REVENUE COLLECTION:

ATF Needs To Improve Its

Offers In Compromise Process

OIG-02-078 April 15, 2002

Office of Inspector General

*******

The Department of the Treasury
Contents

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page i

Audit Report...................................................................................................... 1

Results in Brief................................................................................................. 2

Background...................................................................................................... 4

Findings and Recommendations ........................................................................ 6

ATF Needs To Track and Monitor OIC Cases Better ...................................... 6

 Recommendations ......................................................................................10

OIC Procedures Need Improvement ..............................................................13

 Recommendations .......................................................................................20

Appendices

Appendix 1: Objectives, Scope, and Methodology............................................23

Appendix 2: Schedule of Funds Put To Better Use ...........................................25

Appendix 3: Management Comments ..............................................................26

Appendix 4: Major Contributors To This Report................................................34

Appendix 5: Report Distribution ......................................................................35

Abbreviations

ATF Bureau of Alcohol, Tobacco and Firearms

DIO Director of Industry Operations

FAA Act Federal Alcohol Administration Act 

FMD Financial Management Division

FY Fiscal Year

IEM Integrated Entity Module

IRC Internal Revenue Code

ITC Inventory, Tracking and Closure System

LICS Leads, Investigations, Cases System

NRC National Revenue Center

OIC Offers In Compromise

OIG Office of Inspector General

RAS Revenue Accounting Section
OIG Audit

Report

The Department of the Treasury

Office of Inspector General

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 1

April 15, 2002

Bradley A. Buckles

Director

Bureau of Alcohol, Tobacco and Firearms

This report presents the results of the Office of Inspector General’s 

(OIG) audit to determine whether the Bureau of Alcohol, Tobacco 

and Firearms (ATF) was using the offers in compromise (OIC) 

process effectively and in accordance with the intent of governing 

laws and regulations. We also conducted follow-up on a prior OIG 

report regarding OIC to determine whether planned corrective 

actions for recommendations were implemented. 

ATF is authorized to initiate assessments of additional taxes, 

interest, and penalties; suspend or revoke permits; or take other 

adverse actions to ensure compliance with governing laws and 

regulations. An OIC is an agreement between ATF and a permittee 

to pay a lower amount to settle an adverse action. The OIC is an 

amount determined first by ATF guidelines, then negotiated with 

the permittee. This amount is deemed sufficient by ATF to ensure 

future compliance when a suspension or revocation of a permit is 

not warranted. ATF closed 28 OIC cases in Fiscal Years (FY) 1999 

and 2000 with settlement amounts totaling over $2 million. 

Individual OIC amounts ranged from $500 to $750,000. 

This review was included in the OIG's Annual Plan for Fiscal Year 

2001. We conducted our audit work from December 2000 to 

October 2001 at ATF Headquarters in Washington, D.C., and the 

National Revenue Center (NRC) in Cincinnati, Ohio. A more 

detailed description of our objectives, scope, and methodology is 

provided as Appendix 1.
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 2

Results in Brief

We found that ATF was using the OIC process in accordance with 

the intent of governing laws and regulations and that adequate 

controls existed to account for and safeguard OIC funds. ATF 

accepted OICs to resolve violations. All OIC cases required some 

level of Headquarters review. In addition, ATF developed 

standardized worksheets for processing OIC cases to better ensure 

consistency and fairness. However, we found that ATF could 

improve the OIC process to make it more effective and timely. 

We found that ATF needs to track and monitor OIC cases better. 

ATF had a difficult time providing us with an accurate universe of 

OIC cases closed in FYs 1999 and 2000; was not using N-Spect 

(ATF’s official system designed to provide automated reporting and 

tracking abilities for ATF’s regulatory enforcement) effectively to 

track and monitor OIC cases; was not producing OIC management 

reports; and was not conducting OIC case trend analysis. We 

found that Directors of Industry Operations (DIOs) were 

maintaining their own internal tracking systems. ATF had 

difficulties tracking and monitoring OIC cases because there was 

confusion by the DIOs regarding the definition of a closed OIC 

case; OIC information entered into N-Spect was inaccurate, 

incomplete, and inconsistent; and N-Spect was behind schedule 

because inadequate funding did not allow it to progress as planned. 

Without consistent, reliable, and meaningful OIC data, ATF cannot 

measure the effectiveness of its OIC process, nor can it be assured 

that OIC amounts are adequate to accomplish ATF’s goal of 

voluntary compliance. 

We also found that OIC case processing procedures need 

improvement. OIC case processing procedures did not include 

timeliness guidelines. In addition, OIC case processing procedures 

were not always clear and were not always followed. Without the 

implementation of effective OIC procedures, ATF cannot ensure 

that OIC cases are processed consistently, fairly, and timely. ATF 

closed 28 OIC cases in FYs 1999 and 2000 with over $10 million 

of tax liability being compromised and settlement amounts totaling 

over $2 million. In our review of the 28 closed OIC cases, we 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 3

found that 15 cases were processed more than 2 years after the 

inspection report was completed. Two of these 15 OIC cases 

were closed approximately 6 years from the date of the completed 

inspection report. These 15 cases amounted to over $1.8 million 

of revenue that was not recognized timely. We also looked at 

open cases and found that ATF still had open cases from FYs 1994 

and 1995. By having OIC cases remain unresolved for a long 

period, ATF did not recognize revenue received from OIC cases 

timely and failed to provide permittees with timely adjudication of 

cases. We believe that ATF’s reorganization in October 1998 from 

5 regional offices to 23 field divisions and the consolidation of its 5 

Technical Services Centers into the NRC contributed to some of 

the problems ATF experienced implementing its OIC case 

processing procedures timely and effectively.

