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result, we did not include these BHCs in the calculation during those periods where their Y- 9Cs were not available (fourth quarter of 2008 and earlier for all except GMAC LLC, which also did not have a Y-9C in the first quarter of 2009). We collected Y-9C data from the SNL Financial database to calculate the loan loss rates across BHCs with more than $1 billion of assets and compare the 19 BHCs with the indicative loss rates provided by the SCAP regulators. We used annual data for the year ended December
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31, 2009, on loan charge-offs. We also used average total loan balances. In the Y-9C total loan balances were categorized somewhat differently from charge- offs. Table 9 provides a crosswalk for the asset classification. We aggregated loan balance data into the same categories that were used in the indicative loss rate table in SCAP: first-lien mortgages, prime mortgages, Alt-A mortgages, subprime mortgages, second/junior lien mortgages, closed-end junior liens, home equity lines of credit, commercial and i
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ndustrial loans, commercial real estate loans, construction loans, multifamily loans, nonfarm nonresidential loans, credit card balances, other consumer, and other loans. Once the data were aggregated into these categories, we divided the net charge-offs by the applicable average loan balance. This calculation showed the loss rate for each category (e.g., first-lien mortgages and commercial real estate) for the year ended December 31, 2009. This methodology was applied to calculate the loss rates for the 19
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SCAP BHCs and all BHCs with more than $1 billion of assets, respectively. Because those institutions had recently converted to being BHCs, Y-9C data on loan balances was not available for the fourth quarter of 2008 for American Express Company; The Goldman Sachs Group, Inc.; and Morgan Stanley, and was not available for GMAC LLC for both the first quarter of 2009 and the fourth quarter of 2008. Therefore, we approximated the loan balances in these periods for GMAC LLC and American Express Company based on
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their Form 10-Q for these time periods. Because The Goldman Sachs Group, Inc. and Morgan Stanley have considerably smaller loan balances, in general, than the other BHCs; the fourth quarter of 2008 balance was not approximated for these BHCs. Instead, the average loan balance was simply based on the available data (e.g., first quarter of 2009 through fourth quarter of 2009). We conducted this performance audit from August 2009 to September 2010 in accordance with generally accepted government auditing stand
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ards. 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 objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Twelve of the 19 bank holding companies (BHC) that participated in the Supervisory Capital Assessment Program (SCAP) had redeemed their Troubled Asset Relief Program (TARP) investm
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ents and had their warrants disposed of as of September 22, 2010, and most of them were not required to raise capital under SCAP (table 10). Six of the 19 BHCs tested under SCAP have not repaid TARP investments or disposed of warrants, and one, MetLife, Inc., did not receive any TARP investments. BHCs participating in SCAP must follow specific criteria to repay TARP funds. In approving applications from participating banks that want to repay TARP funds, the Federal Reserve considers various factors. Some of
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these factors include whether the banks can demonstrate an ability to access the long-term debt market without relying on the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program and whether they can successfully access the public equity markets, remain in a position to facilitate lending, and maintain capital levels in accord with supervisory expectations. BHCs intending to repay TARP investments must have post repayment capital ratios that meet or exceed SCAP requirements.
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Table 11 shows the names, location, and total assets as of December 31, 2008, of the 19 bank holding companies (BHC) subject to the Supervisory Capital Assessment Program (SCAP) stress test that was conducted by the federal bank regulators in the spring of 2009. The stress test was a forward-looking exercise intended to help federal banking regulators gauge the extent of the additional capital buffer necessary to keep the BHCs strongly capitalized and lending even if economic conditions are worse than had
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been expected between December 2008 and December 2010. The following tables (12 through 30) compare the 2009 performance of the 19 BHCs involved in SCAP to the 2-year SCAP estimates and the GAO 1- year pro rata estimates for the more adverse economic scenario. Specifically, these tables include comparison of actual and estimates of losses and gains associated with loans, securities, trading and counterparty, resources, preprovision net revenue (PPNR), and allowance for loan and lease losses (ALLL). These ta
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bles also include a comparison of actual capital levels at December 31, 2009, and December 31, 2008. Totals may not add due to rounding. For a more detailed explanation of the calculations made in constructing this analysis, see appendix I. Daniel Garcia-Diaz (Assistant Director), Michael Aksman, Emily Chalmers, Rachel DeMarcus, Laurier Fish, Joe Hunter, William King, Matthew McDonald, Sarah M. McGrath, Timothy Mooney, Marc Molino, Linda Rego, and Cynthia Taylor made important contributions to this report.
