Treasury Inspector General Reports -Issued February, 2016

Transcription

1 Treasury Inspector General Reports -Issued February, 2016 TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Highlights Direct Debit Installment Agreement Procedures Addressing Taxpayer Defaults Can Be Improved IMPACT ON TAXPAYERS Final Report issued on February 5, 2016 Direct debit installment agreements (DDIA) give taxpayers a convenient way to make payments on their installments while eliminating the need for checks or paper forms and IRS resources to process the payments each month. During Fiscal Year 2014, more than 500,000 taxpayers entered into DDIAs, and approximately $2.8 billion was collected. Revising DDIA procedures to automatically add new liabilities to existing DDIAs could increase revenue collection and reduce taxpayer burden. WHY TIGTA DID THE AUDIT Taxpayers are required to remain in tax compliance as a condition of entering into an installment agreement, and systemic processes exist to default an installment agreement if a taxpayer incurs and fails to pay a new tax liability. These defaults may occur even if the taxpayer would have preferred adding the new liability to the installment agreement. This audit was initiated to determine whether the systemic default of 1

2 DDIAs due to new tax liabilities causes unnecessary burden on taxpayers and the IRS or improves taxpayer compliance. WHAT TIGTA FOUND DDIAs provide benefits for both the taxpayer and the IRS. Taxpayers benefit from establishing DDIAs because they do not have to manually write a check and mail it in order to fulfill their obligations. The IRS benefits because taxpayer payments can be posted faster and do not require IRS employee involvement. In addition, taxpayers who enter into DDIAs are less likely to default on their agreement compared with taxpayers who enter into traditional installment agreements. In order to maintain a DDIA, taxpayers must pay any new tax liability when due or the DDIA will systemically default. When defaulted, the IRS stops automatic collection from the taxpayer s financial accounts. TIGTA found that when DDIA defaults are due to a new tax liability, most taxpayers want to include the new balance due into their existing DDIA. In addition, the IRS has a procedure that eliminates the need to default the DDIA if a taxpayer incurs a new tax liability, but it is only used when taxpayers request it. As a result, systemic DDIA defaults increased taxpayer burden because taxpayers incurred additional interest on their unpaid balances. In addition, revenue collection was suspended until the DDIAs were restructured, and some DDIAs were not reestablished. WHAT TIGTA RECOMMENDED TIGTA recommended that the IRS: 1) consider establishing systemic programming to allow DDIA taxpayers who incur a new unpaid tax liability to absorb the new liability into the current agreement without stopping the automatic payment in qualifying situations; 2) in the interim, provide taxpayers with information as to how they can avoid a default of their DDIA in the event of a new unpaid liability on Form 9465, Installment Agreement Request, and Form 433-D, Installment Agreement; and 3) for taxpayers who cannot absorb their liabilities in existing DDIAs, establish procedures so that direct debit payments do not stop while the DDIA is suspended and the IRS actively addresses the new balance due. 2

3 IRS management agreed that systemically adding a new tax liability to an existing DDIA could save time and collect additional revenue, but did not commit to ensuring that qualifying new liabilities would be absorbed into existing DDIAs or discontinuing the practice of stopping automatic collection when the DDIA is suspended due to a new liability. Management did agree to provide taxpayers with more information on how to avoid default. TIGTA believes that all of the recommendations would benefit the IRS and taxpayers. Treasury Inspector General for Tax Administration February 8, 2016 TIGTA IRS Needs Processes To Ensure Reliability of Unemployment Files and to Work Multi-State Cases 3

4 The Internal Revenue Service (IRS) needs to have better processes in place to administer its Federal Unemployment Tax Program. This is a conclusion in an audit report that the Treasury Inspector General for Tax Administration (TIGTA) published. The overall audit objective was to evaluate whether the IRS s Certification Program for the Federal Unemployment Tax Act (FUTA) ensures the accuracy of FUTA credit claims. FUTA requires that Federal and State Governments work together to establish and administer unemployment insurance programs to provide benefits to unemployed workers. The IRS is responsible for collecting the FUTA tax, which is a Federal employer tax on wages paid to employees to fund State workforce agencies. The FUTA tax accumulates as an unemployment trust fund from which funds are dispensed to State Agencies. Employers who pay both the FUTA tax and a State unemployment tax are allowed a credit of the FUTA tax. TIGTA s review identified that the IRS s validation of the State FUTA Certification Data Files does not ensure the reliability of the data before its use in identifying discrepancy cases. Review of the data submitted by State Agencies found that 94 percent of State Agencies submitted data that contained formatting errors in key data fields used to identify FUTA discrepancy cases. For one State, the errors caused the State s certification data to be excluded from the FUTA Certification Program. In addition, TIGTA found that the IRS does not have a process to ensure that State certification data are complete. TIGTA s comparison of the 5,064,269 single-state employers identified 3,452 employers for which no information was reported back from the State. As a result, these employers were excluded from the IRS s FUTA Certification discrepancy analysis. TIGTA also identified that the IRS s processes do not accurately identify multi-state employer discrepancy cases. Using the approach that the IRS should implement, TIGTA s analysis identified 3,729 multi-state employers with potential discrepancies totaling more than $200 million. Finally, TIGTA found that the IRS incorrectly assessed 12,171 employers more FUTA tax than the employer owed, totaling almost $3.2 4