Similar findings were also cited in a prior audit report, Audit Report 

Bureau of Alcohol, Tobacco and Firearms Offers in Compromise, 

OIG-92-058, dated September 23, 1992. Although ATF 

implemented planned corrective actions to address the 

recommendations in this prior report, we noted similar findings 

during our review. Therefore, we believe that corrective actions 

taken were not always effective in correcting the deficiencies 

cited in the prior report. 

We made eight recommendations to improve ATF's OIC process. 

We recommended that ATF management should ensure that an 

appropriate case tracking system is implemented to (1) accurately 

and consistently track OIC cases; (2) produce meaningful 

management reports; and (3) identify trends and patterns in order 

to measure the effectiveness of the OIC process. In addition, we 

recommended that ATF management should ensure that OIC case 

processing procedures are revised and issued in order to provide 

clear guidance for processing OIC cases. These revised 

procedures should include timeliness guidelines. We believe that 

by ATF implementing these recommendations OIC funds would be 

put to better use. 

ATF concurred with our eight recommendations and is taking 

appropriate corrective action. ATF is in the process of making 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 4

N-Spect modifications to ensure proper data input to enable 

monitoring and tracking of OIC cases from within N-Spect. As an 

interim measure, ATF will establish a separate tracking and 

monitoring system at the NRC. ATF is also in the process of 

revising OIC case processing procedures. ATF believes that these 

new procedures, which will include timeliness guidelines, will 

ensure that cases are resolved more expeditiously. The revised 

guidelines will also ensure greater consistency due to restoring 

centralized oversight and resolution. 

Background

An OIC is an agreement between ATF and a permittee to pay a 

lower amount to settle an adverse action. An OIC is a settlement 

to any case where the violations are not strong enough to warrant 

permit action or criminal prosecution and where lesser 

administrative action is deemed not sufficient to ensure future 

compliance. Also, an OIC may be warranted where the evidence 

supports permit action or prosecution, but where (1) the violations 

were committed under extenuating circumstances or (2) the 

violator’s character, conduct, and compliance history mitigate the 

effects of the violation. 

ATF is authorized to accept an OIC under the following three laws 

as a means to resolve violations:

• Internal Revenue Code (IRC) of 1986, Title 26, United States 

Code, Section 7122. These violations involve alcohol and 

tobacco products or firearms that are taxed and regulated 

under the IRC. 

• Federal Alcohol Administration (FAA) Act, Title 27, United 

States Code, Section 207. The violations covered include 

inappropriate labeling, advertising, or marketing through 

unfair trade practices. Each improper label or advertisement 

is considered a violation.

• Alcohol Beverage Labeling Act of 1988, Title 27, United 

States Code, Section 219. This law imposes the 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 5

requirement that the Government Warning Statement 

appear on labels of alcohol beverages imported, bottled, or 

distributed in the United States. Violation of this 

requirement may be resolved through an OIC.

In the OIC process, the original assessment is reduced because: 

(1) the amount of the liability or the ability to collect is in doubt, or 

(2) mitigating circumstances exist whereby the payment of a 

lesser amount is deemed sufficient to ensure voluntary compliance 

in the future. The amount of the OIC is determined first by ATF 

guidelines, and then negotiated with the permittee. 

The Office of Alcohol and Tobacco is responsible for administering 

programs relating to federal tax collection and regulation of the 

alcohol and tobacco industries. The primary mission of the Office 

of Alcohol and Tobacco is to develop national priorities and 

strategies and evaluate field implementation of these priorities and 

strategies. The Office is responsible for providing oversight and 

advice for OIC cases. The Office of Alcohol and Tobacco is 

comprised of four divisions and the NRC. 

The NRC located in Cincinnati, Ohio, administers policy and 

programs supporting ATF’s “collect the revenue” strategic goal by 

reconciling tax returns, reports and claims; processing applications 

for and issuing permits; and providing technical advice. The NRC 

processes OIC cases and maintains historical files and serves as 

the repository for files relating to permittees. 

The Revenue Accounting Section (RAS) of the Financial 

Management Division (FMD), located at the NRC in Cincinnati, 

Ohio, deposits the OIC checks and records the OIC amounts into a 

suspense account. Once the NRC sends notification letters to the 

permittees notifying them their OIC has been accepted, the FMD is 

responsible for transferring the money from the suspense account 

to the revenue account. 

The Director of Industry Operations (DIO) is the deciding official in 

the field for settling OIC cases and is responsible for determining 

the appropriate range of an OIC. ATF has developed standardized 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 6

worksheets to use for determining the correct amount of an OIC 

and the level of Headquarters review and concurrence. These 

worksheets help ensure consistency and fairness of OIC cases 

nationwide throughout ATF. The DIOs report to the Division 

Director located in each field office and are required to keep the 

Division Directors informed on all actions and decisions made 

regarding the regulated industries. 

