Tax Administration: IRS's Innocent Spouse Program Performance Improved; Balanced Performance Measures Needed
Published: 2002-04-24T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: By law, married persons who file joint tax returns are each fully responsible for the accuracy of the tax return and for the full tax liability. This is true even though only one taxpayer may have earned the wages or income shown on the tax return. Under the Internal Revenue Service's (IRS) Innocent Spousal Program, IRS can relieve taxpayers of tax debts on the basis of equity considerations, such as not knowing that their spouse failed to pay taxes due. Since passage of the IRS Restructuring and Reform Act of 1998, IRS has received thousands of requests from taxpayers for innocent spouse relief. IRS's inability to provide timely responses to such requests has generated concerns among taxpayers, Congress, and other stakeholders. IRS reached decisions on 21 percent more cases than it received in fiscal year 2001, reducing some of its backlog from previous years. The agency accomplished this through a variety of initiatives, including a substantial staffing commitment, centralization and specialization, automated tools, and routine estimating of future workload and staffing needs. IRS's procedures conform to applicable guidance for transferring tax liabilities from joint tax accounts to individual tax accounts when innocent spouse relief has been granted. The procedures follow federal internal control guidelines by requiring a mix of checks, verifications, reconciliations, and documentation to support steps throughout the process. The Web site for IRS's Innocent Spouse Program--part of IRS's agency wide Web site--went on-line in December 1999 to help taxpayers determine their eligibility for innocent spouse relief. Because IRS has not evaluated the Web site, the agency does not know how useful the Web site has been to taxpayers in determining their eligibility for innocent spouse relief.

section_title: Letter
paragraphs: By law, married persons who file joint tax returns are each fully responsible for the accuracy of the tax return and for the full tax liability. This is true even though only one taxpayer may have earned the wages or income shown on the tax return. Under the Internal Revenue Service’s (IRS) Innocent Spouse Program, IRS can relieve taxpayers of tax debts on the basis of equity considerations, such as not knowing that their spouse failed to pay taxes due.
Since passage of the IRS Restructuring and Reform Act (Restructuring Act) of 1998, IRS has received thousands of requests from taxpayers for innocent spouse relief. IRS’s inability to provide timely responses to such requests has generated concerns among taxpayers, Congress, and other stakeholders. It took IRS about a year, on average, to completely process an innocent spouse case in fiscal year 2001.
Because of your concerns about IRS’s growing inventory of unresolved innocent spouse cases and the timeliness of IRS’s case processing, you asked us to review IRS’s administration of the program. Specifically, this report assesses (1) IRS’s overall approach to ensure that innocent spouse cases were being processed in a timely, accurate, and consistent manner; (2) the adequacy of IRS’s procedures to transfer tax liabilities between taxpayers when relief was granted to one of the taxpayers; and (3) IRS’s efforts to evaluate the usefulness of its Innocent Spouse Program Web site to taxpayers.
To address these objectives, we reviewed and analyzed Innocent Spouse Program data from IRS’s Innocent Spouse Tracking System (ISTS) and management reports, and we reviewed related policies, procedures, and guidance. We interviewed IRS officials responsible for managing the Innocent Spouse Program as well as officials in IRS’s National Taxpayer Advocate Service Office and Electronic Tax Administration Office and in the U.S. Department of the Treasury’s (Treasury) Office of Chief Counsel. We reviewed reports by the Treasury Inspector General for Tax Administration (TIGTA) and the taxpayer advocate that addressed innocent spouse issues. We focused on program operations that cover the period March 1999 through December 2001, because this period best reflected the program’s results after the Restructuring Act’s changes and because it covers the period for which performance data were most recently available. Our scope and methodology are discussed in more detail in a separate section of this report.
You also asked us to provide information on the number and disposition of innocent spouse cases that federal courts recently litigated; appendix I provides this information. Appendix II provides similar information on cases that were scheduled to be tried in the federal courts but were settled by Treasury’s Office of Chief Counsel and IRS’s Office of Appeals. The data were the most currently available when we performed our review.
subsections: section_title: Background
paragraphs: Under tax law, married couples who file joint tax returns are treated as a single unit, which means that each spouse becomes individually responsible for paying the entire amount of the tax associated with his or her joint return. Accordingly, an “innocent spouse” can be held liable for tax deficiencies assessed after a joint return was filed, even if those liabilities were solely attributable to the actions of the other spouse. However, if certain conditions are met, the innocent spouse may be able to obtain relief from the tax liability. Prior to the Restructuring Act, relief was available to taxpayers but under rather restrictive conditions, such as that certain dollar thresholds for tax underpayments first be met. The Restructuring Act revised the conditions for obtaining innocent spouse relief to make it easier for taxpayers to qualify. The act liberalized the former conditions and added new conditions. Simply stated, the three basic provisions related to innocent spouse relief are as follows:   When the innocent spouse had no knowledge that there was an understatement of tax attributable to erroneous items of the other individual filing the joint return, and considering all facts and circumstances, it would be unfair for IRS to hold the innocent spouse liable for the tax.
When the innocent spouse otherwise qualifies, he or she may request that the tax deficiency from a jointly filed return be recalculated to include only items allocable to him- or herself.
When the tax shown on a joint return was not paid with the return, the innocent spouse may obtain “equitable relief” if he or she did not know that the funds intended to pay the tax were not used for that purpose. Equitable relief is also available for understatements of tax for which relief under the above two conditions was not available.
Each of these three conditions has different eligibility requirements and different types of relief. Appendix III describes in more detail the eligibility requirements for each condition and the factors that IRS is to weigh in deciding whether to grant or deny relief. Relief is generally available to taxpayers for liabilities arising after July 22, 1998, the date that the law was enacted, and for liabilities that arose before that date but remained unpaid as of that date.
