IRS Must Better Adjudicate Employee Tax Cases, TIGTA Says

Improvements Are Needed to Ensure That Employee Tax
Compliance Cases Are Adjudicated Consistently

April 15, 2019

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

Redaction Legend:

1 = Tax Return/Return Information

Highlights

Final Report issued on April 15, 2019

Highlights of Reference Number: 2019-10-021 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

Section (§) 1203 of the IRS Restructuring and Reform Act of 1998 states that the IRS shall terminate the employment of any IRS employee if there is a final determination that the employee committed certain acts of misconduct and omissions, including willful violations of tax law. In Fiscal Year (FY) 2017, IRS management closed 1,250 cases involving employees who either underreported income or did not file their income taxes timely. IRS management determined 90 of the 1,250 cases involved willful noncompliance. As the agency responsible for administering Federal tax law, IRS employees have a higher expectation and responsibility for full tax compliance.

WHY TIGTA DID THE AUDIT

The overall objective of this review was to evaluate the process for determining whether cases of employee tax noncompliance rise to the level of willful noncompliance and determine what actions the IRS takes to address employees with repeated tax noncompliance issues.

WHAT TIGTA FOUND

Although the IRS has established procedures for reviewing and adjudicating § 1203 cases, TIGTA found that IRS management is not always following these procedures. As a result, IRS management does not always accurately determine willful noncompliance or consistently adjudicate § 1203 cases.

TIGTA's review of a statistical sample of 50 of the 1,250 closed cases found that, in 21 cases, IRS management did not make a proper determination of willfulness as required. Based on these results, TIGTA estimates that IRS management did not properly determine willfulness in 530 (42 percent) of the 1,250 cases closed in FY 2017.

TIGTA also found that, in seven cases, IRS management did not include required documentation to support the determination of willfulness. Overall, TIGTA estimates that IRS management did not include required documentation in 177 (14 percent) of the 1,250 cases closed in FY 2017.

In addition, a review of 22 judgmentally selected case files found that IRS management's determinations were not supported by the facts of the case. For example, cases were determined to be nonwillful when the employees had a history of misconduct, such as previous tax noncompliance, or the employee was in a tax-related position, e.g., employees who perform examinations or answer tax questions and thus should be aware of filing requirements.

Finally, labor relations specialists did not ensure that cases were properly classified in the Automated Labor and Employee Relations Tracking System. As a result, an estimated 123 cases closed in FY 2017 are potentially misclassified.

WHAT TIGTA RECOMMENDED

TIGTA made five recommendations to the IRS, which include ensuring that all prior substantiated tax issues are documented and considered in the case file, requiring that management document and comment on both willfulness and reasonable cause factors, and ensuring that cases are properly classified.

IRS management agreed with all five recommendations and plans to take appropriate corrective actions.

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April 15, 2019

MEMORANDUM FOR
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Assistant Inspector General for Audit

SUBJECT:
Final Audit Report — Improvements Are Needed to Ensure That Employee Tax Compliance
Cases Are Adjudicated Consistently (Audit # 201810009)

This report presents the results of our review to evaluate the process for determining whether cases of employee tax noncompliance rise to the level of willful noncompliance and determine what actions the Internal Revenue Service (IRS) takes to address employees with repeated tax noncompliance issues. This audit is included in our Fiscal Year 2019 Annual Audit Plan and addresses the major management challenge of Improving Tax Reporting and Payment Compliance.

Management's complete response to the draft report is included as Appendix VI.

Copies of this report are also being sent to the IRS managers affected by the report recommendations. If you have any questions, please contact me or Deann Baiza, Acting Assistant Inspector General for Audit (Management Services and Exempt Organizations).

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Table of Contents

Background

Results of Review

Appendices

Abbreviations

ALERTS	Automated Labor and Employee Relations Tracking System
ETC	Employee Tax Compliance
FY	Fiscal Year
IRS	Internal Revenue Service
RRA 98	Restructuring and Reform Act of 1998

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Background

Employee tax compliance guidance

The Standards for Ethical Conduct¹ states that all Federal Government employees are expected to satisfy their obligations as citizens of the United States, “including all just financial obligations, especially those such as Federal, State, or local taxes that are imposed by law.” As the agency of the Federal Government primarily responsible for administering the Federal tax law, Internal Revenue Service (IRS) employees have a higher expectation and responsibility for full tax compliance. Specifically, Section (§) 1203, Termination of Employment for Misconduct, of the IRS Restructuring and Reform Act of 1998 (RRA 98)² describes 10 specific acts or omissions for which IRS employees are required to be removed. Two of these apply to IRS employee tax compliance. Specifically,

• § 1203(b)(8) — willfully failing to timely file a Federal tax return unless such failure is due to reasonable cause and not willful neglect.