5 million, due to a programming error and using an incorrect FUTA tax rate to compute the amount of tax owed. The IRS must ensure that the data files that it receives from the State Agencies are complete and reliable prior to using this data to verify employers FUTA tax credit claims, said Mike McKenney, Deputy Inspector General for Audit. TIGTA s review identified that IRS processes do not adequately do this, he added. TIGTA recommended that the Commissioner, Small Business/Self- Employed Division: develop a process to identify errors in State FUTA Certification Data Files; work with State Agencies to ensure that all records are returned; revise its process to accurately identify multi- State employer discrepancy cases; correct tax assessments made on the 12,171 employers as a result of programming errors; and ensure that programming is updated to accurately calculate tax adjustments. The IRS agreed with all but one recommendation, citing the need for additional time to assess the results from a pilot study before taking appropriate action. 5

6 Treasury Inspector General for Tax Administration February 4, 2016 Accounting and Controls Need to be Improved for Excess Collections Ninety percent of the records in the Internal Revenue Service (IRS) Excess Collection File (XSF) represent $4.75 billion in credits to which taxpayers no longer have a legal claim. This is a finding in an audit report that the Treasury Inspector General for Tax Administration (TIGTA) publicly released today. The XSF was established to contain both nonrevenue receipts and tax payments that cannot be associated with the appropriate taxpayers accounts. Weaknesses in the administration of the XSF can create an environment in which unapplied taxpayer credits are vulnerable to loss and can either overstate or understate potential Government obligations. Since January 2010, the XSF has grown from $4.7 billion to $5.8 billion, an increase of 23 percent. TIGTA initiated this audit to determine 6

7 whether the controls over the XSF adequately prevent improper transactions and ensure that expired credits are appropriately accounted for and not exposed to fraud or abuse. TIGTA determined that 2.94 million (90 percent) of the 3.28 million records, involving $4.75 billion (82 percent) of $5.81 billion in the XSF database, were credits transferred to the XSF to which taxpayers no longer had a legal claim. The retention period for credits in the XSF database does not match the time frames for which taxpayers can claim the credits. Even though taxpayers have no legal claim to the funds, the IRS retains these credits in the XSF database for seven years, but IRS management could not explain why the credits are maintained for this length of time. The XSF database contains credits that date back to the 1960 s. The potential liability of credits in the XSF database was overstated by $4.7 billion as of July This amount includes more than $530 million in credits that entered the XSF in Calendar Year Although the IRS Chief Financial Officer accounts for excess collections on an annual basis, there is no attempt to keep track of the overall accumulated balance of the XSF. TIGTA reviewed all credits transferred from the XSF greater than $15,000 and found that transfers did not always comply with procedures and managerial approval is not required. Further, XSF controls do not allow managers to identify when taxpayer credits are transferred from the XSF. These control weaknesses increase the risk of undetected fraud. TIGTA made recommendations to improve IRS controls of the IRS, including shortening the time that credits are in the XSF to the legal timeframes in which taxpayers can use them, using the internal accounting function to track the balances of the XSF, generating reports to track transfers from the accounts, and changing procedures to ensure transfers from the XSF are properly authorized. The IRS agreed only to the last recommended change, but declined to limit the time that credits stay in the XSF or to track the accumulated balances of the XSF. 7