Limited data exist to determine the trend in innocent spouse workload immediately following passage of the Restructuring Act. IRS did not systematically track innocent spouse cases until March 1999, about 8 months after the act was passed. Prior to the Restructuring Act, IRS administered innocent spouse relief as part of its process for examining tax returns and did not keep statistics on the number of cases in which innocent spouse relief was requested or on the disposition of those requests. Nevertheless, according to IRS, because taxpayers were anticipating passage of the Restructuring Act, innocent spouse requests increased from a few cases to about 750 cases in each of the 4 months leading up to the act. During fiscal year 2000, it received, on average, 4,800 cases per month.
IRS processes innocent spouse cases on the basis of proposed regulations issued in January 2001, which set forth the basic guidelines that its examiners are to use in evaluating taxpayers’ cases to determine whether to grant or deny relief. IRS’s Wage and Investment (W&I) Division is responsible for managing this program. Under procedures adopted in fiscal year 2001, virtually all innocent spouse cases are to be processed by correspondence at IRS’s Centralized Innocent Spouse Operation (Cincinnati processing site) in Covington, Kentucky. Generally, only those cases needing face-to-face contact or that arise in the field are to be handled by field staff, generally tax compliance officers and revenue agents in IRS’s Small Business/Self-Employed (SB/SE) Division. As discussed later in this report, IRS is phasing in new W&I field staff to work cases needing face-to-face contact with taxpayers.
Staff at the Cincinnati processing site screen the incoming cases to determine whether they meet the basic eligibility requirements for further processing. These requirements include, among other things, verifying that a joint tax return was filed, that an outstanding tax liability exists, and that the request is for the appropriate tax year. Any request that does not meet the basic requirements is to be judged ineligible for further review and closed through written notification to the taxpayer of the reasons for IRS’s decision. Any case that meets the basic eligibility requirements is to be assigned to an examiner to further review the merits of the taxpayer’s request for relief. IRS is required by law to attempt to contact the other taxpayer who signed the joint tax return, to give him or her an opportunity to participate in the case. IRS generally allows 30 days for the nonrequesting spouse to respond. If a taxpayer files a claim for innocent spouse relief covering more than one tax period or year, IRS evaluates the merits of the claim for each tax year individually to determine whether relief should be granted. Therefore, the claim for each tax year is counted as a separate case. Based on the merits of an individual claim, IRS grants a taxpayer full relief, partial relief, or no relief.
The examiners evaluate the facts and circumstances of each case and ultimately decide whether full, partial, or no relief should be granted. IRS is required by the Restructuring Act to notify the requesting spouse of its decision on each case and to inform him or her of the right to file an appeal with IRS’s Office of Appeals within 30 days. If the taxpayer does not file an appeal with IRS, or after the appeal is settled, IRS is to send a final determination letter to the requesting spouse and, as required by law, advise the individual of his or her right to appeal IRS’s decision to a federal court within 90 days. IRS’s decision on a case becomes final after the taxpayer exhausts all rights to an IRS appeal or a court review or waives these rights and accepts IRS’s decision. At that time, IRS is required to notify the nonrequesting spouse of the final result.
To close a case after relief is finally approved, IRS must separate and transfer taxes from the taxpayers’ joint tax account in the amount of the approved relief. IRS procedures require that its staff establish a separate, individual tax account for the taxpayer who was judged responsible for the tax liability and transfer the tax liability to that account. Any joint tax liability that is not part of the relief granted remains a liability of both taxpayers that IRS may collect from either.
section_title: Objectives, Scope, and Methodology
paragraphs: To assess IRS’s efforts to ensure that innocent spouse cases were being processed in a timely, accurate, and consistent manner, we reviewed W&I and SB/SE planning documents, ISTS data on the program’s performance, and data from the innocent spouse quality review program, which analyzes samples of closed cases for adherence to procedures and accuracy of decisions. We interviewed IRS’s innocent spouse project manager and staff to obtain information on how the program was managed, and we obtained relevant documentation on the program, including its procedures, policies, and guidance. To further assess the management of the program, we relied on our past reports on managing organizational performance, IRS’s guidance regarding performance management, and other management literature, including the Government Performance and Results Act. We reviewed reports by TIGTA and IRS’s taxpayer advocate that addressed innocent spouse management issues. We also analyzed the assumptions that IRS used in projecting inventory and staffing levels.
To determine whether IRS’s efforts to process cases timely, accurately, and consistently were resulting in changes in program performance, we also obtained and analyzed ISTS data from March 1999 to December 2001 regarding the number of innocent spouse cases that IRS received and resolved and their average case-processing times. We performed limited accuracy checks on the ISTS database. In September 2001, TIGTA recommended that IRS strengthen its controls over data in the ISTS. IRS subsequently implemented corrective actions to help ensure the accuracy and validity of the ISTS data, including correcting data from prior years. The database that we used reflected these corrections. We did not test the reliability of the other IRS databases used in our analysis—the Examination Case Reporting System and the Work Planning and Control System—that maintain data on staff hours applied to examination programs, including innocent spouse case processing. We analyzed the direct staff hours that IRS staff charged to conduct case evaluations for fiscal years 2000 and 2001. IRS did not have complete information for earlier periods.
To assess the adequacy of IRS’s procedures to transfer liabilities between taxpayers when relief was granted, we reviewed the procedures and related guidance such as training materials and policy memoranda. We discussed the procedures and related guidance with the innocent spouse project manager, managers at the Cincinnati processing site, and Customer Account Services staff who are responsible for overseeing the process of transferring tax liabilities between tax accounts. We also compared our published guidance on internal control management for federal agencies with IRS’s procedures. We observed the process that IRS had in place at the Cincinnati processing site for transferring tax liabilities from taxpayers’ joint accounts to their individual accounts. We discussed IRS’s procedures with taxpayer advocate service staff to determine whether they received any complaints from taxpayers that IRS had incorrectly transferred liabilities in their innocent spouse cases.
To assess IRS’s efforts to evaluate the usefulness of its Innocent Spouse Program Web site to taxpayers, we reviewed guidance from selected academic and industry experts on assessing Web sites and we interviewed IRS’s Electronic Tax Administration and Innocent Spouse Program officials. We also examined IRS’s Innocent Spouse Web site to determine the type and content of information available to the taxpayers.
