This is the accessible text file for GAO report number GAO-04-1039R entitled 'IRS' Efforts to Evaluate the Section 1203 Process for Employee Misconduct and Measure Its Impacts on Tax Administration' which was released on September 27, 2004. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. September 27, 2004: The Honorable Bill Thomas: Chairman, Committee on Ways and Means: House of Representatives: The Honorable Amo Houghton: Chairman, Subcommittee on Oversight: Committee on Ways and Means: House of Representatives: Subject: IRS' Efforts to Evaluate the Section 1203 Process for Employee Misconduct and Measure Its Impacts on Tax Administration: Congress has long stressed the importance of proper treatment of taxpayers by the Internal Revenue Service (IRS). This emphasis was a major impetus for the IRS Restructuring and Reform Act of 1998,[Footnote 1] which included numerous additional protections for taxpayers. Among these was Section 1203, which defines 10 acts or omissions for which an IRS employee is to be fired.[Footnote 2] Most, but not all, of the acts or omissions involve mistreatment of taxpayers, such as by falsifying information or by harassing them.[Footnote 3] At the same time, Congress has been concerned about IRS's ability to administer the tax laws, including whether the Section 1203 provisions could hamper IRS's enforcement efforts by having a "chilling effect" on IRS employees' willingness to take appropriate enforcement actions against noncompliant taxpayers. Related concerns are whether the IRS and the Treasury Inspector General for Tax Administration (TIGTA) process for reviewing allegations made against employees is too time consuming and inconsistent,[Footnote 4] and whether all the Section 1203 provisions should be retained. In February 2003, we recommended that IRS evaluate the effectiveness of changes it made to speed up and otherwise improve the review of Section 1203 allegations. Congress is now considering legislation that would amend Section 1203 by, for example, deleting the requirement that IRS employees be fired for failing to file a tax return on time when they are owed a refund. This report responds to your request for information on IRS's Section 1203 process. Specifically, you asked for the (1) statistics on Section 1203 allegations and related actions taken; (2) status of any changes to the Section 1203 process and actions taken on our previous recommendation[Footnote 5] to evaluate the process; and (3) actions taken and data collected to measure the effects of Section 1203 on tax administration, particularly IRS's enforcement programs. We briefed your staff on our results on June 17, 2004, and July 27, 2004. As agreed with your staff at those briefings, we updated our briefing slides to include additional statistics on Section 1203 allegations and the most current information on the Section 1203 process. Our updated briefing slides are enclosed. Results: The number of Section 1203 allegations concerning taxpayer and employee rights has declined since 2000, while the number concerning IRS employee tax compliance has varied. After investigation, few allegations have resulted in employee firings. While IRS and TIGTA took some actions to implement our 2003 recommendation on evaluating the Section 1203 process, neither agency had yet developed a balanced set of goals and measures as we recommended. Similarly, IRS took some actions toward measuring the effects of Section 1203 on tax administration through a survey of selected IRS employees, but IRS had not yet committed to regularly surveying its employees to measure these effects over time. Statistics on Section 1203 Allegations, Investigations, and Outcomes: Since Section 1203 took effect in July 1998, the number of allegations filed annually peaked at about 1,700 in 2000, as shown in slide 12. However, the number of allegations regarding taxpayer and employee rights versus those regarding IRS employee compliance with federal tax filing and reporting laws differed over the years. From 1998 to 2000, the number of Section 1203 allegations regarding taxpayer and employee rights increased, particularly from 1999 to 2000. Since 2000, most types of taxpayer and employee rights allegations have decreased each year. For example, Section 1203 allegations related to retaliation or harassment declined from 1,000 in 2000 to 143 in 2003. In contrast, Section 1203 allegations related to employee noncompliance with tax filing and reporting laws steadily increased almost each year since 1998. Partial year data for 2004 through April suggest that this trend might continue. Although 88 percent of the allegations filed between July 1998 and April 2004 were completely investigated, 13 percent of these completed investigations substantiated the allegation made. However, differences exist by type of allegation in the number of completed investigations and substantiated allegations (see slide 16). Of 2,477 completed