Final Report issued on September 12, 2014

Highlights of Reference Number: 2014-30-054 to the Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.

IMPACT ON TAXPAYERS

In today’s global economy, businesses and individuals are becoming more and more involved in international transactions. For U.S. taxpayers, income received from these international transactions is subject to U.S. tax rules and reporting requirements. Accordingly, the role of an international revenue officer is very important in helping taxpayers comply with the tax laws and reducing international tax noncompliance.

WHY TIGTA DID THE AUDIT

The IRS faces many unique challenges in collecting taxes from international taxpayers. Moreover, the IRS does not have reliable statistics on the rate of noncompliance of these taxpayers with their U.S. tax obligations. The overall objective of this review was to evaluate the IRS’s collection efforts on delinquent taxpayers residing in foreign countries.

WHAT TIGTA FOUND

International tax noncompliance remains a significant area of concern for the IRS. However, the IRS’s collection efforts need to be enhanced to ensure that delinquent international taxpayers become compliant with their U.S. tax obligations.

TIGTA’s review found that the IRS has not provided effective management oversight to International Collection, which contributed to several control weaknesses in the program. For example, International Collection does not have:

· Adequate policies, 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.

· A process to measure the value of the “Customs Hold” as an enforcement tool.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS:

1) develop a formal International Collection Strategic plan;

2) update International Collection guidance to provide specific policies and procedures to international revenue officers;

3) evaluate and update the current international revenue officer position descriptions;

4) develop a formal International Collection training plan using Subject Matter Experts to develop and teach international specific courses;

5) evaluate the International Collection inventory selection criteria;

6) develop separate performance measures and track specific enforcement results for International Collection; and

7) continue to pursue direct access to the Customs Hold information.

Treasury Enforcement Communication System

Background

In today’s global economy, businesses and individuals are becoming more and more involved in international transactions. For U.S. taxpayers, income received from these international transactions is subject to U.S. tax rules and reporting requirements.

For purposes of U.S. taxation, international taxpayers can be grouped into four general categories:

• • U.S. individual taxpayers and resident aliens[1] working, living, or doing business abroad.

• • U.S. corporations doing business abroad.

• • Nonresident aliens working or doing business in the United States.

• • Foreign corporations doing business in the United States.

Congress, the U.S. Department of the Treasury, and the IRS have all placed a strong emphasis on reducing international tax noncompliance.

Congress, the U.S. Department of the Treasury, and the Internal Revenue Service (IRS) have all placed a strong emphasis on reducing international tax noncompliance.

The International Collection program (hereafter referred to as International Collection) has been a part of the Small Business/Self-Employed (SB/SE) Division’s Collection Field function since October 2006.

The Collection Field function’s mission is “to provide SB/SE taxpayers with top quality postfiling services by helping them understand and comply with all applicable tax laws and by applying the tax laws with integrity and fairness.” This also includes ensuring payment compliance of international taxpayers who are subject to U.S. tax laws.

International revenue officers in International Collection are primarily responsible for collecting delinquent taxes and tax returns of international taxpayers who are subject to U.S. tax and reporting requirements.

The current International Collection program has 39 international revenue officers assigned to five international groups.

Figure 1: Comparison of the International Collection Staffing and

Dollars Collected During Fiscal Years 2012 Through 2014

Fiscal Year 2012

Fiscal Year 2013

Fiscal Year 2014[2]

Number of International Revenue Officers

Fiscal Year 2012   39

Fiscal Year  2013    40

Fiscal Year  2013  44

Dollars Collected

2014- $53,674,372

2013- $53,045,741

2012- $22,217,561

The IRS faces many unique challenges in collecting taxes from international taxpayers, such as difficulties in locating taxpayers in a foreign country, complexity of international tax law and tax treaty issues, language barriers, and the absence of international toll-free telephone services.

Moreover, the IRS does not have reliable statistics on the rate of noncompliance of these taxpayers with their U.S. tax obligations.

Accordingly, the role of an international revenue officer is very important in helping taxpayers comply with the tax laws and in reducing international tax noncompliance.

