To develop information on the basic differences between the master file and the NMF, we reviewed relevant IRS documentation, including information on the number and types of accounts processed on the NMF; interviewed IRS officials at the National Office, at the Executive Office for Service Center Operations in Cincinnati, OH, and at 3 of IRS’ 10 service centers—Atlanta, GA; Cincinnati; and Fresno, CA; and obtained information from NMF managers at all 10 service centers through a questionnaire. We also observed NMF transactions being processed at the Atlanta and Cincinnati Service Centers. We visited Atlanta and Fresno because they were the two centers with the most NMF accounts at the time we did our work; the Assistant Director of the Fresno Service Center also headed a task force that reviewed the NMF. We visited Cincinnati because of its proximity to the Executive Office for Service Center Operations. To identify problems that IRS and taxpayers have experienced with the NMF, we obtained data through the questionnaire and interviews described in the preceding paragraph as well as interviews at two of IRS’ four regional offices—Western and Midstates—and at two IRS district offices—the Georgia District, headquartered in Atlanta, and the Ohio District, headquartered in Cincinnati. We visited the Western Region to interview the problem resolution analyst who had reviewed the NMF case that was discussed at the Senate Finance Committee hearings. We visited the Midstates Region to meet with Internal Audit staff who were doing related work. We visited the district offices in Atlanta and Cincinnati because of their proximity to other IRS locations at which we were doing work. We also reviewed several IRS reports on the NMF, including a December 1997 report on the results of an internal IRS review of the NMF case that was discussed at the September hearings and a February 1998 report on the NMF by a task group from the Fresno and Ogden Service Centers. We discussed the NMF with problem resolution officers, who are responsible for resolving taxpayer complaints, at the Atlanta, Fresno, and Cincinnati Service Centers. Although we identified several limitations of the NMF, we were unable to determine the extent to which taxpayer problems could be traced back to those limitations because IRS had no data that would allow such an analysis. To determine what IRS has done and plans to do to address the problems caused by the NMF, we identified corrective actions that were recommended as a result of the various IRS reviews and discussed the status of those actions with responsible IRS officials. IRS identified several actions that it said it implemented in early 1999, as we were completing our audit work. We did not verify that those actions were taken or assess their effectiveness in correcting past problems. We did our work from January 1998 to February 1999 in accordance with generally accepted government auditing standards. Before automated data processing, IRS maintained all tax accounts on ledger cards. In 1962, this system was replaced with the master file. Although the master file was an improvement over the manual system, it could not process certain accounts because of system limitations. These accounts, referred to as NMF accounts, were kept on ledger cards until 1991, when the NMF was automated. The automated NMF consists of 10 stand-alone databases—one in each of IRS’ 10 service centers. Each service center has an NMF unit with 5 to 21 staff who enter account information into that center’s database and otherwise manage the system. As of September 8, 1998, according to IRS, there were a total of about 122,000 accounts on the NMF. (See app. I for the number of staff in each service center’s NMF unit and the number of accounts in each center’s NMF database.) There are two general reasons why IRS puts accounts on the NMF. Some accounts have features that do not fit with the master file’s configuration; other accounts have to be processed more quickly than the master file processing procedures allow. Because it is smaller and decentralized, the NMF can handle accounts that the master file cannot and can process transactions faster than the master file. According to IRS, of the 122,000 accounts on the NMF as of September 8, 1998, about 82 percent involved either split assessments or employee plans. Split assessments are accounts that were originally on the master file for a joint entity (e.g., a husband and wife who filed a joint income tax return) but later had to be split into separate accounts. For example, application of the innocent spouse provisions of the tax law can relieve one spouse of all or some of the total tax liability assessed against a married couple who filed a joint return. That would require IRS to separately assess each of the spouses for the amounts that they legally owe. These accounts have to be set up on the NMF because the master file is not configured in a way that allows accounts to be linked to one another and does not allow IRS to separately assess