TIGTA Semiannual Report to Congress Summarizes Achievements

We remain steadfast in our efforts to ensure that the Internal Revenue Service (IRS) carries out its responsibilities to the American taxpayer fairly and efficiently. One of the most critical challenges currently confronting the IRS is the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (Affordable Care Act or ACA), which represents the largest set of tax law changes in more than 20 years. Accordingly, this Semiannual Report contains a special section describing our audit work this reporting period assessing the IRS's initial efforts to implement the ACA's tax provisions.

For instance, one TIGTA audit examined the adequacy of safeguards to protect the confidentiality of Federal tax information that the IRS sends to Federal and State Insurance Exchanges. The Federal tax information helps Insurance Exchanges to validate an individual's eligibility for health insurance coverage and to set the maximum amount of advance premium tax credit, if any, that may be provided.

Another report assesses the IRS's efforts to ensure the accurate reporting and payment of the ACA's medical device excise tax. In this audit, we identified discrepancies totaling almost $117.8 million between the amount of the medical device excise tax captured by the IRS and the amount TIGTA calculated to be due.

Moving forward, as the law's implementation involves and requires the cooperation of a number of Federal agencies that must develop and implement new programs, our work on ACA implementation will also be coordinated with other Inspectors General. Both the Department of Health and Human Services (HHS) Office of the Inspector General (OIG) and TIGTA have developed a multi-year strategy to assess ACA implementation. We plan to closely coordinate, or perform work jointly, with the HHS OIG to review those processes that are highly interdependent between HHS and the IRS.

Meanwhile, these pages also reflect our work auditing other critical areas of tax administration. This report presents our latest findings on the security of taxpayer data and the IRS's customer service efforts, for example. Other areas we reviewed include international and domestic collections, and the IRS's modernization.

TIGTA's Office of Investigations (OI) continues its efforts to protect the integrity of the Federal tax system, including the rapid escalation of a telephone scam that involves criminals impersonating IRS employees. As of this writing, TIGTA has received reports of over 154,000 contacts by individuals posing as IRS employees in an attempt to extort money; reported taxpayer monetary losses to these criminals exceeded $9 million.

Impersonation of the IRS falls within the investigative jurisdiction of TIGTA, and TIGTA is conducting a thorough investigation into this matter. In the meantime, all taxpayers should remain vigilant to avoid becoming a victim of this scam. The most effective way for individuals to report suspicious contacts and losses is by filling out the "IRS Impersonation Scam" form on TIGTA's website, www.treasury.gov/tigta.

OI is also persisting in its efforts to protect taxpayers from threats within the system, notably corrupt IRS employees. During this reporting period, as a result of TIGTA's investigative efforts, one IRS employee pled guilty to charges of filing false tax returns and another was sentenced for conspiracy to commit passport fraud.

I look forward to working with Congress, the Administration, the IRS, and all of TIGTA's employees as we work tirelessly to ensure that our Nation's tax administration system is efficient, effective, and fair.

The Treasury Inspector General for Tax Administration (TIGTA) provides independent oversight of the Department of the Treasury's matters involving Internal Revenue Service (IRS) activities, the IRS Oversight Board, and the IRS Office of Chief Counsel. Although TIGTA is placed organizationally within the Department of the Treasury and reports to the Secretary of the Treasury and to Congress, it functions independently from all other offices and bureaus within the Department.

TIGTA oversees all aspects of activity related to the Federal tax system as administered by the IRS. TIGTA protects the public's confidence in the tax system by identifying and addressing the IRS's management challenges and implementing the priorities of the Department of the Treasury.

TIGTA's organizational structure is comprised of the Office of the Inspector General and six functional offices: the Office of Investigations; the Office of Audit; the Office of Inspections and Evaluations; the Office of Mission Support; the Office of Information Technology; and the Office of Chief Counsel (See chart on page 8).

TIGTA provides audit, investigative, and inspection and evaluation services that promote economy, efficiency, and integrity in the administration of the Internal Revenue laws.

Statutory Mandate

• Protect against external attempts to corrupt or threaten IRS employees.

• Provide policy direction and conduct, supervise, and coordinate audits and investigations related to IRS programs and operations.

• Review existing and proposed legislation and regulations related to IRS programs and operations, and make recommendations concerning the impact of such legislation or regulations.

• Promote the economy and efficiency in the administration of tax laws.

• Prevent and detect waste, fraud, and abuse in IRS programs and operations.

• Inform the Secretary of the Treasury and Congress of problems and deficiencies identified and of the progress made in resolving them.

Organizational Structure

 

 

 

 

Authorities

 

IRS Employee Sentenced for Orchestrating Identity Theft Refund Scheme Using Taxpayer Records

On June 5, 2014, in the Northern District of Georgia, IRS Tax Examining Technician³ Missy Sledge was sentenced for aggravated identity theft and mail fraud. Sledge pled guilty to the offenses in February 2014.⁴

According to court documents, as part of her official IRS duties, Sledge had access to taxpayers' personal identifiers, including names, Social Security Numbers (SSN), dates of birth, and addresses, as well as information about tax professionals. Sledge used this access in furtherance of an identity theft scheme that included the filing of fraudulent tax returns and the subsequent theft of refunds. ⁵ With information from IRS computer systems, Sledge provided taxpayers' personal information to her coconspirators.⁶

It was part of the scheme that others would file fraudulent tax returns with the IRS, using the stolen identities of various taxpayers. Sledge used her IRS computer to review the fraudulent returns submitted, to determine if she could release fraudulent tax refunds from those returns. Sledge would release the fraudulent refund, once identified, for payment. Sledge further assisted those involved in the scheme to impersonate either the taxpayers or their authorized representatives, so that the taxpayers' addresses of record could be changed to a fictitious address accessible to Sledge or others involved in the scheme. Sledge then caused the IRS to mail refunds in the taxpayers' names to the fictitious address, to be intercepted or stolen.⁷

On May 21, 2013, an individual was arrested in Texas and was found to be in possession of an IRS refund check in the amount of $595,901.97, along with three pages of internal IRS documents containing tax information for one of the identity theft victims. A review of IRS systems revealed Sledge made accesses to this taxpayer's account, as well as to the taxpayer's accountant's information, on seven dates between February 2013 and May 2013. The victim was due a large refund because she had overpaid her estimated taxes. One of the perpetrators used the accountant's information and Government-issued representative number to impersonate the tax practitioner in a telephone communication with the IRS on March 5, 2013, in order to change the address on record from a North Carolina address to an address in Atlanta, Georgia. Sledge then released the $595,901.97 refund to the fictitious address.⁸

On May 23, 2013, an e-mail was sent from Sledge's IRS e-mail account containing the personal information for two other taxpayers, a married couple. The e-mail included the taxpayers' names, SSNs, dates of birth, address, and tax preparer's information. A subsequent telephonic address change was made, changing the address of record from the taxpayers' Massachusetts address to a Georgia address, and a refund in the amount of $961,779.33 was paid on or about May 31, 2013. Review of the IRS systems identified accesses to the taxpayers' accounts by Sledge on May 23, 2013, and again in June 2013.⁹

Multiple communications on dates between May 2013 and September 2013 were identified to and from Sledge's IRS e-mail account that relayed taxpayer information and/or internal IRS documents for up to 56 taxpayers to Sledge's coconspirators. Text messages containing taxpayer information and discussing the theft of Government funds were also identified. In one message that she sent to an individual she was trying to recruit as a coconspirator, Sledge told the recipient that she had a business proposition for him and indicated she had a plan to change the addresses so checks would come to him. Sledge offered to split the scheme proceeds three or four ways, depending on the number of people involved. Sledge said she would give him all the information needed to get the address changed without any problems or questions and said, "All of this money is just sitting here for the taking."¹⁰

Sledge was sentenced to 57-months imprisonment, followed by five years of supervised release. Sledge was also ordered to pay restitution to the IRS in the amount of $501,048.40.¹¹

Former Orthodontist Sentenced for Interference With the IRS and False Claims for Refunds

On April 21, 2014, in the Northern District of New York, Glenn R. Unger was sentenced for obstructing and impeding the IRS, submitting false claims for refunds, tax evasion, and submitting fictitious obligations.¹² A jury found Unger guilty of the offenses on October 21, 2013.¹³

According to court documents, Unger, a former orthodontist, corruptly obstructed and impeded the due administration of Internal Revenue laws through fraudulent and obstructive acts from at least 2007 through 2011. Unger filed 14 false and fraudulent claims with the IRS requesting refunds totaling approximately $36 million. One of the primary tax schemes Unger used was the 1099-Original Issue Discount (OID) Scheme.¹⁴ The IRS notified Unger in several letters that his returns were frivolous and subject to a $5,000 penalty per frivolous return. Subsequently, the IRS assessed multiple frivolous filing penalties against Unger. Additionally, the IRS assessed Unger for taxes he owed on income for Tax Years (TY) 2005 and 2006.¹⁵

When Unger was contacted by the IRS Revenue Officer assigned to collect the taxes due and owing, he submitted documentation with constitutional arguments meant to impede and impair the IRS from collecting his taxes due. After unsuccessful attempts to collect the taxes, penalties, and interest from Unger, the IRS filed a tax lien against him in the amount of $116,410.43.¹⁶ Unger subsequently filed false documentation with the Saratoga County Clerk's Office, specifically a "Presentment by Notary Public of Certificate for Filing," attempting to release the Federal tax lien and indicating the matter had been resolved.¹⁷

From the late 1990s through at least the middle of 2006, Unger practiced as an orthodontist at Columbia County Orthodontics in Chatham, New York. In the spring of 2006, Unger approached a nearby orthodontist and requested that he complete the orthodontic care for approximately 80 of Unger's patients. Unger failed to reveal that all of those patients had prepaid for their services. After the orthodontist requested payment for the work, Unger attempted to pay off the debt with a false "Secured Promissory Note." The note was for the amount of $200,000 and claimed that it would pay the Secretary of the Treasury the full amount, and that the same amount would then be paid to the orthodontist as the "fiduciary" on the note. When the orthodontist attempted to deposit the note at his bank, he found it was worthless. Unger also filed the fictitious promissory note, along with other documents, with the Albany County Clerk's Office in an apparent attempt to have a public filing which reflected the purported payment to the other orthodontist.¹⁸

Unger was sentenced to a total term of imprisonment of 97 months, followed by three years of supervised release. Unger was ordered to pay $200,000 in restitution and all taxes, penalties, and interest due to the IRS.

Examples of High-Profile Reports by the Office of Audit:

Amended Tax Return Filing and Processing Needs to Be Modernized to Reduce Erroneous Refunds, Processing Costs, and Taxpayer Burden

Taxpayers can file Form 1040X, Amended U.S. Individual Income Tax Return, to correct previously filed income tax returns. Claims filed on an amended tax return can relate to any item of income, loss, exclusion, deduction, or credit and may result in a tax refund. Our review of a statistical sample of 259 amended tax returns claiming tax refunds of $500 or more in Fiscal Year (FY) 2012 identified 44 tax returns (17 percent) for which the IRS had issued potentially erroneous tax refunds totaling $103,270. The errors we identified on the 44 tax returns included mathematical errors by both taxpayers and the IRS employees responsible for processing the amended tax returns, as well as claims for deductions and/or credits for which the IRS did not receive third-party information substantiating the validity of the deduction or credit claimed.

The verification processes used for original tax returns are not used to process amended tax returns. As a result, the IRS did not identify the errors associated with the 44 tax returns that contained potentially erroneous claims for refunds. Additionally, the IRS requires amended tax returns to be filed on paper. Electronically filed (e-filed) returns benefit the IRS and taxpayers because both processing costs and error rates are lower than those for paper returns.

Based on the sample results, TIGTA estimates that the IRS may have issued more than $439 million in potentially erroneous tax refunds claimed on 187,421 amended returns in FY 2012. As such, the IRS could issue more than $2.1 billion in potentially erroneous tax refunds claimed on amended tax returns over the next five years. Additionally, TIGTA estimates that the IRS could have potentially saved more than $17 million in processing costs during FY 2012 if it had allowed taxpayers to e-file their amended tax returns.

TIGTA recommended that the IRS revise Form 1040 to enable taxpayers to amend their original tax returns using this form, expand e-filing to include amended tax returns, and conduct a review of the 44 amended tax returns identified for which potentially erroneous refunds were issued, in order to determine the proper tax liability.