This review was performed in Collection offices in :

Norwalk, Connecticut; Lanham, Maryland; Bethpage, New York; Buffalo, New York; New York, New York; Seattle, Washington; and the IRS Headquarters in Washington, D.C., and used information obtained from Collection offices in Miami, Florida; Honolulu, Hawaii; and Guaynabo, Puerto Rico, during the period September 2012 through December 2013.

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.

We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

International tax noncompliance remains a significant area of concern and focus for the IRS.

However, 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, procedures, position descriptions, or the training needed to ensure that international revenue officers can accurately 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.

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

• A Lack of Effective Management Oversight Has Affected Many Areas in International Collection

Collection Field function management developed an International Collection Strategy document in June 2012 to support the international vision:

To ensure payment compliance among all persons subject to U.S. tax laws and treaties through the fair and equitable application of these laws, as well as providing education to our customers to promote future compliance.

This strategy was reported as a Collection Field function prior year accomplishment in both the IRS’s Fiscal Year 2013 and Fiscal Year 2014 Collection Program Letters.

However, at the time of our review, Collection Field function management had not allotted any resources to this strategy, nor did we identify any specific actions that had been taken for its implementation.

A strategy is defined as a method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.

The International Collection Strategy document meets this definition, but is too general in nature to be considered a strategic plan. It provides little specificity regarding Collection Field function plans related to enacting the strategy and does not contain key requirements of a strategic plan.

For example, it does not describe how the goals and objectives are to be achieved (including the operational processes, skills, technology, and resources required); identify any external factors that could significantly affect the achievement of the goals and objectives; or describe program evaluations that will be used to establish or revise the goals and objectives.

In addition, the Collection Field function has set no milestones for meeting the goals and objectives of the strategy. Despite Collection Field function management reporting this strategy as an accomplishment in its Collection Program Letters, there appears to have been no urgency to implement the International Collection Strategy since its creation in June 2012.

An International Collection Strategy document was created, but it is not a strategic plan.

We believe that a significant factor preventing the successful implementation of this strategy is the many managerial changes at the executive level in the International Collection program over the last few years. Since September 2012, International Collection has been led by five different Territory Managers and two different Area Directors, all with no previous International Collection experience.

On October 20, 2013, International Collection was officially moved under a new Area Director as part of the overall Collection Field function realignment. Two of the five Territory Managers were placed subsequent to the realignment. Without consistent executive leadership, it is difficult to develop and implement any long-term improvement strategies.

Subsequent to the completion of our fieldwork, a permanent Territory Manager with extensive international experience was placed to lead the International Collection program.

In addition, Collection Field function management appointed an executive to be specifically responsible for the development of an action plan addressing the key areas outlined in the International Collection Strategy document along with working collaboratively with other IRS functions to support its implementation.

However, without establishing a formal strategic plan for International Collection, the complex tax issues facing both the international revenue officer and the international taxpayer may not be fully addressed.

Policies and procedures are insufficient for international revenue officers

There are limited policies and procedures provided specifically for international revenue officers. The Internal Revenue Manual contains more than 6,000 pages of policies and procedures for working collection cases. However, few pages were dedicated specifically to International Collection issues.

We interviewed a judgmental sample[3] of 15 international revenue officers and all five international group managers, many of which expressed frustration regarding the limited policies and procedures available to them.

The following specific concerns were raised:

The available guidance on issues frequently encountered by international revenue officers is often difficult to find because it is scattered throughout the Collection Internal Revenue Manual.

There were similar frustrations regarding International Collection policies and procedures provided on the SB/SE Division’s Collection intranet website.
There is a lack of available job aids addressing international issues.

At the beginning of our review (September 2012), we found that many of the International Collection policies and procedures in the Internal Revenue Manual had not been updated since Calendar Year 2009.

In addition, some of the international guidance on the SB/SE Division’s Collection intranet website had not been updated since Calendar Year 2011, as well as some web links were no longer active.

However, during our review, International Collection management began updating its Internal Revenue Manual guidance and most had been updated as of January 2014. Management also added an Internal Revenue Manual section prescribing procedures to handle certain adjustments required in many international revenue officer cases.