• § 1203(b)(9) — willfully understating their Federal tax liability unless such failure is due to reasonable cause and not willful neglect.

According to the provisions of the RRA 98, the IRS shall terminate the employment of any IRS employee if there is a final determination that the employee committed certain acts of misconduct and omissions, including willful violations of tax law. Section 1203 also states that the determination to terminate may be mitigated only at the discretion of the IRS Commissioner and that the decision on mitigation may not be appealed.

In order for IRS management to determine if a violation is willful, it must be established that the employee knew (or should have known) his or her obligation under the tax law and that the employee knew he or she was violating that duty. This is referred to as “known legal duty.” Labor Relations provides management with case processing procedures to address any potential § 1203(b)(8) or (b)(9) issues.

To sustain a § 1203(b)(8) or (b)(9) charge, the deciding official must find that the employee's conduct was willful. The IRS defines a willful act as the voluntary intentional violation of a known legal duty (i.e., timely filing of a tax return or accurate reporting of a tax obligation) for which there is no reasonable cause.³ Reasonable cause may be established and excuse willful misconduct if the employee exercised ordinary business care and prudence but, due to circumstances beyond the employee's control, he or she was unable to comply with his or her obligations.⁴

IRS employees are responsible for being aware of § 1203 conduct provisions, abiding by them, seeking necessary information regarding their interpretation, and reporting possible § 1203 conduct violations promptly. In addition, employees are reminded annually of their tax obligations. IRS employees are also reminded to review their tax returns for accuracy before filing them and to file on time, no later than the filing deadline.⁵

Roles in the adjudication process of employee tax compliance cases

Within the IRS, multiple groups are involved in identifying and resolving potential employee tax noncompliance.

Employee Tax Compliance (ETC) Branch — An organization within the Employee Conduct and Compliance Office that identifies IRS employees with potential tax noncompliance. Once a potential tax compliance issue is identified, the ETC Branch sends a letter of inquiry to the employee requesting an explanation of the circumstances that led to the tax noncompliance issue. The ETC Branch reviews the employee's response and may close the issue without further managerial review. However, if the tax matter cannot be closed, the ETC Branch will refer the potential tax noncompliance to management through Labor Relations for further review.

Labor Relations — Provides administrative oversight for case management and advises IRS management through the process of determining willfulness of potential tax compliance issues for employees that are Grade 14 or equivalent and below.⁶ Labor relations specialists maintain and track cases in the Automated Labor and Employee Relations Tracking System (ALERTS).⁷

IRS Management — Has the ultimate responsibility of determining whether a potential §1203(b)(8) or (b)(9) was willful or not willful. IRS management works in coordination with an assigned labor relations specialist and is responsible for conducting fact-finding interviews and documenting the final determination as well as the associated penalty.

The § 1203 Review Board — Reviews the willful § 1203 cases to determine whether to sustain the employee's removal or recommend penalty mitigation to the IRS Commissioner.

IRS Commissioner — The ultimate deciding authority for any penalty mitigation for §1203 cases. The IRS Commissioner can sustain a removal or lessen the penalty of an employee who has willfully violated § 1203.

Resolving potential employee tax noncompliance

If the ETC Branch is unable to resolve a tax noncompliance issue with the employee, the case is referred through Labor Relations to the employee's local management. Labor Relations will prepare a case file for management, which includes: prior disciplinary data, tax transcripts,⁸ a 1203 Case Analysis Form,⁹ sample interview questions to guide managers during fact-finding interviews, and the 1203 Willfulness and Reasonable Cause Determinations Guide. Labor Relations sends the case and associated documentation to the employee's immediate manager. The manager completes fact-finding, which includes reviewing the attachments in the tax case and interviewing the employee to make an initial determination of willfulness.¹⁰ Once contact has been made with the employee, the manager consults with the proposing official¹¹ to make a determination of willfulness. The proposing official will document the determination of willfulness and propose a penalty.

