Treasury Inspector General for Tax Administration Reports - October, 2018

Transcription

1 Treasury Inspector General for Tax Administration Reports - October, 2018 TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights THE TAXPAYER PROTECTION PROGRAM INCLUDES PROCESSES AND PROCEDURES THAT ARE GENERALLY EFFECTIVE IN REDUCING TAXPAYER BURDEN Final Report issued on October 17, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS In January 2012, the IRS established the Taxpayer Protection Program (TPP) to proactively identify and prevent the processing of identity theft tax returns and assist taxpayers whose identities are used to file such returns. However, as part of the TPP process to identify potential identity theft returns, many legitimate taxpayer returns are also 1

2 selected. When this happens, it is considered to be a false positive. Taxpayers selected by this process must contact the IRS to authenticate their identity and confirm that they filed the return so that the TPP can issue their refund. WHY TIGTA DID THE AUDIT This audit was initiated to assess the IRS s efforts to reduce the burden for innocent taxpayers whose tax returns and refunds are held during processing as a result of TPP identity theft filters. WHAT TIGTA FOUND For Calendar Year (CY) 2017, the IRS reported that the TPP s false positive rate was 65 percent. To reduce the number of legitimate returns sent to the TPP, the IRS analyzes results from the prior year s identity theft filters and modifies or retires filters that select a high rate of taxpayer returns. The TPP also implemented processes and procedures that were generally effective to reduce burden for taxpayers whose returns are identified as potential identity theft. Our analysis of returns that were sent to the TPP in CY 2017 through May 25, 2017, and were issued a refund, found that the refunds were issued in an average of 46 days. The refund issuance time frame is directly contingent upon the time frame in which the taxpayer contacts the IRS and passes authentication in response to a TPP letter. The 46-day average time is less than the nine weeks that IRS customer service representatives inform taxpayers to expect their refunds. In addition, the IRS issued a TPP letter to 1,481,740 (99 percent) of 1,501,652 individuals whose tax returns were sent to the TPP in CY 2017, as of May 25, For the majority of the 19,912 (1 percent) individuals who were not issued a letter, a programming error prevented the required TPP marker from posting to the taxpayers accounts. Without this marker, TPP tax returns were not held from processing and letters were not issued to the individuals. The IRS identified the programming error on January 27, 2017, and promptly corrected it on January 30, Finally, some taxpayers did not receive refunds to which they were entitled because tax examiners did not properly resolve their cases. Our review of a statistically valid sample of 26 tax returns sent to the Return Integrity and Compliance Services (RICS) organization by the 2

3 Compliance Services Collection Operations (CSCO) function in CY 2017 identified that employees did not properly resolve three (11.5 percent) returns, with refunds totaling $261,613. In CY 2017, the CSCO function referred 282 tax returns to the RICS organization. TIGTA estimates that 19 identity theft tax returns referred to the RICS organization in CY 2017 were not accurately resolved, resulting in taxpayer refunds being delayed or not issued. WHAT TIGTA RECOMMENDED TIGTA recommended that the IRS review the 256 cases that the CSCO function referred to the RICS organization in CY 2017 that were not included in the sample of 26 cases to ensure that the cases were properly resolved. The IRS agreed with this recommendation and plans to review the referred cases for accuracy and completeness. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights THE HUMAN CAPITAL OFFICE ADMINISTERED THE DRUG TESTING OF EMPLOYEES IN TESTING DESIGNATED POSITIONS IN ACCORDANCE WITH ESTABLISHED GUIDELINES Final Report issued on October 18, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS Executive Order established the goal of a drug-free Federal workplace and made it a condition of employment for all Federal employees to refrain from using illegal drugs on and off duty. The Executive Order also required Federal agencies to establish a program to test for the use of illegal drugs by employees in sensitive positions (hereafter referred to as Testing Designated Positions). It is important 3