In addition, Collection management began updating the Collection intranet website as new international procedures were finalized. The IRS informed us that the web links are now monitored and updated regularly.

The complexity of International Collection cases requires specific guidance to address those issues beyond the guidance provided to domestic revenue officers. Most IRS policies generally do not account for the differences between international and domestic taxpayers.

An example is that the timeliness guidelines for working international cases are the same as for working domestic cases.

As a general rule, international cases are more complex than domestic cases because they can involve treaty limitations on what an international revenue officer can and cannot do in a foreign country to contact the taxpayers, obtain tax returns, and collect the taxes due.

Without sufficient policies and procedures, international revenue officers may not be providing the international taxpayer with fair and equitable application of the tax laws.

There are also logistical challenges in contacting and collecting from an international taxpayer that must be acknowledged.

For example, international revenue officers have limited ability to make telephone or field contact with international taxpayers due to time zone and language differences. Therefore, they are often restricted to making the initial contact through registered mail, subject to U.S. Postal regulations, which can delay delivery to the taxpayers.

The Internal Revenue Manual is primarily focused on domestic cases and does not provide separate timeliness guidelines for international cases to account for these differences. The amount of time given to international taxpayers to respond to the correspondence is the same as for domestic taxpayers. More realistic time frames for correspondence with international taxpayers should be incorporated into the International Collection guidance in the Internal Revenue Manual.

Position descriptions for international revenue officers are inadequate

A position description is a document that summarizes the specialized duties, activities, and responsibilities of an employee’s job within the Government. The document describes the position and establishes what types of work are expected of the employee.

Our analysis of the position description used for international revenue officers revealed that the duties and responsibilities are the same as their domestic counterparts, even though the international position requires additional topical specific knowledge and skills.

The only differences in the position descriptions for international revenue officers were additional wording identifying their position as “Moderate Risk” and the requirement for a national security clearance for access to secret and confidential information.

In addition, the international position description does not state that the position is for an international revenue officer and does not even use the word “international” anywhere in the document.

International Collection is generally not recognized as a separate entity within the Collection Field function even though international revenue officers require specific knowledge and skills to address the significant issues facing international taxpayers.

For example, international revenue officers require knowledge in complex U.S. tax rules and reporting requirements that include any tax treaties that are applicable to a taxpayer’s country of residence.

They also have to be knowledgeable of the differences in enforcement capabilities when dealing with an international taxpayer.

Inadequate position descriptions that do not describe the skill sets needed for international revenue officers to successfully work a more complex inventory may not adequately support the Collection Field function’s international initiatives, as well as ensure that quality service is provided to international taxpayers.

Additional in-depth training is needed to ensure that international revenue officers can accurately and timely resolve cases.

The IRS must enforce the tax laws to ensure that U.S. taxpayers meet their tax obligations regardless of where they may work or reside. In order for the IRS to meet this goal, it must address the challenges of international tax administration by properly training its international revenue officers to understand and work complex cross-border issues.

Yet, the IRS has created few training courses specifically for International Collection.

International Collection training is developed by the SB/SE Division’s Human Capital Officer in partnership with the Collection Field function. Each year, Collection Field function management sends out requests to the International Collection group managers to solicit ideas from field personnel for new courses to be developed or requests to bring back courses which need to be updated. Once the course subjects are chosen, international revenue officers are asked to volunteer to develop and teach the courses. The training is taught by international revenue officers, domestic revenue officers, Collection Policy personnel, or a combination of all three depending on the particular subject matter.

In Fiscal Years 2010 and 2011, there was little International Collection training given to international revenue officers.

In Fiscal Year 2012, international revenue officers received training on four topics: Adjustments and Penalties; Foreign Trusts and International Insolvency; Offshore Collection Techniques; and Offshore Research and Resources.

In Fiscal Year 2013, international revenue officers received training on two additional topics: Individual Taxpayer Identification Numbers and Qualified Intermediaries.

We found inaccuracies in training topics because inexperienced international revenue officers developed some of the materials instead of Subject Matter Experts.