The Intelligence Systems Branch is responsible for coordinating the

design, development, installation, training and service of all 

information technology efforts within the ATF’s Intelligence 

Division. These efforts include intelligence specific applications 

such as the automated case management system used across the 

country. N-Spect is a designed part of that case management 

system. 

Findings and Recommendations

Finding 1 ATF Needs To Track and Monitor OIC Cases Better

We found that ATF was not effectively tracking and monitoring 

OIC cases. We found that ATF was not (1) using N-Spect 

effectively to report and track OIC cases; (2) producing any OIC 

management reports; and (3) conducting OIC case trend analysis. 

In our prior audit of ATF’s OIC process, we reported that ATF could 

not provide an accurate universe of OIC cases closed in FYs 1990 

and 1991. During our current review, we found that ATF still had 

a difficult time providing an accurate universe of closed OIC cases. 

During December 2000 and January 2001, ATF Headquarters 

provided us with three different lists of OIC cases closed in FYs 

1999 and 2000. According to Headquarters officials, the lists of 

closed OIC cases were obtained from internal records maintained 

by the Chief, Market Compliance Branch, from information 

received from the NRC, and from information received from all 23 

DIOs. However, the list of closed cases identified by Headquarters 

did not agree with accounting records maintained by the FMD in 

Cincinnati, Ohio. The lists provided by Headquarters did not 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 7

identify 8 OIC cases closed in FY 1999 and included 12 cases as 

closed that were still open.

ATF had difficulties tracking and monitoring OIC cases because 

(1) there was confusion by the DIOs regarding the definition of a 

closed case; (2) OIC information contained in N-Spect was 

inaccurate, incomplete, and inconsistent; (3) N-Spect is 2-3 years 

behind schedule due to inadequate funding that did not allow the 

development to progress as planned; and (4) the prior OIC tracking 

system -- Leads, Investigations, Cases System (LICS) -- was 

discontinued before N-Spect was fully operational. 

As a result, various types of manual and internal tracking systems 

were maintained by most of the 23 DIOs who had OIC cases. 

Without consistent, reliable, and meaningful data, ATF cannot 

readily measure the effectiveness of its OIC process, nor can it be 

assured that OIC amounts are adequate to accomplish ATF’s goal 

of encouraging industry members to voluntarily comply with FAA 

Act and IRC regulations. 

N-Spect Was Not Being Used Effectively To Report and Track OIC 

Cases

According to ATF’s N-Force/N-Spect Development Strategy, 

N-Spect is a database designed to provide automated reporting and 

tracking abilities for ATF’s regulatory function and inspectors. We 

found that N-Spect was not being used effectively to report and 

track OIC cases because (1) OIC information contained in N-Spect 

was inaccurate, incomplete, and inconsistent; and (2) due to 

inadequate funding, N-Spect was not developed and implemented 

as planned. As a result, various types of manual and internal 

tracking systems were maintained by most of the 23 DIOs who 

were processing OIC cases. 

Use of N-Spect is mandatory and N-Spect procedures state that 

supervisors are to consider an employee’s ability to accurately 

maintain N-Spect records during the completion of performance 

appraisals. According to existing procedures, the Alcohol and 

Tobacco Programs Division and Revenue Division are to monitor 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 8

FAA Act and IRC cases in N-Spect to keep Headquarters managers 

aware of the nature of every case involving potential adverse 

actions. We found that ATF officials were not adequately 

monitoring OIC cases in N-Spect.

ATF planned to implement N-Spect in four phases to replace LICS, 

ATF’s former tracking system which was discontinued in 1998. 

Prior to N-Spect, LICS was used to track OIC cases and produce 

management reports regarding OIC cases. LICS now exists at the 

NRC as a historical database containing information on OIC cases.

As a result of funding secured for Phase I, ATF began 

implementing N-Spect in April 1999, with full deployment 

occurring in September 1999. However, ATF’s ability to report 

and track OIC cases became more difficult when LICS was 

discontinued before N-Spect was fully up and running. As a result, 

all OIC information was not entered in LICS or N-Spect during the 

transition from one tracking system to another.

During Phase II, LICS functions were to be integrated into N-Spect, 

along with the ability to query existing data. However, N-Spect 

received no funds for Phase II development in FY 1999 and 

received limited funds for maintenance and minor enhancements. 

The major components of N-Spect Phase II have still not been 

funded and ATF is behind in the original development plan. ATF 

officials informed us that N-Spect was currently 2-3 years behind 

schedule. 

During our review, ATF provided us with printouts of OIC data 

from N-Spect. However, we found that we could not rely on the 

data because it was inaccurate, incomplete, and inconsistent. All 

OIC cases were not being consistently entered and closed in NSpect, some OIC cases were incorrectly identified in N-Spect, and 

in some cases, field divisions were closing OIC cases in N-Spect 

prematurely. 

During our exit conference in January 2002, ATF officials informed 

us that a case tracking system is planned to improve the 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 9

monitoring and tracking of cases. However, this system is not 

operational yet. 