4 that the IRS achieve a drug-free workplace to maintain public confidence in its employees. WHY TIGTA DID THE AUDIT This audit was initiated to assess the effectiveness of IRS actions to notify and randomly drug test employees in Testing Designated Positions. WHAT TIGTA FOUND The IRS has implemented a Drug-Free Workplace Plan to randomly drug test employees in Testing Designated Positions, e.g., employees who carry firearms and those with Secret or above security clearances. Specifically, the IRS 1) notifies employees when entering Testing Designated Positions of the random drug testing requirement, 2) selects and randomly tests a minimum of 10 percent of employees in Testing Designated Positions annually, and 3) appropriately addresses any employees who test positive for drug use. TIGTA selected a random sample from the more than 2,000 employees in Testing Designated Positions during Fiscal Year 2017 and confirmed that 36 of 50 employees were notified of the drug testing requirement. Four of the sampled employees were in Testing Designated Positions but were not notified because the IRS and the union have not completed negotiations to include a small group of bargaining unit employees in random drug testing. The IRS could not provide documentation for the remaining 10 sampled employees, mainly because the notices are issued when an employee enters a Testing Designated Position but are purged from the employee s personnel file after 20 years even if the employee is still in a Testing Designated Position. During Fiscal Year 2017, the IRS selected a random sample of 1 percent of employees in Testing Designated Positions monthly for drug tests. TIGTA determined that, when annualized, this equates to more than the minimum requirement of testing 10 percent of employees in Testing Designated Positions. TIGTA also reviewed monthly lists of employees subject to random drug tests in Fiscal Year 2017 and determined that the IRS accurately identified all applicable employees with the exception of one month. During this month, 52 employees were not subject to random testing but should have been. This issue did not recur in the subsequent months. 4

5 Lastly, the IRS followed procedures and took appropriate disciplinary action when addressing substantiated positive drug tests during Fiscal Years 2013 through WHAT TIGTA RECOMMENDED TIGTA recommended that the IRS Human Capital Officer ensure that documentation is retained in a central location showing that all employees in Testing Designated Positions are notified that they are subject to random drug testing and that the IRS Human Capital Officer and Chief Counsel complete union negotiations to have bargaining unit employees in Testing Designated Positions randomly tested for illegal drug use. In their response, IRS management agreed with our recommendations. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights REVIEW OF THE PROCESSING OF REFERRALS ALLEGING IMPERMISSIBLE POLITICAL ACTIVITY BY TAX-EXEMPT ORGANIZATIONS Final Report issued on October 4, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS The IRS receives and reviews referrals (complaints) from citizens, Members of Congress, and IRS employees alleging that tax-exempt organizations are engaged in improper conduct. To promote public trust in tax administration, referrals should be reviewed impartially to determine whether examinations are warranted. WHY TIGTA DID THE AUDIT A U.S. Senate Committee on Finance (Committee) bipartisan investigation concluded that the IRS had not performed any examinations of 501(c)(4) tax-exempt groups based on referrals alleging 5

6 impermissible political activity from 2010 to In addition, an internal IRS review concluded that the prior IRS process potentially gave the impression that somehow the political leanings of organizations were considered when evaluating referrals. The Committee recommended that TIGTA review the IRS s revised procedures and whether referrals have resulted in examinations. WHAT TIGTA FOUND In July 2015, the IRS created the Political Activities Referral Committee (PARC) with three experienced managers to independently review referrals containing allegations of impermissible political activity and determine if examinations were warranted. Between July 2015 and August 2016, 19 high-profile referrals were forwarded to the PARC. The PARC evaluated the 19 referrals and recommended 10 examinations, more than one-half of which involved 501(c)(4) tax-exempt groups. As of January 2018, five of the 10 recommended examinations had not been initiated; As of January 2018, there have been no revocations or other negative findings as a result of examinations. TIGTA determined the IRS did not adequately document research related to the allegation, tax-exempt laws evaluated, or the rationale behind decisions made. This documentation is vital because the referrals are high profile, involve extremely sensitive allegations of impermissible political activity, and require a subjective analysis of often unique facts and circumstances of unverified information from the allegations. Further, TIGTA reviewed a statistical sample of referrals from more than 6,500 referrals concerning tax-exempt organizations received by the IRS between July 2015 and August Based on this review, TIGTA estimates that more than 1,000 referrals related to allegations of impermissible political activity were not forwarded to the PARC. While the sampled referrals were generally not as high profile as the 19 reviewed by the PARC, they did meet IRS criteria for forwarding to the PARC. WHAT TIGTA RECOMMENDED TIGTA made five recommendations to the Acting Commissioner, Tax Exempt and Government Entities Division, such as providing further 6

