This is the accessible text file for GAO report number GAO-08-166
entitled 'Financial Audit: IRS's Fiscal Years 2007 and 2006 Financial
Statements' which was released on November 9, 2007.
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.
U.S. Government Accountability Office:
GAO:
Report to the Secretary of the Treasury:
November 2007:
Financial Audit:
IRS's Fiscal Years 2007 and 2006 Financial Statements:
GAO-08-166:
GAO Highlights:
Highlights of GAO-08-166, a report to the Secretary of the Treasury.
Why GAO Did This Study:
Because of the significance of Internal Revenue Service (IRS)
collections to overall federal receipts and, in turn, to the
consolidated financial statements of the U.S. government, which GAO is
required to audit, and Congress’s interest in financial management at
IRS, GAO audits IRS’s financial statements annually to determine
whether (1) the financial statements are reliable, and (2) IRS
management maintained effective internal controls. GAO also tests IRS’s
compliance with selected provisions of significant laws and regulations
and its financial systems’ compliance with the Federal Financial
Management Improvement Act of 1996 (FFMIA).
What GAO Found:
In GAO’s opinion, IRS’s fiscal years 2007 and 2006 financial statements
are fairly presented in all material respects. However, serious
internal control and financial management systems deficiencies
continued to make it necessary for IRS to rely on resource-intensive
compensating processes to prepare its financial statements. Because of
these and other deficiencies, IRS did not, in GAO’s opinion, maintain
effective internal controls over financial reporting (including
safeguarding of assets) or compliance with laws and regulations, and
thus did not provide reasonable assurance that losses, misstatements,
and noncompliance with laws and regulations material in relation to the
financial statements would be prevented or detected on a timely basis.
IRS has continued to make significant strides in addressing its
financial management challenges and has substantially mitigated several
material weaknesses in its internal controls. For example, IRS (1)
enhanced its reporting of tax receipts and accelerated its
certification of excise tax receipts to recipient trust funds, (2)
issued its first cost accounting policy to serve as guidance for
costing its services and activities, (3) enhanced its use of available
information to better target collection efforts on outstanding tax debt
and reduce the risk of improper refund disbursements, and (4) made
progress in establishing the framework for implementing a subsidiary
ledger for its tax administration activities. However, IRS’s ability to
fully address its remaining financial management issues largely depends
on addressing the limitations of its automated systems used to process
tax-related activities. IRS has also not determined how to apply the
cost information that resides in its core general ledger system for non-
tax activities to the activities processed by its separate tax
processing systems. Thus, it is unclear how or when these issues will
be resolved. GAO continues to consider issues related to IRS’s controls
over financial reporting, management of unpaid assessments, collection
of revenue and issuance of tax refunds, and information security to be
material weaknesses. Additionally, while IRS continued to make progress
in addressing weaknesses in controls over hard-copy taxpayer receipts
and data, GAO concluded that remaining issues related to this activity
constituted a significant deficiency. Also, GAO found that IRS was not
always in compliance with the law concerning the timely release of tax
liens.
IRS management faces serious challenges from its continued use of
obsolete financial management systems that do not conform to the
requirements of FFMIA. These challenges adversely affect IRS’s ability
to fulfill its responsibilities as the nation’s tax collector because
it is unable to routinely obtain comprehensive, timely, accurate, and
useful information for day-to-day decision making. In addition, as IRS
continues to progress toward ever more automated financial management
processes, the presence of material weaknesses in controls over these
systems, especially in the area of information security, could have
serious implications for our ability to determine whether IRS’s
financial statements are fairly stated.
What GAO Recommends:
Based on prior audits, GAO made numerous recommendations to IRS to
address the internal control and compliance issues that persisted
during fiscal year 2007. GAO will continue to monitor IRS’s progress in
implementing the 144 recommendations that remain open as of the date of
this report, of which 69 relate to the material weakness in information
security.
IRS agreed with the report’s findings and noted that it fairly
presented IRS’s progress and challenges. IRS noted that improving
information security continues to be a priority, and that it has a
solid management team in place to address remaining financial
management challenges.
For a fuller understanding of GAO’s opinion on IRS's fiscal years 2007
and 2006 financial statements, readers should refer to the complete
audit report, available by clicking on [hyperlink, http://www.GAO-08-
166], which includes information on audit objectives, scope, and
methodology. For more information, contact Steven J. Sebastian, (202)
512-3406, sebastians@gao.gov.
[End of section]
Contents:
Letter:
Auditor's Report:
Opinion on IRS's Financial Statements:
Opinion on Internal Controls:
Compliance with Laws and Regulations:
Systems Compliance with the Requirements of FFMIA:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments and Our Evaluation:
Management Discussion and Analysis:
Financial Statements:
Balance Sheets:
Statements of Net Cost:
Statements of Changes in Net Position:
Statements of Budgetary Resources:
Statements of Custodial Activity:
Notes to the Financial Statements:
Required Supplementary Information:
Other Accompanying Information:
Appendixes:
Appendix I: Material Weaknesses, Significant Deficiency, and Compliance
Issues:
Material Weaknesses:
Significant Deficiency:
Compliance Issues:
Appendix II: Details on Audit Methodology:
Appendix III: Comments from the Internal Revenue Service:
[End of section]
Comptroller General of the United States:
United States Government Accountability Office:
Washington, DC 20548:
November 9, 2007:
The Honorable Henry M. Paulson, Jr.:
The Secretary of the Treasury:
Dear Mr. Secretary:
The accompanying report presents the results of our audits of the
financial statements of the Internal Revenue Service (IRS) as of, and
for the fiscal years ending, September 30, 2007, and 2006. We performed
our audits in accordance with the Chief Financial Officers (CFO) Act of
1990, as expanded by the Government Management Reform Act of 1994. This
report contains our (1) unqualified opinions on IRS's financial
statements, (2) opinion that IRS's internal controls were not effective
as of September 30, 2007, (3) conclusion that IRS did not comply with
one provision of the laws and regulations we tested, and (4) conclusion
that IRS's financial management systems were not in substantial
compliance with the requirements of the Federal Financial Management
Improvement Act of 1996 as of September 30, 2007.
Our unqualified opinions on IRS's fiscal years 2007 and 2006 financial
statements were made possible in part by the continued extraordinary
efforts of IRS senior management and staff to compensate for serious
internal control and financial management systems deficiencies. IRS is
currently in the midst of a major business systems modernization that
is ultimately intended to resolve its most serious financial systems
challenges. However, it is unclear when this effort will be completed
or if it will be fully successful. In the interim, preparing reliable
financial statements will continue to be a difficult challenge for IRS,
requiring continued reliance on extraordinary compensating measures. To
date, these measures have proved successful: for the eighth consecutive
year, we have been able to render an unqualified opinion on IRS's
financial statements.
IRS has made great strides over the last several years in addressing
its financial management challenges and has resolved or substantially
mitigated several material weaknesses and other less significant
weaknesses in its internal controls. This progress continued in fiscal
year 2007. For example, during fiscal year 2007, IRS accelerated the
certification of excise tax receipts, thereby improving the timeliness
of distributions of such taxes to recipient trust funds. IRS also has
begun presenting estimates of its Social Security and Medicare tax
collections in other information accompanying its financial statements,
and presenting the most recent available information on the amount of
excise tax receipts certified to the Airport and Airways, Black Lung
Disability, and Highway Trust Funds in its Management Discussion and
Analysis. These actions enhanced the quality and disclosure of the
information presented to financial statement users, and enabled us to
conclude that these reporting issues no longer constitute internal
control deficiencies. IRS also made notable progress in using existing
management information to enable it to make more informed decisions
regarding collection of unpaid taxes and payment of refunds. However,
IRS has not yet developed the agencywide cost-benefit information
needed to assist in determining the optimum level of resources to
devote to maximizing collections of unpaid taxes and minimizing
payments of improper tax refunds in the context of its overall mission
and responsibilities, or to develop related cost-based performance
measures to assist in monitoring progress and adjusting strategies to
better address areas of noncompliance. IRS developed a cost accounting
policy during fiscal year 2007 that provides guidance on managerial
cost concepts for the agency, and has initiated cost pilot projects to
explore ways to apply its cost information to its various activities.
These actions represent a major step forward for IRS in its efforts to
develop the cost-benefit information it needs to make better informed
managerial decisions. However, the results of the cost pilots are not
expected until the last quarter of fiscal year 2008, and how
effectively IRS will apply the cost principles embodied in its new
policy remains unclear. In addition, IRS has continued to progress in
its efforts to develop detailed subsidiary records for its tax
administrative activities, but much remains to be done on this
multiyear effort. IRS has also continued to improve controls over hard-
copy taxpayer receipts and information at its submission processing
centers and lockbox banks. However, IRS has not yet reduced the risk of
loss of taxpayer receipts and information to an acceptable level.
IRS cannot fully address the financial management issues caused by the
limitations of its automated financial management systems without
additional modernization. In formulating its strategy for dealing with
these issues, IRS will also need to address how it will ultimately
apply cost information to its tax administration functions, including
collection of taxes, payment of tax refunds, and management of unpaid
tax assessments, which are accounted for in automated systems that are
physically separate from the Integrated Financial System that
encompasses IRS's cost module. As noted above, IRS has initiated
several pilot projects intended to explore ways of addressing this
issue, but the ultimate solution remains unclear. In 1995, we
designated financial management and systems modernization at IRS as
high-risk areas.[Footnote 1] We continue to consider these issues as
high risk and include them in our Business Systems Modernization high-
risk area.[Footnote 2]
Among the most serious financial management issues still remaining to
be addressed is the continued material weakness in IRS's information
security. As IRS continues its efforts to modernize its financial and
operational systems, it is critical that IRS take actions to establish
and maintain more effective information security controls on a
continuing basis, through an ongoing cycle of risk management
activities, to protect the processing, storage, and transmission of
financial and sensitive data. Until IRS successfully manages its
information security risks, management will not have adequate assurance
of the integrity and reliability of the information generated from its
financial management systems. In addition, as IRS continues to progress
toward ever more automated financial management processes, options for
alternate procedures to verify the accuracy of the information
contained in these systems without relying on automated controls within
them diminish. If IRS does not resolve this issue before these options
disappear, it could have serious implications for our ability to
determine whether IRS's financial statements are fairly stated.
We commend IRS for the improvements it has continued to make in its
financial processes and operations. The agency has made substantial
progress in improving its financial management since our first attempt
to audit its financial statements in fiscal year 1992. Nonetheless, IRS
management and staff will continue to be challenged to sustain the
level of extraordinary effort needed to produce reliable financial
statements that it has demonstrated over the past 8 years. Until the
agency is able to fully address the underlying systems and internal
control issues that have made this process so time consuming and
resource intensive, such efforts will continue to be necessary. While
it has made important progress, IRS continues to lack accurate, useful,
and timely financial information and sound controls with which to make
fully informed decisions day-to-day and to ensure ongoing
accountability, which is a primary objective of the CFO Act. It is
therefore important that its financial management initiatives continue
in order to achieve comprehensive and lasting financial management
reform.
IRS also continues to face a significant challenge in strengthening its
enforcement of the nation's tax laws, another challenge that we have
designated as high risk.[Footnote 3] As we have previously reported,
the resources IRS has been able to dedicate to enforcing the tax laws
have not kept pace with the increases it has seen in its enforcement
workload. At the same time, IRS continues to face significant
compliance-related issues, including combating abusive tax shelters and
tax schemes, on which it is placing a high priority. Critical to IRS's
efforts in improving enforcement and, ultimately, taxpayer compliance,
is the need to have current information on the rate of compliance, both
overall and by type of taxpayer. In 2006, IRS completed a study of the
rate of compliance with the nation's tax laws by individuals and some
small business taxpayers, and is in the process of conducting a study
of S-corporations' compliance.[Footnote 4] In October 2007, IRS also
initiated a study of individual income reporting compliance, and has
requested funding for fiscal year 2008 to support multiple,
simultaneous compliance studies, potentially including corporate
taxpayers, partnerships, employment taxpayers, or tax-exempt entities.
However, until such studies have been conducted, and the results
analyzed, IRS will lack current information on compliance rates.
Additionally, the continued lack of reliable cost-benefit information
and a systematic, agencywide strategy to effectively employ it will
hamper IRS's ability to make the most effective use of the information
acquired during such efforts to enable IRS to better fulfill its
mission.
The accompanying report also discusses other significant issues that we
identified in performing our audit that we believe should be brought to
the attention of IRS management and users of IRS's financial
statements.
We are sending copies of this report to the Chairmen and Ranking
Members of the Senate Committee on Appropriations; Senate Committee on
Finance; Senate Committee on Homeland Security and Governmental
Affairs; Subcommittee on Taxation and IRS Oversight, Senate Committee
on Finance; House Committee on Appropriations; House Committee on Ways
and Means; and House Committee on Oversight and Government Reform. We
are also sending copies of this report to the Chairman and Vice
Chairman of the Joint Committee on Taxation, the Acting Commissioner of
Internal Revenue, the Director of the Office of Management and Budget,
the Chairman of the IRS Oversight Board, and other interested parties.
The report is available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
This report was prepared under the direction of Steven J. Sebastian,
Director, Financial Management and Assurance, who can be reached at
(202) 512-3406 or s [Hyperlink, sebastians@gao.gov] ebastians@gao.gov.