To determine the number and disposition of innocent spouse cases filed in U.S. federal courts, we obtained information from staff at Treasury’s Office of Chief Counsel that identified court decisions on innocent spouse cases compiled from the LexisNexis database for the period June 1996 to June 2001. The compilation excluded those cases that addressed only procedural issues such as whether a court had jurisdiction to hear the case. We also obtained information that was complied from IRS’s Office of Appeals database on innocent spouse cases scheduled for trial that were settled by the Office of Appeals or Treasury’s Office of Chief Counsel from fiscal year 1999, when IRS began tracking these data, through May 2001.
We performed our work with IRS’s W&I Division staff and the National Taxpayer Advocate Service’s office at IRS’s national headquarters in Washington, D.C. We also met with W&I Division staff at the innocent spouse Cincinnati processing site in Covington, Kentucky; IRS’s SB/SE Division office in Atlanta, Georgia; and Treasury’s Office of Chief Counsel in Washington, D.C. We did our work between May 2001 and February 2002 in accordance with generally accepted government auditing standards.
We requested comments on a draft of this report from the commissioner of internal revenue. We received written comments from the commissioner in a letter dated April 18, 2002. The comments are reprinted in appendix VII and are discussed at the end of this letter.
section_title: IRS Is Gaining Control over Its Innocent Spouse Workload but Has Not Developed Balanced Measures
paragraphs: To better ensure timely, accurate, and consistent processing of innocent spouse cases, IRS officials developed and implemented several initiatives. Although the specific contribution of each initiative to improved results is not clear, IRS’s initiatives, in total, have increased its ability to handle innocent spouse cases more quickly and at lower cost while maintaining or improving the accuracy of relief decisions as measured by IRS’s quality review program. The initiatives contributed, along with a decrease in cases received, to IRS’s reaching decisions on more cases than it received in fiscal year 2001. The average times to reach decisions and close cases continued to increase in fiscal year 2001 but should stabilize and then decline in future years.
The principal initiatives that IRS undertook to improve its management of the innocent spouse case workload included   centralizing case processing within one W&I location—its Cincinnati site in Covington, Kentucky—and bringing more of the program staff under the project manager’s direction;   developing an automated decision-making and case-building tool;   developing a model to estimate future workload and staffing needs and monitor program performance; and   measuring the quality of case decision making, including adherence to procedures and the accuracy of decisions.
Although these initiatives, taken as a group, have improved IRS’s ability to process cases and promote quality decision making, IRS has not established a set of balanced performance measures and performance targets for the program. Without such measures, IRS cannot be sure that these changes are having the desired results and are not creating unintended consequences. Balanced measures and performance targets are integral parts of IRS’s performance management system that are intended, in part, to better ensure that program performance does not overly focus on one area of program performance to the detriment of others.
subsections: section_title: Centralized and Specialized Staffing
paragraphs: In anticipation of the Restructuring Act’s passage, IRS decided in April 1998 that innocent spouse cases should be handled in a central processing site. IRS officials believed that centralization would facilitate more rapid and consistent processing of cases because staff in the centralized processing site would specialize in innocent spouse cases and follow consistent procedures and processes in resolving them. Although IRS was unable to fully implement the decision to centralize processing in the years immediately following the act’s passage, over time IRS made considerable progress in doing so.
IRS does not have good data on staff usage before fiscal year 2000, but in fiscal year 2000, staffing totaled 887 full-time equivalents (FTE) with 768 FTEs (about 86 percent) coming from SB/SE field staff and 119 FTEs coming from W&I staff in the centralized processing site. As table 1 shows, however, in fiscal year 2001, IRS increased the FTEs for W&I’s centralized processing and decreased the field staffing. IRS projects that by fiscal year 2003, about 70 percent of the FTEs used in processing innocent spouse cases will be in W&I’s centralized processing site.
In addition to increasing its centralized staffing levels, IRS has improved the capability of the staff. IRS upgraded some examiner positions from grade level GS-7 to GS-8, owing to concerns about attrition, and trained some examiners to specialize in working complex cases that would previously have been sent to field offices. For instance, some of the Cincinnati examiners have been trained to handle cases involving bankruptcies. By the end of fiscal year 2001, IRS had 157 employees at the Cincinnati processing site, with 56 employees examining cases and 30 employees screening cases to determine whether they met the basic eligibility requirements for relief. The remaining employees were supervisors, case quality reviewers, and clerical staff.
In general, the staff assigned to process cases in the centralized processing site are at lower grades—predominantly GS-8—than are the SB/SE staff processing innocent spouse cases in the field. SB/SE staff have generally been graded as GS-9 through GS-13, with most field staff tending to be graded as GS-12. Thus, as IRS has shifted processing more cases in Cincinnati, it has also lowered the salary structure of the staff processing the cases.
Beginning in fiscal year 2002, IRS is using W&I Division taxpayer resolution representatives (TRRs) to process field cases requiring face-to- face contact with the taxpayers. TRRs are to perform a variety of services at IRS field locations throughout the country. By using the W&I Division’s TRRs, the innocent spouse project manager hopes to further reduce reliance on the SB/SE Division’s field staff. Program officials said that their lack of control over SB/SE field staff was one reason why field cases take longer to resolve than cases processed centrally. IRS expects that TRR involvement in the program will be minimal, as the agency expects to process 95 percent of the cases centrally during fiscal year 2003. As of February 2002, IRS projected that 11 TRR FTEs will be used in the Innocent Spouse Program in fiscal year 2002 and only 3 FTEs in fiscal year 2003.
section_title: Automated Decision- Making and Case-Building Tool
paragraphs: To increase the accuracy and consistency of examiners’ decisions about granting relief to innocent spouses, to better ensure that an adequate case file supports each decision, and to speed case processing, IRS developed an “integrated case processing” system (ICP) for innocent spouse cases. The ICP, which was implemented in January 2001 at the Cincinnati processing site, uses a computer program to direct examiners through a series of questions leading to a decision about what, if any, relief is due to the taxpayer. The algorithm was designed to capture all of the factors that must be considered in making these determinations. The ICP also automatically prompts the examiner to create a documented case file so that IRS can be better assured that examiners’ decisions are properly supported. The ICP is intended to increase the accuracy and consistency of determinations, since it is designed to help ensure that examiners consider all pertinent aspects of a taxpayer’s case in accordance with the law. The ICP was expected to increase the speed of case processing, because, among other reasons, examiners would have all of the criteria for decision making available on-line and the structured process for guiding decisions should result in fewer examiner errors.