OIC Management Reports Were Not Produced

At this time, N-Spect is not producing any OIC management 

reports. An ATF official informed us that even if N-Spect was 

producing management reports, the information would not be 

meaningful because N-Spect data is inaccurate, incomplete, and 

inconsistent. Because N-Spect is not producing any management 

reports, Headquarters officials and many of the DIOs are tracking 

OIC cases manually through the use of electronic spreadsheets or 

other means. We were told that area supervisors were responsible 

for keeping OIC cases timely and ensuring that the statute of 

limitations did not run out. 

Our prior OIG report on ATF’s OIC process recommended that ATF 

establish management exception reports which included early 

warning systems in LICS on OIC cases where no action had been 

taken in a specific time period and where the statutes of 

limitations were about to expire. The report also recommended 

that supervisory reviews of these exception reports be required. 

ATF concurred with the recommendation and created an exception 

report that would bring to management's attention any case that 

had no action for a 30-day period. ATF also created an additional 

report for management to indicate when the statutes of limitations 

were about to expire. However, because ATF no longer uses LICS, 

these two exception reports are no longer being created. 

OIC Trend Analysis Was Not Conducted

ATF was not analyzing OIC cases to identify trends, techniques, 

or patterns that might impact ATF. ATF’s FAA Act case 

processing guidelines state that one of the responsibilities of 

the Alcohol and Tobacco Programs Division is to analyze both 

closed and in process FAA Act cases to identify trends, 

techniques, or patterns that may impact the Bureau's 

enforcement or policy considerations. ATF's draft IRC case 

processing guidelines state that the Revenue Division is to 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 10

analyze closed IRC cases. OIC trend analysis would provide 

ATF management with pertinent information regarding the 

timeliness process, the compromised penalties, and the overall 

impact on the Bureau’s ability to ensure that OIC amounts are 

sufficient to achieve ATF’s goal of voluntary compliance.

Recommendations 

1. The Director should take appropriate action to ensure that 

N-Spect integration efforts progress as originally planned and/or 

an appropriate case tracking system is implemented to 

accomplish accurate and consistent tracking and monitoring of 

OIC cases. 

Management Comment.

ATF concurred and stated that the strategic plan for N-Spect 

includes future interfacing with the NRC’s database that 

contains OIC collection data. This interface will provide the 

ability to look at OIC collection data tracked within N-Spect and 

automatically populate the corresponding data fields in the 

systems used by the NRC. This interface between N-Spect and 

the NRC’s Integrated Entity Module (IEM) is dependent upon the 

development and implementation of Phase II of N-Spect and 

Phase II of the Integrated Revenue Information System, which 

contains the IEM. The action due date for the N-Spect 

modifications is September 2003.

As an interim measure, ATF will establish a separate tracking 

and monitoring system at the NRC and will provide written 

procedures for reporting and entering data as well as producing 

management reports and trend analysis. The beginning point 

for this tracking system will be the submission of an OIC by an 

industry member. The action due date for ATF’s interim 

system is June 2002. 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 11

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

2. The Director should ensure that OIC information entered in 

N-Spect or other appropriate system is reviewed and that any 

necessary adjustments are made to correct any OIC information 

that is inaccurate, incomplete, and/or inconsistent.

Management Comment.

ATF concurred and stated that the Field Management Staff, 

Office of Field Operations, will advise all field divisions that had 

inspections, audits, or investigations that resulted in the 

acceptance of an OIC to review data posted in N-Spect and 

make any necessary changes and/or corrections. Furthermore, 

Field Management Staff and the NRC will provide written 

policies and procedures to their employees to provide guidance 

for monitoring OIC cases to ensure information entered in 

N-Spect is accurate and complete. The action due date for this 

recommendation is March 2003.

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

3. The Director should ensure that there is an adequate system in 

place capable of reporting and tracking OIC cases so that 

meaningful management reports can be produced. 

Management Comment.

ATF concurred and stated that N-Spect maintenance release 

Version 1.5 will make posting to certain OIC data fields 

mandatory on the inspection results screen when an OIC is 

recommended. This will ensure proper data input to enable 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 12

monitoring and tracking of OIC cases from within N-Spect. The 

action due date for these N-Spect modifications is March 2003.

As an interim measure, ATF will establish a separate tracking 

and monitoring system at the NRC and will provide written 

procedures for reporting and entering data as well as producing 

management reports and trend analysis. The action due date 

for the interim system is June 2002.

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

4. The Director should ensure that OIC cases are monitored and 

analyzed to identify trends and patterns in order to measure the 

effectiveness of the OIC process. 

Management Comment.

ATF concurred and stated that once N-Spect maintenance 

release Version 1.4 is placed into production and all mandatory 

data has been posted, ATF will be able to monitor and analyze 

data to identify trends and patterns through the use of Oracle 

Discoverer, a data query and report generation tool. The OIC 

case processing procedures, which are currently being revised, 

will identify the office(s) responsible for monitoring and 

analyzing OIC cases. The action due date for these N-Spect 

modifications is March 2003.

As an interim measure, ATF will establish a separate tracking 

and monitoring system at the NRC and will provide written 

procedures for reporting and entering data as well as producing 

management reports and trend analysis. The action due date 

for the interim system is June 2002.