If I can be of further assistance, please call me at (202) 512-5500.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report.
Sincerely yours,
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of letter]
Comptroller General of the United States:
United States Government Accountability Office:
Washington, DC 20548:
To the Acting Commissioner of Internal Revenue:
In accordance with the Chief Financial Officers (CFO) Act of 1990, as
expanded by the Government Management Reform Act of 1994,[Footnote 5]
this report presents the results of our audits of the financial
statements of the Internal Revenue Service (IRS) for fiscal years 2007
and 2006. The financial statements report the assets, liabilities, net
position, net costs, changes in net position, budgetary resources, and
custodial activity related to IRS's administration of its
responsibilities for implementing federal tax legislation. The
financial statements do not include an estimate of the amount of taxes
that are owed the federal government but have not been paid by
taxpayers, often referred to as the tax gap,[Footnote 6] nor do they
include information on tax expenditures.[Footnote 7]
In its role as the nation's tax collector, IRS has a demanding
responsibility in collecting taxes, processing tax returns, and
enforcing the nation's tax laws. IRS is a large and complex
organization, adding unique operational challenges for management. IRS
employs tens of thousands of people in its Washington, D.C.,
headquarters, 10 service center campuses, 3 computing centers, and
numerous other field offices throughout the United States. In fiscal
years 2007 and 2006, IRS collected about $2.7 trillion and $2.5
trillion, respectively, in tax payments; processed hundreds of millions
of tax and information returns; and paid about $292 billion and $277
billion, respectively, in refunds to taxpayers.
One of the largest obstacles continuing to face IRS management is the
agency's lack of an effective financial management system capable of
producing the reliable, useful, and timely information IRS managers
need to assist in making day-to-day decisions, which is a primary
objective of the CFO Act. IRS continued to make progress in modernizing
its financial management capabilities, and continued to make strides in
addressing its financial management challenges. IRS nonetheless
continued to confront many of the pervasive internal control weaknesses
that we have reported each year since our first attempt to audit its
financial statements in fiscal year 1992.[Footnote 8] In fiscal year
2007, for the eighth consecutive year, IRS was able to produce
financial statements covering its tax administration and nontax
administrative activities that are fairly stated in all material
respects. However, until IRS resolves the issues affecting the
automated systems it relies on to process the administration of tax-
related transactions, it will continue to be challenged to sustain the
level of effort needed to produce reliable financial statements in a
timely manner.
During fiscal year 2007, IRS continued to make significant progress in
its efforts to address its weaknesses in controls over several critical
areas, including reliability of financial reporting, management of
unpaid tax assessments, collections of unpaid taxes and disbursements
of improper tax refunds, and security over hard-copy taxpayer receipts
and data. For example, IRS separately reported estimated receipts of
Social Security and Medicare taxes in the other accompanying
information to its financial statements, and significantly accelerated
its certification of excise tax receipts to the recipient trust funds.
On the basis of these improvements, we no longer consider these
matters, which have been long-standing components of broader IRS
financial reporting issues, to represent internal control deficiencies.
IRS also continued to enhance the capabilities of its Custodial Detail
Data Base (CDDB), which is intended to ultimately serve as a subsidiary
ledger for IRS's tax administration activities, including tax revenue
receipts, tax refund disbursements, and unpaid tax debt. IRS plans for
CDDB to achieve this goal by linking account information in IRS's
master files[Footnote 9] with its general ledger for tax administration
activities. In fiscal year 2006, IRS implemented the first phase of
CDDB, which primarily consisted of computer programs that analyze and
classify related taxpayer accounts from IRS's masterfile that are
associated with unpaid payroll taxes.[Footnote 10] However, these
programs only had the capability to process less complex accounts
recorded in IRS's masterfiles beginning in August of 2001. During
fiscal year 2007, IRS enhanced CDDB to process a larger percentage of
accounts associated with unpaid payroll taxes. Also, during fiscal year
2007, IRS implemented CDDB programs to begin journalizing tax debt
information from its master files to its general ledger weekly, a first
step in establishing CDDB's capability to serve as a subsidiary ledger
for unpaid tax debt. However, IRS is still unable to use CDDB as its
subsidiary ledger for external reporting, and must continue to use a
labor-intensive, manual compensating process to estimate the year-end
balances of the various categories of unpaid tax assessments to avoid
material misstatements to its financial statements.[Footnote 11] For
example, IRS had to make over $20 billion in adjustments to the year-
end gross taxes receivable balance produced by CDDB as a result of its
manual estimation process for financial reporting. Full operational
capability of CDDB is several years away and depends in part on the
successful implementation of future system releases.
During fiscal year 2007, IRS continued to expand processing of the less
complex individual tax returns through its Customer Account Data Engine
(CADE), the system IRS is implementing to replace its individual master
files. However, because of problems IRS identified during testing,
start-up of the latest release of CADE was delayed and it did not
achieve the level of processing originally planned. According to IRS,
this latest release of CADE did not become fully operational until May
2007, which was about 5 months behind schedule. IRS informed us that it
originally intended CADE to process 33 million tax returns during
fiscal year 2007, which would have been over four times the 7.3 million
tax returns processed by CADE during fiscal year 2006. However, due to
the delay, CADE did not achieve this goal. During fiscal year 2007,
CADE processed 11.2 million tax returns, including 10.9 million tax
refunds totaling $11.6 billion, which represented about 4 percent of
all tax refunds disbursed by IRS in fiscal year 2007. It is unclear
when IRS will be able to rely on CADE to process all individual tax
collections and related tax refunds. In addition, once fully
implemented, CADE is only intended to replace the individual master
files; it is unclear how or when IRS will replace the business master
files.
IRS has made notable progress in using existing management information
as a basis for more informed decisions on collection of unpaid taxes
and payment of tax refunds. However, IRS has not yet developed the
agency-wide cost-benefit information needed to better determine the
optimum level of resources to devote to maximizing collections of
unpaid taxes and minimizing payments of improper tax refunds in the
context of its overall mission and responsibilities, or to develop
related cost-based performance measures to assist in monitoring
progress and adjusting strategies to better address areas of
noncompliance. IRS has developed a cost policy to provide guidance on
managerial cost accounting concepts for the agency and has initiated
cost pilot projects to explore ways to apply its cost information to
its various activities. These actions represent a major step forward
for IRS in its efforts to develop the cost-benefit information it needs
to provide a basis for well-informed management decisions. However, the
results of the cost pilots are not expected until the last quarter of
fiscal year 2008, and how effectively IRS will apply the cost
accounting principles embodied in its new policy remains unclear.
While IRS has made notable improvements throughout fiscal year 2007,
control deficiencies over financial reporting, management of unpaid tax
assessments, and collection of tax revenue and issuance of tax refunds
continued to represent material weaknesses.[Footnote 12] These
weaknesses are caused primarily by IRS's continued reliance on outdated
automated systems to provide the financial information that management
needs to make well-informed decisions, and similar weaknesses and
problems will continue to exist until these legacy systems are
replaced. In addition, we continue to consider issues related to
information security to be a material weakness. The persistent, serious
deficiencies in information security increase the risk that
confidential IRS and taxpayer information will be compromised, and have
serious implications related to the reliability of financial management
information produced by IRS's systems. As IRS continues to increase the
automation of accounting and reporting processes, the need for
effective security over the data these systems process becomes
increasingly more critical. Absent effective information security,
confidential taxpayer records will remain at risk and we, as IRS's
auditors, will continue to be unable to rely on the automated controls
built into these systems to obtain assurance that the reported balances
generated by them are reliable. Opportunities for us to utilize the
types of alternate audit procedures we have applied in the past to
compensate for this condition, such as reviewing comparisons between
automated systems and utilizing remaining hard-copy records, are
diminishing as IRS's modernization efforts progress. If IRS does not
resolve its information security material weaknesses before these
options disappear, it could have serious implications for our ability
to determine whether IRS's financial statements are fairly stated.
Opportunities for further improvement in IRS's financial reporting in
the near term are unclear. IRS has not fully addressed how it will
apply the cost information provided by its Integrated Financial System
to the tax-administration-related transactions, which are processed by
the separate systems that support financial management of IRS's tax
administration functions, including its collection of tax revenue
receipts, disbursement of tax refunds, and identification, management,
and collection of outstanding federal taxes. It is therefore unclear
how or when IRS will acquire the ability to fully measure the cost-
effectiveness of its operational activities or develop related cost-
based performance measures to facilitate informed decision-making by
management, and to more effectively support requests to Congress for
additional resources.
Opinion on IRS's Financial Statements:
IRS's financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, IRS's assets, liabilities, net
position, net costs, changes in net position, budgetary resources, and
custodial activity as of, and for the fiscal years ended, September 30,
2007, and September 30, 2006.
However, misstatements may nevertheless occur in other financial
information reported by IRS as a result of the internal control
deficiencies described in this report.
IRS's financial statements include tax revenues collected during the
fiscal year as well as the total unpaid taxes for which IRS and the
taxpayers or courts agree on the amounts owed. Cumulative unpaid tax
assessments for which there is no future collection potential or for
which there is no agreement on the amounts owed are not reported in the
financial statements. Rather, they are reported as write-offs and
compliance assessments, respectively, in required supplemental
information to IRS's financial statements. Also, in conformity with
U.S. generally accepted accounting principles, to the extent that taxes
owed in accordance with the nation's tax laws are not reported by
taxpayers and are not identified through IRS's various enforcement
programs, they are not reported in the financial statements nor in
required supplemental information to the financial statements.
Additionally, in conformity with U.S. generally accepted accounting
principles, tax expenditures represent the amount of revenue the
government forgoes resulting from federal tax law provisions that (1)
allow a special exclusion, exemption, or deduction from gross income,
or (2) provide a special credit, preferential rate, or deferred tax
liability. Tax expenditures are not reported in the financial
statements but rather presented as other accompanying information.
Opinion on Internal Controls:
Because of the material weaknesses in internal controls discussed
below, IRS did not maintain effective internal controls over financial
reporting (including safeguarding of assets) or compliance with laws
and regulations, and thus did not provide reasonable assurance that
losses, misstatements, and noncompliance with laws material in relation
to the financial statements would be prevented or detected on a timely
basis. Our opinion is based on criteria established under 31 U.S.C. §
3512 (c), (d), commonly referred to as the Federal Managers' Financial
Integrity Act of 1982 (FIA), and Office of Management and Budget (OMB)
Circular No. A-123, Management's Responsibility for Internal Control.
Despite its material weaknesses in internal controls and its systems
deficiencies, IRS was able to prepare financial statements that were
fairly stated in all material respects for fiscal years 2007 and 2006.
Nonetheless, IRS continues to face the following key issues that
represent material weaknesses in internal controls:
* weaknesses in controls over the financial reporting process,
resulting in IRS not (1) being able to prepare reliable financial
statements without extensive compensating procedures and (2) having
current and reliable ongoing information to support management decision
making and to prepare cost-based performance measures;
* weaknesses in controls over unpaid tax assessments, resulting in
IRS's inability to properly manage unpaid tax assessments and leading
to increased taxpayer burden;
* weaknesses in controls over the collection of tax revenues due the
federal government and over the issuance of tax refunds, resulting in
lost revenue to the federal government and potentially billions of
dollars in improper tax refund payments; and:
* weaknesses in information security controls, resulting in increased
risk of unauthorized individuals accessing, altering, or abusing
proprietary IRS programs and electronic data and taxpayer information.
These material weaknesses in internal controls may adversely affect any
decision by IRS's management that is based, in whole or in part, on
information that is inaccurate because of these deficiencies. In
addition, unaudited financial information reported by IRS, including
performance information, may also contain misstatements resulting from
these deficiencies. The issues encompassed by these material weaknesses
were reflected in the material weaknesses reported by IRS in its fiscal
year 2007 FIA assurance statement to the Department of the Treasury
(Treasury).
In addition to the material weaknesses discussed above, we identified
one internal control deficiency that although not a material weakness,
represents a significant deficiency in the design or operation of
internal control that adversely affects IRS's ability to meet the
internal control objectives described in this report.[Footnote 13] This
deficiency entails weaknesses in IRS's controls over hard-copy taxpayer
receipts and related information that increase the risk that this
information may be lost, stolen, or compromised. IRS included this
issue as a significant deficiency in its fiscal year 2007 FIA assurance
statement to the Treasury.
We have reported on these material weaknesses and the significant
deficiency in prior audits and have provided IRS recommendations to
address these issues.[Footnote 14] One hundred and forty-four
recommendations were still open as of the date of this report, of which
69 relate to the material weakness in information security. IRS
continues to make strides in resolving these matters. We will follow up
in future audits to monitor IRS's progress in implementing these
recommendations. For more details on these issues, see appendix I.
Compliance with Laws and Regulations:
Our tests of compliance with selected provisions of laws and
regulations disclosed one area of noncompliance that is reportable
under U.S. generally accepted government auditing standards and OMB
guidance. This area relates to IRS not releasing federal tax liens
against taxpayers' property on time.[Footnote 15] Except as noted
above, our tests for compliance with laws and regulations disclosed no
other instances of noncompliance that would be reportable under U.S.
generally accepted government auditing standards or OMB audit guidance.
However, the objective of our audit was not to provide an opinion on
overall compliance with laws and regulations. Accordingly, we do not
express such an opinion. For more details on these issues, see appendix
I.