IRS is planning future enhancements to the ICP that would make it easier for examiners to access and update taxpayer data. IRS plans to make the ICP available to the field office TRRs to better ensure the accuracy and consistency of their determinations.
section_title: Model for Estimating Future Workloads and Staffing Needs
paragraphs: IRS developed an inventory model in April 2000 to enhance its ability to manage staff resources and the inventory of innocent spouse cases. IRS uses the model to estimate the numbers of staff that it will need in the field and at the Cincinnati processing site to process enough cases to result in a targeted level of cases at the end of the fiscal year. The model helped IRS to gauge the amount of progress that it could make in reducing its inventory of cases, assuming differing mixes in the numbers of staff available in Cincinnati and the field.
According to the innocent spouse project manager, the model provides a reasonable basis for planning and leads to improved staff allocations, but it is not expected to be precise. The project manager said that the projected case closures that are derived from the model estimates become part of the W&I Division’s business and operating plans for the given fiscal year.
The model begins with the existing inventory, adds projections of new cases expected to be received during the period in question, and estimates the number of cases that will be in inventory at the end of the period, given assumptions about the number of staff who will be available and their productivity in handling cases. IRS’s estimates of new cases likely to be received are based largely on prior experience and professional judgment. Staff requirements are projected on the basis of the percentage of cases that IRS estimates will be processed centrally versus in the field and on the types, numbers, and productivity of staff at these locations. For example, in fiscal year 2001, IRS estimated that the examiners at the centralized site could process about 14 cases per week, spending about 2.9 hours per case; this estimation was based in part on data from IRS’s Work Planning and Control System and assumed productivity increases. For cases processed in the field, IRS used actual time from IRS’s Examination Case Reporting System that showed that tax compliance officers were processing a case in about 5.6 hours and revenue agents were processing a case in about 13 hours. IRS estimated that the new TRRs would require about the same amount of time to process a case as do tax compliance officers.
To test the functioning of the model, we analyzed the assumptions in IRS’s model as of November 2001 against recent performance data to confirm whether IRS would be likely to reduce its inventory of cases and reach the inventory level that it had projected for the end of fiscal year 2003. Our analysis showed that examiners at the centralized site had not been as productive as IRS believed. We determined that IRS would have to add the equivalent of 16 FTEs or become about 17 percent more efficient to achieve its projected ending inventory level for fiscal year 2003. Our analysis did not consider the productivity levels of field staff who are projected to close about 5 percent of cases. We recognize that other factors may also affect IRS’s ability to meet its targeted inventory levels, such as unexpected changes in the volume of new cases, the proportion of cases processed centrally versus in the field, and the productivity of field staff.
IRS revises the projections from its model routinely as new data show changes in the volume of cases being received and in the productivity of staff. Subsequent to our test of the model, IRS revised its inventory projection using lower assumptions about examiners’ productivity. Table 2 shows IRS’s inventory projections for fiscal years 2002 and 2003 as of February 2002. As shown in the table, the inventory is expected to drop 43 percent during fiscal year 2002—from 52,093 cases to 29,810 cases.
section_title: Quality Review Process
paragraphs: In June 1999, IRS established a process for reviewing closed innocent spouse cases from all locations to help ensure that high-quality case decisions were being made. Beginning in July 2000, IRS’s research staff developed statistically valid sampling plans for each location on the basis of projected annual case receipts. Staff assigned to the quality review function assess the sampled cases using quality standards developed especially for the review. The standards are structured to evaluate whether examiners have followed all of the required processes for an innocent spouse case as well as whether the decision made by the examiner was correct. Adherence to process requirements is reviewed both to ensure compliance with legally required procedures, such as notifying the nonrequesting spouse and giving the individual an opportunity to participate in the case, and because the adherence to required process steps is expected to lead to better IRS decisions about the requested relief. The accuracy of decisions is reviewed to provide IRS data on the accuracy and consistency of decisions made in the diverse offices handling innocent spouse cases.
Originally, the quality review staff included SB/SE Division revenue agents at grade levels GS-11 through GS-13. Starting in fiscal year 2002, IRS relieved SB/SE of the quality review function and now staffs the review with experienced W&I Division grade-level GS-9 examiners, who are to periodically rotate to the quality review function from the Cincinnati Innocent Spouse Program staff.
Overall, IRS’s innocent spouse case quality was maintained between fiscal years 2000 and 2001, as shown in table 3. In the first quarter of fiscal year 2002, however, the quality review results reflected better performance. During that quarter, the quality review staff agreed with 100 percent of the decisions to grant and deny relief made for the sample of cases from the centralized processing site. For all field locations combined, the reviewers agreed with 93 percent of the decisions made. However, owing to the small sample size, the quarterly results may not be indicative of results over a longer period. The results from the first quarter of fiscal year 2002 are the first quality review data that accounted for IRS’s use of automation in case processing and for the staffing enhancements at the centralized processing site.
section_title: Effect of IRS’s Initiatives on Timeliness, Accuracy, and Consistency
paragraphs: The effect of each of the individual IRS initiatives to process innocent spouse cases more timely, accurately, and consistently is difficult to separate and quantify. However, taken as a whole, these initiatives have enabled IRS to reduce its inventory of undecided innocent spouse cases while maintaining or improving the quality of its decisions as measured by the quality review program. The decline in cases received during fiscal year 2001 also contributed to IRS’s ability to reduce its inventory of cases.
Table 4 shows that for the first year since the Restructuring Act was passed, IRS reached a decision on more cases than it received. IRS decided 61,423 cases in fiscal year 2001, or about 21 percent more than the 50,840 cases it received, reducing some of the backlog from previous years. IRS received about 12 percent fewer cases in fiscal year 2001 than in fiscal year 2000, which contributed to its ability to reach decisions on more cases than it received. Appendix VI shows the disposition of resolved cases for fiscal years 1999 through 2001.