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 13

Finding 2 OIC Procedures Need Improvement

In our prior audit of ATF’s OIC process, we reported that ATF did 

not always process OIC cases timely and that procedures to 

process OIC cases needed improvement. During our current audit, 

we found that ATF still did not always process OIC cases timely 

and that OIC case processing procedures still needed improvement 

because procedures did not include timeliness guidelines, were not 

always clear, and were not always followed. ATF did not 

recognize over $1.8 million in revenue timely and failed to provide 

permittees with timely adjudication of cases as a result of OIC 

cases that remained unresolved for a long period. We believe ATF 

did not make the development and implementation of clear and 

effective OIC procedures a management priority. Without the 

implementation of effective OIC procedures, ATF cannot ensure 

that OIC cases are processed consistently, fairly, and timely. 

ATF officials informed us that they were in the process of 

revising OIC case processing procedures. ATF officials stated 

that they plan to issue one directive covering both FAA Act and 

IRC cases and that these revised procedures would include 

timeliness guidelines. ATF officials plan to complete the new 

procedures by March 31, 2002. 

OIC Cases Were Not Always Processed Timely 

We found that OIC cases were not always processed timely. 

ATF closed 28 OIC cases in FYs 1999 and 2000 with over $10 

million of tax liability being compromised and settlement 

amounts totaling over $2 million. Individual OIC amounts 

ranged from $500 to $750,000. In our review of these 28 

cases, we found that only 2 of the 28 OIC cases were 

processed in less than a year and 7 cases were processed 

between 1 and 2 years. Also, we found that 15 cases were 

processed more than 2 years after the inspection report was 

completed. Two of these 15 OIC cases were closed 

approximately 6 years from the date of the completed 

inspection report. These 15 cases amounted to over $1.8 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 14

million not recognized timely as revenue. (See Appendix 2.) For 

the remaining 4 cases, it was difficult to determine exactly how 

timely the cases were processed, because the NRC did not 

have all the necessary documentation for us to make an 

assessment on the timeliness of the case. 

In addition, during our visit to the NRC in February 2001, we 

found that ATF had numerous open OIC cases that were not 

processed timely. For example, 1 OIC case dated back to 

FY 1994; 1 OIC case had been open since FY 1995; 2 OIC 

cases had been open since FY 1996; 2 OIC cases had been 

open since FY 1997; and 4 OIC cases had been open since 

FY 1998. ATF closed 3 of these 10 cases in August 2001. 

The other 7 remained open. When OIC cases remain open for 

extended periods, ATF is not recognizing its revenue timely. 

These 10 cases amount to over $338,000. 

Money received from an OIC case is deposited into a suspense 

account where it remains until the OIC case is accepted and 

the NRC prepares a notification memorandum requesting the 

FMD’s Revenue Accounting Section (RAS) to transfer the OIC 

funds from the suspense account to the revenue account. Until 

the offer is accepted and the permittee is notified in writing, 

the OIC may be withdrawn at any time by the permittee. As a 

result, unaccepted OIC amounts are not available for use by the 

Government, and those amounts held in escrow are liabilities to 

the Government. 

Except for OIC cases involving firearms and ammunition taxes, 

all OIC amounts recognized as revenue are remitted to the 

Department of the Treasury General Fund. The Department 

further distributes this revenue to Federal agencies in 

accordance with various laws and regulations. OIC revenue 

involving firearms and ammunition taxes is transferred directly 

to the Department of the Interior to aid that Department. 

By having OIC cases remain unresolved for long periods, ATF 

did not recognize over $1.8 million in revenue timely and failed 

to provide all permittees with timely notification of acceptance 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 15

of offers and adjudication or settlement of cases. ATF delayed 

allowing these funds to be put to better use by not recognizing 

revenue timely. 

We believe that OIC cases were not always processed timely 

due to several reasons. First, OIC timeliness guidelines were 

not included in current OIC case processing procedures. In our 

prior audit report, Audit Report Bureau of Alcohol, Tobacco and 

Firearms Offers In Compromise, we recommended that the 

Director establish separate IRC and FAA guidelines as to what 

constituted timely completion of an OIC case. ATF concurred 

with this recommendation and issued Federal Alcohol 

Administration Act Case Processing Guidelines, ATF B 5190.2, 

in January 1993 and Internal Revenue Code Case Timely 

Processing Charts, ATF B 5640.3, in October 1994. These 

guidelines stated that the OIC process should be completed 

within 175 workdays for FAA Act cases and 164 workdays for 

IRC cases, from the time of the completed inspection report 

with a recommendation for an OIC. The FAA Act guidelines 

expired in January 1995 and the IRC guidelines expired in 

December 1995. 

ATF subsequently issued revised FAA Act guidelines in August 

1999 and draft IRC guidelines in March 1999. However, 

neither of these revised procedures included timeliness 

guidelines. We were told that the revised procedures did not 

include timeliness guidelines because, in some cases, the 

timeliness guidelines were not reasonable and the guidelines 

were too hard to implement. 

We asked the DIOs what they considered timely for processing 

OIC cases to completion. Their responses varied from 4-6 

months from completion of the fieldwork to 18 months from 

completion of fieldwork. However, most of the DIOs stated 

that they considered OIC cases timely if they were processed in 

less than 1 year. We found that only two OIC cases in our 

sample were processed in less than a year. Processing times 

for the other cases ranged from about 16 months to about 6 

years. Also, during our review of closed OIC cases we found 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 16

instances where ATF did not process the OIC timely once the 

OIC check was deposited and the offer was accepted. 

