IRS Referral Programs: Opportunities Exist to Strengthen Controls and Increase Coordination across Overlapping Programs
Released: 2016-03-24T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Reports by the public of suspected underreporting of taxes or other tax violations can help IRS detect millions of dollars in taxes that would otherwise go uncollected. Productive referrals can help address the net $385 billion tax gap—the difference between the amount of taxes paid voluntarily on time and the amount owed. IRS received about 87,000 information referrals in fiscal year 2015.

GAO was asked to assess the overall effectiveness of the information referral process. This report (1) describes IRS's process for screening and routing information referrals; (2) assesses the controls for the information referral screening and routing process; and (3) evaluates the coordination between the information referral process, the Whistleblower Office, and other IRS referral programs. GAO reviewed IRS guidance, processes, and controls for the information referral process, assessed whether IRS's processes followed Standards for Internal Control in the Federal Government , and interviewed IRS officials.

section_title: What GAO Found
paragraphs: Information referrals from the public alleging tax noncompliance must be submitted on paper forms by mail to the Internal Revenue Service (IRS). These referrals are manually screened by clerical staff and routed by mail to units across IRS for further action, as shown in the figure.

Ineffective internal controls undercut IRS management of the information referral process. IRS does not have an organizational structure for information referrals with clear leadership for defining objectives and outcomes for measuring cost-effectiveness and results. Without clear leadership, IRS does not know how effectively it is leveraging information referrals to address the tax gap. IRS has incomplete documentation of procedures for the information referral process, increasing the risk of delays and added costs in routing the information for further action. Although one-quarter of the information referrals in fiscal year 2015 were sent for destruction after screening, IRS has not documented procedures for supervisory review of those referrals prior to destruction. Without procedures to address these control deficiencies, IRS is compromised in its ability to know how effectively it is leveraging tax noncompliance information reported by the public.

Fragmentation and overlap across IRS's general information referral process and eight specialized referral programs, such as for reporting identity theft and misconduct by return preparers, can confuse the public trying to report tax noncompliance to IRS. Yet coordination between referral programs is limited, and IRS does not have a mechanism for sharing information on crosscutting issues and collaborating to improve the efficiency of operations across the mix of referral programs. As a result, IRS may be missing opportunities to leverage resources and reduce the burden on the public trying to report possible noncompliance.

section_title: What GAO Recommends
paragraphs: GAO recommends, among other things, that IRS establish an organizational structure that identifies responsibility for defining objectives and for measuring results for information referrals; document procedures for the information referral process; and establish a coordination mechanism across IRS referral programs. IRS agreed with GAO's recommendations.

section_title: Letter
paragraphs: One of the ways the Internal Revenue Service (IRS) promotes voluntary  compliance is by collecting revenue from noncompliant taxpayers—giving  honest taxpayers confidence that others are paying their fair share. To do  so, IRS leverages external resources to identify tax revenue that would  otherwise go uncollected: these external resources include referrals from  the public that provide information about suspected tax noncompliance by  individuals and businesses, as well as by government and tax-exempt  entities. Proceeds from productive referrals can help reduce the tax   gap—the estimated difference between the taxes paid voluntarily on time  and what taxpayers actually owe. IRS estimated that for tax year 2006,  the $450 billion gross tax gap included $376 billion in underreporting on  tax returns, $46 billion due in delinquent tax debt, and $28 billion due in  unfiled tax returns. IRS estimates that it will eventually recover about   14 percent ($65 billion) of the gross tax gap through late payments and  enforcement actions, including collection.

Individuals can report alleged tax noncompliance by individuals and  businesses to IRS using IRS’s Information Referral (Form 3949-A), which  covers underreporting of income, false claims of tax benefits, failure to file  a return, and failure to withhold and pay taxes. Individuals submitting an  information referral can report alleged tax noncompliance anonymously.  Those seeking a financial award instead are to file their claims using  Form 211 with the IRS Whistleblower Office. IRS also has other  specialized referral programs handling identity theft, misconduct by tax  return preparers, or wrongdoing by tax-exempt organizations.

During fiscal year 2015, IRS had over 1 million visits to its tax fraud  reporting web page which identifies several IRS referral forms available to  report alleged tax noncompliance. IRS received over 87,000 information  referrals. IRS faces the challenge of screening the volume of these  information referrals—which cover a range of tax issues—and of  identifying those with the greatest potential to help IRS collect tax  revenue that would otherwise go uncollected. Resource limitations and  interest in minimizing taxpayer burden result in IRS auditing a small  fraction of the total number of tax returns filed for a given tax year.  Targeting audits to noncompliant returns reduces the burden on  compliant taxpayers.

The Treasury Inspector General for Tax Administration (TIGTA) has  previously reported on limitations with IRS handling of information  referrals. In September 2012, TIGTA found the instructions for Form  3949-A were confusing and submission of incomplete referrals was not  useful for IRS follow-up. About 3,000 identify theft reports incorrectly  submitted on the information referral form were destroyed by IRS due to a  lack of procedures on how to process these claims. In February 2013,  TIGTA found that IRS units did not have routine processes to screen  referrals for audit follow-up. In response, IRS took steps to revise the  information referral form and its instructions and set up an agency-wide  coordination team to develop information referral screening guidelines.

You asked us to assess the overall effectiveness of IRS’s information  referral process. This report (1) describes IRS’s process for screening  and routing information referrals and for prioritizing information referrals  within the IRS audit workload; (2) assesses the controls for the  information referral screening and routing process; and (3) evaluates the  coordination between the information referral process, the Whistleblower  Office, and other IRS referral programs.

For the first objective, we reviewed IRS documents describing the  information referral screening and routing process, including the Internal  Revenue Manual (IRM) and Form 3949-A Screening and Routing  Guidelines (the guidelines). We interviewed IRS officials responsible for  maintaining the guidelines and those overseeing the screening and  routing process and in March 2015 we observed the information referral  screening process in Fresno, California. We analyzed data on the volume  of information referrals received and routed to operating divisions for  fiscal years 2012 through 2015. Based on our testing of the data and  review of documentation and interviews, we identified several  discrepancies in the information referral inventory reporting (described  later in this report) but determined that the data were reliable for the  purposes of this report. We reviewed IRS policy and procedure  documents that describe the processes for screening, classifying,  prioritizing, and selecting Form 3949-A for audit. We also interviewed IRS  audit officials responsible for these processes in the Wage and  Investment (W&I) and Small Business/Self-Employed (SB/SE) divisions  because they receive about two-thirds of the referrals sent for review, and  in the Criminal Investigation (CI) division, which receives referrals  involving possible large dollar value or broader schemes. In addition, we  analyzed data from the Audit Information Management System on referral  audits closed in fiscal years 2012 through 2015 and the recommended  tax assessments. Based on our testing of the data and review of  documentation and interviews, we determined that these data were  reliable for the purposes of this report.

For the second objective, we reviewed the existing internal controls for  the information referral screening process and assessed whether the  procedures adhered to relevant Standards for Internal Control in the  Federal Government. To assess how IRS implements its procedures and  controls, we used the guidelines and other procedure documents as  criteria. We also reviewed inventory data including data on misrouted  referrals returned by other IRS units for fiscal years 2012 through 2015,  and we interviewed IRS officials on misrouted referrals. Based on our  review of the data and interviews, we determined that the misroute data  were not reliable for the purposes of this report because the total number  of misroutes is unknown as not all misrouted referrals are properly  identified and recorded. In addition, we reviewed a nongeneralizable  sample of 38 referrals—selected using a systematic sample from among  the 5,935 referrals retained for destruction from January through March  2015—to check whether IRS followed its procedures. We also reviewed  12 referrals related to child identity theft out of 155 referrals that were  retained for destruction in March 2015—to follow-up on information  obtained during the site visit regarding Image Control Team (ICT) clerical  staff screening of referrals alleging child identity theft. Finally, we  interviewed IRS officials about the processes and controls for the  guidelines and screening process and to discuss any potential  deficiencies we identified.

