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OFFICE OF INSPECTOR GENERAL

SEMIANNUAL REPORT THE CONGRESS

APRIL 1, 1996 - SEPTEMBER 30, 1996

Activities of the Department of the Treasury's:

* Office of Inspector General

* IRS Inspection Service

* Customs Office of Internal Affairs

* ATF Office of Inspection

* Secret Service Office of Inspection

CROSS REFERENCES TO INSPECTOR GENERAL ACT, AS AMENDED

Section 4(a)(2): Review of Legislation and

Regulations 62-63

Section 5(a)(1): Significant Problems, Abuses, and

Deficiencies 11-48

Section 5(a)(2): Recommendations with Respect to

Significant Problems, Abuses, and

Deficiencies 11-48

Section 5(a)(3): Significant Unimplemented Recommendations

Described in Previous Semiannual Reports 56-62

Section 5(a)(4): Matters Referred to Prosecutive

Authorities 65-66

Section 5(a)(5): Summary of Instances Where Information Was

Refused 67

Section 5(a)(6): List of Audit Reports 69-76

Section 5(a)(7): Summary of Significant Reports 7-48

Section 5(a)(8): Statistical Table - Questioned

Costs 50-51

Section 5(a)(9): Statistical Table - Recommendations that

Funds Be Put to Better Use 51-53

Section 5(a)(10): Summary of Audit Reports Issued Before

the Commencement of the Reporting Period for which No

Management Decision Has Been Made 54-56

Section 5(a)(11): Significant Revised Management Decisions

Made During the Reporting Period 62

Section 5(a)(12): Management Decisions with which the

Inspector General Is in Disagreement 54

FOREWORD

This is the fifth semiannual report that I am submitting to the Secretary and the Congress as Inspector General of the Department of the Treasury. In this report, we highlight our efforts to help strengthen Federal financial management. During the past 6 months, the Office of Inspector General's (OIG) financial statement audit work has laid a strong foundation for meeting the major challenges that lie ahead. We have taken a proactive approach with the Department's bureaus to address major financial management and internal control vulnerabilities that inhibit reliable, auditable financial information. As a result, nine of the twelve departmental entities that were audited for Fiscal Year 1995 received unqualified opinions on their full sets of statements.

Through our work with Treasury managers and assisted by our mutually supportive partnership with the General Accounting Office, the OIG is helping the Department to address these responsibilities and build a strengthened financial infrastructure. We are working on the Fiscal Year 1996 Department-wide statements, which are due in the Spring of 1997. In addition, the Office of Management and Budget has designated the Department as a pilot agency, under the Government Management Reform Act, for preparing an annual Accountability Report. The Accountability Report will consolidate various financial management and performance reporting requirements, including audited agency-wide financial statements.

Our partnerships and cooperative relationships continue in other areas within the Department. For example, in recent months, the OIG has been asked for assistance by the Office of the Assistant Secretary for International Affairs, IRS' Office of Chief Counsel, and Treasury's Franchise Fund. We also helped the Department to identify unaudited costs associated with the Good O' Boy Policy Review, continued to provide technical assistance to the Community Development Financial Institutions Fund, and are surveying information technology investments throughout the Department to determine Treasury's readiness for the year 2000.

Having developed a track record of requests for assistance, the OIG hopes to continue to be available to Department managers to help them address emerging issues and challenges. We realize that we must continue to perform our jobs in different ways than in the past. By doing so, we will be able to better serve you--the Department, the Congress, and the American public--our customers.

Valerie Lau

Inspector General

Department of the Treasury

October 31, 1996

Acronyms

AD-CV Antidumping and Countervailing

AIMS Audit Information Management System

APRM Audit Peer Review Manual

CAWR Combined Annual Wage Reporting

CDFI Community Development Financial Institutions

CES Centralized Examination Station

CFO Chief Financial Officers

CID Criminal Investigation Division

CMO Certified Money Orders

CMP Civil Monetary Penalties

COPRA Customs Officers Pay Reform Amendments

DCAA Defense Contract Audit Agency

DIS Distributed Input System

DOJ Department of Justice

DPS Document Processing System

EAC External Audit Committee

EARL Electronic Audit Research Log

EBT Electronic Benefits Transfer

ECIE Executive Council on Integrity and Efficiency

EFDS Electronic Fraud Detection System

EFTPS Electronic Federal Tax Payment System

EITC Earned Income Tax Credit

ELF Electronic Filing

FFB Federal Financing Bank

FFSAM Federal Financial Statement Audit Manual

FinCEN Financial Crimes Enforcement Network

FMFIA Federal Managers' Financial Integrity Act

GAO General Accounting Office

GMRA Government Management Reform Act

GPRA Government Performance and Results Act

ICP Integrated Case Processing

IDGs Issue Development Groups

IDRS Integrated Data Retrieval System

IEF Information Engineering Facility

IGATI Inspectors General Auditor Training Institute

IMF International Monetary Fund

IPA Independent Public Accountant

IRA Individual Retirement Arrangement

MIS Management Information System

MVV Mission, Vision, and Values Statements

NAFTA North American Free Trade Agreement

NPR National Performance Review

NTEU National Treasury Employees Union

OIG Office of Inspector General

OMB Office of Management and Budget

OSC Ogden Service Center

PCIE President's Council on Integrity and Efficiency

PIP Participating Inspector Program

SBA Small Business Administration

SCRIPS Service Center Recognition/Image Processing System

SFR Substitute For Return

SSNs Social Security Numbers

TFF Treasury Forfeiture Fund

TIES Totally Integrated Examination System

TINs Taxpayer Identification Numbers

TSM Tax Systems Modernization

TABLE OF CONTENTS

Page

FOREWORD i

OVERVIEW 1

INTRODUCTION 5

Treasury Functions and Organization 6

Management and Financial Leadership 7

CHAPTER I: FINANCIAL MANAGEMENT

Financial Audits 11

Financially Related Reviews 18

CHAPTER II: ECONOMY, EFFICIENCY, AND EFFECTIVENESS

Government Performance and Results Act 19

Performance Reviews 21

Management Assessments 28

Information Technology Oversight 31

Contract Oversight 34

CHAPTER III: INVESTIGATIVE ACTIVITIES

Integrity Awareness and Deterrence 37

Criminal Investigations 39

Employee Conduct 48

STATISTICAL SUMMARIES 49

APPENDIX A: AUDIT REPORT LISTING APRIL 1, 1996, THROUGH

SEPTEMBER 30, 1996 69

Department of the Treasury

Bureas Employees

Bureau of Alcohol, Tobacco and Firearms (ATF) 4,100

Office of the Comptroller of the Currency (OCC) 3,300

U.S. Customs Service (Customs) 19,200

Departmental Offices (DO) 1,800

Bureau of Engraving and Printing (BEP) 3,000

Federal Law Enforcement Training Center (FLETC) 500

Financial Management Service (FMS) 2,200

Internal Revenue Service (IRS) 102,000

U.S. Mint (Mint) 2,100

Bureau of the Public Debt (BPD) 1,700

U.S. Secret Service (Secret Service) 4,700

Office of Thrift Supervision (OTS) 1,400

Total 146,000

OVERVIEW

The OIG issued 50 reports during the reporting period with recommendations that funds be put to better use and questioned costs totaling $17.8 million. The IRS Inspection Service issued 93 reports with recommendations that $1.4 million be put to better use. Monetary benefits relating to investigations conducted by the OIG and Offices of Internal Affairs and Inspection exceeded $15.1 million. The following summaries represent major issues and concerns for the second half of Fiscal Year 1996.

FINANCIAL MANAGEMENT

* The past year's audit work has laid a strong foundation for meeting the challenges of the Department's expanded financial reporting responsibilities. The OIG audited Customs, ATF, the Exchange Stabilization Fund, and a significant portion of the Treasury Forfeiture Fund. ATF received an unqualified opinion on its statement of financial position, and Customs received a qualified opinion on its statement of financial position and a disclaimer on its statement of operations. The OIG also performed audit surveys of Secret Service and BPD, and provided oversight and technical assistance for eight audits performed by contractors.

* Substantial benefits have resulted from the process of preparing and auditing financial statements. Areas for improvement in management controls and business processes have been identified, allowing bureaus to manage and operate their businesses more effectively throughout the year and provide an audited annual reporting of their financial operations and positions. In addition, Congress is able to make more informed decisions on budget and fiscal matters.

* Treasury is one of six agencies designated under GMRA by the Office of Management and Budget as a pilot for preparing an annual Accountability Report that consolidates various financial management and performance reporting requirements, including audited agency-wide financial statements. The OIG has assisted the Department in developing the Accountability Report. (See pages 11 to 18.)

TAX SYSTEMS MODERNIZATION

* The IRS Inspection Service still considers TSM an FMFIA material weakness and categorizes TSM control weaknesses as "Program Management," "Infrastructure," and "Financial Management."

* IRS internal auditors found that Electronic Federal Tax Payment System (EFTPS) developers and users disagreed about processing, which could have contributed to the delaying of EFTPS' March 1996 implementation and may still jeopardize the successful enrollment and payment processing of over 1 million taxpayers, who were required to start paying taxes electronically on July 1, 1997 by the North American Free Trade Agreement. Following its implementation, EFTPS will serve as the Government's electronic payment processing system.

* IRS has utilized GAO's best practice methodology to prioritize its TSM technology investments. The current Document Processing System (DPS) design was designated as a low priority, and IRS consequently carried out a detailed review of its options for the program. The DPS was a major part of IRS' effort to automate tax return processing through an image-based tax processing system. (See pages 31 to 33.)

MATERIAL LOSS REVIEW

* In the report of its September 1995 review of Mechanics National Bank, a failed bank that had been supervised by OCC, the OIG indicated that Civil Monetary Penalties (CMP) could have been used as one means of addressing continued unsafe banking practices. In June 1996, a CMP and Restitution payments against the individual who served as both the bank's former Director and former Chairman were effected by OCC. A Prohibition Notice prohibiting the former official from any future participation in the affairs of any insured depository institution also was effected. (See pages 27 and 28.)

INTERNATIONAL MONETARY FUND EXTERNAL AUDIT COMMITTEE

* In June 1996, the Deputy Inspector General served as a member of IMF's 1996 EAC. The EAC, which represents IMF member countries, was responsible for performing an external audit of the financial statements and accounts administered by IMF for the year ending April 30, 1996. The EAC's three members individually sign IMF's annual financial statements. It has been 10 years since a representative from the OIG last served on the EAC. (See pages 9 and 10.)

OIG SPECIAL AGENTS HONORED

* The United States Attorneys for the District of Columbia and the Eastern District of Virginia recognized three special agents from the OIG's Northeastern Region for their outstanding efforts in conducting two criminal investigations during the past year. The first case, a contract fraud investigation, resulted in criminal and civil penalties for the defendant of over $4 million dollars and a sentence of 37 months of incarceration. The second case, involving a Treasury employee's illegal disclosure of confidential information to a private investigator, resulted in the employee being incarcerated for 30 days and ordered to pay criminal and civil penalties of over $100,000. (See page 39.)

INTRODUCTION

Under the provisions of the Inspector General Act of 1978, as amended, Treasury's OIG reports to the Congress semiannually on its activities. This report, which covers the second half of Fiscal Year 1996, describes major issues and concerns identified during reviews, audits, evaluations, and investigations, along with recommendations for corrective action. Because the report describes selected significant reviews and investigations, the conditions should not be considered as representative of overall conditions in the Department of the Treasury and its bureaus.

Treasury's Inspector General reports directly to the Secretary and Deputy Secretary. The OIG consists of:

* The Audit Directorate,

* The Investigations Directorate,

* The Office of Evaluations,

* The Office of Information Technology, and

* The Resources Directorate.

In accordance with the Government Performance and Results Act (GPRA), the OIG is engaging in a strategic planning process with the goals of achieving the greatest impact from available resources and ensuring mission accomplishment and customer satisfaction. The OIG's mission is to conduct independent audits, investigations, and reviews to help the Department accomplish its mission; improve the Department's programs and operations; promote economy, efficiency, and effectiveness; and prevent and detect fraud and abuse. As it has increased its involvement in performance budgeting, the OIG has reengineered its products, streamlined its organization, and explored new ways in which it can contribute to positive change in the Department and strengthen the Department's position as a leader in Federal financial management.

In addition to Treasury OIG operations, the report covers the activities of the Offices of Internal Affairs and Inspection at ATF, Customs, IRS, and Secret Service. The Inspector General is responsible for oversight of internal investigations by the Offices of Internal Affairs and Inspection at ATF, Customs, and Secret Service and of the IRS Inspection Service's internal audits and investigations.

The ATF Office of Inspection plans, directs, and coordinates ATF's inspection and internal affairs activities. Those activities include: office and program inspections, which appraise the effectiveness of ATF operations, assess the quality of management and supervision, and determine adherence to organizational policies, regulations, and procedures; shooting reviews; and investigations into allegations of employee misconduct (both administrative and criminal), fraudulent Office of Worker's Compensation Program claims, and bribery, and investigations of tort claims and other critical or sensitive incidents. All findings are reported to the Director of ATF and his Executive Staff. In addition, the Office of Inspection executes ATF's personnel security program.

As part of its shared responsibility with management to secure the right of every Customs employee to work in an environment that is free from corruption, misconduct, or mismanagement, the Customs Office of Internal Affairs investigates allegations of misconduct; reports investigative results in a professional and timely manner; screens potential Customs employees for character and suitability; educates Customs employees regarding ethical standards and integrity responsibilities; evaluates physical security threats to Customs employees, facilities, and sensitive information; and inspects Customs operations and processes for managerial effectiveness and improvement.

Guided by a commitment to uphold the policies of Secret Service and to ensure quality assurance, the Office of Inspection's responsibilities include internal special investigations, policy compliance reviews, ethics assessments, reviews of operational programs, and validation of career development and training programs. As a unique, non-parochial operational unit, which is responsible for critical and impartial reviews, the Office of Inspection provides objective and unbiased feedback and oversight that validates both the Secret Service strategic and customer service plans.

The IRS Inspection Service provides independent and professional services to promote the effective administration of the nation's tax laws; detect and deter fraud and abuse in IRS programs and operations; and protect IRS against external attempts to corrupt or threaten its employees. The organization, which includes Internal Audit and Internal Security functions, is headed by the Chief Inspector, who reports directly to the IRS Commissioner and is overseen by Treasury's Inspector General. This arrangement ensures that audit and investigative results are reported independently to the IRS Commissioner and the Secretary of the Treasury.

TREASURY FUNCTIONS AND ORGANIZATION

Treasury is organized into 12 bureaus and offices. Treasury's mission is to formulate and recommend economic, fiscal, and tax policies; serve as the financial agent of the United States Government; enforce the law; protect the President and other officials; and manufacture coins and currency.

The OIG and Offices of Internal Affairs and Inspection assist in performing Treasury's many roles, which include such diverse functions as striking commemorative medals, enforcing national firearms and explosives laws, and investigating financial institution fraud. Today, over 146,000 full-time Federal employees work for the Department of the Treasury throughout the world. Treasury, as one of the oldest Federal agencies, performs some of the most fundamental governmental activities, including collecting and borrowing the money to run our Government.