We reviewed the training materials for four of the six international training topics and found that they were not always developed or taught by Subject Matter Experts.

We found that some topics were developed by lower graded and/or inexperienced international revenue officers who volunteered to research, develop, and teach the topic.

Although we determined that IRS Counsel and SB/SE Division Training personnel are responsible for reviewing and approving the topics before they are provided to the international revenue officers, inaccuracies were identified in two of the topics.

For example, the Adjustments and Penalties topic included incorrect information on where to send international adjustments to be processed, which we were told caused significant delays to the resolution of hundreds of cases and may have negatively impacted customer service to international taxpayers.

The approved International Strategy document states that timely training will be provided to international revenue officers on topics that are unique to international casework. In addition, the IRS Strategic Plan for Fiscal Years 2009 through 2013 states that the IRS must invest to meet the challenges of international tax administration and train employees to identify and understand issues in a complex and cross-border international environment.

However, most of the judgmental sample of 15 international revenue officers and five group managers interviewed believed the training they received was insufficient in improving their skills and did not provide them with an in-depth knowledge for resolving their cases. In addition, one Territory Manager considered the centralized training approach of little value because the training was focused on very basic information.

When training courses do not contain information specific to international revenue officers, International Collection management customizes them.

For example, all newly hired international revenue officers receive the same basic domestic revenue officer training with domestic revenue officers, followed by separate “international” training. According to some of the judgmental sample of 15 international revenue officers we interviewed, there were instances when domestic revenue officers with no International Collection experience were provided as On-the-Job-Trainers for the international portion of the training.

According to the group managers and internal revenue officers interviewed, this can be problematic because international revenue officers are required to know international tax and treaty laws, which can make determining the correct tax liability more difficult. In addition, some managers expressed concern that the investigative tools available to international revenue officers are often limited, and locating taxpayers living abroad can be more involved and time consuming than locating domestic taxpayers.

There are risks of inequitable treatment of international taxpayers and violating tax treaties if the international revenue officers are not provided adequate training on international issues.

International Collection’s Inventory Selection Process May Not Ensure That the Most Productive Cases Are Worked

International Collection’s inventory practices for selecting international casework may not ensure that international revenue officers receive the highest priority cases. The assignment of inventory is a priority and is a key factor in determining workload needs and balancing resources across the Collection Field function.

The Inventory Delivery System is a collection system that automates the grading and assignment of cases received into the Collection Field function. The level of complexity, or grade of a case, is based on an application of business rules programmed into the Inventory Delivery System and applied systemically upon receipt of the casework.

The Entity Case Management System (ENTITY) receives data from the Inventory Delivery System and delivers the case inventory to the field. Cases receive their risk level assignment in priority order with no distinction between domestic and international cases.

Appropriately graded case inventory is based on the accuracy and relevance of the criteria used to determine the risk levels of the cases in the Collection Queue.

There are no separate criteria for determining risks and grading international cases. International group managers pull the high and medium-risk cases from the Collection Queue for their international revenue officers to work.

However, ENTITY does not take into account the affluence of the foreign country[5] where the taxpayer is currently living, nor does it determine whether the taxpayer had assets in the United States before moving overseas. ENTITY looks only at the case as a Taxpayer Delinquent Account or a Taxpayer Delinquency Investigation that has accompanying Information Returns Processing documents that may or may not change the grading of the case or the risk level.

Domestic criteria are used to determine the risk level of international cases, which can cause the highest priority cases to not be worked.

Interviews with Collection Field function management and review of Collection accomplishment reports indicate that productivity is currently measured primarily on whether employees complied with procedural requirements and the number of cases they closed.

The amount of revenue collected does not appear to be taken into consideration when assessing whether or not International Collection is successfully selecting the cases with the most collection potential.

According to International Collection group managers, they face a more difficult challenge in identifying current and potentially collectible cases for assignment to their revenue officers.

Although monitoring compliance with procedural requirements is important, measures and desired outcomes related to closing cases should also be aligned with Collection’s primary mission of collecting revenue and making the best use of limited International Collection resources.