7 guidance and training on the requirements for consistently and clearly documenting referral case files, and requirements for forwarding cases to the PARC. In their response to our report, IRS management agreed with all five recommendations. The IRS stated that it has emphasized the requirements for consistently documenting related research for cases, and provided guidance and group discussions on forwarding cases to the PARC. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights BILLIONS IN TIP-RELATED TAX NONCOMPLIANCE ARE NOT FULLY ADDRESSED AND TIP AGREEMENTS ARE GENERALLY NOT ENFORCED Final Report issued on September 28, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS Tips are considered wages and are subject to employment taxes including Federal Insurance Contributions Act, Federal Unemployment Tax Act, and Federal income tax withholding. If the IRS does not enforce underreported tip income by employees and employers, it is unfair to those taxpayers who do report and pay tax on tip income accurately. WHY TIGTA DID THE AUDIT The IRS estimates that 10 percent ($23 billion) of the estimated 2006 individual income tax underreporting Tax Gap ($235 billion) is due to unreported tip income by employees. The overall objective of this audit was to determine whether the IRS is using the National Tip Reporting 7

8 Compliance Program (NTRCP) to provide balanced and adequate reporting compliance oversight of taxpayers in industries in which tipping is customary. WHAT TIGTA FOUND The NTRCP prioritized the renewal of lower risk Gaming Industry Tip Compliance Agreements (GITCA) and Tip Rate Determination Agreements (TRDA) over higher risk compliance reviews of Tip Reporting Alternative Commitment (TRAC) agreements and tip examinations. Since Fiscal Year (FY) 2013, the NTRCP completed 875 GITCA and TRDA renewals compared with 262 tip examinations and 53 TRAC reviews. TIGTA determined that 1,971 (30 percent) of the 6,513 businesses with tip agreements that also filed taxes during Tax Year 2016 had projected unreported tips of nearly $1.66 billion. Employers with TRAC agreements accounted for 815 (41 percent) of this noncompliance, involving almost $1.2 billion (72 percent), including 47 full-service restaurants that potentially underreported by over $1 million each. The IRS provided tip income audit protection to these potentially noncompliant businesses and employees. There is an even higher risk of tax noncompliance for employers in tipping industries that do not have a tip agreement. TIGTA identified 15,771 employers with $6.3 billion in projected unreported tip income for Tax Year 2016, including 676 employers who underreported by over $1 million. Meanwhile, the NTRCP completed only 34 tip examinations of employers in FY IRS management believes that focusing on the renewal of GITCAs allows them to reach and maintain compliance for a large number of employers and their employees all at once. However, TIGTA determined that **1** of 10 randomly sampled FY 2017 GITCA and TRDA renewal reviews resulted in either no change to the tip rates or a reduction by an average of 17 percent. In addition, unlike TRACs, GITCA and TRDA employers must submit annual reports that the NTRCP can use to assess the risk of noncompliance. TIGTA s review of the 10 most recently completed tip agreement compliance reviews showed that the NTRCP examiners had documented at least one reason to revoke the tip agreements in **1** 8

