Problems with IRS Data Systems

Since Charles O. Rossotti became IRS Commissioner in 1997, the IRS has moved ahead on a massive re-organization plan. The goal, Mr. Rossotti has said in numerous statements, is to improve the service the IRS provides its customers. In addition to the major organizational changes mandated by Congress, the IRS also has received hundreds of millions of dollars in special funding for new computer systems.

Basic to plan was a new organizational strategy where the IRS would be divided into four specialized operating divisions One would handle the roughly 90 million returns filed by individual taxpayers with income from wages and investments. A second would focus on dealing with an estimated 40 million returns filed by small businesses and self-employed individuals. Another would concern itself with 80,000 large and middle-sized business. The fourth and final division would deal with 1.6 million tax exempt organizations, employee plans and state and local government agencies.

The new system, the IRS said, would be more efficient and would help the agency make sure that similarly situated taxpayers were treated in a similar way. These assurance, however, so far do not appear to be correct. Here is the story:

As it has in the past, shortly after the end of fiscal year 2001, TRAC asked the IRS for data about that year’s operations -- information about audits, collections, appeals, and taxpayer services, etc. And several weeks before April 15, various IRS organizations began to respond to TRAC’s request.

Analysis of the data, however, showed information about the geographic location of taxpayers who had been audited or subjected to agency collection procedures was often inaccurate or missing.

The most serious loss of such information was for corporations, where accurate geographic identifiers were only available for 2 percent of the tax dollars owed by these entities.

Following up on this problem, TRAC asked the IRS’s Large and Mid-Size Business (LMSB) Division for statistical information on the geographic location of the targeted organizations.

LMSB refused this request despite an existing court injunction, previously obtained by one of TRAC’s co-directors, requiring the continued release of such geographic data. LMSB volunteered that it had collected detailed information by the five very large business sectors that division was now organized into: (1) financial services and healthcare; (2) natural resources; (3) communications, technology and media; (4) food, mass retailers & pharmaceuticals; and (5) heavy manufacturing, construction and transportation. TRAC requested this information.

On March 27 the LMSB Division refused TRAC’s request for further data and TRAC immediately appealed this withholding of geographic and industry breakdowns to IRS Commissioner Rossotti’s office. On April 1 Commissioner Rossotti’s office provided TRAC with specific counts of the number of audits it allegedly had conducted on the businesses assigned to these five industry sectors. [Figures on audits by IRS areas and territories for FY2001 are still being withheld.] TRAC immediately began an analysis of the data, including calculating the audit rates for each grouping. Partly because these rates suggested vast sector-by-sector differences, we ask the IRS for its comment.

Within a matter of hours, the IRS retracted the sector audit counts, acknowledging that they were not correct and that under the new reorganization such counts were not now possible. The basic problem is that IRS current data systems do not record information about the taxpayer’s location or its industry grouping -- they record the location and division of the IRS office which is often quite different.

Thus, this accounting failure occurred because the audit of a corporation is always categorized under the industry unit where the IRS employee conducting the audit is assigned when the case is closed. This means, for example, that if an IRS employee conducting an audit of a natural resources corporation is transferred to the division handling financial companies, the audit of the natural resources corporation will end up being improperly categorized on the IRS books. For these and a variety of other reasons, including the interconnectedness of financial matters in a wider world that does not fit neatly into the confines of the IRS’s organizational sections, the actual function of the corporation may differ from the assigned mission of the agency unit doing the audit.

The IRS contends that its accounting problems are temporary and that within two or three years the system will provide the American people a reliable way to assure themselves about the effectiveness and fairness of the tax collection system. And it insists that collecting information about the geographic distribution of its audits and other enforcement information is not necessary because the agency eventually will have the useful sector-by-sector data. This year's embarrassing failure, however, strongly suggests that IRS is just plain wrong; that the accounting shortcomings inherent to its new organizational structure, combined with the challenge of properly categorizing America's hugely varied mix of taxpayers, means that tracking the performance of the agency is now impossible. 


Transactional Records Access Clearinghouse, Syracuse University
Copyright, 2002