MANAGEMENT AND FINANCIAL LEADERSHIP

President's Council on Integrity and Efficiency Audit Committee

Treasury's Inspector General has chaired the Audit Committee of the President's Council on Integrity and Efficiency (PCIE) since March 1995. The Audit Committee, which provides recommendations for improving audit quality, leadership in coordinating interagency and PCIE-wide audits, methods for enhancing the professionalism of PCIE member organizations, and information and opinions relating to emerging issues in Government financial management and new auditing and accounting proclamations, has significant visibility in the Inspector General community.

During the 6 months ending September 30, 1996, the Audit Committee:

* Finalized plans to establish a PCIE-wide Master Audit Services Contract beginning in 1998. Through the Master Contract, participating OIGs will be able to select an Independent Public Accountant (IPA) from a prequalified list that will include specialists such as statisticians, actuaries, economists, and electronic data processing auditors. Participating OIGs will be freed of the administrative burden associated with in-house contracting processes. Much of the credit for this important initiative is due to the Department of Labor's OIG, the Master Contract's host agency.

* Undertook the task of updating two important professional guides used by the Inspector General community. In association with the Federal Audit Executive Council, the Audit Committee is updating the PCIE Audit Peer Review Manual (APRM), which is used to assure the quality and professionalism of audit functions. The revised APRM, which is expected to be issued later this year, will incorporate recent changes to the Government Auditing Standards and improve the quality and completeness of future peer reviews. In addition, the Audit Committee has formed a Task Group to revise the PCIE Federal Financial Statement Audit Manual (FFSAM). Changes to Government financial management practices mandated by legislation such as the Chief Financial Officers (CFO) Act and the Government Management Reform Act (GMRA) prompted the Audit Committee to review the FFSAM's relevancy. The PCIE will work with the General Accounting Office (GAO) and the private sector auditing and accounting community to assure that the FFSAM addresses the many new issues emerging in Government financial management.

* Commenced a review of the Inspectors General Auditor Training Institute's (IGATI) funding and financial operations. Although IGATI was established in 1990, it has never undergone a financial review of its activities. The results will be available later this year.

* Began developing the framework for a CFO Roundtable. In association with GAO, the Audit Committee is planning to assemble interested Government and private sector accountants and auditors to discuss practical problems fulfilling the CFO Act and GMRA mandates.

Governmental Affairs Committee Testimony

On June 6, 1996, the Inspector General testified before the Senate Governmental Affairs Committee chaired by Senator Ted Stevens. The hearing focused on ways to improve IRS' financial accounting systems. The Inspector General testified that the IRS Commissioner cannot provide reasonable assurance regarding the adequacy of IRS financial accounting systems internal controls due to continued weaknesses in the Revenue Accounting Systems. The systems neither meet current accounting standards for financial management systems nor provide an adequate transaction trail.

The Inspector General stated that work undertaken by the IRS Chief Inspector and GAO has provided extensive coverage of IRS' financial management activities. The OIG has been careful to avoid duplicating audit effort and has focused efforts on those areas in need of Inspector General oversight. The OIG has formed a partnership with GAO and the IRS Chief Inspector to audit IRS' Fiscal Year 1996 financial statements.

The Inspector General also testified about problems that have continued to plague IRS' Tax Systems Modernization (TSM). Although IRS management has taken a number of corrective actions to resolve reported weaknesses, the solutions have not yet taken hold. For this reason, the Inspector General, in coordination with the IRS Chief Inspector, indicated disagreement with IRS' classification of TSM as an "area of concern" rather than a material weakness in its Fiscal Year 1995 Federal Managers' Financial Integrity Act (FMFIA) Assurance letter. The Secretary agreed with the OIG's position and reported TSM as a material weakness in the Department's Fiscal Year 1995 FMFIA Assurance letter.

OIG Change Management

The OIG initiated a Workplace Effectiveness Study, which assessed its organizational climate and established a Representatives of the OIG Change Management Team accept a plaque of recognition from Inspector General Valerie Lau.

benchmark for improvement, in 1995. In September 1995, the OIG began development and implementation of a workplace effectiveness action plan. Assisted by a group of change management consultants, senior OIG managers established a schedule for achieving goals in six key areas: performance measurement; diversity and Equal Employment Opportunity; the OIG's management information system (MIS); communication strategy; employee development; and position management. Significant progress has been made on the OIG's goals. For example, diversity programs at various organizations, including ATF and the International Monetary Fund (IMF), are being evaluated for applicability to the OIG and planning is underway for a new MIS.

Between June and August 1996, workshops on "Enhancing the Organizational Functioning of the OIG" were held for approximately 250 employees to reinforce the change process. The sessions updated individuals on the change process and provided tools for improving OIG organizational effectiveness. In addition, substantial agreement that greater adherence to the OIG's Mission, Vision, and Values statements (MVV) should underpin OIG change efforts was reached. The OIG's September 1996 Management Conference subsequently focused on establishing accountability at each management level so that actions are aligned with the OIG's MVV to produce high quality work products and a skilled, professional workforce.

Electronic Benefits Transfer

The OIG continues to assist FMS managers in resolving program and operational issues arising from the development and implementation of the nationwide Electronic Benefits Transfer (EBT) system. However, the implementation strategy is now in question because a recent appeals court decision voided an October 1995 FMS assessment under which a national bank was to design EBT systems for eight states. Legislation enacted after the court decision reaffirmed FMS' authority to designate financial institutions and to continue operation of the existing EBT pilot program. Treasury and Department of Justice attorneys are reviewing the implications of the decision and new legislation.

The EBT system ultimately should result in reduced costs and the more efficient delivery of benefits. The OIG is working with FMS to ensure the efficient distribution of benefits, the protection of recipient data, adequate fraud controls and other security measures, and reasonable automated teller machine fees.

International Monetary Fund External Audit Committee

For 3 weeks in June 1996, the Deputy Inspector General served as a member of the IMF's 1996 External Audit Committee (EAC). The Deputy Inspector General was nominated by the Secretary of the Treasury and confirmed by IMF's Executive Board. It has been 10 years since a representative from the OIG last served on the EAC. The IMF is a cooperative intergovernmental monetary and financial institution having 181 member countries, which promotes and facilitates the stability of the international financial system. The IMF is unique among intergovernmental organizations in its combination of regulatory, consultative, and financial functions, which derive from the purposes for which it was established: to facilitate the balanced growth of international trade, promote exchange rate stability, and assist in the establishment of a multilateral system of payments in respect of current transactions between members; to provide financial resources to enable its members to correct payments imbalances; and to provide a forum for consultation and collaboration on international monetary problems.

The EAC, which represents member countries, was responsible for performing an external audit of the financial statements and accounts administered by IMF for the year ending April 30, 1996. A big six accounting firm assisted the EAC with this task. The EAC also has authority to raise personnel and programmatic issues. This is accomplished by meeting throughout the year, sharing information via correspondence or the telephone, and serving at the IMF for 3 to 4 weeks in June. Each year the EAC is comprised of three members, a continuing member from the previous year who chairs the committee and two new members. In 1996, the continuing member was from Fiji and the new members were from the United States and the Czech Republic. One of the two new members will be selected to serve as the continuing member next year. All three members individually sign IMF's annual financial statements.

Intelligence Community Inspector General Forum

The Treasury OIG was recently invited to join the Intelligence Community Inspector General Forum. The Forum will provide the OIG with the opportunity to share information with other Inspectors General whose duties and responsibilities include the auditing, inspection, or investigation of intelligence community programs and operations. An additional purpose of the Forum is to ensure adequate Inspector General oversight of intelligence programs and operations and to prevent the unnecessary duplication of effort.

FINANCIAL MANAGEMENT

The CFO Act and GMRA have provided a strong mandate for strengthening Federal financial management. A key component of these important initiatives is the requirement for audited financial statements. The CFO Act requires audited financial statements for revolving funds, trust funds, and significant commercial activities. GMRA extends these requirements to encompass all accounts and activities of the agencies covered by the CFO Act. Annual audited Treasury-wide financial statements are required for Fiscal Year 1996 and subsequent years. In addition, Treasury is one of six agencies designated under GMRA by the Office of Management and Budget (OMB) as a pilot for preparing an annual Accountability Report. The Accountability Report consolidates various financial management and performance reporting requirements, including audited agency-wide financial statements.

Substantial benefits have resulted from the process of preparing and auditing financial statements. Although achieving audit assurance is the focal point of these efforts, major benefits come from identifying areas for improvement in management controls and business processes. The Department's bureaus subsequently are able to manage and operate their businesses more effectively throughout the year, as well as to provide an audited annual reporting of their financial operations and positions. In addition, Congress is able to make more informed decisions on budget and fiscal matters.

FINANCIAL AUDITS

Audit Strategy

The OIG has developed an innovative strategy for ensuring that the financial statements audit requirements of the CFO Act and GMRA are successfully implemented at Treasury. An integral part of the OIG's strategy is to take a proactive approach with the Department's bureaus to address major financial management and internal control vulnerabilities that inhibit reliable, auditable financial information. The OIG works closely with management to develop corrective action plans that consider resource constraints and provide aggressive, but realistic time frames for implementation. In addition, the OIG assists management in identifying critical actions which must be taken within the existing systems framework versus those actions that cannot be feasibly implemented without major systems overhaul. This short-term/long-term approach is essential for ensuring that steady progress is achieved.

The OIG's audit plan incorporates an optimal mix of OIG and contracted audit resources, along with joint audit efforts performed with GAO at several key departmental components. OIG staff are used primarily for the audits of law enforcement agencies due to the sensitive nature of and need for security clearances for access at those agencies. In addition, OIG staff are needed to perform the joint audit efforts with GAO. Contractors are used for most of the remaining financial statements audit work.

A mutually supportive working partnership with GAO is a critical part of the plan. The Department comprises a major component of the consolidated Government-wide financial statements on which GAO will report for Fiscal Year 1997 and subsequent years. Treasury's financial statements, therefore, are of common interest to GAO as the Government-wide auditor as well as the Inspector General as the Department's auditor. The OIG's partnership with GAO enables both organizations to achieve maximum efficiency of audit resources, while meeting their mutual audit objectives. Strong relationships at all levels have been developed with GAO, and joint audits are underway at IRS, BPD, and FMS.

Successful implementation of the OIG's audit strategy also is dependent upon adequate audit funding. The OIG has undergone major restructuring to give the highest priority to financial statements audits. However, while audit resources have been reprogrammed to the maximum extent possible, this has been insufficient to meet the OIG's expanded audit requirements under GMRA.

Approximately 35 additional auditors need to be hired by the OIG. The OIG has worked closely with the Department's Budget Office and CFO Council to obtain reimbursements from audited bureaus to fund the additional auditors and meet the Department's audit requirements. Approximately $1.5 million was included in the Fiscal Year 1997 budgets of IRS, Customs, and ATF for this purpose. In addition, the OIG is to be reimbursed approximately $500,000 by the Treasury Forfeiture Fund (TFF), Secret Service, and the Mint in Fiscal Year 1997, although the amount was not included in their Fiscal Year 1997 budgets. The positive response of Treasury's bureaus to funding a portion of the overall financial statements audit costs is a clear indicator of the Department-wide commitment to achieving the common goal of audited financial statements.

Although much progress has been made, the OIG faces considerable challenges in meeting the Department's expanded financial reporting responsibilities under GMRA. Several bureaus that have been audited under the CFO Act continue to experience financial systems and internal control problems which inhibit reliable, auditable financial information. Other major departmental entities, including Secret Service and major components of BPD and FMS, will be audited for the first time in connection with GMRA for Fiscal Year 1996. Successful audit outcomes at all key bureaus are necessary for Treasury to accomplish its overall financial reporting objectives and achieve audited Department-wide statements.

Financial Statement Audits

The past year's audit work has laid a strong foundation for meeting the major challenges ahead. The OIG audited Customs, ATF, the Exchange Stabilization Fund, the Mint's custodial gold and silver reserves, and a significant portion of TFF. The OIG also performed audit surveys of two key bureaus, Secret Service and BPD, and provided oversight and technical assistance for eight audits performed by contractors. GAO performed the Fiscal Year 1995 audit of IRS. However, for Fiscal Year 1996 and subsequent years, the OIG and GAO will perform this audit jointly.

The audit results for Fiscal Year 1995, with comparative data for Fiscal Year 1994, are summarized in a table on page 16. Twelve departmental entities were audited for Fiscal Year 1995, of which nine received unqualified opinions on their full sets of statements. Among the remaining three bureaus, ATF received an unqualified opinion on its statement of financial position, Customs received a qualified opinion on its statement of financial position and a disclaimer on its statement of operations, and IRS received a disclaimer on its full set of statements. Both ATF's and Customs' success stories were made possible by the high priority and commitment that the bureaus' top management gave, as well as by the proactive, client service oriented approach of the OIG's audit teams.

Significant audit results and findings from the Fiscal Year 1995 financial statements audits appear below.

* The OIG audited Customs' Fiscal Year 1995 financial statements, issuing a qualified opinion on the Consolidated Statement of Financial Position and a disclaimer on the Consolidated Statement of Operations and Changes in Net Position. Customs' progress in correcting weaknesses identified in previous audits enabled the OIG to provide limited audit assurance for the first time. While the results of the OIG's Fiscal Year 1995 audit are a clear indication of Customs' substantial progress toward correcting weaknesses identified in previous audit efforts and improving financial management and reporting, many of the continuing weaknesses are long-standing and require extensive, sustained improvements for correction.

The OIG cited five material weaknesses: (1) necessary controls and procedures were not in place to prevent duplicate, excessive, or otherwise improper drawback payments and other refunds; (2) Customs' revenue accounting system contained over 1 million "open" and potentially revenue-generating transactions, allowed the input of illogical transactions, and included several revenue misclassifications; (3) a fully comprehensive compliance measurement program to quantify the revenue gap and determine trade law compliance had not been implemented for in-bond and outbound shipments, bonded warehouses, drawback, foreign trade zones, and passenger user fees; (4) core financial systems were not integrated and did not capture all transactions occurring during the year; and (5) weaknesses existed in controls to prevent unauthorized access and changes to program and data files in Customs' systems.

* GAO, with assistance from the IRS Inspection Service, has audited the Principal Financial Statements of IRS since Fiscal Year 1992. For Fiscal Year 1995, as in the previous 3 years, GAO reported that limitations on the scope of the audit resulted in a disclaimer of opinion because IRS cannot provide support for major portions of the information presented in the statements. GAO cited five major financial management problems, which have prevented it from attesting to the reliability of IRS' financial statements: (1) the amount of total revenue ($1.4 trillion) and tax refunds ($122 billion) could not be verified or reconciled to accounting records maintained for individual taxpayers in the aggregate; (2) the amounts reported for various types of taxes collected, such as Social Security, income, and excise taxes, could not be substantiated; (3) the reliability of reported estimates of $113 billion for valid accounts receivable and $46 billion for collectible accounts receivable could not be determined; (4) a significant portion of IRS' reported $3 billion in non-payroll operating expenses could not be verified; and (5) amounts reported as appropriations available for operations could not be reconciled fully with the Department's central accounting records, and hundreds of millions of dollars in differences were identified.

