TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
The Office of Appeals Closed Case Files Are Overwhelming Onsite Storage Space
January 15, 2008
Reference Number: 2008-10-055
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone Number |
202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site |
http://www.tigta.gov
January 15, 2008
MEMORANDUM FOR CHIEF, APPEALS
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Office of Appeals Closed Case Files Are Overwhelming Onsite Storage Space (Audit # 200610050)
This report presents the results of our review of the Office
of Appeals (Appeals) closed case files. The
overall objective of this review was to determine whether Appeals has an
effective process to efficiently retain closed case information. This audit was performed as a result of
information identified during a previous audit and was included in our Fiscal
Year 2007 Annual Audit Plan.
Impact on the Taxpayer
Appeals creates an internal file containing copies of
documents related to each hearing conducted.
However, because it closes more than 100,000 cases a year, Appeals is
running out of storage space for these files and has begun shipping them to
offsite storage for a fee. Appeals could
save the time for creating the files and expense of the offsite storage to improve
taxpayer services in support of its mission.
The staff time used to create the files could be used to process
additional Appeals cases and the funds used to pay for the offsite storage
could be used to fund additional staff positions in Appeals.
Synopsis
The Appeals closed
case filing system is rapidly becoming unmanageable and losing the benefit of its
original reason for creation. Appeals
closed case files are used primarily because Appeals has had difficulty in obtaining
administrative files promptly from the Internal Revenue Service (IRS) business
units. Because its inventory is consistently
more than 100,000 closed cases per year, and some closed case files are retained
for up to 10 years, Appeals is faced with difficult decisions about the method it
uses to retain these files. Some case files
are no longer easily accessible to Appeals employees, and Appeals is running
out of storage space. In addition, the
files contain duplicate information that is available in the administrative
files and, in some cases, electronically on the Appeals computer system. Further, Appeals did not know how often its files
were used and by whom, what documents were requested, what types of cases were
reviewed most often, or how often its files were needed as the cases got older.
Due to space limitations, Appeals has begun to ship
some files to a
In Calendar Year 2003, Appeals began development of the Paperless Attachment Program to create and store electronic versions of its files. However, the Program was not adequately planned or tested. In Fiscal Year 2007, Appeals suspended the Program to evaluate technical alternatives and to implement a project management approach. We believe Appeals should further assess the storage and technical requirements of the Program and conduct controlled tests before implementing it.
Recommendations
We recommended the Chief, Appeals:
Response
IRS management agreed with all of our
recommendations. Appeals plans to conduct
an analysis of how often and when Appeals files are accessed as well as the
reason for access and types of documents involved. Based on results of the analysis of how often
and when Appeals files are accessed, Appeals plans to emphasize and/or issue
case file retention guidelines. Appeals plans
to also perform an analysis to determine if its files for Equivalent Hearings
are being kept longer than required by the Appeals Records Control
Schedule. Further, Appeals plans to determine
which of its files currently stored at a
Copies of
this report are also being sent to the IRS managers affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant
Inspector General for Audit (Headquarters Operations and Exempt Organizations
Programs), at (202) 622-8500.
Problems With and
Costs of Storing Appeals Closed Case Files May Exceed the Benefits
The Appeals Paperless
Attachment Program May Not Replace Appeals Closed Case Files
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
V – Contents of Appeals Closed Office Files
Appendix
VI – Glossary of Terms
Appendix
VII – Management’s Response to the Draft Report
Abbreviations
|
ACDS |
Appeals Centralized Database System |
|
CDP |
Collection Due Process |
|
FY |
Fiscal Year |
|
IRS |
Internal Revenue Service |
Taxpayers who disagree with the Internal Revenue Service (IRS) about their tax liabilities or certain collection actions have the right to ask the Office of Appeals (Appeals) to review their cases. Appeals is an independent function within the IRS whose mission is to settle tax disputes fairly and impartially without litigation.
Before enactment of the IRS Restructuring and Reform Act of 1998,[3] the majority of Appeals cases involved hearings for examinations and penalty assessments or for court-docketed cases. The volume of Appeals cases increased significantly after the enactment of the IRS Restructuring and Reform Act of 1998, because the Act established appeal rights for Collection Due Process (CDP),[4] Offer in Compromise, and Innocent Spouse cases. These types of cases have become a significant portion of Appeals casework. In Fiscal Year (FY) 2006, Appeals closed approximately 102,600 cases. Figure 1 presents the total Appeals cases, by type, closed in FYs 2004 - 2006.
Figure 1: Appeals Inventory of Closed Cases
|
Type of Case |
FY 2004 |
FY 2005 |
FY 2006 |
|
Examination |
28,592 |
30,810 |
33,182 |
|
CDP |
32,226 |
27,888 |
32,362 |
|
Offer in Compromise |
17,887 |
17,850 |
12,846 |
|
Penalty Appeals |
14,647 |
14,066 |
12,392 |
|
Innocent Spouse |
4,713 |
5,169 |
4,564 |
|
Industry |
670 |
664 |
856 |
|
Coordinated Industry |
653 |
610 |
639 |
|
Other |
4,558 |
5,540 |
5,718 |
|
Totals |
103,946 |
102,597 |
102,559 |
|
Source: Appeals Strategic Planning/Measures Analysis, Commissioner’s Monthly Report dated September 2006. |
|||
When Appeals assigns a taxpayer’s case for consideration, the hearing officer reviews the administrative file to learn the history of the taxpayer’s account. After Appeals makes a decision on the taxpayer’s case, it adds key documents such as the Appeals Case Memorandum and determination letter to the administrative file. Appeals then returns the administrative file to the appropriate business unit.[5]
In addition, an Appeals employee makes copies of pertinent documentation from the taxpayer’s appeal to create an Appeals Closed Office File (Appeals file). Appeals management advised us that Appeals has had difficulty obtaining the administrative files from other IRS functions. The Appeals files allow the Office greater control in obtaining copies of taxpayer information so it can more promptly answer questions from taxpayers or other IRS functions. Occasionally, a taxpayer will return to Appeals to discuss a different tax period. The Appeals file provides the hearing officer with perspective about a taxpayer’s case if there is not enough time to wait for the administrative file to be located and delivered. See Appendix V for a complete list of documents typically maintained in the Appeals files.