investigations of taxpayer and employee rights allegations, 36 (1.5 percent) were substantiated. More allegations regarding noncompliance with federal tax laws were substantiated; of 2,986 completed investigations, 667 (22.3 percent) were substantiated. Of the 582 substantiated allegations where penalty decisions were complete,[Footnote 6] 126 (21.7 percent) resulted in employee firings. Another 149 (25.6 percent) resulted in employees resigning or retiring, and 257 (44.2 percent) resulted in penalty mitigation. Another 50 cases or 8.6 percent were closed because the employee separated for other reasons. The vast majority of the firings and other penalties were for noncompliance with federal tax laws, because such cases were the vast majority of substantiated allegations. Slide 17 has details. Status and Evaluation of the Section 1203 Process: IRS and TIGTA managers stated that the basic Section 1203 process has not changed since 2002. However, IRS managers added that an IRS task force is studying the part of the process that deals with the Employee Tax Compliance (ETC) process and plans to recommend changes during November 2004. This task force is to identify ways to (1) more quickly process ETC issues including Section 1203 allegations and (2) more effectively educate employees about their responsibilities to comply with federal tax law. IRS also is taking some actions to implement our previous recommendation on evaluating the Section 1203 process, but has not yet developed a full set of goals and measures for evaluating the process. We had recommended that IRS and TIGTA develop an approach for evaluating the Section 1203 process, using (1) results-oriented goals, (2) balanced performance measures to assess progress towards those goals, and (3) methods for collecting and analyzing data related to the goals and measures. IRS program managers stated that they are developing a data sharing system in conjunction with TIGTA that could be used to evaluate the entire Section 1203 process. Depending on the results of pilot testing during the fall of 2004, this system could be implemented as early as December 2004. Although IRS and TIGTA have developed goals and measures on the timeliness of certain parts of the Section 1203 process, they have not developed other goals and measures, such as on the quality of the process or the satisfaction of those involved in the process. Without these other goals and measures, IRS does not have a balanced evaluation system. In other programs, IRS relies on a balanced set of goals and measures that address the results of the program (such as making quality decisions in a timely manner), and the satisfaction of customers and employees (such as their views on fairness and timeliness). Having more than one goal and measure and then balancing those goals and measures is important to avoid adverse effects. For example, if improvements are made in the timeliness of the process but the quality of the decisions made during screening, investigating, and adjudicating is poor, or if those involved in the process view the process as unfair or incomplete, the net effect could be negative. IRS managers explained that the Section 1203 process has been evolving since they implemented the changes during 2002. As a result, they said that they have not taken the time to focus on other potential goals and measures. Even so, they stated that they believe that the process is rigorous and subjects each allegation to multiple levels of review in an attempt to ensure quality in making sensitive decisions about employees' careers. They agreed, however, that other goals and measures would provide a more balanced evaluation system and that they will consider developing others. Measuring the Effects of Section 1203 on Tax Administration: IRS has not yet measured the effects of Section 1203 on enforcement programs. In light of IRS officials stating that they still believe that Section 1203 can have a chilling effect on enforcement, measuring these effects is important. IRS plans to measure employees' willingness to take enforcement actions under Section 1203, using a revised version of the survey we used for our 2003 report to identify the extent of their willingness. According to an IRS official, IRS plans to administer the survey by the end of calendar year 2004. For now, the survey is to be administered to IRS enforcement employees who contact small business and self-employed taxpayers about their tax compliance. IRS has not yet decided how regularly to administer the survey and for which types of employees. For example, IRS could also survey certain types of enforcement employees who interact with individual taxpayers who do not have business incomes and who have been subjected to Section 1203 allegations. The planned survey could be administered to more types of employees. Further, IRS could administer the survey regularly, such as annually or every 2 years. Having a regular