GAO summarized the status of prior years' audit recommendations, noting that IRS completed action on 17 of 59 recommendations. Although long standing and pervasive financial management problems remain, IRS management has expressed its commitment to provide the necessary resources and management oversight to resolve weaknesses. Certain corrective actions, such as reprogramming software for antiquated systems and developing new systems, require longer term solutions.

* The OIG issued an unqualified opinion on ATF's Statement of Financial Position as of September 30, 1995. This was a significant accomplishment for the bureau as it was the first year that a financial statement audit had been attempted. The OIG's objective was to provide assurance on beginning Fiscal Year 1996 asset, liability, and equity balances so that the audit of additional Fiscal Year 1996 financial statements can be performed efficiently.

OIG auditors identified no material weaknesses in ATF's internal control structure and no instances of reportable noncompliance with laws and regulations. However, the OIG identified nine reportable conditions, which related to accounts receivable reconciliation procedures for taxes due the Government, controls over accountability for reimbursable work agreements, implementation or adherence to accounting policies and procedures, and retention of supporting documentation. The auditors also reported problems with ATF's access control software, which failed to protect programs and files from unauthorized change or use.

* The TFF Fiscal Year 1995 financial statements, audited by an IPA in conjunction with OIG auditors, received an unqualified opinion. The TFF consolidates all Treasury law enforcement organizations under a single forfeiture fund program administered by the Department. Participants in TFF include Customs, IRS, ATF, Secret Service, the Financial Crimes Enforcement Network (FinCEN), and FLETC, as well as the Coast Guard. An important purpose of the fund is to encourage state and local law enforcement involvement through the equitable sharing of forfeited assets. The fund is used to centralize the accounting for property or currency seized during Treasury law enforcement operations and sharing this property with Federal, state, and local law enforcement agencies that directly participate in the seizure and forfeiture.

While the Fiscal Year 1995 TFF financial statements received an unqualified opinion, the auditors identified three material weaknesses in the internal control structure: (1) accounting records primarily were maintained on the cash basis of accounting rather than the accrual basis; (2) the general ledger did not record all balances and transactions reflected in the financial statements; and (3) the value of forfeited and seized property was not recorded in the general ledger and recorded timely in supporting subsidiary systems.

The OIG and IPA also identified problems associated with multiple property tracking systems. Specifically, TFF's participating bureaus maintain and track seized and forfeited property on their own individual property tracking systems. As a result, extensive manual manipulations and reconciliations were required to prepare the analysis of change in seized and forfeited property. Furthermore, due to limitations of the tracking systems, the appropriate unit of measurement for quantities (e.g., cases, pounds, etc.) was not presented in accordance with the requirements of Statement of Federal Financial Accounting Standards No. 3, Accounting for Inventory and Related Property.

* An IPA under contract to the OIG rendered an unqualified opinion on the Federal Financing Bank (FFB) Statement of Financial Position as of September 30, 1995, related statements of operations and accumulated deficit, and cash flows. The FFB provides loans to Federal agencies and non-Federal entities, and purchases loan assets from Federal agencies. Loans to nonfederal borrowers, including foreign governments, are secured by Federal agency guarantees.

The IPA reported that the FFB likely will require Congressional appropriations and/or an increased interest rate spread to finance its $2.3 billion deficit. The FFB has incurred losses because past legislation allowed specific borrowers to prepay certain loans without the prepayment penalty (known as premiums). However, the FFB must pay the prepayment premiums on the underlying obligations to the Treasury. In addition, legislation allows one specific borrower to pay FFB less interest than is stated in its loan agreements. Because it must pay the higher loan agreement amount of interest on the underlying borrowings to Treasury, the FFB absorbs the cost of foregone interest.

The IPA also identified three material weaknesses in the internal control structure: (1) the lack of a single, integrated financial accounting system; (2) the lack of an organizational structure promoting accountability and empowering managers to take action to correct weaknesses; and (3) no independent verification of interest credits provided to the Rural Utilities Service under the Rural Electrification Administration Act. There were no instances of noncompliance with laws and regulations.

* An IPA rendered an unqualified opinion on both the Mint's consolidated and Numismatic Public Enterprise Fund for the year ended September 30, 1995. However, the IPA identified two material weaknesses in the internal control structure. The existing structure of mainframe, manual, and personal computer based systems did not provide useful, timely information; and efforts to fully integrate the financial management system were cumbersome and delayed. In addition, the Mint's fund structure during Fiscal Year 1995 was divided among seven funds, which resulted in incomplete cost reporting and weakened internal controls. Because the President signed

DEPARTMENT OF THE TREASURY

FISCAL YEAR 1994-1995 AUDITED FINANCIAL STATEMENTS

FISCAL YEAR 1995 FISCAL YEAR 1994

AUDIT RESULTS AUDIT RESULTS

ENTITIES Opinion Material Other Opinion Material Other

Weakness- Report- Weakness- Report- es able es able

Condi- Condi-

tions tions

Headquarters/General Services (DO)

Exchange

Stabili-

zation

Fund

U a/ 0 0 U 0 0

FFB

U 3 0 U 2 0

Working Capital Fund

U 0 0 U 0 0

Other Funds

NA a/ - - NA - -

Tax/Trade Compliance/Law Enforcement

IRS

D a/ 5 b/ D b/ b/

Customs c/

Q a/ 5 7 D 11 12

ATF d/

U 0 9 NA - -

Secret

Service

NA - - NA - -

FinCEN

NA - - NA - -

FLETC

NA - - NA - -

TFF e/

U 3 4 Q 6 4

Central Fiscal Services

FMS -

Salaries

&

Expenses

U 1 4 U 1 2

FMS -

Trust

Funds

NA - - NA - -

FMS -

Disburse-

ments

NA - - NA - -

BPD

NA - - NA - -

Banking/Thrift Oversight

OCC

U 0 0 U 0 0

OTS

U 0 0 U 0 2

Manufacturing

BEP

U 0 0 U 0 1

Mint

U 2 1 U 3 0

a/ U = Unqualified; NA = Not Audited; D = Disclaimer; Q = Qualified.

b/ In connection with its Fiscal Year 1992-1995 audits of IRS, GAO provided recommendations to correct 59 system and internal control weaknesses. GAO's Fiscal Year 1995 audit report stated that corrective actions had been completed for 17 of these 59 recommendations.

c/ Qualified opinion on Fiscal Year 1995 Statement of Financial Position; disclaimer on Statement of Operations.

d/ Unqualified opinion on Fiscal Year 1995 Statement of Financial Position; Statement of Operations not audited.

e/ The OIG audited TFF's sensitive items (e.g., narcotics, firearms, and explosives) and a contractor audited non-sensitive property.

legislation in November 1995 establishing the Mint as a single, revolving fund, it now has the authority to consolidate its funds.

* The OIG contracted for an audit of the Fiscal Year 1995 Financial Statements of the FMS Salaries and Expenses Appropriation. The IPA rendered an unqualified opinion on the statements. However, the IPA reported as a material weakness the fact that FMS does not maintain reliable property, plant, and equipment records, or perform a physical inventory of those assets. No other material weaknesses were noted. (OIG)

Department-wide Financial Statements

The OIG participated in an advisory committee of internal and external financial experts to develop the Department's prototype Fiscal Year 1995 Accountability Report. The Accountability Report consolidates financial statements with other reporting requirements of the CFO Act, GMRA, FMFIA, GPRA, the Prompt Payment Act, and other legislation.

The OIG is planning an audit of the Fiscal Year 1996 Department-wide financial statements required by GMRA. The statements will be included in the Fiscal Year 1996 Accountability Report. The Inspector General plans to work closely with departmental officials on finalizing the financial statement presentation as part of this effort. Meeting the statutory due date of March 1, 1997 for submission of the Fiscal Year 1996 Department-wide statements is a significant challenge faced by both the Department and the OIG.

The overall audit opinion on Treasury will be largely contingent upon audit results at major component entities, including IRS and other bureaus that are material to the Department-wide statements. The problems at IRS are deep-rooted and will take time to correct. In its most recent audit report, GAO acknowledged progress by IRS in addressing these problems, however, additional corrective actions are necessary to enable an affirmative opinion on the financial statements.

The Fiscal Year 1996 audit opinion also will be affected by an audit scope limitation on the public debt and related interest reported by BPD and on Government-wide cash balances maintained by FMS. GAO and the OIG have initiated joint audit efforts at BPD and FMS with the goal of opining on the Fiscal Year 1997 balances. Given their size and complexity, and the fact that this is an initial audit, it is not feasible to attempt to audit the Fiscal Year 1996 balances within the time frame for the submission of the Fiscal Year 1996 Accountability Report. (OIG)

FINANCIALLY RELATED REVIEWS

Treasury Check Production Transfer

At the request of DO officials, OIG auditors observed and evaluated both the transfer of Treasury check production equipment and supplies from Illinois to Pennsylvania, and the new production process after relocation. Consistent with the OIG's objective, the security, accountability, and integrity of the check production process remained intact throughout the move. Consequently, the auditors found that DO and the American Bank Note Company, the exclusive manufacturer of blank Treasury checks, effectively managed the transfer. (Report #OIG-96-082)

Financial Accounting and Reporting of IRS Collection Division's Seized Assets

IRS internal auditors assisting GAO in its audit of IRS' Fiscal Year 1994 financial statements reviewed the IRS Collection Division's seized asset program. The auditors found that IRS performed seizures in accordance with existing policies and procedures, complied with pertinent laws and regulations, caused no undue taxpayer burden, adequately safeguarded property, and protected the Government's rights. While no lost or stolen assets were identified, the auditors determined that IRS overstated the Collection Division's seized asset inventory, that accounting information was not timely or reliable, and that Collateral and Revolving Fund transactions were inaccurately presented.

The auditors made several recommendations for improving the financial accounting and reporting of the Collection Division's seized assets. These recommendations included developing and issuing information resource management guidelines to value seized assets in accordance with general accounting standards, reconciliation procedures to ensure that IRS properly presents seized asset ending balances in its financial statements, guidelines clarifying what items should be classified as collateral on the financial statements, and employee training on the operational and financial statement reporting requirements. IRS management agreed to the conditions cited in the report and has planned or completed corrective action. (IRS Report #064008)

ECONOMY, EFFICIENCY, AND EFFECTIVENESS

The Inspector General Act of 1978 established OIGs to promote the efficiency, economy, and effectiveness of Federal programs and operations. At Treasury, the Act has resulted in a program of audits and evaluations that focuses on internal controls, management assessment, and program compliance and performance. This work enables the OIG and the Offices of Internal Affairs and Inspection at ATF, Customs, IRS, and Secret Service to provide independent, objective assessments of programs and performance which help to improve the Department's operations and ensure that programs achieve desired results.

The OIG has refocused much of its audit and evaluations work to address National Performance Review (NPR) proposals for reorienting the Inspectors General. The NPR's report stated, "In a government focused on results, the Inspectors General can play a key role not only in controlling managers' behavior by monitoring it, but in helping to improve it. In the future, [Inspectors General] should help managers evaluate their management control systems...[and] help improve systems to prevent waste, fraud and abuse, and ensure efficient, effective service."

As the Department addresses critical changes affecting its bureaus and programs, the OIG believes that its work is helping by providing independent, objective information and recommendations for program improvements. The OIG has sought to provide products that its customers, departmental managers, and the Congress will find useful and relevant. One of the OIG's objectives is to help decision makers find solutions to the problems they face in new or modified programs and with rapidly changing technology that affects all areas of business and finance.

GOVERNMENT PERFORMANCE AND RESULTS ACT

President's Council on Integrity and Efficiency Survey of GPRA/Performance Measures

At the request of the Chair of the PCIE, the Inspectors General of Treasury and the Small Business Administration (SBA) surveyed PCIE and Executive Council on Integrity and Efficiency (ECIE) members on their involvement in GPRA and performance measurement in their host departments or agencies. In this joint project, the OIG's Office of Evaluations worked with SBA's Office of Inspection and Evaluation.

GPRA requires that most Federal departments and independent agencies develop strategic plans, annual performance plans, and supporting reports for submission to OMB and the Congress. The perceived basis for an Inspector General community role in GPRA implementation and performance measurement lies in the Inspector General Act of 1978, as amended; the CFO Act; GMRA; and the Inspectors General Vision and Strategies to Apply Our Reinvention Principles of 1994. The underlying purpose of all of these initiatives is to improve program efficiency, effectiveness, and accountability in the Federal Government.

The survey found that nearly all of the PCIE and half of the ECIE Inspectors General reported some involvement in GPRA activities. The reason most often cited for involvement was "OIG Initiative," either alone or with other reasons such as the Inspectors General Vision and Strategies to Apply to Our Reinvention Principles. More than half of the PCIE Inspectors General cited the CFO Act as a reason for involvement, including one large PCIE OIG, which cited the act as its only reason to be involved in GPRA activities. While most respondents support an OIG role in GPRA activities, they believe that the OIGs should not assume management's role by selecting or making decisions on plans and performance measures, or by taking any actions that will compromise OIG independence.

There was no clear consensus that OIGs should focus resources on one specific area. Several respondents volunteered their concern over the limited availability of resources. Nearly 90 percent of the PCIE plan to audit or review underlying data systems within the next 2 years. Depending on the number and complexity of the systems to be reviewed and whether the systems are paper or electronic media-based, such reviews may absorb a significant amount of resources. Further, a discussion on linking GPRA-driven program measures with audited financial statements could help to ensure the consistent utilization of standard performance measures used in each department's and agency's management and financial reports and annual budget estimates. (Report #OIG-96-E16)

Customs GPRA Initiative

In September 1995, Customs' Office of Internal Affairs began work on a GPRA initiative to develop a performance management system. The project framework is based upon creating an organizational mission statement and analyzing Internal Affairs from four perspectives, financial, internal processes, customer service, and the organization's ability to grow from lessons learned. The goal of Internal Affairs' GPRA initiative is to improve the quality of the services and products it provides, to aid in planning and budgeting and to ensure accountability and control by providing management with information on the application of resources, to improve management actions by measuring productivity changes linked to revised management practices, and to identify opportunities for learning and growth.

In preparation for its performance measurement pilot program, Internal Affairs has established solid performance measures, including strategic goals and mission objectives, for seven functional areas since April 1, 1996. The performance measures were collated at three levels relating to base-line, upper managerial, and executive level measures. The 1-year pilot program to analyze and refine the measures that have been developed will begin on October 1, 1996. Internal Affairs will implement its performance measurement system on October 1, 1997, upon completion of the pilot program. (Customs Internal Affairs)

PERFORMANCE REVIEWS

During the past 6 months, the OIG has taken steps to enhance performance audit coverage for the Department. To augment its Strategic Plan, the Audit Directorate completed an Issue Area Plan that will allow it to identify and audit those areas of greatest importance not only to the Department but also to OMB and the Congress. In addition, the Audit Directorate has established Issue Development Groups (IDGs), which are composed of field office personnel who conduct audits throughout the Department, to maintain the Issue Area Plan. The IDGs gather information to update the Plan, set priorities for the audits that are included in the OIG's audit plan, and serve as liaisons to the Department's bureaus, thereby improving customer service. These steps represent an investment that will result in better focused audits that produce more timely and productive outcomes.

