the 
90-day period has expired.  Of the 11 90-day letters issued, 
3 were not sent to the Processing Branch for assessment and 
8 were not sent to the taxpayer in a timely manner.  Therefore, 
in all 11 cases, the Bureau was precluded from initiating 
collection action on tax amounts due as a result of completed 
audits.

Subsequent Actions.  At the February 18, 2003 exit 
conference, Bureau officials stated that they were reviewing the 
workflow between the Office of Chief Counsel and the 
reviewer/conferee to determine what changes can be made to 
ensure timely processing of the 90-day letters.





RECOMMENDATIONS



   
TO THE GOVERNOR OF 
THE VIRGIN ISLANDS


We recommend that the Governor of the Virgin Islands require 
the Director of Internal Revenue to:
   
     1.  Develop a plan of action for fully implementing   
recommendations from the December 1997 report that are 
classified as ï¿½partially implementedï¿½ or ï¿½not implemented.ï¿½  
The plan of action should include the title of responsible 
officials and the target dates for corrective actions, and should 
focus on pending issues related to prior period tax returns.

     2.  Coordinate with the Department of Finance to establish 
procedures to ensure that delinquent taxes are offset against 
payments made to government vendors and contractors.
   
     3.  Ensure that revenue officers use all available resources, 
including the use of liens or levies, to collect taxes owed on 
delinquent accounts.  The Bureau should also take action to 
write-off old accounts that are deemed to be uncollectible.

     4.  Place a high priority on completing audits of tax returns 
selected for review that are nearing the end of the 3-year       
statute of limitations.


AUDITEE RESPONSE


We received a February 19, 2003 response (Appendix 3) to the 
preliminary draft report from the Director of Internal Revenue 
that addressed the status of the prior audit recommendations 
(see Appendix 1).  We incorporated information from that 
response into the body of the report.  However, we did not 
receive a follow-up response to the official draft report that 
addressed the four new recommendations made in the report.  
Therefore we consider Recommendations 1 through 4 to be 
unresolved (Appendix 4).






APPENDIX 1 - STATUS OF PRIOR RECOMMENDATIONS

Report No. 98-I-188
Internal Revenue Taxes,
Bureau of Internal Revenue,
Government of the Virgin Islands




                   Prior Recommendations                 


A.1.	Develop a detailed action plan that 
outlines the Bureauï¿½s implementation schedule 
for integrating the withholding, hotel 
occupancy, and excise taxes modules onto the 
mainframe computer so that this project is 
completed by the Bureauï¿½s September 1998 
target date.





A.2.	Ensure that entries for tax payments 
made with checks that have not been honored by 
a bank are reversed from taxpayer accounts as 
paid amounts within a reasonable time (such as 
30 days) after the date that they were presented 
in payment of the accounts.  Also, consideration 
should be given to integrating the listing of 
checks not honored onto the mainframe 
computer and developing a program to allow 
interaction between the listing and the payment 
posting process.















                   Prior Recommendations                  

A.3.	Assess the causes for the delays in 
clearing income tax error registers and ensure 
that the Code and Edit Unit has sufficient staff 
resources, training, and computer access to 
process tax returns expeditiously.



          Status of Corrective Actions Taken          


Partially Implemented.  Although the Bureau 
did not meet its September 1998 target date, the 
Bureauï¿½s new VITAX system has since been 
implemented.  It integrates the processing of 
income, withholding, gross receipts, and hotel 
occupancy taxes.  At the exit conference, Bureau 
officials stated that they decided not to integrate 
excise taxes into the new system because of the 
high volume of low dollar value transactions.  
However, that decision was being reconsidered 
by the Bureau.

Partially Implemented.  We reviewed 42 checks 
totaling $308,000 that were paid by taxpayers but 
not honored by the banks, and found that none 
were reversed from taxpayer accounts.  We 
further reviewed the Bureauï¿½s debit advices for 
income taxes as far back as 1988 and did not find 
any examples of reversed income tax payments.  
At the exit conference, Bureau officials stated 
that processing of dishonored checks was 
incorporated into the new VITAX system.  Once 
the Bureau is notified by the Department of 
Finance that a check has been returned by the 
bank, a form is generated on the computer to 
assess the taxpayer for the original tax amount 
and the applicable bad check penalty.







	APPENDIX 1
	Page 2 of 5

          Status of Corrective Actions Taken          


Partially Implemented.  We were unable to 
determine the actual status of 26 of 30 returns 
selected for review because either they could not 
be located or there was no explanation as to why 
they were being held.  At the exit conference, 
Bureau officials stated that the Code and Edit 
Unit was renamed the Error Resolution Section 
and candidates were being interviewed for vacant 
positions. Additionally, we were given a live 
demonstration of how existing staff use the new 
VITAX system to review and resolve tax return 
errors online. For errors requiring additional 
information from the taxpayers, the system 
generates the necessary notice to be sent to the 
taxpayers.