Systems Compliance with the Requirements of FFMIA:
We found that IRS's financial management systems did not substantially
comply with the requirements of the Federal Financial Management
Improvement Act of 1996 (FFMIA) as of September 30, 2007.[Footnote 16]
Specifically, IRS's systems did not substantially comply with Federal
Financial Management System Requirements (FFMSR), federal accounting
standards (U.S. generally accepted accounting principles), and the U.S.
Government Standard General Ledger (SGL) at the transaction level. Our
conclusion is based on criteria established under FFMIA; OMB Circular
No. A-127, Financial Management Systems[Footnote 17] (which includes
the Joint Financial Management Improvement Program (JFMIP)/OMB series
of system requirements documents); U.S. generally accepted accounting
principles; and the SGL.[Footnote 18]
The issues resulting in IRS's nonconformance with the requirements of
FFMIA relate to the material weaknesses discussed above, and were
reflected in the material weaknesses in IRS's fiscal year 2007 FIA
assurance statement to Treasury. IRS's FFMIA remediation plan details
its planned corrective actions for the weaknesses that render its
financial management systems noncompliant with the requirements of
FFMIA. For more details on these issues, see appendix I.
Consistency of Other Information:
IRS's Management Discussion and Analysis and required supplementary and
other accompanying information contain a wide range of data, some of
which are not directly related to the financial statements. We did not
audit and do not express an opinion on this information. However, we
compared this information for consistency with the financial statements
and discussed the methods of measurement and presentation with IRS
officials. Based on this limited work, we found no material
inconsistencies with the financial statements, U.S. generally accepted
accounting principles, or OMB guidance.
Objectives, Scope, and Methodology:
Management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing, maintaining, and assessing internal
control to provide reasonable assurance that the broad control
objectives of 31 U.S.C. § 3512 (c), (d) (FIA) are met; (3) complying
with applicable laws and regulations; and (4) ensuring that IRS's
financial management systems substantially comply with the requirements
of FFMIA.
We are responsible for obtaining reasonable assurance about whether (1)
the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles, and (2) management maintained effective internal controls,
the objectives of which are the following:
* Financial reporting--transactions are properly recorded, processed,
and summarized to permit the preparation of financial statements in
conformity with U.S. generally accepted accounting principles and
assets are safeguarded against loss from unauthorized acquisition, use,
and disposition.
* Compliance with laws and regulations--transactions are executed in
accordance with laws governing the use of budget authority and with
other laws and regulations that could have a direct and material effect
on the financial statements and any other laws, regulations, and
governmentwide policies identified by OMB audit guidance.
We are also responsible for (1) testing compliance with selected
provisions of laws and regulations that have a direct and material
effect on the financial statements and laws for which OMB audit
guidance requires testing, (2) testing whether IRS's financial
management systems substantially comply with the three requirements of
FFMIA, and (3) performing limited procedures with respect to certain
other information appearing in these annual financial statements. For
more details on our methodology and the laws and regulations we tested,
see appendix II.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FIA, such as controls relevant to
preparing statistical reports and ensuring efficient operations. We
limited our internal control testing to testing controls over financial
reporting and compliance with laws and regulations. We did not test
compliance with all laws and regulations applicable to IRS. We limited
our tests of compliance to those laws and regulations that had a direct
and material effect on the financial statements or that were required
to be tested by OMB audit guidance that we deemed applicable to IRS's
financial statements for the fiscal years ended September 30, 2007, and
2006. We caution that noncompliance may occur and not be detected by
these tests and that such testing may not be sufficient for other
purposes. We performed our work in accordance with U.S. generally
accepted government auditing standards and OMB audit guidance.
Agency Comments and Our Evaluation:
In responding to this report, IRS agreed that the report fairly
presents its financial management progress and remaining management and
systems challenges. IRS also noted its significant accomplishments in
addressing its financial management challenges, including (1)
implementation of another phase of the CDDB, which created an interface
between CDDB and IRACS for posting summary unpaid assessment and
accrual data to IRACS, (2) improvement in the timely release of liens
to an 88 percent timeliness rate, which represented a 19 percentage
point increase over the timeliness rate in fiscal year 2006, (3)
achievement of a 21 percent increase in the Trust Fund Recovery Penalty
accuracy rate through the use of CDDB, (4) issuing of IRS's first cost
accounting policy, and (5) improvement in its capability to capitalize
or expense assets and properly account for Business Systems
Modernization costs in internal use software.
IRS also recognized the importance of the information security issues
discussed in the material weakness in information security, and noted
certain steps it has taken to address these issues. These steps include
(1) establishing an Office of Privacy, Information Protection, and Data
Security to provide direction and oversight of the security and
protection of sensitive information, (2) developing an integrated
Information Technology Security Schedule and Plan and a comprehensive
security strategy, (3) encrypting all laptop data and tapes used in
electronic data exchanges, and (4) implementing an enterprise anti-
virus internet gateway solution to detect and quarantine malicious
content from invading systems. IRS also recognized that while
challenges remain, it has a solid management team dedicated to
promoting the highest standard of financial management, and will
continue to focus on information security while improving financial
reporting.
The complete text of IRS's response is included in appendix III.
Signed by:
David M. Walker:
Comptroller General of the United States:
November 5, 2007:
[End of section]
Management Discussion and Analysis:
The Internal Revenue Service:
FY 2007 Management Discussion and Analysis At a Glance:
Linda Stiff became Acting Internal Revenue Service (IRS) Commissioner
on September 10, 2007. The Commissioner administers, manages, and
directs the execution and application of the Internal Revenue laws,
along with directing the collection of tax revenue that funds most
federal government operations and public services.
History:
The IRS is one of the oldest bureaus in the United States Government.
Article 1, Section 8 of the Constitution gave the Federal Government
the power to “lay and collect Taxes, Duties, Imposts and Excises, to
pay the Debts and provide for the common Defense and general Welfare of
the United States…” The roots of the IRS go back to the Civil War when
President Lincoln and the Congress, in 1862, established the Bureau of
Internal Revenue and the nation’s first income tax. In 1953, the Bureau
of Internal Revenue name was changed to the Internal Revenue Service
(IRS).
Vision:
The IRS will be a 21st Century agency with the human capital and
technology capabilities to effectively and efficiently collect the
taxes owed with the least disruption and burden to taxpayers.
Organization:
The organizational structure (Appendix A) of the IRS closely resembles
the private sector model, with core business activities organized around
customers with similar needs. The scope of IRS operations includes
collection of individual and corporate taxes, examination of returns,
taxpayer assistance, as well as oversight of the tax exempt
organizations and the Earned Income Tax Credit program, the nation’s
largest federally administered means-tested benefits program.
Operating Divisions:
* Wage and Investment (W&I);
* Small Business and Self Employed (SB/SE);
* Large and Mid-Size Business (LMSB);
* Tax-Exempt and Government Entities (TE/GE).
Employees:
The IRS employs over 100,000 employees.
Location:
The IRS is headquartered in Washington, D.C. The IRS also has employees
located at 748 field offices in all states and territories and some U.S.
embassies and consulates.
IRS FY 2007 Statistics:
Total Revenue Collected: $2.69 trillion;
Total Enforcement Revenue Collected: $59.2 billion;
Total Refunds: $292 billion;
Number of Hits on IRS.gov: 1.35 billion;
Number of Information Reporting Documents Processed: 1.45 billion;
Number of Downloads from IRS.gov: 157 million;
Number of Returns Filed: 235 million;
“Where’s My Refund?” Usage: 32.1 million;
Number of Taxpayers Assisted: 63.3 million;
Number of Returns Filed Electronically: 89.2 million.
Financial Resources:
The IRS FY 2007 budget was $10.6 billion in direct appropriations,
supplemented by $198.8 million in user fee revenue and $73.3 million in
reimbursable resources for a total operating level of $10.9 billion.
Internet:
The IRS provides tax information, taxpayer services, forms, and
publications at [hyperlink, http://www.irs.gov].
“Taxes are the price we pay for living in a civilized society”: US
Supreme Court Justice Oliver Wendell Holmes.
Serving The Nation’’s Taxpayers:
Strategic Plan Framework:
Mission:
Provide America’s taxpayers top-quality service by helping them
understand and meet their tax responsibilities and by applying the tax
law with integrity and fairness to all.
Goals And Objectives:
* Improve Taxpayer Service:
- Improve service options for the tax paying public;
- Facilitate participation in the tax system by all sectors of the
public;
- Simplify the tax process.
* Enhance Enforcement Of The Tax Law:
- Discourage and deter non-compliance with emphasis on corrosive
activity by corporations, high-income individual taxpayers and other
contributors to the tax gap;
- Ensure that attorneys, accountants and other tax practitioners
adhere to professional standards and follow the law;
- Detect and deter domestic and off-shore based tax and financial
criminal activity;
- Deter abuse within tax-exempt and governmental entities and
misuse of such entities by third parties for tax avoidance or other
unintended purposes.
* Modernize The IRS Through Its People, Processes, And Technology:
- Increase organizational capacity to enable full engagement and
maximum productivity of employees;
- Modernize information systems to improve service and enforcement;
- Ensure the safety and security of people, facilities and information
systems;
- Modernize business processes and align the infrastructure support to
maximize resources devoted to frontline operations.
Service + Enforcement = Compliance.
IRS Resources:
Funding by Appropriation:
Enforcement: 44%;
Operations Support: 32%;
Taxpayer Services: 20%;
Business Systems Modernization: 2%;
Health Insurance Tax Credit Administration: 0%;
Other: 2%.
Appropriations (dollars in thousands):
In FY 2007, the Congress implemented a new appropriations structure for
the IRS that realigned resources from its three major operating
appropriations into three new accounts – Taxpayer Services,
Enforcement, and Operations Support. Appropriated funds are shown
below:
* Taxpayer Services [$2,156,988] funds processing tax returns and
related documents, assistance for taxpayers in filing returns and
paying taxes due.
* Enforcement [$4,741,680] funds examination of tax returns,
collection of balances, the administrative and judicial settlement of
taxpayer appeals of examination findings, as well as providing
resources for strengthened enforcement to reduce invalid claims and
erroneous filings associated with the Earned Income Tax Credit (EITC)
program.
* Operations Support [$3,470,882] funds administrative services, policy
management and IRS-wide support. The appropriation also funds staffing,
equipment, and related costs to manage, maintain, and operate critical
information systems that support tax administration.
* Business Systems Modernization [$212,659] funds capital asset
acquisitions of information technology systems to modernize key tax
administration systems.
* Health Insurance Tax Credit Administration [$14,856] funds the
administration of the Health Coverage Tax Credit (HCTC).
* Other: Mandatory Appropriation (Special Funds): User Fees [$167,405]
financed by payment for goods and services provided and Private
Collection Agency [$10,757] collection fees.
How IRS Uses Its Resources:
Compliance Services: 64%;
Filing and Account Services: 30%;
Taxpayer Assistance and Education: 4%;
Administration of Tax Credit Programs: 2%.
Use of Resources:
The Statement of Net Cost reflects the use of IRS resources in
conducting its major programs. The IRS uses a cost allocation
methodology to assign support and overhead costs to each program
described below. The Statement of Net Cost reports the full costs of
these programs in accordance with the Statement of Federal
Financial Accounting Standards No. 4, “Managerial Cost Accounting.”
* Taxpayer Assistance and Education [4%] activities include taxpayer
education and outreach, tax publication issuance and distribution.
* Filing and Account Services [30%] activities include filing tax
returns, maintaining customer accounts, and processing taxpayer
information.
* Compliance Services [64%] activities include pre-filing agreements,
document matching, examination, collection, and criminal investigation
activities.
* Administration of Tax Credit Programs [2%] includes costs for EITC
and HCTC program activities.
The following table shows comparative data on the use of IRS resources
by major programs:
Use of Resources (dollars in thousands):
Taxpayer Assistance and Education:
Fiscal Year 2007: $478,663;
Fiscal Year 2006: $407,599.
Filing and Account Services:
Fiscal Year 2007: $3,640,565;
Fiscal Year 2006: $3,689,626.
Compliance Services:
Fiscal Year 2007: $7,701,812;
Fiscal Year 2006: $7,408,340.
Administration of Tax Credit Programs:
Fiscal Year 2007: $190,881;
Fiscal Year 2006: $191,965.
The Tax Gap:
The gross tax gap is the difference between the total tax imposed on
taxpayers by law for a given tax year and the amount of that tax
liability that is paid on time. The most recent IRS estimate (completed
in 2006) of the gross tax gap is $345 billion for Tax Year 2001.
The net tax gap is currently estimated as follows:
Net Tax Gap:
Gross Tax Gap: $345 billion;
Enforced and Other Late Payments: $55 billion;
Net Tax Gap: $290 billion.
The components of the tax gap are:
Gross Tax Gap:
Underreporting: 82%;
Underpayment: 10%;
Nonfiling: 8%.
In August 2007, the IRS released the report, “Reducing the Federal Tax
Gap: A Report on Improving Voluntary Compliance,” a follow-up to
Treasury’s “Comprehensive Strategy for Reducing the Tax Gap” issued in
September 2006. The report presents the current tax gap activities and
the steps taken to improve compliance. The report:
* Details information on steps being taken to reduce opportunities for
tax evasion, leverage technology, and support legislative proposals
that will improve compliance;
* Presents an outreach approach to ensure all taxpayers understand
their tax obligations;
* Recognizes the importance of having a multi-year research program
to help the IRS understand both the scope of and reasons for non-
compliance.
