IRS Referral Programs:

Opportunities Exist to Strengthen Controls and Increase Coordination across Overlapping Programs

GAO-16-155: Published: Feb 23, 2016. Publicly Released: Mar 24, 2016.

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What GAO Found

Information referrals from the public alleging tax noncompliance must be submitted on paper forms by mail to the Internal Revenue Service (IRS). These referrals are manually screened by clerical staff and routed by mail to units across IRS for further action, as shown in the figure.

Process for Screening and Routing Information Referrals for Further Review

Process for Screening and Routing Information Referrals for Further Review

Ineffective internal controls undercut IRS management of the information referral process. IRS does not have an organizational structure for information referrals with clear leadership for defining objectives and outcomes for measuring cost-effectiveness and results. Without clear leadership, IRS does not know how effectively it is leveraging information referrals to address the tax gap. IRS has incomplete documentation of procedures for the information referral process, increasing the risk of delays and added costs in routing the information for further action. Although one-quarter of the information referrals in fiscal year 2015 were sent for destruction after screening, IRS has not documented procedures for supervisory review of those referrals prior to destruction. Without procedures to address these control deficiencies, IRS is compromised in its ability to know how effectively it is leveraging tax noncompliance information reported by the public.

Fragmentation and overlap across IRS's general information referral process and eight specialized referral programs, such as for reporting identity theft and misconduct by return preparers, can confuse the public trying to report tax noncompliance to IRS. Yet coordination between referral programs is limited, and IRS does not have a mechanism for sharing information on crosscutting issues and collaborating to improve the efficiency of operations across the mix of referral programs. As a result, IRS may be missing opportunities to leverage resources and reduce the burden on the public trying to report possible noncompliance.

Why GAO Did This Study

Reports by the public of suspected underreporting of taxes or other tax violations can help IRS detect millions of dollars in taxes that would otherwise go uncollected. Productive referrals can help address the net $385 billion tax gap—the difference between the amount of taxes paid voluntarily on time and the amount owed. IRS received about 87,000 information referrals in fiscal year 2015.

GAO was asked to assess the overall effectiveness of the information referral process. This report (1) describes IRS's process for screening and routing information referrals; (2) assesses the controls for the information referral screening and routing process; and (3) evaluates the coordination between the information referral process, the Whistleblower Office, and other IRS referral programs. GAO reviewed IRS guidance, processes, and controls for the information referral process, assessed whether IRS's processes followed Standards for Internal Control in the Federal Government , and interviewed IRS officials.

What GAO Recommends

GAO recommends, among other things, that IRS establish an organizational structure that identifies responsibility for defining objectives and for measuring results for information referrals; document procedures for the information referral process; and establish a coordination mechanism across IRS referral programs. IRS agreed with GAO's recommendations.

For more information, contact Jessica Lucas-Judy at (202) 512-9110 or lucasjudyj@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: As of March 2019, IRS had taken some actions to establish, document, and implement an organizational structure identifying responsibility for defining objectives with an appropriate line of reporting for measuring costs and results for information referrals. The cross-functional team established by the Deputy Commissioner for Services and Enforcement assessed the feasibility of consolidating various information referral programs under one structure and made recommendations to the Deputy Commissioner of Services and Enforcement. W&I has existing processing in place for receiving and processing paper forms and retained the intake and screening responsibilities. Oversight of Form 3949-A intake transitioned from Accounts Management to Submission Processing Headquarters in October 2016. SB/SE is responsible for defining objectives and monitoring results for information referrals. As of February 2018, IRS had established some internal accounting codes to help measure costs and results. In February 2019, IRS provided cost information for the initial intake and partial cost information on further screening of referrals routed to some examination units. GAO will continue to monitor IRS's actions to monitor both costs and outcomes from leveraging referrals from the public alleging tax noncompliance.

    Recommendation: The Commissioner of Internal Revenue should establish, document, and implement an organizational structure identifying responsibility for defining objectives with an appropriate line of reporting for measuring costs and results for information referrals.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: IRS has taken some action to ensure that the IRM has internal controls for processing information referrals by establishing, documenting, and implementing supervisory review and segregation of duties for inventory management reporting procedures. IRS added Internal Revenue Manual procedures for the Submissions Processing Image Control Team for supervisory review and segregation of duties. Specifically, no one individual should control all key aspects of a transaction or event, and duties for processing, recording, reviewing transactions, and preparing inventory reports are to be separated among individuals to reduce the risk of error or fraud. As of March 2019, GAO continues to monitor IRS action to implement and monitor controls to ensure the reliability of information referral intake and routing inventory reporting.

    Recommendation: The Commissioner of Internal Revenue should ensure that the IRM has internal controls for processing information referrals by establishing, documenting, and implementing supervisory review and segregation of duties for inventory management reporting procedures.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: IRS has taken actions to establish and document controls for monitoring information referrals retained prior to destruction. In January 2018, IRS updated Internal Revenue Manual (IRM) procedures requiring managers to ensure quality reviews are performed and recorded for information referrals screened by the clerks, including referrals retained for destruction. The retention file is to be subject to weekly review, and managers are to monitor and track the reasons for referrals being retained prior to destruction. GAO continues to monitor IRS action to analyze the volume of incoming referrals retained to avoid destroying referrals that could help combat tax noncompliance. As of February 2018, IRS also has taken action to document controls over information referrals routed to the Wage and Investment (W&I) and Small Business and Self-Employed (SB/SE) divisions for audit consideration. For Form 3949-A information referrals, W&I and SB/SE campus examination units are to retain rejected referrals for 90 days after classification and selected referrals for three years after the examination closing date. IRM procedures updated in October 2017 specify that W&I and SB/SE campus examination management are to conduct periodic reviews of the rejected information referrals to ensure the fairness and integrity of the classification process. SB/SE field examination also has new procedures for tracking and monitoring the inventory of examination leads received, including information referrals reported by the public. A referral coordinator is to review information referrals for examination potential and log whether a referral was selected for examination or not. IRM procedures specify referrals not selected are to be retained for 26 months prior to destruction. As of March 2019, GAO continues to monitor IRS action to implement and monitor the new controls over considering information referrals as examination leads.