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Available data showed that case dispositions and processing times in disciplinary cases during the period of January 1, 1996, through June 30, 1998, differed for SES employees and lower-level, or general schedule (GS), staff. In addition, a 1997 IRS internal study found that actions taken against lower-level employees more closely conformed to the IRS table of penalties than actions taken against higher-graded employees. However, because of dissimilarities in the types of offenses and incomplete case files,
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these data do not necessarily prove disparate treatment. Agencies must consider many factors, such as the nature and seriousness of the offense; the employee’s job level and type of employment; whether the offense was intentional, technical, or inadvertent; the employee’s past disciplinary record; and the notoriety of the offense or its impact upon the reputation of the agency, in deciding what penalty, if any, should be imposed in any given case. IRS recognized that problems have hindered the processing a
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nd resolution of employee misconduct cases and has begun revamping its disciplinary systems. For the period we studied, IRS tracked disciplinary cases for GS and SES employees in different systems. The Office of Labor Relations (OLR), which is the personnel office for non-SES staff, handled GS cases. It tracked these cases in the Automated Labor and Employee Relations Tracking System (ALERTS), although IRS officials told us that ALERTS data were often missing or incomplete. The Office of Executive Support (
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OES), which is the personnel office for IRS executives, handled SES cases. Although ALERTS was supposed to also track SES cases, OES tracked SES cases by using a log and monthly briefing reports. The monthly briefing reports were used to inform the Deputy Commissioner about the status of cases. We selected the cases for our study of disciplinary actions for SES and lower-level staff as follows: For GS cases, we used ALERTS data for 22,025 cases received in, or closed by, OLR between January 1, 1996, and Jun
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e 30, 1998. For SES cases, our information came from two sources: (1) a 70-case random sample of SES nontax misconduct case files that were active between January 1, 1996, and June 30, 1998; and (2) for the same time period, 43 other SES nontax cases reported either in the logs or as “overaged” SES cases in the monthly briefing reports. In total, we looked at 113 cases involving 83 SESers. Unless otherwise noted, all SES statistics presented in this section are based on the random sample. See appendix I for
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more information on how we selected the cases for our study. We were unable to make many meaningful statistical comparisons between SES and GS employee misconduct cases for three reasons. First, we were able to collect more detailed data through our SES file review than from the ALERTS database used for GS cases. This was particularly true regarding dates on which important events occurred. As a result, we could not compare average processing time at each phase of the disciplinary process, although we were
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able to compare processing times from case receipt through case closure. Second, the level of detail and accuracy of ALERTS data varied widely. Some IRS regions historically took ALERTS data entry more seriously than others did, according to an IRS memorandum, and cases contained varying levels of detail about case histories, issues, facts, and analyses. ALERTS had few built-in system controls to ensure data integrity. Instead, IRS relied on managers to ensure the accuracy of their subordinates’ work. Thir
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d, some data were missing for the majority of the cases tracked in ALERTS. For example, we could not analyze the frequency with which final dispositions were less severe than proposed dispositions because both pieces of information were available for only about 13 percent of the ALERTS cases. Because officials said that ALERTS was OLR’s means of recording information on lower-level disciplinary cases, we used it to the extent that it had information comparable to what we collected on SES cases. Available da
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ta showed that processing time and frequency and type of case dispositions differed for SES and lower-level staff. On average, from OES’ or OLR’s receipt of a case until case closure, SES cases, on the basis of our 70-case random sample, lasted almost a year (352 days) and lower-level cases lasted less than 3 months (80 days). We estimated that the largest difference between SES and GS case dispositions occurred in the closed without action (CWA) and clearance categories. As shown in table 1, the dispositio
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ns in 73 percent of SES cases were CWA or clearance, versus 26 percent for GS cases. CWA is to be used to close a case when the evidence neither proves nor disproves the allegation(s). A disposition of clearance is to be used when the evidence clearly establishes that the allegations are false. In practice, neither disposition results in a penalty. The actual breakdown between the two dispositions is as follows: for SES cases, 61 percent were CWA and 12 percent were clearance; for GS cases, 24 percent were
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CWA and 2 percent were clearance. Table 1 outlines in order of severity the frequency with which available data indicate that various dispositions were imposed for SES and lower- level staff. SES data are based on the 56 closed cases in our 70-case sample. GS data are based on 15,656 closed cases in ALERTS. Ninety-five- percent confidence intervals for the SES data are presented to more accurately portray our findings. Using these confidence intervals, the rates of occurrence differed between SES and GS cas
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es for dispositions of clearance and CWA, reprimand, suspension, and other. However, using 95- percent confidence intervals and eliminating the CWA or clearance category from the analysis, the rates of occurrence between SES and GS cases were similar for all dispositions, except oral or written counseling and retired/resigned. In any case, we will discuss later in this report that differences in dispositions of SES and GS cases do not necessarily mean that the dispositions were inappropriate or that dispara
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te treatment occurred. We also analyzed disciplinary actions for an additional 43 SES cases. Because these cases were not randomly selected, the results may not be representative. Of the 43 cases, we found 9 in the more serious categories—6 instances of counseling, 1 reprimand, 1 suspension, and 1 removal. As further detailed in the upcoming section of this report on alleged case- processing delays by the Deputy Commissioner, SES cases took a long time to close for many reasons. These reasons included poor