Second, we believe that OIC cases were not always processed 

timely because ATF’s reorganization and consolidation of the 

Technical Services Centers resulted in communication and/or 

coordination problems between some of the field divisions, 

NRC, and FMD. In October 1998, ATF reorganized and 

established the Field Operations Directorate with 23 DIOs 

responsible for settling OIC cases. Prior to ATF’s 

reorganization, ATF had 5 Regional Directors responsible for 

processing OIC cases. In addition, by December 2000, ATF had 

consolidated its five Technical Services Centers, located 

throughout the country, into the NRC. ATF lost a lot of 

expertise due to turnover of knowledgeable staff as a result of 

the consolidation. Many of the newer employees hired did not 

have knowledge of and experience with the OIC process.

As a result of these organizational changes, the NRC did not 

always receive OIC case documentation timely. We also found 

that workflow between the field and the NRC was not always 

clear and that some communication and coordination problems 

existed between the NRC and DIOs because the NRC reported 

to the Headquarters Revenue Division under the Assistant 

Director, Alcohol and Tobacco, and the DIOs reported to the 

Field Division Directors under the Assistant Director, Field 

Operations. 

Third, in some cases, delays in OIC case processing occurred 

because legal and compliance approval reviews were not 

timely. In one case, the Market Compliance Branch was unable 

to locate the OIC case and the NRC had to make copies and 

resubmit the case. In another case, there was some 

disagreement on ATF’s position between Chief Counsel at 

Headquarters, the Assistant Chief Counsel in Cincinnati, and 

Counsel in San Francisco. As a result, the NRC was waiting to 

get a clear consensus from Counsel. 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 17

Although the RAS was monitoring OIC cases for timeliness and 

requesting follow-up regarding the status of these cases from 

the Chief, NRC, ATF officials did not take the necessary action 

to ensure that timeliness issues were addressed and resolved. 

OIC Case Processing Guidelines Were Not Always Clear and 

Not Always Followed 

We found several instances where OIC procedures were not 

clear and/or were not followed. For example, we found that:

• OIC case processing guidelines did not include a clear 

definition of what constituted a closed OIC case. Confusion 

regarding the definition of a closed case resulted in 

difficulties and differences in reporting the number of OIC 

cases closed in FYs 1999 and 2000. FAA Act and IRC case 

processing guidelines state that a case is closed when all 

resolving actions are completed and final N-Spect entries 

have been made. We asked the DIOs when they considered 

an OIC case closed. Their responses varied. Some DIOs 

regarded a case as closed when the offer was accepted by 

ATF. Other DIOs stated that they believed an OIC case was 

closed when the notification letter was sent to the permittee 

or to the Internal Revenue Service. Other DIOs stated they 

believed a case was closed when the OIC information was 

entered into N-Spect. One DIO considered a case closed 

when the OIC payment was received. Without a more 

specific definition of when an OIC case should be considered 

as closed, ATF will continue to capture and report 

inaccurate and unreliable information regarding its closed 

OIC cases.

• All open OIC cases were not entered into N-Spect. In 

addition, the DIOs had multiple definitions for determining 

when an OIC case was considered opened for tracking 

purposes. One DIO stated that an OIC case was 

considered open when the inspection report was 

completed and the DIO concurred with the recommended 

action. Another DIO considered a case open when the 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 18

case was entered into N-Spect with a recommendation 

for an OIC. Another DIO considered a case open when 

the case was forwarded to Counsel for review. Another 

DIO stated that an OIC case was not considered open 

until an OIC was offered by the permittee. According to 

ATF procedures, it is important to develop consistency in 

inputting information into the system. This will reduce 

time spent by employees at every level in recovering 

information, compiling statistics, and updating and 

correcting files.

• The field divisions were not always notifying the NRC 

when an FAA Act case resulted in a recommendation for 

an OIC. According to case processing procedures, area 

supervisors are responsible for notifying, by electronic 

mail, the DIO and the NRC when an FAA Act case is 

opened. We found four OIC cases that had not been 

communicated to the NRC. 

• Standardized worksheets were not always prepared or 

documented in the case files. The use of standardized 

worksheets helps ensure that OIC cases are processed 

fairly and consistently through ATF’s 23 field divisions. 

According to ATF, consistent treatment of all regulated 

industry members is essential to continued compliance 

on the part of industry and essential to the integrity of 

ATF’s inspection and enforcement programs. Beginning 

in FY 1999, both FAA Act and IRC case processing 

procedures required a Case Review Formula Worksheet 

to be completed for each OIC case to determine the 

appropriate level of Headquarters review and 

concurrence. We found that this worksheet was not 

always prepared and/or was not documented in the OIC 

case file. Other worksheets, including worksheets to 

determine a recommendation for an appropriate range of 

an OIC, were also either not always completed or not 

documented in OIC case files at the NRC. 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 19

• The Offer in Compromise Form, ATF F 5640.1 (3-95) and 

ATF F 5640.2 (1-84), provides incorrect locations to the 

permittees on where to file the offers. The OIC form for 

IRC violations lists the old Technical Services Offices - all 

of which were closed by December 2000. The OIC form 

for FAA Act violations states that the OIC is to be filed 

with the Regional Director (Compliance) - a position that 

no longer exists. The correct location on where to file 

the offers is the NRC in Cincinnati, Ohio. 