The potential § 1203 tax case, along with the appropriate documentation, determination of willfulness, and proposed penalty, is forwarded to one of three Labor Relations branch consultants.¹² The Labor Relations branch consultant reviews management's determination to assess whether or not he or she agrees with management or if additional facts are needed to support management's determination. If the Labor Relations branch consultant disagrees with management's determination, he or she may seek an opinion from the IRS General Legal Services¹³ to provide additional information to the proposing official.

Although Labor Relations is involved in this process, the determination of willfulness and penalty is ultimately management's decision. Figure 1 depicts the process for determining the willfulness of a tax violation in an ETC case.

In Fiscal Year (FY)¹⁴ 2017, IRS management closed 1,250 cases of potentially willful violations of tax law and found 90 to be willful. Of the 1,250 cases closed in FY 2017:

• 326 were potential § 1203(b)(8) — willful failure to timely file a Federal tax return.

• 884 were potential § 1203(b)(9) — willful understatement of Federal tax liability.

• 40 were both potential failure to timely file and understatement of liability (§ 1203(b)(8) and § 1203(b)(9)).

We determined that 802 employees associated with the 1,250 cases were employed in tax-related positions. Examples of employees in tax-related positions include individuals who perform examinations, answer tax questions, or investigate possible tax noncompliance. Figure 2 provides a breakdown on the number of overall cases involving employees in tax-related versus other positions. Figure 3 provides examples of the types of tax-related positions held by employees with potential § 1203 tax violations.

Figure 2: Total Potential § 1203 Tax Cases Closed in FY 2017
(based on the attribute of whether the employees' positions are tax related)

	Tax-Related Positions	Other Positions	Total Cases
Nonwillful Determination	736	424	1,160
Willful Determination	66	24	90
Total	802	448	1,250
Source: Treasury Inspector General for Tax Administration analysis of § 1203(b)(8) and (b)(9) cases closed in FY 2017 and IRS designation of employees in tax-related positions.

Figure 3: Types of Tax-Related Positions Held by Employees With Potential § 1203 Tax Cases Closed in FY 2017

Tax-Related Position	Position Description	Not Willful	Willful	Total Cases
Contact Representative	Performs work involving the customer service toll-free telephone system used by the public to resolve issues about tax administration.	247	28	275
Tax Examining Technician	Resolves tax account issues, such as tax delinquency, adjusts taxpayer accounts, and provides information on all types of individual and business accounts.	174	16	190
Internal Revenue Agent	Investigates the most complex tax returns filed by individuals or business entities.	70	4	74
Revenue Officer	Collects delinquent accounts, secures delinquent tax returns, and conducts tax investigations.	*1*	*1*	51
Criminal Investigator	Plans and conducts investigations concerning alleged criminal tax fraud and has other investigative responsibilities.	*1*	*1*	22
Other15		174	*1*	190
	Total:	736	66	802
Source: Treasury Inspector General for Tax Administration analysis of § 1203(b)(8) and (b)(9) cases closed in FY 2017 and IRS designation of employees in tax-related positions.

Based on our review of ALERTS data, we identified 334 employees who had substantiated tax noncompliance in prior years. Prior substantiated tax noncompliance includes issues such as:

• Prior substantiated § 1203 willful tax noncompliance.

• Late paid or unpaid Federal taxes.

• Late or nonfiled Federal tax returns.

We identified 15 employees who had a prior substantiated § 1203 willful tax noncompliance case. These repeat offenders were not previously terminated under the provisions of RRA 98 and subsequently had another potential § 1203 tax violation in FY 2017. Through its adjudication process, the IRS determined that eight of the 15 employees did not willfully violate §1203 in FY 2017. * * * 1 * * *

This review was performed at the Human Capital Office at the IRS National Headquarters in Washington, D.C., and at Labor Relations offices in Fresno and Walnut Creek, California; Washington, D.C.; Atlanta, Georgia; Kansas City and St. Louis, Missouri; and Dallas, Texas, during the period November 2017 through October 2018. We conducted this performance audit 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 objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.