Cost of the Good O' Boy Roundup Policy Review

In response to a Congressional request, the OIG assisted the Department by identifying unaudited costs associated with the Good O' Boy Roundup Policy Review (the Review). The Review, begun in July 1995 and completed in April 1996, examined departmental procedures for addressing employee conduct associated with allegations of misconduct by Treasury law enforcement officers and others at an annual retreat outside Ocoee, Tennessee, known as the Good O' Boy Roundup. The OIG will audit all contract costs incurred after the completion of a contract used to provide services for the Review. (Report #OIG-CA-96-003)

Tobacco Revenue Lost at Sea

Tax-exempt cigarettes, purchased on behalf of fishing vessels for consumption at sea, are being diverted to the domestic economy to avoid Federal and state excise taxes. The OIG estimates that during 1994 and the first half of 1995, $210,000 in Federal tax revenue and $450,000 in state tax revenue were not collected at three Massachusetts ports when over 870,000 packs of tax-exempt cigarettes were diverted to the domestic economy. Similar revenue shortfalls likely are occurring in the Northwest, but insufficient data are available to estimate the amount of taxes that are not being collected. Among the conditions in the Northwest that indicate a potential for diversion are a recent documented case of diversion on the part of an export warehouse and the unreasonably large quantities of tax-exempt cigarettes that are purchased by fishing vessels in the region.

Customs and ATF share responsibility for regulating the sale of tax-exempt cigarettes to the fishing industry. Neither bureau has effectively addressed the revenue shortfall due to the fact that Customs had not defined what constitutes reasonable purchases of tax-exempt cigarettes and ATF examiners, when auditing export warehouses, did not verify the validity of signatures on withdrawal forms. In addition, Customs lacked resources to supervise the lading of vessels. As a result of the audit, Customs has drafted a directive to establish guidelines and control for the withdrawal of cigarettes and alcoholic beverages for use on fishing vessels. The directive is being circulated for signature. In addition, Customs and ATF will work together to reduce the revenue shortfall by restricting the quantities of cigarette purchases and by requiring documentation to verify withdrawals on behalf of the fishing vessels. (Report #OIG-96-099)

Quality Control Review of IRS' Office of Audit Projects

The OIG reviewed the compliance of IRS' Office of Audit Projects, a component of the IRS Inspection Service, with the Comptroller General's Government Auditing Standards and IRS policies and procedures. The work was performed to meet OIG oversight responsibilities and served as an external quality control review. The Office of Audit Projects' internal quality control system operated effectively and provided reasonable assurance of compliance with the Government Auditing Standards and bureau policies and procedures. However, personnel needed to improve documentation associated with finding abstracts, which document the elements of a finding; supervisory review; and workpapers. OIG auditors also found that office requirements for the timely issuance of draft and final reports were not always met. (Report #OIG-96-093)

Overtime Pay for Customs Inspectors

An OIG report to the Assistant Secretary for Enforcement recommended the revision of the Customs Officers Pay Reform Amendments (COPRA). The COPRA, which went into effect January 1, 1994, significantly changed the way Customs officers were compensated for night differential earnings under the premium pay system. Previously, Customs officers were paid under an overtime act passed in 1911 and were compensated for shift differentials under the Federal Employee Pay Act. When COPRA was passed, costs for overtime were projected to decrease as a result of the new legislation. However, since COPRA's implementation, there has been a corresponding increase in premium pay. Specifically, night differentials have increased from $51,000 in Fiscal Year 1993 to about $6.3 million and $8.9 million respectively in Fiscal Years 1994 and 1995.

The COPRA also restricts Customs officers from earning more that $25,000 in overtime pay in 1 year. Congress instituted the cap in 1979 because it believed that Customs management had failed to deal with overtime in an effective manner over the years. The cap was removed from Customs appropriation language and placed in COPRA. However, the OIG found that the overtime cap is not an effective tool for managing overtime because the percentage of Customs officers reaching the cap has increased since it was put into place. Furthermore, additional administrative time is required to ensure that the cap is not exceeded.

The Assistant Secretary for Enforcement will recommend that Customs form a working group to develop a comprehensive study, including recommendations, on managing COPRA. The Office of Enforcement wants to ensure that all of the problems related to Customs overtime are fully reviewed. (Report #OIG-96-094)

Revenue Protection Strategies

The IRS continues to improve systems for detecting return filing fraud in advance of issuing tax refunds. During the second 6 months of Fiscal Year 1996, IRS internal auditors continued to assess revenue protection activities by issuing five audit reports, which are summarized below.

* The Return Preparer Program is a key component in IRS' process of dealing with tax return preparers who understate their client's tax liabilities. Once a pattern of preparer misconduct is established, all returns completed by the preparer are selected for audit. Such action is referred to as a Program Action case and can result in the assessment of multiple penalties against the preparer. As part of their continuing efforts to identify additional productive returns for audit and to evaluate opportunities for strengthening the program, IRS internal auditors conducted a review of the Return Preparer Program.

The auditors determined that IRS is actively involved in return preparer activities. National, regional, and district offices have coordinated efforts and established new guidelines for dealing with noncompliant tax return preparers. The auditors also determined that Program Action cases can be a good source for increasing Office Audit yields. However, IRS efforts to identify problem preparers are hindered because warranted preparer penalties are not always addressed during audits and preparer taxpayer identification numbers (TINs) are not always matched to individual returns in the audit stream in order to identify additional Program Action cases.

The auditors recommended that IRS management establish a systemic link between preparers and returns in the examination stream. Ideally, this would be accomplished by adding the preparer TIN to each IRS Audit Information Management System (AIMS) record. However, if adding preparer TINs is delayed due to other IRS priorities, the auditors recommended that the Midwest Automated Compliance System be enhanced so that preparer TINs can be added periodically to closed AIMS records in the interim. After agreeing with the audit findings and recommendations, IRS management has begun initiating appropriate corrective action. (IRS Report #064102)

* During the 1994 filing season, IRS internal auditors reviewed the use of duplicate Social Security Numbers (SSNs). At that time, IRS management agreed to separate the duplicate use of SSNs from the issue of filing fraud and to develop a separate compliance strategy for dealing with the problem. A subsequent review of parent and dependent duplicate exemption claims was performed to provide IRS management with additional information regarding the problem's extent and to jointly test one solution for correcting a segment of the problem.

The auditors determined that action is needed to ensure that IRS can effectively reverse the continuous and costly duplicate use of SSNs. An analysis of tax return data from 1991 through 1994 identified three ways in which taxpayers improperly use dependents' SSNs, and the approximate number of occurrences and corresponding potential revenue impact for each. The average number of occurrences for (1)

duplicate uses of a SSN to claim a dependent was estimated to range from 1.2 to 2.7 million, with a revenue impact of $388 to $912 million; (2) duplicate uses of a SSN for an Earned Income Tax Credit claim was estimated to range from 170,000 to 542,000, with a revenue impact of $137 to $555 million; and (3) duplicate uses of a SSN by both a parent and a dependent was estimated to range from 660,000 to 1.8 million, with a revenue impact of $135 to $447 million.

In a cooperative effort, the auditors worked with IRS staff at one service center to issue letters, including amended return forms, to parents and dependents who both claimed the dependent's personal exemption in 1993. Their results showed that the letters were effective in prompting taxpayers to correct the duplicate claims in tax year 1993 and remain compliant in tax year 1994. IRS management agreed to identify solutions to address the problem of the duplicate use of SSNs. (IRS Report #063502)

* During the past several years, IRS has taken action to improve the accounts receivable inventory's reliability as an indicator of potential Government revenue. Internal auditors evaluated the effectiveness of IRS actions to prevent the erroneous assessment of taxes, the inclusion of these taxes in the accounts receivable inventory, and the unnecessary expenditure of IRS and taxpayer resources when collecting certain taxes.

The auditors determined that IRS unnecessarily expends valuable resources assessing and then subsequently abating a majority of cases in the Combined Annual Wage Reporting (CAWR) and Social Security Penalty programs; effective controls are needed in the Compliance Division to prevent erroneous assessments against taxpayers who file tax returns just prior to Substitute For Return (SFR) assessments; and the policy used to allow interest-free assessments on CAWR discrepancy cases does not appear to meet the requirements outlined in the Internal Revenue Code and related tax regulations.

The auditors recommended that IRS continue to pursue better access to Social Security data, and that Compliance Division employees research available data files and prevent automated SFR assessments. Management agreed to take appropriate corrective action. In deference to the IRS Chief Counsel's opinion that IRS' policy of allowing interest-free assessments on CAWR discrepancy cases is acceptable, IRS management determined that corrective action was unnecessary and the Inspection Service decided not to pursue further action. (IRS Report #065002)

* Approximately 2.3 million employment tax nonfiler cases are closed yearly without securing a taxable return. These cases are costly to process and divert resources from more productive compliance issues. Internal auditors evaluated the Master File and CAWR employment tax delinquency programs to determine if nonfilers are effectively and efficiently identified. The auditors determined that unproductive employment tax nonfiler cases can be significantly reduced by changing the way an employer's filing history is used to generate nonfiler cases and that CAWR has minimal impact on employment tax nonfiler efforts.

The auditors recommended that IRS incorporate W-2 and W-3 forms into the delinquency check process to ensure that the master file shows that employment tax returns are due from issuing employers, and reevaluate the types of CAWR nonfiler referrals that are made to the Collection Division. Management agreed with the recommendations and planned appropriate corrective actions. (IRS Report #065503)

* Although the majority of tax returns filed with IRS are paper, approaches for identifying fraud on paper returns have not kept pace with IRS efforts to detect and deter fraud on electronically filed returns. IRS internal auditors determined that IRS needs interim strategies to improve fraud detection on paper returns until the data contained on paper returns can be electronically captured.

Labor intensive manual review processes are currently used to locate, route, and review paper returns for fraud. Electronic methods of fraud detection would improve fraud control techniques for paper returns and enable IRS to better utilize limited resources. The auditors recommended that IRS implement an electronic system to select paper refund returns for fraud review, incorporate electronic scheme detection strategies when selecting paper refund returns for fraud review, and provide complete and accurate research data for examiners. IRS management agreed with the recommendations and proposed corrective action. (IRS Report #065806)

IRS Electronic Audit Research Log System

In response to a 1992 Internal Audit report, IRS implemented the Electronic Audit Research Log (EARL) system to identify employee browsing of taxpayer accounts on the Integrated Data Retrieval System (IDRS). The EARL system, which is intended to be an interim project until the Security and Communications project incorporates security controls into the TSM computing environment, is designed to identify the browsing of taxpayer accounts and is not intended to identify fraud.

The auditors determined that, although EARL has been under development since 1993, it has only a limited ability to identify browsing, and that consistent executive oversight, user involvement, and clear strategic direction are needed for EARL to meet IRS' objectives. Limited project planning, coupled with changes during the past year in executive and management officials involved in EARL's development, have resulted in a lack of strategic direction for EARL and a system that has limited ability to identify employee browsing. The auditors also found that IRS management needs to establish an optimum operational goal for the current EARL system, and concurrently develop a future direction and methodology for detecting browsing which takes into consideration organizational changes and technological advances that may impact IRS. In addition, IRS management has not developed procedures to assure that potential browsing cases are consistently reviewed and referred to management officials throughout IRS.

The auditors recommended that IRS management establish and document the strategic direction for EARL and ensure that users are involved at key points throughout the system's development. Having agreed with the recommendations, IRS management plans to develop the strategic direction for EARL and revise management information systems to provide more accurate feedback to IRS executives. Computer programs and processing procedures also will be enhanced to increase IRS' ability to cost-effectively identify browsing. (IRS Report #064810)

IRS Background Investigation and Security Clearance Programs

The IRS Business Master Plan includes providing security for information and systems through various controls, such as background investigations and security clearances. Background investigations are conducted to determine if individuals are suitable for IRS employment. In addition, each IRS position is assigned a sensitivity code based on various risk factors, including access to classified information. The sensitivity codes are used to determine the type of background investigation required. For example, employees in positions which are classified as high risk are required to have a more thorough background investigation, along with an update investigation every 5 years.

An evaluation of the effectiveness of IRS' background investigation and security clearance programs revealed that IRS needs an effective control system to ensure that all required background investigations are conducted; additional guidelines are required to ensure the proper resolution of discrepancy cases that were identified during the 1994 conversion to the Security Entry and Tracking System; and more effective processes are needed to assure that certain security clearance holders receive their 5-year update investigation and that security clearances are canceled when employees leave IRS.

IRS internal auditors recommended that IRS management issue guidelines to personnel offices requiring the use of computerized data to periodically generate reports which identify employees who need initial background investigations, more thorough background investigations, and/or 5-year update investigations. The auditors also recommended that IRS develop a computer generated report to alert the Personnel Security Team when clearances need to be canceled. Management agreed with the recommendations and plans to take appropriate action. (IRS Report #062904)

Information Security Over IRS Small Scale Computer Systems

In August 1994, IRS internal auditors issued a report entitled "Review of Information Security Over Small Scale Computer Systems." The report concluded that sensitive IRS information was vulnerable to disclosure, fraudulent manipulation, theft, and loss. In response, IRS management conducted security self-assessments and certified that each network and stand-alone system, which processed or stored taxpayer data, was secure. During a follow-up to the 1994 review, internal auditors examined controls over the physical and access security of selected microcomputers and local area networks to determine whether taxpayer data remains at risk. The auditors also evaluated the adequacy of managerial oversight and guidance, and the effectiveness of IRS management's self-assessment and certification validation processes.

The auditors concluded that, while IRS management is concerned about data security and has taken actions to improve conditions, security over sensitive information remains much as it was during the 1994 review. For example, employees continued to reveal passwords over the telephone; equipment and data continued to be inadequately protected, with employees without a "need to know" able to access data; and data continued to be retrieved from computers that were slated to be excessed. In addition, IDRS and other taxpayer data printouts were left in open areas, and IDRS information downloaded onto personal computers was inadequately password protected.

The auditors recommended that IRS management perform another self-assessment and validation of IRS' systems; develop a plan that will budget for the expected costs of bringing IRS into compliance within 2 years; and ensure that the FMFIA process identifies systems with inadequate security capabilities or improper configurations, and assures that future purchases meet minimum security requirements. Management agreed with the recommendations and proposed corrective actions. (IRS Report #066401)

Customs Centralized Examination Stations

As a result of a 1994 audit of Customs' Centralized Examination Station (CES) Program, the OIG recommended the suspension of a Los Angeles area warehouse that was licensed and bonded by Customs. The OIG also recommended that Customs strengthen program management and controls. Customs proposed regulations in January 1996 to enable it to take action if a CES owner, the entity, or a person having substantial control of the CES operation committed, was indicted for, or was convicted of a felony, a misdemeanor involving theft, or a theft connected crime. The final regulations were effective August 26, 1996.

