oversight

Tax Administration: Uses of and Problems With IRS' Non-Master File

Published by the Government Accountability Office on 1999-04-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Chairman, Committee on
                Ways and Means
                House of Representatives


April 1999
                TAX
                ADMINISTRATION
                Uses of and Problems
                With IRS’ Non-Master
                File




GAO/GGD-99-42
GAO                United States
                   General Accounting Office
                   Washington, D.C. 20548

                   General Government Division



                   B-279039

                   April 21, 1999

                   The Honorable Bill Archer
                   Chairman, Committee on Ways and Means
                   House of Representatives

                   Dear Mr. Chairman:

                   The Internal Revenue Service (IRS) maintains and processes most
                   taxpayer accounts on the master file, which consists of separate files for
                   various types of taxpayers, such as individuals, businesses, employee
                                                     1
                   plans, and exempt organizations. However, the master file has systemic
                   limitations that render it incapable of handling some types of accounts.
                   IRS established the non-master file (NMF) for those exceptions.
                                                                                                                            2
                   In September 1997, the Senate Finance Committee held hearings on IRS.
                   During those hearings, a taxpayer discussed numerous problems that she
                   had encountered in trying to resolve her NMF account. Accordingly, you
                   requested that we develop information to enhance your understanding of
                   the NMF. In response to your request and subsequent conversations with
                   your office, this report discusses (1) the basic differences between the
                   master file and the NMF; (2) known problems that IRS and taxpayers have
                   been experiencing with the NMF, including the sources of such problems;
                   and (3) recent IRS proposals and actions intended to address these
                   problems.

                   IRS uses the NMF for accounts that either the master file is not configured
Results in Brief   to process or that must be processed more quickly than can be done
                   through the master file. Compared to the master file, the NMF is newer
                   (1991 vs. 1962) and smaller (about 122,000 NMF accounts scattered among
                   10 decentralized databases vs. millions of master file accounts in one large
                   centralized system). The NMF is more flexible than the master file, and
                   IRS’ procedures for entering data into and processing accounts on the
                   NMF are more streamlined and thus quicker than those for the master file.

                   Although the NMF enables IRS to process certain accounts that cannot be
                   handled by the master file, the NMF also had limitations, at the time of our
                   review, that caused problems for IRS staff and taxpayers. Our review and

                   1
                    In this report, we will refer to the various master files collectively as “the master file,” except when it
                   is necessary to specifically identify one of them.
                   2
                       Hearings before the Committee on Finance, U.S. Senate, 105th Cong. 1st sess., Sept. 23-25, 1997.




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              IRS’ studies revealed that the most significant limitations were (1) the lack
              of a central repository of all NMF accounts, (2) the absence of any
              meaningful link to the automated system that IRS staff use to obtain
              information about taxpayers’ accounts, and (3) the fact that the NMF
              processing procedures were predominately manual. These limitations
              made it difficult for IRS staff to identify and access accounts and could
              cause delays in processing account information in some situations, such as
              when a taxpayer moves from one service center’s jurisdiction to another.
              These access problems and processing delays, in turn, could cause
              taxpayers whose accounts were processed on the NMF to receive
              incorrect information and experience poor customer service.

              After the September 1997 Senate Finance Committee hearings, IRS
              undertook several reviews of the NMF and developed a plan that included
              numerous proposed corrective actions. Implementation of some
              significant proposed actions, such as the movement of certain NMF
              accounts to the master file, has been deferred until at least 2001 because
              those actions involve extensive computer reprogramming that could
              interfere with IRS’ efforts to make sure its computer systems are Year 2000
              compliant. Recognizing the need to make improvements in the near term,
              however, IRS recently implemented other actions, such as adding a unique
              toll-free telephone number to NMF notices, that required fewer resources
              and little or no reprogramming.

              If effectively implemented, IRS’ near-term actions, in conjunction with the
              actions that have been deferred, should go a long way toward correcting
              identified NMF problems. However, IRS’ action plan lacks a key
              component. There is nothing in the plan about IRS’ (1) monitoring the
              NMF to identify any problems that arise in the future and (2) ensuring that
              timely action is taken to address any such problems. We are
              recommending that IRS institute procedures to achieve those ends.

              To develop information on the basic differences between the master file
Scope and     and the NMF, we reviewed relevant IRS documentation, including
Methodology   information on the number and types of accounts processed on the NMF;
              interviewed IRS officials at the National Office, at the Executive Office for
              Service Center Operations in Cincinnati, OH, and at 3 of IRS’ 10 service
              centers—Atlanta, GA; Cincinnati; and Fresno, CA; and obtained
              information from NMF managers at all 10 service centers through a
              questionnaire. We also observed NMF transactions being processed at the
              Atlanta and Cincinnati Service Centers. We visited Atlanta and Fresno
              because they were the two centers with the most NMF accounts at the
              time we did our work; the Assistant Director of the Fresno Service Center



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             also headed a task force that reviewed the NMF. We visited Cincinnati
             because of its proximity to the Executive Office for Service Center
             Operations.

             To identify problems that IRS and taxpayers have experienced with the
             NMF, we obtained data through the questionnaire and interviews
             described in the preceding paragraph as well as interviews at two of IRS’
             four regional offices—Western and Midstates—and at two IRS district
             offices—the Georgia District, headquartered in Atlanta, and the Ohio
             District, headquartered in Cincinnati. We visited the Western Region to
             interview the problem resolution analyst who had reviewed the NMF case
             that was discussed at the Senate Finance Committee hearings. We visited
             the Midstates Region to meet with Internal Audit staff who were doing
             related work. We visited the district offices in Atlanta and Cincinnati
             because of their proximity to other IRS locations at which we were doing
             work.