However, the decline in cases received does not fully account for IRS’s progress in reducing its inventory of undecided cases. The resulting increase in productivity appears to be largely attributable to IRS’s strategy of centralizing case processing in Cincinnati, but it may be partly due to the use of the ICP and to general improvements in how IRS handles innocent spouse cases.
As table 5 shows, IRS has shifted an increasing portion of cases to the Cincinnati processing site. Because Cincinnati staff reach decisions on cases about four times faster than field office staff, IRS has realized an overall gain in productivity, which rose, on average, from 60 cases per FTE to 82 cases per FTE, or by 37 percent, between fiscal years 2000 and 2001. In fiscal year 2000, field office examiners took, on average, about 11.7 hours to make a determination on a case, compared with about 3.1 hours per case for examiners at the Cincinnati processing site. Similarly, in fiscal year 2001, field office examiners took, on average, about 10.5 hours per case, compared with 2.5 hours per case at the Cincinnati processing site.
Because IRS expects to shift 95 percent of innocent spouse cases to the Cincinnati processing site, where cases are processed faster, by the end of fiscal year 2003, additional gains in overall productivity are expected. These projected productivity gains, coupled with IRS’s expectation that new case receipts will remain fairly close to the volume received in 2001, result in the significant estimated reduction in total staffing for the Innocent Spouse Program shown in table 1. If this reduction is achieved, IRS will have reduced overall staffing for the Innocent Spouse Program by 75 percent between fiscal year 2000 and fiscal year 2003 and will have redirected hundreds of tax compliance officers and revenue agents to their traditional duties.
To some extent, IRS also was able to reach decisions on more innocent spouse cases than it received in fiscal year 2001 because the portion of innocent spouse cases it receives that are not eligible for relief has been increasing. As a percentage of cases received, those determined to be ineligible rose from about 13 percent in fiscal year 1999 to 45 percent in fiscal year 2000 and to 56.5 percent in fiscal year 2001. Most requests for innocent spouse relief that are not eligible—for instance, because the taxpayers did not file a joint return in the year for which relief is requested—are identified during screenings at the Cincinnati processing site. Officials estimated that, on average, staff who screen cases at the Cincinnati site need about 30 minutes per case to determine whether a taxpayer’s request meets the basic eligibility requirements. In general, 80 percent or more of the cases found to be ineligible for relief are identified during case screening; the remainder are found to be ineligible during case processing either at the Cincinnati site or by field staff.
Although, in general, determining whether a case is ineligible does not require a significant amount of IRS time, agency officials are concerned about the portion of cases received that do not meet basic eligibility requirements. As a result, they have made revisions to forms and attempted to better inform tax practitioners of the innocent spouse eligibility requirements. In addition, IRS’s Web site, which is discussed later in this report, includes information on the Innocent Spouse Program that is intended to help taxpayers determine their eligibility. Appendix IV provides more information on ineligible cases.
The improvements that IRS has realized in handling innocent spouse cases and in reducing its inventory of undecided cases have occurred while the agency has maintained or increased the accuracy of relief decisions. As the data in table 3 illustrate, IRS’s reviewers have concurred with the case decision in a growing proportion of cases over time. Moreover, although this example reflects only the results during the first quarter of fiscal year 2002, the quality review staff agreed 100 percent of the time with the sample of case decisions pulled from the centralized processing site. This was the first quality measurement that reflected use of the ICP system and staffing enhancements at the centralized site.
IRS was not successful through fiscal year 2001 in reducing the average time to reach a decision on whether relief would be granted or to reach closure on cases, including all required notices, appeals, and transfers of taxpayers’ liabilities when full or partial relief was granted. Table 6 shows that average times to decide and close cases continued to increase in the field offices and at the Cincinnati processing site through fiscal year 2001.
If IRS is successful in reducing the inventory of cases by 43 percent during fiscal year 2002 as shown in table 2, the average case-processing time likely will stabilize or begin to decline. As a general rule, IRS processes the older cases in its inventory before it processes the newer cases. Thus, a significant reduction in inventory would disproportionately draw from the oldest cases. As these older cases are cleared out, and if IRS succeeds in processing as many cases as it receives in a year—that is, the maintenance level of inventory that the project manager would like to achieve—the average time for each case processed should decline. Further, because IRS estimates that 95 percent of the cases received will be processed at the Cincinnati processing site by the end of fiscal year 2003, and because Cincinnati’s times for deciding cases are less than half the times for cases decided in the field, as shown in table 6, case-processing times should begin to fall toward the shorter times that are used at the centralized site. Appendix V provides information on the average number of days for IRS to come to a decision on a case.
section_title: Innocent Spouse Program Management Could Be Enhanced with More Balanced Performance Measures and Targets
paragraphs: As part of its strategic planning process, IRS has instructed divisions, operating units, and lower levels of the organization to implement management practices that will help IRS support its strategic goals of top- quality service to each taxpayer in every interaction, top-quality service to all taxpayers through fairness, and productivity through a quality work environment. IRS views balanced measures as its primary means for assessing organizational performance. The three balanced measures— customer service, employee satisfaction, and business results—are to be considered when setting objectives, establishing goals, assessing progress and results, and evaluating performance. Business results measures are to reflect both quantity and quality.
W&I stated in its October 2001 business performance review guidance that one of the keys to meeting future division objectives is the use of balanced measures to achieve target levels of performance at lower levels within the division. The performance measures are to be aligned with the strategic goals that the programs support. Other IRS management guidance such as IRS’s Strategic Planning, Budgeting, and Performance Management Process Manager’s Guide instructs programs that report to operating units, such as divisions, to develop measures, with designated performance targets, for use in evaluating progress toward achieving IRS’s mission and long-term goals. Performance measures and associated target performance levels that are explicitly stated and that conform to IRS’s goals form the basis for communicating desired outcomes to program staff. Further, such measures and targets form the basis for assessing progress, identifying and addressing performance shortfalls, and holding managers and staff accountable for achieving results.