• OIC cases were not being closed in N-Spect. OIC case 

processing procedures dated August 1999 stated that 

the NRC was responsible for closing N-Spect entries for 

cases recommending an OIC. NRC officials informed us 

that the field division was responsible for closing N-Spect 

entries. NRC personnel also explained that they did not 

even obtain read-only access to N-Spect information until 

March 2001. Of the 28 OIC cases that were closed in 

FYs 1999 and 2000, only 2 were entered as closed in 

N-Spect. ATF cannot effectively monitor OIC cases 

using N-Spect if OIC information is not properly entered. 

• Completed OIC case files were not always sent to the NRC. 

Case processing procedures require that all closed case files 

be sent to the NRC for inclusion in the permittee’s file. The 

NRC is responsible for maintaining custody of official case 

files. Without the complete file documentation, ATF cannot 

ensure that the correct OIC amount was accepted and that 

the entire amount was collected. 

• IRC case processing guidelines, which have been in draft 

status since March 1999, have not yet been finalized. 

One of our audit objectives was to determine whether 

corrective actions were taken to address

recommendations made in our prior OIG audit report, 

Audit Report Bureau of Alcohol, Tobacco and Firearms 

Offers In Compromise. The prior report found that IRC 

procedures were in draft and the OIG recommended that 

the Director issue final IRC guidelines. ATF took 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 20

corrective action and issued IRC guidelines, Review and 

Resolution of internal Revenue Cases, ATF 5640.2B, in 

October 1992 and Internal Revenue Code Case Timely 

Processing Charts, ATF B 5640.3, in October 1994. 

However, although corrective action was implemented, 

IRC procedures were subsequently revised and issued 

again in draft in March 1999. As of January 15, 2002, 

these procedures have still not been finalized. 

Recommendations

1. The Director should ensure that timeliness guidelines are 

established for processing OIC cases to timely recognize 

revenue and allow funds to be put to better use. 

Management Comment.

ATF concurred and stated that it is in the process of revising 

OIC case processing procedures. These revised procedures will 

include timeliness guidelines. The action due date for this 

recommendation is March 2003.

 

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

2. The Director should re-emphasize to the field divisions the 

importance of sending completed OIC case documentation 

promptly to the NRC. 

Management Comment.

ATF concurred and stated that this will be emphasized in the 

new case processing procedures currently under development. 

The action due date for this recommendation is March 2003.
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 21

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

3. The Director should ensure that appropriate follow-up action 

is taken to resolve OIC cases identified by the RAS as 

untimely to more quickly recognize revenue received as a 

result of an OIC. 

Management Comment.

ATF concurred and stated that since May 2001, the average 

age of an open case has dropped from 27 months to 15 

months. ATF stated that its goal is to reduce the average 

processing time. ATF believes that the new case processing 

procedures, which include timeliness guidelines, will ensure 

that cases are resolved more expeditiously. The action due 

date for this recommendation is March 2003.

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

4. The Director should ensure that OIC case processing 

procedures are revised and issued to provide clear guidance 

for processing OIC cases. Revised procedures should 

include a more specific definition for classifying a case as 

closed; specific instructions regarding OIC workflow 

processes, including entering and closing cases in N-Spect; 

an updated OIC form that lists the correct address for 

submitting an offer; and timeliness guidelines for processing 

OIC cases. The Director should emphasize the importance 

of implementing these procedures to ensure that OIC cases 

are processed fairly, consistently, and timely. 
ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 22

Management Comment.

ATF concurred and stated that revised case processing 

procedures will ensure greater consistency due to restoring 

centralized oversight and resolution. The revised procedures 

will include a more specific definition for classifying a case as 

closed, specific instructions regarding OIC workflow processes, 

and timeliness guidelines for processing OIC cases. In addition, 

ATF has already begun revising the OIC form, which will reflect 

both the correct name and address for mailing an OIC. The 

action due date is March 2003.

OIG Comment.

The OIG believes that the actions taken and planned by ATF 

address the intent of the recommendation.

* * * * * *

We appreciate the cooperation and courtesies extended to our 

staff during the audit. If you have any questions, please 

contact me at (202) 927-5591, or a member of your staff may 

contact Lynn Richardson, Audit Manager at (202) 927-6367. 

Major contributors to this report are listed in Appendix 4.

Alexander Best, Jr.

National Director, Enforcement Program Audits
Appendix 1

Objectives, Scope, and Methodology

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 23

Our objective was to determine whether ATF was using the OIC 

process effectively and in accordance with the intent of governing 

laws and regulations. Our specific objectives were to determine 

whether:

• The OIC process was applied consistently, fairly, and timely;

• OIC amounts accepted were sufficient to achieve ATF's goal of 

obtaining voluntary compliance;

• Adequate controls existed to account for and safeguard OIC 

funds; and

• Planned corrective actions for recommendations on a prior OIG 

report were implemented.

