This is the accessible text file for GAO report number GAO-07-1160 
entitled 'Tax Administration: The Internal Revenue Service Can Improve 
Its Management of Paper Case Files' which was released on October 11, 
2007. 

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

United States Government Accountability Office: 

GAO: 

September 2007: 

Tax Administration: 

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

Tax Administration: 

GAO-07-1160: 

GAO Highlights: 

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

Why GAO Did This Study: 

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

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

What GAO Found: 

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

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

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

[See PDF for image] 

Source: GAO analysis of IRS data; Art Explosion (images). 

[End of section] 

What GAO Recommends: 

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

To view the full product, including the scope and methodology, click on 
[hyperlink, http://wwww.GAO-07-1160]. For more information, contact 
Michael Brostek at (202) 512-9110 or brostekm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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

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

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Internal Revenue Service: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Figures: 

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

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

Abbreviations: 

ACS: Automated Collection System: 

ARM: Area Records Manager: 

AWSS: Agency-Wide Shared Services: 

CCP: Centralized Case Processing: 

CDP: Collection Due Process: 

COVERS: Control of Veterans Records System: 

DLN: Document Locator Number: 

FRA: Federal Records Act: 

FRC: Federal Records Center: 

IDRS: Integrated Data Retrieval System: 

IRC: Information Resource Coordinator: 

IRM: Internal Revenue Manual: 

IRS: Internal Revenue Service: 

LMSB: Large and Mid-size Business Division: 

NRP: National Research Project: 

PWS: Performance Work Statement: 

SB/SE: Small Business/Self-Employed Division: 

SPC: Submission Processing Center: 

TE/GE: Tax-Exempt and Government Entities Division: 

TFRP: Trust Fund Recovery Penalty: 

TIGTA: Treasury Inspector General for Tax Administration: 

VA: Department of Veterans Affairs: 

W&I: Wage and Investment Division: 

United States Government Accountability Office: 

Washington, DC 20548: 

September 28, 2007: 

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

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

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

Results in Brief: 

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

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

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

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

Background: 

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

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

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

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

[See PDF for image] 

Source: GAO analysis of IRS data. 

[End of figure] 

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

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

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

IRS Has Lost Revenue in Court Proceedings: 

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

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

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

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

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

Case Files May Be Unavailable for Other Units: 

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

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

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

Congressional Oversight May Be Hindered: 

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

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

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

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

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

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

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

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

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

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

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

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

[See PDF for image] 

Source: GAO analysis of IRS data; Art Explosion (images). 

[End of figure] 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Cannot Determine Whether Actions for Improvement Are Needed: 

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

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

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

To automate the location of paper case files sent to the FRC, SB/SE 
Collection officials said they enter FRC information along with other 
case information into its Junior system. Junior has been designed as a 
case processing, closed files inventory tracking system for cases that 
are being sent to the FRC. While IRS officials told us this system has 
improved IRS's ability to locate paper case files, they provided no 
data to support this conclusion. In addition, the Junior system is only 
used by SB/SE Collection for specific types of cases (taxpayer 
delinquency investigations, taxpayer delinquency accounts, and 
installment agreements[Footnote 24]). However, an AWSS official 
suggested that use of Junior by other programs and operating divisions 
could improve locating closed paper case files. 

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

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

Conclusions: 

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

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

Recommendations for Executive Action: 

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

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

- tracking the number of paper case files that cannot be located or are 
received untimely and the reasons why and: 

- developing performance measures to monitor the effectiveness of the 
paper case file process to assist in determining which options for 
improving paper case file management are the most beneficial for IRS. 

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

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

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

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

Agency Comments: 

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

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

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

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

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

Signed by: 

Michael Brostek: 

Director, Tax Issues Strategic Issues Team: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

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

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

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

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

[End of section] 

Appendix II: Comments from the Internal Revenue Service: 

Department of the Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

September 18, 2007: 

Mr. Michael Brostek: 
Director, Tax Issues: 
U.S. Government Accountability Office: 
441 G. St. N.W. 
Washington DC 20548: 

Dear Mr. Brostek: 

Thank you for the opportunity to respond to your draft entitled "Tax 
Administration: The Internal Revenue Service Can Improve Its Management 
of Paper Case Files," (GAO-07-1160). 

We appreciate your report that emphasizes the importance of maintaining 
an effective process for paper case file management and describes the 
difficulties we sometimes experience in locating and retrieving paper 
case files. 

The Internal Revenue Services (IRS) is committed to responding to 
requests for paper case files as efficiently and expeditiously as 
possible. We agreed that the type of paper case files referenced in the 
report are often needed by staff to fulfill mission critical 
requirements, and we recognize the impact on tax administration and 
customer service when we fail to locate specific files. 

We agree that the IRS needs to review its Records Management Program, 
baseline current practices and procedures, and identify changes and 
improvements. We will form a cross-functional working group to 
implement this review and develop corrective actions. In doing that, we 
will take into account all of GAO's recommendations. 

As we move forward to improve the Records Management Program, I am 
pleased to report some systematic enhancements by the Wage and 
Investment Division that we can already build on to facilitate the 
requests for tax returns and associated records. 

* Changes to the application/program on the IRS computer system IDRS 
that requires the input of the requester's mailing address has speeded 
the routing and delivery of tax returns and associated records to the 
requester. 

* With the opening and subsequent operation of the Consolidated Alpha 
Site in Independence, MO, campuses are able to hold List Year Records 
in-house for much longer periods of time so that requests for tax 
returns are filled quicker and can be serviced locally. 

* Tax records for the Ogden and Atlanta campuses were consolidated into 
one National Archives and Records Administration (NARA) facility, 
eliminating requests to multiple Federal Record Centers for two of the 
two of the larger Submission Processing Campuses. 

* New procedures were implemented to streamline the routing process for 
tax records requested by the Examination function, which allowed for 
more timely receipt of records. 

These enhancements, along with future identified changes and 
improvements, including the expected consolidation of submission 
processing centers and continued increase in electronic filing, will 
improve the IRS' ability to locate retrieve, and control case files in 
a more efficient manner. 

If you have any questions, pleas contact Floyd Williams, Director, 
Legislative Affairs, at (202) 622-3720. 

Sincerely, 

Linda E. Stiff: 

Acting Commissioner of Internal Revenue: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Michael Brostek, (202) 512-9110 or brostekm@gao.gov: 

Acknowledgments: 

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

[End of section] 

Footnotes: 

[1] 44 U.S.C. § 3102. 

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

[3] GAO, Standards for Internal Control in the Federal Government, GAO/ 
AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[4] A WSS plans, develops, promotes, and establishes agencywide policy, 
standards and procedures, and guidelines on records management. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[19] IRCs monitor filing operations in their local offices. 

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

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

[22] TIGTA 2004-10-186. 

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

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

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