In their response to the report, IRS officials agreed with two of the three recommendations and disagreed with one. Although the IRS disagreed with the recommendation to revise Form 1040, it plans to consider changing the format and appearance of Form 1040X. The IRS also plans to consider e-filing of amended returns, based on available funding and resources. The IRS reviewed the 44 potentially erroneous refund returns and generally agreed that procedures were not correctly followed for those identified as having processing errors.

Reference No. 2014-40-028

Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System Business Results

The Automated Collection System (ACS) has an integral role in the IRS's efforts to collect unpaid taxes and secure unfiled tax returns. The ACS is responsible for answering incoming taxpayer calls and working the inventory of taxpayer delinquent accounts. The ACS's work with delinquent taxpayers is a major factor in determining the IRS's overall success in meeting the Collection Program's mission.

The IRS places a high priority on answering incoming telephone calls because it believes that communication with taxpayers helps resolve delinquencies and brings taxpayers into compliance with their tax obligations. Since FY 2010, 39 percent of the ACS workforce has been lost due to attrition or reassignment. Because resources are needed to answer telephone calls, fewer resources are available to work inventory. However, the IRS's overall collection inventory practices were not changed and new inventory continued to be sent to the ACS without interruption, even though inventory was infrequently worked.

The combination of fewer resources and the business need to continue answering telephone calls has contributed to unfavorable trends in several ACS business results over the past four years. Our review of ACS business results for FYs 2010 through 2013 determined that: the inventory is growing, since new inventory is outpacing case closures; the inventory is aging, since the inventory is taking longer to close; revenue has declined; more cases have been closed as Currently Not Collectible; and more cases have been transferred to the Queue,¹⁹ which further reduces the probability of collection.

We also determined that fewer enforcement actions (liens and levies) were taken. To collect delinquent taxes, ACS contact representatives file liens against taxpayers' assets (such as property) and issue levies against taxpayers' wages and bank accounts. In April 2011, the IRS changed its procedures for processing ACS systemic lien determinations. A lien determination is the decision-making process on whether or not to file a Notice of Federal Tax Lien to protect the Government's interest. ACS management changed the criterion for which a lien determination is required. Since the procedural change, as of December 2013, balance due accounts for 118,116 taxpayers had been transferred to the Queue without a Notice of Federal Tax Lien to protect the Government's interest on more than $2.8 billion in tax liabilities. Many of these cases will remain in the Queue and will never be worked. IRS management did not study the impact this policy change would have on tax administration before implementing it.

TIGTA recommended that the IRS: re-examine the ACS's role in the collection workflow process, including inventory delivery to the ACS as well as case retention criteria, and align ACS resources accordingly; request a study to determine the impact of the policy change to not require Notice of Federal Tax Lien determinations on certain unpaid balances; and establish performance metrics for ACS call data to measure the impact that answering taxpayer calls has on compliance business results.

IRS officials agreed with the recommendations and plan to take corrective action.

Reference No. 2014-30-080

The IRS's implementation of audit recommendations results in:

• Cost savings;

• Increased or protected revenue;

• Protection of taxpayers' rights and entitlements; and

• More efficient use of resources.

Security for Taxpayer Data and Employees

The IRS faces the daunting task of securing its massive computer systems against the growing threat of cyberattacks. Effective information systems security becomes essential to ensure that data are protected against inadvertent or deliberate misuse, improper disclosure, or destruction, and that computer operations supporting tax administration are secured against disruption or compromise.

Some Contractor Personnel Without Background Investigations Had Access to Taxpayer Data and Other Sensitive Information

IRS policy requires contractor personnel to undergo background investigations if they will have or require access to Sensitive But Unclassified (SBU) information, including taxpayer information. Taxpayer and other SBU information may be at risk due to a lack of background investigation requirements in five contracts. For example, in one printing services contract, the IRS provided the contractor with a compact disk containing 1.4 million taxpayer names, addresses, and SSNs; however, none of the contractor personnel who worked on this contract were subject to a background investigation.

In addition, TIGTA found 12 contracts for which IRS program and procurement office staff correctly determined that contractor personnel required background investigations because they would have had access to SBU information. However, not all contractor personnel underwent an interim access approval or had a final background investigation prior to beginning work on the contract.

Further, TIGTA identified 20 contracts for which the IRS did not require all individuals with access to SBU information to sign a nondisclosure agreement. The purpose of the nondisclosure agreements is to make contractor personnel aware of their responsibilities for maintaining the confidentiality of taxpayer information and to deter noncompliance by explaining consequences related to violations. Without these signed agreements, the IRS may be unable to hold contractors accountable for failure to properly use and protect SBU information. In June 2013, after the period covered by our audit, the IRS issued more explicit guidance indicating that all contractor personnel who require or have access to SBU information shall complete, sign, and submit an approved nondisclosure agreement.

TIGTA recommended that the IRS:

• Establish clear policies and procedures to assure that the types of service contracts identified in this review have appropriate security provisions and that associated contractor personnel have interim access approvals or final background investigations prior to beginning work on the contract;

• Evaluate and, if feasible, implement enhanced security requirements policies and procedures for emergency procurements;

• Train program office and procurement staff on contractor security requirements and the necessity for contractor personnel to sign nondisclosure agreements prior to working on a contract;

• Consider implementing a policy to ensure that contracts include requirements for contractors to provide a level of detail in their invoices that allows for proper receipt and acceptance; and

• Work with the Department of the Treasury Security Office to review the waiver currently in place that exempts expert witnesses from the background investigations and determine if the waiver is still appropriate in the current security environment.

Reference No. 2014-10-037

Implementing the Affordable Care Act and Other Tax Law Changes

Each filing season tests the IRS's ability to implement tax law changes made by Congress, because the IRS must often act quickly to assess the changes and determine the necessary actions to:

• Ensure that all legislated requirements are satisfied;

• Create new or revise existing tax forms, instructions, and publications;

• Revise internal operating procedures; and

• Reprogram major computer systems used for processing returns.

The closure of Government operations between October 1 and October 16, 2013 reduced the time the IRS had to implement tax law changes and bring tax return processing systems online. As a result, the IRS delayed the start of the filing season from January 21 to January 31, 2014.

As of May 2, 2014, the IRS had received more than 135.5 million tax returns. Of those, more than 117 million (86.4 percent) were e-filed and nearly 18.5 million (13.6 percent) were filed on paper. The e-file volume was 2.9 percent higher than the volume for the same period in the 2013 Filing Season. The IRS had issued more than 99.9 million refunds totaling nearly $269.5 billion as of May 2, 2014.

The IRS reported that it had identified and confirmed 236,313 fraudulent tax returns involving identity theft as of April 30, 2014. Overall, the IRS identified 268,233 tax returns with more than $1.48 billion claimed in fraudulent refunds and prevented the issuance of more than $1.32 billion (88.9 percent) of the fraudulent refunds it identified. The IRS also identified 63,087 potentially fraudulent tax returns filed with prisoner SSNs for screening.

Our review of those tax provisions that created additional taxes or modified existing tax provisions for the 2014 Filing Season found that the key provisions were correctly implemented. However, we did identify a problem in which some taxpayers' nonrefundable credit claims were being improperly reduced due to IRS employee error.

The IRS continues to offer more self-assistance options that taxpayers can access 24 hours a day, seven days a week. However, the IRS did not always ensure that these self-help tools were updated with the most current tax information before the start of the filing season. In addition, the number of taxpayers assisted at IRS Taxpayer Assistance Centers and over the telephone continues to decline.

Finally, TIGTA found that some taxpayers and tax return preparers continue to misuse the split refund option to direct a portion of a tax refund to a preparer for payment of services. TIGTA also found that some paid tax return preparers continue to be noncompliant with the Earned Income Tax Credit (EITC) due diligence requirements, but the number has decreased substantially when compared to previous filing seasons.

TIGTA recommended that the IRS:

• Review the tax returns in which it appears that the split refund option was used inappropriately to direct a portion of the tax refund to the tax return preparer;

• Implement computer programming to systemically ensure that taxpayers' claims for nonrefundable credits are allowed when applicable;

• Ensure that EITC due diligence penalties are assessed on all paid tax return preparers who do not comply with the due diligence requirements; and

• Ensure that YouTube videos are updated with the most current tax information.

Reference No. 2014-40-077

Tax Compliance Initiatives

Tax compliance initiatives include the administration of tax regulations, collection of the correct amount of tax from businesses and individuals, and oversight of tax-exempt and Government entities. Increasing voluntary taxpayer compliance and reducing the Tax Gap ²⁰ remain the focus of many IRS initiatives. Although the IRS reported that the Tax Gap is caused by both unintentional taxpayer errors and willful tax evasion or cheating, it does not have sufficient data to distinguish the amounts attributable to each. The IRS also reported that a meaningful improvement in the voluntary compliance rate requires a long-term, focused effort involving taxpayer service, modernization, and enforcement.

Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes

While tax-exempt organizations are generally not required to pay income taxes, they are generally required to pay other taxes, such as payroll taxes. IRS records indicate that, while a majority of tax-exempt organizations pay their Federal taxes, there is a small percentage that are not paying their taxes. More than 64,200 tax-exempt organizations (3.8 percent) owed nearly $875 million of Federal tax debt as of June 16, 2012. While some organizations owed minor amounts, approximately 1,200 tax-exempt organizations owed more than $100,000 each. Unpaid taxes were often associated with multiple tax periods. For example, nine organizations each had Federal tax debt spanning 10 or more years that collectively totaled more than $5.5 million.

TIGTA reviewed 25 organizations -- each of which was tax-exempt under I.R.C. § 501(c)(3) -- that appeared to be among the worst examples involving unpaid Federal tax (but not representative of the population of all tax-exempt organizations with unpaid tax). These organizations generally received Government payments of $148 million over a three-year period, including Medicare, Medicaid, and Government grants; had annual revenue of almost $167 million; and owned assets of more than $97 million, but continually failed to remit payroll and other taxes, including penalties and interest, totaling more than $25 million.

The Internal Revenue Code does not authorize the IRS to revoke tax-exempt status based on an organization's failure to pay payroll taxes, and most of the organizations that TIGTA reviewed were still recognized by the IRS as tax-exempt as of May 2013. The Exempt Organizations function had completed several examinations, but was generally not aware of the behavior of the organizations because another IRS business unit is responsible for collecting the delinquent tax debt.

TIGTA recommended that the IRS:

• Determine what information or systems are available from collection cases that would be useful in identifying tax-exempt organizations potentially abusing the tax system;

• Periodically complete analyses to identify for examination (if necessary) tax-exempt organizations that potentially abuse their tax-exempt status; and

• Work with the Department of the Treasury to evaluate whether a legislative proposal is warranted to strengthen the IRS's ability to enforce payroll tax noncompliance by tax-exempt organizations.

Expansion of the Delinquent Return Refund Hold Program Could Improve Filing Compliance and Help Reduce the Tax Gap

The IRS has the authority to delay issuing income tax refunds for up to six months while it investigates return delinquencies from other tax years. By holding refunds, the IRS encourages taxpayers to take action and resolve their delinquent filing obligations earlier. In Calendar Year (CY) 2012, the IRS's Delinquent Return Refund Hold Program (Program) collected nearly $242 million, which was applied to balances due on delinquent returns.

TIGTA compared delinquent return data for a population of refund hold cases with a certain dollar amount above the threshold criteria to a population of cases with a certain dollar amount below the threshold criteria (i.e., refunds were not held for these cases). This comparison shows that the Program significantly increased taxpayer filing compliance by successfully prompting taxpayers to resolve return delinquencies from previous tax years. Specifically, 88 percent of delinquencies associated with the held refunds were subsequently resolved, compared with less than one percent of delinquencies associated with cases for which refunds were not held.

In a prior report,²¹ TIGTA recommended that the IRS re-evaluate the administrative dollar tolerance for holding refunds, to determine whether the dollar threshold could be reset at a lower level. Upon evaluation, the IRS proposed lowering the Program threshold and determined that a tolerance change could have resulted in approximately 50,000 additional refund returns held during FY 2009, adding potential revenue of $21 million. In the current budget environment, lowering the threshold and expanding the Program represents an opportunity to increase both taxpayer filing compliance and revenue dollars at a lower cost than traditional collection programs, such as assigning cases to revenue officers in the field. Further, such efforts could have a direct positive impact on lowering the Tax Gap.