8 TIGTA believes that all of the recommendations, if implemented, would strengthen controls and improve the administration of the XSF. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Accounting and Controls Need to Be Improved for Excess Collections Final Report issued on December 15, 2015 IMPACT ON TAXPAYERS The Excess Collection File (XSF) was established to contain both nonrevenue receipts and tax payments that cannot be associated with the appropriate taxpayers accounts. Weaknesses in the administration of the XSF can create an environment in which unapplied taxpayer credits are vulnerable to loss and can either overstate or understate potential Government obligations. WHY TIGTA DID THE AUDIT Since January 2010, the XSF has grown from $4.7 billion to $5.8 billion, an increase of 23 percent. This audit was initiated to determine whether the controls over the XSF adequately prevent improper transactions and ensure that expired credits are appropriately accounted for and not exposed to fraud or abuse. WHAT TIGTA FOUND 8

9 TIGTA determined that 2.94 million (90 percent) of the 3.28 million records, involving $4.75 billion (82 percent) of $5.81 billion in the XSF database, were credits transferred to the XSF due to barred statute, i.e., the taxpayer no longer has a legal claim to the credit. The retention period for credits in the XSF database does not match the time frames for which taxpayers can claim the credits. The IRS retains these credits in the XSF database for seven years even though taxpayers have no legal claim to the funds. IRS management could not explain why XSF credits are maintained specifically for seven years. The XSF database actually has credits from the 1980 s, 1970 s, and even 1960 s. As a result, the potential liability of credits in the XSF database was overstated by $4.7 billion as of July This amount includes more than $530 million in credits that entered the XSF in Calendar Year 2013 due to barred statute. Eliminating these credits from the XSF database could decrease the IRS s exposure to potential fraud because credits will no longer be able to be viewed and accessed in the database. The IRS s internal financial accounting for excess collections can also be improved to help the IRS manage the risks associated with the XSF. For example, although the IRS Chief Financial Officer accounts for excess collections on an annual basis there is no attempt to keep track of the overall accumulated balance of the XSF which our audit determined to be at least $5.8 billion. TIGTA also reviewed all credits transferred from the XSF greater than $15,000 and found that transfers did not always comply with procedures and managerial approval is not required. Further, XSF controls do not allow managers to identify when taxpayer credits are transferred out of the XSF. These control weaknesses increase the risk of undetected fraud. WHAT TIGTA RECOMMENDED TIGTA recommended that the IRS: 1) change the XSF purging criteria from the XSF entry date to the IRS received date; 2) use the general refund statute of limitations as the standard for moving credits from the XSF; 3) utilize the internal accounting function to improve IRS controls over the XSF; 4) capture and report data specific to transfers from the XSF; 5) ensure that employees comply with XSF documentation 9

10 requirements; and 6) require management approval of all transfers out of the XSF. IRS management agreed with two of our recommendations but declined to take action on the rest. TIGTA continues to believe all of the recommendations if implemented would strengthen controls and improve the administration of the XSF. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Highlights Continued Refinement of the Return Review Program Identity Theft Detection Models is Needed to Increase Detection Final Report issued on December 11, 2015 IMPACT ON TAXPAYERS Identity theft continues to be a serious and evolving issue which has a significant impact on tax administration. In February 2009, the IRS began development of the Return Review Program (RRP) to replace its current fraud detection system. The IRS conducted a pilot test of the RRP to assess its effectiveness in identifying potential identity theft tax returns during Processing Year 2014, and based on the positive pilot results, expanded the use of the RRP s identity theft detection for Processing Year WHY TIGTA DID THE AUDIT 10

11 This audit was initiated as part of our continued coverage of the IRS s identity theft detection efforts. The overall objective of this review was to assess the effectiveness of the IRS s RRP efforts to improve identity theft detection and prevention. TIGTA also assessed the IRS s new process to limit direct deposits to a single bank account in an effort to further combat identity theft. WHAT TIGTA FOUND The RRP provides the IRS with the ability to change or adjust selection models throughout the processing year. For example, the RRP provides the capability to change models to identify new or variations of identity theft schemes as they emerge. This capability is not possible with the detection system that the RRP will eventually replace. The RRP pilot successfully identified tax returns involving identity theft that were not identified by other fraud detection systems. However, TIGTA s analysis also showed that 54,175 confirmed identity theft tax returns with refunds totaling more than $313 million were identified by other existing fraud detection systems, but were not selected by the RRP. As the IRS continues to develop the RRP, it needs to ensure that the RRP will identify identity theft cases being identified by existing systems as well as other identity theft cases. In response to TIGTA s continued identification of large volumes of potentially fraudulent tax returns with tax refunds deposited into the same bank, the IRS implemented a new process to limit the number of deposits (three) to a single bank account. TIGTA s review of this process identified programming errors that resulted in 5,516 direct deposits totaling almost $13.5 million that were not converted to paper refund checks. The IRS addressed two of the programming errors and plans to correct the remaining error by August Also, additional processes are needed for processing checks returned as undeliverable. For example, TIGTA identified 113 tax refunds totaling $354,109 that were returned undeliverable for which the IRS did not reissue a refund check as required after the taxpayer contacted the IRS and made an address change. Finally, TIGTA identified 325 returned undeliverable tax refund checks totaling $309,068 in which the IRS did not identify the refund as being associated with an identity theft tax 11