For the third objective, we reviewed referral programs with specialized  forms for reporting identity theft, fraud by tax return preparers, abusive tax  promotions, and misconduct by tax-exempt organizations. We analyzed  and compared IRS forms used in the referral programs to identify  common information items as well as information specific to each  program. We also drew on information and analysis from our October  2015 report on the IRS Whistleblower Office. We reviewed the IRM and  other IRS guidance and interviewed IRS officials for each referral  program to determine how the other referral programs receive and screen  their referrals. We assessed coordination among IRS’s programs using  the relevant Standards for Internal Control in the Federal Government  and our prior work on interagency collaboration that identifies key  practices and considerations for implementing collaborative  mechanisms. We also drew on our April 2015 guide on fragmentation,  overlap, and duplication.

We conducted this performance audit from December 2014 to February  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. For more detailed  information on our scope and methodology, see appendix I.
subsections: section_title: Background
subsections: section_title: Overview of IRS Referrals for Tax Noncompliance
paragraphs: In order to collect tax revenue that would otherwise go uncollected and  resolve threats to the integrity and fairness of the tax system, IRS  encourages the public to report possible federal tax noncompliance and  fraud. IRS has a web page to help the public find resources for reporting  both general and specific types of federal tax noncompliance. IRS’s  information referral process is for reporting general types of tax  noncompliance, including failure to file a tax return, report income, or pay  taxes owed. IRS has other specialized processes for reporting specific  types of tax noncompliance, such as identity theft and misconduct by a  tax return preparer.

In fiscal year 2015, IRS received over 87,000 information referrals, as  shown in figure 1. During fiscal years 2013 and 2014, IRS revised the  information referral instructions for the public to help clarify the other  specific forms to use to report directly to IRS’s specialized referral  programs, which IRS officials said has contributed to the reduced volume  in information referrals.

section_title: Paper Information Referrals Mailed to IRS
paragraphs: The public reports general tax noncompliance—by individuals,  businesses, or both—by submitting Form 3949-A. The form provides  checkboxes for identifying 16 types of noncompliance (including activities  such as organized crime, narcotics income, and false/altered documents)  and requests the dollar amounts and years of unreported income, among  other things (see figure 2). The form instructions, which are reproduced in  appendix II, explain the different checkboxes for reporting tax  noncompliance.

In completing the information referral form, a person is asked to provide  as much information as possible identifying the name, address, and tax  identification number of the taxpayer reported. Providing partial  information does not mean IRS will reject the information outright, but  insufficient identifying information may preclude IRS from making use of a  referral. The person submitting an information referral is also asked to  provide personal identifying information but may submit anonymously.  Persons submitting an information referral are not entitled to any reward if  the information is used and results in additional tax being collected.  Once the form is completed, the person mails it to the IRS submission  processing center in Fresno, California, where the form enters the  information referral process.

section_title: IRS Roles and Responsibilities for Processing Information Referrals
paragraphs: As summarized in table 1, multiple units across IRS play important roles  in processing information referrals submitted by the public:

The Image Control Team (ICT), within the submission processing  center in Fresno, California, receives and initially screens paper  information referrals received by mail for routing to other IRS units for  further action. Like other ICT clerical units, the Fresno ICT is also  responsible for processing, distributing, and managing other time- sensitive taxpayer correspondence.

Submission Processing management assigns Fresno ICT staff for  information referral screening as resources are available.

Accounts Management maintains the guidelines and facilitates  coordination between Submission Processing, Fresno ICT, and the  various IRS units, such as SB/SE and W&I, which receive information  referrals for follow-up.

Tiger Team—established in October 2012 by IRS with membership  composed of representatives from Accounts Management,  Submission Processing, and IRS audit and investigation operating  divisions—is responsible for developing the guidelines for screening  and routing information referrals for further action. The Tiger Team  meets bimonthly to discuss the guidelines, provide feedback on  information referrals misrouted to other IRS units, and receive  updates on the number of information referrals received and screened  and routed by Fresno ICT. In addition, the Tiger Team receives  questions from Fresno ICT regarding how the information referrals  should be handled when new situations arise.

Following initial processing, IRS operating divisions screen information  referrals for audit and investigation potential. The W&I division handles  referrals about individual income taxpayers. The SB/SE division handles  referrals about small businesses and business income for individual  taxpayers. The Large Business and International division handles  referrals about large corporations and partnerships as well as  international income tax issues. The Tax Exempt and Government  Entities (TE/GE) division receives referrals about tax-exempt  organizations, employee retirement plans, and government entities. The  Criminal Investigation (CI) division receives referrals about schemes and  transactions involving larger dollars or numbers of taxpayers.

section_title: Information Referral Screening Is a Manual Process, and Operating Division Priorities Determine Audit Selection
paragraphs: The information referral screening and routing process involves multiple  steps, as shown in figure 3. The process begins when a person mails a  paper information referral reporting alleged tax noncompliance to IRS in  Fresno, California. The process ends with the information referral being  retained for destruction or routed by mail to an operating division or other  IRS unit for additional review to determine if the alleged wrongdoer may  owe taxes or face other enforcement actions.

Intake. Information referrals alleging tax noncompliance are initially  received in the Submission Processing, Receipt and Control unit  (mailroom) of the IRS Fresno campus: mailroom staff date stamp the  forms and route them to ICT. Upon receipt in ICT, the information  referrals are date stamped a second time and batched in bundles of 25 or  less. The inventory of information referrals is stored on a wall of  bookcases until Fresno ICT clerical staff are available to screen them.

Initial screening. Once assigned to review information referrals, Fresno  ICT clerical staff screen the information referral text describing the alleged  violation (shown in figure 2). To do this, staff look for key words that  signal possible tax law noncompliance as specified in the guidelines. For  example, if an information referral alleges unreported income, staff look  for the “unreported income” checkbox or key words, such as paid by  cash, off the books, or under the table. A referral may allege multiple  types of tax noncompliance, and determining the appropriate IRS unit to  receive the referral for further action can be subjective.

Taxpayer identification research. After initial screening for the tax  issues, Fresno ICT clerical staff must determine if the information referral  includes a tax identification number (TIN) that identifies the alleged  wrongdoer. If a TIN is not included, staff use the IRS integrated data  retrieval system (IDRS) to locate the Social Security number for an  individual or the employer identification number for a business. For  alleged issues with Form 1040 individual tax returns, such as itemized  deductions or refundable credits, Fresno ICT clerical staff use IDRS to  determine whether the taxpayer is overseen by W&I or SB/SE. After  doing the appropriate screening and research, the Fresno ICT employee  who performed the work is required to enter his or her identification  number on the top left hand corner of the paper information referral.

Routing. Upon completion of TIN research, Fresno ICT clerical staff use  the guidelines to route information referrals to IRS divisions or other units  or to retain them for destruction. After determining the appropriate routing,  clerical staff manually sort the paper referrals into 31 boxes—each  labeled with key words drawn from the guidelines and the name of the  corresponding IRS unit. For example, the box for routing business tax  issues to SB/SE audit lists key words for unreported business income,  such as “company or corporation,” “rental property,” and “self-employed.”  For alleged issues with Form 1040 individual tax returns, such as  itemized deductions or refundable credits, Fresno ICT clerical staff sort  the information referrals into separate boxes for W&I and SB/SE routing  based on the IDRS tax identification research. On an intermittent basis (or  when a box is full), Fresno ICT lead staff count the number of information  referrals in a box, attach a Form 3210 Document Transmittal, and route  the referrals by mail to the designated operating division or other IRS unit  for further review. Fresno ICT routes information referrals to 26 different  locations across about 15 other IRS operating divisions and units. SB/SE  and W&I audit divisions are the most common recipients of information  referrals from the Fresno ICT, as shown in figure 4. From fiscal years  2012 through 2015, SB/SE received over 170,000 information referrals  and W&I received over 100,000—about two-thirds of all information  referrals routed for further review.