TIGTA recommended that the IRS consider opportunities to expand the use of the Program as resources become available, and that it develop specific performance measures to compare actual results with management's goal to improve filing compliance.

The IRS agreed with the recommendations. However, management did not commit to a specific corrective action plan to expand the Program and agreed only to explore the development of performance measures, with implementation dependent on the availability of resources. Reference No. 2014-30-023

Additional Actions Are Needed to Ensure That Improper Fuel Tax Credit Claims Are Disallowed

Taxpayers are allowed to claim a fuel tax credit on their individual tax returns to offset the amount of any Federal taxes paid on fuel used for off-highway business purposes, such as farming or commercial fishing. In Processing Years (PY) 2011 through 2013, approximately $694 million in fuel tax credits were claimed by individual taxpayers. A significant number of claims for these credits are potentially improper. For several years, the IRS has included fuel tax credit scams on its annual list of the "Dirty Dozen" tax scams.

Our evaluation of data from PYs 2011 through 2013 indicates that a total of 4,004 Forms 1040, U.S. Individual Income Tax Return, claiming a fuel tax credit at or above the threshold amount for manual screening were not properly coded for review, and credits totaling approximately $47.2 million may have been erroneously released to taxpayers. Furthermore, there were 198,395 returns with fuel tax credit claims below the manual screening threshold amount that were questionable because they did not report any business income to support the business use of the fuel. These lower claim amounts are generally not selected for review under current IRS policy. As a result, approximately $120.5 million in questionable fuel tax credit claims may have been allowed in the three years reviewed.

TIGTA's evaluation indicates that a combination of factors caused the IRS to release the questionable claims and that the IRS can take actions at the processing and examination levels to better ensure that fuel tax credit claims are refunded only when appropriate. Without improved controls and processes to prevent the issuance of questionable refunds, millions of dollars in Federal tax revenue will be lost each year.

TIGTA recommended that the IRS:

• Use systemic controls to ensure that all Forms 1040 filed claiming a fuel tax credit at the threshold amount or above are manually reviewed prior to refund issuance;

• Consider lowering the systemic threshold amount for selecting and reviewing Forms 1040 that claim a fuel tax credit but report only wage income; and

• Provide managers and examiners with additional training and procedures to determine acceptable supporting documentation for fuel tax credit claims.

Modernization

The Business Systems Modernization Program is a complex effort to modernize IRS technology and related business processes. It involves integrating thousands of hardware and software components while replacing outdated technology and maintaining the current tax system. The IRS's modernization efforts are expected to provide the foundation for implementing a real-time tax system, reducing improper payments and fraudulent refunds, and providing the technology infrastructure and architecture that will enable taxpayers and other stakeholders to securely access tax account information.

Customer Account Data Engine 2 Database Validation Is Progressing; However, Data Coverage, Data Defect Reporting, and Documentation Need Improvement

There is a significant effort underway to ensure the accuracy of individual taxpayer account data on the Customer Account Data Engine 2 (CADE 2) database. This effort is an important part of the implementation of the CADE 2 database because inaccurate data could delay this database from becoming the authoritative source of data, thereby increasing the cost of implementation.

Data validation efforts were efficiently performed due to adequate planning and resource coordination. The IRS identified the data fields to be verified and the manner in which each would be validated. While a large percentage of the data fields are validated with automated data compare tools, there is no documented plan to ensure that data fields validated using other means are validated periodically.

The IRS developed a Data Quality Scorecard to track progress in meeting data quality success criteria. However, the processes needed to effectively perform these activities were not sufficiently documented. As a result, some of the metrics were initially reported incorrectly.

TIGTA recommended that:

• Data validation test results be maintained and available for data fields not validated by automated data compare tools;

• Data validation plans include periodically validating the data fields that are not validated with automated data compare tools;

• All data sampling processes be completely documented;

• Details needed for determining the Data Quality Scorecard metrics be completely documented;

• All documentation needed to verify the data in the Data Quality Scorecard be stored for future reference;

• Automated data compare tools identify and report on data fields, not field identifier numbers; and

• Automated data compare tool reports clearly identify counters and align with data validation metrics.

The Information Reporting and Document Matching Case Management System Could Not Be Deployed

The Information Reporting and Document Matching (IRDM) legislation requires third-party payors to submit information returns to the IRS showing the amount of revenue earned by businesses. The legislation requires these payors to report information to the IRS for three issues that contribute to the Tax Gap. The three transaction types involve merchant payment cards, cost basis for securities, and certain Government payments.

The IRDM Case Management System requirements were not sufficient for the successful deployment of the System. User Acceptance Testing generated a high number of problem tickets, 50 percent of which were to clarify requirements and business rules. After a year of User Acceptance Testing, IRS officials acknowledged that the IRDM Case Management System could not effectively process business cases containing underreported income and could not be deployed into the IRS production environment.

In the absence of an IRDM Case Management System, thousands of business taxpayer cases containing underreported income could not be processed. The IRS spent approximately $8.6 million from FYs 2009 through 2013 on developing the IRDM Case Management System. Unprocessed 2011 cases could have potentially resulted in assessed taxes of $54.9 million.

TIGTA recommended that the IRS:

• Ensure that requirements management processes for future IRDM Case Management System development are performed in accordance with established guidelines;

• Ensure that IRDM Case Management System requirements are completely identified; and

• Assess Case Management capabilities and act promptly to implement an IRDM case management application to avoid losing significant tax assessment revenue in the future.

A Service-Wide Strategy Is Needed to Increase Business Tax Return Electronic Filing

While e-filing of business tax returns continues to increase, the e-filing rate still lags behind that of individual tax returns. Since RRA 98 went into effect, the IRS has focused most of its efforts on increasing the e-filing rate of individual tax returns. These efforts have resulted in considerable growth in the e-filing of individual tax returns, which was at an 81 percent rate in PY 2012, compared to a 41 percent rate for business tax returns in TY 2012.

Employment tax returns provide the most significant opportunity for growth in business e-filing. For TY 2012, more than 21.1 million employment tax returns (71 percent) were paper-filed. Stakeholders have cited a burdensome electronic signature process as one of the barriers to e-filing employment tax returns.

Processes have not been established to consistently ensure compliance with e-filing requirements and assessment of penalties. A Federal mandate was enacted in January 2012 requiring paid preparers who file 11 or more individual returns to e-file. A similar requirement for paid preparers who file business returns would result in an increase of e-filed business returns. Our review of TY 2012 business tax returns found that the IRS could increase its e-filing rate by 23.8 percent and reduce paper return processing costs by more than $17 million annually if a similar e-filing requirement applied to paid preparers filing business tax returns.

TIGTA recommended that the IRS:

• Develop a business tax return e-filing Service-wide strategy;

• Continue to expand the types of business tax returns that can be e-filed;

• Evaluate the possibility of providing business filers with the option of Free Fillable Forms;²²

• Develop a less burdensome electronic signature process for employment tax returns;

• Evaluate the feasibility of using the Electronic Federal Tax Payment System to e-file employment tax returns;

• Develop processes and procedures to consistently identify business filers that are not compliant with the e-filing requirements;

• Develop processes and procedures to consistently assess penalties; and

• Work with the Department of the Treasury to consider a legislative proposal to revise current requirements and/or create new requirements for the e-filing of business tax returns.

Providing Quality Taxpayer Service Operations

The Department of the Treasury and the IRS recognize that the delivery of effective taxpayer service has a significant impact on voluntary tax compliance. Answering taxpayers' questions to assist them in correctly preparing their returns reduces the need to send notices and correspondence when taxpayers make errors. Taxpayer service also reduces unintentional noncompliance and shrinks the need for future collection activity.

The Taxpayer Advocate Service Can Improve the Processing of Systemic Burden Cases

Congress established the Office of the Taxpayer Advocate to assist taxpayers who experience difficulties resolving their tax problems with the IRS or receiving timely and appropriate responses to their inquiries. Many of these taxpayer issues fall under the category of systemic burden, which involves instances in which an IRS process, system, or procedure has not operated as intended.

The Taxpayer Advocate Service (TAS) properly exercised its authorities when taking account-related actions to assist taxpayers. However, TIGTA's review of TAS's handling of a statistical sample of cases found several areas in which taxpayer service could be improved. Specifically, TIGTA found that in more than one-half of the cases TAS personnel bypassed taxpayers' authorized representatives, made unauthorized disclosures to third parties, or made numerous processing errors.

To help keep its workload manageable, TAS has policies in place establishing which types of cases it will accept and which it will refer to other IRS functions. However, TIGTA found that TAS often accepted cases that its policies noted should have been referred to other IRS functions. Accepting these cases increases TAS's workload; nonetheless, it is within TAS's discretion to do so.

TIGTA recommended that the Office of the Taxpayer Advocate:

• Reissue guidance to TAS personnel explaining the requirement to contact only authorized representatives;

• Review the potential unauthorized disclosures of tax return information;

• Provide training regarding its systemic burden case acceptance criteria;

• Consider developing a new or revising an existing criteria code for cases in which TAS exercised its discretion and accepted cases that did not meet its systemic burden acceptance criteria; and

• Reinforce the importance of ensuring that all actions taken on cases are accurate.

Identity Protection Personal Identification Numbers Are Not Provided to All Eligible Taxpayers

To provide relief to victims of identity theft, the IRS began issuing Identity Protection Personal Identification Numbers (IP PIN) to eligible taxpayers in FY 2011. Use of IP PINs provides relief to taxpayers because it allows the IRS to process tax returns without delay and help prevent the misuse of taxpayers' SSNs on fraudulent tax returns.

For PY 2013, the IRS issued over 770,000 IP PIN notices to taxpayers for use in filing their tax returns. This number increased to over 1.2 million for PY 2014. In addition, taxpayers who used their IP PINs to file their tax returns claiming a refund in PY 2013 had their returns processed in a time frame similar to that experienced by the general population of return filers claiming a refund.

Although the program has been expanded, the IRS did not provide IP PINs to 532,637 taxpayers who had identity theft indicators on their tax accounts indicating that the IRS had resolved their cases. The IRS also did not provide IP PINs to 24,628 taxpayers whose Personally Identifiable Information (PII) had been lost, breached, or stolen.

Furthermore, IRS programming errors resulted in 32,274 taxpayers not receiving an IP PIN timely. Other programming errors resulted in the IRS issuing 13,220 IP PIN notices to deceased taxpayers. Sending unnecessary IRS notices to surviving spouses and grieving families adds to their burden. TIGTA also identified that the IP PIN notice issued to 759,446 taxpayers for PY 2013 did not provide taxpayers adequate instructions on how to use the number and the importance of using it on a tax return. For example, the notice did not provide information regarding the effect on the processing of the taxpayer's tax return and the issuance of any refund due if the IP PIN is not used.

TIGTA recommended that the IRS:

• Ensure that IP PINs are consistently issued to victims of identity theft;

• Revise IP PIN issuance criteria to make eligible those taxpayers who have had their PII lost, breached, disclosed, or stolen, and who have authenticated themselves;

• Ensure that finalized IP PIN criteria are provided to the Applications Development function prior to each filing season, and establish a process to ensure that IP PIN criteria are accurately programmed by the Applications Development function; and

• Revise the notice used to issue the IP PIN to clearly detail the effect on the processing of a recipient's tax return, and issuance of any refund due, when the number is not included on a filed tax return.

Achieving Program Efficiencies and Cost Savings

Given the current economic environment and the increased focus by the Administration, Congress, and the American people on Government accountability and efficient use of resources, the American people must be able to trust that their Government is taking action to stop wasteful practices and to ensure that every tax dollar is spent wisely. While the IRS has made progress in using its data to improve program effectiveness and reduce costs, this area continues to be a major challenge.

Controls Over Records Storage Costs Could Be Improved

TIGTA identified two areas in which controls over records storage costs could be improved. Specifically, TIGTA found that, as of June 2013, the IRS had 238,523 cubic feet of records past due for disposal, for which it was obligated to pay ongoing monthly storage costs. As a result, unnecessary costs of over $700,000 were incurred for those records. During our audit, the IRS took a number of actions to address the volume of records past due for disposal and to minimize future costs. The IRS reduced its volume of records past due for disposal from 238,523 cubic feet as of June 2013 to 16,013 cubic feet as of March 2014.