Appeals also stores an electronic version of the Case Activity Record on the Appeals Centralized Database System (ACDS). As a result, there are two potential sources of records in addition to the Appeals files: the administrative files stored with the business units or campuses and electronic records stored on the ACDS. The ACDS can provide quick access to major decisions from the Appeals hearing. The administrative file contains all relevant paper documents.
We performed this review at the Appeals offices in Holtsville, New York; Denver, Colorado; Fresno, California; and Memphis, Tennessee, during the period September 2006 through July 2007. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The Appeals closed case filing system is rapidly
becoming unmanageable and losing the benefit of its original reason for
creation. Because its inventory is
consistently more than 100,000 cases per year, and some closed case files are
retained for up to 10 years, Appeals is faced with difficult decisions about
the method it uses to retain these files.
Some case files are no longer easily accessible to Appeals employees,
and Appeals is running out of storage space.
In addition, the Appeals files contain duplicate information that is
available in the administrative files and, in some cases, electronically on the
ACDS.
Due to space limitations, Appeals has begun to ship
some CDP files to a Federal Records Center to store them for a fee. However, by shipping the files to a third
party, Appeals is losing the benefits of creating these files–better control
over obtaining the files and the convenience of having the records onsite. In addition, Appeals must pay for this
storage. We estimated Appeals could
spend about $78,000 over a 10-year period to store CDP Appeals files at the various
Federal Records Centers nationwide. We
also estimated Appeals is spending at least $266,000 each year for staff time
and supplies to create its files. Given
these conditions, we believe Appeals should revise its policies and procedures
related to the creation, storage, and retention of Appeals files.
In 2003, Appeals began development of the Paperless
Attachment Program to create and store electronic versions of the Appeals
files. However, the Program was not
adequately planned or tested. For
example, after nearly 4 years in development, Appeals had not adequately tested
the Program or identified its storage and technical requirements. In FY 2007, Appeals suspended the Program to
evaluate alternatives to scanning documents into the ACDS and to implement a
project management approach. We believe
Appeals should further assess the storage and technical requirements of the Program
and conduct controlled tests before implementing it.
Problems With and Costs of Storing Appeals Closed Case Files May Exceed the Benefits
Appeals creates and maintains Appeals files primarily because it had difficulty in promptly obtaining administrative files from the business units, and because Appeals management had determined these files were more convenient than the administrative files for many of their needs. We reviewed the uses of the Appeals files, and the costs to create and store them, to determine whether Appeals’ policy for maintaining closed files was effective and efficient. Sound management practices include a consideration of the costs and benefits before implementing new policies.
Appeals officials stated the administrative files for cases closed
in the campuses handling Appeals cases are sent to the Cincinnati Campus in
Appeals
did not know how often its files were needed
While reviewing Appeals files may be more convenient for its employees than waiting for receipt of administrative files, Appeals had not conducted any studies to determine how often its files were needed. Further, because Appeals files may not contain complete records, Appeals employees may still need to request administrative files to obtain all necessary information. For example, an administrative file may include correspondence between the IRS and the taxpayer, IRS system printouts, or original tax returns that are not duplicated for the Appeals file.
In April 2007, Appeals conducted an employee survey that collected general information on how often employees accessed Appeals files. Most of the responses indicated these files were helpful to address subsequent inquiries from taxpayers and IRS employees, such as those in the Taxpayer Advocate Service and the Office of Chief Counsel. Other survey responses included ease of access to documents for Appeals officers reviewing the work performed on the case, Appeals internal quality review, and answering Congressional inquiries. However, Appeals did not track how often its files were used and by whom, what documents were requested, or what types of cases were reviewed most often. Therefore, Appeals could not determine how many of the Appeals files were actually used or what specific documents were used. Further, Appeals did not know how often its files were needed as the cases got older.
Appeals did not have sufficient storage space for the increasing number of files
For most types of cases, Appeals retains its files for 3 years.[6] However, Appeals stores some types of Appeals files much longer. For example, Freedom of Information Act[7] Appeals files are retained for 6 years from the year of closure, and CDP Appeals files are retained for 10 years after the cases are closed.[8]
Appeals procedures require CDP Appeals files to be stored until the latest collection statute has expired. However, the campuses were storing this type of file according to the month and year in which the case was closed rather than the statute expiration date. For Appeals staff to determine which files need to be purged, they needed to review every file to determine if the latest collection statute date had expired. To avoid this labor-intensive process, Appeals decided to store the CDP Appeals files for 10 years after the cases were closed to ensure all collection statute dates had expired. Therefore, some CDP Appeals files were stored for years longer than required, which added to the storage space problem.[9]
The lack of adequate storage space caused problems at the locations that stored Appeals files. During our review, we visited the three campuses that stored Appeals files. Due to lack of space, the campuses stored boxes of these files in cabinets and up against walls. For example:
The campuses we visited did not always store the Appeals files in an organized manner. These files were stored by the month and year in which each case was closed, then by the first letter of the taxpayer’s last name. However, the files were not always alphabetized. An employee looking for a particular file would potentially have to search through several boxes to locate the correct file.