and bill the filers of a joint return. According to IRS, of the 122,000 accounts on the NMF as of September 8, 1998, about 71,000 (58 percent) involved split assessments. Employee plan accounts are on the NMF, according to IRS, so that IRS can assess excise taxes related to the plans. IRS officials told us that there is no place on the master file to enter the employee plan number, which is needed to assess the excise taxes. Thus, the accounts are put on the NMF, which is configured to accept employee plan numbers. IRS data indicate that about 29,000 (24 percent) of the 122,000 NMF accounts as of September 8, 1998, involved employee plans. According to IRS, most of the remaining NMF accounts as of September 8, 1998, fell into one of the following five categories. IRS had no data on the number of accounts in each of these categories. New legislation: The NMF permits rapid implementation of new tax laws that may require extensive, and thus time-consuming, modifications to the master file. Because it is much smaller than the master file (as discussed later), the NMF can be quickly changed to handle these new laws. Overflow accounts: These are accounts that have more transactions than the master file is configured to handle. When the physical size of an account exceeds the master file configuration, IRS is to transfer the account to the NMF, which has no constraint on an account’s size. Large dollar amounts: These are accounts with dollar balances that exceed the space allotted in the master file for an account’s dollar amount. In that regard, the master file is not configured to handle accounts with balances of $100 million or more. The NMF has no such limitation. Immediate assessments: These are accounts that must be assessed more quickly than the master file process allows. Generally, these assessments involve situations where IRS has determined that the assessment or collection of a deficiency will be jeopardized by delay. In such cases, IRS is authorized to immediately assess such deficiency. These accounts are processed on the NMF because, according to IRS, the NMF can process assessments in 24 to 36 hours, while the master file takes several weeks. Reversal of erroneous abatements: These are accounts in which an assessment is needed to correct some clerical action that had erroneously reduced (abated) a taxpayer’s tax liability, and the statute of limitations for assessments had expired. As configured, the master file prevents the reversal of abatements after expiration of the statute of limitations. As indicated by the information in the previous section, most of the accounts on the NMF are there because of limitations in the master file’s configuration (e.g., the master file’s inability to handle split assessments, large accounts, and employee plan numbers). Other accounts (e.g., those involving new legislation and immediate assessments) are on the NMF because they have to be processed more quickly than is possible on the master file. There are two basic reasons why accounts can be processed more quickly on the NMF than on the master file. First, the NMF is much smaller than the master file and, thus, easier to work with. The NMF had 122,000 accounts as of September 8, 1998, and those accounts were spread among stand-alone systems in each of IRS’ 10 service centers. By comparison, the master file is one large system, housed in Martinsburg, WV, that has an account for every taxpayer that files a return—about 200 million in 1998. Second, the process IRS follows to enter account data into the master file and make the updated information available for researching taxpayer accounts is much more time-consuming than the NMF process. For master file purposes, account data flow from the service centers, where the data are initially received and validated, to IRS’ computing center in Martinsburg, where the data are posted to the master file. Data coming into Martinsburg from the individual service centers are not posted to the master file upon receipt. Instead, data are accumulated during the week for posting on weekends. Martinsburg sends output from the posting process back to the service centers for their use in updating the Integrated Data Retrieval System (IDRS). IDRS is the primary system that IRS employees use to research and update accounts. For example, IRS’ customer service representatives use IDRS to access accounts in responding to taxpayer inquiries. According to IRS, the process from the time data are sent to Martinsburg until updated account information is available on IDRS can take from 4 to 6 weeks. The NMF process is more streamlined and thus quicker. After receipt and validation by the service center, NMF account data are sent to the NMF unit in that same service center for immediate input to the NMF. According to IRS, that process generally takes about 1 day. There is no movement of data between the service center and Martinsburg, and NMF data are generally not input to IDRS (the one exception to this rule, delinquent accounts, will be discussed later).