Retention. Referrals that cannot be routed as instructed by the guidelines  are retained for destruction for 90 days. These may include information  referrals that do not allege a federal tax issue or do not have key words  specified in the guidelines. For example, the referral may allege that the  taxpayer owes paid child support, has unpaid state taxes, or is improperly  receiving benefits from another federal program. Those retained may also  include referrals without the name, address, or TIN where the clerical staff  cannot identify the alleged taxpayer. IRS officials told us that some  referrals have only vague insinuations of wrongdoing and that a small  number of individuals repeatedly submit multiple claims of this type. For  example, a few individuals send in bulk referrals with similar allegations  about businesses in certain industries or geographic areas. Since fiscal  year 2012, the share of referrals sent for destruction has increased, with  25 percent of referrals retained for destruction in fiscal years 2014 and  2015. Once sent to retention, information referrals are boxed and sealed  for storage for 90 days. These referrals are not subject to further  screening or analysis prior to destruction.
subsections: section_title: Operating Division Priorities Influence Audit Selection Decisions
paragraphs: After information referrals are routed to the appropriate IRS audit unit,  staff within that unit determine if there is a tax noncompliance issue and  whether it is worth pursuing in light of available resources and priorities.  The first step is classification, which is a process of determining whether  a return should be selected for audit and what issues should be audited.  The next steps are prioritization and actual return selection. For paper  information referrals, these steps are generally a manual process.
subsections: section_title: Classification
paragraphs: To classify information referrals, operating units and divisions (such as  W&I and SB/SE) review the content of the information referral to  determine whether the referral has audit potential—returns for which an  audit is most likely to find errors and recommend changes to the reported  tax. Factors to be considered at this stage include a clear and reliable  issue, strong supporting documentation by the person submitting the  information referral, attainment of certain IRS-defined criteria or  tolerances (such as dollar thresholds), inclusion of a significant dollar  amount in the allegation, and criminal or significant civil tax potential. If  the referral does not have audit potential, it is held for the retention period  and then destroyed.

section_title: Prioritization
paragraphs: After classifying those information referrals with audit potential, IRS  determines each referral’s priority. The prioritization process varies  among IRS operating divisions. W&I and SB/SE both perform  correspondence audits—in which a letter is sent to taxpayers asking them  to provide information about an item on their tax return. SB/SE also  performs field audits—which include face-to-face audits with taxpayers to  review their books and records.

To prioritize its audits, W&I uses a work plan to determine how many  Earned Income Tax Credit (EITC) information referrals to audit each  month for its correspondence audits. According to W&I officials, the  planned number of referral audits by month is an estimate, and  sometimes other non-referral cases may receive higher priority over  referrals for audit. If W&I performs fewer referral-related audits than  estimated in one month, it will plan to perform more in the following  month.

SB/SE prioritizes returns for examination based on the merit of the tax  issue, not on the source of the information. SB/SE also uses a work  plan for its correspondence audits, but does not have targets for numbers  of information referral cases to audit. According to SB/SE officials,  whether a referral is included in a correspondence audit is dependent on  the current inventory level. In contrast, SB/SE field audit uses a project  code list to prioritize audits by project issues, such as tax return  preparers, offshore transactions, abusive transactions, fraud, and  information referrals. According to SB/SE officials, other projects may be  a higher priority than information referrals in general, and a referral that  involves higher priority issues would be considered higher priority as well.  For example, an information referral involving offshore transactions would  receive a higher priority than a routine information referral.

According to CI officials, CI conducts a general review of all referrals  (regardless of the source) in order to evaluate the facts and allegations  and to determine if there is a potential criminal lead that warrants an  investigation. CI priorities are those referrals that involve high-risk tax  noncompliance or financial crimes.

section_title: Selection
paragraphs: Taxpayers are selected for audit based on the amount of audit potential,  how they fit into the audit plan, the resources available, and the size of  the inventory. According to IRS officials, there are many reasons why  information referrals may not be selected for audit. For example, if a  referral contains erroneous information (such as a tax return that was  incorrectly claimed to be unfiled) it may not be selected. In addition, a  referral may not lead to a new audit case if IRS has already identified that  return through another selection mechanism.

section_title: The Small Share of Information Referrals Audited Resulted in Millions in Additional Tax Assessments Recommended
paragraphs: In fiscal years 2012 through 2015, about 4.6 percent of information  referrals routed to SB/SE and W&I led to audits. Specifically, about 5.4  percent of information referrals routed to SB/SE and about 3.4 percent  routed to W&I led to audits over that period. As shown in tables 2 and 3,  approximately 13,000 audits selected based on information referrals  resulted in over $209 million in additional tax assessments  recommended.

section_title: Ineffective Internal Controls Undercut IRS’s Ability to Sufficiently Manage Information Referrals
paragraphs: Internal control standards can serve as tools to help IRS management  ensure that the information referral process contributes to IRS’s mission  of treating all taxpayers equitably and with integrity. However, when we  compared IRS’s process to these standards, we found that some controls  were deficient in their design and implementation. Specifically, we found  limitations in oversight structure, documentation of procedures, and  monitoring results. These control deficiencies increase the risk that  handling of information referrals could fall short of the IRS mission,  resulting in inconsistent and inequitable treatment of noncompliance  leads submitted by the public.
subsections: section_title: IRS Organizational Structure for Information Referrals Is Fragmented without Clear Leadership for Defining Objectives and Measuring Results
paragraphs: According to federal internal control standards, an agency’s  organizational structure provides management’s framework for planning,  directing, and controlling operations to achieve agency objectives. A good  internal control environment requires that the agency’s organizational  structure clearly defines key areas of authority and responsibility and  establishes appropriate lines of reporting. IRS does not have an  organizational structure for the information referral process with clear  leadership responsible for defining objectives in measureable terms to  ensure that the objectives of the information referral process aligns with  IRS’s mission of fair and equitable application of the tax laws and  addressing the tax gap. For example, within the current structure,  Accounts Management and the Fresno ICT have separate responsibilities  focused on routing information referrals to other IRS units, but Accounts  Management and the Fresno ICT are not responsible for determining the  outcomes of the information referrals. Also, the Tiger Team is not tasked  with tracking how many referrals undergo follow-up and results achieved,  such as detecting noncompliant taxpayers and potential revenue that  would otherwise go uncollected.

In an effort to determine measureable outcomes for the information  referral process, in 2013 TIGTA recommended that W&I assess the value  of the information referral process to reassess the emphasis placed on  that process, and prioritize it as needed. IRS had agreed to assess the  value of the process after implementing other changes TIGTA  recommended in a prior report which included revising the form and its  instructions and developing guidelines for screening and routing  referrals. As of December 2015, IRS had not taken action on this  recommendation. In November 2015, W&I leadership explained that it  would not be cost-effective for Accounts Management and Fresno ICT to  track the information referrals and determine outcomes achieved by the  various divisions and other units that receive the forms when ICT is only  processing the forms. According to IRS officials, Fresno ICT clerical staff  spent over 4,900 hours on information referral screening in fiscal year  2015, but those hours do not reflect Submission Processing and  Accounts Management time for the coordination activities and maintaining  the guidelines. Although IRS has not assessed the value of the  information referral process, according to IRS’s Audit Information  Management System data, audits based on information referrals resulted  in at least $62 million in recommended tax assessments for fiscal year  2014 (the most recent complete year available).