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case-tracking procedures, inadequate file management, and poor communication among agency officials involved in the disciplinary process. We do not know to what extent, if any, these difficulties contributed to differences in processing times between SES and GS cases. Many factors can affect the discipline imposed in a particular case. These factors include the nature and seriousness of the offense; the employee’s job level and type of employment; whether the offense was intentional, technical, or inadverte
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nt; the employee’s past disciplinary record; and the notoriety of the offense or its impact upon the reputation of the agency. Collectively, these factors are components of what is known as the Douglas Factors, and they must be considered in determining the appropriate penalty in a case. See appendix II for a listing of the Douglas Factors. Not all of the Douglas Factors will be pertinent in every case, and, while some factors will weigh in the employee’s favor (mitigating factors), others may weigh against
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the employee (aggravating factors). IRS officials told us that lower-level actions tend to be more straightforward than SES actions, with fewer mitigating factors. Since mitigating factors tend to reduce the level of discipline imposed, this could partially explain why penalties might be imposed differently in lower-level cases than in SES cases. We found that allegations against SES employees were usually reported to a hotline, the Department of the Treasury’s Office of Inspector General (OIG), or the IRS
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Inspection Service. Because complaints against SES employees can be anonymous, this anonymity can affect IRS’ ability to follow up on a complaint or investigate it thoroughly. In contrast, IRS officials told us that GS cases were generally filed by managers about their subordinates. In these cases, the complainant was known and generally provided concrete evidence to support the allegation. Further, typical issues surrounding lower-level cases may be less complicated or easier to successfully investigate t
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han those involving SES employees. Table 2 outlines in more detail the most common issues in SES and lower-level staff cases. SES data are based on our 70-case sample. GS data are based on 22,025 cases in ALERTS. We subjectively classified the issues in SES cases, and our classifications may not be precise. Overall, we found that the most common issue in SES cases was prohibited personnel practices, while time and attendance was the most common issue in GS cases. In 1994, in response to an internal IRS stud
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y reporting a perception that managers received preferential treatment in disciplinary matters, IRS created a table of penalties, the Guide for Penalty Determinations. The purpose of the guide was to ensure that decisions on substantiated cases of misconduct were appropriate and consistent throughout IRS. In 1997 and 1998, IRS studied the effect of the guide on GS and SES employees and found that actions taken against lower-graded employees more closely conformed to the guide than those taken against higher
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-graded employees (see table 3); for GS employees overall, 91 percent of disciplinary actions conformed to the guide, versus 74 percent for SES employees; when disciplinary actions did not conform to the guide, the actions were below the guide’s prescribed range 93 percent of the time for GS employees overall, versus 100 percent of the time for GS-13 through GS-15 and SES employees; and if admonishments were included as part of reprimands, conformance with the guide approached 100 percent for GS-13 through
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GS-15 employees. The IRS study and IRS officials agreed that the guide had limitations and no longer met IRS needs. Specifically, the guide covered all employees but did not address statutory and regulatory limitations that restricted management’s ability to impose disciplinary suspensions on SES employees. IRS officials said that governmentwide, there was no level of discipline available for SES employees that was more severe than a reprimand but less severe than a suspension of at least 15 days. In contra
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st, GS employees could have received suspensions of 14 days or less. While the guide prescribed a penalty range of “reprimand to suspension,” the only option for SES employees, because of the statutory limitations against suspensions of less than 15 days, was a reprimand if management wished to impose a penalty, but not the harshest available penalty. IRS officials also told us that in certain cases, they might have imposed discipline in between a reprimand and a 15-day suspension had they had the option to
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do so. According to IRS officials, IRS’ 1995 attempt to have the Office of Personnel Management deal with this issue was unsuccessful. Statutory and regulatory requirements could partially explain why reprimands might have been imposed when a harsher disciplinary action might have seemed more appropriate. Applying to employees at different levels, the IRS penalty guide was constructed with very broad recommended discipline ranges to provide for management discretion. However, one IRS study pointed out that
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, in some instances, this rendered the guide useless (e.g., when the penalty range was “reprimand to removal”). IRS created a disciplinary review team in September 1998. Among other things, the team was to develop an action plan that addressed case handling, complaint systems, review and revise IRS’ Guide for Penalty Determinations; and develop a process to review and monitor complaints. As of March 1999, the team was proposing a new integrated IRS complaint process. Its intent was to overcome problems with
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complaint processing systems’ not (1) communicating or coordinating with each other, (2) capturing the universe of complaints, (3) specifically tracking or accurately measuring complaints, and (4) following up on complaints to ensure that appropriate corrective action had been taken. The team was proposing a 26-person Commissioner’s Review Group to, among other things, manage and analyze complaints sent to the Commissioner of Internal Revenue, monitor other IRS complaint systems, and coordinate with the sy
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stems’ representatives. The team was also redesigning the penalty guide. On the basis of our review of SES cases, we did not find a case in which an individual who was ineligible to retire at the time an allegation was filed, retired while the case was pending with the Deputy Commissioner. However, we found cases that spent up to 4 years at this stage in the disciplinary process and cases that stalled at various points throughout the process. Although OES’ goal for closing an SES case was 90 days, on the ba