Our review generally covered FYs 1999 and 2000. To accomplish 

our review, we conducted audit work at ATF Headquarters in 

Washington, D.C., where we interviewed officials in the Office of 

Alcohol and Tobacco and officials in the Intelligence Division of the 

Office of Field Operations. We also visited the NRC in Cincinnati, 

Ohio and interviewed NRC and FMD officials responsible for 

processing OIC cases. In addition, we prepared a data collection 

instrument that was sent to all 23 DIOs to obtain their views on 

the OIC process.

We reviewed applicable governing laws and regulations related to 

OIC. We reviewed ATF policies, procedures, and directives 

regarding the OIC process. In addition, we reviewed ATF policies 

and procedures regarding N-Spect. We reviewed all 28 OIC cases 

that ATF closed in FYs 1999 and 2000 to determine whether OIC 

cases were processed properly and in accordance with ATF 

guidelines. We obtained OIC case documentation, reviewed 

accounting reports, and verified that OIC funds were received by 

NRC and deposited by FMD. We evaluated whether effective 

internal controls existed to prevent or detect fraud and to 

safeguard OIC funds. We also reviewed numerous open OIC cases 

that we believed were not processed timely.
Appendix 1

Objectives, Scope, and Methodology

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 24

We conducted our audit between December 2000 and October 

2001 in accordance with generally accepted government auditing 

standards.
Appendix 2

Schedule of Funds Put To Better Use

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 25

We found that OIC cases were not always processed timely. 

Fifteen of the 28 OIC cases closed in FYs 1999 and 2000 were 

processed more than 2 years after the inspection report was 

completed (see schedule below). These 15 cases amounted to 

over $1.8 million not recognized timely as revenue. ATF delayed 

allowing these funds to be put to better use by not recognizing 

revenue timely. We believe that funds could be used more 

efficiently, if management took actions to implement the four 

recommendations included in Finding 2. Accordingly, over $1.8 

million in OIC funds will be recorded in the Inventory, Tracking and 

Closure System (ITC) as funds put to better use and included in the 

OIG Semiannual Report to the Congress. It is ATF management’s 

responsibility to record the actual funds put to better use as a 

result of its implementation of the recommendations in the ITC. 

SCHEDULE 1 - Finding 2 - Recommendations 1 to 4

ACCEPTED OIC AMOUNTS CLOSED DURING FYS 1999 AND 2000

Case Type

Liability or 

penalty being 

compromised

OIC amount 

accepted by ATF

OIC amount that 

took over 2 years 

to close

1 IRC $1,191,773.70 $450,000.00 $450,000.00 

2 IRC $4,823,311.58 $300,000.00 $300,000.00 

3 IRC $175,128.15 $85,000.00 $85,000.00 

4 IRC $1,333,513.69 $80,000.00 $80,000.00 

5 IRC $129,825.06 $45,000.00 $45,000.00 

6 IRC $499,437.46 $40,014.26 $40,014.26 

7 IRC $65,655.61 $37,737.00 $37,737.00 

8 IRC $203,671.18 $17,000.00 $17,000.00 

9 IRC $47,288.09 $15,000.00 $15,000.00 

10 IRC/FAA $26,214.75 $13,000.00 $13,000.00 

11 IRC $38,701.74 $10,000.00 $10,000.00 

12 IRC $7,472.38 $3,700.00 $3,700.00 

13 IRC $1,219,417.48 $45,000.00 (a)

14 IRC/FAA $257,000.00 $65,000.00 (a)

15 IRC $37,277.41 $1,000.00 (a)

16 IRC $23,115.38 $10,000.00 (a)

17 IRC $5,145.77 $1,000.00 (b)

18 IRC $882.77 $500.00 (b)

19 IRC Not provided $2,000.00 (b)

20 FAA/IRC non-tax (c) $100,000.00 (a)

21 FAA (c) $750,000.00 $750,000.00 

22 FAA (c) $5,000.00 $5,000.00 

23 FAA (c) $3,000.00 $3,000.00 

24 FAA (c) $7,500.00 (a)

25 FAA (c) $5,000.00 (b)

26 FAA (c) $20,000.00 (a)

27 FAA (c) $70,000.00 (a)

28 FAA (c) $2,500.00 (a)

Totals $10,084,832.20 $2,183,951.26 $1,854,451.26 

(a) = ATF processed case to closure in less than 2 years.

(b) = Documentation was not provided to determine timeliness.

(c) = FAA and IRC non-tax cases do not involve a tax liability.
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 26
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 27
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 28
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 29
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 30
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 31
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 32
Appendix 3

Management Comments

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 33
Appendix 4

Major Contributors To This Report

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 34

Enforcement Directorate

Alexander Best, Jr., National Director, Enforcement Program

 Audits

Lynn Richardson, Audit Manager

Irene Aultman, Lead Auditor

Annette Dunn, Auditor
Appendix 5

Report Distribution

ATF Needs To Improve Its Offers In Compromise Process (OIG-02-078) Page 35

U.S. Department of the Treasury

Under Secretary for Enforcement

Assistant Secretary (Enforcement)

Office of Accounting and Internal Control

Office of Strategic Planning and Evaluations 

Bureau of Alcohol, Tobacco and Firearms

Director

Assistant Director, Alcohol and Tobacco 

Assistant Director, Field Operations 

Assistant Director, Inspection

Chief, National Revenue Center

Office of Management and Budget

OIG Budget Examiner