Results of Review

Adjudication of Section 1203 Cases Is Not Consistent

Although the IRS has established procedures for reviewing and adjudicating § 1203 cases, we found that IRS management does not always follow these procedures. As a result, the adjudication of § 1203 cases is inconsistent. Our review of a statistically valid sample¹⁶ of 50 § 1203 cases closed in FY 2017 identified 21 cases in which IRS management did not make a proper determination of willfulness as required.¹⁷ We also identified seven cases that did not contain required documentation. Based on these results, we estimate that IRS management neglected to make a proper determination on 530 (42 percent)¹⁸ of the 1,250 § 1203 cases closed in FY 2017 and that 177 (14 percent)¹⁹ cases lack required documentation. * * * 1 * * *

As the agency responsible for administering the Federal tax law, IRS employees have a higher expectation and responsibility for full tax compliance. Employees who willfully do not comply with their Federal tax responsibilities are in direct violation of the Standards of Ethical Conduct. As such, it is essential that the IRS take appropriate steps to ensure that employees who willfully do not comply with the Federal tax laws are appropriately and consistently penalized.

A determination of willfulness was not always made before determining reasonable cause

While guidance provides an avenue for a willful violation of tax law to be excused with reasonable cause, Labor Relations guidance clearly states management needs to establish whether the noncompliance is willful before considering reasonable cause:

The first action required is to review the evidence and determine whether the employee's noncompliance is a willful violation of the 1203 statute. To determine whether the employee violated 1203(b)(8) or (b)(9), you must also determine whether the employee's actions were due to reasonable cause and consult with the servicing labor relations specialist for guidance.²⁰

Additionally, according to guidance provided to management by Labor Relations:

Reasonable cause allows IRS management to consider whether the facts and circumstances at the time of a violation might have impacted the employee's ability to meet his/her tax responsibilities. If reasonable cause exists, then the willful conduct is excused.²¹

In the 21 cases we identified in which IRS management did not make a proper determination of willfulness as required, we found that IRS management did not determine willfulness before establishing reasonable cause in 19 (38 percent) cases.²² In these 19 cases, management only determined if reasonable cause existed. The reasonable cause claims that IRS management relied upon in the 19 cases included: missing signatures, tax software issues, * * * 1* * *, reliance on tax preparers, and forgetfulness. For example, several employees stated that they forgot to claim Form 1099 income²³ for areas such as * * *  1 * * *, and retirement distributions. Additionally, four employees cited an inability to properly use e-file software, such as TurboTax,^® which therefore caused their returns to be filed late.

To properly determine whether a claim for reasonable cause is appropriate to excuse a willful violation, management must clearly establish willfulness by citing factors such as the fact that the employee is in a tax-related position, has been with the IRS for numerous years, or has had prior tax noncompliance. Then management can properly evaluate if a claim of reasonable cause is appropriate for the facts and circumstances of the case. By relying upon only reasonable cause factors, management cannot properly consider all relevant facts and circumstances and cannot make a proper determination on a case.

Part 1 of the 1203 Case Analysis Form lists certain factors for management to consider in establishing an employee's known legal duty such as:

• The employee's position.

• The employee's length of service.

• Whether the employee has prior tax issues.²⁴

• Facts surrounding the potential § 1203 misconduct.

Part 2 of the 1203 Case Analysis Form documents management's determination of willfulness along with Labor Relations' concurrence or disagreement. However, the 1203 Case Analysis Form does not require management to separately consider and comment on willfulness before considering reasonable cause factors.

Sufficient documentation was not always included in the § 1203 case file

IRS guidance instructs management to consider prior tax issues and include any additional facts for supporting a willful determination, e.g., prior filing history, repeat tax errors, or a prior notice of discipline for the same tax issue. While it is the ultimate responsibility of IRS management to make a determination on willfulness, Labor Relations plays a critical role in equipping management with the applicable factors for management to consider. Labor relations specialists are responsible for filling out Part 1 of the 1203 Case Analysis Form, which documents key factors, before forwarding the case to management for review and determination. As noted previously, Part 1 lists certain factors that management is to consider in establishing an employee's known legal duty. In addition, Labor Relations reviews each case after IRS management has made a final determination and provides guidance as needed.

However, our review of the statistical sample of 50 cases identified seven cases in which applicable factors were not included in the case file for management's consideration * * * 1 * * *. In five cases, Labor Relations did not include documentation in the case file such as prior instances of * * * 1 * * * late payment or nonpayment of taxes, and * * * 1 * * *

Based on these results, we estimate that 177 (14 percent) of 1,250 cases closed in FY 2017 concerning potential § 1203(b)(8) and (b)(9) tax noncompliance did not consider prior noncompliance or were not properly documented.²⁵

The IRS cannot ensure that management has all the necessary information needed to properly make a determination on willfulness if Labor Relations does not include sufficient detail of an employee's prior substantiated issues in the case file. In addition, errors in the oversight of case adjudication by Labor Relations can result in cases being processed incorrectly. * * * 1 * * *