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sis of our random sample, cases averaged almost 1 year for OES to close. Further, IRS had poor case-tracking procedures, inadequate file management, missing and incomplete files, and poor communication among officials involved in the disciplinary process. Because IRS’ 1990 and 1994 written SES case-handling procedures were out of date, IRS officials described the operable procedures to us. During the period covered by our review, OES handled SES misconduct cases. Its goal for closing a case was 90 days from
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its receipt of a case. Once OES received a case, it was to enter it into ALERTS, although it did not always do this, and prepare a case analysis. The case analysis and supporting documents were then to be forwarded to the appropriate Regional Commissioner, Chief, or Executive Officer for Service Center Operations, who was to act as the “recommending official.” Within 30 days, the recommending official was to review the case with the help of local labor relations experts, develop any additional facts deemed
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appropriate, and return a case report to OES, including a recommendation for disposition. If OES disagreed with the report for any reason, it was to include a “statement of differences” in its case analysis. OES was to forward the field report and the OES analysis to the Deputy Commissioner’s office for concurrence or disapproval. If the Deputy Commissioner concurred with the proposed disposition, the recommending official could take action. If the Deputy Commissioner did not approve, he could impose a les
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ser disposition or return the case to OES for further development. IRS executive case-handling procedures did not define a time period within which the Deputy Commissioner was to act on case dispositions. We collected information on SES cases from two sources: (1) the five specific cases mentioned during the April 1998 Senate Finance hearings, and (2) a 70-case random sample of the SES misconduct case files as previously described, plus 43 more cases from OES tracking logs and monthly briefing reports, for
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a total of 113 cases. These 113 cases involved 83 individuals. Again, see appendix I for more details on how we selected the cases to study. Of the 113 SES cases we reviewed, we did not find a single instance in which an individual who was ineligible to retire at the time the allegation was filed, retired while the case was pending with the Deputy Commissioner. Overall, of the 83 individuals involved in the 113 cases, 25 people, or 30 percent, had retired from IRS by December 31, 1998. Of these 25 people, 1
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3 retired before their cases were closed or the cases were closed because the individuals retired. At the time of retirement, cases for 2 of the 13 people were pending in the Deputy Commissioner’s office, but both of these individuals had been eligible to retire at the time the complaints against them were originally filed. Cases for the remaining 11 of the 13 people either were still being investigated or were pending in OES, that is, they had not yet reached the Deputy Commissioner’s office. In doing our
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analyses, we focused on actual retirements and did not reach general conclusions about eligibility to retire. As table 4 shows, of the five executive cases mentioned during the April 1998 hearings, two of the executives were already eligible to retire when the allegations against them were filed. We refer to the executives in the five cases as Executives A through E. One of the two eligible executives— Executive B—was still an IRS employee as of September 30, 1998. The other—Executive D—retired while, in OE
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S’ view, his case was pending in the Deputy Commissioner’s office. Of the three individuals who were not eligible to retire when the allegations against them were filed, one retired 16 months after his case was closed. The other two executives, one of whom was not found culpable, were still employed by IRS as of September 30, 1998. IRS records showed that the misconduct cases spent from 2 months to 4 years at the Deputy Commissioner level. See appendix III for more details about the five cases. As shown in
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table 5, on the basis of our random sample, the total processing time for SES misconduct cases averaged 471 days (almost 16 months) from the date the complaint was filed until the case was closed. Most of this time involved OES case analysis and referral to the recommending official for inquiry (214 days, or about 7 months) and investigation by the recommending official (124 days, or more than 4 months). These averages exceeded IRS’ most recent, written case- processing time guidelines, which were 14 and 30
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days, respectively. The average total time from OES’ receipt of a case to the case’s closure was 352 days, compared to a goal of 90 days. As previously mentioned, there was no targeted time frame for the Deputy Commissioner’s review. However, on average, cases spent 42 days at this level. In addition, we found that some cases took a particularly long time to be resolved. For example, in our sample cases, from the date the complaint was filed to the date the case was closed, 8 cases took at least 2 years, a
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n additional case took more than 3 years, and still another case took longer than 4 years. In 1992, IRS acknowledged that the best way to prevent employees from retiring before their cases closed was to improve timeliness. Although we found no cases in which individuals ineligible to retire when allegations were made retired with the case pending before the Deputy Commissioner, the longer it takes to close cases, the more likely that individuals would retire or resign while their cases were open. Our review
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and a recent IRS task force report identified numerous problems with the executive misconduct case-handling process. These problems included inadequate staffing, poor communication, inaccurate and incomplete records and files, outdated procedures, conflicts over proposed case dispositions, and internal disagreement about case investigations. These problems contributed to the lengthy case-processing times in the available data and case files. According to IRS officials, IRS’ downsizing a few years ago signi
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ficantly affected OES and field staff resources. From late 1996 through early 1998, OES devoted only one staff year to executive misconduct cases. The staff year was divided between the Director and one employee. In mid-1998, the Director moved to Labor Relations, and the employee retired, leaving OES with no resident expertise. Previously, four or five case experts handled executive cases. In total, according to an IRS official, the office was understaffed for about 18 months, which caused a case backlog.