    Recommendation: The Commissioner of Internal Revenue should ensure that the IRM has internal controls for processing information referrals by establishing, documenting, and implementing ongoing monitoring of information referrals retained for destruction, including a mechanism for tracking the reasons referrals were retained prior to destruction.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: IRS has taken actions to document procedures to provide feedback to the Submissions Processing Image Control Team on the number and types of information referrals misrouted and a mechanism to analyze patterns of misroute errors. In October 2017, IRS updated Internal Revenue Manual procedures specifying that the Wage & Investment and Small Business and Self Employed divisions are to return any referrals received that do not meet the routing guidelines. The Image Control Team is to re-route the referrals to the appropriate area and track the volume of misroutes in its inventory reports. IRS uses bi-monthly meetings to facilitate communication and feedback on the number and types of referrals misrouted and on their disposition. As of March 2019, GAO continues to monitor IRS action to implement and monitor controls to reduce misrouting which can result in delays and added costs for re-screening.

    Recommendation: The Commissioner of Internal Revenue should ensure that the IRM has internal controls for processing information referrals by establishing, documenting, and implementing procedures for each IRS operating unit receiving information referrals to provide feedback on the number and types of referrals misrouted and on their disposition, and a mechanism to analyze patterns of misroute errors.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Open

    Comments: As of March 2019, IRS had taken some action to establish a coordination mechanism to help IRS referral programs communicate and share information, as GAO recommended in its February 2016 report. IRS established a cross-functional team in February 2016 to comprehensively review IRS's referral programs. Among other things, this team explored aligning all IRS referral programs within an organizational structure to more efficiently coordinate, communicate, and share information across the referral programs. The Deputy Commissioner of Services and Enforcement directed the largest recipient of referrals to facilitate quarterly meetings in order to improve communication and information sharing across multiple IRS referral programs. Three initial meetings were held in 2017, and future meetings were to begin once a charter was finalized. As of March 2019, IRS was working on a charter to formalize the new referral coordination working group. GAO will continue to monitor the IRS charter approval and working group meetings.

    Recommendation: The Commissioner of Internal Revenue should establish a coordination mechanism to facilitate communication and information sharing across IRS referral programs on crosscutting tax issues and ways to improve efficiency in the mechanisms for public reporting of possible tax violations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Open

    Priority recommendation

    Comments: As of March 2019, IRS had taken some action to establish a mechanism to coordinate on a plan and timeline for developing a consolidated, online referral submission, as GAO recommended in its February 2016 report. IRS established a cross-functional team in February 2016 to comprehensively review IRS's referral programs. Among other things, the team has explored options to consolidate the initial screening operations and determine the scope and complexity for moving the referral process to an online format. According to IRS, an electronic submission process is expected to provide better access to the program and reduce the burden associated with making a written report or referral. In November 2016, the cross-functional team requested information technology resources for fiscal year 2019 to develop an online system which could potentially replace four separate referral forms, filter out incomplete referrals, and electronically route referrals for further IRS action. As of March 2019, IRS was considering funding for fiscal year 2020 for the portal development. IRS assessed options for consolidating all forms for the various referral programs and determined that consolidating them to a single form was not feasible because of the technical nature and complexity of the various referral types. As of March 2019, the cross-functional team had worked with IRS On Line Services to develop an online application prototype and was considering the cost-effectiveness of a commercial off-the-shelf product. According to IRS, the online application will make it easier for the public to report possible tax violations. Also, the online system will improve efficiency in coordination and provide reports that will be incorporated into the quarterly coordination meetings to achieve a broader collaborative mechanism across the multiple referral programs. As of March 2019, IRS was still working on the charter for the new coordination working group. IRS said it will consider further consolidating the referral programs once the online application is in place. GAO will continue to assess these efforts as they are further developed.

    Recommendation: The Commissioner of Internal Revenue should direct the referral programs to establish a mechanism to coordinate on a plan and timeline for developing a consolidated, online referral submission in order to better position IRS to leverage specialized expertise while exploring options to further consolidate the initial screening operations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Open

    Comments: IRS has taken actions to document the information referral screening and routing guidelines, used by the Image Control Team and IRS units receiving information referrals, in the Internal Revenue Manual (IRM). The IRM procedures detail procedures for the Image Control Team screening of form 3949-A. Updates of the screening and routing guidelines are communicated to the Image Control Team and other IRS units by the IRS Servicewide Electronic Research Program which provides IRS employees intranet access to the IRM and other IRS information. As of March 2019, GAO continues to monitor IRS action to implement the controls for processing information referrals.

    Recommendation: The Commissioner of Internal Revenue should ensure that the Internal Revenue Manual (IRM) has internal controls for processing information referrals by establishing, documenting, and implementing procedures for maintaining and communicating the information referral screening and routing guidelines to the Image Control Team (ICT) and IRS units receiving information referrals as well as procedures for ICT screening and routing operations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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