W&I and SB/SE received nearly two-thirds of information referrals routed  out of Fresno but W&I and SB/SE do not track their costs for screening  and classifying paper information referrals for audit consideration. The  IRS realignment of compliance operations has led to additional  processing steps within the W&I and SB/SE units that process information  referrals. In November 2014, IRS realigned compliance operations across  its W&I and SB/SE operating divisions. As a result of this realignment, all  EITC and pre-refund compliance programs are now carried out by W&I,  and all other discretionary programs moved to SB/SE. At the end of fiscal  year 2015, the guidelines still directed Fresno ICT to send information  referrals involving individual taxpayers without business or self-employed  income to W&I and all referrals for individual taxpayers with business  income to SB/SE. According to IRS audit officials, W&I and SB/SE are  taking an additional step to physically exchange information referrals  routed from Fresno between their correspondence audit units in Andover,  Massachusetts. As of December 2015, W&I was routing information  referrals other than those for the EITC to SB/SE, and SB/SE was routing  all EITC referrals to W&I. According to IRS officials, W&I and SB/SE  have agreed to conduct a test to track receipts of EITC and non-EITC  information referrals and to discuss the results in early 2016 to determine  the next steps for the routing of the information referrals.

The fragmented structure of oversight and management of the  information referral screening process coupled with dispersed  responsibility for follow-up activities throughout IRS also complicates  determining how much IRS spends in total on screening paper  information referrals and mailing the paper forms back and forth between  IRS locations. Without clear leadership and responsibility for defining  program objectives and measuring outcomes resulting from information  referrals about tax noncompliance by individuals and businesses, IRS  does not know the costs of the information referral process or how  effectively that process is contributing to the agency’s mission and  addressing the tax gap.

section_title: IRS Has Not Documented and Consistently Implemented Procedures Controlling the Information Referral Screening and Routing Process
paragraphs: Federal internal control standards call for all transactions and other  significant events to be clearly documented and available for examination.  The documentation should appear in management directives,  administrative policies, or operating manuals and may be in paper or  electronic form. All documentation and records should be properly  managed and maintained. IRS requires primary sources of guidance and  procedures with an IRS-wide or organizational impact to be included in  the IRM. This requirement is intended to ensure that IRS employees  have the approved policy and guidance they need to carry out their  responsibilities in administering the tax laws. However, we found gaps in  documentation of procedures for ICT clerical screening and routing of  information referrals as well as for updating and distribution of screening  and routing guidelines.

IRS has incomplete documentation of procedures for screening and  routing information referrals to other IRS units for further action. Since  2012, IRS has developed written screening and routing guidelines  documenting which tax issues to mail to specific points of contact in other  IRS units. Accounts Management distributes these guidelines via the  Servicewide Electronic Research Program, which provides employees  with access to current IRMs, interim procedural guidance, and reference  materials. In November 2015 Submission Processing issued IRM  procedures for ICT clerical operations effective January 1, 2016.  However, the revised IRM does not have procedures for the Fresno ICT  clerical screening and routing of information referrals. Specifically, the  Fresno ICT does not have documented procedures to ensure that labels  used by the clerical staff in sorting screened referrals into the various  boxes for routing are consistent with the guidelines developed by the  Tiger Team. The Fresno ICT staff developed the box labels as an onsite  job aid, and the Fresno ICT managers incorporated the box numbering  job aid in training for the 2015 filing season temporary clerical staff.

However, discrepancies between the key words on the box labels and the  guidelines have resulted in misrouting. For example, we observed that  labels indicated to route referrals alleging unreported retirement and tax- exempt bond income to the TE/GE division. However, the guidelines  direct routing individual income misreporting allegations to the W&I and  SB/SE divisions. TE/GE officials confirmed that the ICT incorrectly routes  referrals about individuals misreporting income to their unit. They also  said that the number of misroutes had decreased as misroutes were  discussed at Tiger Team meetings and Fresno ICT clerks received  additional training on screening referrals.

The revised IRM lists the Form 3949-A screening and routing guidelines  as a document but does not have procedures for the Fresno ICT  regarding (1) applying the guidelines, (2) inventory management  reporting,(3) monitoring referrals retained for destruction, and (4)  feedback on the misrouted referrals. In contrast, IRM procedures for the  correspondence scanning performed by ICT clerical staff detail steps on  removing staples from paper to be scanned and the daily tasks for  cleaning the scanners. The lack of documented procedures clearly  linking the guidelines to the physical logistics of clerical routing of paper  forms increases the risk that the guidelines will not be implemented  consistently.

We also found deficiencies in maintaining and communicating the  guidelines to the clerical staff. According to an Accounts Management  official, in the fall of 2014, the Accounts Management unit inadvertently  distributed an outdated copy of the guidelines that did not incorporate  clarifications added to aid the Fresno ICT staff with clerical screening of  information referrals involving child identify theft (discussed further  below). According to Accounts Management officials, they are working to  ensure that updated guidelines are communicated in a timely basis to the  clerical staff. At the June 2015 coordination meeting, the Fresno ICT  managers said that they were not aware that the Accounts Management  unit had distributed updated guidelines on the Servicewide Electronic  Research Program. As a result, the Fresno ICT managers did not  distribute copies of the latest guidance for the clerical staff to follow.  According to IRS officials in September 2015, the Accounts Management  unit began to electronically distribute updated guidelines each month and  to alert the Fresno ICT managers by email so they can print paper  guidelines for the clerical staff. However, we noted that the revised IRM  for ICT operations does not have procedures for this communication  practice. In December 2015, when we discussed this with IRS officials,  they agreed that the IRM should document the guidelines and procedures  for the Fresno ICT clerical staff for screening and routing information  referrals.

In addition, inadequate controls over maintaining and communicating the  routing guidelines coupled with incomplete procedures linking the routing  guidelines to the routing boxes have contributed to clerical confusion and  errors that resulted in IRS erroneously destroying information referrals  from taxpayers reporting child identity theft. In March 2015, the ICT  clerical staff we observed in Fresno said that they were uncertain how to  route such referrals. The clerical staff we interviewed said that the label  on the identity theft routing box originally specified child identity theft as  key words for screening and routing, but those key words were omitted at  some point in updating the box label. Although the routing guidelines for  screening and routing identity theft referrals approved by the Tiger Team  had not changed, some clerical staff stopped routing child identity theft  referrals and instead retained those for destruction. We were not able to  quantify how many information referrals reporting child identify theft may  have been erroneously destroyed between the fall of 2014 and March  2015.

During our audit visit, we reviewed the most recent box of 155 information  referrals retained for destruction and identified 12 information referrals  reporting potential child identity theft or misuse of a child’s tax  identification number where the parent or custodian did not know who  was using the child’s identity. During a meeting with Fresno ICT  managers regarding the 12 information referrals, the ICT managers said  that they determined that 4 of the 12 referrals were correctly retained for  destruction because the individual submitting the referral did not specify  another tax issue and did not know who used the child’s identity. Seven of  the 12 referrals should not have been retained for destruction and were  subsequently routed by the Fresno ICT as stolen refund cases, and one  of the 12 referrals alleging identity theft by a tax return preparer was  routed to the Return Preparer referral program. During the June 2015  coordination meeting that we observed, Accounts Management officials  orally directed the Fresno ICT managers to instruct the clerical staff to  route referrals about child identity theft. The Fresno ICT managers  instead requested that Accounts Management and Tiger Team clarify the  guidelines for child identity theft reports to avoid further confusion. In  August 2015, the clarification was added to the routing guidelines.