A.4.	Require the Computer Branch to 
produce printouts of nonfilers, filers of duplicate 
dependent claims, and comparisons of 
businessesï¿½ sales and gross receipts taxes paid 
on an annual basis and to provide the results to 
the Audit Enforcement Branch.








B.1.	Ensure that Revenue officers in the 
Delinquent Accounts and Returns Branch 
follow up with all taxpayers within 10 days after 
a taxpayer misses the specific payment deadline 
in accordance with the Internal Revenue Code.









                   Prior Recommendations                 


B.2.	Ensure that Revenue officers maintain a 
master inventory listing and case histories for 
each taxpayer account assigned to them.  The 
master inventory listing should identify when 
the statute of limitations will expire for each 
case, and the case histories should include the 
taxpayerï¿½s residential address and telephone 
number, each collection action taken by the 
Revenue officer, and a plan of action to close 
the case.
 
B.3.	Enforce the provisions of the Virgin 
Islands Code regarding the use of liens and 
levies as collection tools.








B.4.	Determine the feasibility of assigning, 
permanently or temporarily, tax revenue clerks 
and/or taxpayer representatives from other 
branches to the Delinquent Accounts Branch, 
who can address taxpayer inquiries, or of 
redirecting calls telephonically to other branches 
where taxpayer representatives are located.

B.5.	Ensure that penalty waivers are granted 
only in accordance with established regulations. 
 In that regard, each request for a penalty waiver 
should include a written request from the 
taxpayer and a written decision by the Bureau to 
approve or deny the request based on reasonable 
cause as defined by the Internal Revenue Code.






                   Prior Recommendations                 

C.1.	Request that the legislature appropriate 
funds for the Bureau to hire qualified senior 
revenue agents to conduct audits of the casualty 
loss claims filed as result of Hurricane Marilyn 
and to conduct audits of complex tax issues.  In 
addition, the senior revenue agents should 
provide on-the-job training to the Audit 
Branchï¿½s other revenue agents.




C.2.	Require the Audit Branch to use the 
printouts that identify non-filers and filers of 
duplicate dependent claims produced by the 
Computer Branch and to establish audit criteria 
to select returns from these lists for audit 
examination based on the potential to produce 
additional revenue for the Bureau.




C.3.	Require the Audit Branch to select for 
audit a random sample of taxpayers from 
sources such as business professionals, 
construction contractors, professional service 
contractors with the Government of the Virgin 
Islands, and business license applicants in order 
to have a more comprehensive universe of tax 
returns and to use available enforcement 
measures to promote taxpayer compliance.

C.4. Require the Audit Branchï¿½s 
reviewer/conferee and the group supervisors to 
document changes to workpaper files that affect 
tax amounts due and to include supervisory 
approval of these changes in revenue agentsï¿½ 
workpaper files.






                   Prior Recommendations                  

C.5.	Provide or allocate additional personnel 
to the reviewer/confereeï¿½s secretary to aid in the 
processing of the statutory notices of deficiency 
(90-day letters) in a timely manner and to 
remove the 90-day letters from the audit files for 
transmission to the Processing Branch for 
assessment in a timely manner.


Implemented.  Although the Computer Branch 
still did not produce the recommended printouts 
for tax audit purposes, the Bureauï¿½s new VITAX 
system includes the capability for online queries 
of the taxpayer database based on criteria 
developed by the Audit Enforcement Branch.  
For example, the Audit Enforcement Branch was 
able to identify and take action on more than 
2,000 cases of duplicate dependent claims for tax 
year 2001.  Additionally, the Audit Enforcement 
Branch can query the system based on such 
elements as gross receipts taxes paid, 
withholding taxes paid, or tax credits claimed.

Partially Implemented.  We found that revenue 
officers did not perform follow-up collection 
activities on delinquent accounts or make 
reasonable collection efforts before the statute of 
limitations on collections expired for 68 taxpayer 
delinquent accounts totaling $408,000.  At the 
exit conference, Bureau officials stated that 
additional staff was being hired to fill vacant 
positions in the St. Thomas and St. Croix offices 
of the Delinquent Accounts and Returns Branch 
to ensure timely collection action.
	APPENDIX 1
	Page 3 of 5

          Status of Corrective Actions Taken          


Implemented.     For prior period tax returns, we 
found that 31 of 40 case history sheets reviewed 
either did not contain evidence of collection 
activity or did not document that adequate 
collection activity was undertaken.  At the exit 
conference, Bureau officials stated that the 
Delinquent Accounts and Returns Branch had 
developed a computer program to maintain a 
complete inventory of assigned cases, including 
the information defined in the recommendation.