This report, combined with legislative changes and tax simplification,
will guide IRS efforts to reduce the tax gap.
Fiscal Year (FY) 2007 Performance:
The IRS improved compliance through taxpayer service and enforcement
efforts, with 23 of its 30 performance measures [Footnote 19] meeting
or within 98.5% of the target. In addition, 83% of the measures showed
performance at or above FY 2006 levels. In FY 2007, 75% (9 of 12) of
the Taxpayer Service targets and 78% (14 of 18) of the Enforcement
targets were met or within 98.5% of the target. Detailed information on
performance is contained in this section of the report; Appendix B,
Performance Data; and Appendix C, Explanation of Shortfalls.
FY 2007 was also a record year for collections related to enforcement
activities; over $59.2 billion was collected, a 75% increase over FY
2001.
IRS Enforcement Revenues (dollars in billions):
FY01: $33.8;
FY02: 34.1;
FY03: 37.6;
FY04: 43.1;
FY05: 4.3;
FY06: 48.7;
FY07: 59.2.
The steady increase in enforcement revenue is primarily a result of
concerted efforts by the IRS to detect and deter noncompliance with the
tax code.
In FY 2007, the IRS worked to improve its estimates of noncompliance to
pinpoint areas where taxpayers are not in compliance with federal tax
laws. A reporting compliance study for Subchapter S corporations was
initiated and the examination phase was completed in FY 2007. A Tax Year
(TY) 2006 individual income reporting compliance study began in October
2007. In addition, the IRS updated its workload selection models for TY
2006 using data from prior reporting compliance studies, enabling the
IRS to better leverage limited enforcement resources and reduce the
burden on compliant taxpayers.
The IRS established a set of enterprise-wide long-term goals, which
were approved by the IRS Oversight Board in March 2007. These long-term
goals link to the IRS FY 2005-2009 Strategic Plan and serve as
overarching indicators of achievement of the objectives that support
the IRS’s mission critical programs. These goals include measures of
voluntary compliance, electronic filing, non-revenue enforcement
activity, taxpayer satisfaction, and employee engagement/satisfaction.
Strategic Goal: Improve Taxpayer Service;
Objectives:
* Improve Service Options for the Tax Paying Public;
* Facilitate Participation in the Tax System by All Sectors of
the Public;
* Simplify the Tax Process.
Taxpayer Assistance Facts:
IRS.gov keeps taxpayers current with information they need to file
their tax returns. The “1040 Central” page contains news releases, fact
sheets, and tax tips all designed to keep taxpayers informed of changes
as they happen.
Taxpayers continue to call the IRS and use toll-free services to obtain
answers to their tax law and account related questions. In FY 2007, the
IRS:
* Achieved an 82.1% customer service representative level of service,
meeting the target;
* Answered 33.2 million assistor telephone calls and completed 23.1
million automated calls; and;
* Correctly responded to 91.2% of tax law questions and 93.4% of
account questions received via the telephone.
The IRS also provides toll-free service for customers such as business
and specialty taxpayers, practitioners, international taxpayers, and
the National Taxpayer Advocate.
The IRS provides 5,397 different tax forms, which can be downloaded
from the IRS.gov website. In FY 2007, 72.5 million forms were
downloaded by taxpayers. Each year, the IRS also mails out tax forms to
individual and business taxpayers. In FY 2007 the number of forms
mailed was 112 million. Many forms are available for Spanish language
taxpayers. In FY 2007, 47 different forms were available in Spanish.
Improve Taxpayer Service:
Helping taxpayers understand their tax reporting and payment
obligations is the cornerstone of taxpayer compliance. In FY 2007, 75%
(9 of 12) of the Taxpayer Service performance targets were met or
within 98.5% of the target. The remaining three measures fell within
95% of the target. Improved service options for taxpayers and
simplifying the tax process are key strategies for improving service.
The IRS continued to make improvements in key services for taxpayers in
FY 2007. Assisting taxpayers with their tax questions before they file
their returns addresses inadvertent non-compliance and reduces
burdensome post-filing notices and other correspondence from the IRS.
The IRS provides assistance to millions of taxpayers through toll-free
call centers, the IRS.gov website, Taxpayer Assistance Centers,
Volunteer Income Tax Assistance, and Tax Counseling for the Elderly
sites.
In addition, developing and maintaining relationships with IRS
stakeholders and partners in tax administration has become a key
strategy in developing and distributing tax information to our
customers. By augmenting and opening these avenues of communication,
the IRS is able to quickly identify and respond to emerging issues in
tax compliance and to more efficiently provide education and outreach
to a wider population of taxpayers to improve compliance.
More taxpayers are interacting with the IRS through the IRS.gov
website. Information available on-line has improved customer
satisfaction because of its speed, accessibility, and accuracy. For
example:
* More than 1.35 billion web pages were viewed on IRS.gov, an increase
of 3.8% over 2006;
* More than 32.1 million taxpayers used “Where’s My Refund?,” an
increase of 30% over 2006;
* 443,558 taxpayers used the new sales tax deduction calculator
developed for the 2007 filing season. The calculator helped taxpayers
determine the correct amount of optional general sales tax they were
eligible to claim; and;
* The popular IRS website, IRS.gov, received an overall customer
satisfaction score of 74 based on a 100 point scale as measured by the
American Customer Satisfaction Index (ACSI). This represents a five
point increase over the 2005 filing season score, which can be
attributed to the redesign of IRS.gov making information easier for
taxpayers to find. The increased score places IRS.gov among the better
performing Federal websites.
Taxpayer Assistance Blueprint (TAB):
TAB represents the most extensive IRS research conducted on the needs,
preferences, and behaviors of taxpayers and partners who assist them in
complying with the tax laws. The Phase 1 TAB Report issued in FY 2006
focused on research and key strategic improvement themes.
The IRS delivered the Phase 2 Report to Congress on April 11, 2007. The
report included the TAB Strategic Plan, and the recommendations focused
on specific categories of work and services.
The IRS established a Taxpayer Services Program Management Office and
IRS Services Committee to formalize integrated service investment
decision-making.
Significant Insights Revealed:
* The majority of taxpayers who used IRS assistance indicated a
willingness to use electronic services;
* Fewer customers visit Taxpayer Assistance Centers relative to
other options such as phone and correspondence;
* Taxpayers are most concerned with first contact resolution;
* 9 out of 10 taxpayers using IRS services in 2005 reported they
would use the same methods again.
Next Steps:
* Continue TAB Strategic Plan integration in planning and budgeting
processes. Implement service improvement initiatives and future
research projects identified by the TAB Strategic Plan, which were
incorporated into the FY 2008 Budget Submission.
* Implement Multi-year Research Portfolio by making service-related
decisions based on taxpayer data.
* Develop new measures for compliance, taxpayer, partner, and
government value.
* Continue solicitation of stakeholder and employee input.
Highlights of the 2007 Filing Season:
The IRS delivered a successful 2007 filing season even with addressing
new challenges associated with the implementation of the Telephone
Excise Tax Refund (a one-time payment designed to refund long distance
telephone taxes), introducing split refund capability, which provided
taxpayers with more control over their refunds by allowing direct
deposit of a refund to up to three financial accounts, and making the
necessary changes to forms and systems to accommodate late passage of
provisions of the Tax Relief and Health Care Act of 2006. Results of
the 2007 filing season include:
* Processed more than 139.7 million individual returns and issued more
than 105.5 million refunds totaling $261 billion;
* Maintained a telephone level of service of 82.1% while answering 33.2
million calls;
* Served over 7 million taxpayers at 401 Taxpayer Assistance Centers;
* Increased electronic filing:
- Individual returns electronically filed reached 57.1%, up from 54.1%
in 2006;
- Business returns electronically filed reached 19.1%, up from 16.6% in
2006;
- Home computer filing increased to 22.5 million returns, an 11%
improvement over 2006;
- Tax professional use of e-file increased to 57.2 million
returns or 10% over 2006; and;
- More than 4.1 million taxpayers used the free services offered by the
Free File Alliance.
Customer satisfaction of individual tax return filers increased from a
score of 64 in 2005 to 65 in 2006 based on the ACSI - 100 point scale.
Over 83,000 taxpayer returns requested the split refund option. The
capability to split refunds in the 2007 filing season provided
individual taxpayers with a new option of choosing direct deposit for
depositing their tax refunds. All taxpayers who filed using any of the
1040 series forms had the option to divide their refunds in up to three
financial accounts including individual retirement accounts, over 500
college savings plans, savings bonds, or a variety of other accounts.
More than 1,000 revisions affecting 137 of the 164 filing season
products used by taxpayers were made with minimal impact to the filing
season. For the second year in a row, the IRS responded quickly to late-
in-the-year passage of tax legislation. Due to the late passage of
provisions of the Tax Relief and Health Care Act of 2006, the IRS had
to quickly make changes to the processing systems and create or revise
forms to allow taxpayers to take advantage of the Act’s provisions.
Telephone Excise Tax Refund (TETR):
The IRS successfully implemented TETR, a one-time payment available on
federal income tax returns to refund previously collected long distance
telephone taxes. The integrated approach included:
* Using regular IRS income tax processing channels and existing income
tax forms by adding a line for TETR on every form;
* Developing a method for claiming the credit using a standard amount
for individuals and an estimation formula for businesses;
* Reprogramming major filing systems to process the TETR credit with
the filing of individual tax returns;
* Creating a new form for individuals without an income tax filing
requirement to claim the credit;
* Implementing an extensive communication strategy that focused on
education, maximizing media reach, and publicizing compliance issues.
For the 2007 filing season, the IRS issued 22 news releases, 8 “Tax
Tips,” and messages included in over 4,000 articles related to taxes
and tax filing. To further assist taxpayers and the practitioner
community, the IRS launched a TETR web page on IRS.gov that was viewed
by more than 4.5 million people.
Successful delivery of the integrated TETR approach enabled the filing
of over 94 million 2006 federal income tax returns, which claimed more
than $4.81 billion in telephone excise tax refunds.
In addition, the IRS prevented more than $40 million in erroneous
refunds through in-depth analysis of TETR claims and split refund
requests. The comprehensive approach to administering this refund
allowed the IRS to successfully meet taxpayer and stakeholder
expectations.
Taxpayer Outreach:
The IRS enhanced its outreach and educational services through
partnerships between the IRS and public organizations. Outreach
involves direct contact with customers through IRS participation at
conferences, seminars, and workshops or indirect contact with customers
through newsletters, websites, and customer partnerships.
The IRS partners with partner organizations such as state taxing
authorities and volunteer groups to serve taxpayer needs. Through its
11,922 Volunteer Income Tax Assistance and Tax Counseling for the
Elderly sites, the IRS provided free tax assistance to the elderly,
disabled, and limited English proficient individuals and families. The
76,619 volunteers located at the sites filed approximately 2.63 million
returns, a 14% increase over FY 2006.
The IRS established 16 new low income tax clinics (LITC) in rural areas
to help taxpayers who cannot afford representation obtain competent
assistance in meeting their obligations. LITCs reduce taxpayer
uncertainty and errors by clarifying taxpayer rights and
responsibilities, and through their outreach efforts, offer effective
information and education.
The Earned Income Tax Credit (EITC) is a refundable Federal income tax
credit for low-income working individuals and families. The IRS
improved services for EITC participants through the following actions:
* Developed a three-point plan expanding outreach initiatives and
identified ways to simplify and improve forms and make IRS.gov more
user friendly;
* Held a Nationwide EITC Awareness Day to increase awareness of the
EITC among eligible taxpayers, especially those with limited English
proficiency;
* Developed outreach products and strategies to reach and increase
participation among the underserved EITC populations, such as Hispanic
and rural communities; and;
* Increased partnerships with community-based organizations dedicated
to assisting taxpayers with financial literacy, return preparation and
tax return filing. As a result, the IRS increased outreach by 15% and
return preparation by 18% over FY 2006.
Strategic Goal: Enhance Enforcement Of The Tax Law:
Objectives:
* Discourage and Deter Non-Compliance with Emphasis on Corrosive
Activity by Corporations, High-Income Individual Taxpayers and Other
Contributors to the Tax Gap;
* Ensure that Attorneys, Accountants and Other Tax Practitioners Adhere
to Professional Standards and Follow the Law;
* Detect and Deter Domestic and Off-Shore Based Tax and Financial
Criminal Activity;
* Deter Abuse within Tax-Exempt and Governmental Entities and Misuse of
such Entities by Third Parties for Tax Avoidance or Other Unintended
Purposes.
Enforcement Facts:
Enforcement authority is used to collect the taxes that are due from
people who do not fulfill their tax obligations. Non-compliance may
not be deliberate and can stem from a wide range of causes, including
lack of knowledge, confusion, poor record-keeping, differing legal
interpretations, unexpected personal emergencies, and temporary cash
flow problems. However, some noncompliance is willful, even to the
point of criminal tax evasion.
Efforts to minimize the burden for compliant taxpayers support the
overall goal of full participation in the tax system.
