Contents

Additional Corrective Actions Needed To Improve ATF’s Revenue

Inspection Program (OIG-01-083) Page 1

Audit Report................................................................................................................................ 2

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

Background ................................................................................................................................. 3

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

Further Work Needed On Prior Recommendations........................................................ 6

Recommendation 1 .............................................................................................................. 8

Recommendation 2 ............................................................................................................ 11

Recommendation 3 ............................................................................................................ 13

Appendices

Appendix 1: Objectives, Scope, and Methodology....................................................... 17

Appendix 2: Management Comments............................................................................ 19

Appendix 3: Major Contributors To This Report ........................................................... 22

Appendix 4: Report Distribution....................................................................................... 23

Abbreviations

ATF Bureau of Alcohol, Tobacco and Firearms

A&T Office of Alcohol and Tobacco

DSP Distilled Spirits Plant

FAA Federal Alcohol Administration

FY Fiscal Year

GAO General Accounting Office

IRC Internal Revenue Code

ITC Treasury’s Inventory Tracking and Closure System

ITP Inspection Targeting Program

NRC National Revenue Center

OIG Office of Inspector General

OPM Office of Personnel Management

PPC Policy and Programs Coordination Staff
OIG Audit

Report

The Department of the Treasury

Office of Inspector General

Additional Corrective Actions Needed To Improve ATF’s Revenue

Inspection Program (OIG-01-083) Page 2

August 1, 2001

Bradley A. Buckles

Director

Bureau of Alcohol, Tobacco and Firearms

We conducted a follow-up audit of the Bureau of Alcohol, Tobacco and

Firearms' (ATF) Tax Compliance Inspection Program. ATF’s

inspectors conduct tax compliance inspections 1 of wineries, breweries,

distilled spirits plants (DSP), tobacco manufacturers, export

warehouses, and firearms and ammunition manufacturers.

We conducted this follow-up audit of ATF as part of our

Fiscal Year (FY) 2000 audit plan. Our primary objective was to

determine whether ATF had taken corrective actions to address the

six recommendations contained in a September 15, 1994,

Office of Inspector General (OIG) audit report, Bureau of Alcohol,

Tobacco, and Firearms: Tax Compliance Inspection Improvements

Needed (OIG-94-143). We conducted our audit fieldwork from

August 2000 to April 2001 at ATF Headquarters. A more detailed

description of the audit objectives, scope, and methodology is provided

as Appendix 1.

Results in Brief

ATF has to some extent addressed each of the six recommendations

in the prior audit report. However, ATF needs to do more work on

three of the recommendations. For example, although ATF developed

several performance measures related to its “Collect the Revenue”

strategy, the measures do not specifically relate to the outcomes of the

revenue inspection program. Additionally, while ATF Headquarters

advised and directed its field offices about documenting inspection

work steps, ATF has done little to validate progress in that area.

 

1

 Throughout this report, the terms “tax compliance inspection,” “revenue inspection,” and “revenue

examination” are used interchangeably and have the same meaning.
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Inspection Program (OIG-01-083) Page 3

Finally, although ATF also contacted the Office of Personnel

Management (OPM) regarding changing the qualifications for its

inspectors, it did not conduct a full-blown study of the issue as

recommended by OPM.

Based on our follow-up of the prior audit report’s recommendations

and evaluation of ATF’s corrective actions, we made three

recommendations to address concerns we identified. We recommend

that the ATF Director: (1) require the Assistant Director, Alcohol and

Tobacco, to develop and test additional performance measures for the

revenue inspection program; (2) conduct more operational reviews of

field offices to ensure inspectors comply with documentation

requirements; and (3) implement a training program that ensures all

inspectors are properly trained on how to conduct revenue

examinations.

ATF management concurred with the findings and recommendations.

ATF said it would develop performance measures in FY 2002 for the

alcohol and tobacco revenue inspection program. Additionally, the

Office of Alcohol and Tobacco will partner with the Office of

Inspections in FY 2002 when they conduct internal operational

reviews. Finally, ATF is in the process of conducting its first advanced

alcohol and tobacco training class during July-August 2001. ATF plans

to conduct two more of the courses in the near future.

We believe the completion of these corrective actions will improve

ATF's revenue inspection program. The complete text of ATF's

response is provided in Appendix 2.

Background

ATF is a law enforcement organization within the

Department of the Treasury with unique responsibilities dedicated to

reducing violent crime, collecting revenue, and protecting the public.