TIGTA also found that the review process and documentation supporting records storage service invoices were not sufficient to reasonably validate the charges billed for the services. For example, TIGTA's review of the invoice certification process from May 2013 through March 2014 did not identify any evidence that the IRS performed a review of supporting information available from the National Archives and Records Administration, or in any way compared the invoiced charges to IRS internal records, prior to certifying the invoices for payment. During this period, the IRS paid the National Archives and Records Administration $30.8 million for storage services. The IRS acknowledged that the approach used to certify these invoices needed improvement and advised TIGTA that it is in the process of addressing this issue by developing additional guidance specifically focused on reviewing and validating invoice charges.

TIGTA recommended that the IRS continue to carefully monitor the volume of records past due for disposal and address any delays in the timely destruction of those records, ensure that established procedures to verify invoice charges are adhered to prior to certifying payment, and review the validity of the charges TIGTA identified as not supported by required documentation.

IRS management agreed with two of the recommendations, but disagreed with the recommendation that it review the validity of all charges identified as not supported by required documentation. TIGTA believes that the $30.8 million paid for records storage service charges that were not supported by required documentation represents a material amount warranting further review by the IRS. Reference No. 2014-10-074

The Internal Revenue Service Should Improve Server Software Asset Management and Reduce Costs

Software licenses are legal rights to use software in accordance with terms and conditions specified by the software copyright owner. Our review of 23 server software products revealed that the IRS is not adequately managing server software licenses. The IRS does not have enterprise-wide or local policies, procedures, and requirements for managing server software licenses and does not have a centralized, enterprise-wide organizational structure for managing server software licenses.

Additionally, the IRS does not have an enterprise-wide inventory of license purchase and deployment data on server-based software, or any specialized software license management tools for developing and maintaining such an enterprise-wide inventory. TIGTA estimates that the amount wasted because of inadequate management of server software licenses is in the range of $81 million to $114 million, based on amounts spent for licenses and annual license maintenance that were not being used at the time of a compliance review. This range could be lower or higher depending on the extent to which the IRS had used the licenses prior to the compliance review. However, the IRS does not know if the software licenses were ever used. In addition, for some software, more licenses were deployed than purchased. TIGTA estimates the value of these overdeployed licenses to be in the range of $24 million to $29 million.

TIGTA recommended that the IRS incorporate server software license management in the enterprise-wide software management program currently under development.

IRS management agreed with the recommendation. Reference No. 2014-20-042

With the development and implementation of new programs by the Department of Health and Human Services (HHS) and the IRS to fulfill the requirements of the Affordable Care Act, both the HHS Office of the Inspector General (OIG) and TIGTA have developed multi-year strategies to assess Affordable Care Act implementation. These strategies include continuing the ongoing coordination between the HHS OIG and TIGTA to help ensure that our work is complementary, and forming a joint working team focused primarily on Premium Tax Credits.²⁴ We plan to closely coordinate with the HHS OIG to review those processes that are highly interdependent between HHS and the IRS, or to perform work jointly where appropriate.

TIGTA has issued numerous reports related to the IRS's efforts to implement the Affordable Care Act tax provisions. For this six-month period, TIGTA issued the following significant reports:

Affordable Care Act: Expanded Guidance Provided Assistance to the Exchanges, but Greater Assurance of the Protection of Federal Tax Information Is Needed

The Affordable Care Act authorizes States to create marketplaces, called "Exchanges," to simplify the search for health coverage by providing multiple options in one place. Eligible taxpayers who purchase health insurance through an Exchange may qualify for and request a refundable tax credit to assist with paying their health insurance premiums. The Affordable Care Act also authorizes the IRS to disclose limited tax return information to the Exchanges when an applicant seeks financial assistance. To protect the confidentiality of the Federal tax information disclosed to the Exchanges, the IRS has established safeguards that the Exchanges must employ.

The IRS provided staff dedicated to facilitating the readiness of the Exchanges to receive Federal tax information and meet the October 1, 2013, deadline for enrollment for health insurance. TIGTA observed the Office of Safeguards' on-site reviews of two Exchanges and found its on-site testing procedures to be generally adequate.

However, additional procedures are needed to provide greater assurance that Federal tax information will be protected prior to approving its release. Specifically, IRS procedures did not require the Exchanges or other agencies to submit an initial independent security assessment report that could help to evaluate risk levels and the status of required security controls. The current documentation on which the Office of Safeguards bases its approval for release of Federal tax information does not provide sufficient evidence that required controls have been implemented. TIGTA also found deficiencies in procedures related to obtaining signed systems security authorizations and ensuring the timely on-site reviews of agencies that have deployed new systems.

TIGTA recommended that the IRS ensure that policy and procedures are revised so that independent assessments of security controls and signed system security authorizations are received and reviewed before the IRS approves the release of Federal tax information, and that on-site reviews of agencies that have deployed new systems are prioritized according to risk and scheduled timely.

IRS management agreed with our recommendations and plans to take appropriate corrective actions. Reference Number: 2014-23-070

Affordable Care Act: Despite Initial Challenges, the Internal Revenue Service Successfully Implemented the Branded Prescription Drug Fee

The Affordable Care Act imposes an annual fee on pharmaceutical manufacturers and importers based on branded prescription drug sales made to specified Government agencies. The fees collected under the branded prescription drug fee program are to be transferred to the Medicare Part B Trust Fund, which is used to subsidize a portion of the Medicare Part B program.

The IRS successfully implemented the branded prescription drug fee through collaborative efforts with various third parties and an alternative approach to calculate and assess the fee. The alternative approach was needed after the IRS learned that the purchasing Government agencies' branded prescription drug sales data would not be available until after the legislative deadline for calculating the annual fee. The IRS developed a new reporting form (Form 8947, Report of Branded Prescription Drug Information) and instructions. TIGTA reviewed a judgmental sample²⁵ of15 Forms 8947(representing more than 80 percent of the sales volume used to calculate the fee) for CYs 2011 and 2012 and independently calculated the fee assessments. TIGTA determined that the IRS's calculation, assessment, and collection of the fees were all accurate for our sampled cases.

TIGTA identified one area requiring management's attention. From TIGTA's sample of 15 cases, TIGTA determined that some covered entities incorrectly interpreted the temporary regulations. Changes to Form 8947 and its instructions should help clarify these issues and reduce the burden on taxpayers.

TIGTA recommended that IRS management revise sections of Form 8947 and its instructions to clarify certain issues.

IRS management agreed with the recommendations and plans to revise sections of Form 8947 and its instructions to clarify taxpayers' understanding and reduce taxpayer burden. Reference Number: 2014-33-032

Affordable Care Act: An Improved Strategy Is Needed to Ensure Accurate Reporting and Payment of the Medical Device Excise Tax

The Affordable Care Act includes a tax provision that provides for an excise tax for medical devices sold beginning January 1, 2013. Manufacturers, producers, and importers are responsible for collecting the medical device excise tax and must file a Form 720, Quarterly Federal Excise Tax Return.

Our review found that both the number of Forms 720 filed that reported the medical device excise tax and the amount of the associated revenue reported are lower than estimated. The IRS is attempting to develop a compliance strategy to ensure that businesses are compliant with medical device excise tax filing and payment requirements and has taken several measures to advise medical device manufacturers of the new excise tax. However, the IRS cannot identify the population of medical device manufacturers registered with the Food and Drug Administration that are required to file a Form 720 and pay the excise tax.

In addition, processing controls do not ensure the accuracy of medical device excise tax figures reported on paper-filed Forms 720. Our analysis of 5,107 Forms 720 processed for the quarters ending March 31 and June 30, 2013, identified discrepancies in the amount of the medical device excise tax and/or the taxable sales amount captured from 276 paper-filed tax returns. TIGTA identified medical device excise tax discrepancies totaling almost $117.8 million when comparing the excise tax amount captured by the IRS from the Form 720 to the excise tax amount calculated by TIGTA.

Finally, the IRS erroneously assessed 219 failure-to-deposit penalties totaling $706,753 against businesses that filed Forms 720 for the quarters ending March 31 and June 30, 2013, which was designated a penalty-relief period. The IRS had reversed 133 of the 219 penalty assessments. When TIGTA alerted the IRS of the remaining 86 penalties, IRS management reversed the penalties and issued apology letters to the affected taxpayers.

TIGTA recommended that the IRS continue to refine its compliance strategy to include actions that can be taken to identify noncompliant manufacturers, establish a process to verify the accuracy of the medical device excise tax amount for paper-filed Forms 720, and initiate a process to correspond with taxpayers to obtain missing taxable sales or tax amounts.

IRS management agreed with the recommendations and plans to take appropriate corrective actions. Reference Number: 2014-43-043

Affordable Care Act: Accuracy of Responses to Exchange Requests for Income and Family Size Verification Information and Maximum Advance Premium Tax Credit Calculation

As of March 31, 2014, the IRS had received more than 27 million Income and Family Size Verification information requests and more than 11 million Advance Premium Tax Credit requests. Based on the information furnished by the Exchange, our review of the IRS's response to 101,018 Income and Family Size Verification requests received by the IRS between October 1 and October 4, 2013, showed that the IRS had provided accurate responses for 100,985 of the 101,018 requests (99.97 percent).

TIGTA identified 33 requests for which the IRS incorrectly notified the Exchange that it could not provide tax information for the individuals for whom the Exchange was requesting information, because the IRS was unable to match the names on the applications to IRS data records. These responses were incorrect because the names of the individuals used on the applications were in fact available in IRS data records. This oversight resulted from a computer programming error in which the IRS data used to provide information in response to Exchange requests did not always contain the most recent name shown on the individual's tax account.

In addition, TIGTA reviewed the IRS's responses to 120,824 Advance Premium Tax Credit requests received between October 1 and October 14, 2013. This review, based on information furnished by the Exchange, showed that the IRS had accurately calculated the maximum monthly Advance Premium Tax Credits for all 120,824 requests.

TIGTA recommended that the IRS ensure that data records used to provide responses to Exchange requests accurately reflect an individual's most recent name, as contained in IRS tax data.

IRS management agreed with the recommendation and has already implemented programming modifications. Reference Number: 2014-43-044

TIGTA special agents are authorized to execute and serve search warrants and arrest warrants; serve subpoenas and summonses; and make arrests without a warrant for any offense against the United States that is related to Internal Revenue laws and is committed in a special agent's presence, or for any felony cognizable under such laws if there are reasonable grounds to believe that the person to be arrested has committed, or is committing, any such felony.

The Performance Model

OI accomplishes its mission objectives through the hard work of its employees and a performance model that focuses OI's resources on three primary areas of investigative responsibility:

• Employee integrity;

• Employee and infrastructure security; and

• External attempts to corrupt tax administration.

Employee misconduct undermines the IRS's ability to deliver taxpayer service, to enforce tax laws effectively, and to collect taxes owed to the Federal Government. External threats against the IRS impede its ability to fairly and efficiently carry out its role as the Nation's revenue collector. Individuals who attempt to corrupt or otherwise interfere with tax administration negatively impact the IRS's ability to collect revenue.

TIGTA refers its investigations to the Department of Justice for prosecution when warranted.

Performance Area: Employee Integrity

Taxpayers must have confidence in the fair and impartial administration of the Federal tax system. IRS employee misconduct, whether real or perceived, can erode the public's trust and impede the IRS's ability to effectively enforce tax laws. Employee misconduct can take many forms, such as the misuse of IRS resources or authority, theft, fraud, extortion, taxpayer abuse, unauthorized access to, and disclosure of, tax return information, and identity theft.

During this reporting period, employee integrity investigations accounted for 54 percent of OI's work. The following cases represent OI's efforts to ensure employee integrity during this six-month reporting period:

 

Employee Integrity

 

 

 

On June 17, 2014, in the Eastern District of Pennsylvania, IRS employee Lora Lewis pled guilty to filing false Federal tax returns.²⁶ Lewis was charged with the offense on April 15, 2014.