Inadequate controls over the guidelines without clearly documented  clerical review procedures pose the risk that clerical staff may apply  outdated or inaccurate routing guidelines. Misrouting the information  referrals causes delays and added cost for IRS in getting referrals to the  appropriate unit for follow-up. Information referrals inappropriately  retained for destruction may compromise IRS’s ability to combat tax  noncompliance reported by the public and to assist identity theft victims.

section_title: IRS Lacks Supervisory Review and Segregation of Duties for Preparing Information Referral Inventory Reports
paragraphs: According to federal internal control standards, effective management of  an organization’s workforce—its human capital—is essential to achieving  results. Qualified and continuous supervision should be provided to  ensure that internal control objectives are met. Internal control standards  also require key duties and responsibilities to be divided or segregated  among different people to reduce the risk of error or fraud. This should  include separating the responsibilities for authorizing transactions,  processing and recording them, reviewing the transactions, and handling  related assets. No one individual should control all key aspects of a  transaction or event.

According to Fresno ICT management, due to limited experienced staff  for the information referral process, management relies on one lead clerk  to keep track of the information referral inventory. That Fresno ICT lead  clerk is responsible for several key inventory reporting duties which  include documenting the number of referrals received, counting and  mailing those routed to other IRS units, and compiling the weekly  inventory reports. The weekly inventory reports compiled by the Fresno  ICT are used by Submission Processing, Accounts Management, and  other IRS units participating in the Tiger Team to track the volume of  information referrals received, referrals waiting in inventory, and volumes  routed to other units. Inventory information is used by the Fresno ICT  management in assigning clerical staff The Fresno ICT has not trained  additional lead clerks to compile the inventory reports. Given the  fragmented organizational structure and shared use of the weekly report,  it is unclear whether the Accounts Management unit or the Fresno ICT is  responsible for documenting procedures on how to prepare the inventory  reports.

In addition, IRS officials explained that due to time constraints and other  priorities in the Fresno ICT, information referral inventory reports are not  reviewed by a supervisor before relaying the weekly report to Accounts  Management. During our visit, we tested several weekly reports to the  transmittal forms that document the number of information referrals that  are routed to other units. Developing the reports involves several  calculations to document the number of information referrals received and  routed to each of the other operating units. We identified errors in tallying  the counts of referrals retained, recording the number of referrals sent to  each IRS unit, and calculating the total number routed. The lack of  supervisory review and segregation of duties in preparing information  referral inventory reports can lead to errors in developing these reports  which are used by other IRS operating units.

section_title: Information Referrals Retained for Destruction Are Not Subject to Ongoing Monitoring
paragraphs: According to federal internal control standards, ongoing monitoring should  occur in the course of normal operations. It is performed continually and  is ingrained in the agency’s operations. It includes regular management  and supervisory activities, comparisons, reconciliations, and other actions  people take in performing their duties.

We found that IRS does not have documented procedures for supervisory  review for screening referrals retained for destruction, although one- quarter of information referrals received in fiscal years 2014 and 2015  were destroyed rather than routed for follow-up. The ICT quality review  staff are to sample all ICT work streams, but we could not determine  which, if any, retained referrals had been reviewed under that process.  According to the Fresno ICT managers and lead clerical staff, the lead  clerk is to conduct a limited visual review of the referrals retained for  destruction before sealing and dating each storage box, but we found no  documentation of such reviews. Also, IRS does not track common  reasons as to why referrals are not routed for follow-up.

Information referrals inappropriately retained for destruction may  compromise IRS’s ability to combat tax noncompliance reported by the  public and to assist identity theft victims. According to the Fresno ICT  manager, prior to our March 2015 site visit, the Fresno ICT conducted an  ad hoc quality review of referrals retained for destruction and had trained  all clerical staff on the routing guidelines. According to the Fresno ICT  manager, the clerical staff who do not screen information referrals  regularly—such as temporary seasonal staff during the tax filing   season—are less familiar with the guidelines and are more likely to  incorrectly retain referrals for destruction. In response to the ad hoc  review by Fresno ICT, the ICT removed and routed for follow-up several  hundred referrals that otherwise would have been destroyed.

During our March 2015 visit to the IRS ICT office in Fresno, California, we  reviewed a nongeneralizable sample of 38 information referrals (screened  during early January 2015 through mid-March 2015) retained for  destruction. Even though IRS had conducted an ad hoc quality review of  referrals retained for destruction prior to our visit, we questioned IRS  officials about 10 of the 38 retained referrals we reviewed. These 10  referrals lacked documentation of clerical screening and tax identification  number research or did not appear to follow the routing guidelines. IRS  managers subsequently determined 4 of the 10 should not have been  retained for destruction. Three referrals were routed to other IRS units  after clerical staff completed TIN research and re-screened. One Spanish  language referral had not been screened and was sorted for screening by  a clerical staff person knowledgeable of Spanish.

The ad hoc review conducted by the Fresno ICT in March 2015 saved  hundreds of referrals from destruction, but without periodic monitoring of  the reasons for referrals being retained, IRS is missing an opportunity to  identify patterns in retention errors. Analysis of referrals retained before  destruction could help identify clerical staff errors that may be addressed  by better documenting procedures. For example, the screening and  routing guidelines do not have a procedure for referrals in languages  other than English. The Fresno ICT has set up two boxes labeled for  Spanish and other languages, respectively. However, clerical staff may  not know to sort other language referrals in those boxes, and lead clerks  may not regularly check those boxes because they are not part of the  weekly routing mail and inventory report. Without procedures for  reviewing information referrals retained for destruction, some referrals  may be inappropriately retained which may compromise IRS’s ability to  combat tax noncompliance reported by the public.

section_title: Misroutes Returned Are Used as a Measure of Routing Quality, but the Extent of Misrouting Is Unknown
paragraphs: Federal internal controls and all transactions and other significant events  need to be clearly documented, and the documentation should be readily  available for examination. The documentation should appear in  management directives, administrative policies, or operating manuals and  may be in paper or electronic form. All documentation and records should  be properly managed and maintained.

Officials from the Accounts Management unit and the Fresno ICT told us  that they rely on misrouted information referrals that are returned by other  IRS units as feedback about the quality of the screening and routing  process. The weekly inventory management and routing report  documents the number of misroutes returned by various IRS units. The  Fresno ICT uses the misrouted referrals to provide feedback to clerical  staff about specific errors and then re-routes the paper referrals by mail to  the appropriate unit for follow-up. IRS units that return misroutes to the  Fresno ICT use an IRS transmittal form to document the return of  misroutes to the ICT. The transmittal form also reports the number of  referrals incorrectly sent to the IRS unit. This feedback process adds  costs of mailing misroutes back and delays in re-routing referrals for  follow-up. For fiscal year 2016 as of December 2015, W&I returned 625  misrouted information referrals by mail to Fresno. According to Accounts  Management and Fresno ICT officials, misrouted referrals involving  business income issues are to be re-routed by mail to SB/SE.