By storing Appeals files at a Federal Records Center, Appeals is losing the benefits of creating this type of file
Until September 2006, Appeals offices kept the Appeals files onsite. However, in October 2006, Appeals sent some CDP Appeals files to a Federal Records Center for storage, and Appeals officials told us they were considering additional shipments. Because Appeals closes approximately 30,000 CDP cases each year, it is likely some of the Federal Records Centers will be used to store these files.[10] By shipping the files to a third party, Appeals is losing the benefits of creating these files–better control over obtaining the files and the convenience of having the records onsite.
Because the Federal Records Centers are controlled by a third party, Appeals does not have direct control over its files and must order them when needed. This process takes time and is not consistent with the justification used for creating the Appeals files. Once files are archived at the Federal Records Centers, their retrieval and location can be difficult due to the vast numbers and types of files stored there. The Federal Records Centers store records in batches, which can include numerous boxes of files. Although the Federal Records Centers can quickly locate a shipment of boxes, it may be necessary to physically search through all of the boxes to find a particular file if boxes are not appropriately labeled. Further, the information contained in an Appeals file stored at a Federal Records Center is already available in the IRS administrative file, which is also stored at a Federal Records Center in a different box if the case is closed or still with the IRS function if the case is active.
In addition, Appeals must pay for the storage. The Federal Records Centers charge a one-time fee, plus an annual fee, to store records. Appeals could put $60,570 of funds to better use over 5 years by discontinuing the practice of sending Appeals files to the Federal Records Centers.[11] At the end of 10 years, 300,000 CDP files could be stored at the Federal Records Centers at a total cost of $78,133. Figure 2 shows the cumulative storage costs that would be incurred in each of the 10 years for the storage of CDP Appeals files.
Figure 2: Costs for Storage of CDP Appeals Files[12]
|
Year |
Number of CDP Appeals Files to Be
Stored |
Number of Boxes to Be Stored |
Annual Storage Cost per Box |
Total Annual Storage Costsa |
One-Time Cost per Boxb |
Total One-Time Costs |
Total Costsc |
|
1 |
30,000 |
323 |
$2.28 |
$736 |
$11.65 |
$3,763 |
$4,499 |
|
2 |
60,000 |
646 |
$2.28 |
$1,472 |
$11.65 |
$3,763 |
$5,236 |
|
3 |
90,000 |
969 |
$2.28 |
$2,209 |
$11.65 |
$3,763 |
$5,972 |
|
4 |
120,000 |
1,292 |
$2.28 |
$2,946 |
$11.65 |
$3,763 |
$6,709 |
|
5 |
150,000 |
1,615 |
$2.28 |
$3,682 |
$11.65 |
$3,763 |
$7,445 |
|
6 |
180,000 |
1,938 |
$2.28 |
$4,419 |
$11.65 |
$3,763 |
$8,182 |
|
7 |
210,000 |
2,261 |
$2.28 |
$5,155 |
$11.65 |
$3,763 |
$8,918 |
|
8 |
240,000 |
2,584 |
$2.28 |
$5,892 |
$11.65 |
$3,763 |
$9,654 |
|
9 |
270,000 |
2,907 |
$2.28 |
$6,628 |
$11.65 |
$3,763 |
$10,391 |
|
10 |
300,000 |
3,230 |
$2.28 |
$7,364 |
$11.65 |
$3,763 |
$11,127 |
|
Totals |
|
|
|
$40,504 |
|
$37,630 |
$78,133 |
|
a) The Federal Records Centers charge 19 cents per box per month. We estimated 93 CDP Appeals files will fit in each box, so 323 boxes would be needed for 1 year of CDP Appeals files (30,000 files/93 files per box). The annual cost to store 1 box is $2.28 ($.19 per month for 12 months). b) The 1-time costs per box are $2.00 for the box,
$1.20 for shipping, $3.45 for shelving, and $5.00 for disposition (total of
$11.65). The 1-time fee of $11.65
applies only to the 30,000 CDP Appeals files added each year rather than to the
total number of files in storage each year. c) Total for each row may be off by $1 due to
rounding. Source: Our analysis based on estimates provided by
Appeals staff. |
|||||||
If Appeals needs to retrieve an Appeals file that has been sent to a Federal Records Center, additional costs will be incurred because the Centers charge a total of $6.90 to pull and reshelve a single box. Because boxes are sent in shipments, it is possible a Federal Records Center would have to pull several boxes to locate a particular Appeals file, thus significantly increasing the cost.
Appeals incurred significant costs to create its Appeals files
We estimated that Appeals incurred staff costs of $252,744 to create Appeals files in FY 2006. Figure 3 shows our estimates of these costs based on information provided by Appeals staff for the grade levels of Appeals Processing Service function staff nationwide and the time needed to copy case documents.