The IRS Oversight Board conducts an annual survey to gain deeper
understanding of taxpayer’s attitudes. The 2007 results showed:
* 84% of survey participants thought it was not at all acceptable to
cheat on your income taxes;
* 89% of survey participants agreed that everyone who cheats should
be held accountable.
Enhance Enforcement of the Tax Law:
Potential for narrowing of the nation’s tax gap hinges primarily on IRS
efforts to improve compliance with U.S. tax laws. IRS enforcement was
within 98.5% of the target for 78% (14 of 18) of its program targets.
Highlights of Enforcement Performance:
IRS examination and collection programs targeted a wide range of
contributors to the tax gap and, in FY 2007, the IRS showed steady
progress, building on the FY 2006 successes:
* Increased enforcement revenue 22%;
* Increased high-income taxpayer audits 29%;
* Increased individual audits 8%;
* Increased small business audits 17%, and corporate
audits 3%; and;
* Increased collection case closures 12%, and dollars
collected 13%.
Maintaining a strong enforcement presence in the tax-exempt and
governmental sectors (including religious, charitable, social,
educational, political, and other not-for-profit organizations, as well
as employee pension plans and tax-exempt bonds) is particularly
important given the role that a small number of these entities play in
accommodating abusive transactions entered into by taxable parties. In
FY 2007, the IRS expanded its enforcement presence including:
* Increased enforcement contacts 12% over FY 2006
levels; and;
* Conducted reviews of executive compensation practices among tax-
exempt organizations and initiated a new phase of the project to
address loans to officers.
The IRS continued to investigate significant tax, money laundering, and
other financial activities that adversely affect tax administration.
The IRS also took steps to combat fraudulent and financial crime
schemes identified through improved case development efforts and
partnership with other law enforcement agencies. Performance levels for
the criminal investigation program remained high in FY 2007:
* Completed criminal investigations totaled 4,269, exceeding the target
of 4,000;
* Maintained a conviction rate of over 90%;
* Increased acceptance rate by the Department of Justice to 94.6%,
higher than the FY 2006 rate of 92.2%, and the acceptance rate by the
U.S. Attorney increased to 90.2%, 2% higher than the 88.3% achieved in
FY 2006;
* Obtained over 2,155 convictions, exceeding the 2,069 target; and;
* Stopped fraudulent claims in excess of $1 billion through IRS Fraud
Detection Centers.
The IRS also developed the Compliance Resolution Program and strategies
to advance compliance goals and minimize burden on taxpayers. This
Compliance Resolution Program partners with external stakeholders in
order to address a specific tax issue that arose from the American Jobs
Creation Act of 2004 regarding the treatment of taxes due by employees
who exercised specific stock rights. The IRS permitted employers to
voluntarily pay certain taxes and interest for employees who exercised
certain discounted stock options and stock appreciation rights in 2006.
In FY 2007, 78 employers participated in the Compliance Resolution
Program with $116.3 million received.
In the tax exempt sector, new outreach initiatives included:
* Launching [hyperlink, http://www.stayexempt.org], a popular tax
compliance website for exempt entities and providing new web-based
tools to help tax-exempt entities understand their federal tax
requirements; and;
* Conducting workshops to assist remote tribal villages in
understanding federal and state employment tax and other reporting
requirements.
Compliance Assurance Process (CAP) Pilot Program:
Under this pilot program, the IRS works with large business taxpayers
to identify and resolve issues prior to return filing, which provides a
high level of certainty to taxpayers that corporate tax returns are
substantially compliant when filed.
Currently 78 taxpayers have participated in the CAP program.
Compliance Assurance Process (CAP) Participation (Cumulative):
TY 2005: 17;
TY 2006: 34;
TY 2007: 78.
The CAP program benefits both the IRS and the taxpayer by fostering
compliance, reducing the time it takes to process a return, and
improving both customer and employee satisfaction while maintaining
a high level of quality.
From the taxpayers’ perspective, CAP represents improvements to
their internal business processes as corporate tax departments interact
with the IRS on a real-time basis. CAP allows emerging compliance
issues to be identified and addressed much sooner than the traditional
IRS audit process would allow.
CAP offers many other benefits:
* Communication about completed transactions occurs sooner and allows
for an analysis of material items affecting the tax return;
* Immediate review of transactions after completion, while knowledgeable
personnel and necessary records are most accessible;
* Compliance issues in need of resolution are identified early.
Globalization of Tax Administration:
In FY 2007, the IRS reorganized its international organization to
better address the increasing scope of international tax administration
where non-compliance is a significant and growing problem. In addition,
the IRS developed a comprehensive strategy to identify and highlight
activities that will improve customer service, enhance international tax
compliance, and modernize the IRS to more effectively keep pace with
globalization.
The exchange of information between a foreign revenue agency and the
IRS led to the recent unraveling of an abusive cross-border tax scheme
involving hundreds of taxpayers and tens of millions of dollars in
improper deductions and unreported income. In late 2007, the Joint
International Tax Shelter Information Centre (JITSIC) will open a second
office in London and the Japanese National Tax Agency will join. JITSIC
shares information and expertise in identifying and curbing tax
avoidance and shelters. As collaboration between member countries
continues to grow, more crossborder schemes will be uncovered, shared,
and addressed.
Tax Shelter and Promoters and Abusive Tax Initiatives:
The IRS continues to deter tax shelter abuse and tax scheme promoters
through targeted audits, aggressive litigation, and publicity.
Tax Shelter Promoter Program:
The IRS made significant progress in resolving civil matters with
promoters of abusive and listed tax shelter transactions. In addition
to large penalty assessments and public admissions of regrettable
behavior by businesses and some of their former employees, the IRS is
obtaining future compliance agreements from promoters. For FY 2007,
penalties assessed and collected from the Promoter program totaled
nearly $69 million.
Tax Preparer and Promoter Activities:
The IRS continues to investigate and prosecute preparers involved in
criminal activity. Many taxpayers rely on the advice and counsel
provided by a tax preparer to fulfill their tax responsibilities. The
IRS is engaged in ensuring tax preparers and promoters are working
within the frame of the tax code. The IRS is targeting preparers whose
tax work indicates questionable return preparation practices and/or
disseminating questionable advice or promoting questionable tax
avoidance strategies.
Abusive Tax Avoidance Initiatives:
The IRS focused its efforts to combat abusive tax avoidance transactions
(ATAT) by providing early guidance, addressing shelters at the promoter
level, and increasing the strength of the IRS response. The IRS will
continue to aggressively address abusive transactions through enhanced
identification techniques, published guidance, traditional examination
processes, alternative dispute resolutions, communication, and resource
allocation.
Productivity Improvements:
The IRS continued to improve quality, efficiency, and service delivery
through a wide-range of initiatives designed to increase service
coverage to taxpayers and increase productivity. Improvements in
workload selection techniques, streamlining and centralizing work
processes, focusing on case quality and the use of embedded quality
reports, decreasing cycle time, and increasing managerial involvement
in casework were all factors contributing to IRS productivity
improvements.
The IRS substantially enhanced its productivity by implementing
technological and process improvements in the Automated Underreporter
(AUR), Examination, and Compliance Services Collection Operations.
Significant improvements made in FY 2007 included:
* Implemented a new AUR case selection and scoring methodology for
individuals, resulting in a 20.5% increase in AUR assessments;
* Controlled and directed incoming Examination toll-free calls through
an Intelligent Call Management system resulting in a 6.1% increase in
the service level; and;
* Automated the processing of over 43% of installment agreement problem
cases, which freed resources to process additional installment
agreement compliance work.
The IRS continued to reengineer its examination and collection
procedures to reduce time, increase yield, and expand coverage.
Emphasizing early identification of tax liabilities through increased
audits and more focused collection activities, the IRS undertook the
following actions:
* Piloted new Automated Substitute for Return screening and batching
procedures, with the increased efficiencies resulting in a productivity
improvement of over 156%, from 7.5 cases per hour to 19.2 cases per
hour;
* Increased detection of fraudulent activities and increased the number
of recommendations for civil fraud penalties by 49% over the prior year
level; and;
* Developed an Employment Tax Strategy that includes
eliminating/reducing overlaps and gaps in processes to enhance
organizational effectiveness; expanding work relationships with federal
and state authorities; conducting studies to better understand the tax
gap; and assessing new ways to impact taxpayer behavior.
Strategic Goal:
Modernize the IRS through its People, Processes, and Technology:
Objectives:
* Increase Organizational Capacity to Enable Full Engagement and
Maximum Productivity of Employees;
* Modernize Information Systems to Improve Service and Enforcement;
* Ensure the Safety and Security of People, Facilities and Information
Systems;
* Modernize Business Processes and Align the Infrastructure Support to
Maximize Resources Devoted to Front-line Operations.
BSM Project Schedule Accomplishments:
Met: 77%;
Not Met: 23%.
BSM Project Cost Accomplishments:
Met: 92%;
Not Met: 8%.
Modernization Facts:
* The IRS maintains over 290 million individual and business taxpayer
accounts;
* The IRS processes up to 624 million real-time transactions per month;
* The IRS has over 400 automated systems and maintains over 72 million
lines of code.
Modernize the IRS through its People, Processes, and Technology:
The increased reliance on technology and its impact on business
processes and the ability to maintain a talented workforce are
positively changing how IRS employees conduct business and deliver
services. The IRS delivered the majority of major project milestones
within the target of +/- 10% variance for cost and schedule, a
significant achievement that continues to validate Business Systems
Modernization (BSM) program management effectiveness.
Business Systems Modernization (BSM):
For the third year in a row, the IRS made substantial progress in
meeting project deliverables and has continued to build foundational
processes, controls and governance that are essential to continued
success in managing the complex system development efforts. In FY 2007,
the IRS implemented a new governance structure for its information
technology (IT) investment projects. The new structure facilitates the
ability to identify and address project-related issues and risks,
ensuring IT investment projects deliver required results. Project-level
accountability and decision making are promoted for projects that do
not have problems or issues, while the new governance model specifies
appropriate thresholds for elevating project-related issues that may
arise.
The IRS also developed a five-year IT Modernization Vision and Strategy
that addresses priorities for modernizing frontline tax administration
functions. The strategy guides IT investment decision making for 2007
and beyond. Important aspects include: establishing partnerships among
IT and business leadership; leveraging existing systems; emphasizing
the delivery of smaller, incremental releases; and unifying the
portfolio-level view of investments.
Notable modernization accomplishments for FY 2007 include:
* Delivered new Customer Account Data Engine (CADE) filing
capabilities, enabling CADE to process over 11 million returns and
issue refunds of $11.6 billion; and;
* Added new capabilities to the Modernized e-File (MeF) system that
allowed the receipt of electronically filed Partnership Returns (Forms
1065 & 1065B), meeting the mandate for taxpayers with 100 or more
partners to file electronically. MeF received over two million
corporate, non-profit, and partnership forms for processing.
* Deployed the first two releases of the Accounts Management Services
(AMS) system which is designed to enable authorized users to resolve
taxpayer issues by accessing integrated account data. AMS builds the
applications and databases that enable IRS employees to use the data in
CADE to facilitate faster, more accurate issue resolution and results
in quick and accurate access to authoritative account information in
response to customer inquiries. AMS delivered functionality to provide
daily rather than weekly updates to the authoritative account and began
the Domain Architecture which will describe the business vision and
supporting conceptual technical architecture that will drive AMS
releases for the next five years.
In addition to the key modernization projects, several initiatives and
improvements were undertaken in 2007 to effectively integrate the
systems with the legacy production environment, and to improve the
technology infrastructure. New and improved processes were also put in
place to better integrate business and technology strategies, and to
allow the IRS to operate more efficiently with improved productivity.
* Institutionalized the use of the Enterprise Architecture into the
Modernization Vision and Strategy process where the IRS received the
prestigious E-Gov award as the Best Civilian Agency to use the
Enterprise Architecture for Government Business Transformation.
* Completed the Enterprise Service Oriented Architecture strategy and
established the process to identify Enterprise Common Services in order
to achieve operation excellence and cost savings.
* Delivered high-priority portal platform improvements and stabilized
operations to meet near term needs for the 2007/2008 filing seasons for
tax practitioners and internal IRS users.
* Integrated the Enterprise Application Integration Broker into the
core infrastructure to enable the use of common services to leverage
data and applications between legacy and modernized environments.
* Expanded the Infrastructure Center of Excellence to include
configuration management, measurement and analysis, capacity planning
and performance engineering, and project monitoring and control.
Expansion of Mandatory Corporate Modernized e-File (MeF):
Corporations with assets over $50 million that file 250 or more returns
annually were required to electronically file their Form 1120 or 1120S
tax return for tax years ending on or after December 31, 2005. For tax
years ending on or after December 31, 2006, the asset threshold was
reduced to $10 million.
The IRS worked extensively with stakeholder groups throughout the
implementation of the e-file mandate to address impediments to e-filing.
As a result, most corporations required to e-file complied with the
mandate.
For filing year 2006, 11,000 large corporations with more than $50
million in assets were required to efile. Ultimately, more than 15,000
large corporations electronically filed including more than 4,000 large
corporate taxpayers who voluntarily e-filed during 2006.
To ensure the successful expansion of its business e-file program, the
IRS established an E-Filing Project Office to work with external and
internal stakeholders, address e-file issues, and monitor taxpayer
compliance with the corporate e-file mandate. In filing year 2007, more
than 16,900 corporate taxpayers efiled their returns.