According to court documents, Lewis, while employed as an IRS contact representative in Philadelphia, Pennsylvania, made various false claims on her tax returns for TYs 2007 through 2011. During TYs 2007 through 2011, Lewis received unemployment compensation while employed full time at the IRS, but did not report such compensation on her tax returns. During the same tax years, Lewis filed her returns claiming "Head of Household" status, thereby increasing her standard and other deductions by $16,059 in total. She also claimed EITCs each year, totaling $11,961, to which she was not entitled. Other facts related to the offense include the following:

• In TY 2008, Lewis claimed the $7,500 First Time Homebuyers Credit, even though she did not purchase a home.

• In TYs 2009 through 2011, Lewis claimed education credits to which she was not entitled, totaling $5,600.

• In TYs 2008, 2010, and 2011, Lewis received distributions from her Thrift Savings Plan in the amount of $8,144, but did not report the distributions as income and repay such funds.

• In TYs 2008 through 2011, Lewis claimed Individual Retirement Account (IRA) deductions in the amount of $5,000, thereby lowering her taxable income each year, knowing that she did not have an IRA.

• In 2009, Lewis claimed on her income tax return that she purchased an automobile, although she did not.²⁷

On April 11, 2014, in the Southern District of Texas, former Internal Revenue Service (IRS) employee Temi Russell was sentenced for conspiracy to commit passport fraud.²⁸ Russell pled guilty to the offense in April 2013.²⁹ From October 11, 2007 through September 2, 2010, Russell and a coconspirator, Nyle Churchwell, worked at a Federal building in Houston, Texas.³⁰ Russell was an IRS Tax Examiner and Churchwell was a Senior Fraud Adjudication Manager for the Houston Passport Agency.³¹ Russell introduced another coconspirator, Lorna Brown, to Churchwell.³²

As part of the scheme, Brown, who was found guilty of aiding and abetting in this matter,³³ brought non-U.S. citizens to the passport office to get false U.S. passports.³⁴ Russell and Churchwell assisted applicants with false passport applications. Churchwell then approved false passports knowing that the documents and witness information submitted was false.³⁵ After the passports were processed, Russell would pick up and deliver them to the subjects. ³⁶ Russell was sentenced to five years of probation, including six months of home detention, and was fined $1,000.³⁷

It is particularly troubling when IRS employees, who are entrusted with the sensitive personal and financial information of millions of taxpayers, misuse their positions in furtherance of identity theft and other fraud schemes. This breach of trust erodes the public's confidence in the IRS. TIGTA proactively reviews the activities of IRS employees who access taxpayer accounts for any indication of unauthorized accesses that may be part of a larger fraud scheme. The following cases represent OI's efforts to investigate identity theft committed by IRS employees during this six-month reporting period:

IRS Data Entry Clerk Sentenced for Identity Theft Scheme Using IRS Documents

On July 7, 2014, in the Eastern District of California, IRS employee Monica Hernandez was sentenced for making and subscribing a false income tax return, wire fraud, and aggravated identity theft.³⁸ Hernandez pled guilty to the offenses in January 2014.³⁹ According to court documents, at all times relevant to the offenses, Hernandez was employed as a part-time data entry clerk at the IRS Fresno Service Center in Fresno, California. As part of her duties, Hernandez regularly handled and processed tax returns on behalf of the IRS by entering taxpayers' tax information into the IRS computer system. During the course of her IRS employment, Hernandez stole tax information in order to file fraudulent tax returns and claim large tax refunds.

Specifically, Hernandez stole taxpayers' Forms 1099-B, which list income received and moneys withheld from interest and dividend earnings. Hernandez then falsified and forged the Forms 1099 to reflect her personal information and filed her own tax returns claiming the information from the forged 1099s in the form of excessive withholdings.⁴⁰ Between 2007 and 2009, Hernandez filed three false tax returns for herself using this method and obtained refunds from the IRS in the amount of $175,144.⁴¹

Starting on or around February 2010, Hernandez began to file a new series of fraudulent tax returns, falsely claiming excessive withholdings. However, this time she used the personal information belonging to other individuals, rather than her own, to obtain the large refunds. Hernandez initially acquired the identification information of some of the individuals, including deceased persons, from sites on the Internet. She also used the identity of a relative to file one false return and subsequently opened a bank account in the relative's name in order to deposit the fraudulently obtained refund check.⁴²

In continuance of her scheme, Hernandez illegally acquired and removed 68 separate tax returns from the IRS Service Center in Fresno, California. These returns had been received by the IRS, but had not yet been entered into the IRS computer system. The stolen tax returns contained the names, SSNs, addresses, and other pertinent data associated with the taxpayers. Hernandez then proceeded to file fraudulent tax returns electronically for her own benefit, using the identification of some of these taxpayers, and claimed excessive withholdings from dividends and interest income in order to increase the amount of the refunds. Hernandez filed approximately 10 tax returns, in which she attempted to claim refunds totaling $1,745,013.⁴³

Hernandez was sentenced to 53-months imprisonment, followed by three years of supervised probation. Additionally, Hernandez was ordered to pay restitution to the IRS in the amount of $175,144.⁴⁴

IRS Employee Arrested in $1 Million Identity Theft Conspiracy

On July 18, 2014, IRS employee Viririana Hernandez and coconspirators Roberto Martinez, Jr. and Lilliana Gonzales were arrested in Fresno, California.⁴⁵ The three, along with co-defendant Daniel Miranda, Jr., were indicted in the Eastern District of California on July 17, 2014, for conspiracy, wire fraud, bank fraud, and aggravated identity theft. Miranda was also charged with mail fraud.⁴⁶

According to court documents, the four engaged in an identity theft conspiracy using the personal information of victims obtained through various methods, including IRS personnel records. Hernandez has been employed by the IRS in Fresno since 2006, working in a variety of administrative positions, some allowing her access to human resources files on other IRS employees. From at least June 2012 through at least January 2014, Hernandez, Miranda, Martinez, and Gonzales conspired to defraud retail merchants, cardholders, and banks to obtain money, services, and property under fraudulent pretenses. As part of the conspiracy, Hernandez mined IRS databases for personal information, such as dates of birth and SSNs belonging to current and former IRS workers, and made such information available for use by the other conspirators. By October 2012, defendant Miranda possessed the personal information of approximately 288 current and former IRS employees. The defendants also obtained personal information through a number of employment applications for a franchise restaurant.⁴⁷

Once in possession of some initial personal information, the conspirators sought to obtain additional information, including details of credit cards and other financial accounts. They then used the personal information to fraudulently open new financial accounts in the victims' names or to fraudulently gain access to the victims' existing financial accounts, often by adding themselves as authorized users. The conspirators made a myriad of fraudulent purchases using this method of access to their victims' bank and store credit accounts. The defendants also used their wrongful access to get cash advances from ATMs and in-person bank transactions. On at least two occasions, the victim's personal data, including name, date of birth, address, and specific store credit account information was sent via text to IRS employee Hernandez. On one such occasion, the same day that she received the victim's account information by text, Hernandez subsequently used it to purchase three Gucci watches, totaling $3,348.89, at Macy's.⁴⁸

To avoid detection and maximize the amount of money, goods, and services they could obtain, the conspirators often made numerous purchases on the accounts in a short amount of time, before their fraud was discovered and the accounts were suspended. They also used the victims' accounts to purchase gift cards or to purchase merchandise and then return the merchandise for store credit. This allowed the defendants to continue to use gift cards or store credit even if a victim had cancelled access to the credit card.⁴⁹

In total, the conspiracy involved at least 160 victims and fraudulent attempts to obtain over $1 million in goods and services. The defendants, if convicted, could face a maximum sentence of 30 years in prison.⁵⁰

Employee Integrity Projects

TIGTA ensures IRS employee integrity by conducting proactive investigative initiatives to detect misconduct in the administration of IRS programs. During this reporting period, TIGTA initiated 28 proactive investigations to detect systemic weaknesses or potential IRS program vulnerabilities.

Performance Area: Employee and Infrastructure Security

Collecting taxes is a critical function of the Federal Government. Threats and assaults directed at IRS employees, facilities, and infrastructure impede the effective administration of the Federal tax system and the IRS's ability to collect tax revenue. All reports of threats, assaults, and forcible interference against IRS employees performing their official duties are referred to OI. During this six-month reporting period, OI responded to 994 threat-related incidents.

Contact with the IRS can be stressful and emotional for taxpayers. While the majority of taxpayer contacts are routine, some may become confrontational and even violent. TIGTA's special agents provide physical security, known as "armed escorts," to IRS employees who have face-to-face contact with taxpayers who may pose a danger to them, to ensure that these employees have a secure environment in which they can perform their critical tax administration functions. During this six-month reporting period, OI conducted 33 armed escorts for IRS employees.

OI provides investigative information to the IRS Office of Employee Protection (OEP) to identify potentially dangerous taxpayers (PDT). Taxpayers meeting the IRS PDT criteria are designated as potentially dangerous. Five years after this designation has been made, TIGTA conducts a follow-up assessment of the taxpayer so that OEP can determine if the taxpayer still poses a danger to IRS employees.

During this six-month reporting period, threat and assault investigations accounted for 36 percent of OI's work. The following cases represent OI's efforts to ensure the safety of IRS employees during the reporting period:

 

Threats/Assualts

 

 

 

On May 23, 2014, in the District of Rhode Island, Andrew Calcione was found guilty in a bench trial⁵¹ for retaliating against a Federal official with threats and for threatening the official's family member.⁵²

According to court documents, Calcione knowingly and intentionally threatened to assault and murder an IRS Revenue Agent, as well as the Revenue Agent's immediate family member. Calcione made such threats with the intent to impede, intimidate, and interfere with the official duties of the IRS employee and to retaliate against the employee on account of the employee's performance of official IRS business.⁵³

An IRS examination of Calcione's 2008-2010 Federal tax returns had resulted in an estimated tax liability of $300,000. Calcione previously operated his own insurance and financial services business in Rhode Island, but the Rhode Island Department of Business Regulation had taken action against his Insurance Producer's License. A few days after Calcione was contacted by the IRS Revenue Agent regarding the ongoing examination of his tax returns, Calcione left a voice mail message that contained threatening statements on the Revenue Agent's business telephone. The threat was clear, unambiguous, and frighteningly detailed. In summary, Calcione said he was going to show up where the Revenue Agent lived the next time he called. The message further contained a threat to torture the Revenue Agent, rape and kill his wife, then murder his child in front of him, all before ultimately killing the Revenue Agent.⁵⁴

Performance Area: External Attempts to Corrupt Tax Administration

TIGTA also investigates external attempts to corrupt or impede tax administration. These crimes include: impersonating IRS employees or misusing the IRS emblems or seals; filing false or frivolous documents against IRS employees; using fraudulent IRS documentation to perpetrate criminal activity; offering bribes to IRS employees to influence their tax cases; or committing fraud in contracts awarded by the IRS to contractors. These attempts to corrupt or otherwise interfere with tax administration not only inhibit the IRS's ability to collect revenue, but they also undermine the public's confidence in fair and effective tax administration.

For example, individuals may impersonate the IRS or its employees to obtain Personally Identifiable Information (PII) from unsuspecting taxpayers or to defraud them out of their money. These individuals may claim to be IRS employees on the telephone or may misuse IRS logos, seals, or symbols to create official-looking letters and e-mails they send to taxpayers. The taxpayers are often told they owe money to the IRS that must be paid through a pre-loaded debit card or wire transfer. Sometimes taxpayers are tricked into providing their PII, which the impersonator uses to commit identity theft. TIGTA aggressively investigates these criminal activities to ensure that taxpayers maintain confidence in the integrity of Federal tax administration.

In a current nationwide impersonation scam investigation, as of September 22, 2014, OI has received over 154,000 reports from taxpayers who were contacted by individuals impersonating IRS employees. More than 1,600 individuals have provided their PII to these criminals and/or paid them more than $9 million.

Also, individuals with personal vendettas against the IRS sometimes file false liens or other financial encumbrances against IRS employees in retaliation. The filing of an invalid lien in retaliation against a Government employee not only creates personal financial troubles for the targeted employee, it is also a criminal act. TIGTA special agents investigate these acts of retaliation and work with the Department of Justice to prosecute such acts that interfere with or impede Federal tax administration.