measurement would give IRS some indication of whether its employees are more or less willing to perform their duties as assigned under the purview of Section 1203. IRS officials said they are concerned about the time and effort of continually doing the survey, particularly when so few allegations in recent years have involved contacts with taxpayers. They also said that they are considering other means for getting input on the impacts of Section 1203 on enforcement, such as through focus groups. IRS officials said that after the survey is completed in 2004, they will decide whether and how often to administer the survey and whether other IRS employees should be included. Concluding Observations: IRS and TIGTA have taken initial steps toward developing an approach for evaluating the entire Section 1203 process. However, IRS and TIGTA have not yet developed a balanced set of goals and measures, as recommended in our 2003 report. Given our previous recommendation and because of the ongoing development of the evaluation system for the Section 1203 process, we are not making a new recommendation. Rather, we will continue to track actions to meet our previous recommendation until we see the development of a balanced set of measures. IRS has also taken initial steps to measure the effects of Section 1203 on tax administration by asking certain types of enforcement employees about their willingness to enforce the tax laws given Section 1203. This survey is important to IRS management to periodically get an indication of how Section 1203 affects IRS employees' willingness to enforce the tax laws, regardless of whether they have had a Section 1203 allegation. Any IRS employee who contacts taxpayers could be subjected to a Section 1203 allegation, which could affect their willingness to take enforcement actions. However, IRS has not yet committed to regularly surveying IRS employees, in part because of the time and effort of doing surveys. As stated previously, because IRS is considering such a commitment as it continues to develop the measurement system, we are not yet making a recommendation. Scope and Methodology: To determine the number, type, and disposition of Section 1203 allegations, we analyzed data from IRS's Automated Labor and Employee Relations Tracking System (ALERTS) database as of April 30, 2004. The data included all Section 1203 cases that originated in IRS or TIGTA and were either investigated by TIGTA or referred to IRS for investigation or adjudication. On the basis of our review of IRS's documentation and interviews with IRS officials, we have determined how IRS ensures the accuracy and completeness of the ALERTS data entry and processing as well as maintenance of data integrity. In addition, our testing of the ALERTS database indicated that the data are sufficiently reliable for purposes of this report. To describe the status of any changes to the Section 1203 process, our previous recommendation on evaluating the process, and actions taken and data collected to measure the effects of Section 1203 on IRS's enforcement programs, we interviewed IRS's Employee Conduct and Compliance Office staff. We also collected information from IRS offices responsible for handling allegations on employee tax compliance and discrimination, which used variations of the basic Section 1203 process. Although our previous recommendation covered all parts of the Section 1203 process, our briefing slides focused on the basic Section 1203 process that involved allegations on the treatment of taxpayers rather than on misconduct internal to IRS. We supplemented this work with interviews of TIGTA and IRS's Office of Program Evaluation and Risk Analysis (OPERA) staff. We also reviewed various IRS documents on the timeliness of processing Section 1203 allegations. Finally, we obtained information from staff of IRS's Wage and Income Division as well as the Small Business/Self Employed Division on training provided to the employees of these divisions about Section 1203. We conducted our work from April 2004 through July 2004 in accordance with generally accepted government auditing standards. Agency Comments and Our Evaluation: We asked IRS and TIGTA to provide us comments on a draft of this report. The IRS Commissioner responded on September 15, 2004, saying that IRS is continuing to develop balanced goals and measures for evaluating the Section 1203 process (see app. I). He referred to timeliness goals and measures and to a 100 percent review of all Section 1203 cases as a measure of quality. He also referred to plans to revise our 2002 survey and administer it to selected IRS enforcement employees to measure, among other things, the extent to which they are willing to take specific enforcement actions given Section 1203 and the extent to which they think that a Section 1203 allegation will be handled timely and fairly as a measure of employee satisfaction. We view these steps as progress. However, unless