The owners and certain employees of the warehouse were indicted in 1994 in a case under the jurisdiction of the Immigration and Naturalization Service. Subsequently, two officers of the warehouse pled guilty to charges in the indictment, and Customs initiated action to revoke their licenses to operate a Container Freight Station, a Bonded Warehouse, and as a Cartman. Customs has now revoked those licenses and, based on authorities in the new regulations, will be revoking the CES designation. (Report #OIG-95-012)

Material Loss Review

Section 38(k) of the Federal Deposit Insurance Act requires the OIG to report on thrift and national bank failures that result in a material loss to the Federal deposit insurance funds. As reported in the September 1995 Semiannual Report, the OIG conducted a review of Mechanics National Bank, a failed bank that had been supervised by OCC. In addition to discussing the conditions and causes of the bank's failure and the adequacy of OCC's supervision, the report also noted that OCC enforcement actions could have been more proactive and progressively severe when the bank continued to operate in an unsafe and unsound manner after a series of onsite examinations and enforcement actions.

The OIG report indicated that CMP could have been used as one means of addressing the continued unsafe banking practices. In June 1996, OCC effected a CMP and Restitution payments, which totaled $25,000, against the individual who served as both the bank's former Director and former Chairman. A Prohibition Notice prohibiting the former official from any future participation in the affairs of any insured depository institution also was effected. (Report #OIG-95-134)

Secret Service Customer Service Activities

Secret Service has a tradition of providing high quality customer service in all that it does to fulfill its two main missions, criminal investigations and protection. With the enactment of Executive Order 12862, "Setting Customer Standards," Secret Service has developed a formal plan to document and implement goals and strategies to provide the very best customer service to all recipients of its services (i.e., to provide "value for money" to American taxpayers).

The Office of Inspection continues to formulate support strategies to enhance the Secret Service Customer Service Plan, which includes developing inspection protocols to measure customer satisfaction both internally and externally. Customer service is an integral part of Secret Service's overall strategic plan and the Office of Inspection will continue to play a key role in keeping customer service a priority. (Secret Service Inspection)

MANAGEMENT ASSESSMENTS

Community Development Financial Institutions Fund

The OIG continued to provide technical assistance to the Community Development Financial Institutions (CDFI) Fund, at the Fund's request. In an effort that was critical to ensuring the integrity of award monitoring, OIG evaluators researched, collected, and analyzed procedural information from several Federal and private organizations. The SBA, Departments of Labor and Housing and Urban Development, Neighborhood Reinvestment Corporation, Ford Foundation, and State of Michigan were contacted to obtain information on policies and procedures covering award monitoring.

After analyzing the monitoring policies and procedures in detail, the OIG tailored several procedures used by the organizations to the Fund's needs. Suggested award monitoring elements included status reports, site visits, and adequate records maintenance. The issued report, "Award Monitoring Procedures," was intended to provide guidance through examples for use in managing the Fund.

The CDFI Fund was established by the Community Development Banking and Financial Institutions Act of 1994. The Fund consists of two separate programs, the CDFI Program and the Bank Enterprise Award Program, with an initial funding level of about $50 million. These programs are designed to facilitate the flow of lending and investment capital into distressed communities and to individuals who have been unable to take full advantage of the financial services industry. Recently, the Fund's responsibilities were expanded to include administering the Presidential Awards for Excellence in Microenterprise Development. (Report #OIG-96-E15)

Closure of the Thrift Depositor Protection Oversight Board Staff Offices

Under Treasury Order 114-02, the Inspector General has the authority to "act as Inspector General for the Thrift Depositor Protection Oversight Board" (the Board). As part of this responsibility, the OIG conducted a review of the closure of the Board staff offices. The OIG report disclosed that the Board properly accounted for and transferred all property, equipment, records, files, and administrative and program responsibilities upon closure of the staff offices.

All of the Board's accounts have been properly accounted for, with the exception of the Advisory Board Expense account. The staff offices were unable to reconcile the account for the year ending September 30, 1995. The Board agreed with the OIG's recommendation to correct the situation before the final independent audit is conducted for the year ending September 30, 1996, and has already taken corrective action to implement the recommendation. The Board's Acting Executive Director and its accountant, the General Services Administration, were able to provide sufficient documentation to reconcile the Advisory Board Expense account. (Report #OIG-96-100)

ATF Inspections

During the 6-month period ending September 30, 1996, the ATF Office of Inspection conducted 7 full inspections. The inspections, which involved the review of 47 separate headquarters and field locations, included areas such as personnel, training, office security, internal controls, and a qualitative and quantitative analysis of productivity. In addition, all employees were interviewed regarding morale, supervision, and work-related problems.

The offices inspected generally were in compliance with no significant deficiencies. Minor deficiencies and/or variances identified during the inspections were discussed with affected managers at the closing conferences and documented in the final inspection reports, which were disseminated to all affected ATF managers. Inspection team leaders briefed the Director of ATF after each inspection. (ATF Inspection)

Customs Inspections and Financial Undercover Audits

The Customs Office of Internal Affairs conducts various types of reviews, including comprehensive inspections, spot checks, assessments, and financial audits of undercover operations. The reviews gauge the effectiveness and efficiency of the offices involved and verify the implementation of strategic plans and compliance with policy and established operating procedures. During the 6-month period ending September 30, 1996, the Customs Office of Internal Affairs conducted eight comprehensive inspections, including three Special Agent in Charge offices, two port locations, and three Customs Foreign Attaché offices.

Office of Internal Affairs inspections are conducted by a multidisciplinary team of Internal Affairs staff and field managers from peer organizations, who also are

known as field inspectors. Typically senior level personnel, the field inspectors participate in a training week prior to the inspection, during which the team reviews the results of research and analysis conducted on the location to be inspected. Based on the review, specific areas are targeted for on-site inspection. Having field inspectors, who possess current operational knowledge, review functions in which they have expertise enhances the credibility of the inspections. In addition, the field inspectors have an opportunity to observe a variety of management styles and operational procedures. This process has been mutually enriching and has broadened the perspective of those associated with it.

A program of interim spot check inspections, the first of which was conducted in a Special Agent in Charge office, was initiated as a complement to the comprehensive inspections. Of note is the fact that the volume of investigative activity, seizures, and arrests along the Southern Border has substantially increased. Nine financial audits of closed undercover operations also were conducted during the reporting period. The audits are required by Title 19 United States Code 2081, Section 3131, and seek to provide assurance that the financial records of undercover operations are in accordance with applicable policy and procedures. The undercover operations involve highly sensitive money laundering, drug trafficking, fraud, and strategic investigative cases, and the audit findings are required to be reported to the Department and the Congress. (Customs Internal Affairs)

Secret Service Inspections

Established on July 1, 1950, the Secret Service Office of Inspection is charged with reviewing policies, procedures, and their implementation in the Secret Service. The Office of Inspection's programs include organizational analysis and cover areas such as personnel, office security, communications, training, management, and supervision. In addition, every employee is afforded a confidential interview to assess the quality of management and supervision within Secret Service. During the 6-month period ending September 30, 1996, the Office of Inspection conducted 35 inspections of field offices, divisions, and resident offices, including follow-up visits, re-inspections, and unannounced audits.

All of the field offices, divisions, and resident offices that were inspected were in compliance with Secret Service policies and procedures, with the exception of minor discrepancies that were brought to the attention of the agents in charge and corrected during the course of the inspections. Offices that previously had received recommendations were re-inspected and found to be in compliance. In addition, the unannounced audits did not reveal any misuse of Government funds or unauthorized transactions. (Secret Service Inspection)

ATF Management Enhancement Program

A Management Enhancement Program has been established within ATF's Inspection Division to serve as a training and developmental tool for ATF managers. The program, which targets both new and veteran managers, aims to enhance managers' overall knowledge of ATF programs, policies, and procedures by enlisting their participation, along with permanent Inspection Division staff, in operational reviews. Recently appointed mid- and senior-level field managers are selected to participate in the program prior to assuming their new positions. Through the program, the new managers are exposed to and trained in the appropriate application of a broad spectrum of administrative and operational issues.

Program participation by seasoned managers has dual benefits. First, the managers are exposed to the review process and receive refresher training in operational and administrative procedures that have been identified as being critical to ATF's efficient operation. In addition, the managers' current, hands-on knowledge of operational issues is included in the process, thereby helping to ensure that inspection procedures evolve as new issues of importance arise. (ATF Inspection)

Secret Service Participating Inspector Program

In keeping with the objectives and goals of Secret Service's strategic plan, the Participating Inspector Program (PIP) was established in January 1995 as a developmental learning assignment for Secret Service managers. The PIP enhances the inspection and review process, provides a more meaningful feedback to offices and divisions following an inspection, and broadens the experience and knowledge of the special agent and administrative managers who participate in the program.

The PIP has two major objectives. First, the Office of Inspection uses PIP to enhance supervisors' management skills by providing them with the opportunity to review the various Secret Service program areas encountered during an inspection. In addition, PIP allows participating inspectors to experience the different management styles and ideas that are generated from program areas outside of their specific expertise. The PIP's second objective is to utilize selected support personnel who are especially proficient in their specialized program areas to share their expertise with offices and divisions identified as needing program specific assistance during an inspection. (Secret Service Inspection)

INFORMATION TECHNOLOGY OVERSIGHT

Tax Systems Modernization

The TSM is the centerpiece of IRS efforts to reengineer business processes, information systems, and organizational culture. Since 1988, IRS has invested $2.7 billion to create an environment where taxpayer accounts are updated rapidly and taxpayer information is readily available to IRS employees in order to respond to taxpayer inquiries. The IRS Inspection Service and others have provided extensive audit coverage of the costs and difficulties associated with modernizing IRS information systems. The Inspection Service still considers TSM an FMFIA material weakness and categorizes TSM control weaknesses as "Program Management," "Infrastructure," and "Financial Management."

Since Fiscal Year 1991, the Inspection Service has issued 86 reports relating to TSM initiatives, including three in the second half of Fiscal Year 1996. Each of these reports has been made available to the Department for its use in facilitating oversight. In addition, IRS internal auditors have another seven TSM reviews in various stages of completion. All reports issued in the 6 months ending September 30, 1996 are summarized below.

* The IRS TeleFile Program is an interactive computer system that is available to eligible taxpayers toll-free, 24 hours-a-day, 7 days-a-week via a touch-tone telephone. During the 1996 filing season, IRS expanded the program nationwide, with TeleFile returns being processed through the Electronic Filing System at the Cincinnati Service Center, the Tennessee Computing Center, and the Ogden Service Center (OSC).

IRS internal auditors determined that, overall, IRS management effectively prepared for and successfully implemented the nationwide expansion of the TeleFile Program. Specifically, the TeleFile interview script and computer programs were adequately tested and any significant problems were resolved prior to implementation; taxpayer demand for the program and related filing volumes were adequately met and calls correctly overflowed to the OSC; prior Inspection Service recommendations for improved training and increased marketing efforts for the program were effectively implemented; and budget constraints and uncertainties did not adversely affect IRS management's ability to administer the program during the 1996 filing season.

The auditors also determined that although the program was implemented nationwide and IRS had been processing returns at the three sites since January 11, 1996, a Security Certification and Accreditation was not completed. Without the certification and accreditation, IRS has no assurance that taxpayer data are adequately secured. The auditors recommended that IRS management ensure that TeleFile systems are adequately tested and that a Security Certification and Accreditation is completed. Management agreed with the recommendation and took corrective action. (IRS Report #064401)

* Following its implementation, EFTPS will serve as the Government's electronic payment processing system. The prospective system was reviewed by IRS internal auditors before its scheduled implementation date of March 1996. The auditors determined that, while applicable general requirements of the Federal tax deposit system were present in EFTPS' design, other significant issues needed to be brought to the attention of IRS management. The EFTPS developers and users disagreed about processing, which could have contributed to the delaying of EFTPS' March 1996 implementation and may still jeopardize the successful enrollment and payment processing of over 1 million taxpayers, who were required to start paying taxes electronically on July 1, 1997 by the North American Free Trade Agreement (NAFTA).

The auditors recommended that EFTPS developers and users complete the system requirements and design, and that IRS management provide training for the EFTPS pilot. In response, IRS management plans to establish change control procedures for addressing significant changes to EFTPS User Requirements; initiate steps to address quality review and training issues; monitor control file operations until assurances are obtained that EFTPS will provide the tools necessary to ensure control file integrity; and use automated alternatives, whenever possible. (IRS Report #064202)

* The DPS was a major part of IRS' effort to automate tax return processing through an image-based tax processing system. The DPS's primary objective was to be a transitional system that converted a residual volume of paper returns into an electronic format while IRS increased the volume of electronic filers. As of September 1995, IRS had invested $245 million in DPS, with total costs through Fiscal Year 2000 estimated at $828 million. Internal auditors evaluated the effectiveness of DPS' implementation and determined that IRS effectively took corrective action for some of the recommendations from a previous DPS audit.

Although IRS attempted corrective actions to implement the recommendation that it review current programming resources and objectives for the development of critical DPS sub-systems, the actions were not effective. Consequently, IRS continued to experience setbacks in the delivery of major DPS sub-systems. As part of its reassessment of TSM projects, IRS recommended a scaled-back DPS alternative, which, the Inspection Service determined, significantly altered and deferred the original functionality envisioned for DPS. In addition, the alternative included overly optimistic timelines that seriously impacted the credibility of its estimated cost. The auditors concluded that failure to meet the timelines could further increase costs and delay the complete implementation of DPS at all Submission Processing Centers. Furthermore, continued delays in the development of DPS subsystems indicate that IRS personnel may not have the required technical expertise.

The auditors recommended that IRS consider canceling the DPS contract and all related obligations to minimize current expenditures and contract withdrawal penalties. IRS could continue using the Distributed Input System (DIS), or a replacement system, to process paper tax returns while IRS implements methods for increasing the volume of electronic filers. Since issuance of the draft audit report, IRS has utilized GAO's best practice methodology to prioritize its TSM technology investments. The current DPS design was designated as a low priority, and IRS consequently carried out a detailed review of its options for this program, including the operational impact of and other organizations' experiences with image and data capture technology; an assessment of whether reengineering can significantly reduce the volume of paper returns; and a test of the major technical and operational capabilities during the DPS Prototype.

After completing the above analyses, IRS, with concurrence from the Department's Modernization Management Board, decided that completing the DPS program was not cost-effective given its projected Return on Investment and overall reductions in systems development funding. The program, therefore, was terminated in October 1996. In addition, although it was not classified as a TSM project, partial replacement of DIS to key-enter data from paper tax returns, was identified as an investment priority. Internal auditors plan to continue reviewing DPS implementation by closely evaluating the progress and results of the analyses and assessing the analyses' impact on TSM. (IRS Report #064302)

CONTRACT OVERSIGHT

$2.4 Million in Contract Costs Questioned

All Treasury bureau requests for preaward, cost incurred, and other contract audits are referred to the OIG. The OIG either performs the audits, refers the audits to the Defense Contract Audit Agency (DCAA) and other cognizant Government audit agencies, or contracts with an IPA.