During this reporting period, investigations into attempts to corrupt or impede tax administration accounted for 10 percent of OI's work. The following cases represent OI's efforts to investigate and deter external attempts to corrupt tax administration during this six-month reporting period:

 

External Attempts to Corrupt

 

 

 

On April 16, 2014, in the District of Oregon, Mark Ellis was sentenced for making false claims to the IRS and retaliating against a Federal law enforcement officer.⁵⁵ Ellis pled guilty to the offenses in August 2013.⁵⁶

According to court documents, Ellis, a resident of Bend, Oregon, used and promoted illegal debt termination programs in an attempt to fraudulently cancel his and others' debts, including home mortgages and credit card bills, and to falsely obtain tax refunds to which he and others were not entitled. Specifically, Ellis purchased and used trusts to illegally hide income and assets from the IRS, and filed false Forms 1099-OID (known as IRS Original Issue Discount forms) and false Federal tax returns, causing the IRS to issue him a tax refund in the amount of $311,459.56.⁵⁷

In retaliation against Federal officials, Ellis filed several false liens in public records against the real and personal property of former Secretary of the Treasury Timothy Geithner and two other Federal employees on account of the performance of their official duties, knowing such liens contained false and fictitious representations.⁵⁸

Ellis was sentenced to 12-months and one-day imprisonment and was ordered to pay restitution to the IRS in the amount of $311,459.56. He was further ordered to submit true and accurate returns for TYs 2004 through 2013 and pay all associated taxes due.⁵⁹

Ohio Accountant Pleads Guilty to Impeding the Internal Revenue Laws and Schemes to Defraud His Clients

On June 10, 2014, in the Eastern District of Pennsylvania, accountant Andrew Zelenkofske entered a guilty plea for interfering with the administration of the Internal Revenue laws, wire fraud, mail fraud, and engaging in monetary transactions in property derived from specified unlawful activity.⁶⁰ Zelenkofske was charged with the offenses on January 9, 2014,⁶¹ and June 3, 2014,⁶² in associated cases.

According to court documents, from approximately 2009 through 2013, Zelenkofske engaged in various schemes to defraud individuals to obtain money by means of false and fraudulent pretenses and representations, and to obstruct the due administration of the Internal Revenue laws.⁶³

Zelenkofske, a resident of Ohio, provided tax and accounting services to individuals, including the preparation of Federal and State income tax returns. Some of Zelenkofske's clients were Pennsylvania residents. In November 2013, Zelenkofske had a power of attorney to represent a Pennsylvania couple before the IRS. After the IRS issued a levy to a financial firm in the amount of $91,193.53 for taxes owed by the couple, Zelenkofske corruptly endeavored to impede the Internal Revenue laws by transmitting, via e-mail, a falsified IRS Form 668-D, Release of Levy, purportedly removing the levy from the couple's account. Zelenkofske did so knowing the IRS had not authorized the release of the levy.

Prior to this, around April 2011, Zelenkofske devised a scheme to defraud another Pennsylvania client, a senior citizen with little experience managing financial matters. Zelenkofske falsely represented that the client owed the IRS a substantial amount of taxes and directed the client to send him multiple payments for the purported taxes. Zelenkofske kept all of the money received from the victim and used it for his own personal and business expenses, defrauding the client of approximately $237,050.

Zelenkofske also identified start-up businesses as investments for his clients and business associates. In 2003, Zelenkofske recruited four individuals to invest in a start-up retailer in Philadelphia, Pennsylvania called Five Below, Inc. Zelenkofske and the other four individuals each contributed $40,000 towards the investment. In 2010, when Five Below issued a dividend check in the amount of $704,556.58 to the investors, Zelenkofske received and deposited the check as the managing member of the holding company, but concealed the payment from the other investors, representing that he did not receive it. When confronted about the dividend payment, Zelenkofske admitted its receipt and entered into an agreement to repay the four victims approximately $563,520. He repaid a portion of the debt, leaving the victims defrauded of approximately $137,254.⁶⁴

In another scheme, Zelenkofske solicited and received $650,000 from individuals for a purported investment opportunity in a biotechnology company. Rather than using the funds as he represented, Zelenkofske used the money to finance his own personal and business expenses, including $200,000 which he used for an investment in the start-up company in his own name.⁶⁵

New Jersey Man Pleads Guilty to Forging Documents to Interfere With the IRS

On April 22, 2014, in the District of New Jersey, Charles Jarvis pled guilty to interfering with the administration of the Internal Revenue laws.⁶⁶

According to the criminal Information filed on the same date, Jarvis, a resident of Toms River, New Jersey, corruptly endeavored to impede and impair the administration of the Internal Revenue Code by forging documents purported to be from the IRS. Jarvis did so to facilitate a real estate transaction and evade a Federal tax lien.

In 2012, Jarvis and his spouse filed joint income tax returns with the IRS for TYs 2009 and 2010 and incurred a tax liability of approximately $76,676 due to insufficient withholdings. In October 2012, the IRS filed a tax lien against Jarvis and his spouse, which applied to all property and rights to property belonging to the two. Earlier in 2012, Jarvis's spouse had inherited her mother's entire estate, including a parcel of property in Ocean County, New Jersey. Jarvis's spouse contracted to sell the property in November 2012, but was unable to transfer the title to the buyer due to the IRS tax lien. Charles Jarvis forged a "Notice of Tax Lien Release" and a letter purportedly from the IRS in an effort to facilitate the sale, despite his spouse's and his outstanding tax debt. He then e-mailed the forged IRS documents to the attorney handling the sale, who, in turn, provided the documents to the title company. Based on the false representations in the forged IRS documents, the transaction was closed and the title was transferred to the buyer.⁶⁷

California Man Found Guilty for Retaliating Against IRS Employees

On May 27, 2014, in the Eastern District of California, James O. Molen was found guilty on all counts of a 2012 indictment.⁶⁸ The five-count indictment charged Molen with retaliating against Federal officers, corruptly impeding the due administration of the Internal Revenue laws, and contempt of court.⁶⁹

According to court documents, from 2003 to 2010, Molen, a resident of Chico, California, corruptly endeavored to impede the due administration of the Internal Revenue laws by recording liens against Federal judges and Executive Branch employees, making false and frivolous statements to the IRS, and offering a fictitious instrument as payment to the IRS, among other things.

Molen retaliated against two IRS revenue officers by filing false liens and encumbrances against their personal property in public records. Molen did so because of the revenue officers' performance of their official duties, knowing the liens and encumbrances were false and fictitious. Additionally, Molen filed Uniform Commercial Code Financing Statements with the California Secretary of State, purporting to secure debts owed by the same two IRS revenue officers.⁷⁰

The contempt of court charges against Molen stemmed from a 2007 civil judgment, wherein he was permanently forbidden from filing any documents or instruments that purported to create a nonconsensual encumbrance against a Government employee.⁷¹

Molen knowingly and willfully disobeyed this order by filing documents against the IRS revenue officers in February 2010.⁷²

Tax Preparer Outreach

In addition to promoting employee integrity, TIGTA is also committed to educating tax preparers on integrity. During this semiannual reporting period, TIGTA special agents provided integrity presentations to tax preparers at IRS tax forums nationwide. The focus of these presentations was, "Doing the Right Thing: Integrity, TIGTA, and You."

The presentations informed tax preparers of TIGTA's role in investigations of alleged misconduct by tax preparers, how to recognize and report misconduct committed by IRS employees or paid preparers, and when to report potential risk to IRS employee safety.

Investigative Support

Criminal Intelligence & Counterterrorism Group

OI established a Criminal Intelligence Program (CIP) to identify, assess, and investigate criminal activities of individuals or groups who seek to impact the safety of IRS employees or otherwise interfere with the administration of the Internal Revenue laws. The Criminal Intelligence & Counterterrorism Group (CICT) spearheads the agency's program. Members of CICT participate in various task forces to facilitate the timely receipt of criminal intelligence information. The team consists of special agents and analysts who evaluate information concerning potential threats against IRS employees, facilities, and infrastructure and provide it to the appropriate stakeholders within TIGTA, the IRS, and the Department of the Treasury.

CICT undertakes investigative initiatives to identify individuals who could commit violence against IRS employees, or who could otherwise pose a threat to IRS employees, facilities, or infrastructure.

CICT provides crucial intelligence to IRS officials to assist them in making proactive operational decisions about potential violence or other activities that could pose a threat to IRS systems, operations, and employees. To augment the timely distribution of critical threat information to the appropriate parties, CICT developed the Threat Information Notification System (TINS). TINS alerts key personnel to threats and incidents that have been reported and streamlines the process for coordinating information between OI, the IRS, and the Department of the Treasury, so a threat mitigation strategy can be developed.

This function has two primary product lines: inspections and evaluations.

Inspections are intended to:

• Provide factual and analytical information;

• Monitor compliance;

• Measure performance;

• Assess the effectiveness and efficiency of programs and operations;

• Share best practices; and

• Inquire into allegations of waste, fraud, abuse, and mismanagement.

• Provide in-depth reviews of specific management issues, policies, or programs;

• Address Governmentwide or multi-agency issues; and

• Develop recommendations to streamline operations, enhance data quality, and minimize inefficient and ineffective procedures.

Compliance With Constitution Day Training Requirements

This report presented the results of our inspection to determine whether the IRS complied with the requirements of the Consolidated Appropriations Act of 2005⁷³ to provide training materials on the U.S. Constitution to newly hired employees and to all IRS employees each year on September 17th, designated as Constitution Day and Citizenship Day.⁷⁴

We found that the IRS complied with the requirements of the Consolidated Appropriations Act of 2005 by providing training and educational materials about the Constitution to new employees as part of their orientation process and to all employees each year on September 17th.

While the IRS met the requirements of the law, it has the opportunity to relate the training material more to its mission, as some other Federal agencies have done. For example, the IRS might elaborate on how its taxing authority is derived from the Constitution.

The IRS agreed to the facts in the draft report. Reference No. 2014-IE-R007

Internal Revenue Service's Compliance With the Lautenberg Amendment

This report presented the results of our inspection to determine whether the IRS has policies and procedures in place to identify law enforcement officers (special agents) convicted of, or who pled no contest to, a misdemeanor crime of domestic violence, which under U.S. law prohibits any person from possessing a weapon or ammunition.

We found that the IRS has adequate controls in place to help ensure compliance with the Lautenberg Amendment,⁷⁵ which prohibits any person convicted of a misdemeanor crime of domestic violence from possessing firearms or ammunition, and therefore bars a person with such a conviction from employment with the IRS as a special agent. The controls include a prescreening process and background investigation for new law enforcement applicants, and periodic background investigations for existing special agents. Any discrepancies and potentially unfavorable information found as a result of the background investigation are reported to the appropriate IRS offices for review and administrative or disciplinary action, as deemed necessary.

The IRS agreed with the observations in the draft report. Reference No. 2014-IE-R008

Follow-up Review of Controls Over Religious Compensatory Time

This report presented the results of our inspection to determine whether IRS controls have significantly reduced the number of employees who have excessive religious compensatory time (RCT) balances, and to determine whether additional controls are required to deter or prevent the misuse of RCT. Executive agency employees are allowed to work additional hours and then use that time for personal religious beliefs that require the employees' absence from work. The time worked and then taken is referred to as RCT. This benefit allows employees to participate in religious observances without using annual leave or leave without pay.

The IRS has implemented corrective actions that have improved controls over the use of RCT. Between June 2010 and November 2013, the IRS reduced the number of employees with RCT balances and those with excessive RCT balances by approximately 51 and 68 percent, respectively.⁷⁶ Overall, the percentage of IRS employees with RCT balances has been reduced to less than one percent of all employees. Additionally, we found that between FYs 2009 and 2013, the IRS reduced the costs of payments to employees who separated with RCT balances by approximately 39 percent. For the same time period, the debts owed to the IRS by former employees who separated with advanced RCT balances decreased by 28 percent.

Although there were improvements in controls over the use of RCT, we identified a relatively small number of employees with high balances for both advanced RCT and advanced sick leave. While an employee can accumulate both advanced RCT and advanced sick leave, high balances of both could indicate that managers and employees are using RCT to circumvent Federal Government and agency leave policies and procedures by authorizing advanced RCT in lieu of sick leave. In such cases, IRS managers should investigate the issue further, as required by IRS policies and procedures. In the event that the activity may require a more thorough investigation, or is potentially criminal, TIGTA's OI should be contacted.