For FY 2007, new MeF capabilities allowed the receipt of electronically
filed Partnership Returns (Forms 1065 and 1065B), meeting the mandate
for taxpayers with 100 or more partners to file electronically. MeF
received over 2 million corporate, non-profit, and partnership forms
for processing.
The expansion of business e-file promotes a more efficient and timely
filing process.
Protection of Sensitive Information/Information Technology (IT)
Security:
Security of infrastructure and IT systems remains a top priority for
the IRS. In FY 2007, the IRS continued to update its systems, processes,
and training efforts to ensure taxpayer information is properly
safeguarded. The IRS completed all required Federal Information
Security Management Act activities; contingency plan testing on the 260
applications and systems on the master inventory; and live disaster
recovery testing for all major applications. The IRS also established
new offices and governing bodies to provide direction and oversight
regarding the security and protection of sensitive information.
The IRS security effort to protect sensitive information included:
* Installed automatic full disk encryption on all of the total deployed
inventory of over 50,000 IRS laptops;
* Implemented a secure electronic online solution for data exchanged
with federal, state, and other partners;
* Updated employee required online training courses with the most
recent policy guidance and employee responsibilities related to the
protection of sensitive information and the use of encryption tools;
* Deployed mandatory information protection training for all IRS
employees and contractors having access to sensitive information;
* Issued updated data protection policies, processes, and education
training tools to improve employee awareness and skill levels;
* Deployed upgraded firewall intrusion detection devices.
Human Capital:
Workforce planning is a significant challenge. With a diverse
population of more than 100,000 employees and more than 700 locations
across the country, the IRS works continuously to ensure that its
employees are in the right place at the right time and have the skills
and competencies needed to accomplish the IRS mission.
In FY 2007, the IRS continued to hire and train candidates to fill key
mission critical occupations:
Mission Critical Occupation: Revenue Agents;
FY 2007 Targeted Staff Level: 12,691;
Met: [Check].
Mission Critical Occupation: Special Agents;
FY 2007 Targeted Staff Level: 2,672;
Met: [Check].
Mission Critical Occupation: Tax Examiners & Tax Compliance Officers;
FY 2007 Targeted Staff Level: 11,656;
Met: within 98% of target.
Mission Critical Occupation: Revenue Officers;
FY 2007 Targeted Staff Level: 5,675;
Met: within 95% of target.
Continuing to use enforcement resources effectively while recruiting,
hiring, and developing new and existing talent to meet the demands of
the future resulted in a consistent increase in enforcement revenue
over the past four years.
In FY 2007, the IRS established Human Capital outcome indicators of
talent, performance culture, leadership, and knowledge management to
assess how well it is strategically managing human capital to achieve
the IRS mission. For example, to meet changing business and
technological demands, the IRS initiated a program to identify targeted
occupations, skill sets, and hard-to-fill positions. The program
features integration of all recruitment, hiring, and compensation
efforts, along with the development of new and improved methods of
predicting future attrition through retirements. Developing activities
specifically targeted toward mitigating the impact of retirements as
well as attracting and retaining new hires with advanced skills
continues to be critical to the successful delivery of IRS business
goals.
The IRS continued to work on development of a human capital strategy in
FY 2007. The strategy includes bringing critical personnel on board and
includes objectives for employee training, leadership development, and
workforce retention. Actions taken in FY 2007 included:
* Established a Center of Excellence Office to determine the skills and
competencies for each area of expertise; and;
* Developed training requirements and a new recruitment strategy.
Future efforts are aimed at synchronizing the hiring of new staff with
the retirement of older staff such that adequate knowledge transfer
occurs.
OMB Circular A-123, “Management’s Responsibility for Internal Control”:
The IRS conducted the required evaluation of the effectiveness of its
internal control over financial reporting in accordance with Appendix A
of OMB Circular A-123.
For FY 2007, the IRS conducted the following A-123 activities:
* Tested 35 transaction processes material to Treasury’s Consolidated
Financial Statements, including:
- 29 administrative processes related to $10 billion in administrative
transactions;
- 6 custodial tax-related processes related to $2.69 trillion in tax
revenues;
* Reviewed controls over the IRS’s financial reporting, specifically
Treasury Information Executive Repository reporting;
* Conducted a self-assessment of the internal control environment using
the Government Accountability Office’s (GAO’s) abbreviated Internal
Control Evaluation Checklist;
* Reviewed IRS compliance with applicable laws and regulatory
requirements regarding financial reporting and internal control;
* Reviewed GAO and Treasury Inspector General for Tax Administration
audit reports and findings.
Based upon the results of the evaluation, the IRS provided qualified
assurance that its internal controls were operating effectively.
The qualified assurance is based on the condition of four material
weaknesses reported by GAO in the IRS's FY 2006 and FY 2005 audited
financial statements. GAO, however, acknowledged the development of
compensating procedures to produce financial statements that are
fairly stated and issued an unqualified opinion.
In May 2007, GAO reported on the IRS’s FY 2006 A-123 testing noting
that the IRS appropriately planned and implemented its first-year
assessment.
Systems Controls and Legal Compliance:
The IRS continued to enhance financial management and appropriate
controls that are an integral component of all IRS programs.
Federal Managers’ Financial Integrity Act (FMFIA):
During FY 2007, the IRS complied with the internal control requirements
of FMFIA, the Office of Management and Budget (OMB) Circular A-123, and
the Reports Consolidation Act of 2000. The IRS organizations operated
in accordance with the procedures and standards prescribed by the
Comptroller General and OMB Guidelines.
The systems of management control for the IRS organizations are
designed to ensure that:
* programs achieve their intended results;
* resources are consistent with the overall mission;
* programs and resources are free from waste, fraud, and
mismanagement;
* laws and regulations are followed;
* controls are sufficient to minimize improper and erroneous
payments;
* performance information is reliable;
* system security is in substantial compliance with all relevant
requirements;
* continuity of operations planning in critical areas is sufficient to
reduce risk to reasonable levels; and;
* financial management standards are in compliance with Federal
financial systems standards, i.e., FMFIA Section 4 and Federal
Financial Management Improvement Act (FFMIA).
Because the IRS has open material weaknesses and the financial
management systems do not substantially comply with the FFMIA, the IRS
provides qualified assurance that the above listed systems of
management control objectives were achieved by the IRS during FY 2007.
This assurance is provided relative to Sections 2 and 4 of FMFIA. The
material weaknesses are:
* Improve Modernization Management and Processes;
* Earned Income Tax Credit (EITC) Non-Compliance;
* Computer Security;
* Financial Accounting of Revenue – Custodial.
Federal Financial Management Improvement Act (FFMIA):
The IRS has made significant progress bringing financial management
systems into compliance with FFMIA. During FY 2007, the IRS implemented
a new interface between the Custodial Detail Data Base (CDDB) and the
Interim Revenue Accounting Control System to create a summary of unpaid
assessment and accrual data.
Lien Release Non-Compliance Issue:
As of September 30, 2007, the IRS did not consistently comply with
section 6325 of the Internal Revenue Code regarding the timely release
of federal tax liens. The IRS Financial and Management Controls
Executive Steering Committee (FMC ESC) monitors the action plan which
addresses issues identified by the IRS, Government Accountability
Office (GAO), and the Treasury Inspector General for Tax Administration
(TIGTA).
Property and Equipment:
GAO concluded in the report on the IRS’s FY 2006 and FY 2005 Financial
Statements that Property and Equipment (P&E) accounting records no
longer constitutes a reportable condition. However, the IRS continued
to strengthen internal controls and procedures that enhanced its
ability to account for P&E. Specifically, the IRS revised the dollar
threshold for review of P&E accounting transactions and conducted
intensive reviews of the large dollar transactions increasing the
accuracy of P&E reporting. The IRS improved its capability to
capitalize assets or expense other items and properly account for
Business System Modernization costs in internal use software.
Federal Information Security Management Act (FISMA):
In accordance with the requirements of FISMA, the IRS took actions to
establish a stronger agency-wide information security program due to
the IRS's Computer Security Material Weakness:
Actions: Certification and Testing of systems;
Status: Two thirds complete [1].
Actions: Systems Accreditation;
Status: 98% Approved.
Actions: Specialized training;
Status: 99% of Employees.
Actions: Annual Awareness Training;
Status: 99% of Employees and Contractors.
Actions: Contractor Systems Reviews;
Status: 100%.
Actions: Annual Security Controls Testing;
Status: 100%.
Actions: Annual IT Contingency Plan Testing;
Status: 100%.
Actions: Privacy Impact Assessment;
Status: 100%.
Actions: System of Record Notice;
Status: 100% compliance.
[1]The final one-third will be completed in 2008.
[End of table]
* The IRS certification program is in the third year of a three year
cycle to certify all IRS reported systems. There are 260 systems
operating under a full Authority to Operate (ATO), 4 with an Interim ATO
(IATO), and 2 certifications are currently in progress. For all ATO
and IATO Systems, Security Test and Evaluations are documented in a
Plan of Action and Milestones.
* Maintained the 24 X 7 incident response center to monitor IRS
computer and network security, and created a second center to provide
back-up capabilities.
* Completed all required FISMA activities contingency plan testing on
all of the 260 applications/ systems on the master inventory and live
disaster recovery tests for all major applications.
The IRS's strategy is to implement an enterprise-wide risk management
approach that cost-effectively focuses resources on major systems and
assets supporting tax administration.
Reports Consolidation Act of 2000:
The IRS provided assurance that its critical performance measures are
reliable. Internal Revenue Manual 1.5, “Managing Statistics in a
Balanced Measurement System Handbook,” provides a detailed template
that documents each measure’s definition, formula, reliability, and
reporting frequency. These controls ensure that the data is consistently
and accurately collected over time.
Continuity of Operations (COOP):
IRS leaders practiced scenarios during the annual COOP exercise to make
sure the IRS could sustain operations after a catastrophic event.
Scenarios included: workplace violence; weather disasters;
international, domestic, and cyberterrorism; and blackouts.
Months of intricate planning and extensive logistical coordination were
conducted to prepare for the realistic, one to two-day drills. Practice
scenarios involved computer hackers penetrating information systems,
bombs, explosions or shootings at offices, and floods or weather-related
destruction. IRS executives reviewed the results of each exercise to
learn where the IRS could make necessary changes to strengthen its
overall plan. Other important practice activities like simulation
exercises and tests of individual business resumption plans took place
on a smaller scale.
Major Management Challenges and High-Risk Areas:
Over the last several years, GAO, TIGTA, and the Office of Inspector
General for Treasury have identified several Management Challenges and
High-Risk areas facing the IRS. In FY 2007, TIGTA reorganized the
challenges by dividing the category of Tax Compliance Initiatives into
two subcategories: Business and Individual and Tax Exempt Entities.
These subcategories better defined the need to administer tax
regulations and collect tax dollars from businesses and individuals,
and to oversee compliance issues for tax-exempt entities. Appendix E
identifies specific steps and actions being taken for the ten
management challenges below:
* Modernization of the Internal Revenue Service;
* Tax Compliance Initiatives;
* Security of the Internal Revenue Service;
* Providing Quality Taxpayer Service Operations;
* Complexity of the Tax Law;
* Using Performance and Financial Information for Program and Budget
Decisions;
* Erroneous and Improper Payments;
* Taxpayer Protection and Rights;
* Processing Returns and Implementing Tax Law Changes During the Tax
Filing Season;
* Human Capital.
Limitations of Financial Statements:
The principal financial statements have been prepared to report the
results of IRS operations, pursuant to the requirements of 31 U.S.C.
3515(b). The statements were prepared from the books and records of the
IRS in accordance with generally accepted accounting principles for
Federal entities and the format prescribed by OMB. The statements are
in addition to the financial reports used to monitor and control
budgetary resources, which are prepared from the same books and
records. The statements should be read with the realization that they
are a component of the U.S. Government, a sovereign entity.
Progress Made on Earned Income Tax Credit (EITC) Material Weakness:
The IRS continued progress on its action plan for the EITC material
weakness by providing a current estimate of error, an explanation of
the methodology, and an action plan to reduce error. The following
actions were also taken in FY 2007:
* Incorporated EITC into the National Research Program study for Tax
Year 2006. Results, expected in 2009, will enable the IRS to provide
updated estimates of error for the Improper Payment Information Act
based on recent compliance data;
* Began development of a holistic, data-driven, five-year strategy
designed to use enforcement and outreach treatments involving taxpayers,
preparers, and third parties to reduce EITC errors and protect revenue;
* Conducted a nationwide EITC Awareness Day for EITC eligible
taxpayers;
* Delivered key compliance activities including 500,000 audits, over
390,000 misreported income cases and 500,000 math error notices,
protecting revenue of $2.6 billion;
* Tested alternative treatments, such as soft notices, as compared to
more costly standard compliance treatments, i.e., examinations;
* Completed return preparer compliance tests designed to identify and
deter preparers of large numbers of erroneous EITC claims;
* Completed reports on the second and third year of the EITC
certification tests and in the process of completing a cumulative
report,
which will be used to make informed decisions about implementation of
certification as a compliance treatment.
Overview of Revenue and Administrative Accounts:
The IRS FY 2007 financial statements received an unqualified audit
opinion for the eighth consecutive year.