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However, the new Chief of OES was able to bring the staffing level up to eight, including two individuals with employee relations backgrounds to act as team leaders. She also used detailees and a technical contractor to reduce the case backlog. The understaffing issue also extended to the labor relations functions in the regions. These functions supplied the staff that recommending officials used to investigate misconduct cases. When the regional offices were consolidated several years ago, they lost their
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labor relations functions as well as a central repository for program administration and expertise. IRS did not enter executive misconduct cases into ALERTS from late 1996 through early 1998. IRS officials told us they did not have enough labor relations experts to properly track cases on ALERTS because the system required significant detail about each case. Instead, it tracked these cases using logs and monthly briefing reports. OES also used the briefing reports to inform the Deputy Commissioner of case s
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tatus. IRS officials acknowledged that these independent systems often disagreed with each other about the details and status of the cases. Our review found that poor communication among IRS support staff, the Deputy Commissioner’s office, IRS Inspection, and OIG contributed to case-processing delays. As previously mentioned, the Deputy Commissioner considered one case to be closed with the transfer of the individual, but OES was not told to formally close the case. In another instance, the Deputy Commissio
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ner told us that he inadvertently allowed a case to be lost in the system. Case information in the ALERTS, OES, and IRS Inspection tracking systems was also found to be inconsistent and inaccurate in many instances. For example, according to IRS officials, cases recorded as “overaged” in the IRS Inspection system were recorded as “closed” by the field offices, leading to confusion among officials as to whether a case was open or closed and where a particular case was pending at a given time. An internal IRS
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study found that many cases had timeliness problems, especially cases that had been referred to IRS from OIG. In certain instances, cases stayed at a particular phase in the process for months before an OES employee inquired about their status. In one instance, for nearly 2 years, OES did not follow up on the status of an OIG investigation. IRS officials told us that these problems occurred primarily because IRS had no contact person for OIG cases before early 1997, and because OES lacked staff resources t
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o properly monitor cases. Our review identified several concerns surrounding IRS’ files, records, and miscellaneous procedures for executive misconduct cases. Examples included the following: Poor filing. Executive misconduct cases were to be filed alphabetically. Several times, we happened upon misfiled cases only because we went through all of the files to draw our sample. Also, in one instance, a closing letter addressed to the executive involved in a case was filed instead of being mailed to the individ
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ual. It took nearly 5 months for the error to be discovered and rectified. Missing files and records. We requested eight case files for our review that IRS could not provide, even after more than 4 months. Incomplete files. In some cases, the case files did not document important information, such as dates, transmittal memorandums, and final case dispositions. In one instance, the case file consisted of a single E-mail message. The case was serious enough to warrant suspending the individual. Noncompliance
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with procedures. In several instances, field staff imposed discipline before the Deputy Commissioner had concurred with the proposed action. Several files contained memorandums to the field staff, reminding them not to impose discipline or close a case until the Deputy Commissioner had indicated his approval. Further, as mentioned in appendix III, a premature disposition occurred in one of our case studies. According to two 1998 IRS internal studies, outdated procedures led to inefficient case handling and
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confusion as to who was responsible for what. Because of regional and district consolidations and a national office restructuring, the written, 1994 case-handling procedures no longer accurately depicted the proper flow of cases. Although procedures were informally adjusted and work kept moving, it was not efficient. As a result, ad hoc procedures were developed in each region, leading to communication problems between the regions and the national office. IRS recognized this problem in March 1998 and comple
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ted a draft of new case procedures in July 1998. During that time, the Internal Revenue Service Reform and Restructuring Act of 1998 established the Treasury Inspector General for Tax Administration (TIGTA), and procedures were again revised to accurately depict TIGTA’s role. According to IRS officials, draft procedures were sent to IRS field offices for comment in mid-March 1999. Another factor contributing to case-processing delays was internal disagreement surrounding the proper level of discipline to im
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pose in particular cases. In our case studies, we noted instances in which internal disputes significantly lengthened case-processing times. OES officials told us that this situation occurred much more frequently in the past. However, over the past few years, IRS has made a concerted effort to resolve disputes below the Deputy Commissioner level. As shown in table 6, in the cases involving Executives C and D, disagreements were serious. In fact, they warranted formal statements of differences. In each of th
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ese two cases, OES endorsed a stronger level of discipline than that suggested by the recommending official. In the case of Executive E, IRS officials disagreed among themselves over the facts of the case. Although an IRS Internal Security investigation confirmed the allegations, the Deputy Commissioner was not comfortable with the allegations’ correctness. However, he eventually agreed that the allegations had some merit. The Deputy Commissioner issued a letter of counseling 5-½ years after the complaint w