Figure 3: Staff Costs for Creation of Appeals Files in FY 2006
|
Type of Case |
Total Closures |
Average Staff
Minutes to Copy Each Case |
Average Staff
Cost per Minute |
Estimated Total
Staff Cost |
|
Examination |
33,182 |
10.0 |
$0.2458 |
$81,562 |
|
CDP |
32,362 |
9.7 |
$0.2458 |
$77,160 |
|
Offer in Compromise |
12,846 |
12.6 |
$0.2458 |
$39,785 |
|
Penalty Appeals |
12,392 |
6.4 |
$0.2458 |
$19,494 |
|
Innocent Spouse |
4,564 |
11.3 |
$0.2458 |
$12,677 |
|
Other |
5,718 |
15.7 |
$0.2458 |
$22,066 |
|
Totals |
101,064[13] |
|
|
$252,744 |
Source: Our analysis based on estimates provided by Appeals staff.
The creation of each Appeals file involves staff time, paper, and copier costs.[14] In addition to the employees’ time to create the files, Appeals must use its paper supplies to print the documents. Figure 4 shows our estimates of the paper costs incurred in creating Appeals files. The estimates are based on information provided by Appeals staff regarding the cost of paper and information from our statistical analysis of a sample of Appeals cases.
Figure 4: Paper Costs for Creation of Appeals Files in FY 2006
|
Type of Case |
Total Closures |
Sample Size |
Total Pages in Sample |
Estimated Total Pagesa |
Paper Cost per Page |
Estimated Total Paper Costs |
|
Examination |
33,182 |
200 |
5,801 |
962,444 |
$0.00544 |
$5,236 |
|
CDP |
32,362 |
152 |
3,689 |
785,417 |
$0.00544 |
$4,273 |
|
Offer in Compromise |
12,846 |
49 |
1,125 |
294,934 |
$0.00544 |
$1,604 |
|
Penalty Appeals |
12,392 |
25 |
221 |
109,545 |
$0.00544 |
$596 |
|
Innocent Spouse |
4,564 |
25 |
699 |
127,609 |
$0.00544 |
$694 |
|
Other |
5,718 |
49 |
857 |
100,007 |
$0.00544 |
$544 |
|
Totals |
101,064 |
500 |
12,392 |
2,379,956 |
|
$12,947 |
|
a) For each type of case, the Estimated
Total Pages is calculated by dividing the Total Pages in Sample by the Sample
Size and then multiplying by the Total Closures. |
||||||
Source: Our review of a statistically valid sample of cases closed by Appeals in FY 2006.
Assuming the Appeals inventory remains constant, we estimated Appeals spends at least $266,000 per year in staff and paper costs to create Appeals files.[15] Over 5 years, the costs would exceed $1.3 million. Given the cost, duplication, and storage limitations, we believe Appeals should reevaluate its need and processes for creating and retaining Appeals files.
Taxpayer information is available from other sources
Appeals management advised us the Appeals files are necessary because they have had difficulty in promptly retrieving the administrative files when needed, especially when taxpayers petition the Tax Court. Appeals has conducted independent studies of FY 2006 data that showed more than 60 percent of the administrative files were received within 30 calendar days when taxpayers petitioned the Tax Court; however, it took more than 45 calendar days to receive 20 percent of the administrative files for some taxpayers who had petitioned the Tax Court. Both the Government Accountability Office[16] and the Treasury Inspector General for Tax Administration[17] have issued reports related to the difficulty in obtaining administrative files.
Appeals files are made up of copies of original documents maintained in the administrative files. Appeals procedures state the purpose of the Appeals file is to “. . . keep a copy of important Appeals correspondence and documents . . . that may not be a permanent part of the administrative file.” However, as long as Appeals places all necessary original documents from taxpayers’ hearings in the administrative files, or maintains some case-related information electronically on the ACDS, the Appeals files may not be necessary.
Recommendations
Recommendation 1: The Chief, Appeals, should conduct an analysis on all types of cases to determine how often and when Appeals files are accessed. This analysis should include which Appeals file documents are most often reviewed.
Management’s Response: IRS management agreed with the recommendation and plans to conduct an analysis on how often and when Appeals files are accessed, including the reason for access and the types of documents involved.
Recommendation 2: Based on the results of the analysis in Recommendation 1, the Chief, Appeals, should issue new guidelines for retention of Appeals files, especially concerning the 10-year retention period for CDP case files, based on how often the files are used and the cost to retain the files. At a minimum, the new guidelines and policies should:
· Consider the cost of creating and storing Appeals files.
· Ensure taxpayer information is adequately protected and secured.
· Ensure files can be stored locally and are easily accessible.
· Ensure CDP files can be timely identified and destroyed.
Management’s Response: IRS management agreed with the recommendation and, based on the results of the analysis for Recommendation 1, plans to emphasize and/or issue case file retention guidelines that address each of the recommended areas, except for storing Appeals files locally, because Appeals processes preclude local storage of all closed case files. Appeals plans to also conduct an analysis to determine if its files for Equivalent Hearings are being retained longer than required by the Appeals Records Control Schedule.
Recommendation 3: The Chief, Appeals, should destroy or return the existing Appeals files currently stored at a Federal Records Center and discontinue sending Appeals files in the future.