Although Accounts Management and the Fresno ICT rely on misrouted  information referrals as feedback about the quality of the routing process,  the IRM does not contain procedures on handling information referral  misroutes. The total number of misroutes by the Fresno ICT is unknown  as not all misroutes are properly identified and recorded. Information  referral inventory reporting showed nearly 1,400 referrals (approximately  2 percent) were initially misrouted in fiscal year 2015. The Accounts  Management unit and Fresno ICT officials said these data reflect when  operating units return misrouted referrals back to the ICT. However, some  units have not returned information referrals misrouted by the Fresno ICT  and instead forwarded misroutes directly to other units rather than mailing  misroutes back to the ICT for re-routing. According to SB/SE officials, the  SB/SE division previously forwarded misrouted information referrals to  other units but now returns misroutes to the Fresno ICT. TE/GE officials  told us that they forward misrouted information referrals to other units  rather than mailing misroutes back to the ICT for re-routing. The lack of  documented guidance on handling information referral misroutes poses  the risk that IRS may be missing opportunities to identify the number and  types of misroute errors and analyze ways to reduce misrouting.

section_title: Opportunities Exist to Improve Coordination across Fragmented and Overlapping Referral Programs and to Share Efficiency Improvement Practices
subsections: section_title: Fragmented Referral Programs Complicate Tax Noncompliance Reporting and Result in Overlapping Efforts
paragraphs: We found that fragmentation and overlap characterize the IRS system  used for public reporting of tax noncompliance and potential fraud.  Fragmentation can sometimes result in duplication of efforts, and  inefficient use of resources. Multiple and uncoordinated forms and  instructions can confuse the public trying to submit information to IRS.  Such conditions can also create rework for IRS in routing information for  specialized review. Gaps and delays in routing and redirecting information  among referral programs could hamper IRS’s pursuit of some tax  noncompliance and potentially leave taxpayers vulnerable to issues such  as identity theft or abusive transactions. As we have previously reported,  fragmentation and overlap can have potentially positive effects, such as  when programs work together to provide services or when the overlap is  planned so that the public is receiving services in a coordinated manner.

In addition to the general information referral process, we identified eight  other specialized referral programs, as shown in table 4. Several of the  referral programs have their own forms and their own mechanisms for  intake and screening.

Fragmentation and overlap across a mix of IRS external referral programs  and processes create duplication of effort, contribute to inefficient use of  resources, and may be confusing to individuals submitting referrals. We  cannot quantify the extent of duplication when a person submits the same  information to more than one program or submits duplicate information  referrals because IRS has no way to track information across the multiple  referral programs. However we did identify some issues:

The public submits referral information on the wrong form or to  the wrong office. Although IRS revised the information referral  instructions in March 2014 to help clarify how to submit specialized  forms directly to other referral programs (as shown in table 4), Fresno  ICT continues to erroneously receive information referrals that must  be routed to those referral programs and the Whistleblower Office. For  example, Fresno ICT routed more than 2,900 information referrals  related to identity theft and return preparer misconduct in fiscal year  2015. Also, some individuals mistakenly mail information referrals to  the SB/SE Abusive Transactions referral program instead of the  Fresno ICT address specified on the information referral form.

Some individuals submit multiple forms for the same allegation.

IRS officials stated that several programs could receive the same  referral for processing. For example, some whistleblowers submit both  the information referral Form 3949-A and the whistleblower claim  Form 211, either together as a package or separately to both Fresno  ICT and the Whistleblower Office.

Routing between referral programs results in delays and added  costs for re-screening. For specialized referrals submitted as  information referrals, the Fresno ICT first screens and routes the  referrals to other IRS referral programs where the referrals again  undergo intake and screening. Similarly, staff from the SB/SE Abusive  Transactions program must screen and mail the information referrals  to the Fresno ICT for processing. Form 3949-A referrals submitted  directly to the E-file program—discussed further below—are first  screened in IRS scheme detection centers and then mailed to Fresno  ICT for information referral processing.

section_title: Referral Programs May Benefit from Improved Communication and Options to Increase Referral Intake Efficiencies
paragraphs: According to federal internal control standards, management should  ensure there are adequate means of communicating with, and obtaining  information from, external stakeholders that may have significant impact  on achieving goals. Effective information technology management is  critical to achieving useful, reliable, and continuous recording and  communication of information.
subsections: section_title: IRS Lacks Mechanisms for Coordinating and Streamlining Referral Intake Processes
paragraphs: IRS does not have a mechanism to facilitate information sharing across  the multiple referral programs used for handling tax noncompliance and  other issues reported by the public. While Accounts Management uses  the Tiger Team to enable communication and coordination with other IRS  units that receive information referrals, IRS does not consistently draw on  this vehicle in coordinating information referral activity.

For example, we found that officials from one referral program (tax  exempt organizations) attend the Tiger Team meeting. Officials from  other referral programs were not aware of the Tiger Team, met  separately with Accounts Management officials, or did not attend the  Tiger Team meeting. According to an Accounts Management official,  the Tiger Team was established to address misrouted Form 3949-A  information referrals and to respond to inquiries from IRS units that  receive most of the information referrals—specifically, SB/SE and  W&I.

The SB/SE Abusive Tax Transactions program does not receive  information referrals routed from Fresno and thus does not have staff  participate in Tiger Team discussions on information referral routing  guidelines. However, the Abusive Tax Transactions program does  receive information referrals that are mistakenly mailed by the public  to the Abusive Tax Transactions mailing address. According to an  official from the Abusive Tax Schemes programs, they must then  screen and forward the erroneously submitted information referrals to  the IRS Fresno office for appropriate screening and routing. This  referral program had not reached out through the Tiger Team or to  Accounts Management to determine and resolve why the public is  mailing information referrals to their program.

The E-file program does not participate in the Tiger Team or in  discussions on developing the information referral routing guidelines.  However, the E-file program began using Form 3949-A for its own  referral program for reporting fraudulent or abusive tax returns.  Accounts Management officials were not previously aware of this use  of the information referral form until we brought it to their attention.  According to an Accounts Management official, this gap in  coordination on the use of the form could result in some e-file related  information referrals mailed to Fresno being destroyed.

In the past, our work has found that mechanisms or strategies to  coordinate programs that address crosscutting issues may reduce  potentially fragmented, overlapping, and duplicative efforts. Some of the  specialized referral programs with overlapping responsibilities already  have some formal means of coordinating on crosscutting issues and  sharing information on related referrals. For example, the Return Preparer  Office and SB/SE Abusive Transactions regularly coordinate on abusive  transactions involving tax preparers and can access common electronic  information systems to identify overlapping referrals. The Return Preparer  Office also shares information with the Identity Theft Program on identity  theft, a crosscutting issue. For example, identity theft can involve another  IRS unit and a different referral form, such as the Identity Theft Program  and the Return Preparer Office based on the type of identity theft. If the  taxpayer is alleging that they are an actual or potential victim of identity  theft, the specific Identity Theft referral form should be used to report the  allegation. If the taxpayer is alleging a return preparer filed a return or  altered their return without their consent, the Return Preparer Office  referral form should be used to report the allegation. Other referral  programs using specialized forms also have practices that could improve  information referral processing, as shown in table 5.

Improving the referral intake process through improved collaboration and  coordination could benefit both IRS and the public. Specifically,  harmonizing referral forms and instructions to avoid duplicate and  misdirected filings may improve efficiency and help to reduce public  confusion and administrative burden. For example, an IRS mechanism for  coordinating referrals could explore electronic fax (e-fax) as a method to  improve efficiency of referral intake. In fiscal year 2015, IRS received over  87,000 information referrals submitted on Form 3949-A or as letters. As  previously mentioned, IRS only accepts paper information referrals, which  must be mailed to the Fresno office where the Image Control Team  manually sorts and routes the form to other IRS units for further review. In  contrast, five referral programs with forms—Identity Theft, SB/SE Abusive  Transactions, Return Preparer Office, TE/GE Exempt Organizations, and  E-file program—allow the public to submit referrals by fax. In 2013, IRS  briefly explored and rejected the e-fax option for information referrals  because the Image Control Team screening clerks at that time did not  have computers to access fax submissions. Since December 2014,  Fresno Image Control Team clerks have had access to computers to  perform TIN research for information referrals; however, IRS has not  revisited the e-fax option. Although IRS officials stated they do not believe  e-fax for information referrals is feasible due to the large volume received,  other IRS units collaborating across referral programs could provide  lessons learned or suggestions for streamlining the intake process  through e-fax or other options.