Among its many responsibilities, ATF enforces Federal laws and

regulations relating to alcohol and tobacco by working directly and in

cooperation with others to ensure fair and proper revenue collection.

One of the goals of ATF’s alcohol and tobacco programs is to ensure

the collection of alcohol and tobacco excise taxes. During FY 2000,

approximately 5,000 taxpayers consisting of DSPs, breweries,


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Inspection Program (OIG-01-083) Page 6

ATF also did not perform many inspections using these new

procedures at the time we conducted our fieldwork. ATF was forced to

shift inspector resources to Firearms and Explosives for a good part of

the year. Accordingly, we plan to conduct a future audit to assess the

effectiveness of the program changes, including the success of the

new targeting program and the quality of the inspections being

conducted.

Findings and Recommendations

Finding 1 Further Work Needed On Prior Recommendations

We found ATF had taken corrective actions on the

six recommendations contained in an OIG report titled Bureau of

Alcohol, Tobacco, and Firearms: Tax Compliance Inspection

Improvements Needed (OIG-94-143, issued September 15, 1994).

However, ATF did not fully meet the intent of those original

recommendations. Specifically, ATF did not develop sufficient

performance measures for the revenue inspection program. Also,

ATF did little to ensure inspectors were complying with inspection

documentation requirements. Finally, ATF did not do enough to

ensure that inspectors had the necessary training to adequately

conduct revenue examinations.

The following sections detail each of the prior audit report’s findings

and recommendations, and the OIG’s follow-up evaluation of corrective

action. We also included three new recommendations.

Prior Recommendation 1: Performance Measurement System

In our September 1994 audit report, we had difficulty determining

whether ATF conducted effective inspections because ATF did not

summarize data on inspection results. ATF had maintained data on

tax adjustments resulting from inspections; however, this data did not

enable us to reach conclusions about program results. Data that

would have helped would have included the nature of violations

identified, corrections needed in producer record-keeping, and internal

control weaknesses.
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The report said there was no apparent relationship between the

amount of revenue identified during the compliance inspections to

other factors, such as (1) the number of inspections ATF conducted or

the number of hours expended conducting them, (2) total tax liability of

those plants inspected, or (3) implementation of ATF’s targeting

program, which was designed to better select plants based on

assigned level of risk.

We recommended the Director, ATF, develop a performance

measurement system for the alcohol and tobacco tax compliance

program that more systematically recorded, summarized, and analyzed

the data from its tax compliance inspection efforts. ATF concurred with

the recommendation. ATF said it already accumulated, summarized,

and analyzed a great deal of data regarding its inspections, but agreed

more could be done. By the start of FY 1996, ATF said it would

expand the data it accumulated so that it could better measure

inspection results.

OIG Follow-up Evaluation of Corrective Action

According to the Treasury Department’s Inventory Tracking and

Closure System (ITC), ATF closed the recommendation on

July 22, 1997. ATF reported it developed performance measures that

would be tested during FY 1998 and fully implemented during

FY 1999. These performance measures would enable ATF to identify

the “tax gap” as it applies to the segment of the related industry each

year. Within a span of 3 to 5 years, ATF should have identified any tax

gaps that may have existed, as well as strategies for closing those

gaps. The performance measures were to be tested, evaluated, and

revised, as appropriate.

In August 2000, we met with the Chief, Revenue Division,

ATF Headquarters, to obtain details about the performance measures

ATF said it developed. The Chief provided us with copies of

ATF’s draft Strategic Plan, which listed ATF’s strategic goals related to

its “Collect the Revenue” activity. She also provided another document

labeled “Collect the Revenue Strategy Performance Measures.” This

unsigned and undated document listed performance measures for

FYs 2000, 2001, and 2002.
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For FY 2000, the document listed three performance measures:

(1) taxes/fees collected from alcohol, tobacco, firearms, and explosives

industries; (2) ratio of taxes collected versus resources expended; and

(3) burden hours reduced. ATF included these three performance

measures in its FYs 1998, 1999, and 2000 Accountability Reports. We

note that none of these measures specifically relates to the revenue

inspection program.

The Chief, Policy and Programs Coordination Staff, Office of Alcohol

and Tobacco (A&T), indicated that these measures were not

developed as a result of the September 1994 audit report. He added

that the Chief, National Revenue Center, believes better measures are

needed to measure the outcomes of the revenue program.