             We also reviewed several IRS reports on the NMF, including a December
             1997 report on the results of an internal IRS review of the NMF case that
             was discussed at the September hearings and a February 1998 report on
             the NMF by a task group from the Fresno and Ogden Service Centers. We
             discussed the NMF with problem resolution officers, who are responsible
             for resolving taxpayer complaints, at the Atlanta, Fresno, and Cincinnati
             Service Centers. Although we identified several limitations of the NMF, we
             were unable to determine the extent to which taxpayer problems could be
             traced back to those limitations because IRS had no data that would allow
             such an analysis.

             To determine what IRS has done and plans to do to address the problems
             caused by the NMF, we identified corrective actions that were
             recommended as a result of the various IRS reviews and discussed the
             status of those actions with responsible IRS officials. IRS identified several
             actions that it said it implemented in early 1999, as we were completing
             our audit work. We did not verify that those actions were taken or assess
             their effectiveness in correcting past problems.

             We did our work from January 1998 to February 1999 in accordance with
             generally accepted government auditing standards.

             Before automated data processing, IRS maintained all tax accounts on
Background   ledger cards. In 1962, this system was replaced with the master file.
             Although the master file was an improvement over the manual system, it
             could not process certain accounts because of system limitations. These



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                              accounts, referred to as NMF accounts, were kept on ledger cards until
                              1991, when the NMF was automated.

                              The automated NMF consists of 10 stand-alone databases—one in each of
                              IRS’ 10 service centers. Each service center has an NMF unit with 5 to 21
                              staff who enter account information into that center’s database and
                              otherwise manage the system. As of September 8, 1998, according to IRS,
                              there were a total of about 122,000 accounts on the NMF. (See app. I for
                              the number of staff in each service center’s NMF unit and the number of
                              accounts in each center’s NMF database.)

                              There are two general reasons why IRS puts accounts on the NMF. Some
The NMF Enables IRS           accounts have features that do not fit with the master file’s configuration;
to Process Taxpayer           other accounts have to be processed more quickly than the master file
Accounts That Cannot          processing procedures allow. Because it is smaller and decentralized, the
                              NMF can handle accounts that the master file cannot and can process
Be Processed on the           transactions faster than the master file.
Master File
Most NMF Accounts Involve     According to IRS, of the 122,000 accounts on the NMF as of September 8,
                              1998, about 82 percent involved either split assessments or employee
Either Split Assessments or   plans. Split assessments are accounts that were originally on the master
Employee Plans                file for a joint entity (e.g., a husband and wife who filed a joint income tax
                              return) but later had to be split into separate accounts. For example,
                              application of the innocent spouse provisions of the tax law can relieve
                              one spouse of all or some of the total tax liability assessed against a
                              married couple who filed a joint return. That would require IRS to
                              separately assess each of the spouses for the amounts that they legally
                                    3
                              owe. These accounts have to be set up on the NMF because the master file
                              is not configured in a way that allows accounts to be linked to one another
                              and does not allow IRS to separately assess and bill the filers of a joint
                              return. According to IRS, of the 122,000 accounts on the NMF as of
                              September 8, 1998, about 71,000 (58 percent) involved split assessments.

                              Employee plan accounts are on the NMF, according to IRS, so that IRS can
                              assess excise taxes related to the plans. IRS officials told us that there is
                              no place on the master file to enter the employee plan number, which is
                              needed to assess the excise taxes. Thus, the accounts are put on the NMF,
                              which is configured to accept employee plan numbers. IRS data indicate


                              3
                               IRS would also split a joint account into separate accounts if only one of the parties (1) claimed
                              bankruptcy, (2) petitioned the Tax Court, or (3) submitted an offer-in-compromise that was accepted
                              by IRS. An offer-in-compromise is a taxpayer proposal to settle an outstanding tax debt at something
                              less than the amount owed.




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  that about 29,000 (24 percent) of the 122,000 NMF accounts as of
  September 8, 1998, involved employee plans.

  According to IRS, most of the remaining NMF accounts as of September 8,
  1998, fell into one of the following five categories. IRS had no data on the
  number of accounts in each of these categories.

• New legislation: The NMF permits rapid implementation of new tax laws
  that may require extensive, and thus time-consuming, modifications to the
  master file. Because it is much smaller than the master file (as discussed
  later), the NMF can be quickly changed to handle these new laws.

• Overflow accounts: These are accounts that have more transactions than
  the master file is configured to handle. When the physical size of an
  account exceeds the master file configuration, IRS is to transfer the
  account to the NMF, which has no constraint on an account’s size.

• Large dollar amounts: These are accounts with dollar balances that exceed
  the space allotted in the master file for an account’s dollar amount. In that
  regard, the master file is not configured to handle accounts with balances
  of $100 million or more. The NMF has no such limitation.

• Immediate assessments: These are accounts that must be assessed more
  quickly than the master file process allows. Generally, these assessments
  involve situations where IRS has determined that the assessment or
  collection of a deficiency will be jeopardized by delay. In such cases, IRS is
  authorized to immediately assess such deficiency. These accounts are
  processed on the NMF because, according to IRS, the NMF can process
  assessments in 24 to 36 hours, while the master file takes several weeks.

• Reversal of erroneous abatements: These are accounts in which an
  assessment is needed to correct some clerical action that had erroneously
  reduced (abated) a taxpayer’s tax liability, and the statute of limitations for
  assessments had expired. As configured, the master file prevents the
  reversal of abatements after expiration of the statute of limitations.




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Master File Configuration   As indicated by the information in the previous section, most of the
                            accounts on the NMF are there because of limitations in the master file’s
and Processing Procedures   configuration (e.g., the master file’s inability to handle split assessments,
Make NMF Necessary                                                            4
                            large accounts, and employee plan numbers). Other accounts (e.g., those
                            involving new legislation and immediate assessments) are on the NMF
                            because they have to be processed more quickly than is possible on the
                            master file.

                            There are two basic reasons why accounts can be processed more quickly
                            on the NMF than on the master file. First, the NMF is much smaller than
                            the master file and, thus, easier to work with. The NMF had 122,000
                            accounts as of September 8, 1998, and those accounts were spread among
                            stand-alone systems in each of IRS’ 10 service centers. By comparison, the
                            master file is one large system, housed in Martinsburg, WV, that has an
                                                                                                      5
                            account for every taxpayer that files a return—about 200 million in 1998.