Without a broader collaborative mechanism to communicate across its  referral programs and collaborate on practices for receiving and  screening referrals, IRS may be missing opportunities to leverage  resources, streamline intake processes, and address challenges arising  from the fragmented and overlapping referral programs.

section_title: Opportunities to Consolidate Referral Intake
paragraphs: Resolving the inefficiencies of IRS’s paper-based information referral  system poses a unique challenge for management, given resource  constraints, the complexity of current processes, and the need to protect  taxpayer information. We have previously identified a number of  management approaches that may enable IRS to consolidate the referral  intake and screening process and improve efficiency, including  implementing process improvement methods and technology  improvements that improve efficiency, increase product quality, and  decrease costs. Process improvement methods can involve examining  processes and systems to identify and correct costly errors, bottlenecks,  or duplicative processes while maintaining or improving the quality of  outputs. Providing information to policymakers on how to improve  efficiency and reduce and better manage fragmentation, overlap, or  duplication can help alleviate some of the government’s fiscal pressures  and improve program effectiveness.

Another component of improved efficiency involves identifying,  developing, and implementing strategies that streamline the reporting of  tax noncompliance while appealing to the public. According to IRS’s  Strategic Plan for fiscal years 2014 through 2017, the public has a  preference for Internet-based service over other service channels such as  phones, paper, or in-person. IRS says it is committed to expanding its  portfolio of digital service offerings to meet customer expectations while  continuing to keep taxpayer data secure. State tax agencies and other  federal agencies accept fraud referrals via online Internet submission. For  example, among seven of the most populous states, five provided an  online reporting option to report allegations of tax fraud and evasion.  Similarly, the Social Security Administration has an online form for  reporting fraud via its website.

Finally, strengthened collaboration across the nine referral programs  could enable IRS to explore a more systemic online referral submission  process: such an effort could help the agency improve its ability to more  efficiently receive and process information referrals, while also reducing  the public confusion caused by trying to choose among multiple forms.  Currently, IRS’s specialized referral forms to report alleged tax  noncompliance are received within IRS units through different channels  (mail, fax, email). As discussed earlier, the public often uses information  referrals because it is a general form that is used to report different tax  noncompliance; however, we found that information referrals are  misrouted and often retained for destruction. According to a Return  Preparer Office official, the Return Preparer Office is exploring conversion  of its specialized referral form to an online form. However, if the various  referral programs separately explore developing online form submission,  IRS risks replicating or compounding the fragmented mix with multiple  referral forms and means of submission. An IRS official stated that a  universal online referral intake system to control the routing of referrals  would be preferable to separate systems for each referral form.  Streamlining referral submission could be less cumbersome for the public  and could reduce delays and rework in re-routing information to  specialized referral programs. According to IRS officials, more electronic  submissions is a vision for the future but funding is limited. However,  officials stated that committing resources for referral capacity is in the  queue behind direct taxpayer account services. An IRS plan and timeline  for developing a consolidated, online referral submission could assist IRS  in leveraging specialized expertise to further consolidate the referral  intake process.

section_title: Conclusions
paragraphs: Information referrals are a key mechanism for the public to report  potential tax noncompliance and aid IRS in addressing the tax gap. Audits  of individuals and businesses based on information referrals resulted in at  least $62 million in recommended assessments in fiscal year 2014.  However, IRS oversight and management of its information referral  screening process is fragmented across multiple IRS units, with the actual  handling of referral follow-up further dispersed across operating divisions,  multiple referral programs, and other IRS units. Although IRS has  guidelines for screening and routing the information referrals, it does not  have an organizational structure for the Form 3949-A information referral  process that identifies responsibility for defining program objectives and  an appropriate line of reporting for measuring results. Without such a  structure, IRS cannot ensure accountability in the referral process or  determine how effectively it is using resources in this area.

IRS has not consistently documented and implemented procedures for  the information referral process. Procedures are not clearly documented  for the screening and routing guidelines and changes are not consistently  communicated to relevant staff, resulting in referrals being misrouted or  inadvertently destroyed and errors in inventory management. In addition  IRS does not have procedures for monitoring information referrals  retained for destruction or those that are incorrectly routed. Without  adequate internal controls, IRS cannot effectively manage the information  referral process. Documenting and implementing procedures for the  information referral process would help IRS ensure that the process is  implemented consistently.

IRS has a fragmented and overlapping system for the public to report tax  noncompliance, with several units having their own forms and  mechanisms for intake and screening. Multiple referral forms and  instructions may contribute to inefficient use of IRS resources. In addition,  IRS does not have a mechanism for coordinating referral issues across  the multiple programs used for handling tax noncompliance. Without a  coordination mechanism, IRS may be missing opportunities to leverage  resources and address challenges from the multiple referral programs.  Choosing to stay with the paper information referral means that the  manual screening of the waiting inventory must compete with other IRS  staffing resources needed for scanning and relaying time-sensitive  taxpayer correspondence. Strengthened collaboration across the referral  programs could enable IRS to explore an online referral submission  process which could help the agency improve its processing of  information referrals. Without a mechanism to coordinate on a plan and  timeline for developing a consolidated, online referral submission, IRS  cannot receive referrals efficiently or meet its strategic goal of expanding  its portfolio of digital service offerings to the public.

section_title: Recommendations for Executive Action
paragraphs: We recommend the Commissioner of Internal Revenue take the following  seven actions:

Establish, document, and implement an organizational structure  identifying responsibility for defining objectives with an appropriate  line of reporting for measuring costs and results for information  referrals.

Ensure that the IRM has internal controls for processing information establishing, documenting, and implementing procedures for  maintaining and communicating the information referral screening  and routing guidelines to ICT and IRS units receiving information  referrals as well as procedures for ICT screening and routing  operations; establishing, documenting, and implementing supervisory review  and segregation of duties for inventory management reporting  procedures; establishing, documenting, and implementing ongoing monitoring  of information referrals retained for destruction, including a  mechanism for tracking the reasons referrals were retained prior  to destruction; and establishing, documenting, and implementing procedures for each  IRS operating unit receiving information referrals to provide  feedback on the number and types of referrals misrouted and on  their disposition, and a mechanism to analyze patterns of misroute  errors.

Establish a coordination mechanism to facilitate communication and  information sharing across IRS referral programs on crosscutting tax  issues and ways to improve efficiency in the mechanisms for public  reporting of possible tax violations.

Direct the referral programs to establish a mechanism to coordinate  on a plan and timeline for developing a consolidated, online referral  submission in order to better position IRS to leverage specialized  expertise while exploring options to further consolidate the initial  screening operations.

section_title: Agency Comments
paragraphs: We provided a draft of this product to the Commissioner of Internal  Revenue for comment. The IRS Deputy Commissioner for Services and  Enforcement provided written comments dated February 8, 2016, which  are summarized below and reprinted in appendix III. In an email received  February 9, 2016, IRS indicated through the Office of Audit Coordination  that it generally agreed with our recommendations. In its letter, IRS stated  that our report identified several opportunities for improving the  information referral process, and in response, IRS set up a new   cross-functional working group to develop a streamlined, coordinated,  and efficient process with appropriate internal controls. IRS also plans to  explore the feasibility of a single referral form and consider offering a  secure online option for the public to submit referrals to IRS. IRS stated  that it is identifying the specific actions, responsible officials, and  implementation timelines to address our recommendations.