We recognize ATF continues to develop performance measures for its

revenue inspection program. While it has developed some measures,

ATF needs to do more to be in compliance with the intent of our

original recommendation. Performance measures such as “ratio of

additional taxes collected versus direct resources expended” provide

ATF with the financial benefits derived from conducting revenue

inspections. However, ATF needs to develop other measures that can

provide ATF with more information about how well industries are

complying with excise tax regulations. These include, but are not

limited to, the number of IRC violations by type of activity/operation per

inspection, and the percentage of targeted plants with tax errors.

Recommendation

1. The Director, ATF, should require the Assistant Director,

Alcohol and Tobacco, to develop and test additional performance

measures for the Alcohol and Tobacco revenue inspection

program. The purpose of these additional measures should allow

ATF to measure whether the program is effective in ensuring

industries are paying all the revenue due the government and

operating in accordance with regulations.

Management Comment. ATF management agreed with the

recommendation. ATF said during FY 2002 it would develop

performance measures for the revenue inspection program.


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During these site visits, the PPC staff reviewed the quality of the

revenue inspections, including a determination as to whether the

inspectors were completing and documenting all required work steps.

Based on these reviews, A&T partnered with the Office of Field

Operations and issued a memorandum to all Division Directors

regarding inspection reports. The memorandum, dated April 30, 2001,

indicated past reviews by the OIG and ATF’s Office of Inspection had

cited numerous deficiencies in the reporting of inspection findings. The

memorandum reminded area supervisors they were responsible for

thoroughly reviewing inspection reports and ensuring that proper

inspection data was being entered into ATF’s inspection information

system (N-spect).

We plan to conduct a future audit to assess the effectiveness of the

program changes, including the success of the new targeting program

and the quality of the inspections ATF is conducting.

Recommendation

2. The Director, ATF, should conduct more operational reviews of field

offices to ensure inspectors are compiling with inspection

documentation requirements.

Management Comment. ATF management agreed with the

recommendation. The Office of Alcohol and Tobacco will partner

with the Office of Inspection when conducting internal operational

reviews.

OIG Evaluation. The OIG believes the corrective actions planned

address the intent of the recommendation.

Prior Recommendation 4: Inspector Training

Our September 1994 audit report said inspectors’ limited accounting

knowledge raised questions about their ability to adequately assess

producer accounting systems and controls. In addition, while

ATF worked to increase the accounting knowledge of its inspectors,

57 percent of these inspectors had less accounting training than

ATF preferred. We recommended that the ATF Director discuss with

OPM, once again, the possibility of requiring accounting training for the
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inspector position, and consider replacing vacated inspector positions

with individuals having at least 12 hours of accounting training.

In response to the recommendation, ATF said it would complete a

study in which it would re-evaluate the relationship between the

inspector position and accounting credits. Based on the results of the

study, ATF would take appropriate action that may include the specific

steps recommended by audit. ATF said it would inform us of the

results of the study and any implementation plans.

OIG Follow-Up Evaluation of Corrective Action

ATF sent a request to OPM on February 21, 1995, to change the

qualifications for the inspector position (1854 series). According to an

ATF official’s notes of a telephone conversation, OPM believed a

full-blown study needed to be done to determine why the General

Accounting Office (GAO)5 and ATF believed 1854s could not

successfully perform without formal education. OPM wanted to know

how many people had to be fired because they lacked the proper

education to fulfill their duties or how many had to be put on a

performance improvement plan.

Based on discussions with staff from ATF’s Office of Inspection and

PPC, we determined that ATF never conducted the study. When we

discussed this issue with the Chief, Field Management Staff, in

August 2000, she stated the qualifications for the inspector position

had not changed. ATF will pay for accounting training should

inspectors request it; however, it is not a requirement.

Discussions with the Chief, PPC, indicate the level of revenue

examination training given to new inspectors is minimal. The New

Professional Training given to new inspectors since 1998 has

eliminated most of the revenue audit training and focuses mainly on

ATF’s firearms and explosives programs. This fact, coupled with the

fact that many of ATF’s most experienced revenue inspectors have

retired or will do so in the next few years, indicates that ATF will be left

with an inspector workforce with little or no experience to conduct

effective revenue examinations in the future.

 

5

 Our prior audit report noted that, in March 1991, GAO concluded inspections could be more effective if

inspectors had more accounting knowledge.
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Recommendation

3. The Director, ATF, should implement a training program that

ensures all inspectors are properly trained on how to conduct

revenue examinations.