                            Second, the process IRS follows to enter account data into the master file
                            and make the updated information available for researching taxpayer
                            accounts is much more time-consuming than the NMF process. For master
                            file purposes, account data flow from the service centers, where the data
                            are initially received and validated, to IRS’ computing center in
                            Martinsburg, where the data are posted to the master file. Data coming
                            into Martinsburg from the individual service centers are not posted to the
                            master file upon receipt. Instead, data are accumulated during the week
                            for posting on weekends. Martinsburg sends output from the posting
                            process back to the service centers for their use in updating the Integrated
                            Data Retrieval System (IDRS). IDRS is the primary system that IRS
                                                                              6
                            employees use to research and update accounts. For example, IRS’
                            customer service representatives use IDRS to access accounts in
                            responding to taxpayer inquiries. According to IRS, the process from the
                            4
                             We do not know why the master file was not configured to accept these type of accounts when it was
                            established in 1962 or why IRS did not reconfigure the master file once it became apparent that certain
                            accounts could not be entered into the master file.
                            5
                             The definition of an account on the NMF differs from the definition of an account on the master file.
                            On the master file, each taxpayer has an account that includes everything related to that taxpayer over
                            the years (returns filed, payments made, additional taxes assessed as a result of audit, etc.). On the
                            NMF, a taxpayer may have more than one account. To illustrate, if a taxpayer files a return showing a
                            $1,000 tax liability and a subsequent audit shows that the taxpayer understated income and owes
                            another $500, there would be two accounts on the NMF for that taxpayer—one for the $1,000 assessed
                            on the basis of the filed return and a second for the $500 assessed as a result of the audit. On the
                            master file, both of these transactions would be part of one account.
                            6
                             IDRS gives IRS employees instantaneous visual access to certain taxpayer accounts. According to
                            IRS, the system’s capabilities include (1) researching account information; (2) entering transactions,
                            such as adjustments and name or address changes; (3) entering collection information for storage and
                            processing in the system; and (4) automatically generating notices to taxpayers and other output.




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                                time data are sent to Martinsburg until updated account information is
                                available on IDRS can take from 4 to 6 weeks.

                                The NMF process is more streamlined and thus quicker. After receipt and
                                validation by the service center, NMF account data are sent to the NMF
                                unit in that same service center for immediate input to the NMF. According
                                to IRS, that process generally takes about 1 day. There is no movement of
                                data between the service center and Martinsburg, and NMF data are
                                generally not input to IDRS (the one exception to this rule, delinquent
                                accounts, will be discussed later).

                                Although the NMF enables IRS to process accounts that cannot be
Despite Some                    processed on the master file, the NMF also had limitations, at the time of
Advantages, NMF                 our review, that caused problems for IRS employees and taxpayers. While
System Limitations              the NMF’s decentralization allowed employees to quickly enter account
                                data and make more timely assessments than would be possible with the
Contributed to                  master file, it also limited the ability of employees to research NMF
Processing Delays,              accounts. The ability to research NMF accounts was further limited by the
Incorrect Assessments,          absence of any meaningful link between the NMF and IDRS. The
and Customer Service            decentralized NMF system also involved many manual procedures and
Problems                        computations that increased the risk of error and delayed some
                                processing. These problems could adversely affect the ability of IRS staff
                                to do their jobs, including their ability to provide accurate service to
                                taxpayers with accounts on the NMF.

It Has Been Difficult for IRS   IRS staff need the ability to research account data. Customer service
                                representatives, for example, need that capability so they can respond to
Staff to Research NMF           taxpayer inquiries about their accounts and any related correspondence
Accounts                        they may have received from IRS. Revenue agents and revenue officers
                                need research capability in conjunction with their audit and collection
                                case work.

                                At the time of our review, it was difficult for IRS staff to research NMF
                                accounts because, as described by an IRS task force, IRS staff often had
                                “difficulty identifying that the account is, in fact, in the NMF and then in
                                determining which of the ten service centers has control of the account.” A
                                significant barrier to any research effort involving NMF accounts was the
                                absence of a central repository of all such accounts. Each of the 10 service
                                centers maintains its own NMF system on a stand-alone database. Even
                                though these systems are basically the same, they are not linked in a way
                                that facilitates easy access. A unique password is needed to process and
                                research accounts on each of the 10 NMF databases. IRS staff in one
                                service center cannot access other centers’ NMF accounts without going



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through the time-consuming process of obtaining a password from the
system administrator at each center.

NMF account research was also hampered by the fact that only delinquent
NMF accounts were on IDRS. As noted earlier, IDRS (1) facilitates
research and, ultimately, the resolution of account questions by giving IRS
staff instantaneous access to accounts that are on IDRS and (2) allows IRS
staff to adjust accounts on-line. These advantages were not available to
IRS staff dealing with the NMF, because NMF accounts were only put on
IDRS after they were classified as delinquent and because, even with
delinquent NMF accounts, IRS staff were limited in how they could use
IDRS. According to IRS officials, delinquent NMF accounts, unlike
delinquent master file accounts, were put on IDRS for reference purposes
only. Any transactions involving delinquent NMF accounts still had to take
place on the NMF.

The lack of a central repository of NMF accounts created a situation in
which customer service representatives and other IRS staff were either not
aware of an NMF account or had to contact the NMF units in as many as
10 service centers to see if such an account existed. As users of the
system, NMF staff told us of their frustration in not having universal access
to all NMF accounts. They contended that the absence of universal access
made researching accounts difficult and that, as a result, some staff were
likely to forgo this process and not learn of the existence of an NMF
account. In its report on the NMF, an IRS task force said that this research
limitation resulted in numerous instances in which NMF accounts were
not identified and had even resulted in erroneous refunds to taxpayers.