As agreed with your offices, unless you publically release its contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies to the Secretary of the  Treasury, the Commissioner of Internal Revenue, and other interested  parties. The report will also be available at no charge on the GAO website  at http://www.gao.gov.

If you, or your staff, have any questions about this report, please contact  me at (202) 512-9110 or at lucasjudyj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix IV.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: You asked us to assess the overall effectiveness of the Internal Revenue  Service’s (IRS) information referral process. This report (1) describes  IRS’s process for screening and routing Form 3949-A information  referrals and for prioritizing information referrals within the IRS audit  workload; (2) assesses the controls for the information referral screening  and routing process; and (3) evaluates the coordination between the  information referral process, the Whistleblower Office, and other IRS  referral programs.

For the first objective, we reviewed IRS documents, to the extent that they  were available, describing the information referral screening, routing,  classifying, prioritizing, and selection of information referrals for audit.  The documents include the Internal Revenue Manual (IRM), Form 3949-A  Screening and Routing Guidelines, operating division referral processing  flowcharts, organizational charts, and training materials. We interviewed  IRS officials responsible for maintaining the screening and routing  guidelines and those overseeing the clerical screening and routing  process, and in March 2015 we observed the information referral  screening process in Fresno, California. We reviewed coordination  meeting agendas and minutes and observed coordination meetings  between the officials responsible for the screening process and with other  IRS unit officials. In addition, we analyzed inventory data on the volumes  of referrals received and routed to operating divisions for fiscal years  2012 through 2015. Based on testing of the data and review of  documentation and interviews, we identified several weaknesses in the  information referral inventory reporting including minor miscalculations of  referral routing totals and lack of supervisory review but determined that  the data were reliable for the purposes of this report.

We also interviewed IRS audit officials in the Wage and Investment (W&I)  and Small Business/Self-Employed (SB/SE) operating divisions because  they receive about two-thirds of the referrals sent for screening,  classifying, prioritizing, and audit selection. We also interviewed IRS  officials from the Criminal Investigation division which receives referrals  involving possible large dollar value or broader schemes. We analyzed  data from the Audit Information Management System for W&I and SB/SE  referral audits closed and the recommended tax assessments from fiscal  year 2012 through 2015 (as of August 2015, the latest data available).  We compared the results of our analyses of data to the tabulations  provided by W&I and SB/SE to assess consistency of the results. Based  on our testing of the data and review of documentation and interviews, we  determined that these data were reliable for the purposes of this report.

For the second objective, we reviewed existing internal controls for the  information referral screening process and assessed whether the  procedures aligned with relevant Standards for Internal Control in the  Federal Government. To assess how IRS implements its procedures and  controls, we used IRS’s Form 3949-A screening and routing guidelines  and other procedure documents as criteria. We reviewed inventory data  including data on misrouted referrals returned by other IRS units for fiscal  years 2012 through 2015, and we interviewed IRS officials on misrouted  referrals. Based on our review of the data and interviews, we determined  that the misroute data were not reliable for the purposes of this report  because the total number of misroutes is unknown as not all misrouted  referrals are properly identified and recorded. We also reviewed a  nongeneralizable sample of 38 referrals retained for destruction to check  whether the documentation followed the procedures. We selected a  systematic sample of these referrals from among 5,935 referrals retained  for destruction from January through March 2015; we selected about  every 150th referral among those boxed for destruction. To follow-up on  information obtained during the site visit regarding ICT clerical staff  screening of referrals alleging child identity theft, we identified 12 referrals  that were related to child identity theft out of 155 referrals that were  retained for destruction in March 2015. The 12 referrals were referrals  reporting identify theft by a parent/custodian of a child’s identification  number where the parent/custodian did not know who was using the  child’s identity. We did not include cases that involved custodial issues  about eligibility to claim a dependent which are not considered identity  theft. Finally, we interviewed IRS officials about the processes and  controls for the routing guidelines and screening process, and to discuss  any potential deficiencies we identified.

For the third objective, we interviewed IRS officials to determine the  extent of coordination between the information referral process and other  IRS external referral programs. Specifically, we reviewed referral  programs with forms for reporting identity theft, fraud by tax return  preparers, abusive tax promotions, and misconduct by tax-exempt  organizations. We drew on information and analysis from our October  2015 report on the IRS Whistleblower Office. We analyzed and  compared the Form 3949-A, Form 211, Application for Award for Original  Information, (Whistleblower Office form), and five other public referral  forms to identify common information items as well as information specific  to the various referral programs. We reviewed the IRS web page on  reporting tax noncompliance. We also reviewed other IRS web pages  that identified other referral programs that handled issues for the E-file  program, employee plans and tax shelters. We reviewed the IRM and  other IRS guidance and interviewed IRS officials for referral programs  with forms to determine how the other referral programs receive and  screen their referrals and also process information referrals. We reviewed  the Standards for Internal Control in the Federal Government and our  prior reports on interagency collaboration, which discuss key practices  and considerations for implementing collaborative mechanisms. We also  drew on our April 2015 guide on fragmentation, overlap, and duplication.  We interviewed IRS officials about options to coordinate or consolidate  referral form intake in order to address areas of potential fragmentation,  overlap, and duplication.

We conducted this performance audit from December 2014 to February  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

section_title: Appendix II: IRS Form 3949-A Information Referral

section_title: Appendix III: Comment from the Treasury Department

section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, MaryLynn Sergent (Assistant  Director), LaSonya Roberts, (Analyst in charge), Jehan A. Chase, Deirdre  Duffy, Steven Flint, George Guttman, Laurie C. King, James R. McTigue,  Donna L. Miller, and Cynthia M. Saunders made key contributions to this  report.


Question-summary annotations: questions: question: What role do internal controls play in the IRS's information referral process?
answer: Ineffective internal controls undercut IRS management of the information referral process. IRS does not have an organizational structure for information referrals with clear leadership for defining objectives and outcomes for measuring cost-effectiveness and results.

question: Why are effective internal controls important to the IRS?
answer: Without clear leadership, IRS does not know how effectively it is leveraging information referrals to address the tax gap.
child_questions: question: How does incomplete documentation influence this process?
answer: IRS has incomplete documentation of procedures for the information referral process, increasing the risk of delays and added costs in routing the information for further action.

question: Why is a lack of procedures for control deficiencies hurting the IRS?
answer: Without procedures to address these control deficiencies, IRS is compromised in its ability to know how effectively it is leveraging tax noncompliance information reported by the public.

questions: question: What can confuse members of the public reporting tax noncompliance?
answer: Fragmentation and overlap across IRS's general information referral process and eight specialized referral programs, such as for reporting identity theft and misconduct by return preparers, can confuse the public trying to report tax noncompliance to IRS.

question: How does the IRS attempt to handle coordination between referral programs?
answer: Yet coordination between referral programs is limited, and IRS does not have a mechanism for sharing information on crosscutting issues and collaborating to improve the efficiency of operations across the mix of referral programs.
child_questions: question: How does this impact the efficacy of the IRS in reporting tax noncompliance?
answer: As a result, IRS may be missing opportunities to leverage resources and reduce the burden on the public trying to report possible noncompliance.

questions: question: What was GAO focused on covering in this report?
answer: GAO was asked to assess the overall effectiveness of the information referral process.
child_questions: question: What information regarding the IRS processes was covered in this report?
answer: This report (1) describes IRS's process for screening and routing information referrals; (2) assesses the controls for the information referral screening and routing process; and (3) evaluates the coordination between the information referral process, the Whistleblower Office, and other IRS referral programs.

question: What other processes were covered?
answer: GAO reviewed IRS guidance, processes, and controls for the information referral process, assessed whether IRS's processes followed Standards for Internal Control in the Federal Government , and interviewed IRS officials.