Partially Implemented.  For prior period tax 
returns, we found that revenue officers did not 
use liens and levies as collection tools to enforce 
the collection of amounts owed in 33 of 
40 taxpayer case files reviewed that comprised 
214 taxpayer delinquent accounts totaling 
$4.8 million.  At the exit conference, Bureau 
officials stated that they were now using liens 
and levies when deemed necessary and 
appropriate.

Implemented.  The Bureau hired five Tax 
Revenue Clerks in April 1998 to handle 
delinquent taxpayer cases with outstanding taxes 
totaling less than $15,000, delinquent taxpayers 
without appointments, and taxpayer inquiries, 
and to redirect telephone calls to the appropriate 
employees in the other branches.

Partially Implemented.  For prior period tax 
returns, we found 177 instances totaling 
$164,000 where the Bureau did not document 
supervisory approval of penalty waivers.  At the 
exit conference, Bureau officials stated that 
Internal Revenue Code changes removed the 
requirement for written requests for penalty 
waivers.  Additionally, the new VITAX system 
provides for online processing of penalty 
waivers.

	APPENDIX 1
	Page 4 of 5
          Status of Corrective Actions Taken          


Partially Implemented.  The Bureau did not 
hire senior revenue agents to audit the 1995 
casualty loss claims and complex tax issues.  
However, formal training pertaining to the new 
tax law changes and the fundamental principles 
concerning taxation was provided to existing 
revenue agents.  At the exit conference, Bureau 
officials stated that funding was being sought to 
hire a retired IRS employee as a senior revenue 
agent.  They also stated that the casualty loss 
claims were audited on a random sample basis.

Implemented.    The Computer Branch still did 
not produce listings of nonfilers and filers of 
duplicate dependent claims.  However, the new 
VITAX system includes the capability for online 
queries of the taxpayer database based on criteria 
developed by the Audit Enforcement Branch.  
Additionally, at the exit conference, Bureau 
officials stated that the reviewer/conferee 
conducts an annual nonfiler review based on 
1099-MISC forms submitted to the Bureau.

Implemented.  We found that the Audit 
Enforcement Branch allocated most of its audit 
resources to auditing earned-income credit cases. 
However, at the exit conference, Bureau officials 
stated that they also had completed audits of tax 
returns in selected professions including doctors, 
attorneys, contractors, and service-station 
owners.


Implemented.  We found that, in 8 of 19 cases, 
supervisory approvals of tax audit changes were 
not documented.  At the exit conference, Bureau 
officials stated that documentation was now 
required for supervisory approvals of tax audit 
changes.



	APPENDIX 1
	Page 5 of 5
          Status of Corrective Actions Taken          


Not Implemented.     We found that additional 
personnel was not allocated to aid in the 
processing of the statutory notices of deficiency 
(90-day letter).  Further, in 11 instances where 
statutory notices were issued, three were not 
forwarded to the Processing Branch for 
assessment and eight were not sent to the 
taxpayers in a timely manner.  At the exit 
conference, Bureau officials stated that they were 
reviewing the work flow between the Office of 
General Counsel and the reviewer/conferee to 
determine what changes can be made to ensure 
timely processing of the 90-day letters.






APPENDIX 2 - MONETARY IMPACT



	
	Finding Area
                        

Computer Operations
   Dishonored Checks

Delinquent Accounts and Returns
   Delinquent Taxes Receivable
   Lapsed Statute of Limitations

   Totals
   
   

Unrealized Revenues



        $308,000

            
       4,800,000
          408,000
   
     $5,516,000








APPENDIX 3 - RESPONSE TO DRAFT REPORT

 


	APPENDIX 3
	Page 2 of 9

 


	APPENDIX 3
	Page 3 of 9

 


	APPENDIX 3
	Page 4 of 9

 


	APPENDIX 3
	Page 5 of 9

 


	APPENDIX 3
	Page 6 of 9

 


	APPENDIX 3
	Page 7 of 9

 


	APPENDIX 3
	Page 8 of 9

 


	APPENDIX 3
	Page 9 of 9

 



APPENDIX 4 - STATUS OF RECOMMENDATIONS


Finding/Recommendation
             Reference              
            
1 to 4



         Status          
        
Unresolved.



                       Action Required                         
             
Consider the recommendations and provide a 
response that states concurrence or 
nonconcurrence.  If concurrence is stated, 
provide a corrective action plan that includes 
the target dates and titles of the officials 
responsible for implementation of the 
recommendations.













































































	




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