the 100-percent review for quality has a clear definition of quality as well as specific measures and goals to track quality--as we recommended in our 2003 report--the results will be difficult to interpret. Similarly, IRS has not made decisions on the specific goals and measures for the satisfaction of employees engaged in the Section 1203 process or affected by the process. On September 13, 2004, the Acting Inspector General for TIGTA acknowledged our findings and decision to track progress in meeting our 2003 recommendation rather than make a new one (see app. II). She referred to the challenge in developing a coordinated evaluation system for the Section 1203 process because of TIGTA's independence in overseeing IRS. She said TIGTA has its own set of goals, measures, and performance data for evaluating TIGTA's processing of all complaints and investigations, including those involving Section 1203. She also pointed to workload indicators such as timeliness to ensure quality performance, and to meetings with IRS employees to solicit input on their satisfaction. We acknowledged TIGTA's concern with independence in our 2003 report, discussing why coordination with IRS on how each agency will evaluate its part of the Section 1203 process need not jeopardize TIGTA's independence. Our issue now is whether each agency has produced a balanced evaluation system for its part of the process. While TIGTA has made progress, its goals and measures for employee satisfaction do not specifically tie to Section 1203 investigations, and it has no goals and measures for customer satisfaction with the Section 1203 process. As a result, determining whether employee or customer satisfaction with the process is increasing or decreasing is not possible. We recognize that costs would be associated with producing goals and measures. However, the attention given the Section 1203 process by taxpayers, IRS employees, and the Congress shows the importance of having balanced goals and measures for reliable monitoring of how well the process works. We are sending copies of this report to the Commissioner of Internal Revenue and other interested parties. We will make copies available to others upon request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. This report was prepared under the direction of Tom Short, Assistant Director. Other major contributors included Perry Datwyler, MacDonald Phillips, Jeff Schmerling, Brenda Rabinowitz, Evan Gilman, Shirley Jones, and Michael Rose. If you have any questions about this report, please contact me at email@example.com or Tom Short at firstname.lastname@example.org or either of us at (202) 512-9110. Signed by: James R. White: Director, Tax Issues: Enclosure: [See PDF for image] [End of slide presentation] [End of section] Appendix I: Comments from the Internal Revenue Service: COMMISSIONER: DEPARTMENT OF THE TREASURY: INTERNAL REVENUE SERVICE: WASHINGTON, D.C. 20224: September 15, 2004: Mr. James R. White: Director, Tax Issues: United States Government Accountability Office: 441 G Street, N.W. Washington, D.C. 20548: Dear Mr. White: Thank you for the opportunity to review the draft report, "Statistics on Section 1203, and IRS's Efforts to Evaluate the Section 1203 Process and Measure the Impacts," (GAO-04-1039R). We also appreciate the good working relationship we developed with your staff during this review, and the input they provided us on our plans to implement a follow-up survey to the survey GAO completed in 2002. As discussed in the draft report, we are continuing to develop a balanced set of goals and measures for evaluating the Section 1203 process. As a result of our own internal work with contractors and your last review, we implemented procedural changes in processing Section 1203 cases that resulted in a 100% independent review of all allegations, which we consider to be a quality measure. We also set goals for timely processing of cases as identified in your report. Finally, as noted in the slides of your draft report, we are conducting a follow-up survey to your survey of Small Business/Self-Employed (SB/ SE) employees. Our goal is to measure, among other things, whether there have been any changes in their perception of whether Section 1203 is impacting their willingness to take enforcement actions. We purposefully limited the survey to SB/SE employees so that we could compare the results with your initial survey. In this same survey, we also are getting a baseline measure of whether employees think a Section 1203 allegation against them will be handled in a timely and fair manner. We will continue to look at ways to measure our current processing and to improve service to taxpayers and employees in implementing Section 1203. We anticipate being able to share the results of our survey of SB/SE frontline compliance staff with you sometime in the second quarter of 2005 and look forward to continuing to work with you on Section 1203 