Management Comment. ATF concurred with the recommendation.

ATF is in the process of conducting its first advance alcohol and

tobacco training class and plans to conduct two others classes in

the near future.

OIG Evaluation. The OIG believes the corrective actions taken and

planned address the intent of the recommendation.

Prior Recommendations 5 & 6: Free-of-Tax Exports

Alcohol beverage and tobacco products may be exported tax-free

provided the taxpayer provides ATF with acceptable, complete, and

accurate proof of the exportation. ATF’s internal processing

procedures require that export documentation be provided to

ATF within 90 days of the claimed shipment date. If ATF does not

receive the required documentation within 90 days, ATF is required to

send a proposed assessment letter to the taxpayer. If no

documentation is received 45 days after the letter has been sent,

ATF is supposed to proceed with a tax assessment covering the

quantity of goods claimed to have been exported.

Our September 1994 audit found free-of-tax exports were not always

promptly or properly validated. The report said there were no

incentives for plants to promptly provide the supporting documentation

for free-of-tax exports. Further, two of ATF’s former regional offices

were not always promptly assessing tax and interest due when the

plants did not provide supporting documentation within the required,

135-day timeframe.

We made two recommendations to address this area. First, we

recommended the Director, ATF, require Compliance Operations to

review the time limit established under ATF Order 5020.8A of 135 days

for providing proof of export to either validate the established limit or

set a new time limit. We also recommended the Director explore a
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statutory change to allow ATF to take enforcement action, such as a

monetary penalty, against alcohol and tobacco exporters who

consistently fail to provide evidence of export within the prescribed

period. ATF concurred with both recommendations. ATF said it would

review the time limits and revise them if appropriate, and would study

the feasibility of recommending a statutory change.

OIG Follow-up Evaluation of Corrective Action

ATF did not change the timeframes associated with export

documentation. When we conducted two recent export audits of

distilled spirits and tobacco products6, ATF’s internal procedures still

contained the 135-day timeframe for reviewing export documentation.

Regarding the second recommendation, ATF said that its regulatory

management staff and Chief Counsel discussed the feasibility of the

recommended statutory change. ATF determined that such a change

would not increase the rate of compliance nor would the Congress be

apt to pass such a law. Accordingly, ATF implemented no changes

over the export documentation review process.

The two more recent OIG audits of controls over tax-free exports of

distilled spirits and tobacco products found the documentation

problems still existed, and may have become worse. Specifically,

these audits found ATF had either inadequate or no documentation for

numerous exportations, and documentation containing technical

violations. Both reports noted a significant number of the exports were

considered “open,” that is, ATF had either not received the export

documentation proof, or had not yet reviewed the documentation.

Furthermore, the majority of these shipments exceeded the 135-day

limitation, and ATF should have assessed these taxpayers millions of

dollars in excise tax plus interest.

A significant portion of the recent export documentation problems can

be attributed to extensive organizational changes ATF has

experienced over the last several years. In FY 1996, ATF initiated a

5-year plan to consolidate the business processes of its five regional

technical services offices and a tax processing center into a centralized

business center known as the National Revenue Center (NRC). As a

 

6

Bureau of Alcohol, Tobacco and Firearms Controls Over Tax Free Spirit Exports, OIG-99-123,

September 15, 1999, and The Bureau of Alcohol, Tobacco and Firearms Needs to Improve its Controls Over

Tax-Free Tobacco Exports, OIG-01-019, November 13, 2000.
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result of these organizational changes and reduced staffing, ATF was

forced to prioritize workload assignments.

As a result of the two more recent audits, we made 15 additional

recommendations designed to improve controls over the exportation of

distilled spirits and tobacco products. We plan to assess the

effectiveness of ATF’s corrective actions related to these

recommendations during a future audit. We believe when

ATF completes the corrective actions associated with the more recent

findings and recommendations, ATF will achieve improved controls

over the tax-free exportation of alcohol and tobacco products.

ATF has already taken corrective action on some of these

recommendations. For example, in July 2000, ATF issued Industry

Circular Number 2000-2, Exportation of Distilled Spirits, Wine, Beer,

and Tobacco Products Without Payment of Tax. This Circular, issued

to all proprietors of DSPs, bonded wine premises, breweries, tobacco

manufacturers and export warehouses, clarified ATF’s position on the

types of export shipments allowable without payment of tax, and the

kinds of documentation ATF would consider as acceptable proof of

export for each type of shipment. It also reminds proprietors that

failure to provide satisfactory proof of export may subject them to

liability for the excise tax plus interest.