Management’s Response: IRS
management agreed with the recommendation and stated they plan to determine
which Appeals files currently stored at a
The Appeals Paperless Attachment Program May Not Replace Appeals Closed Case Files
In Calendar Year 2003, Appeals began work on the Paperless Attachment Program, which was being designed to use an electronic file attachment option available in the ACDS that was not being used. The main purpose of the Paperless Attachment Program was to enable Appeals to store an electronic version of an Appeals file rather than a paper version. This Program would allow employees to research a case on the ACDS and find all Appeals documents rather than locating, and possibly having to ship, the paper file. We reviewed the development of the Program to determine if it was adequately planned, including the performance of a cost/benefit analysis. Sound management practices include adequately planning a new program before it is implemented.
Although Appeals spent nearly 4 years developing it, the Program was not thoroughly researched or tested (e.g., Appeals did not perform any official testing to ensure the Program would work as intended). Although some employees tried the Program, they were not required to provide any formal feedback.
In addition, Appeals did not estimate the storage space required to store the electronic Appeals files. Instead, it relied on assurances from its information technology staff that sufficient electronic storage space was available. However, Appeals did not perform any preimplementation tests to determine how much space the files would occupy on the ACDS. Appeals officials advised us they planned to determine the average space requirement by reviewing the electronic storage space used by 1 office in 1 week after Appeals began to use the Program.
The Paperless Attachment Program could adversely affect performance of the ACDS
Although Appeals planned to store electronic versions of the Appeals files on its main server, the ACDS, management did not conduct an analysis to determine the average size of electronic files to assess the overall storage capacity needed for the Paperless Attachment Program. Instead, Appeals planned to establish a maximum limit of 500 megabytes per Appeals file. This approach provided Appeals with insufficient data to adequately plan for the Program’s implementation. Because not all files will be the same size, there is a wide range of possible total storage requirements. However, if some Appeals files reach the limit of 500 megabytes per file, the performance of the ACDS could be adversely affected.
To determine the potential storage requirements using Appeals’ limit of 500 megabytes per file, we calculated the amount of electronic storage space needed to store Appeals files based on the average number of cases closed each year. Appeals closes approximately 100,000 cases annually,[18] (30,000 CDP and 70,000 for all other types of cases[19]). Further, Appeals retains its CDP case files for 10 years and its other types of files for at least 2 years.[20] Figure 5 shows the potential storage space required to store all Appeals files for 10 years.
Figure 5:
Potential Storage Space Requirements for Appeals Files Based on the
Retention Period for Each File Type
|
Year |
Cumulative Number of
CDP Cases to Be Storeda |
Storage Space
Potential for CDP Casesb |
Number of Non-CDP
Cases to Be Storedc |
Storage Space
Potential for Non-CDP Casesd |
Maximum Storage
Space Potentiale |
|
1 |
30,000 |
14,648 GB |
70,000 |
34,180 GB |
48,828 GB |
|
2 |
60,000 |
29,297 GB |
140,000 |
68,359 GB |
97,656 GB |
|
3 |
90,000 |
43,945 GB |
140,000 |
68,359 GB |
112,305 GB |
|
4 |
120,000 |
58,594 GB |
140,000 |
68,359 GB |
126,953 GB |
|
5 |
150,000 |
73,242 GB |
140,000 |
68,359 GB |
141,602 GB |
|
6 |
180,000 |
87,891 GB |
140,000 |
68,359 GB |
156,250 GB |
|
7 |
210,000 |
102,539 GB |
140,000 |
68,359 GB |
170,898 GB |
|
8 |
240,000 |
117,188 GB |
140,000 |
68,359 GB |
185,547 GB |
|
9 |
270,000 |
131,836 GB |
140,000 |
68,359 GB |
200,195 GB |
|
10 |
300,000 |
146,484
GB |
140,000 |
68,359 GB |
214,844
GB |
|
GB
= Gigabytes a)
Because the CDP files are stored for 10 years, each year 30,000 files will be
stored in addition to all those put in storage in the previous years. b)
The Storage Space Potential for CDP Cases is calculated by multiplying the
Cumulative Number of CDP Cases to Be Stored by 500 megabytes (the Appeals
limit) and then dividing by 1,024 (the number of megabytes in a gigabyte). c) Because
we assumed the Non-CDP files are maintained for 2 years, after Year 2 the
Number of Non-CDP Cases to Be Stored will remain constant because as 70,000
files are added each year, the 70,000 files put in storage 2 years previously
will be purged. d)
The Storage Space Potential for Non-CDP Cases is calculated by multiplying
the Number of Non-CDP Cases to Be Stored by 500 megabytes (the Appeals limit)
and then dividing by 1,024 (the number of megabytes in a gigabyte). e)
Total for each row may be off by 1 GB due to rounding. |
|||||
Source: Our analysis based on estimates provided by
Appeals staff.
At the end of 10 years, the Paperless Attachment Program’s storage requirements could be nearly 215,000 gigabytes, with the CDP Appeals files requiring more than 146,000 gigabytes. In contrast, the current size of the ACDS is approximately 25 gigabytes. The upper limit of our calculated potential storage space represents an increase of approximately 859,000 percent over the current size of the ACDS. Expressed in simple terms for comparison, if the current ACDS size were represented as a 1-foot ruler, the highest potential storage requirement for the Paperless Attachment Program could be nearly the height of 6 Empire State Buildings stacked on top of each other.[21] As a practical matter, the highest end of this range would not be feasible given the capacity of the ACDS and demonstrates the need for a better analysis and estimate of the true storage requirements.