9 cases, but the agreements were not revoked. The NTRCP has revoked only 13 tip agreements since FY WHAT TIGTA RECOMMENDED TIGTA made nine recommendations to improve the NTRCP s administration of tip agreements and examinations. In response to the report, IRS management agreed with the recommendations and plans to take corrective actions. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights THE INTERNAL REVENUE SERVICE S BANK SECRECY ACT PROGRAM HAS MINIMAL IMPACT ON COMPLIANCE Final Report issued on September 24, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS The Currency and Foreign Transactions Reporting Act of 1970 requires U.S. financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and to assist U.S. persons in reporting foreign bank and financial accounts. The law has been amended several times and is now known as the Bank Secrecy Act (BSA). The IRS received delegated authority to enforce the BSA s criminal provisions and examine certain nonbank financial institutions. The IRS also has authority to examine trades and businesses for compliance with Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, under Internal Revenue Code Title 26 and 31 and authority to assess penalties under Title 26. However, the Financial Crimes Enforcement Network (FinCEN) retains the final authority to impose Internal Revenue Code Title 31 civil penalties. 9

10 WHY TIGTA DID THE AUDIT This audit was initiated to evaluate the impact of the IRS s compliance efforts related to its delegated authority under the BSA. WHAT TIGTA FOUND The IRS Small Business/Self-Employed Division conducts BSA compliance activities through its Specialty Examination function, which has a dedicated BSA Program. TIGTA reviewed a statistically valid random sample of 140 compliance cases from a population of 24,212 closed cases worked by the BSA Program for Fiscal Years 2014 through 2016 and found that 105 (75 percent) were closed with 383 Title 31 violations in which the respective business only received a letter citing the violations found. For the same fiscal year period, TIGTA found that 1) referrals to the FinCEN of Title 31 penalty cases go through lengthy delays and have little impact on BSA compliance; 2) the BSA Program spent about $97 million to assess approximately $39 million in penalties; and 3) while referrals were made to IRS Criminal Investigation, most of the investigations were declined and less than half of the cases were accepted. Additionally, a September 2016 TIGTA report addressed the need for the IRS to incorporate BSA Program personnel in developing its virtual currency strategy; however, the IRS has still not effectively used the BSA Program in this area. TIGTA also found that until June 2017, the BSA Program did not require Publication 1, Your Rights as a Taxpayer, as a required enclosure to notify taxpayers of their rights when initiating a Form 8300, Title 26 examination, and some examiners still are unaware of the change that requires taxpayers to be notified of their rights. WHAT TIGTA RECOMMENDED TIGTA recommended that the IRS: 1) coordinate with the FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work; 2) leverage the BSA Program s Title 31 authority and annual examination planning in the development of the IRS s virtual currency strategy; 3) notify examiners of new appointment letter enclosures that includes Publication 1; 4) evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and 5) improve the process for referrals to IRS Criminal Investigation. The IRS agreed with four of the five recommendations. 10

11 The IRS will incorporate its virtual currency strategy into its Title 31 compliance efforts; provide BSA examiners guidance on appointment letter enclosures; review and improve the FinCEN referral process; and review the BSA criminal referral criteria to maximize efficiency and enhance BSA referrals to Criminal Investigation. However, the IRS disagreed with pursuing Title 31 penalty authority stating it was outside its purview and that the FinCEN intends to retain this authority TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights A SHORTENED DELIVERY CYCLE, HIGH VOLUME OF CHANGES, AND MISSED DEADLINES INCREASE THE RISK OF A DELAYED START OF THE 2019 FILING SEASON Final Report issued on September 25, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue IMPACT ON TAXPAYERS The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code affecting individuals, businesses, and tax-exempt organizations. It is the first major tax reform legislation in more than 30 years. The IRS estimates that implementation will require creating or revising about 450 forms, publications, and instructions and modifying about 140 information technology systems to ensure that it can accommodate the newly revised tax forms. WHY TIGTA DID THE AUDIT This audit was initiated to provide a status of the Information Technology organization s progress to make system modifications required by the Tax Cuts and Jobs Act of 2017 (hereafter referred to as the Act) for the 2019 Filing Season. WHAT TIGTA FOUND The Information Technology organization s normal deadline for business units requesting information technology products and services for the next filing season is January 31 st. With the passage of the Act in 11