IRS management's determination was not always supported by the facts and circumstances of cases

Our review of a judgmental sample²⁶ of 22 potential § 1203 tax noncompliance cases, closed in FY 2017, found that the facts of the case did not support IRS management's determination regarding willfulness in 13 (59 percent) of the cases. We based our judgmental selection on factors such as employees with prior tax-related discipline (including § 1203 discipline); cases in which Labor Relations and IRS management disagreed; cases involving employees with past nontax misconduct; and cases involving employees in tax-related positions. Of these 22 potential § 1203 tax noncompliance cases:

• 5 were determined by management to be willful § 1203 tax violations.

• 17 were determined by management to be nonwillful § 1203 tax violations.

To establish whether an employee had a known legal duty, managers can consider factors such as the employee's filing history, prior discipline for the same tax issue, and repeated “errors.” We reviewed the case files to determine if managers took into account prior misconduct, especially tax-related misconduct, when making a determination of willfulness.

Based on our review, we found that management appropriately considered and documented the factors to support the determinations in nine of the 22 cases. Of these nine cases, five were determined by IRS management to be willful violations of tax law. We found that, when a case is determined to be a willful violation of tax law, management clearly establishes and documents the known legal duty of the employee to support the determination by referencing factors such as the employee's position, length of service with the IRS, and prior filing history. The following is an example of a case in which the facts and circumstances align with the manager's position and Labor Relations concurrence for a willful violation of § 1203.

However, IRS management did not appropriately consider and document the factors of the case to support the determination in 13 cases we reviewed. In each of these 13 cases, IRS management determined that the employee's violation was not willful, but the case facts and circumstances did not support the determination. Specifically, IRS management did not document or comment on all of the factors in Part 1 of the 1203 Case Analysis Form. We found that, when a case was determined to be a nonwillful violation of tax law, management did not clearly establish and document the known legal duty of the employee and did not demonstrate that the employee's position, length of service, and prior filing history were all factored into the determination of willfulness. In 10 of the 13 cases, we identified employees who had at least one prior case that contained a substantiated tax violation.²⁷ We found that, in some of these cases, not all prior tax-related discipline was documented and considered by management.

 Examples 2 through 4 illustrate cases in which IRS management did not consider all applicable factors when determining willfulness.

For the case in Example 2, our review of ALERTS data indicated that, * * * 1 * * *

Example 3 shows a case in which * * * 1 * * *

Example 4 shows three employees in tax-related positions who had each been with the IRS more than 20 years and who were previously disciplined for tax noncompliance. Examples of employees in tax-related positions include revenue agents, contact representatives, and correspondence examination technicians. Each of these employees' tax noncompliance was determined to be not willful.

We also identified five cases in which labor relations specialists did not agree with management's determination. The employees in these five cases failed to report income on their tax returns or * * * 1 * * *. In accordance with applicable laws, it is within management's authority to suspend, remove, or take other disciplinary actions against such employees. If Labor Relations and management disagree on the determination of willfulness, additional opinions can be obtained from a Labor Relations branch consultant or from General Legal Services. However, it is not mandatory to seek any other opinion as the final determination of willfulness rests solely with management.

In four of the five cases, an additional opinion was obtained from a Labor Relations branch consultant. While management determined that these employees did not willfully violate tax law, Labor Relations disagreed, citing that these employees should have known of their tax obligations. Example 5 shows cases in which IRS management and Labor Relations did not agree on the determination of willfulness.

The IRS plays a critical role in ensuring that taxpayers understand and meet their tax obligations. Allowing its own employees to be tax noncompliant without significant consequences can adversely affect the public's confidence that the IRS is meeting its obligation to administer the Nation's tax system fairly. The examples illustrate the need for IRS management to adequately consider and document factors such as an employee's position, length of service, filing history, and prior violations when determining if a tax violation rises to the level of a willful violation.

Recommendations

The IRS Human Capital Officer should:

Recommendation 1: Ensure that Labor Relations includes all prior substantiated factors in the case file for a potentially willful tax violation determination.

Recommendation 2: Update the 1203 Case Analysis Form to require that management comment separately on willfulness and reasonable cause.

Recommendation 3: Ensure that management makes a determination on the willfulness of a tax violation on the 1203 Case Analysis Form by first considering willful factors and then determining if reasonable cause exists to excuse the violation.