The Balance Sheet reflects total assets of $31 billion of which $26
billion (83%) are Federal Taxes Receivable, which represents amounts
expected to be collected from past due accounts. The $5 billion
increase in total assets is primarily attributable to the increase in
Federal taxes receivable. The majority of IRS’s liabilities consist of
amounts due to Treasury related to Federal taxes receivable.
The Statement of Custodial Activity shows that IRS programs collected
$2.69 trillion in federal tax receipts.
Financing Sources:
The IRS receives the majority of its funding through annual and
multiyear appropriations, which are available for use within certain
specified statutory limits. Besides appropriations, the IRS used other
financing sources. These included net transfers from other federal
agencies and revenue from user fees for direct services provided to
customers (for example, installment agreement fees, photocopy fees, and
letter rulings and determinations fees).
Financial Highlights:
Revenue and Refund Trend Information:
FY 2007 revenue receipts collected by IRS, $2.69 trillion, increased by
approximately 7% from FY 2006. Federal tax revenues are collected
through six major classifications: individual income FICA/SECA,
corporate income, excise taxes, estate and gift taxes, railroad
retirement, and federal unemployment taxes.
FY 2007 tax refund activity, $292 billion, increased by approximately
5% from FY 2006. Federal tax refunds include payments for tax,
interest, and Earned Income Tax Credit and Child Care Tax Credit in
excess of the tax liability. In FY 2007, the IRS issued payments of $64
million for Advanced Earned Income Tax Credit.
Excise Tax Trust Fund:
The Quarterly Federal Excise Tax Return, Form 720, reports liability
for excise taxes. Taxpayers make periodic deposits in advance of filing
the return. These deposits are classified as Federal Excise Tax. After
the IRS receives and processes the returns, the IRS certifies amounts
for several Trust Funds. Amounts reported on the Statement of Custodial
Activity are for fiscal year collections (October 1 through September
30). Because Form 720 reporting requirements are completed after
receipt of most of the deposits, the certification amounts will not
match the amounts collected in the fiscal year. The table below shows
revised receipts certified to the Airport and Airway Trust Fund, Black
Lung Disability Trust Fund and the Highway Trust Fund for the eight
liability quarters from December 2004 through September 2006. The
Treasury Department’s Financial Management Service and the Bureau of
Public Debt prepare the warrants and allocations to the various Trust
Funds.
Table:
Airport & Airway Trust Fund:
Liability Quarter Ended, December 2004 – September 2005:
$10,379,502,000;
Liability Quarter Ended, December 2005 – September 2006:
$10,183,465,000.
Black Lung Disability Trust Fund:
Liability Quarter Ended, December 2004 – September 2005: 612,445,000;
Liability Quarter Ended, December 2005 – September 2006: 607,881,000.
Highway Trust Fund:
Liability Quarter Ended, December 2004 – September 2005:
39,537,447,000;
Liability Quarter Ended, December 2005 – September 2006:
41,266,551,000.
Total:
Liability Quarter Ended, December 2004 – September 2005:
$50,529,394,000;
Liability Quarter Ended, December 2005 – September 2006:
$52,057,897,000.
Analysis of Unpaid Assessments – Most Unpaid Assessments Are Not
Receivables and Are Largely Uncollectible:
The unpaid assessment balance includes amounts owed by taxpayers who
file returns without sufficient payment as well as amounts assessed
through the IRS enforcement programs. As reflected in the supplemental
information to the IRS FY 2007 Financial Statements, the unpaid
assessment balance was about $263 billion as of September 30, 2007.
Under federal accounting standards, unpaid assessments require taxpayer
or court agreement to be considered federal taxes receivable.
Assessments not agreed to by taxpayers or the courts are considered
compliance assessments and are not considered federal taxes receivable.
Assessments considered to have no future collection potential are
called writeoffs. The following provides detail on unpaid assessments:
* Taxes receivable represent $98 billion (37%) of unpaid assessments
and increased $7 billion (8%) from 91 billion as of September 30, 2006.
About $72 billion (73%) of this balance is estimated to be
uncollectible due primarily to the taxpayer’s economic situation.
Except for bankruptcy situations, the IRS may continue collection
actions for 10 years after the assessment. About $26 billion (27%) of
taxes receivable is estimated to be collectible.
* Compliance assessments of $65 billion represent amounts that have not
been agreed to by either the taxpayer or a court. These assessments
result primarily from various IRS enforcement programs promoting
voluntary compliance.
* Write-off amounts of $100 billion include amounts owed by defunct
corporations with no assets and failed financial institutions. The
remaining amounts are owed by taxpayers with extreme economic and/or
financial hardships, deceased taxpayers, and taxpayers who are
insolvent due to bankruptcy.
* About $151 billion (58%) of the unpaid assessment balance as of
September 30, 2007, consists of interest and penalties and is largely
uncollectible.
Custodial Detail Data Base (CDDB):
CDDB was implemented by the IRS in FY 2006 to comply with the Federal
Financial Management Improvement Act and to resolve a material weakness
in financial systems relating to accounting for duplicate Trust Fund
Recovery Penalty assessments and the lack of a subsidiary ledger.
CDDB is an enhancement to the Financial Management Information System,
an operational system supplying reports and data used for the audit of
the Custodial Financial Statements of the IRS and provides data to
support the annual financial audit. CDDB is comprised of four primary
releases.
For FY 2007, CDDB accomplishments and implementation progress included:
* Completed the interface between CDDB and the Interim Revenue
Accounting Control System (IRACS) in April 2007 to post to the IRACS
data base unpaid assessments segregated by each of the financial
classifications used in the financial statements, the duplicate and non-
duplicate amounts related to taxpayer accounts associated with unpaid
payroll taxes, and their related accrued penalty and interest.
* Completed CDDB Release 2B Systems Acceptance Testing (SAT) to post
the revenue transactions to a data base. Loading the pre-posted
payments from Electronic Federal Tax Payment System at the transaction
level will begin in November 2007.
* Conducting SAT for posting a Trace ID Number to revenue transactions
in the remaining payment systems for Release 3 by December 2007, and
going into production in January 2008.
The Integrated Financial System (IFS):
Since IFS implementation in FY 2005, the IRS has expanded its
capabilities. For example, enhancements and interfaces were implemented
for several programs, including Homeland Security Presidential
Directive #12, Federal Highway Administration, and Income Verification
Express Service user fees. Also, customized budget execution and cost
reports produced from the IFS business warehouse were developed. New
training for IFS users was delivered providing techniques for fully
using the extensive reporting capabilities of IFS.
Appendix A: Organization Chart:
Department Of The Treasury, Internal Revenue Service:
[See PDF for image]
Commissioner; Chief of Staff:
* Appeals;
* Chief Counsel;
* National Taxpayer Advocate.
Commissioner; Chief of Staff:
* EEO and Diversity;
* Research, Analysis and Statistics;
* Communications and Liaison.
Commissioner; Chief of Staff:
* Deputy Commissioner, Services and Enforcement;
- Office of Professional Responsibility;
- Whistleblower Office.
Commissioner; Chief of Staff:
* Deputy Commissioner, Services and Enforcement;
- Small Business/Self Employed;
- Large and Mid-Sized Business;
- Criminal Investigation;
- Tax Exempt and Government Entities;
- Wage and Investment.
Commissioner; Chief of Staff:
- Deputy Commissioner, Operations Support;
- Chief Information Officer;
- Agency-Wide Shared Services;
- Human Capital Officer;
- Chief Financial Officer;
- Privacy, Information Protection and Data Security Office.
[End of appendix]
Appendix B: Performance Measurement Data:
Measure: Customer Service Representative (CSR) Level of Service;
2004: 87.3%;
2005: 82.6%;
2006: 82.%;
2007, Target: 82%;
2007: Actual: 82.1.
Measure: Customer Contacts Resolved per Staff Year;
2004: 8,015;
2005: 7,585;
2006: 7,414;
2007, Target: 7,702;
2007: Actual: 7,648.
Measure: Percent of Eligible Taxpayers Who File for EITC (CY):
2004: 80.0%;
2005: 80.0%;
2006: *;
2007, Target: 75-85%;
2007: Actual: *.
Measure: Customer Accuracy – Tax Law Phones;
2004: 80.0%;
2005: 89.0%;
2006: 90.9%;
2007, Target: 91.0%;
2007: Actual: 91.2%.
Measure: Customer Accuracy – Customer Accounts (Phones):
2004: 89.3%;
2005: 91.5%;
2006: 93.2%;
2007, Target: 93.3%;
2007: Actual: 93.4.
Measure: Timeliness of Critical Filing Season Tax Products to the
Public:
2004: 76.0%;
2005: 91.4%;
2006: 83.0%;
2007, Target: 85.2%;
2007: Actual: 83.5%.
Measure: Timeliness of Critical Other Tax Products to the Public:
2004: 76.0%;
2005: 80.0%;
2006: 61.2%;
2007, Target: 79.6%;
2007: Actual: 84.0%.
Measure: Percent Individual Returns Processed Electronically:
2004: 46.5%;
2005: 51.1%;
2006: 54.1%;
2007, Target: 57.0%;
2007: Actual: 57.1.
Measure: Cost per Taxpayer Served ($) (HCTC):
2004: N/A;
2005: N/A;
2006: $13.71;
2007, Target: $14.25;
2007: Actual: $14.93.
Measure: Sign-Up Time (days) – Customer Engagement (HCTC):
2004: N/A;
2005: 98.1;
2006: 98.7;
2007, Target: 97.0;
2007: Actual: 93.3.
Measure: Percent Business Returns Processed Electronically:
2004: 17.4%;
2005: 17.8%;
2006: 16.6%;
2007, Target: 19.5%;
2007: Actual: 191.1%.
Measure: Refund Timeliness – Individual (Paper):
2004: 98.3%;
2005: 99.2%;
2006: 99.3%;
2007, Target: 99.2%;
2007: Actual: 99.1%.
Measure: Taxpayer Self Assistance:
2004: 46.4%;
2005: 42.5%;
2006: 46.8%;
2007, Target: 48.6%;
2007: Actual: 49.5.
Measure: Examination Coverage – Individual:
2004: 0.8%;
2005: 0.9%;
2006: 1.0%;
2007, Target: 1.0%;
2007: Actual: 1.0%.
Measure: Field Examination Embedded Quality (EQ):
2004: N/A;
2005: N/A;
2006: 85.9%;
2007, Target: 87.0%;
2007: Actual: 85.9%.
Measure: Office Examination Embedded Quality (EQ):
2004: N/A;
2005: N/A;
2006: 88.2%;
2007, Target: 89.0%
2007: Actual: 89.4.
Measure: Examination Quality – Industry:
2004: 74.0%;
2005: 77.0%;
2006: 85.0%;
2007, Target: 88.0%;
2007: Actual: 87%.
Measure: Examination Quality – Coordinated Industry:
2004: 87.0%;
2005: 89.0%;
2006: 96.0%;
2007, Target: 97.0%;
2007: Actual: 96.0%.
Measure: Examination Coverage – Business (Corps. >$10M):
2004: 7.5%;
2005: 7.8%;
2006: 7.3%;
2007, Target: 8.2%;
2007: Actual: 7.2%.
Measure: Examination Efficiency – Individual (1040):
2004: N/A;
2005: 121;
2006: 128;
2007, Target: 136;
2007: Actual: 137.
Measure: Automated Underreporter (AUR) Efficiency:
2004: 1,514;
2005: 1,701;
2006: 1,832;
2007, Target: 1,932;
2007: Actual: 1,956.
Measure: Automated Underreporter (AUR) Coverage:
2004: 1.9%;
2005: 2.2%;
2006: 2.4%;
2007, Target: 2.5%;
2007: Actual: 2.5%.
Measure: Collection Coverage – Units:
2004: N/A;
2005: 53.0%;
2006: 54.0%;
2007, Target: 54.0%;
2007: Actual: 54.0%.
Measure: Collection Efficiency – Units:
2004: N/A;
2005: 1,514;
2006: 1,677;
2007, Target: 1,723;
2007: Actual: 1,828.
Measure: Field Collection Embedded Quality (EQ):
2004: N/A;
2005: N/A;
2006: 84.2%;
2007, Target: 86.0%;
2007: Actual: 84.0%.
Measure: Automated Collection System (ACS) Accuracy:
2004: 87.8%;
2005: 88.5%;
2006: 91.0%;
2007, Target: 91.0%;
2007: Actual: 92.9%.
Measure: Criminal Investigations Completed: 4,387 4,104 4,157 4,000
4,269
2004: 4,387;
2005: 4,104;
2006: 4,157;
2007, Target: 4,000;
2007: Actual: 4,269.
Measure: Number of Convictions:
2004: 2,008;
2005: 2,151;
2006: 2,019;
2007, Target: 2,069;
2007: Actual: 2,155.
Measure: Conviction Rate:
2004: 91.2%;
2005: 91.2;
2006: 91.5%;
2007, Target: 92.0%;
2007: Actual: 90.2%.
Measure: Conviction Efficiency Rate ($):
2004: 362,849;
2005: 295,316;
2006: 328,750;
2007, Target: 314,008;
2007: Actual: 301,788.
Measure: TE/GE Determination Case Closures:
2004: 143,877;
2005: 126,481;
2006: 108,462;
2007, Target: 118,200;
2007: Actual: 109,408.