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as filed, which was more than 4 years after he received the case. As of March 1999, an IRS disciplinary review team was proposing changes to overcome problems with complaints processing. One of the units of its proposed Commissioner’s Review Group was to provide labor relations support for SES and other cases. This unit would have 11 employees. In addition, the Commissioner’s Review Group would have a contractor available to supplement it and support field investigations when management believed help was ne
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eded. As previously mentioned, the group would also be responsible for overcoming communication and coordination problems among complaint-processing systems. IRS did not comprehensively collect and analyze information on reprisals against IRS employee whistleblowers or on IRS retaliation against taxpayers. Some information was available on the number of IRS-related whistleblowing reprisal cases resolved by the two agencies responsible for considering such cases. For example, one of the agencies, OSC, receiv
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ed 63 IRS whistleblower reprisal matters over the fiscal years 1995 through 1997 and obtained action from IRS favorable to employees in 4 cases. Concerning allegations of IRS retaliation against taxpayers, we reported in 1996 and 1998 that IRS did not systematically capture information needed to identify, address, and prevent such taxpayer abuse. During this review, we also found limited and incomplete IRS information of past revenue agent retaliation against taxpayers. The IRS Restructuring and Reform Act
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of 1998 included several provisions related to abuse or retaliation against taxpayers, their representatives, or IRS employees. As of March 1999, the IRS disciplinary review team was proposing how data needed to fulfill the act’s requirements would be assembled. It is against the law to take a personnel action as a reprisal against a whistleblower. More specifically, an employee with personnel authority is not allowed to take, fail to take, or threaten a personnel action against an employee because the empl
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oyee made a protected disclosure of information. Protected disclosures include disclosures that an employee reasonably believes show a violation of law, rule, or regulation; gross mismanagement; gross waste of funds; or an abuse of authority. If federal employees believe they have been subject to reprisal, they may pursue their complaint through the agency where they work. Alternatively, they may direct their complaint to OSC or MSPB. We could not determine the extent of reprisal against whistleblowers beca
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use IRS did not track information on whistleblower claims of reprisal. According to a knowledgeable IRS official, until recently, the ALERTS database did not have a code to capture information on retaliation associated with individuals, including reprisal against whistleblowers. However, OSC and MSPB provided the number of complaints filed with them. Under the Whistleblower Protection Act of 1989, OSC’s main role is to protect federal employees, especially whistleblowers, from prohibited personnel practices
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. In this role, OSC is to act in the interests of the employees by investigating their complaints of whistleblower reprisal and initiating appropriate actions. Whistleblowing employees may file a complaint with OSC for most personnel actions that are allegedly based on whistleblowing. As shown in table 7, between fiscal years 1995 and 1997, OSC received 63 whistleblowing reprisal matters related to IRS, compared to 2,092 for the federal government as a whole. However, OSC concluded that a much smaller numbe
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r of IRS and governmentwide reprisal matters involved potentially valid statutory claims and therefore warranted more extensive investigation. OSC closed cases without further action for many reasons, including lack of jurisdiction over an agency or employee, absence of an element needed to establish a violation, and insufficient evidence. Since IRS had about 100,000 employees during this period, the ratio of matters received to the number of employees was less than a tenth of 1 percent. Similarly, although
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OSC received whistleblowing reprisal matters from throughout the federal government, the number of matters received was an extremely small percentage of the civilian employee federal workforce that numbered almost 2 million people. As table 7 further shows, at times both IRS and the federal government took “favorable actions” as a result of OSC investigations. In general, favorable actions are those that may directly benefit the complaining employee, punish the supervisor involved, or systematically preven
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t future questionable personnel actions. Agencies take these actions after receiving a request from OSC or with knowledge of a pending OSC investigation. The four favorable actions taken by IRS between fiscal years 1995 and 1997 entailed removing disciplinary letters from a personnel file, correcting an employee’s pay level, presenting a performance award, and promoting an employee retroactively and providing back pay. Employee complaints of whistleblowing reprisal may reach MSPB in two ways. First, if empl
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oyees do not obtain relief through OSC, they may appeal to MSPB. Second, employees may appeal directly to MSPB without first going through OSC. They may do this for actions including adverse actions, performance-based removals or reductions in grade, denials of within-grade salary increases, reduction-in-force actions, and denials of restoration or reemployment rights. MSPB categorizes both types of appeals as “initial appeals.” MSPB administrative judges throughout the country decide initial appeals. The j
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2,773 |