The W&I strategic plan has only one explicit performance measure for the Innocent Spouse Program, the number of cases closed in a fiscal year, which reflects only the business results quantity component of IRS’s balanced approach to measuring performance. Data for the number of cases closed provides some useful information on the performance of the program. However, this one measure fails to address other dimensions of performance. For example, it does not address timeliness and quality, which relate both to business results and to the customer satisfaction component of IRS’s balanced approach. Striving to achieve a specific number of case closings in a year could come at the expense of higher- quality decisions, which is why IRS’s performance management system stresses the need for balanced performance measures. Although timeliness and quality measures and targets have not been adopted for the Innocent Spouse Program, the W&I strategic plan for fiscal years 2001 to 2003 recognizes that a measure of timeliness is needed and states that IRS is to establish such a measure.
Although IRS does not have performance measures or targets for timeliness and quality in the Innocent Spouse Program, the agency is gathering data that can be used in developing such measures and targets. Within its ISTS, IRS already flags innocent spouse cases that have remained unusually long in any processing stage. Beginning in fiscal year 2002, for all cases that are processed centrally, IRS will begin recording in ISTS the actual staff time used to close each case. In addition, IRS has developed estimates of the time to process a case under optimal circumstances. Program officials told us that the estimated times are used for benchmarking actual processing times but are not goals. The records of staff time to close each case and initial efforts to define benchmarks for case timeliness should therefore provide data that IRS can analyze in developing an appropriate performance measure, as well as a desired target level, for case-processing timeliness.
IRS had a performance measure for case quality as well as target levels of acceptable quality, but the agency recently dropped its performance target. IRS collects information on the quality of innocent spouse case determinations that derives from its quality review process, which samples closed cases. In fiscal years 2000 and 2001, IRS’s quality goals for the Innocent Spouse Program were that the reviewers would concur with the examiners’ decisions in 85 and 90 percent, respectively, of the sampled cases. In January 2002, the project manager told us that their goal should be the attainment of each quality standard for all cases and that they would no longer specify a quality goal as a percentage of cases meeting the quality standards. Accordingly, although IRS will continue to measure case quality, it no longer plans to include a specific performance measure and performance target for the quality of innocent spouse cases in its strategic or operating plans.
In discussing the program’s performance measures and targets, the project manager said that the Innocent Spouse Program is small in comparison with other IRS programs and that consideration needs to be given to how much effort should be expended in developing performance measures and targets. Because data are being collected that could be used in developing timeliness and case quality performance measures and targets, the required effort should not be too great.
In March 2002, program officials told us that by the end of fiscal year 2003, IRS plans to have collected survey data relating to innocent spouse customer satisfaction that will enable it to develop related performance measures and targets. The officials said that these data on customer satisfaction, along with existing data on business results—including case quality measures—and employee satisfaction, would position IRS to develop a set of balanced performance measures and targets for the Innocent Spouse Program.
section_title: IRS’s Procedures for Transferring Tax Liabilities Conform to Applicable Guidance
paragraphs: IRS procedures for transferring tax liabilities in innocent spouse cases conform to federal guidance for ensuring accurate and complete information processing. The procedures, if adhered to, should preclude erroneous transfers of liabilities between spouses as well as the sending of collection notices to the innocent spouse for liabilities that have been transferred to the other spouse.
To ensure accurate and complete processing, federal guidance on internal controls for managing information processing advises agencies to include in their procedures a variety of controls tailored to their systems. The guidance advises agencies to employ a combination of actions such as edit checks for controlling data entry and reconciliation of account totals. For authorization control, the guidance advises agencies to use key source documents with authorizing signatures, batch control sheets, and independent reviews of data before the data are entered into the system. The guidance instructs agencies to design their data entry processes to provide for editing and validating data and for output reports.
IRS’s procedures for transferring tax liabilities in innocent spouse cases employ a variety of processes to control for accuracy and completeness. For example, IRS requires that the document with the final authorizing signature approving the taxpayer’s request for relief be the key document used to start the transfer process. The procedures require that an employee who was not involved in deciding the case perform edit checks and verify the information on the approval document by comparing it with the taxpayer’s account information. Further, IRS procedures require that a worksheet be prepared to document, verify, review, and reconcile the accuracy of account adjustments before any changes are made to the tax accounts. The worksheet is required to include specific instructions for the data entry personnel to use when making the tax account adjustments, such as the exact dollar amount of tax liability to be transferred from the joint account to a separate, individual account and the specific transaction codes required by IRS’s information systems to enter the changes. Staff are required to include documentation in the case files as evidence that the required tasks were completed. The procedures require that Accounting staff from a separate unit verify, reconcile, and record tax account adjustments in a journal before they are made. After the adjustments are made, Customer Account Service staff are to certify that the adjustments were made in accordance with IRS’s guidelines.
On the basis of our review of IRS’s procedures and our inspection of the process used at the Cincinnati processing site for transferring tax liabilities when innocent spouse relief was approved, we concluded that the procedures conform with the federal guidance for managing information processing. If IRS staff reconcile, edit, and verify the account information as they are required to do, the adjustments to transfer the tax liabilities should be made correctly. However, we did not independently test a sample of closed cases, and therefore we cannot determine the extent to which IRS staff actually performed the required control activities. The taxpayer advocate concurs that IRS’s procedures to transfer tax liabilities in innocent spouse cases appear to be adequate and should resolve the past problems of monitoring taxpayers’ accounts after the liabilities were transferred.
section_title: IRS Established an Innocent Spouse Web Site to Educate Taxpayers but Has Not Assessed Its Usefulness
paragraphs: IRS has established a Web site for its Innocent Spouse Program but has not evaluated the site. As a result, IRS does not know how useful the site is to taxpayers or what effect, if any, it has had on lessening taxpayer confusion about innocent spouse eligibility. Program officials said that recent enhancements to the Web site would enable them to collect data that could help them assess whether the site is useful to taxpayers.
subsections: section_title: In Developing Its Innocent Spouse Web Site, IRS Did Not Consider Assessing the Site’s Usefulness to Taxpayers
paragraphs: IRS officials in the Electronic Tax Administration and Innocent Spouse Program offices told us that in developing the Web site, they did not give any consideration to the benefits that taxpayers’ evaluations of the site might offer. Their immediate goal in developing the Web site was to give taxpayers an easy tool to help them determine their eligibility for the program.
