Annual Audit Plan -- FY2005 - Department of the Treasury

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Treasury Inspector General for Tax Administration - Office of Audit Fiscal Year 2005 Annual Audit Plan MESSAGE FROM THE DEPUTY INSPECTOR GENERAL FOR AUDIT Administering America’s tax laws and collecting the revenues that fund most Government operations and public services is a complex job and, naturally, is a concern of the American public, the President, the Congress, and other stakeholders. The Treasury Inspector General for Tax Administration’s (TIGTA) Office of Audit, established in 1999, is responsible for evaluating all Internal Revenue Service (IRS) programs. The TIGTA believes that the IRS, in Fiscal Year (FY) 2005, will continue to struggle with the same issues previously identified as major challenges, including providing effective customer service and enforcement, modernizing its archaic computer systems, complying with its financial stewardship duties, and meeting human capital requirements, while ensuring the security of its staff, the computer systems, the data, and its property. Some of the concerns of the current Administration, as cited in The President’s Management Agenda, 1 are also issues at the IRS. In addition, the IRS and the Government Accountability Office (GAO) have listed some of these issues as material weaknesses in IRS programs. Customer service, enforcement, and modernization are primary goals that the IRS includes in its recently released updated Strategic Plan – a roadmap for IRS operations over the next five years. The plan details the IRS’ three strategic goals for improving taxpayer service; enhancing enforcement of the tax law; and modernizing the IRS through its people, processes, and technology. In releasing the Plan, the IRS Commissioner stressed the IRS’ commitment to continued service, even as the focus on enforcement is enhanced. He believes it is not an issue of service OR enforcement, but of service AND enforcement, and that the two together will equal compliance. The IRS’ first goal, improve taxpayer service, includes helping the taxpaying public understand their tax obligations and making it easier to participate in the tax system. Minimizing the burden for compliant taxpayers and increasing enforcement on noncompliant taxpayers, the second goal, will move the IRS towards full participation by all taxpayers in the tax system. By enhancing enforcement, the IRS will strive to rectify a wide range of tax gap causes, from inadvertent noncompliance stemming from lack of knowledge, confusion, poor record keeping, differing legal interpretations, unexpected personal emergencies and temporary cash flow problems, to willful and fraudulent avoidance of taxes. Investments in tax shelters, trusts, and other structured products that promise tax benefits that do not conform to the law are all too common. The IRS’ Plan includes objectives to detect and deter some of these corporate and high-income 1 The President’s Management Agenda, Fiscal Year 2002; http://www.whitehouse.gov/omb/budintegration/pma_index.html. Fiscal Year 2005 Annual Audit Plan Page 1
Treasury Inspector General for Tax Administration - Office of Audit individual taxpayer corrosive activities, domestic and off-shore tax and financial criminal activity, as well as abuse and misuse of tax-exempt and governmental entities. In order to achieve the first two goals, it is necessary for the IRS to accomplish its third goal, modernization. Since its reorganization, mandated by the IRS Restructuring and Reform Act of 1998 (RRA 98), 2 the IRS has made progress in updating some systems and processes. For example, in 2003 some 52.9 million taxpayers filed tax returns electronically. 3 In addition, in late 2003 the IRS launched a suite of Internet-based business tools that give tax professionals and financial institutions easier access to client information, including on-line registering to create an electronic account, applying for and receiving a Preparer Tax Identification Number immediately over the Internet, as well as an Interactive Taxpayer Identification Number Matching pre-filing service for banks and others that pay income subject to backup withholding. 4 Other services will also be available soon. The modernization effort includes reengineering processes. The IRS, for example, has taken action to increase the levels of compliance, and enforcement activities have improved. Collection yields for FY 2003, for instance, were significantly higher than the low point occurring in FY 1999. Examinations of individual tax returns have also increased. In addition, the results of the National Research Program, which will be completed soon, promise improvements in the selection for examination process. This progress was accomplished even though the Compliance staffing has decreased from 1998-1999 levels. The IRS’ financial statements and related activities remain a concern to stakeholders, even though the GAO found that the IRS’ FY 2003 financial statements were fairly presented in all material respects. 5 But, because of serious deficiencies in financial systems and internal control weaknesses, the IRS again had to rely extensively on resource-intensive compensating processes to prepare its financial statements. Despite strides in some areas (e.g., the IRS improved the accuracy and reliability of its property and equipment inventory records and implemented a system to ensure that software and software licenses were properly controlled and used in accordance with license agreements), the IRS continues to be challenged by control weaknesses and system deficiencies affecting financial reporting, unpaid tax assessments, tax revenue and refunds, and computer security. The absence of a financial management system that can produce timely, accurate, and useful information needed for day-to-day decisions continues to be one of the largest obstacles facing IRS management. 2 Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app., 16 U.S.C., 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 Publication 55B, Internal Revenue Service Data Book 2003 4 http://bsm.web.irs.gov/eservices/News/IR-03-1281.doc 5 Financial Audit: IRS’s Fiscal Years 2003 and 2002 Financial Statements (GAO-04-126, November 13, 2003). Fiscal Year 2005 Annual Audit Plan Page 2
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Annual Audit Plan -- FY2005 - Department of the Treasury

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