Recommendation 4: Provide annual training to labor relations specialists and management to ensure that both willfulness and reasonable cause factors are documented and commented on when making a determination on a potentially willful tax violation.

Case Data Recorded in the Automated Labor and Employee Relations System Are Not Always Accurate

Our review of a statistical sample of 50 § 1203 cases closed in FY 2017 identified five (10 percent) cases that were erroneously classified in the ALERTS.²⁸ These cases were misclassified as a potential § 1203 tax case when there was no potential tax violation or were coded as a willful violation although the § 1203 issue was not addressed.²⁹ IRS guidance requires that labor relations specialists input the appropriate issue codes in the ALERTS and ensure that erroneous issue codes are deleted.³⁰ We contacted the assigned labor relations specialists for each of the five cases and confirmed that these cases were miscoded in the ALERTS and should not have been marked as a potential § 1203 tax case. Based on these results, we estimate that 123 cases closed in FY 2017 concerning potential § 1203(b)(8) and (b)(9) tax noncompliance were erroneously classified in the ALERTS.³¹

Inaccurate ALERTS data may result in the improper processing of conduct cases. Inaccurate reporting of employee tax issues or misclassified case files could potentially overstate § 1203 cases in semiannual reports to the public.

According to IRS management, these inaccuracies occurred because of oversights by the assigned labor relations specialists. IRS management provided documentation of the current staffing challenges that are negatively affecting Labor Relations' ability to manage its case workload. Specifically, the IRS indicated that between Calendar Years 2015 and 2018, it lost 50 labor relations specialists.

Recommendation

Recommendation 5: The IRS Human Capital Officer should establish processes to ensure that the issue codes and determinations of willfulness are accurately recorded in the ALERTS.

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Appendix I

Detailed Objective, Scope, and Methodology

Our overall objective was to evaluate the process for determining whether cases of employee tax noncompliance rise to the level of willful noncompliance and determine what actions the IRS takes to address employees with repeated tax noncompliance issues. To accomplish our objective, we:

Internal controls methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined that the following internal controls were relevant to our audit objective: Public Law;⁵ Department of the Treasury directives;⁶ Federal Regulations;⁷ and IRS policies, procedures, and guidelines for administering the ETC program. We evaluated these controls by interviewing IRS personnel regarding the ETC program, reviewing applicable documentation, and analyzing selected case files.

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Appendix II

Major Contributors to This Report

Gregory D. Kutz, Assistant Inspector General for Audit (Management Services and Exempt Organizations)

Deann L. Baiza, Acting Assistant Inspector General for Audit (Management Services and Exempt Organizations)

Troy D. Paterson, Acting Assistant Inspector General for Audit (Management Services and Exempt Organizations)

Jonathan T. Meyer, Director

Kasey J. Koontz, Acting Audit Manager

Zachary P. Orrico, Lead Auditor

Nina A. Hill, Senior Auditor

Gene A. Luevano, Senior Auditor

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Appendix III

Report Distribution List

Deputy Commissioner for Operations Support

Internal Revenue Service Human Capital Officer

Deputy Human Capital Officer

Director, Workforce Relations

Division Director, Office of Audit Coordination

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Appendix IV

Outcome Measure

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measure:

• Reliability of Information — Potential; 123 § 1203 ALERTS¹ cases closed in FY² 2017 that were misclassified (see page 16).

Methodology Used to Measure the Reported Benefit:

We reviewed a statistically valid random sample of 50 potential § 1203 tax cases that were closed in FY 2017 as either willful or nonwillful and found that five (10 percent) cases were misclassified in the ALERTS. Of the five misclassified cases, * * * 1 * * *. Using the five misclassified cases and a contract statistician, we projected an error rate to the overall population. Based on a 90 percent confidence level, we estimate that 123³ of the 1,250 cases closed in FY 2017 were misclassified.

Figure 1: Calculation of Estimated Number of Misclassified Potential § 1203 Tax Cases Closed in FY 2017

Strata	Sample Size	Total Population of Cases	Misclassified Cases
			Total Number in Sample	Percentage in Sample	Estimated Number in Total Population
Nonwillful Determination	46	1,160	*1*	8.70%	101
Willful Determination	4	90	*1*	*1*	23
Totals	50	1,250	5		124*
Source: Statistician projections provided based on audit results. *Difference is due to rounding.

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Appendix V

1203 Case Analysis Form