Even if IRS staff had universal access to all NMF accounts, there still
would have been no assurance that they could more effectively respond to
inquiries from NMF taxpayers. That is because IRS staff, at the time of our
review, often did not realize that the account in question was an NMF
account. When a taxpayer with an NMF account receives a notice from
IRS, the taxpayer’s Social Security number on that notice is to end with an
“N.” However, according to IRS, taxpayers are typically unaware that their
accounts are on the NMF and that the “N” after their Social Security
number indicates an NMF account. As a result, when they call IRS about
their account and are asked for their Social Security number, they typically
do not include the “N.” Thus, at the time of our review, customer service
representatives who infrequently came into contact with NMF accounts
may not have known to search the NMF databases and, as a result, may
have given the taxpayer incorrect information.




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                            The problems IRS staff encountered in trying to identify and access NMF
                            accounts could have resulted in problems for taxpayers. The NMF-related
                            case that was discussed in the 1997 Senate Finance Committee hearings
                            involved a taxpayer who encountered several problems over several years
                            in trying to get accurate information from IRS about the status of her
                            account. Among other things, according to an IRS review of the case, a
                            customer service representative had overlooked the “N” after the
                            taxpayer’s Social Security number and did not search the NMF for the
                            taxpayer’s account. Even if the account had been identified as an NMF
                            account, the customer service representative would not have had access
                            unless the account happened to be in that particular service center’s NMF.
                            We were unable to determine the extent to which other taxpayers
                            encountered problems in trying to get information about NMF accounts
                            because IRS had no data that would allow such an analysis.

                            According to IRS officials, they have recently taken some corrective
                            actions to resolve the problems with identifying and accessing NMF
                            accounts. These actions are discussed later in this report.

Certain NMF Processes       As discussed earlier, one of the benefits of the NMF is the ability to do
                            things more quickly on it than on the master file. That benefit derives from
Have Been Error-Prone and   the fact that each service center can directly enter data into its own NMF
Time-Consuming              database instead of having to spend time sending data to a centralized
                            location and waiting for the data to be processed and available for use.

                            Although a service center’s ability to enter data directly into its own
                            database has advantages, having 10 such databases can cause significant
                            problems when, for example, taxpayers move from one service center’s
                            jurisdiction to another. In these circumstances, IRS would have to
                            manually transfer the account from one center to the other. To accomplish
                            this, staff at the former center would manually prepare an account
                            transfer-in form, attach an account transcript, and mail both to the latter
                            center, whose staff would have to manually key the account data into that
                            center’s NMF. According to IRS, this manual transfer process could take
                            from 4 to 6 weeks. In discussing this process, an IRS task force noted that
                            “many cases are transferred from one service center to another, resulting
                            in temporary loss of visibility, delayed actions, and lost paperwork.”

                            Not only are the NMF databases not linked, but they also do not interface
                            with the master file. As with transfers between service centers, account
                            transfers between the master file and the NMF require manual
                            intervention, which can take several weeks. The need for manual
                            intervention to transfer accounts from the master file to the NMF is



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problematic because (1) most of the accounts on the NMF (such as those
involving split assessments) were originally posted to the master file and
(2) there may be many more such occurrences as a result of the innocent
                                                                     7
spouse provisions in the IRS Restructuring and Reform Act of 1998. In
commenting on a draft of this report, IRS noted that a programming
change has been scheduled that should reduce the time it takes to transfer
accounts from the master file to the NMF. According to IRS, that change is
scheduled for implementation in January 2000.

The time-consuming manual transfer processes increase the risk that
information will not be readily available to respond to taxpayer inquiries or
that taxpayers will be given incorrect information in response to their
inquiries. For example, account activity may be taking place while the
account is being moved from the master file to the NMF or from one
service center’s NMF to another. According to IRS, while the account is
being manually transferred and not visible, IRS staff could mistakenly
make refunds to the taxpayer when, in fact, an outstanding balance
remains on the NMF account. Also, if payments are received or
assessments are made in the former center after the account has been
transferred, the related documents are to be mailed to the latter center for
entering into the system, thereby resulting in additional delays.

Another significant part of the NMF process that staff have had to handle
manually involves the computation of penalties and interest. Before
automation of the NMF in 1991, penalties and interest for all NMF
accounts were computed manually. Shortly after automation of the NMF,
IRS discovered that the system was incorrectly calculating penalties and
interest in some cases. NMF staff then had to manually compute penalties
and interest and enter the results into the system.

According to NMF staff responsible for manually computing penalties and
interest, the process is laborious, and it takes a long time to develop the
full range of technical skills needed to make the computations. Staff at one
of the service centers told us that the computation of penalties and interest
was the biggest problem they had with the NMF.




7
 Before this act, to qualify for innocent spouse relief, a person had to meet certain criteria and establish
that the understatement of tax liability met certain thresholds. The act eliminated those thresholds,
which we estimated, based on prior work in the area, could add another 40,000 accounts to the NMF.




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                          After the September 1997 Senate Finance Committee hearings, IRS
Corrective Actions        undertook the following reviews of the NMF:
Have Been Identified;
Implementation of       • In November 1997, a problem resolution analyst in IRS’ Western Region
Some Has Been             was tasked with identifying and reviewing all problems and mistakes that
                          occurred in IRS’ handling of the NMF case that was discussed at the
Deferred                  hearings. She reported on the results of her review in a December 1997
                          report that was submitted to IRS’ Deputy Commissioner.
                        • In December 1997, a group from the Fresno and Ogden Service Centers
                          was tasked with studying the NMF process and recommending corrective
                          actions that could be implemented in the short term. That group issued its
                          report in February 1998.
                        • In December 1997, another group, chaired by IRS’ National Director of
                          Submission Processing, was formed to address longer term solutions.
                        • In November 1997, IRS’ Office of Internal Audit began a review directed at
                          determining whether NMF transactions were recorded accurately and
                          timely. As of February 28, 1999, Internal Audit was finalizing a report on its
                          results.