12 December 2017, the Information Technology organization established several interim deadlines to facilitate timely implementation of the Act s tax provisions. However, the business units missed the deadlines for submitting work request notifications and business requirements. Subsequently, the Information Technology organization set a new deadline of June 1, 2018, for submitting final work request notifications. The most recent deadline shortened the time frame for making system changes for the 2019 Filing Season by four months. As of July 5, 2018, the Information Technology organization has not received all final work request notifications and business requirements. Delays in receiving this information will result in less time for modifying and testing systems and increases the risk of a delayed start of the 2019 Filing Season. Another area of concern that could affect the timely implementation of the Act s tax provisions for the 2019 Filing Season is the IRS s ability to quickly fill critical positions that were vacated by employees or contractors. Due to the lengthy process to hire employees or bring contractors onboard, the positions might not be quickly filled causing risk to the timeliness of the information technology updates. The IRS received $320 million to implement the Act, allocating $291 million it estimated would be needed for the information technology and ancillary operations support work. TIGTA calculated it would take more than 1.1 million labor hours based on the IRS s estimate of 542 full-time equivalents to implement the Act s tax provisions. The IRS plans to use current and new employees to meet these needs. As of June 2018, 117 current and new employees have been hired and entered on duty to meet these needs. In addition, the Information Technology organization is planning to identify any potential negative impact on existing programs and projects caused by implementing the Act. As of July 16, 2018, the IRS had not provided documentation of any ongoing projects or programs that will be negatively affected by the implementation of the Act. TIGTA is continuing to review the Information Technology organization s efforts to implement the Act. 12

13 WHAT TIGTA RECOMMENDED This report was prepared to provide information only. Therefore, no recommendations were made in the report. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights THE INTERNAL REVENUE SERVICE AND PRIVATE DEBT COLLECTORS TOOK SOME ACTION FOR 16 POTENTIAL VIOLATIONS OF FAIR TAX COLLECTION PRACTICES DURING FISCAL YEAR 2017 Final Report issued on September 25, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS The abuse and harassment of taxpayers by IRS and private collection agency (PCA) employees while attempting to collect taxes harms taxpayers and can have a negative impact on voluntary compliance. It is important that taxpayers receive fair and balanced treatment from IRS and PCA employees when they attempt to collect taxes. 13

14 WHY TIGTA DID THE AUDIT The overall objective of this review was to obtain information on any reported violations of Fair Tax Collection Practices (FTCP) (Internal Revenue Code Section 6304) by IRS employees and on any reported or potential violations of the Fair Debt Collection Practice Act (FDCPA) (15 United States Code Sections 1601 note, p (2010)) by PCA employees, including any related administrative or civil actions resulting from those violations, for collection cases closed during Fiscal Year This information will be used to comply with the IRS Restructuring and Reform Act of 1998 requirement that TIGTA includes in one of its Semiannual Reports to Congress information regarding administrative or civil actions related to FTCP violations. WHAT TIGTA FOUND TIGTA identified two FTCP violations closed in Fiscal Year 2017 that resulted in administrative actions for IRS collection employees. One violation involved contacting taxpayers directly without the required consent of the taxpayer s power of attorney, and the other violation involved alleged harassment or abuse of a taxpayer by filing a Notice of Federal Tax Lien without providing the taxpayer notice. In addition, TIGTA identified one case that IRS management incorrectly processed as an FTCP violation. After bringing the issue to the IRS s attention, officials corrected the case to reflect that the allegation was unsubstantiated. Separate from our review of IRS FTCP violations, TIGTA identified six potential FTCP and eight potential FDCPA violations by PCA employees. The PCAs reported only two of the 14 potential violations to the IRS. IRS management took no action on the two cases to ensure that the PCAs took all appropriate steps to discipline the employee and reduce the risk that violations will continue. Finally, there were no civil actions resulting in monetary awards for damages to taxpayers because of an FTCP violation. WHAT TIGTA RECOMMENDED TIGTA recommended that the Human Capital Officer require the Labor Relations function to review and ensure that IRS management follows the IRS Manager s Guide to Penalty Determinations when making recommendations for administrative action against IRS 14