12 return and take actions to remove the fraudulent refund from the tax account. WHAT TIGTA RECOMMENDED TIGTA recommended that the Commissioner, Wage and Investment Division, ensure that the RRP selects identity theft tax returns identified by other fraud detection systems and develop additional processes to resolve taxpayer accounts when checks are returned as undeliverable or remain uncashed. The IRS agreed with three of the four recommendations and partially agreed with the remaining recommendation. Treasury Inspector General for Tax Administration January 28, 2016 TIGTA To Increase Detection, the IRS Needs to Refine its Return Review Program Identity Theft Models 12

13 A pilot program of the Internal Revenue Service s (IRS) replacement fraud detection system successfully identified tax returns involving identity theft that other IRS fraud detection systems did not identify. However, the other existing fraud detection systems identified tax returns involving identity theft that the replacement system did not select. For example, the other IRS fraud detection systems identified 54,175 confirmed identity theft tax returns with refunds totaling more than $313 million not identified by the replacement system. This is a finding in an audit report that the Treasury Inspector General for Tax Administration (TIGTA) publicly released today. Identity theft continues to be a serious and evolving issue which has a significant impact on tax administration. In February 2009, the IRS began developing the Return Review Program (RRP) to replace its current fraud detection system. The IRS conducted a pilot test of the RRP to assess its effectiveness in identifying potential identity theft tax returns during Processing Year 2014, and because of the positive pilot results, expanded the use of the RRP s identity theft detection for Processing Year The TIGTA audit was initiated as part of its continued coverage of the IRS s identity theft detection efforts. The overall objective of this review was to assess the effectiveness of the IRS s RRP efforts to improve identity theft detection and prevention. TIGTA also assessed the IRS s new process to limit direct deposits to a single bank account in an effort to further combat identity theft. With identity theft continually evolving, it is important that the IRS advance its detection and prevention efforts into the next generation, said Mike McKenney, Deputy Inspector General for Audit. The IRS needs to make every effort to ensure that its replacement fraud detection system detects identity theft cases identified by existing systems, as well as improving upon its identity theft detection and prevention efforts, he added. With the RRP, the IRS can change or adjust selection models for identity theft during the processing year. For example, the RRP provides the capability to change models to identify new or variations of identity theft schemes as they emerge. This capability is not possible with the detection system that the RRP will eventually replace. 13

14 In response to TIGTA s continued identification of large volumes of potentially fraudulent tax returns with tax refunds deposited into the same bank, the IRS implemented a new process to limit the number of deposits (three) to a single bank account. TIGTA s review of this process identified programming errors that resulted in 5,516 direct deposits totaling almost $13.5 million that were not converted to paper refund checks. The IRS addressed two of the programming errors and plans to correct the remaining error by August Also, for processing checks returned as undeliverable, the IRS needs additional procedures. For example, TIGTA identified 113 tax refunds totaling $354,109 that were returned as undeliverable for which the IRS did not reissue a refund check as required after the taxpayer contacted the IRS and made an address change. Finally, TIGTA identified 325 returned undeliverable tax refund checks totaling $309,068 in which the IRS did not identify the refund as associated with an identity theft tax return and did not take action to remove the fraudulent refund from the tax account. TIGTA recommended that the Commissioner, Wage and Investment Division, ensure that the RRP selects identity theft tax returns identified by other fraud detection systems and develop additional processes to resolve taxpayer accounts when checks are returned as undeliverable or remain uncashed. The IRS agreed with three of the four recommendations and partially agreed with the remaining recommendation, stating that processes are in place for addressing and resolving refund cancellations caused by refund checks not being cashed within fourteen months of issuance. However, the volume of taxpayer accounts with cancelled refund checks is not yet known. While the time for the check cancellation has not yet passed and the volume of converted refund payments that are ultimately cancelled is unknown, TIGTA continues to believe that appropriate next steps are to treat the taxpayer accounts as identity theft. 14