As shown on page 35, the OIG performed or contracted for a total of 26 contract audits which questioned $2.4 million in Treasury contractor costs. Contracting officers agreed to savings and disallowed costs of over $6.3 million, including amounts which were questioned prior to March 31, 1996. An additional $9.9 million in potential monetary benefits, including amounts which were questioned prior to March 31, 1996, are awaiting completion of negotiations with contractors.

Preaward audits, which provide information on whether pricing proposals are fair and reasonable, are used by contracting officers in negotiating contracts. During a prior period, United States Postal Inspection Service auditors questioned $2,725,183 of the costs included in a $13,160,405 proposal submitted to IRS, including $48,491 of unsupported costs. After negotiations, which were conducted in March 1996, IRS contracting officials sustained $2,691,076, or 99 percent of the questioned costs. The United States Postal Inspection Service performed an audit of the proposal for maintenance and repair services to 20 composite mail processing systems located in IRS Service Centers.

The audit disclosed that the majority of questioned costs related to labor, indirect expenses, and a maintenance subcontract. The contractor's proposed labor rates were based on average rates paid employees for each labor category while the auditors' recommended labor rates were based on weighted averages. The contractor's method of computing labor rates did not consider the effects of increases or decreases in personnel due to turnover or reassignments from one category to another. The contractor's forecasted indirect rates were based on its Fiscal Year 1995 profit plan, whereas the auditors' recommended rates include adjustments to the forecasted rates to reflect more accurate, current, and complete information. Costs proposed for a maintenance subcontract were adjusted by the auditors to reflect more current data and to cover the entire periods of contract performance. (Report #OIG-95-120)

Termination settlement audits are used as the basis to pay contractors for preparations made and work done under the terminated portions of contracts. A second audit questioned $537,916 of the amount included in a $2,647,985 termination settlement proposal submitted to FMS. After negotiations, which were conducted during August 1996, FMS contracting officials attained savings of $307,209. The DCAA performed an audit of the proposal for teleprocessing services, including conversion of Government On-Line Accounting Link System applications. FMS terminated the contract for the convenience of the Government effective August 31, 1995, resulting in the

COMPLETED CONTRACT AUDITS

APRIL 1, 1996, THROUGH SEPTEMBER 30, 1996

PREAWARD PROPOSAL OVERHEAD AUDITS** OTHER CONTRACT

AUDITS* AUDITS*

FUNDS

NUMBER TO BE PUT NUMBER NUMBER

OF TO BETTER OF COSTS OF COSTS

REPORTS USE REPORTS QUESTIONED REPORTS QUESTIONED

_CUSTOMS_

3 $178,202 4 $72,220 0 $0

_DO_

1 16,600 2 21,485 0 0

_IRS_

4 1,520,728 3 0 4 0

_BEP_

0 0 2 292,049 0 0

_ATF_

2 260,199 1 0 0 0

_TOTALS***_

10 $1,975,729 12 $385,754 4 $0

* One preaward audit was accomplished by an IPA and the remaining nine were accomplished by DCAA auditors. All of the four "other" contract audits were accomplished by DCAA.

** All twelve overhead audits were accomplished by DCAA auditors.

*** The monetary amounts are reflected in the table on monetary benefits from OIG audits in the Statistical Summaries chapter of this report.

contractor's submission of the termination settlement proposal. The Government was unable to provide the software system configuration data. Thus, the contractor was unable to perform the contract effort.

The audit disclosed that the majority of the questioned amount ($440,836) represents profit, which is unallowable under Government regulations. The DCAA questioned profit in excess of the 5 percent profit rate included in the contractor's best and final offer at the time of the contract award. The contractor's termination settlement proposal, in fact, contained profit of 26.31 percent. The DCAA also found that the contractor's termination settlement proposal exceeded the contract award price by $81,457. Government regulations limit the total amount payable for a settlement to the contract price. (Report #OIG-96-036)

IRS Service Center Recognition/Image Processing System Procurement

In February 1993, IRS awarded an $87.7 million fixed-price, requirements-type contract for its Service Center Recognition/Image Processing System (SCRIPS) procurement. The contract was modified 57 times through October 1995, with the result that the total cost has increased to approximately $121.4 million. Internal auditors initiated this review as a result of numerous concerns involving the SCRIPS procurement that were identified during an audit of the SCRIPS Rollout Process (IRS Report #062315). The auditors' objective was to determine whether the SCRIPS procurement followed established contracting laws, regulations, and procedures; SCRIPS deliverables met contractual requirements for quality and timeliness; and payments to the vendor for SCRIPS deliverables were proper.

The winning vendor was required to furnish at no cost all maintenance as specified in the contract during a 90 day warranty period. Following the warranty period, the vendor was required to provide maintenance at prices established in the contract. However, the auditors determined that the vendor overcharged IRS over $200,000 for maintenance. The auditors recommended that contracting officials and users understand their responsibilities for contract deliverables; the SCRIPS contract be modified only for deliverables not in the original contract; IRS management determine if automated data processing support services should be contracted out; and the SCRIPS contract properly reflect maintenance rates. Management agreed to each issue identified in the report and has planned or taken corrective action. (IRS Report #063708)

INVESTIGATIVE ACTIVITIES

The OIG and the Offices of Internal Affairs and Inspection at ATF, Customs, IRS, and Secret Service carry out many activities designed to protect the integrity of the Department and its bureaus. These activities range from preventive measures such as integrity awareness programs to investigations of civil and criminal fraud. Because of the sensitive nature of much of the Department's work, this is a high priority area for the OIG and the Offices of Internal Affairs and Inspection.

INTEGRITY AWARENESS AND DETERRENCE

Integrity Awareness: A High Priority

Integrity awareness remains a high priority for Treasury internal investigators. During the last 6 months, the Offices of Internal Affairs and Inspection at ATF, Customs, IRS, and Secret Service gave over 399 presentations to 11,225 employees. Highlights of these programs follow:

* IRS Inspection Service auditors and investigators routinely make presentations to IRS personnel that are designed to heighten their awareness of ethics and integrity. These presentations address various topics and are tailored to the particular needs of the audience. For the 6-month period ending September 30, 1996, 351 presentations were made to 10,139 employees.

* Customs' Office of Internal Affairs special agents conduct yearly integrity and bribery awareness presentations. In the past 6 months, Internal Affairs agents made 42 presentations to 526 employees.

* ATF Inspection special agents and managers present integrity awareness and Ethics in Government briefings at bureau conferences, meetings, and supervisory, new agent, and inspector training classes. During the 6-month period, Inspection made six integrity awareness presentations to 160 employees.

* Secret Service's Office of Inspection works closely with all elements of the Secret Service to foster the highest standards of integrity and ethics. To this end, inspectors conducted integrity and ethics briefings for 400 employees, including criminal investigator recruits, experienced criminal investigators, special officers, Uniformed Division Officer recruits and officers, and administrative personnel. (Offices of Internal Affairs and Inspection)

Customs' Physical Security Program

In the past few years, a number of security incidents, including the bombing of the Oklahoma City Federal Building, have resulted in a heightened sense and awareness of security issues in the Federal Government. Reflecting these concerns with security, the Commissioner of Customs requested the OIG to conduct a review of Customs' physical security program to determine its effectiveness. The security program includes physical security, which covers facilities, airports, and communications security; information security, which includes classified documents; automated information security; executive protection; and technical surveillance countermeasures. Customs' Office of Internal Affairs, Office of Security Management, is responsible for the security program.

The OIG's review concluded that security management within Customs had been de-emphasized over the past few years, rendering Customs vulnerable in several of its security program areas. Staff assigned to perform security-related work had been reduced due to other priorities and initiatives. In addition, the quality and number of physical security inspections, along with communications involving national security information, have been seriously deficient. Controls over and the monitoring of the management and accountability of classified documents also needed improvement. The review found that Customs employees at various facilities may be working in unsafe environments, the safety of the general public and airline employees doing business in Customs areas and facilities may be at risk, and information, equipment, and materials at Customs facilities may not be adequately safeguarded or protected. On August 9, 1996, the OIG issued a report that contains 20 recommendations for improving Customs' security program. (OIG)

Special Investigations Conducted by Secret Service

The OIG Office of Oversight issued a report on Secret Service's Office of Inspection. Based on a review of 30 of 61 Special Investigations completed during Calendar Year 1994, the OIG noted that due professional care was not consistently exercised in conducting the investigations and that reports of investigation did not routinely address all relevant aspects of the investigation. In addition, the OIG does not believe appropriate disciplinary action was always taken by Secret Service management.

The OIG provided several recommendations to improve the quality of the investigations that the Office of Inspection conducts. For example, the OIG recommended that the Director of Secret Service ensure that responsible management officials take appropriate action with regard to evidence presented in a report of investigation. Secret Service agreed to implement changes or take actions that would adequately address the OIG's recommendations. (OIG)

CRIMINAL INVESTIGATIONS

Criminal investigations by the OIG and the Offices of Internal Affairs and Inspection at ATF, Customs, IRS, and Secret Service include investigations of procurement fraud; assaults and threats against employees; bribery; allegations of criminal acts, such as embezzlement and theft, by employees; referrals from national integrity projects; and allegations of corruption against IRS by practitioners, such as attorneys and certified public accountants.

OIG Special Agents Honored by United States Attorneys

During the 6-month period ending September 30, 1996, the United States Attorneys for the District of Columbia and the Eastern District of Virginia recognized three special agents from the OIG's Northeastern Region for their outstanding efforts in conducting criminal investigations during the past year. The United States Attorney for the District of Columbia honored Special Agents Sandra Macadoff and Rosa Howard at his District's Sixteenth Annual Law Enforcement Awards Ceremony for conducting a contract fraud investigation that resulted in criminal and civil penalties for the defendant of over $4 million dollars. The defendant also was sentenced to 37 months of incarceration.

During her District's 1996 Agents Award Ceremony, the United States Attorney for the Eastern District of Virginia honored Special Agent John Zemlan for conducting an investigation of a Treasury employee's illegal disclosure of confidential information to a private investigator. Due to severity and potential harmful effect of the disclosure, the Treasury employee was incarcerated for 30 days and ordered to pay criminal and civil penalties of over $100,000. (OIG)

BEP Stamp Theft

The OIG and Secret Service, with the assistance of the BEP Security staff, conducted a joint investigation into the theft of $5,600 in United States postage stamps from BEP. In March 1996, a BEP employee, who attempted to exit BEP with rolls of stamps on his person, was searched by a BEP police officer when the metal detector sounded an alarm. The BEP employee was arrested and a subsequent search of his locker and vehicle yielded additional rolls of stamps. After resigning from BEP, the employee pled guilty to the theft of Government property on April 25, 1996. On September 19, 1996, the employee was sentenced to 3 years of supervised probation and fined $2,300 for the theft of Government property. An additional $2,300 in cash which was seized from the employee's automobile also was retained by the Government. (OIG and Secret Service Inspection)

BEP Employee Uses False SSN

The OIG, with the assistance of the BEP Security Office, conducted an investigation involving a BEP employee who used a false SSN and an altered W-2 form to obtain a loan. The investigation disclosed that, based on the false information provided by the employee, a loan was approved. On April 5, 1996, the employee was fired by BEP and a bench arrest warrant was issued due to the employee's non-appearance in court. In September 1996, the employee pled guilty to using false statements to obtain credit and was ordered to pay $1,800 in restitution. The employee also was found guilty of two failure to appear charges and was sentenced to 180 days of imprisonment, with 170 days suspended. (OIG)

Government Credit Card Abuse by IRS Employee

The OIG initiated an investigation after learning that an IRS employee made $13,000 in personal charges on his Government American Express card. At the time of the credit card abuse, IRS was in the process of firing the employee for false statements on his Standard Form 171. IRS terminated the employee on July 1, 1996. Although the employee vacated his home after an arrest warrant was issued, the OIG located and subsequently arrested him on September 5, 1996. The employee was indicted for theft on September 27, 1996. A trial date is pending. (OIG)

OTS Employee Indicted for Tax Evasion

The OIG investigated allegations that an OTS employee failed to pay taxes from 1991 through 1994. The employee subsequently was indicted on eight counts for failing to pay District of Columbia taxes, and a trial date has been set for October 1996. (OIG)

Travel Agency Employee Arrested for Credit Card Fraud

The OIG investigated a temporary employee of OCC's contract travel agency for credit card fraud. The investigation disclosed that the temporary employee used Government and personal credit card information, which belonged to at least three OCC employees, without permission for a total loss of nearly $12,000. The temporary employee was arrested by the OIG on June 6, 1996, and is awaiting trial. (OIG)

Customs Inspector Resigns After Being Found Guilty

On July 8, 1996, a senior Customs inspector was found guilty of making false material statements to the Department of Labor in order to conceal the fact that he had embezzled over $14,000 from the National Treasury Employees Union (NTEU) account. The inspector faces a possible maximum sentence of 10 years incarceration and/or a $250,000 fine. The judge allowed the inspector, who was on unpaid suspension from Customs, to remain free on personal recognizance until his sentencing. On July 11, 1996, the inspector's port director informed Internal Affairs that the inspector wanted to resign from Customs. The inspector subsequently submitted a letter of resignation. Sentencing of the inspector is scheduled for November 7, 1996. (Customs Internal Affairs)

Customs Inspector Resigns Through Settlement Agreement

A Customs inspector, acting through legal counsel provided by NTEU, entered into a settlement agreement with Customs that resulted in his voluntary resignation on July 18, 1996. In March 1995, an American citizen alleged that the Customs inspector had abused his authority, had disclosed enforcement activity to a Canadian citizen, and was involved in a conflict of interest. The Customs inspector, who was authorized for outside employment as a barrister (attorney) in Canada, referred the American citizen for a secondary examination in furtherance of his legal practice. At the time of the incident, the Customs inspector represented the Canadian citizen in civil litigation against the American citizen.