The IRS agreed with the results of our draft report and provided additional information related to previous TIGTA recommendations. Reference No. 2014-IE-R009

American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (Recovery Act)⁷⁷ was enacted on February 17, 2009. The Recovery Act presented significant challenges to all Federal agencies as they moved to implement provisions quickly while attempting to minimize risk and meet increased standards for transparency and accountability. However, with its more than 50 tax provisions, the Recovery Act posed especially significant challenges to the IRS, as the Nation's tax collection agency and administrator of the tax laws.

Funding for Recovery Act-related activities expired September 30, 2013. TIGTA completed audits/inspections/evaluations initiated prior to the funding expiration and issued the following significant report related to the IRS's efforts to implement Recovery Act tax provisions during this six-month reporting period:

Overview of TIGTA's Oversight of the American Recovery and Reinvestment Act of 2009

This report summarized I&E's evaluation of TIGTA's challenges and successes in carrying out its responsibilities of overseeing the IRS's implementation of the Recovery Act. I&E worked with all of TIGTA's functions to ensure that it captured everyone's efforts; I&E also worked with the Recovery Accountability and Transparency Board (Board)⁷⁸ staff to ensure reports referenced in the capstone report matched what is shown on Recovery.gov.

TIGTA's successful implementation of the Recovery Act was a full team effort by the Inspector General, TIGTA executives, and the entire chain of agency managers and staff. From the inception of the Recovery Act through September 30, 2013, TIGTA accomplished the following:

• Completed 28 Recovery Act-related investigations, including two that resulted in successful prosecutions;

• Issued 42 Recovery Act-related audits and inspections and evaluations reports (36 completed and published, six completed and not published) that contained recommendations for better use of funds totaling approximately $7.6 billion; and

• Completed training sessions for approximately 1,650 individuals explaining the impact of the Recovery Act.

The United States taxes U.S. individuals and businesses on their worldwide income and taxes foreign persons on their U.S. source income. International tax administration can be divided into four general areas:

• U.S. business cross-border;

• Foreign business in the U.S.;

• Individual cross-border; and

• Foreign person with taxable U.S. income.

The President, the Secretary of the Treasury, and the IRS Commissioner have placed an emphasis on international tax compliance. Also, business tax reform discussions include potential substantive changes to intercompany transfer pricing policy. In addition, the IRS is implementing the Foreign Account Tax Compliance Act (FATCA)⁷⁹ to help prevent U.S. taxpayers from hiding assets offshore.

The Internal Revenue Service Needs to Enhance Its International Collection Efforts

International tax noncompliance remains a significant area of concern for the IRS. The IRS's collection efforts need to be enhanced to ensure that delinquent international taxpayers become compliant with their U.S. tax obligations. Our review found that the IRS has not provided effective management oversight to international collection, contributing to several control weaknesses in the program. Most notably, international collection does not have:

• Adequate policies and procedures, position descriptions, or the training needed to ensure that international revenue officers can properly work international collection cases;

• A specific inventory selection process that ensures that the international collection cases with the highest risk are worked;

• Performance measures and enforcement results reported separately from domestic collection; and

• A process to measure the effectiveness of the Customs Hold⁸⁰ as an enforcement tool.

• Develop a formal international collection strategic plan;

• Update international collection guidance to provide specific policies and procedures for international revenue officers;

• Evaluate and update the current international revenue officer position descriptions;

• Develop a formal international collection training plan using subject matter experts to develop and teach international specific courses;

• Evaluate the international collection inventory selection criteria;

• Develop separate performance measures and track specific enforcement results for international collection; and

• Continue to pursue direct access to the Customs Hold information.

Additional Actions Are Needed to Help Ensure Taxpayer Compliance With the Foreign Investment in Real Property Tax Act

Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)⁸¹ to provide Federal tax rules for the sale of U.S. real property by foreign persons. There are some barriers for the IRS in ensuring that real estate sales transactions comply with FIRPTA.

TIGTA's review of real estate transaction data reported to the IRS revealed that there may be noncompliance with FIRPTA filing requirements. TIGTA also found that the IRS did not always ensure compliance with FIRPTA filing requirements when a request for reduced withholding was filed and the FIRPTA withholding tax was still owed.

Additionally, TIGTA identified various internal control weaknesses in the processing of FIRPTA withholding payments and FIRPTA withholding credits claimed by foreign sellers on their income tax returns. These internal control weaknesses resulted in the issuance of erroneous refunds and balance due notices. For instance, we identified 32 of 509 refunds, totaling approximately $1.5 million, that were erroneously issued to the buyer during TYs 2010 through 2012.

TIGTA recommended that the IRS revise the Form 1099-S, Proceeds From Real Estate Transactions, to more easily identify real estate transactions subject to FIRPTA and consider legislative changes to reduce barriers to the effective administration of FIRPTA. TIGTA also made several recommendations to improve controls over the processing of FIRPTA transactions.

IRS management agreed with the recommendations, except for one recommendation intended to help it validate affidavits of non-foreign status. TIGTA continues to believe that the IRS should follow through on this recommendation. Reference Number: 2014-30-051

International Visitors

In April 2014, TIGTA hosted a delegation from the country of Mongolia, consisting of the Vice-Minister of the Ministry of Finance and the Director of Fiscal Policy and Management. The purpose of the visit was to discuss the role TIGTA plays as an investigative and audit function, and its relationship with the IRS.

On April 30, 2014, Mr. George testified before the Senate Committee on Appropriations, Subcommittee on Financial Services and General Government, regarding the FY 2015 budget requests of TIGTA and the IRS, and about TIGTA's recent work related to the most significant challenges facing the IRS. The following is a summary of the Inspector General's testimony.

Providing effective taxpayer services while operating with a reduced budget is a significant challenge facing the IRS. In the past, TIGTA has evaluated the IRS's efforts to provide quality customer service and has made recommendations for areas of improvement. Although the IRS has implemented certain procedures to better assist the American taxpayer, funding reductions pose a significant challenge. These budget constraints continue to require the IRS to cut service to taxpayers, which makes it difficult for the IRS to effectively assist taxpayers. As demand for taxpayer services continues to increase, resources devoted to customer service have decreased, thereby affecting the quality of customer service that the IRS is able to provide. For example, we have seen a decline in the IRS's ability to provide a sufficient level of customer service in each of the ways that taxpayers interact with the IRS: namely by telephone, walk-in, and correspondence.

Implementing the tax law changes associated with the ACA will also present many challenges for the IRS in the coming years. For example, the ACA provides for a refundable tax credit, known as the Premium Tax Credit, to offset an individual's health insurance expenses. Like other refundable credits, there is a risk for improper payments with the Premium Tax Credit. As such, TIGTA is evaluating the accuracy of the data that the IRS provides to HHS for use in enrolling individuals and calculating the Advance Premium Tax Credit.⁸² We also plan to assess the protection of Federal tax data provided to the Exchanges.⁸³

In addition, TIGTA is concerned that the potential for refund fraud and related schemes could increase as a result of processing ACA Premium Tax Credits unless the IRS builds, implements, updates, and embeds ACA predictive analytical fraud models into its tax filing process. We also anticipate a significant increase in the number of ACA-related impersonation attempts as the IRS begins its role in ACA compliance activity. Accordingly, TIGTA has implemented a multi-year oversight strategy that includes audits, evaluations, and investigative resources to assess and to proactively deter efforts to impede the IRS's implementation of the ACA. This strategy also includes coordination with other agencies, including the HHS Office of Inspector General.

Another serious challenge confronting the IRS is the Tax Gap. The most recent IRS assessment is that the gross Tax Gap is about $450 billion dollars annually. Most of this amount, $376 billion dollars, is attributable to taxpayers underreporting their tax liabilities. Moreover, the scope, complexity, and magnitude of the international financial system also present significant enforcement challenges for the IRS. The number of taxpayers conducting international business transactions continues to grow as technological advances provide opportunities for offshore investments that were once possible only for large corporations and wealthy individuals. As this global economic activity increases, so do concerns regarding the International Tax Gap. While the IRS has not developed an accurate and reliable estimate of the International Tax Gap, non-IRS sources estimate it to be between $40 billion and $133 billion annually. The IRS also currently faces the challenge of implementing FATCA, which was enacted to combat tax evasion by U.S. persons holding investments in offshore accounts.

Tax fraud-related identity theft continues to be a growing problem that results in billions of dollars in improper payments. For TY 2011, TIGTA identified 1.1 million undetected returns that claimed potentially fraudulent refunds totaling $3.6 billion dollars. While this is a decrease of $1.6 billion dollars from the prior year, indicating that the IRS is making progress, significant improvements are still needed. In fact, we reported that the impact of identity theft on tax administration continues to be significantly greater than the amount the IRS detects and prevents.⁸⁴ Without the necessary resources, it is unlikely that the IRS will be able to work the entire inventory of potentially fraudulent tax returns it identifies. If the IRS does not work the remainder of the potentially fraudulent tax returns it identifies, the refunds for those returns will be issued. The net cost of failing to provide the necessary resources is substantial, given that the potential revenue loss to the Federal Government of these tax fraud-related identity theft cases is billions of dollars annually.

• An alleged violation of a provision of a law, regulation, contract, or other requirement governing the expenditure of funds;

• A finding, at the time of the audit, that such cost is not supported by adequate documentation (an unsupported cost); or

• A finding that expenditure of funds for the intended purpose is unnecessary or unreasonable.

                         Reports With Questioned Costs

• Reductions in outlays;

• Deobligations of funds from programs or operations;

• Costs not incurred by implementing recommended improvements related to operations;

• Avoidance of unnecessary expenditures noted in pre-award reviews of contract agreements;

• Prevention of erroneous payment of refundable credits, e.g., Earned Income Tax Credit; or

• Any other savings that are specifically identified.

          Reports With Recommendations That Funds Be Put to Better Use

IRS and the Department of the Treasury, Members of Congress, and the taxpaying public, and are expressed in quantifiable terms to provide further insight into the value and potential impact of the Office of Audit's products and services. Including this information also promotes adherence to the intent and spirit of the Government Performance and Results Act.

Definitions of these additional measures are:

Increased Revenue: Assessment or collection of additional taxes.

Revenue Protection: Ensuring the accuracy of the total tax, penalties, and interest paid to the Federal Government.

Reduction of Burden on Taxpayers: Decreases by individuals or businesses in the need for, frequency of, or time spent on communication, record keeping, preparation, or costs to comply with tax laws, regulations, and IRS policies and procedures.

Taxpayer Rights and Entitlements at Risk: The protection of due process (rights) granted to taxpayers by law, regulation, or IRS policies and procedures. These rights most commonly arise when filing tax returns, paying delinquent taxes, and examining the accuracy of tax liabilities. The acceptance of claims for and issuance of refunds (entitlements) are also included in this category, such as when taxpayers legitimately assert that they overpaid their taxes.

Taxpayer Privacy and Security: Protection of taxpayer financial and account information (privacy). Processes and programs that provide protection of tax administration, account information, and organizational assets (security).

Inefficient Use of Resources: Value of efficiencies gained from recommendations to reduce costs while maintaining or improving the effectiveness of specific programs; resources saved would be available for other IRS programs. Also, the value of internal control weaknesses that resulted in an unrecoverable expenditure of funds with no tangible or useful benefit in return.

Reliability of Management Information: Ensuring the accuracy, validity, relevance, and integrity of data, including the sources of data and the applications and processing thereof, used by the organization to plan, monitor, and report on its financial and operational activities. This measure will often be expressed as an absolute value, i.e., without regard to whether a number is positive or negative, of overstatements or understatements of amounts recorded on the organization's documents or systems.

Protection of Resources: Safeguarding human and capital assets, used by or in the custody of the organization, from accidental or malicious injury, theft, destruction, loss, misuse, overpayment, or degradation.

The number of taxpayer accounts and dollar values shown in the following chart were derived from analyses of historical data, and are thus considered potential barometers of the impact of audit recommendations. Actual results will vary depending on the timing and extent of management's implementation of the corresponding corrective actions, and the number of accounts or subsequent business activities affected as of the dates of implementation. Also, a report may have issues that affect more than one outcome measure category.