Appeals had not analyzed the ability of the ACDS to handle the additional workload of the Paperless Attachment Program. During the beginning stages of the Program’s development, an executive over the Program stated the ACDS could not be used to house the electronic Appeals files, because doing so would cause the ACDS to crash. During our discussions with Appeals officials, we were advised they planned to maintain all electronic documents for these files on the ACDS.
However, Appeals had not conducted any testing to determine if the ACDS server could handle the increased workload presented by the Paperless Attachment Program. Appeals management believed actual physical storage space would not be an issue due to their ability to purchase additional hard drives. However, some Appeals staff expressed concern about the server’s ability to handle the frequent uploads and downloads that the new Program would require. Appeals had not developed a contingency plan in the event that the server could not handle the added workload.
In addition, the storage space and demands on the server could be detrimental to the efficiency of the ACDS, which is the main system used by most employees in Appeals including hearing officers, their managers, tax computation specialists, and the Appeals Processing Service function staff. The ACDS is used to log in cases, track activity related to the cases, charge time to each case, document employee evaluations, and close cases and for business planning purposes. A decrease in the efficiency of this System could severely affect the overall performance of Appeals. Appeals information technology staff believe it may be possible to compress the data, thereby decreasing the amount of electronic storage space needed, but this has not yet been tested.
There are recurring costs for the Paperless Attachment Program
In addition to the funds already expended, there will be continuing expenses related to use of the Paperless Attachment Program. The major ongoing expense will be staff time to scan and upload the documents. However, there would also be continuing equipment costs, as scanners need to be replaced and additional electronic storage space needs to be purchased.
Based on the limited testing performed, Appeals estimated it would take 5 minutes per case to scan in the necessary documents. Applying this time to the approximately 100,000 cases closed per year, we determined more than 8,000 hours a year would have to be dedicated to scanning documents. If the Appeals Processing Service function technicians who currently make copies of documents for the paper Appeals files are responsible for scanning documents, the estimated annual staff costs would be $122,900 to scan documents for Appeals files.[22]
Appeals plans to reevaluate the Paperless Attachment Program
At the conclusion of our fieldwork, Appeals management informed us they were considering using copiers rather than scanners to upload electronic documents to the ACDS. However, to comply with the national contract the IRS has for its copiers, Appeals must first convert its copier inventory and participate in a certification process. Although the Paperless Attachment Program was scheduled to be implemented in March 2007, it will remain on hold until all machines are certified under the national contract. Appeals’ goal is to have all machines under the national contract in early FY 2008.
The Chief, Appeals, recognized that additional planning and cost/benefit analysis were necessary to improve development of the Paperless Attachment Program. As a result, implementation of the Program was delayed, and Appeals began a “second phase” of development to include a cost/benefit analysis and consideration of the additional server space needed and the potential impact on performance of the ACDS. We believe Appeals should assess storage requirements and conduct testing of the ACDS before proceeding with implementation of the Paperless Attachment Program.
Recommendation
Recommendation 4: The Chief, Appeals, should conduct further planning, analysis, and testing, including assessing storage requirements, before implementing the Paperless Attachment Program.
Management’s Response: IRS management agreed with the recommendation and plans to conduct further planning, analysis, and testing, including determining storage requirements, before implementing or cancelling the Paperless Attachment Program.
Appendix I
Detailed Objective, Scope, and Methodology
The objective of this audit was to determine whether the Office of Appeals (Appeals) has an effective process to efficiently retain closed case information. To accomplish our objective, we:
I. Reviewed existing regulations, requirements, guidelines, and procedures regarding the production and maintenance of Appeals files.
A. Reviewed various Internal Revenue Manual sections regarding the production, use, and maintenance of these files.
B. Discussed with Appeals officials the business purpose for these files, the processing of cases, and the retention policies for files.
This review was the extent of our work on internal controls. We did not identify any internal control weaknesses or issues.
II. Obtained from the ACDS[23] file maintained at the Treasury Inspector General for Tax Administration Data Center Warehouse a computer extract of all cases closed between October 1, 2005, and September 30, 2006. We validated the reliability of the computer extract using information from the Data Center Warehouse, reviewed the appropriateness of data within fields requested, and compared population totals to information obtained from Appeals officials.
III. Selected statistically valid samples for each of six separate types of cases.[24] The total sample of 500 cases was selected based on a confidence level of 95 percent and a precision rate of +5 percent; it included an additional 100 cases randomly selected to substitute for lost or unobtainable cases. The total sample was obtained from the population of 101,064 cases closed in FY 2006 for the 6 types of cases.
IV. Obtained and reviewed case files for each of the six samples to determine the number of pages in each reviewed Appeals file. We also estimated the costs to create and store the files and assessed electronic storage requirements.
V. Conducted site visits and interviews with Appeals officials to determine staff and Paperless Attachment Program costs related to the production of Appeals files. We applied this cost information to the estimated page totals derived from our file reviews.
VI. Discussed with Appeals officials the development of the Paperless Attachment Program, including the planning process, costs associated with the Program, and plans for its implementation.