implementation. If you have any questions, please call Ronald Glaser, Director, Employee Conduct and Compliance Office, at (202) 622-4381. Sincerely, Signed by: Mark W. Everson: Appendix II: Comments from the Treasury Inspector General for Tax Administration: DEPARTMENT OF THE TREASURY: WASHINGTON, D.C. 20005: September 13, 2004: Mr. James R. White: Director, Tax Issues: U.S. Government Accountability Office: 441 G Street N.W. Room 2440C: Washington, DC 20548: Dear Mr. White, We have reviewed the draft report concerning the Internal Revenue Service (IRS) and the Treasury Inspector General for Tax Administration (TIGTA) processing of alleged Section 1203 violations and the implementation of "balanced" performance measures. The report is entitled Statistics on Section 1203, and IRS's Efforts to Evaluate the Section 1203 Process and Measure the Impacts (GAO-04-1039R). We appreciate the opportunity to comment on the report. This draft report responds to a Congressional request for information on the IRS Section 1203 process. Specifically, the U.S. Government Accountability Office (GAO) was asked for (1) statistics on Section 1203 allegations and related actions taken; (2) status of any changes to the Section 1203 process and actions taken on GAO's previous recommendation to evaluate the process; and (3) actions taken and data collected to measure the effects of Section 1203 on tax administration, particularly IRS's enforcement programs. Your draft report found that the number of Section 1203 allegations concerning taxpayer and employee rights has declined since 2000, while the number concerning IRS employee tax compliance have varied. In addition, while IRS and TIGTA took some actions to implement GAO's 2003 recommendationl [NOTE 1], neither agency had yet developed a balanced set of goals and measures as GAO recommended. This draft report did not make a new recommendation because IRS and TIGTA have yet to develop a balanced set of goals and measures, as GAO recommended in 2003. Instead, GAO intends to continue to track IRS and TIGTA actions to meet previous recommendations until GAO observes the development of a balanced set of measures. As noted in our reply to GAO-03-394 dated February 6, 2003, TIGTA understands the desire to have a jointly established and implemented plan between IRS and TIGTA for a coordinated evaluation system for the Section 1203 process. However, there are significant challenges to meeting this objective. The Inspector General Act of 1978 (IG Act), as modified by the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), created TIGTA to provide completely independent oversight of the IRS. As such, TIGTA has independently established goals, performance measures, and methods for analyzing performance data for TIGTA investigations, including Section 1203 allegations. The development of a joint, balanced set of goals by IRS and TIGTA, at least in appearance, would compromise our oversight independence, which was one of the principal congressional purposes for forming TIGTA. As also noted in our February 6, 2003 reply, TIGTA and the IRS worked together to create the IRS Board of Professional Responsibility (BEPR), a streamlined Section 1203 review and adjudication process. TIGTA has established an effective policy for evaluating all complaints and investigations, to include Section 1203 issues. TIGTA also utilizes internal workload indicators (proper complaint triaging and timeliness) to assist managers in measuring and ensuring quality performance. TIGTA will continue to gauge customer satisfaction through periodic meetings with IRS managers and labor relations functions. Thank you for the opportunity to review and comment on your draft report regarding the processing of Section 1203 allegations. If you need any further information, please contact Mr. Timothy Camus, Assistant Inspector General for Investigations, at (202) 927-7234. Sincerely, Signed by: Pamela J. Gardiner: Acting Inspector General: (450320): FOOTNOTES  P.L. 105-206, July 22, 1998.  The IRS Commissioner has statutory discretion to mitigate the penalty by imposing some other disciplinary outcome other than firing the employee who committed a Section 1203 violation.  The 10 acts or omissions under Section 1203 can be broken into two types--eight relate to employee and taxpayer rights--such as the right not to be harassed or not to be discriminated against--and two relate to IRS employee noncompliance with tax laws--such as not filing a required tax return on time.  TIGTA's role in the process is to investigate most types of Section 1203 allegations, excluding allegations involving employees' tax noncompliance and discrimination.  GAO, Tax Administration: IRS and TIGTA Should Evaluate Their Processing of Employee Misconduct under Section 1203, GAO-03-394 (Washington, D.C. Feb. 14, 2003).  Decisions for 121 of the 703 substantiated allegations were still being processed when we finished our analysis.