According to the September Fiscal Year 2012 International Territory Report provided by Collection Field function management, 3,451 (35.9 percent) of 9,612 Taxpayer Delinquent Account modules were closed as Currently Not Collectible.

Under the current prioritization system, the three most frequent reasons for closing International Collection cases as Currently Not Collectible are:

• · The taxpayer could pay, but the IRS was unable to collect the liability because the taxpayer resides in a foreign country.

• · The IRS was unable to locate the taxpayer or their assets.

• · The IRS was unable to contact a taxpayer, and although the taxpayer’s address was known, there was no means to enforce collection.

Collection Field function management needs to ensure that their inventory selection process identifies and selects international cases with the most collection potential for international revenue officers to work. For example, enhancing case selection criteria by including the international attributes of a case may help identify and remove cases with low Representation potential from inventory allowing international revenue officers to work more productive cases. The selection criteria should prioritize collecting revenue to help close the International Tax Gap while also making the best use of the limited resources of International Collection.

Office of Audit Comment:

While IRS management stated that they regularly update their inventory selection models and that the corrective actions for this recommendation are complete, no additional evidence was provided to support that international collection case results were specifically evaluated or that any international specific case selection models were updated.

This is a concern considering that more than one-third of the International Collection program’s inventory is closed as Currently Not Collectible.

We still believe that international collection case selection practices need to be reevaluated and adjustments made to inventory selection models to identify more productive cases by including international attributes in the selection criteria, better identification of taxpayers with the ability to pay, and taxpayers who can be located and subsequently contacted.

Separate Performance Measures and Quantifiable Enforcement Results Are Needed to Determine the Success of International Collection Efforts

Performance measures for International Collection are not reported separately from Domestic Collection.

The IRS combines Domestic, International, and Puerto Rico collection results when reporting overall Collection Field function performance. According to Collection Field function management, the IRS does not find it necessary to further break down collection results to highlight International Collection statistics. The Area Director tracks the international inventory using separate productivity reports that include the number of international revenue officers and number of cases closed by their grade level. The Territory Manager and Area Director believed these reports provided the key information needed to monitor the international program with the focus primarily on the number of case closures.

The approved International Collection Strategy document states that international case processing will be examined to improve case processing efficiencies for systemic (e.g., ENTITY) and non-systemic cases. The non-systemic cases include Mutual Collection Assistance Request cases, Continental Shelf cases, and Offshore Voluntary Disclosure Initiative Program cases. These are not included as closures for International Collection because they are not part of the inventory system. International revenue officers also work other collateral cases including Qualified Intermediary cases. These cases are also non-systemic cases.

According to the International Collection Territory Manager, approximately 70 percent of the international revenue officer’s time is spent working ENTITY cases and the other 30 percent is spent on these non-systemic cases. When time is spent on non-systemic cases, the determination of resources expended in direct casework is not accurate because non-systemic cases are considered non-case related activities and reported as indirect time, overhead, or details.

Although the formal reporting of Collection performance measures has not broken out International Collection statistics, in Fiscal Year 2012, Collection Field function management created a new International Territory Report to provide certain International Collection statistics. This report accounts for some of the non-systemic or “other” casework in International Collection, and allows for reporting of selected results for international cases. However, the International Territory Report does not provide specific international case statistics that are related to existing Collection Field function performance measures.

Overall, Collection Field function performance measures address many operational statistics covering dollars collected; the number and types of closures; enforcement actions such as liens, levies, and seizures; age of inventory; and many other measures. However, in spite of using the International Territory Report and other Collection reports, Collection Field function management could not provide the following data specifically for international cases:

Dollars collected from tax returns secured.
Dollars collected from notices with international revenue officer assignments.
The number of liens, levies, and seizures resulting from international revenue officer enforcement actions.

Performance measures provide a way to determine what has been accomplished and whether or not an organization is meeting its stated goals and objectives. Without specific performance measures for International Collection, the IRS cannot establish effective performance goals or measure International Collection’s success in achieving them. In addition, the IRS cannot address the challenges of international tax enforcement without having key International Collection statistics.

Recommendation

Recommendation 6: The Commissioner, SB/SE Division, should develop separate performance measures and track the enforcement results for International Collection to determine the success of its collection efforts.