udges either dismiss the cases or decide them on their merits. Common reasons for dismissing cases are that they do not raise appealable matters within MSPB’s jurisdiction or that they are not filed within the required time limit. The parties to the dispute also may enter into a voluntary settlement, sometimes with assistance from the judge. Cases not dismissed or settled are adjudicated on their merits. Possible outcomes are that the agency action may be affirmed or reversed or the agency penalty may be mi
|
2,774 |
tigated or otherwise modified. A party dissatisfied with a case decision may file a “petition for review” by MSPB’s three-member board. The board may grant a petition if it determines that the initial decision was based on an erroneous interpretation of law or regulation or if new and material evidence became available. It may dismiss a petition that is untimely, withdrawn by the parties, or moot. Petitions may also be denied or settled. As with OSC, the number of whistleblowing reprisal decisions issued by
|
2,775 |
MSPB was very small compared to the size of the IRS and federal workforces. As shown in table 8, for fiscal years 1995 through 1997, MSPB decided 45 initial appeals of whistleblowing reprisal allegations involving IRS. Similar to MSPB’s rulings involving the rest of the federal government, MSPB dismissed the majority of initial appeals involving IRS and denied the majority of petitions for review. However, settlements occurred in more than half of the initial appeals that were not dismissed, which could me
|
2,776 |
an that employees were getting some relief. MSPB also occasionally remanded petitions for review, that is, sent them back for further consideration. MSPB ordered IRS corrective action (canceling an employee’s removal and mandating back pay) in one initial appeal case when due process measures unrelated to reprisal were not followed. To our knowledge, except for this case, MSPB did not reverse any IRS actions regarding alleged whistleblower reprisal matters over the 3-year period. For government initial appe
|
2,777 |
als as a whole, MSPB ordered agency corrective action 11 times and otherwise reversed agency actions in 24 instances. Before the IRS Reform and Restructuring Act of 1998, IRS did not systematically collect information on retaliation against taxpayers. As we have previously reported, IRS information systems were designed for tracking disciplinary and investigative cases or correspondence and not for identifying, addressing, or preventing retaliation against taxpayers. The systems contained data elements that
|
2,778 |
encompassed broad categories of employee misconduct, taxpayer problems, and legal action. Information in the systems related to allegations of taxpayer abuse was not easily distinguishable from information on allegations not involving taxpayers. Consequently, we found limited information on potential taxpayer abuse in IRS information systems, as shown in table 9. Recent changes in the law and IRS’ progress on information systems are intended to improve IRS’ ability to determine the extent to which its empl
|
2,779 |
oyees might have retaliated against taxpayers or employees for whistleblowing. Enacted in July 1998, the IRS Restructuring and Reform Act of 1998 included several provisions related to abuse or retaliation against taxpayers, their representatives, or IRS employees. “violations of the Internal Revenue Code of 1986, Department of Treasury regulations, or policies of the Internal Revenue Service (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer r
|
2,780 |
epresentative, or other employee of the Internal Revenue Service” …or ... “threatening to audit a taxpayer for the purpose of extracting personal gain or benefit.” The act also required the Treasury Inspector General for Tax Administration to include in its annual report summary information about any termination under section 1203 or about any termination that would have occurred had the Commissioner not determined there were mitigating factors. In March 1999, the disciplinary review team previously describ
|
2,781 |
ed was proposing that the Commissioner’s Review Group report these data to the Inspector General as well as broader data on the number of taxpayer complaints and the number of taxpayer abuse and employee misconduct allegations. The group would collect, consolidate, and validate data from existing systems and obtain supplemental information to fill gaps. However, according to the team, the group would have to qualify the initial reports to the Inspector General, waiting for data reliability to be established
|
2,782 |
. With respect to allegations of improper zeroing out or reductions of recommended tax by IRS managers, we found no evidence to support the allegations in the eight specific cases referred to us by the IRS employees who testified at the hearings. On the other hand, IRS does not systematically collect data on the extent to which additional taxes recommended by IRS auditors are zeroed out or reduced without a basis in law or IRS procedure. While there are no data on improper reductions, there are data on IRS
|
2,783 |
recommendations of additional tax that were not ultimately assessed. On the basis of such data, we recently reported that the majority of recommended additional taxes was not assessed. We attributed this result to a variety of factors, including the complexity of the tax code and the overreliance on taxes recommended as a measure of audit results. IRS’ process for doing audits of taxpayers’ returns and closing related disputes over additional recommended taxes has several steps. In an audit, an IRS auditor
|
2,784 |
usually reviews the taxpayer’s books and records to determine compliance with tax laws and identify whether the proper amount of tax has been reported. To close an audit, the auditor may recommend increasing, decreasing, or not changing the tax reported. If a taxpayer disagrees with the recommendation at the close of the examination, the taxpayer may request an immediate review by the auditor’s supervisor. If the taxpayer agrees with the recommended additional tax or does not respond to IRS’ notices of exam
|
2,785 |
ination results, IRS assesses the tax. With an assessment notice, IRS formally notifies the taxpayer that the specified amount of tax is owed and that interest and penalties may accrue if the tax is not paid by a certain date. The assessed amount, not the amount an auditor recommends at the end of the audit, establishes the taxpayer’s liability. If the taxpayer disagrees with an examination’s recommendation, the recommendation may be protested to IRS’ Office of Appeals or the dispute can be taken to court.