The Innocent Spouse Program Web site, which went on-line in December 1999, was developed to help taxpayers determine their eligibility for innocent spouse relief. It is one of IRS’s initiatives to better educate taxpayers and tax practitioners about the Innocent Spouse Program’s eligibility requirements. By answering a series of yes-or-no questions, a taxpayer can generally determine whether he or she is eligible for innocent spouse relief. Called the Innocent Spouse Tax Relief Eligibility Explorer, the Web site takes the user through each of the innocent spouse eligibility factors via a series of questions. The Web site also allows the user to download the form used to apply to IRS for relief.
IRS has taken steps to increase awareness of the Web site among members of the public and within the tax professional community. IRS officials say that they have advertised the Web site in several ways, such as by including the Web site’s address in IRS publications regarding the Innocent Spouse Program and linking the Web site to the Tax Professionals Web site within IRS’s agencywide Web site.
Since officials had not considered evaluating the Innocent Spouse Program Web site when it was first created, they did not include features that would allow the collection of data for a meaningful evaluation. For example, IRS officials did not develop a capability for collecting information through Web-site-based customer surveys or customer feedback links.
section_title: IRS’s Upgraded Innocent Spouse Web Site Will Provide Some, But Not Sufficient, Information
paragraphs: As part of the upgrading of its agencywide Web site, IRS is enhancing the data collection capabilities of the Innocent Spouse Program Web site. According to an official in IRS’s Electronic Administration Office, the upgrading is being done in phases and the implementation of the initial phase began in January 2002. With more powerful software applications and tools, IRS will have the capability to collect data on use of the Web site and gather comments from taxpayers. For example, IRS will be able to collect data on the number of times the Innocent Spouse Web site was accessed, the number of times users accessed the Web site’s eligibility questionnaire, and the number of times users completed the questionnaire and were found eligible or ineligible for consideration. As the new Innocent Spouse Web site evolves, IRS expects to develop standard performance reports and refine data collection by involving the stakeholders responsible for the contents of the various links on the agencywide Web site. IRS anticipates that project managers will have the opportunity to add additional customized enhancements and applications later.
Although the Web site’s enhancements may provide IRS with more useful information than it currently has, the agency’s plans did not call for obtaining directly from taxpayers any information on the Web site’s usefulness. However, when we discussed the lack of such plans with Innocent Spouse Program officials in March 2002, they said that they would ask IRS’s Electronic Tax Administration officials to include a survey of taxpayers. They said that they would gather information on the usefulness of the Web site that then could be used in determining how to reduce the number of ineligible cases. They said that they would do this for six months and then evaluate the costs and benefits. According to some information management experts, customer comments, surveys, and focus groups can provide valuable information for managers to assess the usefulness of a Web site.
section_title: Conclusions
paragraphs: Over the past three years, IRS designed and implemented a number of initiatives to improve its ability to process innocent spouse cases timely, accurately, and consistently. In fiscal year 2001, these initiatives and the reduction of new cases collectively contributed to IRS’s progress, for the first time since passage of the Restructuring Act, in reducing its inventory of innocent spouse cases while maintaining or increasing the quality of its case decisions. Absent unforeseen significant increases in the innocent spouse caseload, IRS appears to be positioned to make material additional improvements in reducing the inventory of cases at the same time that it redirects hundreds of employees to perform other work. To date, these improvements have not resulted in reduced average times for making case decisions and completing cases. However, improvement in the timeliness of case processing should be realized as inventory levels decrease and work is shifted to IRS’s centralized processing center.
Although program improvements have been, and should continue to be, realized, IRS lacks a balanced set of measures for the Innocent Spouse Program that would help ensure that future performance does not inappropriately concentrate on one aspect of performance at the expense of others. IRS’s only performance measure for the Innocent Spouse Program focuses on business results—that is, the number of cases closed. Because IRS is collecting information relevant to other dimensions of its performance, such as timeliness and case quality, developing performance measures and target levels for performance should not be burdensome for this relatively small IRS program.
IRS established its Innocent Spouse Program Web site to help educate taxpayers about eligibility requirements for the program. However, more than half of taxpayers’ requests for innocent spouse relief are judged to be ineligible by IRS. Although IRS officials are beginning to formulate plans to evaluate the Web site, unless and until those plans are implemented, the agency would continue to lack a basis for determining whether the Web site could be improved to lessen taxpayers’ confusion about eligibility requirements. If IRS had information on taxpayers’ opinions about its Web site, it would be in a better position to adopt cost-effective strategies for further educating taxpayers and tax practitioners about the program. Better informed taxpayers will likely mean fewer ineligible cases and even further performance enhancements.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the commissioner of internal revenue   establish balanced performance measures and targets for the Innocent   evaluate the Innocent Spouse Program Web site’s usefulness to taxpayers.
section_title: Agency Comments and Our Evaluation.
paragraphs: On April 18, 2002, we received written comments on a draft of this report from the commissioner of internal revenue (see app. VII). The commissioner concurred with our recommendations and stated that our report acknowledges the significant efforts taken by IRS to control the Innocent Spouse Program’s workload.
The commissioner also said that our methodology for determining the average time from receipt of a case to a notification decision on cases closed over a yearlong period is disproportionately drawn from older cases in IRS’s inventory. He enclosed a table showing, alternatively, the average time that cases received in a fiscal year have taken IRS to process. Although the commissioner’s alternative calculation provides a useful perspective, we chose to reflect the average time that the taxpayers whom IRS notified of a decision during a fiscal year had to wait for that decision. Our methodology accurately reflects that average wait time.
As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its issue date. We will then send copies of the report to the commissioner of internal revenue and other interested parties. We will make copies available to others who request them.