Appendix II
Major Contributors to This Report
Nancy
A. Nakamura, Assistant Inspector General for Audit (Headquarters Operations and
Exempt Organizations Programs)
Carl
L. Aley, Director
Janice
M. Pryor, Audit Manager
Stephanie
K. Foster, Lead Auditor
Mark
A. Judson, Senior Auditor
Donald
J. Martineau, Auditor
Appendix III
Acting Commissioner C
Office of the
Commissioner – Attn: Acting Chief of
Staff C
Deputy Chief, Appeals AP
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Chief, Appeals AP
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
·
Funds Put to Better Use – Potential; $60,570 to
store CDP[25]
Office of Appeals (Appeals) files over 5 years at a
Methodology Used to Measure the Reported Benefit:
If Appeals discontinues sending its files to a
Appendix V
Contents of Appeals Closed Office Files
Office of Appeals (Appeals) procedures state that, if the following documents have been prepared, a copy should be maintained in the Appeals file:
· Case Activity Record.[26]
· Appeals Transmittal and Case Memo (Form 5402).
· Appeals Case Memorandum.
· Audit Statement.
· Agreement.
· Appeals Closing Record (Form 5403).
· Appeals Short Closings (Form 5570).
· Appeals Transmittal Memorandum and Supporting Statement-Penalty (Form 9120).
· Request for Adjustment (Form 3870).
· Concurrent Determinations of Deficiencies (Increases in Tax) and Overassessments (Decreases in Tax) in Cases Involving Restricted Interest Provisions of the Internal Revenue Code (Form 2285).
· Closing Agreement.
· Closing Letter.
· Notice of Termination of Special Consent to Extend the Time to Assess Tax (Form 872-T).
· Audit Statement (Form 3610).
· Statement - Income Tax Changes (Form 5278).
· Tax Court Decisions.
· Installment Agreement.
· Prior and/or related supporting statements, if applicable.
· Copy of the revenue agent’s report for the flowthrough entity or U.S. Individual Income Tax Return (Form 1040) Profit or Loss From Business (Schedule C) promotion for tax shelter cases.
· Copy of Notice of Deficiency.
· Copy of determination letter.
Other documents that may be in the Appeals file, although not required, include:
· Closing Agreement on Final Determination Covering Specific Matters (Form 906) or Agreement as to Final Determination of Tax Liability (Form 866).
· Counsel Settlement Memorandum.
· Fast Track Settlement Report (if applicable).
· Operations Assistance Request (OAR) (Form 12412).
· Waiver of Statutory Notification of Claim Disallowance (Form 2297).
· Notice of Determination of Worker Classification.
For CDP cases, Appeals also maintains the following documents:
· CDP Notice (Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing (Letter 1058), Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320 (Letter 3172), et al.).
· Cases Activity Record and Automated Timekeeping System Case History.
· ACDS Case Summary Card.
· Request for a Collection Due Process Hearing (Form 12153) or Written Request.
· Envelope (Postmark).
· Determination/Decision Letter and Attachment.
· Summary Notice of Determination, Waiver of Right to Judicial Review of a Collection Due Process Determination and Waiver of Suspension of Levy Action (Form 12257).
· Form 3210 (Document Transmittal).
· Appeals Case Memo (if applicable).
· Court Decision (if applicable).
· Offer in Compromise (if applicable).
· Form 3870 (if applicable).
· Form 9120 (if applicable).
Appendix VI
|
Administrative File |
A file containing one or more examined tax returns; the examination report; and all papers, correspondence, and other documents relative to the taxpayer’s liability for the year or years involved. It is the official IRS record of the case. |
|
Appeals Case Memorandum |
A report prepared by the hearing officer to adequately explain and support the basis on which a work unit is disposed. |
|
Appeals Centralized Database System (ACDS) |
A web-based application used by all Office of Appeals (Appeals) employees; it incorporates functionality for various employee occupations, including executives, Headquarters analysts, Appeals Processing Service function employees, Appeals managers, and hearing officers. |
|
Appeals Processing Service Function |
The function that provides technical assistance and support for controlling and processing all Appeals and Office of Chief Counsel tax cases. It is the final processing point in the Appeals office and performs the full range of interim and closing actions. This includes adjustments, assessments, manual refunds, abatements, installment agreements, and offers in compromise for all types of tax cases. |
|
Campus |
The data processing arm of the IRS. The campuses process paper and electronic submissions, correct errors, and forward data to the Computing Centers for analysis and posting to taxpayer accounts. |
|
Case Activity Record |
The record that tracks the amount of time a hearing officer worked on a particular case; it includes notes by the hearing officer regarding actions taken and decisions made related to the case. |
|
Case Activity Record and Automated Timekeeping System |
A subsystem within the ACDS used by hearing officers to record their case time, prepare their timesheets, and record case activity. |
|
Collection Due Process (CDP) |
The process through which a taxpayer may appeal the first time a Federal Tax Lien is filed on a tax period and before the IRS levies against his or her property. This type of case is referred to as a CDP case. |
|
Coordinated Industry Case Program |
The program that involves taxpayers liable for one or more different types of excise taxes. Cases involve those in which the taxpayer and its effectively controlled entities warrant the application of team examination procedures. |
|
Determination Letter |
A letter sent to the taxpayer informing him or her of the hearing officer’s decision regarding the case. In a CDP hearing, the determination letter also informs the taxpayer of his or her right to petition the Tax Court if he or she does not agree with the Appeals decision. |
|
Examination |
The IRS examination (audit) of a tax return(s) to verify that the tax reported is correct. |
|
Federal Records Center |
The Federal Records Center Program stores and services records for nearly 400 Federal Government agencies. The Program operates 17 facilities nationwide and stores 25 million cubic feet of records. |
|
Gigabyte |
Represents 1.073741824 billion bytes or 1,024 megabytes. Most hard drive sizes are listed in gigabytes. |