ATF said it also issued the Circular to all of its specialists and senior

clerks, discussed them in detail by unit supervisors at meetings with

their employees, and provided NRC employees on-the-job training on

the requirements for reviewing or auditing export documentation.

We believe that, if ATF fully implements all of the recommendations we

made during our two recent reviews of distilled spirits and tobacco

exports, the intent of the 1994 recommendations would be satisfied.

Accordingly, we are not making any additional recommendations at

this time.

* * * * * *

We would like to extend our appreciation to ATF for the cooperation

and courtesies extended to our staff during the review. If you have any

questions, please contact me at (617) 223-8640, or a member of your

staff may contact Dennis Deely, Audit Manager, at (856) 968-4907,
Additional Corrective Actions Needed To Improve ATF’s Revenue

Inspection Program (OIG-01-083) Page 16

extension 248. Major contributors to this report are listed in

Appendix 3.

/s/

Donald P. Benson

Regional Inspector General for Audit
Appendix 1

Objectives, Scope, and Methodology

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Inspection Program (OIG-01-083) Page 17

The overall objective of our audit was to determine whether

ATF implemented corrective actions to address the

six recommendations contained in our prior audit report entitled,

Bureau of Alcohol, Tobacco, and Firearms: Tax Compliance Inspection

Improvements Needed, OIG-94-143, issued September 15, 1994.

To conduct our audit, we obtained information from ATF’s internet site

(www.atf.treas.gov) on its mission, vision, and values, and

ATF’s Strategic Plan.

We conducted various interviews of the Chief, Policy and Programs

Coordination Staff and the Chief, Revenue Division (Office of Alcohol

and Tobacco) to obtain background information and an overview of

ATF’s revenue inspection program.

We interviewed the Assistant to the Special Agent in Charge,

Inspection Division (Office of Inspection) and a member of his staff

regarding their role in monitoring OIG recommendations. We obtained

and reviewed the file of information the staff member maintained on

the September 1994 audit report. He used this information, such as

certificates of completion and other forms of documentation, to close

out recommendations in the Treasury’s Inventory Tracking and Closure

System (ITC).

Based on the information contained in the Office of Inspection file, we

conducted follow-up interviews of knowledgeable officials as needed

for specific recommendations. For example, regarding performance

measures for the revenue inspection program, we contacted the

Chief, Revenue Division, the Program Manager at the National

Revenue Center in Cincinnati, OH, and the Chief, Policy Programs and

Coordination Staff.

We interviewed the Chief, Field Management Staff, to obtain

information about training for inspectors, staffing, operating plans and

final reports, as well as other background information.

We reviewed two OIG audit reports reports pertaining to free-of-tax

exports issued after the September 1994 audit report. The two reports

were, Bureau of Alcohol, Tobacco and Firearms Controls Over Tax

Free Spirit Exports, OIG-99-123, September 15, 1999, and The Bureau
Appendix 1

Objectives, Scope, and Methodology

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Inspection Program (OIG-01-083) Page 18

of Alcohol, Tobacco and Firearms Needs to Improve its Controls Over

Tax-Free Tobacco Exports, OIG-01-019, November 13, 2000. We

also obtained and reviewed ITC reports for these two reports to

determine the status (open or closed) of the recommendations.

We conducted our audit between August 2000 and April 2001 in

accordance with generally accepted government auditing standards.
Appendix 2

Management Comments

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Appendix 2

Management Comments

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Inspection Program (OIG-01-083) Page 20
Appendix 2

Management Comments

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Inspection Program (OIG-01-083) Page 21
Appendix 3

Major Contributors To This Report

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Northeastern Region

Donald P. Benson, Regional Inspector General for Audit

Dennis F. Deely, Audit Manager

Robert E. Ferrara, Auditor
Appendix 4

Report Distribution

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Inspection Program (OIG-01-083) Page 23

The Department of the Treasury

Under Secretary of the Treasury for Enforcement

Office of Strategic Planning and Evaluations

Office of Accounting and Internal Controls

Bureau or Alcohol, Tobacco and Firearms

Director

Assistant Director Alcohol and Tobacco

Deputy Assistant Director Alcohol and Tobacco

Chief, Revenue Division

Chief, National Revenue Center

Assistant Director (Inspection)

Office of Management and Budget

OIG Budget Examiner