                          Those reviews identified the many systemic and procedural problems
                          previously discussed and generated many recommendations for corrective
                          action. (See app. II for a list of the recommended corrective actions and
                          information on their status as of Feb. 17, 1999.) Included among those
                          recommended actions were some that, if they were to be implemented
                          immediately, would require a significant amount of computer
                          reprogramming at a time when IRS has higher priority programming work
                          associated with making its systems Year 2000 compliant. As a result, IRS
                          deferred until at least 2001 the implementation of two recommendations
                          that called for (1) moving many NMF accounts to the master file and (2)
                          consolidating NMF accounts in one service center. IRS also adopted an
                          alternative to two other recommendations that called for (1) loading all
                          NMF accounts on IDRS and (2) changing the command code used by IRS
                          staff to search the IDRS database.

                          There were several other recommendations, such as adding a unique toll-
                          free telephone number on NMF notices and enhancing the technical
                          expertise available to IRS staff working on NMF accounts, that required
                          little or no reprogramming. According to IRS, those recommendations
                          were generally implemented in January and February 1999.

                          Although IRS’ corrective actions address the major problems identified
                          with the NMF, they do not include any steps directed at (1) monitoring the




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                         NMF to identify any problems that arise in the future and (2) ensuring that
                         timely action is taken to address any such problems.

Moving NMF Accounts to   Probably the most significant corrective action proposed by IRS would
                         move accounts involving split assessments and employee plans from the
the Master File          NMF to the master file. As noted earlier, about 82 percent of all the
                         accounts on the NMF in September 1998 fell into one of those two
                         categories.

                         Implementation of this action, which would reduce the number of NMF
                         accounts considerably, would require extensive reprogramming of the
                         master file. According to a cost estimate prepared by IRS’ Office of
                         Information Services, which is responsible for any computer programming
                         needed to implement the various recommendations, reprogramming the
                         master file to accept split assessment accounts would require about 680
                         days of staff time at a cost of about $185,000. (An estimate for
                         reprogramming the master file to accept employee plan accounts was not
                         available at the time we did our work.) This effort was put on hold
                         because, according to IRS officials, the Commissioner of Internal Revenue
                         requested that any efforts requiring extensive reprogramming be
                         reconsidered given the need to give priority to Year 2000 compliance
                         efforts. IRS’ current schedule calls for implementing this recommendation
                         in 2001.

                         Moving accounts involving split assessments and employee plans to the
                         master file should improve customer service not only to the taxpayers
                         whose accounts are moved to the master file but also to the remaining
                         smaller number of NMF taxpayers. Movement of these accounts to the
                         master file is a critical first step that, as discussed later, could have
                         implications for other proposed corrective actions. However, based on our
                         past work on the challenges facing IRS in trying to meet its Year 2000
                         requirements, we believe it was reasonable for IRS to delay this action
                                                                      8
                         until after Year 2000 changes are made.

Consolidating NMF        Consolidation of all NMF accounts at one service center would improve
                         service to NMF taxpayers, enable IRS to provide more consistent
Accounts                 treatment of NMF taxpayers, and facilitate the correct resolution of
                         taxpayer problems by IRS staff. Specifically, with all accounts located at
                         one center, accessibility and identification of accounts would be less of an
                         issue. NMF staff would not have to research databases in up to 10 centers

                         8
                          IRS’ Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures
                         (GAO/GGD-98-138, June 15, 1998).




                         Page 12                                                    GAO/GGD-99-42 IRS’ Non-Master File
                           B-279039




                           to locate an account. Accounts would less likely be overlooked, and
                           consolidation would eliminate the need for different passwords. There
                           would no longer be a need to transfer documents between NMF databases
                           and to delay account updates during the time-consuming transfer process.

                           In discussing the possibility of consolidating all NMF accounts at one
                           service center, an IRS task force said that IRS would need to secure
                           software and a new computer to house the consolidated database at an
                           estimated cost of about $250,000. Also, according to the task force, there
                           would be additional costs for salary, benefits, and training.

                           IRS officials told us that consolidation has been put on hold until after
                           some of the other corrective actions are implemented. Specifically,
                           officials said that they would like to consider consolidation after they are
                           more certain which accounts are going to be moved to the master file. At
                           that time, there will be a better sense of how many NMF accounts will be
                           left. In that regard, even if IRS proceeds with its plans to move accounts
                           from the NMF to the master file, it believes, as do we, that there will
                           continue to be a need for a system, such as the NMF, for the remaining
                           accounts—at least until future systems modernization efforts produce a
                           different form of master file.

                           We agree that a decision about consolidation would best be made after
                           deciding which, if any, accounts will be moved to the master file. At that
                           time, IRS should have a better idea of the number of accounts that will
                           have to be consolidated and a better basis for determining whether
                           consolidation is necessary. For example, if accounts involving split
                           assessments are moved to the master file, as is the current plan, the need
                           for consolidation may be less persuasive because, according to IRS, those
                           are the NMF accounts that are most likely to involve transfers between
                           service centers. If IRS should decide to proceed with consolidation after
                           moving certain accounts to the master file, the cost might be much less
                           than estimated by the task force because existing equipment and staffing
                           may be sufficient to handle the smaller number of NMF accounts.

Loading All NMF Accounts   Two corrective actions proposed by an IRS task force called for loading all
                           NMF accounts on IDRS and modifying a command code used by customer
on IDRS and Modifying a    service representatives to search the IDRS database. These two actions, in
Command Code               concert, were intended to make it easier for IRS staff to identify and
                           access an NMF account. The first action would eliminate the current NMF
                           access problem by allowing anyone with access to IDRS to research
                           information on all NMF accounts. The second action would cause all of a
                           taxpayer’s accounts on IDRS (including any NMF account) to be reflected



                           Page 13                                       GAO/GGD-99-42 IRS’ Non-Master File
  B-279039




  when a customer service representative enters the taxpayer’s nine-digit
  Social Security number. At the time of our review, if an “N” was not
  entered after the Social Security number, the customer service
  representative did not receive any prompt identifying the existence of an
  NMF account.