|
2,786 |
The Office of Appeals settles most of these disputes, and the remainder are docketed for trial. Agreements made in settlements and court decisions determine the assessed part of the disputed tax. The issue of reductions in recommended tax was raised in the Committee’s hearing by IRS auditors who alleged that some supervisors “zeroed out” or reduced the results of audits—that is, the audits were closed with no or reduced recommended additional tax, without a basis in law or IRS procedure. The witnesses furth
|
2,787 |
er alleged that the reasons for zeroing out included retaliating against auditors to diminish their chances for promotion, favoring former IRS employees in private practice, and exchanging zeroing out for bribes and gratuities from taxpayers. IRS has not systematically collected data on the extent to which additional taxes recommended by auditors have been zeroed out or reduced without a basis in law or IRS procedure. In particular, IRS had no data on supervisors’ improperly limiting auditors’ recommendatio
|
2,788 |
ns of additional tax before an audit was closed. However, IRS collects data on the amounts of recommended taxes that were not assessed and the number of examinations closed with no change in tax liability. One of our recent reports illustrates the lack of data on the extent to which supervisors improperly limit auditors’ recommendations of additional tax.We found that an estimated 94 percent of IRS workpapers lacked documentation that the group manager reviewed either the support for adjustments or the repo
|
2,789 |
rt communicating the adjustments to the taxpayer. IRS managers acknowledged that because of competing priorities, they could not thoroughly review workpapers for all audits. IRS officials commented that supervisory reviews were usually completed through other processes, such as reviewing time spent on an audit, conducting on- the-job visits, and discussing cases with auditors. We recommended that the IRS Commissioner require all audit supervisors to document their review of all workpapers to help ensure the
|
2,790 |
quality of all examinations. In another recent report, we found that most additional taxes recommended by IRS auditors were not assessed. Table 10 shows taxes recommended by IRS auditors and the percentage of these amounts assessed for audits closed in fiscal years 1992 through 1997. During these years, at most, 41 percent of the additional taxes recommended during audits were assessed. Other IRS data showed that many examinations were concluded with no recommended additional tax. For example, according to
|
2,791 |
IRS’ Fiscal Year 1997 Data Book, 24 percent of the corporate examinations completed during fiscal year 1997 were closed with no proposed tax change. Our previous work identified several factors that, in part, explained why recommended additional taxes were not assessed after audits were closed. Factors like these could also explain some actions by supervisors to zero out or reduce recommended tax amounts prior to audits being closed. However, IRS does not collect data on the extent to which these factors,
|
2,792 |
or others, contribute to supervisors’ decisions prior to audits being closed. We reported that the complexity and vagueness of the tax code was one explanation for recommended taxes not being assessed after a corporate audit was closed. Because of the complexity and vagueness of the tax code, IRS revenue agents had to spend many audit hours to find the necessary evidence to clearly support any additional recommended taxes. In addition, differing interpretations in applying the tax code to underlying transac
|
2,793 |
tions increased the likelihood of tax disputes. Because corporate representatives usually prevailed in Appeals or the courts, additional taxes recommended were often not actually assessed. We also reported that aspects of the corporate audit process for large corporations also made it difficult for revenue agents to develop enough support to recommend tax changes that could survive a taxpayer appeal. For example, revenue agents worked alone on complex, large corporation audits with little direct assistance
|
2,794 |
from district counsel or their group managers. In addition, when selecting returns for audit, the agents had little information on previously audited corporations or industry issues to serve as guideposts. Finally, the agents had difficulty obtaining relevant information from large corporations in a timely manner. IRS Internal Audit recently cited several factors that contributed to low productivity, as partially manifested by high no-change rates, in the Manhattan District Office. IRS acknowledged that in
|
2,795 |
1995, it took aggressive action to close old examinations. Also, audit group managers in Manhattan and two other districts did not have enough time to perform workload reviews to ensure quality examinations. Manhattan was below the IRS regional average in complying with IRS audit standards for such things as depth of examinations and workpaper support for conclusions. We also reported that relying too heavily on additional taxes recommended as a measure of audit results might create undesirable incentives f
|
2,796 |
or auditors. We found that audits of large corporations raised concerns that relying on recommended taxes as a performance indicator might encourage auditors to recommend taxes that would be unlikely to withstand taxpayer challenges and thus not be assessed. Supervisors on guard against this incentive, which might have also influenced them, might have been accused of improper zeroing out. In this connection, we recently reported that IRS examination and collection employees perceived that managers considere
|
2,797 |
d enforcement results when preparing annual performance evaluations. IRS is increasing its efforts to ensure that enforcement statistics are not used to evaluate its employees. In commenting on our report on enforcement statistics, the Commissioner stated that IRS was taking several actions to ensure that all employees comply with its policies on the proper use of enforcement statistics. These actions included redrafting applicable sections of the Internal Revenue Manual, establishing a panel responsible fo
|
2,798 |
r answering all questions IRS received on enforcement statistics, and establishing an independent review panel to monitor compliance with restrictions on using enforcement statistics. In addition, in January 1999, IRS proposed establishing a balanced system of organizational measures focusing on quality and production measures, but not including tax enforcement results. Several of the individual allegations made by IRS employees that we reviewed involved the issue of improper zeroing out of additional taxes
|
2,799 |
by IRS managers. The eight specific cases in question involved large organizations, and the issues generally related to complex financial transactions. We found no evidence to support the allegations that IRS managers’ decisions to zero out or reduce proposed additional taxes were improper. Instead, we found that the managers acted within their discretion and openly discussed relevant issues with involved IRS agents, technical advisors, and senior management. Ultimately, the decisions were approved by appr
|
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