An Internal Affairs investigation revealed that the secondary examination of the American citizen gave the appearance of a conflict of interest, and that the Customs inspector disclosed information about the secondary examination to his Canadian client. In addition, the Customs inspector solicited the help of a Canadian Government official in an attempt to obstruct the investigation, and made conflicting statements to Internal Affairs agents while under oath. The United States Attorney's Office declined prosecution of the Customs inspector for making false statements. (Customs Internal Affairs)

Customs Employee Sentenced for Bribery and Disclosure of Confidential Government Information

On May 20, 1996, a Customs operational analysis specialist was sentenced to 24 months in prison for bribery and 24 months in prison for the disclosure of confidential Government information. Both sentences will run concurrently. In November 1995, the specialist was arrested by Internal Affairs after he accepted $25,000 from a cooperating source, who he believed was a member of a Colombian drug cartel, for providing sensitive and classified law enforcement documents. (Customs Internal Affairs)

Forgery, False Statements, and Export of a Stolen Vehicle

An individual who was not a Government employee pled guilty to false statements on May 16, 1996, and was sentenced to 6 months of imprisonment and 3 years of supervised release. Investigation by Internal Affairs revealed that the individual forged a letter on Customs letterhead, which directed a shipping company to lift an earlier enforcement hold and allow the release of a vehicle that had been stolen in January 1996 and fraudulently exported to Germany. (Customs Internal Affairs)

Former Customs Inspector Sentenced for Conspiracy, Bribery, and Aiding and Abetting

On April 10, 1996, a former Customs senior inspector was sentenced to concurrently serve 241/4 years of imprisonment for conspiracy and 15 years of imprisonment for bribery and aiding and abetting. Subsequently, the former inspector will concurrently serve 5 years of supervised release for conspiracy and 3 years of supervised release for bribery and aiding and abetting. The former inspector also was ordered to immediately pay a $5,000 fine to the Government. An in-depth investigation by Internal Affairs corroborated the former inspector's involvement in a large-scale narcotics smuggling conspiracy on the Southwest border. (Customs Internal Affairs)

Airport Employees Sentenced for Attempted Possession and Distribution of Cocaine

On April 12, 1996, a John F. Kennedy International Airport employee was sentenced to 3 years of supervised probation for the attempted possession and distribution of cocaine. A second airport employee was sentenced to 18 months (time served) for the same charge. The two individuals were the last of seven defendants to be sentenced as a result of an Internal Affairs investigation of a conspiracy to import marijuana and cocaine that was reported in the September 1995 Semiannual Report. (Customs Internal Affairs)

IRS Impersonation Cases

Every year, taxpayers are swindled out of thousands of dollars by individuals posing as IRS employees or misrepresenting IRS. The IRS Inspection Service is responsible for investigating these occurrences. Actions were taken or initiated on several significant cases during the last 6 months.

* Seven individuals were indicted for conspiracy and wire fraud in connection with a telemarketing scheme in which victims were contacted by telephone, told that they were entitled to a monetary prize or award, and induced to send payment for a fee or service incidental to the transmission of their winnings. The telemarketing scheme defrauded at least 200 victims of up to $1 million. In May 1996, three of the seven individuals were convicted of conspiracy and wire fraud. One of the three received a sentence of 5 years and 4 months incarceration, the second received a 3-year alternate sentence, and the third received a sentence of 2 years.

In December 1995, one of the seven individuals had been convicted of conspiracy and wire fraud and sentenced to serve 21 months for each count. Two additional individuals pled guilty in May 1996. The first defendant received 8 months of incarceration, and the second received 14 months of incarceration and a 3-year alternate sentence. The last of the seven individuals pled guilty on

June 14, 1996, and was sentenced to 6 months of incarceration and a 2-year alternate sentence.

An investigation was initiated after a roommate of one of the individuals advised the Inspection Service that the individual and her brother were operating a telemarketing scheme out of her residence. In order to avoid detection by law enforcement personnel, the telemarketing business relocated frequently. The seven individuals and their co-conspirators deliberately targeted the elderly and other people with a history of vulnerability to telemarketing scams, purchasing lists of names that identified individuals who previously spent money in response to telemarketing overtures. The price paid for the names was based upon the perceived vulnerability of the potential victims.

The investigation disclosed that one of the telemarketing schemes used by the individuals involved pretending to represent a law firm and advising victims that the firm had recovered uncollected money from contests or IRS refunds for them. The seven individuals also claimed to have recovered money previously lost by the victims in telemarketing scams involving fraudulent companies. Victims were told that their prize or award ranged from $10,000 to $50,000 and subsequently were instructed that they had to wire between $500 and $3,000 for Federal taxes, insurance, and attorney's or security fees before they could collect the funds.

To further the scheme, the individuals often encouraged the victims to verify the legitimacy of their organization by calling a supposed state better business bureau or consumer affairs agency. In fact, the individuals provided their own telephone number to the victims to call. Once the victims sent their pre-payment, the individuals did not send the "recovered" funds and usually did not return the victims' phone calls. In addition, some victims, who were identified as being especially vulnerable or forgetful, were defrauded more than once by the individuals.

* On June 26, 1996, an individual, who impersonated an IRS agent on numerous occasions to obtain personal and financial information from taxpayers, was sentenced to 12 years of incarceration for theft. The individual defrauded taxpayers of thousands of dollars by using the data he acquired to withdraw money from his victims' bank accounts.

In 1995, Secret Service advised IRS that the individual had been arrested for credit card fraud after contacting a taxpayer by telephone and identifying himself as an IRS agent who wanted to verify information from the taxpayer's 1994 return. From that call, the individual obtained the taxpayer's SSN and bank account and credit card numbers. The following day, a bank notified the taxpayer's wife that an individual posing as her husband had attempted to withdraw money from their account. One month later, a second taxpayer contacted the IRS Inspection Service to report that an individual identifying himself as an IRS agent had called in order to verify some information. After the second taxpayer provided his SSN and bank account numbers, he determined through his caller ID that the individual was not an IRS employee. The second taxpayer later discovered that the individual, posing as the taxpayer, had forged two checks totaling several thousand dollars.

A third taxpayer interviewed by IRS inspectors provided a similar account of being contacted by an individual who purported to be an IRS agent conducting a telephone audit. As in the first two cases, the taxpayer provided personal and financial information to the caller. During a subsequent visit to his bank, the taxpayer discovered that nearly $900 had been withdrawn from his account. A fourth taxpayer contacted by the individual refused to provide any information over the telephone. All of the taxpayers telephoned by the individual shared his first initial and last name, enabling him to more easily pose as them.

Using address information obtained from the second taxpayer's caller ID, IRS inspectors contacted the occupant of the property, who stated that she shared the apartment with her boyfriend and who consented to a search of the apartment. The inspectors then found a telephone book in which the individual had highlighted names that were similar to his. After a 2-day surveillance, IRS inspectors and local police arrested the individual, who eventually admitted to impersonating an IRS agent to obtain financial information from other individuals and who subsequently confessed to withdrawing funds from those individuals' bank accounts and using their credit card numbers. (IRS Inspection)

Illegal Disclosure of IRS Special Agent Report

A Department of Justice (DOJ) tax attorney was convicted of criminal contempt in November 1993 for providing an IRS Criminal Investigation Division (CID) Special Agent Report to the targets of a CID investigation. One of the targets of the CID investigation pled guilty to conspiracy and received 3 years of incarceration, and the other pled guilty to conspiracy and income tax evasion and received 1 year of incarceration and a 2-year alternate sentence. In March 1996, two additional individuals were arrested and indicted for originally eliciting the illegal disclosure from the DOJ attorney and for providing the documents to the targets of the CID investigation. Both individuals were charged with conspiracy and influencing or injuring an officer.

While executing a search warrant in an unrelated investigation, CID special agents discovered a copy of a sensitive CID case report with exhibits in the possession of one of the targets. The report outlined the CID investigation and proposed prosecution of the two targets, and included an analysis of the case's strengths and weaknesses. In fact, some of the arguments that were raised by the defense attorney mirrored concerns outlined in the report. Forensic examination of the report revealed that it had been handled by the DOJ attorney, both targets, and three of the targets' associates. (IRS Inspection)

IRS Bribery Case

Bribery of employees is a major concern for IRS revenue and collection operations. IRS revenue agents and other employees who have frequent contact with taxpayers need to be particularly alert to the fact that their positions and associated responsibilities make them potential targets for bribery attempts. The following case illustrates an example of bribery offers made to IRS employees.

The president of a corporation pled guilty to conspiring to bribe a corrupt IRS revenue agent in exchange for allowing questionable tax deductions on the company's corporate tax returns. Arrested by IRS inspectors, the taxpayer pled guilty on April 3, 1996 and faces a maximum sentence of 5 years in Federal prison and a $250,000 fine. On July 16, 1996, the taxpayer's accountant pled guilty to conspiracy to commit bribery for his involvement in the scheme.

Prior to the taxpayer's conviction, the revenue agent pled guilty to accepting a bribe and tax evasion. After being investigated by the IRS Inspection Service, the revenue agent signed a plea agreement in which he agreed to provide IRS inspectors with information pertaining to his bribery activity and knowledge of corruption in the district where he worked.

Based on information provided by the revenue agent, a controlled audit was conducted on the taxpayer's business. During the audit, the revenue agent questioned a substantial number of the company's proposed deductions. Based on advice from his accountant, the taxpayer learned that the company would owe a significant amount of additional taxes if the expenses were disallowed and that the legal fees involved in challenging an adverse decision by the revenue agent would be substantial. Consequently, the taxpayer and his accountant decided to pay the revenue agent approximately $12,000 to obtain a favorable result on the audit.

The taxpayer told the judge that he had given his accountant $12,000 in cash to pay the revenue agent. When interviewed by IRS inspectors, the accountant admitted that he received the $12,000 from the taxpayer. However, without the taxpayer's knowledge, the accountant paid the revenue agent only $5000, keeping $4000 for himself and giving the remaining $3000 to a relative. Sentencing of the taxpayer, the accountant, and the revenue agent is pending. (IRS Inspection)

Taxpayer Indicted in Tax Protest Scheme

The IRS Inspection Service is investigating a number of cases that represent a growing trend among tax protesters in which the protesters file false liens against IRS employees, mail documents claiming judgments against IRS employees, and/or submit bogus checks to IRS. The fraudulent checks generally are for approximately twice the protesters' tax liability and the senders demand a refund for the difference. Some protesters threaten to take common law court action against IRS employees for not complying with their instructions.

* On May 8, 1996, a taxpayer was indicted for submitting a fraudulent check for over $500,000 to IRS for the payment of delinquent taxes. Along with the check, the taxpayer sent a document that requested a refund for the overpayment of taxes. Prior to this investigation, in January 1996, the taxpayer was indicted for corrupt interference after filing fraudulent liens against IRS employees. On July 16, 1996, the taxpayer pled guilty to both charges.

During the investigation, which was initiated after the Service Center Processing Division notified the Inspection Service that it had received a suspected bogus check, IRS inspectors accompanied IRS revenue officers conducting a civil seizure of the taxpayer's residence and assets. The inspectors arrested the taxpayer at the time pursuant to an outstanding Federal arrest warrant for failing to appear for arraignment on the corrupt interference charge. While searching the premises, the inspectors found copies of the bogus check and the letter that the taxpayer sent to IRS. Sentencing of the taxpayer is pending.

* A taxpayer and leader of an anti-Government organization was convicted of conspiracy, uttering counterfeited securities, possession of false papers to defraud the United States, and mail fraud. The taxpayer, who faces up to 35 years of imprisonment and $1.25 million of fines, is one of seven individuals who previously were indicted as the result of a joint IRS and United States Postal Inspection Service investigation. The seven individuals participated in a scheme to defraud IRS by producing, selling, and mailing approximately $2 million in bogus money orders made payable to IRS. Of the seven individuals, three have been convicted and four are awaiting final judicial action.

In 1993, the United States Postal Inspection Service contacted the IRS Inspection Service with information regarding the marketing and sale of fraudulent money orders. Over the next several years, IRS received numerous money orders from taxpayers for hundreds of thousands of dollars. Many of the money orders were deemed dishonored checks and were returned to IRS Service Centers by the Federal Reserve Bank. The investigation disclosed that the seven individuals were actively involved in the manufacture, promotion, sale, and use of fraudulent documents that were represented to taxpayers as legitimate remittance items called "Certified Money Orders" (CMO), "Certified Money Certificates," and "Public Office Money Certificates."

According to the witnesses interviewed, the seven individuals operated a business in which they sold CMO packages, which typically contained blank money certificates and orders and instructions on how to fill them out, for $350 each. The witnesses stated that they were told and believed that the money orders were legal and could be used to pay public debts, such as Federal tax payments. In addition, one witness thought that the company was a legitimate debt consolidation agency. (IRS Inspection)

IRS Employee Resigns After Confessing to Fabricating a Bomb Threat

On March 26, 1996, an IRS employee resigned after admitting to making a false report that he had received a bomb threat while at work. The case, which was declined by the United States Attorney's Office in favor of local prosecution, was accepted by the state's attorney's office and further judicial action is pending.

On March 14, 1996, the IRS employee reported that, while screening incoming telephone calls, he received a call from a male who claimed to have placed a bomb near the IRS office parking lot. According to the IRS employee, the caller made reference to the bombing in Oklahoma City and advised everyone to leave the building soon or they would die. As a result of the alleged bomb threat, authorities evacuated the building, which also houses private sector employers, for approximately 90 minutes. Eight local police units, IRS inspectors, Federal Protective Service officers, and General Services Administration special agents responded, and the building and surrounding parking areas were searched. However, no bomb was found.

Approximately 1 week after the incident, one of the IRS employee's coworkers contacted the Inspection Service and reported that a review of the employee's log off times with the computer and telephone system revealed that he was not logged onto the computer or telephone system at the time that he allegedly received the bomb threat. According to the coworker, this would have prohibited the IRS employee from receiving telephone calls.

The IRS employee was interviewed by IRS inspectors and advised that he was under investigation for making a false report of a bomb being planted at the office site. The IRS employee repeatedly denied that he had made a false report. However, after the inspectors informed him that telephone logs showed that he could not have received the call because he had not logged onto the system, the IRS employee admitted that he fabricated the story to bring attention to himself in an attempt to be recognized as a hero. The IRS employee stated that he had not intended for the situation to escalate the way it did and attributed the entire incident to his "runaway imagination." On May 13, 1996, IRS inspectors arrested the former employee. Further judicial action is pending. (IRS Inspection)

IRS Revenue Agent Convicted

On April 26, 1996, an IRS revenue agent was found guilty of submitting false documents to another revenue agent during the audit of his tax returns. The revenue agent received 6 months of incarceration and a 3-year alternate sentence. In July 1992, the IRS Inspection Service had received information that the revenue agent was possibly involved in arson, insurance fraud, and conspiracy in relation to a fire that destroyed his residence. Although the state fire marshal's office ruled the fire as an arson, there was insufficient evidence to sustain criminal prosecution against the revenue agent.

During the course of reviewing the revenue agent's tax returns, questionable items regarding a casualty loss were identified after the revenue agent performing the review requested documentation to verify the amount of the loss. The Inspection Service referred the revenue agent's tax returns to the district director for examination. Subsequent investigation determined that the employee submitted false documents regarding the acquisition of a residence, which falsely inflated the amount of the note that the revenue agent and his wife had assumed by over $30,000.

In addition the revenue agent submitted false documents pertaining to the sale and purchase of two pieces of property. In total, the documents provided inflated the actual amounts of the bank notes by almost $90,000. Subsequently, an increase of tax to the subject's income tax was recommended. (IRS Inspection)

EMPLOYEE CONDUCT

Employee conduct investigations by the OIG and the Offices of Internal Affairs and Inspection at ATF, Customs, IRS, and Secret Service include investigations of violations of the Standards of Ethical Conduct for Employees of the Executive Branch, 5 Code of Federal Regulations 2635, and the Treasury and IRS supplements.