  Because of concerns about the amount of resources that would be
  required to implement these two recommendations, IRS’ Office of
  Information Services developed an alternative that, according to IRS, was
  implemented in January 1999. Under that alternative,

• a specific transaction code (130) is to be generated automatically on the
                                                       9
  master file when an account is opened on the NMF,
• certain identifying information from that account, such as the taxpayer’s
  name and Social Security number, is to be entered into IDRS, and
• a flashing “N” is to be added to IDRS to denote the existence of an NMF
  account.

  Information Services’ alternative also included the establishment of an
  automated NMF National Account Index. As proposed by Information
  Services, a one-time extract of all open NMF accounts would be used to
  assemble the NMF National Account Index, and the file would be updated
  weekly to add new NMF accounts. Thus, the NMF National Account Index
  would be a central compilation of all NMF accounts.

  Information Services told us that because of the extensive reprogramming
  that would be required to modify IDRS to handle all NMF accounts, the
  establishment of the NMF National Account Index and the use of a specific
  transaction code to identify an NMF account would provide an effective
  short-term option to modifying command codes and loading all cases on
  IDRS. According to Information Services, the two originally proposed
  corrective actions were intended to alert IRS staff to the existence of NMF
  accounts and to expedite the research of those accounts. Information
  Services’ alternative would address both concerns. Specifically, automatic
  generation of transaction code 130 should better ensure that anyone
  accessing a master file account is alerted to the existence of a related NMF
  account. In the past, that transaction code was to be entered manually,
  which left open the possibility that it would mistakenly not get entered.
  Also, the flashing “N” should increase visibility of the existence of NMF
  accounts, and the NMF National Account Index should help expedite
  research by listing all NMF accounts and their service center location.
  9
      A transaction code is a three-digit code used to identify actions being taken on a taxpayer’s account.




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                             B-279039




                             Although the Executive Officer for Service Center Operations, who is
                             responsible for day-to-day NMF operations, agreed to the above alternative
                             proposed by Information Services, he would eventually like to see all NMF
                             accounts on IDRS. This is primarily because the National Account Index
                             would contain only certain account information, such as the taxpayer’s
                             name and Social Security number, for identification purposes. Thus, the
                             National Account Index would not give IRS staff the same research
                             capabilities as would be available if all account information were available
                             on IDRS—similar to what is now available on IDRS for delinquent NMF
                             accounts.

                             We recognize that modifying IDRS to accept all NMF accounts would
                             require extensive reprogramming, and we agree that the option proposed
                             by Information Services would help to alleviate some problems with the
                             NMF. We are concerned, however, that the proposed option would add to
                             an already complex system another stand-alone database that would not
                             have enough information on NMF accounts to help staff quickly resolve
                             taxpayers’ problems. The need for IRS to modify IDRS to accept all NMF
                             accounts may be less critical, however, if IRS proceeds with its plan to
                             significantly reduce the size of the NMF by moving split assessments and
                             employee plans to the master file. The cost of loading the remaining
                             accounts on IDRS after such a move might exceed any potential benefits.

Other Corrective Actions     In addition to the corrective actions discussed above, IRS developed a plan
                             that called for implementing a number of other corrective actions in
                             January 1999 that would require little or no reprogramming. Those actions
                             included (1) adding a unique toll-free telephone number to NMF notices,
                             (2) enhancing the technical expertise available to IRS staff who are
                             working with NMF accounts, and (3) improving penalty and interest
                             computations.

Include a Unique Toll-Free   In its February 1998 report, a task force of Fresno and Ogden Service
Telephone Number on NMF      Center staff commented on the need for a unique toll-free telephone
Notices                      number on NMF notices. The task force said that if recipients of an NMF
                             notice called one of the general toll-free numbers that taxpayers were told
                             to call if they had a question, there was a great possibility that they would
                             reach an IRS call site that did not have direct access to the service center
                             where the NMF account was located, thus necessitating another telephone
                             call for the taxpayer or a delay in making contact with the correct NMF
                             site. Additionally, if the taxpayer failed to identify the “N” after the Social
                             Security number, the customer service representative might not search for
                             an NMF account. This could result in a search of only the master file,




                             Page 15                                       GAO/GGD-99-42 IRS’ Non-Master File
                                  B-279039




                                  which could lead to misinformation being given callers about the status of
                                  their accounts.

                                  According to IRS officials, IRS started including a unique toll-free
                                  telephone number on NMF-related notices in February 1999. Each call to
                                  that number is to be routed to a particular service center based on the area
                                  code of the incoming call and is to be answered by specially trained
                                  customer service representatives. This change should help NMF taxpayers
                                  who have questions about their accounts reach someone at IRS with
                                  access to and knowledge about NMF accounts.

Enhance the Technical Expertise   In response to recommendations in one of the internal NMF studies, IRS
Available to IRS Staff Working    has taken steps to enhance the technical expertise available to IRS staff
With NMF Accounts                 who are working with NMF accounts. That enhancement involves the (1)
                                  identification of district office staff who will function as NMF coordinators
                                  in addition to their normal responsibilities and (2) establishment of a new
                                                                                               10
                                  position (NMF account specialist) in the service centers. The district
                                  office NMF coordinators are to provide technical assistance to district
                                  staff, disseminate NMF listings and reports for coordination with district
                                  officials and service center staff, coordinate responses back to the service
                                  center NMF units, and provide continuing education for district staff. The
                                  service center account specialists are to provide technical assistance on
                                  NMF issues and individual accounts and coordinate with the district office
                                  coordinator.

                                  On the basis of our work at the NMF unit in the Atlanta Service Center and
                                  at the Georgia District Office, IRS’ actions, when implemented, should
                                  improve IRS employees’ basic understanding of the NMF. The technical
                                  assistance to be provided by the service center account specialists is
                                  important because we found that while staff in the NMF units understood
                                  the NMF assessment process, they were limited in their overall
                                  understanding of the NMF. Similarly, the availability of help from district
                                  office coordinators should help district office staff who have to work with
                                  NMF accounts because, as noted by IRS officials, those staff are exposed
                                  to NMF accounts so infrequently that they have difficulty gaining
                                  expertise.

