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

Letter

Background

Overview of IRS Referrals for Tax Noncompliance

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.

Paper Information Referrals Mailed to IRS

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.

IRS Roles and Responsibilities for Processing Information Referrals

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.

Information Referral Screening Is a Manual Process, and Operating Division Priorities Determine Audit Selection

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.

Operating Division Priorities Influence Audit Selection Decisions

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.

Classification

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.

Prioritization

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.

Selection

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.

The Small Share of Information Referrals Audited Resulted in Millions in Additional Tax Assessments Recommended

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.

Ineffective Internal Controls Undercut IRS’s Ability to Sufficiently Manage Information Referrals

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.

IRS Organizational Structure for Information Referrals Is Fragmented without Clear Leadership for Defining Objectives and Measuring Results

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.

IRS Has Not Documented and Consistently Implemented Procedures Controlling the Information Referral Screening and Routing Process

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.

IRS Lacks Supervisory Review and Segregation of Duties for Preparing Information Referral Inventory Reports

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.

Information Referrals Retained for Destruction Are Not Subject to Ongoing Monitoring

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.

Misroutes Returned Are Used as a Measure of Routing Quality, but the Extent of Misrouting Is Unknown

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.

Opportunities Exist to Improve Coordination across Fragmented and Overlapping Referral Programs and to Share Efficiency Improvement Practices

Fragmented Referral Programs Complicate Tax Noncompliance Reporting and Result in Overlapping Efforts

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.

Referral Programs May Benefit from Improved Communication and Options to Increase Referral Intake Efficiencies

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.

IRS Lacks Mechanisms for Coordinating and Streamlining Referral Intake Processes

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.

Opportunities to Consolidate Referral Intake

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments

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.

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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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: IRS Form 3949-A Information Referral

Appendix III: Comment from the Treasury Department

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.