       Reports With Additional Quantifiable Impact on Tax Administration

• Revenue Protection: Reference Numbers 2014-40-028, 2014-40-041, 2014-30-052, and 2014-30-067;

• Reliability of Information: Reference Numbers 2014-10-031 and 2014-10-073; and

• Inefficient Use of Resources: Reference Numbers 2014-20-042 and 2014-20-088.

• An alleged violation of a provision of a law, regulation, contract, or other requirement governing the expenditure of funds;

• A finding, at the time of the inspection, that such cost is not supported by adequate documentation (an unsupported cost); or

• A finding that expenditure of funds for the intended purpose is unnecessary or unreasonable.

                          Report With Questioned Costs

Misconduct violations include:

• Willfully failing to obtain the required approval signatures on documents authorizing the seizure of a taxpayer's home, personal belongings, or business assets;

• Providing a false statement under oath with respect to a material matter involving a taxpayer or taxpayer representative;

• Violating, with respect to a taxpayer, taxpayer representative, or other employee of the IRS, any right under the Constitution of the United States, or any civil right established under Title VI or VII of the Civil Rights Act of 1964; Title IX of the Education Amendments of 1972; Age Discrimination in Employment Act of 1967; Age Discrimination Act of 1975; Section 501 or 504 of the Rehabilitation Act of 1973; or Title I of the Americans with Disabilities Act of 1990;

• Falsifying or destroying documents to conceal mistakes made by any employee with respect to a matter involving a taxpayer or taxpayer representative;

• Committing assault or battery on a taxpayer, taxpayer representative, or other employee of the IRS, but only if there is a criminal conviction or a final judgment by a court in a civil case, with respect to the assault or battery;

• Violating the Internal Revenue Code of 1986, as amended (the I.R.C.), the Department of the Treasury regulations, or policies of the IRS (including the Internal Revenue Manual) for the purpose of retaliating against or harassing a taxpayer, taxpayer representative, or other employee of the IRS;

• Willfully misusing provisions of § 6103 of the I.R.C. for the purpose of concealing information from a congressional inquiry;

• Willfully failing to file any return of tax required under the I.R.C. on or before the date prescribed therefore (including any extensions), unless such failure is due to reasonable cause and not to willful neglect;

• Willfully understating Federal tax liability, unless such understatement is due to reasonable cause and not to willful neglect; and

• Threatening to audit a taxpayer for the purpose of extracting personal gain or benefit.

The U.S. Department of Health and Human Services, Office of Inspector General conducted a peer review of the TIGTA Office of Investigations during this reporting period. A final report has not been issued.

No Peer Review Conducted by TIGTA Office of Investigations:

No peer reviews were conducted by the TIGTA Office of Investigations during this reporting period.

No Peer Review Conducted of TIGTA's Office of Inspections and Evaluations

No peer reviews were conducted of the TIGTA Office of Inspections and Evaluations during this reporting period.

No Peer Review Conducted of TIGTA Office of Audit:

No peer reviews were conducted of the TIGTA Office of Audit during this reporting period. In accordance with the three-year cycle, no external peer review was required during this reporting period.

 

 

 

 

* * * * *

 

² Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., and 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).

³ N.D. Ga. Crim. Compl. filed Nov. 25, 2013.

⁴ N.D. Ga. Judgment filed June 5, 2014.

⁵ N.D. Ga. Indict. filed Dec. 10, 2013.

⁶ N.D. Ga. Crim. Compl. filed Nov. 25, 2013.

⁷ N.D. Ga. Indict. filed Dec. 10, 2013.

⁸ N.D. Ga. Crim. Compl. filed Nov. 25, 2013.

⁹Id.

¹⁰Id.

¹¹ N.D. Ga. Judgment filed June 5, 2014.

¹² N.D. N.Y. Judgment filed Apr. 24, 2014.

¹³ N.D. N.Y. Verdict filed Oct. 21, 2013.

¹⁴ 1099-OID schemes involve the filing of fake information returns, such as Form 1099 OID, to justify false refund claims on corresponding tax returns.

¹⁵ N.D. N.Y. United States Trial Memorandum filed Oct. 2, 2013.

¹⁶Id.

¹⁷ N.D. N.Y. Indict. filed Dec. 19, 2012.

¹⁸ N.D. N.Y. United States Trial Memorandum filed Oct. 2, 2013.

¹⁹ An automated holding file for unassigned inventory of delinquent cases for which the collection function does not have enough resources to immediately assign for contact.

²⁰ The IRS defines the Tax Gap as the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year.

²¹ TIGTA, Ref. No, 2004-30-127, The Return Delinquency Notice Program Could Be Used More Effectively to Promote Filing Compliance and Reduce the Tax Gap (Aug. 2004).

²² Fillable forms are online versions of IRS paper forms designed for filers comfortable with preparing their own tax returns. This option allows filers to prepare, print, and e-file a free Federal tax return.

²³ The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (codified in scattered titles of the U.S.C.), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029.

²⁴ A refundable credit to assist eligible individuals with paying their health insurance premiums.

²⁵ A judgmental sample is a non-statistical sample, the results of which cannot be used to project to the population.

²⁶ E.D. Pa. Crim. Docket filed Apr. 15, 2014.

²⁷ E.D. Pa. Info. filed Apr. 15, 2014.

²⁸ S.D. Tex. Judgment filed Apr. 11, 2014.

²⁹ S.D. Tex. Plea Agr. filed Apr.5, 2013.

³⁰ S.D. Tex. Plea Agr. filed Apr. 5, 2013; S.D. Tex. Superseding Indict. filed Sept. 5, 2012.

³¹ S.D. Tex. Superseding Crim. Indict. filed Sept. 5, 2012.

³² S.D. Tex. Plea Agr. filed Apr. 5, 2013.

³³ S.D. Tex. Order for Presentence Investigation and Disclosure & Sentencing Dates filed Sept. 5, 2012; S.D. Tex. Superseding Crim. Info. filed Aug. 23, 2012.

³⁴ S.D. Tex. Plea Agr. filed Apr.5, 2013.

³⁵ S.D. Tex. Superseding Crim. Indict. filed Sept. 5, 2012.

³⁶ S.D. Tex. Plea Agr. filed Apr. 5, 2013.

³⁷ S.D. Tex. Judgment filed Apr. 11, 2014.

³⁸ E.D. Cal. Judgment filed July 8, 2014.

³⁹ E.D. Cal. Plea Agr. filed Jan. 3, 2014.

⁴⁰Id.

⁴¹ E.D. Cal. Indict. filed Apr. 14, 2011.

⁴² E.D. Cal. Plea Agr. filed Jan. 3, 2014.

⁴³Id.

⁴⁴ E.D. Cal. Judgment filed July 8, 2014.

⁴⁵ E.D. Cal. Executed Arrest Warrants for Viririana Hernandez, Roberto Martinez, Jr., and Lilliana Gonzales filed July 23, 2014.

⁴⁶ E.D. Cal. Indict. filed July 17, 2014.

⁴⁷Id.

⁴⁸Id.

⁴⁹Id.

⁵⁰Id.

⁵¹ D. R.I. Docket filed Jan. 15, 2014.

⁵² D. R.I. Indict. filed Jan. 15, 2014.

⁵³Id.

⁵⁴ D. R.I. Government's Pretrial Memorandum filed Apr. 30, 2014.

⁵⁵ D. Or. Judgment filed Apr. 18, 2014.

⁵⁶ D. Or. Plea Agr. filed Sep. 11, 2013.

⁵⁷ D. Or. Indict. filed Feb. 20, 2013.

⁵⁸Id.

⁵⁹ D. Or. Judgment filed Apr. 18, 2014.

⁶⁰ E.D. Pa. Crim. Docket filed June 3, 2014; E.D. Pa. Crim. Docket filed Jan. 9, 2014.

⁶¹ E.D. Pa. Indict. filed Jan. 9, 2014.

⁶² E.D. Pa. Info. filed June 3, 2014.

⁶³ E.D. Pa. Indict. filed Jan. 9, 2014; E.D. Pa. Info. filed June 3, 2014.

⁶⁴ E.D. Pa. Info. filed June 3, 2014.

⁶⁵ E.D. Pa. Indict. filed Jan. 9, 2014.

⁶⁶ D. N.J. Application for Permission to Enter Plea of Guilty filed Apr. 22, 2014; D.N.J. Crim. Docket filed Apr. 22, 2014.

⁶⁷ D.N.J. Info. filed Apr. 22, 2014.

⁶⁸ E.D. Cal. Verdict filed May 27, 2014.

⁶⁹ E.D. Cal. Indict. filed July 12, 2012.

⁷⁰Id.

⁷¹ E.D. Cal. Order filed Feb. 26, 2007 Re: 2:06-cv-00a614-LKK-KJM.

⁷² E.D. Cal. Indict. filed July 12, 2012.

⁷³ Pub. L. No. 108-447, 118 Stat. 2809 (2004).

⁷⁴ Pub. L. No. 108-447, div. J, tit. I, § 111, 118 Stat. 2809, 3344-3345 (2004).

⁷⁵ 18 U.S.C. § 922(g)(9).

⁷⁶ The IRS defines an excessive RCT balance as 80 or more hours, either positive (earned) or negative (advanced) leave.

⁷⁷ Pub. L. No. 111-5, 123 Stat. 115.

⁷⁸ The Recovery Act established the Board. Pub. L. No. 111-5, § 1521, 123 Stat. 115, 289 (2009). The mission of the Board is to promote accountability by coordinating and conducting oversight of Recovery Act funds to prevent fraud, waste, and abuse, and to foster transparency of Recovery Act spending by providing the public with accurate, user-friendly information.

⁷⁹ Pub. L. No. 111-147, Subtitle A, 124 Stat. 71, 96-116 (2010) (codified in scattered sections of 26 U.S.C.).

⁸⁰ A notification to the Department of Homeland Security that, according to IRS records, a taxpayer owes Federal taxes. If the taxpayer should return to the United States or Commonwealth Territories without having paid the total amount due, he or she could be interviewed by a Customs and Border Protection Officer at the time of entry. The IRS will then be advised of the taxpayer's arrival and will be provided with information enabling it to contact the taxpayer regarding payment of his or her outstanding tax liability.

⁸¹ Enacted as Subtitle C of Title XI (the Revenue Adjustments Act of 1980) of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 94 Stat. 2599, 2682 (Dec. 5, 1980).

⁸² The results of this audit have since been reported in TIGTA, Ref. No. 2014-43-044, Affordable Care Act: Accuracy of Response to Exchange Requests for Income and Family Size Verification Information and Maximum Advance Premium Tax Credit Calculation (July 2014).

⁸³ The results of this audit have since been reported in TIGTA, Ref. No. 2014-23-070, Affordable Care Act: Expanded Guidance Provided Assistance to the Exchanges, but Greater Assurance of the Protection of Federal Tax Information Is Needed (September 2014).

⁸⁴ TIGTA, Ref. No. 2013-40-122, Detection Has Improved; However, Identity Theft Continues to Result in Billions of Dollars in Potentially Fraudulent Tax Refunds (Sep. 2013).

⁸⁵ See Appendix II for identification of audit reports involved.

⁸⁶ "Questioned costs" includes "unsupported costs."

⁸⁷ Difference in amount due to rounding.

⁸⁸ See Appendix II for identification of audit reports involved.

⁸⁹ See Appendix II for identification of audit reports involved.

⁹⁰ Complaints for which final determination had not been made at the end of the reporting period.

⁹¹ A non-IRS entity includes other law enforcement entities or Federal agencies.

⁹² Criminal referrals include both Federal and State dispositions.

⁹³ Final criminal dispositions during the reporting period. These data may pertain to investigations referred criminally in prior reporting periods and do not necessarily relate to the investigations referred criminally in the Status of Closed Criminal Investigations table above.

⁹⁴ Generally in a deferred prosecution, the defendant accepts responsibility for his/her actions, and complies with certain conditions imposed by the court. Upon the defendant's completion of the conditions, the court dismisses the case. If the defendant fails to fully comply, the court reinstates prosecution of the charge.

⁹⁵ Final administrative dispositions during the reporting period. These data may pertain to investigations referred administratively in prior reporting periods and do not necessarily relate to the investigations closed in the Investigations Opened and Closed table. These data, as reported, reflect a change in the way administrative dispositions were previously categorized.

⁹⁶ Administrative actions taken by the IRS against non-IRS employees.