Improve Penalty and Interest      As of January 1999, according to IRS, it had made programming changes to
Computations                      correct the automated NMF penalty and interest computations. Even with
                                  this new programming, however, NMF staff still have to manually compute

                                  10
                                   As of February 17, 1999, according to IRS, these new service center positions had been established
                                  but were not yet filled.




                                  Page 16                                                     GAO/GGD-99-42 IRS’ Non-Master File
                              B-279039




                              penalties and interest when the data needed to correctly make the
                              computations are not on the NMF. For example, according to IRS
                              documentation, NMF staff manually compute penalties and interest when
                              (1) the Tax Court or Bankruptcy Court has ordered interest charged at a
                              different rate than normally charged by IRS or (2) an adjustment is made
                              to a taxpayer’s tax liability with no adjustment to penalties and interest. In
                              those situations, according to IRS officials, the NMF has been modified to
                              flag the account so that the system does not attempt to compute penalties
                              and interest. NMF staff are to make the computations and enter the results
                              into the NMF system.

                              In an attempt to alleviate the need for manual computation and reduce the
                              risk of error, the National Office, in August 1998, circulated a commercial
                              off-the-shelf software package for use in computing penalties and interest
                              when the NMF system could not compute them. However, NMF staff told
                              us, and the National Office confirmed, that the service centers stopped
                              using the software because it did not compute penalties and interest
                              accurately. As a result, there remain a number of situations in which
                              penalties and interest must be manually computed and entered into the
                              NMF system.

IRS’ Corrective Action Plan   The various corrective actions discussed earlier and listed in appendix II
                              seem to address all of the major problems identified with the NMF and, if
Says Nothing About            effectively implemented, should result in a dramatic drop in the number of
Monitoring Future Use and     NMF accounts. There is nothing in IRS’ plan, however, that seeks to
Growth of the NMF             prevent the NMF from growing again and eventually causing other
                              problems for other taxpayers. For example, there is nothing in the plan
                              about IRS’ (1) monitoring the NMF to identify any problems that arise in
                              the future and (2) ensuring that timely action is taken to address any such
                              problems.

                              After the Senate hearings, IRS made a concerted effort to identify NMF
Conclusions                   problems and potential solutions. IRS identified major deficiencies with
                              the NMF and compiled a list of corrective actions that, if effectively
                              implemented, should go a long way toward correcting those deficiencies.
                              Understandably, those actions that are expected to require substantial
                              computer programming (including perhaps the most significant action—
                              moving numerous NMF accounts to the master file) have been deferred
                              until after higher priority programming work is done. In the meantime, IRS
                              has taken some significant actions, such as making NMF accounts more
                              easily identifiable and researchable and putting a unique toll-free
                              telephone number on NMF notices. Although it is too soon to assess their




                              Page 17                                       GAO/GGD-99-42 IRS’ Non-Master File
                      B-279039




                      effectiveness, those actions should help IRS provide better service to
                      taxpayers with accounts on the NMF.

                      IRS has populated the NMF with accounts, such as those involving split
                      assessments, that could have been kept off the NMF or moved from the
                      NMF if IRS had made the necessary programming changes to the master
                      file. While we recognize that the number of NMF accounts is small in
                      relation to the total number of accounts IRS has to process and maintain,
                      that is little comfort to taxpayers whose accounts happen to be among that
                      small number. With that in mind, we believe that IRS’ action plan lacks a
                      key component. We saw nothing in the plan about (1) monitoring the NMF
                      to identify any problems that arise in the future and (2) ensuring that
                      timely action is taken to address any such problems.

                      We recommend that the Commissioner of Internal Revenue direct
Recommendation        appropriate officials to institute procedures to (1) monitor future activity
                      in the NMF to identify any problems that arise in the future and (2) ensure
                      that timely action is taken to address any such problems.

                      We obtained written comments on a draft of this report in a March 25,
Agency Comments and   1999, letter from the Commissioner of Internal Revenue (see app. III). IRS
Our Evaluation        said that it agreed with the findings and recommendation in the draft
                      report. IRS also emphasized that it had taken immediate action to address
                      the problems encountered by taxpayers with accounts on the NMF and the
                      resulting issues that surfaced during the Senate Finance Committee
                      hearings in September 1997. IRS noted, however, that “the ultimate
                      solution is the fundamental replacement of the entire master file system
                      and until such time as this occurs, we will continue to be at risk for
                      additional deficiencies to be identified.” IRS pointed out that this ultimate
                      solution is scheduled to be implemented over the next several years and
                      that, until then, it “will continue to monitor the NMF process to identify
                      any problems and take immediate steps to mitigate them.”

                      With respect to our recommendation, IRS said that it had included
                      provisions to monitor future activity on the NMF in its January 1999
                      revision of that part of the Internal Revenue Manual dealing with the NMF.
                      According to IRS, these procedures, in addition to increased monitoring by
                      National Office staff, will ensure that timely action is taken once a problem
                      is identified. However, the procedures referred to by IRS are directed at
                      improving controls over individual accounts on the NMF. The intent of our
                      recommendation was more global. We believe that IRS needs to institute
                      some mechanism that will enable it to proactively identify and correct
                      situations, such as the existence of a large number of accounts on the NMF



                      Page 18                                      GAO/GGD-99-42 IRS’ Non-Master File
B-279039




that could and should be moved to the master file. The presence of such a
mechanism, for example, might have triggered action by IRS to do
something about the large number of split assessment accounts in the
NMF before being prodded in that direction by congressional hearings.

IRS also provided updated information on certain issues discussed in the
report as well as updates on the status of its various corrective actions. We
revised the body of this report and appendix II to reflect those updates.