Measure: BSM Project Cost Variance by Release/Subrelease:
2004: N/A;
2005: N/A;
2006: **;
2007, Target: 10.0%;
2007: Actual: **.
Measure: BSM Project Schedule Variance by Release/Subrelease:
2004: N/A;
2005: N/A;
2006: **;
2007, Target: 10.0%;
2007: Actual: **.
* The methodology for estimating the eligibility rate is being revised.
** Cost and Schedule variance is based on +/- 10% and is reported on
several project releases/subreleases.
[End of appendix]
Appendix C: Explanation of Shortfalls:
Customer Contacts Resolved per Staff Year: The Customer Contacts
Resolved per Staff Year target was set using preliminary FTE levels.
For FY 2007, the actual was 7,648, within 1% of the target of 7,702.
The IRS completed almost 4 million additional web services than
projected. During the latter part of the fiscal year, an emphasis was
placed on reducing inventory levels in the Accounts Management paper
programs, resulting in more FTE spent than were used in calculating the
target. Completing a web service is defined as providing a service
requested by a taxpayer or tax practitioner through self-assist
internet-based applications such as Internet Refund Fact of Filing
("Where's My Refund"), Transcript Delivery System, Preparer Tax
Identification Number, Internet-EIN, Prior Year Earned Income Option,
and Disclosure Authorizations.
Timeliness of Critical Filing Season Tax Products to the Public: For FY
2007, the Timeliness of Critical Filing Season Tax Products to the
Public was 83.5%, 1.7 percentage points below the FY 2007 target of
85.2% and 0.6% above the prior year’s performance of 83.0. The late
passage of Extender Legislation affecting state and local sales taxes
and education expenses was the primary cause for the IRS not meeting
this target. More than 1,000 tax product revisions affecting 137 of the
164 filing season products used by taxpayers were changed with no
impact to the start of the filing season. A total of 27 tax products
were delayed. Eleven tax products were directly impacted by the
Extender legislation and the remaining sixteen were indirectly impacted
by the Extender legislation as a result of workload modifications to
accommodate priority forms and publications. These products were
originally scheduled for processing between October and December 2006.
Cost Per Taxpayer Served ($): For FY 2007, the Cost Per Taxpayer Served
was $14.93, sixty-eight cents above the FY 2007 target of $14.25. The
shortfall was a result of having to absorb a one-time expense to
purchase Health Care Tax Credit Program Kits for taxpayers at a cost of
$300,000 to replace outdated supplies. The $300,000 cost was not
factored in when the target was set.
Percent of Business Returns Processed Electronically: For FY 2007,
19.1% of the business returns processed were filed electronically. This
is 2% below the plan of 19.5% and 15% above the prior year's
performance of 16.6%. For the fiscal year, business returns
processed are running more than 500,000 above total projections. Of
this overall increase over total projections, those from paper
submissions are almost 800,000 above projections, while those from
electronic submissions are almost 475,000 below projections. The
majority of the electronic submission under run continues to be
employment returns (primarily Forms 941, Employer's Quarterly Federal
Tax Return) and corporation returns (primarily Forms 1120, U.S.
Corporation Income Tax Return). The combination of e-File being under
schedule and the total business returns (paper and e-File combined)
being over schedule exacerbates the percentage of business returns e-
Filed.
Refund Timeliness – Individual (Paper): The IRS was within 1% of
target. For FY 2007, Refund Timeliness was 99.1%, 0.1 percentage point
below the FY 2007 target of 99.2%. Delays associated with taxpayer
identification number processing, including: increases in the number of
Individual Taxpayer Identification Number (ITIN) applications;
verification of required documentation (which is often submitted in a
foreign language); and ITIN System stability issues that caused work
stoppages during the peak processing season were the sources for delay.
Assignment of an ITIN must be completed before the associated tax return
can be processed and any refund claim released for processing.
Field Examination Embedded Quality: For FY 2007, Field Examination
Embedded Quality was 85.9%, 1.1 percentage points (a statistically
insignificant amount) short of the FY 2007 target of 87%. The FY 2007
target assumed a 10% improvement factor in the previously weakest
quality attributes. Although the 10% increase did not occur, there were
significant improvements in several other attributes that brought IRS
close to the target. Actions taken to improve the quality score
included studying the consistency between front-line manager Embedded
Quality Review System and the National Quality Review System processes
that produced the measurements. In addition, an Exam Process Challenge
Team was established to improve the audit process, with focus on the
quality attributes in most need of enhancement.
Examination Quality – Industry: The Exam Quality - Industry score of
87% was one percentage point (a statistically insignificant amount)
below the FY 2007 target of 88% because of scores slightly below
expectations in three of the four quality measurement technical
standards as well as in the administrative procedures standard. The
three technical standards were: Planning the Examination,
Inspection/Fact Finding, and Workpapers & Reports. The Quality
Assurance Staff continued to focus on the importance of meeting the
Technical Standards through direct feedback to field teams, partnering
with the industries in Quality Improvement Efforts, Quality Quotes,
Quarterly Reports and outreach to field teams. In addition, while the
field completed the Administrative Procedures Checksheet at a higher
percentage than in prior fiscal years, there were still some instances
where all administrative procedures were not properly documented. The
Quality Assurance Staff continued to stress the importance of properly
completed Administrative Procedures Checksheets and ensured all
administrative and statutory requirements were properly executed and
documented.
Examination Quality – Coordinated Industry: The Exam Quality –
Coordinated Industry score was 96%, one percentage point (a
statistically insignificant amount) below the FY 2007 target of 97%.
The IRS did not meet its target due to several factors related to the
examination planning process, specifically identification of material
issues and mandatory referrals to specialists. Another contributing
factor was missing or unsigned Administrative Procedures Documents. The
IRS continues to focus on the importance of meeting the Auditing
Standards through direct feedback to field teams, partnering with the
industries in Quality Improvement Efforts, Quality Quotes, Quarterly
Reports and outreaches to IRS field teams.
Examination Coverage – Business: The Exam Coverage – Business score was
7.2%, one percentage point below the FY 2007 target of 8.2%. Key
factors contributing to the shortfall, included the implementation of
currency and cycle time initiative, which resulted in substantially
more current coordinated industry cases (CIC) that contain fewer cycles
and fewer returns; increased time spent on the Compliance Assurance
Program (cases addressing issues in a pre-filing environment), which
resulted in less numbers of closed returns from a comparable CIC
examination; and the rollout of the Issue Management System, (a case
management tool used during the examination process) which consumed
more agent time than planned.
Field Collection Embedded Quality: The Field Collection Embedded
Quality score was 84%, two percentage points below the FY 2007 target
of 86%. Although the Field Collection quality score improved over last
fiscal year, the FY 2007 target was established assuming Embedded
Quality would be fully implemented at the start of FY 2007. However,
implementation was delayed until March 2007, and the first quarterly
report was not available until June 2007. These reports provide
managers with data that allows them to focus improvements on specific
attributes. Quality remains a core goal of the Collection organization
and is emphasized in both the Collection Program letter and the
business plans for FY 2008. The IRS took the following actions to
improve quality results: 1) conducted quarterly reviews in each area to
ensure consistent application of the quality attributes and evaluated
trends in order to identify areas that require additional rating
guidance and clarity. The IRS will continue these reviews in FY 2008;
2) developed quality improvement action plans for each Collection area,
which focused on specific elements that dropped 5% or more in each
attribute.
Conviction Rate: Criminal Investigation (CI) has historically achieved
one of the highest conviction rates of any Federal law enforcement
agency. The FY 2007 conviction rate was 90.2%, 1.8 percentage points
below the 92% target rate. The drop in FY 2007 appears to be largely
attributable to an increase in dismissals, many involving complex legal
issues and multiple defendants. Some of these dismissals were appealed
by the government. It is possible to materially reduce the number of
dismissals by selecting less sophisticated cases, however, over the
past five years, CI demonstrated that investigating sophisticated high
dollar, high impact legal source income cases fosters effective
deterrence, although these cases entail risk.
Tax Exempt and Government Entities (TEGE) Determination Case Closures:
The IRS fell short of the combined target of 118,200 determination case
closures by 7%. This was caused by several factors. First, workload in
this area is driven by external demand; for various reasons, the IRS
received 12,000 fewer applications than expected. Responding to customer
requests, the IRS extended certain filing deadlines. In addition,
following a major revision to the user fee schedule for determination,
a large number of submissions were returned to applicants due to
incorrect user fees. Finally, legislative changes in the Pension
Protection Act shifted workload priorities toward a number of time-
consuming cases, resulting in fewer closures overall.
[End of appendix]
Appendix D: Performance Measurement Descriptions:
Customer Service Representative (CSR) Level of Service:
The number of toll free callers that either speak to a Customer Service
Representative or receive informational messages divided by the total
number of attempted calls.
Customer Contacts Resolved per Staff Year:
The number of Customer Contacts resolved in relation to staff years
expended.
Percent of Eligible Taxpayers Who File for EITC:
The number of taxpayers who claim the Earned Income Tax Credit (EITC)
compared to the number of taxpayers who appear to be eligible for the
EITC.
Customer Accuracy – Tax Law Phones:
The percentage of correct answers given by a live assistor on Tollfree
tax law inquiries.
Customer Accuracy – Customer Accounts (Phones):
The percentage of correct answers given by a live assistor on Tollfree
account inquiries.
Timeliness of Critical Filing Season Tax Products to the Public:
The percentage of critical filing season tax products (tax forms,
schedules, instructions, publications, tax packages, and certain
notices required by a large number of filers to prepare a complete and
accurate tax return) available to the public in a timely fashion.
Timeliness of Critical Other Tax Products to the Public:
Percentage of critical other tax products, paper and electronic,
available to the public in a timely fashion.
Percent Individual Returns Processed Electronically:
The percentage of electronically filed individual tax returns divided
by the total individual returns filed.
Cost per Taxpayer Served ($) (HCTC):
The costs associated with serving the taxpayers including program kit
correspondence, registration and program participation.
Sign-Up Time (days) – Customer Engagement (HCTC):
The length of time between the first Program Kit mailing and first
payment received.
Percent Business Returns Processed Electronically:
The percentage of electronically filed business tax returns divided
by the total business returns filed.
Taxpayer Self Assistance Rate:
The percentage of taxpayer assistance requests resolved using self-
assisted automated services.
Refund Timeliness – Individual (Paper):
The percentage of refunds resulting from processing Individual Master
File paper returns issued within 40 days or less.
Examination Coverage – Individual (1040):
The sum of all individual 1040 returns closed by Small Business/Self
Employed (SB/SE), Wage & Investment (W&I), and Large and Mid-Sized
Business (LMSB) (Field Exam and Correspondence Exam programs ) divided
by the total individual return filings for the prior calendar year.
Field Examination Embedded Quality (EQ):
The score awarded to a reviewed field examination case by a Quality
Reviewer using the National Quality Review System (NQRS) quality
attributes.
Office Examination Embedded Quality (EQ):
The score awarded to a reviewed office examination case by a Quality
Reviewer using the NQRS quality attributes.
Examination Coverage – Business (Corps. >$10M):
The number of LMSB “customer base” returns (C and S Corporations with
assets over $10 million and all partnerships) examined and closed by
LMSB during the current fiscal year divided by the number of filings
for the preceding calendar year.
Examination Efficiency – Individual (1040):
The sum of all individual 1040 returns closed by SB/SE, W&I, and LMSB
(Field Exam and Correspondence Exam programs) divided by the total Full-
Time Equivalent (FTE) expended in relation to those individual returns.
Automated Underreporter (AUR) Efficiency:
The total number of W&I and SB/SE contact closures (a closure resulting
from a case where we made contact) divided by the total FTE, including
overtime.
Automated Underreporter (AUR) Coverage:
A percentage representing the total number of W&I and SB/SE contact
closures (a closure resulting from a case where SBSE and W&I made
contact) divided by the total return filings for the prior year.
Examination Quality – Industry:
Average of the scores of Industry Cases reviewed. Case scores are based
on the percentage of elements passed within each auditing standard.
Examination Quality – Coordinated Industry:
Average of the scores of Coordinated Industry Cases reviewed. Case
scores are based on the percentage of elements passed within each
auditing standard.
Collection Coverage – Units:
The volume of collection work disposed compared to the volume of
collection work available.
Collection Efficiency – Units:
The sum of all modules disposed by Automated Collection System (ACS)
(SB/SE & W&I) and by SB/SE Field Collection divided by the total
collection FTE.
Field Collection Embedded Quality (EQ):
The score awarded to a reviewed collection cases by a Quality Reviewer
using the NQRS quality attributes.
Automated Collection System (ACS) Accuracy:
The percent of taxpayers who receive the correct answer to their ACS
question.
Criminal Investigations Completed:
The total number of subject criminal investigations completed during
the fiscal year, including those that resulted in prosecution
recommendations to the Department of Justice as well as those
discontinued due to a lack of prosecution potential.
Number of Convictions:
The number of criminal convictions.
Conviction Rate:
The percent of adjudicated criminal cases that result in convictions.
Conviction Efficiency Rate ($):
The cost of Criminal Investigation’s (CI's) program divided by the
number of convictions. The number of convictions is the total number of
cases with the following statuses: guilty plea, nolo contendere, judge
guilty or jury guilty. The CI financial plan includes direct and
reimbursable costs, including employees’ salaries, benefits, and
investigative expenses, as well as facility costs