Management’s Response: The IRS agreed with this recommendation. Beginning in Fiscal Year 2014, the International Collection program developed measures for closures, efficiency, quality, and employee satisfaction. The IRS is also monitoring a variety of diagnostic indicators and may develop additional measures after programming relating to realignment of Collection is completed.

Office of Audit Comment: IRS management’s response indicates that they consider the corrective actions for this recommendation to be completed. While IRS management stated that the International Collection program has developed measures for closures, efficiency, quality, and employee satisfaction as a result of the realignment of Field Collection in October 2013, we do not believe that the completed corrective actions fully address our recommendation. For example, no corrective actions were taken in relation to the lack of identifiable international collection tax enforcement results, or the IRS’s inability to track these results to determine the overall success of its international collection efforts. Therefore, we believe that the IRS should consider developing corporate level metrics to measure its international enforcement results, which would help to determine the success of its international collection efforts, as well as the accuracy of its international inventory selection models.

The Value of the “Customs Hold” As an Enforcement Tool Has Not Been Assessed

International revenue officers can request that a Customs Hold be input into the Treasury Enforcement Communication System (TECS) for delinquent taxpayers. Once the taxpayer is on the TECS, the U.S. Department of Homeland Security (DHS) notifies the IRS whenever the taxpayer travels into the United States. During our interviews with a judgmental sample of 15 international revenue officers and all five group managers, many identified the Customs Hold as one of the most effective enforcement tools available to them in dealing with delinquent international taxpayers. International revenue officers use information obtained through a Customs Hold to attempt to contact the taxpayers while they are in the United States and/or locate the taxpayers’ assets.

The TECS is a database maintained by the DHS and is used extensively by the law enforcement community. Taxpayers are informed with a Letter 4106, Letter Advising Taxpayer of Department of Homeland Security Notification, that an international revenue officer has taken action to advise the DHS that the taxpayer has outstanding tax liabilities and that this may result in an interview by a Customs and Border Protection Officer if the taxpayer attempts to enter the United States. There is a Memorandum of Understanding[7] between the IRS and the DHS that allows Customs and Border Protection Officers to stop delinquent taxpayers identified on the TECS to collect their contact information of where they will be staying while in the United States.

According to the TECS Coordinator, the international revenue officer must submit a completed Form 6668, TECS Entry Request, to have a Customs Hold placed on a taxpayer. The form is sent to the group manager for a signature and e-mailed to the TECS Coordinator. The TECS Coordinator maintains a spreadsheet to document taxpayers added to or deleted from the TECS. According to the spreadsheet, there are approximately 1,700 taxpayers on the TECS with approximately $1.6 billion in delinquent tax assessments. This includes assessments of approximately $1.1 billion solely owed by international taxpayers. The IRS keeps no record of the dollars collected as a result of the Customs Holds and the subsequent interactions with the delinquent taxpayer. As a result, the actual value of the Customs Hold as an enforcement tool is unknown.

The TECS Coordinator does not have direct access to the system

The TECS Coordinator must submit all requests for taxpayers to be added to or deleted from the TECS through the IRS’s Criminal Investigation. The TECS Coordinator is assigned to the SB/SE Division’s Collection Field function Information Technology and Security office and does not have direct access to the TECS. As a result, the TECS Coordinator cannot independently verify that any requested actions related to the TECS have actually occurred, which could cause:

Taxpayers who have become compliant to be unnecessarily delayed by Customs and Border Protection Officers because they were not properly deleted from the TECS.
The IRS to not obtain updated taxpayer contact information because the taxpayer was never input into the TECS.

There currently is no requirement for the TECS Coordinator to track what is input or deleted from the TECS. The TECS Coordinator created a spreadsheet in an attempt to informally track this information; however, it is not directly linked to the TECS. Although the TECS Coordinator has requested direct access to the TECS and Collection Field function management informed us they have been pursuing direct access, they are dependent on the DHS providing access because the DHS owns the system. Without direct access to the TECS, there is no assurance that information that has been input into the system is up to date and accurate.