|
Hearing Officer |
The general term used to refer to a staff member who conducts Appeals hearings. The term includes both Appeals officers and settlement officers. |
|
Industry Case |
Any Large and Mid-Sized Business Division case that is not designated as a Coordinated Industry Case. |
|
Innocent Spouse |
By requesting Innocent Spouse relief, a taxpayer may be relieved of responsibility for paying tax, interest, and penalties if his or her spouse (or former spouse) improperly reported items or omitted items on a jointly filed tax return. |
|
Megabyte |
A unit used to describe memory and disk capacity that is equal to approximately 1.048576 million bytes or 1,024 kilobytes. It is also equivalent to about 500 pages of text. |
|
Offer in Compromise |
A taxpayer unable to pay his or her tax liability in a lump sum or through an installment agreement may file an offer in compromise. |
|
Other |
“Other” types of appeals include both collection (e.g., Collection Appeals Program) and noncollection (e.g., Preparer, Abatement of Interest) cases. |
|
Paperless Attachment Program |
A program developed by Appeals staff to allow for the scanning of documents to create an electronic version of Appeals files to replace the current paper Appeals files. |
|
Penalty Appeals |
In some cases, taxpayers may request relief from certain penalties if they can show they exercised ordinary business care and prudence in determining their tax obligations but were unable to comply with those obligations due to circumstances beyond their control. |
|
Revenue Agent |
An IRS employee who audits complicated income, sales, and excise tax returns of businesses and large corporations. |
|
Tax Computation Specialist |
An IRS employee responsible for preparing audit statements, notices of deficiency, tentative computations, information statements, and other analyses. In addition, the employee prepares tentative computations, schedules, and exhibits reflecting the impact of legal opinions or settlement possibilities. |
|
Taxpayer Advocate Service |
An IRS program that provides an independent system to assure that tax problems, which have not been resolved through normal channels, are promptly and fairly handled. |
|
Treasury Inspector General for Tax Administration Data Center Warehouse |
A collection of historical data from various IRS databases and systems. |
Appendix VII
Management’s Response to
the Draft Report
The response was removed due to its
size. To see the response, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.
[1] Appendix VI presents a Glossary of Terms used in the report.
[2] At the time of our fieldwork, only one Appeals location had records stored in its local Federal Records Center. Other Appeals locations were also considering sending files to the local Federal Records Centers.
[3] 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., 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.).
[4] Appendix VI presents a Glossary of Terms used in the report.
[5] Administrative files for open cases are stored with the business units or campuses. Administrative files for closed cases are sent to the Cincinnati Campus for processing.
[6] For FY 2006, Appeals would have had all of the cases closed in FYs 2004 and 2005 files and would have added FY 2006 files as the cases were closed. At the beginning of FY 2007, the closed FY 2004 Appeals files would have been purged.
[7] 5 U.S.C. § 552 (2007). This Act provides public access to agency records unless they are protected from disclosure by one of the Act’s nine exemptions or three exclusions.
[8] The Appeals files for Freedom of Information Act cases closed in FY 2006 would be purged at the beginning of FY 2013. The Appeals files for CDP cases closed in FY 2006 would be purged at the beginning of FY 2017.
[9] Based on the collection statute dates identified in the sample reviewed, the average required storage period was 8 years.
[10] The number of cases in total and for each type of case closed by Appeals fluctuates each year. We believe 30,000 is a conservative estimate of the number of CDP cases closed each year.
[11] See Appendix IV for details of calculation.
[12] We focused on storage for only the CDP Appeals files because these files are kept significantly longer than other types of Appeals files.
[13] The Total Closures number does not include the Industry Cases or Coordinated Industry Cases. We did not include these types of cases because they represent a very small percentage of the total population of closed cases. Additionally, the administrative files for these types of cases can be voluminous, making the Appeals files useful when trying to locate important documents.
[14] Appeals did not track copier use, so we were unable to calculate copier costs for creation of Appeals files.
[15] Includes $252,744 in staff costs and $12,947 in paper costs.
[16] TAX ADMINISTRATION: The Internal Revenue Service Can Improve Its Management of Paper Case Files (GAO-07-1160, dated September 2007).
[17] Better Procedures Are Needed to Locate, Retrieve, and Control Tax Records (Reference Number 2004-10-186, dated September 2004).
[18] The number of cases, in total and for each type of case, closed by Appeals fluctuates each year. We believe our estimate of 100,000 closed cases, of which 30,000 are CDP cases, is conservative based on prior year closures.
[19] Non-CDP cases are retained for at least 2 years and up to 3 years. To allow for a conservative estimate, we used the 2-year retention period.
[20] The files for cases with a Closing Agreement are maintained for 10 years. However, Appeals did not track how many cases are closed with a Closing Agreement, so we could not accurately determine the 10-year retention period or how many cases are affected by it.
[21] This analysis is based on the Appeals criterion of 500 megabytes (maximum) per file.
[22] The $122,900 in staff costs is based on FY 2006 salaries.
[23] Appendix VI presents a Glossary of Terms used in the report.
[24] The 6 types of cases and their sample sizes were Examination (200), CDP (152), Offer in Compromise (49), Requests for Penalty Abatement (Penalty Appeals) (25), Innocent Spouse (25), and Other (49), for a total sample size of 500 cases.
[25] Appendix VI presents a Glossary of Terms used in the report.
[26] Appendix VI presents a Glossary of Terms used in the report.