If you have any questions or would like additional information, please call me or Charlie Daniel at (202) 512-9110. Key contributors to this report are Michael S. Arbogast, Helen Branch, and John Gates.
section_title: Appendix I: Few Innocent Spouse Cases Litigated in Federal Courts
paragraphs: Data obtained from IRS show that 73 innocent spouse cases were litigated in court from June 1996 through June 2001. These tried cases were from a large universe of innocent spouse cases; more than 130,000 cases were decided between July 1998 and September 2001. Most cases were tried in the U.S. Tax Court, and federal courts generally upheld IRS’s determinations.
According to officials at the U.S. Department of the Treasury’s (Treasury) Office of Chief Counsel, cases are sent to the courts for three primary reasons—disagreements between the parties over the actual facts of the case, over the interpretation of the law, and over the application of the law to the facts of the case—or some combination of these reasons. The officials also stated that courts weigh their decisions about cases by considering these reasons and other factors. Given this fact and the small number of innocent spouse cases that are tried, the officials do not regard the outcome of tried cases as a reliable measure of the quality of IRS’s innocent spouse decisions.
subsections: section_title: Courts Generally Upheld All or Part of IRS’s Determinations
paragraphs: According to IRS data, from June 1996 through June 2001, 73 innocent spouse cases pertaining to issues of relief were litigated in federal courts. Of these, 54, or about 75 percent, were litigated in the U. S. Tax Court, which has primary jurisdiction to review IRS tax cases. In 63 percent of the cases litigated in the Tax Court, the court concurred with IRS’s decision to deny taxpayers relief; in 24 percent of the cases, the court disagreed with IRS’s decision to deny relief. In the remaining 13 percent of the cases, the court granted taxpayers partial relief. The table below shows the number and disposition of cases litigated in the Tax Court from June 1996 through June 2001.
Although the U.S. Tax Court has primary jurisdiction over innocent spouse cases, in some instances an innocent spouse case may be litigated in another federal court. Innocent spouse cases can be contested in federal district courts and the U.S. Court of Federal Claims if the taxpayer has already paid the tax liability and seeks a refund. Innocent spouse issues may also become part of any U.S. bankruptcy proceedings that the taxpayer initiates. In addition, all innocent spouse cases can be appealed to the U.S. Court of Appeals. According to IRS data, no cases were tried in either the U.S. District Courts or the Court of Federal Claims pertaining to issues of innocent spouse relief. However, 8 cases were decided in U.S. Bankruptcy Courts and 11 cases were decided in the U.S. Court of Appeals.
As with cases tried in the Tax Court, for the 19 cases concluded in the other courts between July 1996 and June 2001, the courts usually sustained IRS’s determinations. IRS data show that the courts agreed with IRS’s decision to deny taxpayers’ relief in 11 cases and disagreed with IRS’s denial of relief in 6 cases. In 2 cases, the courts granted the taxpayers partial relief. The following table shows the number and disposition of cases litigated in the federal courts other than Tax Court.
section_title: Appendix II: Innocent Spouse Cases Scheduled for Court That Were Settled by IRS’s Appeals Office and Treasury’s Counsel
paragraphs: According to IRS, most docketed innocent spouse cases are settled before going to trial. IRS’s Office of Appeals (Appeals) and Treasury’s Office of Chief Counsel (Counsel) work with taxpayers to resolve the cases out of court. IRS officials stated that the primary mission of Appeals is to resolve tax controversies, without litigation, on a basis that is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence.
When Appeals or Counsel settles a case, the outcome may reduce the amount of the taxpayer’s liability, absolve the taxpayer of any liability, or leave unchanged the liability as originally determined by IRS. Of the docketed cases that were settled by Appeals or Counsel, 55 percent resulted in Appeals’ absolving the taxpayer of the liability, and 33 percent resulted in Appeals’ reducing the taxpayer’s liability; in 12 percent of the cases, the liability remained unchanged. However, when the liability is reduced or absolved on behalf of the requesting spouse, the spouse not requesting relief would still be liable for the tax liability related to the jointly filed tax return.
The fact that Appeals or Counsel staff changed an examiner’s determination does not necessarily mean that the examiner was incorrect in the application of law or the analysis of the facts in the case. An Appeals officer has the authority to settle a case on the basis of the hazards of litigation. Revenue agents and tax examiners do not have this authority. Even though an examiner may be correct in the application of law and interpretation of the facts, Appeals officers may settle the case because of a concern that IRS might not prevail in court owing to the relative weaknesses and strengths of IRS’s case and the taxpayer’s positions. The table below shows the number and disposition of docketed innocent spouse cases from fiscal year 1999 through May 2001 that were settled before going to trial.
section_title: Appendix III: IRS’s Innocent Spouse Eligibility Requirements
paragraphs: Allocation of liability (Section 6015(c)
Equitable relief in community property states(Section 66(c)
Two years from first collection activity after July 22, 1998Relief is available only for amounts unpaid as of July 22, 1998, and amounts arising after July 22, 1998. Section 6013(e) criteria that are similar but more restrictive than section 6015(b) criteria apply for amounts paid prior to July 22, 1998.
section_title: Appendix IV: Number and Types of Innocent Spouse Cases Not Meeting Eligibility Requirements, March 1999–September 2001
section_title: Appendix V: Average Days for Innocent Spouse Determinations, Fiscal Years 1999– 2001
paragraphs: Appendix V: Average Days for Innocent Spouse Determinations, Fiscal Years 1999– 2001 All determinations Number of cases Average days Cases not meeting eligibility requirements Number of cases Average days Number of cases Average daysNumber of cases Average daysNumber of cases Average daysLegend: FY = fiscal year.
As shown in the table, the average days for IRS to reach a decision on a case differed based on the outcome of the case—ineligible, full relief, partial relief, and denied relief—but regardless of the outcome, the average days have increased yearly from fiscal year 1999 through fiscal year 2001.
section_title: Appendix VI: Summary of Decided Innocent Spouse Cases, Fiscal Years 1999–2001
section_title: Appendix VII: Comments from the Internal Revenue Service