The Government Accountability Office (GAO) said in a
recent report that the IRS's Exempt Organizations unit had internal controls that, in several areas, were not well designed or well implemented, which increases risk that the unit could "select organizations for examination in an unfair manner."
As far as design went, the GAO said that some of the procedures regarding which organizations need additional examination were either outdated or inaccurate; that there was insufficient monitoring to ensure case file procedures were followed; that the IRS's procedures for maintaining and tracking closed case files were inadequate; and there was a lack of clearly documented selection criteria for some projects and controls for certain activities.
In terms of implementation, the GAO's report said that the IRS lacked up to date data dictionaries, which increases the risk of "data elements not being used accurately"; lacked private impact assessments for some examination selection databases; has only one classifier reviewing each type of referral, which risks potential succession problems and "potential perception of unfairness"; and the membership of the referral committee is not rotating as required.
"There are several areas where EO’s control system could be strengthened, as noted by the control deficiencies identified in this report. Many of these deficiencies pose a risk that could lead to returns being selected, or not selected, for examination based on criteria or practices that fall short of TE/GE’s mission of ensuring fairness and integrity. For example, internal controls monitoring is one way to help reduce risk, but
without consistent monitoring, there is the possibility returns could be selected for unfair reasons," said the GAO in its conclusion.
The GAO recommended several improvements to internal control design and implementation, such as a system of annual reviews to make sure procedures are accurate and up to date, install monitoring procedures to ensure already existing case selection controls are being followed, and working to ensure the referral committee membership rotates as it should.
The IRS, in its response, agreed on the importance of internal controls, and said that the Exempt Organizations unit will continue to review and improve its efforts to effectively oversee the sector.