We are sending copies of this report to Representative Charles B. Rangel,
the Committee’s Ranking Minority Member; Representative Amo
Houghton, Chairman, and Representative William J. Coyne, Ranking
Minority Member, of the Committee’s Subcommittee on Oversight; and
Senator William V. Roth, Jr., Chairman, and Senator Daniel P. Moynihan,
Ranking Minority Member, Senate Committee on Finance. We are also
sending copies to The Honorable Robert E. Rubin, Secretary of the
Treasury; The Honorable Charles O. Rossotti, Commissioner of Internal
Revenue; and The Honorable Jacob Lew, Director, Office of Management
and Budget. Copies will be made available to others on request.

Major contributors to this report are listed in appendix IV. Please contact
me on (202) 512-9110 if you have any questions.

Sincerely yours,




Cornelia M. Ashby
Associate Director, Tax Policy and
  Administration Issues




Page 19                                      GAO/GGD-99-42 IRS’ Non-Master File
Contents



Letter                                                                                                 1


Appendix I                                                                                            22

NMF Staff and
Account Inventory as
of September 8, 1998,
by Service Center
Appendix II                                                                                           23

Status of
Recommended NMF
Corrective Actions as
of February 17, 1999
Appendix III                                                                                          24

Comments From the
Internal Revenue
Service
Appendix IV                                                                                           28

Major Contributors to
This Report




                        Abbreviations

                        IDRS        Integrated Data Retrieval System
                        IRS         Internal Revenue Service
                        NMF         Non-master file




                        Page 20                                        GAO/GGD-99-42 IRS’ Non-Master File
Page 21   GAO/GGD-99-42 IRS’ Non-Master File
Appendix I

NMF Staff and Account Inventory as of
September 8, 1998, by Service Center

              Service Center            Staff           Inventory
              Andover                      5                6,950
              Cincinnati                  13                7,341
              Kansas City                 21                9,091
              Brookhaven                  17               11,312
              Austin                      17               11,349
              Ogden                       17               12,734
              Philadelphia                18               14,245
              Memphis                     17               14,940
              Fresno                      17               16,718
              Atlanta                     17               17,344
              Total                      159              122,024
              Source: IRS.




              Page 22           GAO/GGD-99-42 IRS’ Non-Master File
Appendix II

Status of Recommended NMF Corrective
Actions as of February 17, 1999


Recommended corrective action            Purpose of action                                    Status
1. Move split assessments and            To reduce the number of accounts on the NMF          Deferred until 2001.
employee plan accounts to master file
2. Consolidate NMF accounts at one       To provide better service to taxpayers and           To be considered after IRS is certain
service center                           ensure consistent procedures on NMF                  which accounts will be moved to the
                                         accounts                                             master file.
3. Modify command codes to reflect all   To simplify research by quickly identifying          Actions 3 and 4 have been combined
open accounts                            existence of NMF accounts                            and an alternative was developed that
                                                                                              was implemented in January 1999.
4. Load all NMF accounts onto IDRS       To allow anyone with IDRS access to research         The alternative to this action is the
                                         NMF account information, thus eliminating the        development of the NMF National
                                         NMF access problems                                  Account Index, which was developed
                                                                                              and implemented in January 1999.
5. Add a toll-free telephone number on   To better ensure that NMF taxpayers will reach       Implemented February 8, 1999.
NMF notices                              someone in IRS with access to and knowledge
                                         about NMF accounts
6. Establish an NMF account              To provide technical assistance to IRS field         Positions created but not filled as of
specialist position at each service      offices                                              February 17, 1999.
center
7. Improve penalty and interest          To correct problems with computations of             Programming to correct penalty and
computations                             penalty and interest                                 interest computations implemented in
                                                                                              January 1999. Manual computations
                                                                                              still required in some cases.
8. Create an NMF account transcript      To create a more understandable transcript           Completed in January 1999.
similar to the master file transcript    that is taxpayer-friendly
9. Reinstate publication and             To use as a ready reference source for district      Completed in January 1999.
distribution of a pocket guide to        and service center personnel
include NMF reference information
10. Establish an NMF coordinator         To serve as the NMF expert and liaison for           Rather than establish a separate
position in each district                contacts between the district and                    district coordinator position, the
                                         the service centers                                  intended duties of that position are to
                                                                                              be assigned as collateral duties to
                                                                                              existing staff.
11. Establish a process for review of    To establish a system or process (including          Implemented January 1999.
NMF notices                              criteria) for reviewing NMF notices for accuracy
12. Establish an oversight group to      To monitor implementation of the long-term           Oversight group established.
monitor implementation of the            solutions to NMF problems
National Strategy
13. Generate notice to match master      To identify all address updates                      Completed in January 1999.
file addresses against NMF addresses
14. Create a computer program to         To provide information to ensure that NMF            Completed in January 1999.
match NMF taxpayer identification        accounts reflect current information and
numbers to master file taxpayer          identify all possible opportunities for collection
identification numbers                   of past due amounts
                                           Source: GAO compilation of IRS data.




                                           Page 23                                              GAO/GGD-99-42 IRS’ Non-Master File
Appendix III

Comments From the Internal Revenue Service




               Page 24        GAO/GGD-99-42 IRS’ Non-Master File
Appendix III
Comments From the Internal Revenue Service




Page 25                                      GAO/GGD-99-42 IRS’ Non-Master File
Appendix III
Comments From the Internal Revenue Service




Page 26                                      GAO/GGD-99-42 IRS’ Non-Master File
Appendix III
Comments From the Internal Revenue Service




Page 27                                      GAO/GGD-99-42 IRS’ Non-Master File
Appendix IV

Major Contributors to This Report


                        David J. Attianese, Assistant Director
General Government
Division, Washington,
D.C.

                        Catherine H. Myrick, Evaluator-in-Charge
Atlanta Field Office    John M. Gates, Senior Evaluator
                        Carrie M. Watkins, Evaluator




                        Page 28                                    GAO/GGD-99-42 IRS’ Non-Master File
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