15 employees for all closed FTCP cases. In addition, the Commissioner, Small Business/Self-Employed Division, should ensure that the PCAs provide corrective action reports to the IRS, review the reports to identify potential FDCPA and other potential violations of the law, and ensure that the PCAs remove employees from the IRS account for any intentional violations. In their response, IRS management agreed with the recommendations and plans to take corrective actions. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Office of Audit Highlights BILLIONS IN TIP-RELATED TAX NONCOMPLIANCE ARE NOT FULLY ADDRESSED AND TIP AGREEMENTS ARE GENERALLY NOT ENFORCED Final Report issued on September 28, 2018 Highlights of Reference Number: to the Commissioner of Internal Revenue. IMPACT ON TAXPAYERS Tips are considered wages and are subject to employment taxes including Federal Insurance Contributions Act, Federal Unemployment Tax Act, and Federal income tax withholding. If the IRS does not enforce underreported tip income by employees and employers, it is unfair to those taxpayers who do report and pay tax on tip income accurately. WHY TIGTA DID THE AUDIT The IRS estimates that 10 percent ($23 billion) of the estimated 2006 individual income tax underreporting Tax Gap ($235 billion) is due to unreported tip income by employees. The overall objective of this audit was to determine whether the IRS is using the National Tip Reporting Compliance Program (NTRCP) to provide balanced and adequate reporting compliance oversight of taxpayers in industries in which tipping is customary. 15

16 WHAT TIGTA FOUND The NTRCP prioritized the renewal of lower risk Gaming Industry Tip Compliance Agreements (GITCA) and Tip Rate Determination Agreements (TRDA) over higher risk compliance reviews of Tip Reporting Alternative Commitment (TRAC) agreements and tip examinations. Since Fiscal Year (FY) 2013, the NTRCP completed 875 GITCA and TRDA renewals compared with 262 tip examinations and 53 TRAC reviews. TIGTA determined that 1,971 (30 percent) of the 6,513 businesses with tip agreements that also filed taxes during Tax Year 2016 had projected unreported tips of nearly $1.66 billion. Employers with TRAC agreements accounted for 815 (41 percent) of this noncompliance, involving almost $1.2 billion (72 percent), including 47 full-service restaurants that potentially underreported by over $1 million each. The IRS provided tip income audit protection to these potentially noncompliant businesses and employees. There is an even higher risk of tax noncompliance for employers in tipping industries that do not have a tip agreement. TIGTA identified 15,771 employers with $6.3 billion in projected unreported tip income for Tax Year 2016, including 676 employers who underreported by over $1 million. Meanwhile, the NTRCP completed only 34 tip examinations of employers in FY IRS management believes that focusing on the renewal of GITCAs allows them to reach and maintain compliance for a large number of employers and their employees all at once. However, TIGTA determined that **1** of 10 randomly sampled FY 2017 GITCA and TRDA renewal reviews resulted in either no change to the tip rates or a reduction by an average of 17 percent. In addition, unlike TRACs, GITCA and TRDA employers must submit annual reports that the NTRCP can use to assess the risk of noncompliance. 16

17 TIGTA s review of the 10 most recently completed tip agreement compliance reviews showed that the NTRCP examiners had documented at least one reason to revoke the tip agreements in **1** cases, but the agreements were not revoked. The NTRCP has revoked only 13 tip agreements since FY WHAT TIGTA RECOMMENDED TIGTA made nine recommendations to improve the NTRCP s administration of tip agreements and examinations. In response to the report, IRS management agreed with the recommendations and plans to take corrective actions. 17