Customs Manager Resigns After Allegations of Physical Abuse

The OIG investigated numerous allegations of the physical and verbal abuse of subordinate employees by a Customs manager. Although the manager denied the abuse, he resigned during the investigation, which revealed that similar allegations had been levied against him in previous Government positions. (OIG)

BEP Employee Time and Attendance Abuse

The OIG, with the assistance of BEP management, conducted an investigation involving time and attendance abuse by a BEP manager and his subordinate between January 1994 and January 1996. A review of the applicable records disclosed net time shortages of 202 and 165 hours for the supervisor and his subordinate respectively. The abuse involved late arrivals, early departures, and other unauthorized absences from work, and equated to over $10,000 at both employees' salary rates. During the investigation, the employees admitted their misconduct. Administrative action is pending an administrative follow-up investigation by BEP's Personnel Security Division, which may change the net time shortages for both individuals. In July 1996, the matter also was referred for action under the Program Fraud Civil Remedies Act. (OIG)

STATISTICAL SUMMARIES

This chapter contains statistical analyses of OIG and Office of Inspection and Internal Affairs activities. Several of the analyses fulfill reporting requirements in the Inspector General Act, as amended.

Statistical Summary

_STATISTICAL HIGHLIGHTS OCTOBER 1995 - SEPTEMBER 1996_ a/

_6 MONTHS ENDED_

_3/31/96_ _9/30/96_ _TOTAL_

_AUDITS_

Audit Reports 101 141 242

Recommended Monetary Benefits (in Thousands):

Questioned Costs $4,352 $386 $4,738

Savings 23,989 3,178 27,167

Revenue Enhancements _2,400_ _15,618_ _18,018_

Total $30,741 $19,182 $49,923

_EVALUATIONS_

Evaluation Reports 3 2 5

_INVESTIGATIONS_

Cases Opened 2,051 2,017 4,068

Cases Closed 1,812 2,210 4,022

Successful

Prosecutions 133 183 316

Administrative

Sanctions 434 468 902

Recoveries and Penalties

(in Thousands) $6,782 $15,153 $21,935

_OVERSIGHT AND QUALITY ASSURANCE REVIEWS_

Reviews and

Analyses 3 2 5

a/ Includes statistics for the OIG and Treasury Offices of

Internal Affairs and Inspection.

Audit and Evaluation Reports Issued by Bureau

Appendix A of this report lists individual audit and

evaluation reports issued during the 6 months ended September 30, 1996.

OIG Audits and Evaluations Reports

ATF 5

OCC 1

Customs Service 11

DO 9

BEP 3

FMS 2

IRS* 12

Mint 2

BPD 1

OTS 1

Independent Entity _3_

50

Inspection Service Audits of IRS _93_

Total _143_

* Includes OIG contract audits.

Audit Reports With Questioned Costs

The IRS Inspection Service did not issue any audit reports with questioned costs during this semiannual reporting period. The term "questioned cost" means a cost that is questioned because of (1) an alleged violation of a provision of a law, regulation, contract, or other requirement governing the expenditure of funds; (2) a finding that, at the time of the audit, such cost is not supported by adequate documentation("unsupported cost"); or (3) a finding that the expenditure of funds for the intended purpose is unnecessary or unreasonable.

The term "disallowed cost" means a questioned cost that

management, in a management decision, has sustained or agreed should not be charged to the Government.

OIG AUDIT REPORTS WITH QUESTIONED COSTS

6 MONTHS ENDED SEPTEMBER 30, 1996

_Questioned _Unsupported

Costs_a/ in Costs_a/ (in

_Report Category_ _Number_ Thousands) Thousands)

1. For which no management

decision had been made by

the beginning of the

reporting period 29 $10,637 $0

2. Which were issued

during the reporting

period _6_ b/ _386_ _0_

3. Subtotals (1 plus 2) 35 11,023 0

4. For which a management

decision was made during

the reporting period 14 2,638 0

* dollar value of

disallowed costs 10 c/ 1,782 0

* dollar value of costs

not disallowed 8 c/ 856 0

5. For which no management

decision has been made by

the end of the reporting

period (3 minus 4) _21_ _$8,384_ _$0_

6. Reports for which no

management decision was

made within six months of

issuance _16_ _$8,066_ _$0_

a/ "Questioned costs" includes "unsupported costs."

b/ All six audits were performed by DCAA.

c/ Four reports were partially agreed to and partially not

agreed to.

Audit Reports With Recommendations That Funds Be Put To Better Use

The term "recommendation that funds be put to better use" means a recommendation that funds could be used more efficiently if management took actions to implement and complete the recommendation, including (1) reductions in outlays; (2) deobligations of funds from programs or operations; (3) costs not incurred by implementing recommended improvements related to operations; (4) avoidance of unnecessary expenditures noted in pre-award reviews of contract agreements; (5) any other savings which are specifically identified; or (6) enhancements to revenues.

The term "management decision" means the evaluation by

management of the findings and recommendations included in an audit report and the issuance of a final decision concerning its response to such findings and recommendations, including actions concluded to be necessary.

OIG AUDIT REPORTS WITH RECOMMENDATIONS THAT FUNDS BE PUT TO

BETTER USE

6 MONTHS ENDED SEPTEMBER 30, 1996

_Revenue

_Savings_ Enhance-

(in Thou- ments_ (in

_Report Category_ _Number_ _Total_ sands) Thousands)

1. For which no

management decision has

been made by the

commencement of the

reporting period 25 $21,300 $11,340 $9,960

2. Which were issued

during the reporting

period 7 a/ 17,386 2,186 15,200

3. Subtotals (1 plus

2) 32 38,686 13,526 25,160

4. For which a

management decision

was made during the

reporting period 14 7,758 7,158 600

* dollar value of

recommendations that

were agreed to

by management 9 b/ 5,119 4,519 600

* based on proposed

management action 9 b/ 5,119 4,519 600

* based on proposed

legislative action 0 0 0 0

* dollar value of

recommendations that

were not agreed to

by management 12 2,639 2,639 0

5. For which no

management decision has

been made by the end of

the reporting period

(3 minus 4) _18_ _$30,928_ _$6,368_ _$24,560_

6. Reports for which no

management decision was

made within six months

of issuance _12_ _$14,912_ _$5,552_ _$9,360_

a/ Five audits were performed by DCAA totaling $1,975,729.

b/ Seven reports were partially agreed to and partially not

agreed to.

IRS AUDIT REPORTS WITH RECOMMENDATIONS THAT FUNDS BE PUT TO

BETTER USE

6 MONTHS ENDED SEPTEMBER 30, 1996

_Revenue

_Savings_ Enhance-

in Thou- ments_ (in

_Report Category_ _Number_ _Total_ sands) Thousands)

1. For which no

management decision has

been made by the

commencement of the

reporting period 0 $0 $0 $0

2. Which were issued

during the reporting

period 4 1,410 992 418

3. Subtotals (1 plus

2) 4 1,410 992 418

4. For which a

management decision

was made during the

reporting period 4 1,410 992 418

* dollar value of

recommendations that

were agreed to

by management 4 1,410 992 418

* based on proposed

management action 4 1,410 992 418

* based on proposed

legislative action 0 0 0 0

* dollar value of

recommendations that

were not agreed to

by management 0 0 0 0

5. For which no

management decision has

been made by the end of

the reporting period

(3 minus 4) _0_ _$0_ _$0_ _$0_

6. Reports for which no

management decision was

made within six months

of issuance _0_ _$0_ _$0_ _$0_

Disputed Audit Recommendations

The Inspector General Act requires Inspectors General to provide information on significant management decisions in response to audit recommendations, with which the Inspectors General disagree. As of September 30, 1996, there were no disagreements to report.

Undecided Audit Recommendations

The Inspector General Act requires a summary of each audit report which has been undecided for over 6 months. There were 27 such reports.

_Report Title and Date_ _Report Number_ _Amounts_

1. Evaluation of Termination

Settlement Claim Submitted

Under Contract Number TEP-90-5(TN)

for High Voltage Electrical

Services, 1/7/94 c/ OIG-94-044 $578,471

2. ATF Administration of

Cover Over Payments to Puerto

Rico and the Virgin Islands,

3/28/94 f/ OIG-94-063 3,160,000

3. Evaluation of Change Order

Proposal Submitted under

Contract Number TIR-91-0038

for an Integrated Collection

System, 5/11/94 b/ OIG-94-083 936,583

4. Defective Pricing Review

of Cost or Pricing Data

Submitted under Contract

TEP-88-205(TN), Option Year

One, 5/26/94 a/ OIG-94-096 2,967,177

5. Defective Pricing Review

of Cost or Pricing Data

Submitted under Contract

TEP-91-38(TN) for Currency Ink

and Varnish, 6/7/94 a/ OIG-94-099 1,900,461

6. Evaluation of Proposal

Submitted Under Contract

TEP-91-66 for Installation

and Support Services for

Currency Inspection Systems,

7/19/94 b/ OIG-94-115 275,148

7. Defective Pricing Review

of Cost or Pricing Data

Submitted under Contract

TEP-91-18(TN) Base Year Costs,

7/21/94 a/ OIG-94-116 163,499

8. Evaluation of Subcontract

Price Proposal Submitted

under Contract TEP-91-66 for

Slitting, Batching and

Stacking Systems,

10/3/94 b/ OIG-95-001 853,600

9. Evaluation of

Subcontractor's Direct Labor

and Indirect Cost Rates

Submitted under Contract

TIR-89-0056, Task Order 182

for Automated Data Processing

Support Services,

10/6/94 a/ OIG-95-003 238,156

10. Evaluation of Procurement

Overhead Rates Under Contract

TC-89-047, Review of

Contractor's Accounts Payable

Processing System, and

Compliance with Cost

Accounting Standard 412,

12/15/94 a/ OIG-95-029 10,234

11. Evaluation of Direct

and Indirect Costs and Rates

Claimed under Contract

TC-89-047 for Calendar

Year Ending 12/31/92,

1/11/95 a/ OIG-95-033 69,284

12. Evaluation of Direct and

Indirect Costs and Rates

Claimed under Contract TFTC

91-9 for the Periods

October 1, 1992, through

December 31, 1993,

2/2/95 a/ OIG-95-045 5,282

13. Evaluation of Pricing

Proposal Submitted Under

Pro Forma Contract

TEP-96-01(TN) for Advanced

Counterfeit Deterrent Flush,

7/13/95 d/ OIG-95-100 257,275

14. Follow-Up Audit of the

Federal Workers' Compensation

Program at the Bureau of

Alcohol, Tobacco and Firearms,

8/24/95 g/ OIG-95-118 4,000,000

15. Final Report on the

Executive Office for Asset

Forfeiture's Investment of the

Treasury Forfeiture Fund,

9/27/95 g/ OIG-95-126 2,200,000

16. Costs Incurred Under

Contract TOS-92-71 for Audit

Services, 10/12/95 a/ OIG-96-001 10,923

17. Follow-Up Audit of the

Federal Worker's Compensation

Program at the U.S. Customs

Service, 10/19/95 g/ OIG-97-007 2,100,000

18. Incurred Costs Under

Contract TEP-91-30 for Fiscal

Years 1991, 1992, 1993, and

1994, 11/8/95 b/ OIG-96-016 6,406

19. Proposal Submitted in

Response to Solicitation

CS-95-034 for Support Services

to the Treasury Enforcement

Communication System,

2/13/96 d/ OIG-96-031 147,774

20. Use of Equitable Sharing

Funds by the Philadelphia,

Pennsylvania Police Department,

3/4/96 g/ OIG-96-038 304,373

21. Subcontractor's Incurred

Costs Under Purchase Order

S9216 for Payroll & Personnel

Conversion Services,

3/8/96 b/ OIG-96-041 73,187

22. Cost Incurred Under

Contract TOS-91-31 for

Calendar Year 1991,

3/12/96 e/ OIG-96-042 5,404

23. Use of Equitable

Sharing Revenues by the

Jefferson County, Texas

Narcotics Task Force,

3/12/96 g/ OIG-96-043 47,188

24. Equitable Sharing

Revenues by the Beaumont,

Texas Police Department,

3/12/96 g/ OIG-96-044 271,904

25. Direct Labor and Other

Direct Costs Submitted Under

Contract TC-93-029 for Vessel

Maintenance Services to the

Territory of Puerto Rico,

3/18/96 a/ OIG-96-045 460,591

26. Incurred Costs Under

Contract TIR-93-0035 for

Fiscal Years 1992 Through

1994, 3/21/96 a/ OIG-96-047 15,575

27. Executive Office for

Asset Forfeiture: Use of

Equitable Sharing Funds by

the El Segundo Police

Department During Fiscal Year

1994, 3/29/96 g/ OIG-96-053 1,919,312

TOTAL $22,977,807

a/ Contract negotiations have not yet been held or completed.

b/ Contract negotiations have been held and the OIG is awaiting receipt of the negotiation documentation.

c/ Procurement is in litigation.

d/ The OIG is in the process of reviewing the negotiation documentation.

e/ The contractor is under investigation by the OIG.

f/ Recommendation is awaiting decision from General Counsel.

g/ There is no corrective action plan in place.

Significant Unimplemented Recommendations

The Inspector General Act requires identification of

significant recommendations described in previous semiannual

reports on which corrective actions have not been completed. The following lists of such unimplemented recommendations in OIG and Inspection Service audit reports are based on information in the Department's automated tracking system, which is maintained by Treasury management officials. All of the recommendations are being implemented in accordance with currently established milestones.

_Report Title/Potential

Monetary Benefits and

_Report Number_ _Issue Date_ Recommendation Summary_

_OIG Audits_

OIG-92-062 9/92 Department of the

Treasury's Follow-up of

Corrective Actions

Revise Treasury Directive

40-03, Treasury Audit

Recommendation Monitoring

system. (Two

recommendations)

OIG-93-024 1/93 Contract Administration

at the Federal Law

Enforcement Training

Center

Consult with Legal

Counsel to determine

whether the Government

can collect improper

payments to contractors.

OIG-94-060 3/94 U.S. Customs Service

Antidumping and

Countervailing (AD-CV)

Duty Program

Implement a Performance

Measurement System for

the AD-CV Duty Program

that includes measures

of quality, timeliness,

and efficiency, and will

allow Customs to assess

how well the program has

been implemented.

OIG-94-063 3/94 Alcohol, Tobacco, and

Firearms Administration

of Cover Over Payments to

Puerto Rico and the

Virgin Islands,

$3,160,000

Implement the decision of

the Department of the

Treasury, Office of the

General Counsel, on the

timing of cover over

payments.

OIG-94-071 3/94 U.S. Customs Service: Paperless Entry Program

Entails Greater Risks

Than Perceived

Establish a single audit

program for districts to

use in assessing the

paperless program. (Two

recommendations)

OIG-94-097 5/94 FMS's Activities to

Process and Monitor

Agency Disbursements

Ensure that employees

complete actions so that

Regional Finance Center

files contain only

current Agency Head

signatures. (Two

recommendations)

OIG-94-143 9/94 Bureau of Alcohol,

Tobacco and Firearms:

Tax Compliance Inspection

Improvements Needed

Revise the specialist

questionnaire to ensure

all data concerning

compliance risk is

adequately considered in

developing the Inspection

Targeting Program

rankings. (Two

recommendations)

OIG-95-118 8/95 Follow-Up Audit of the

Federal Worker's

Compensation Program at

the Bureau of Alcohol,

Tobacco and Firearms,

$4,000,000

There is no corrective

action plan in place.

OIG-95-126 9/95 Final Report on the

Executive Office for

Asset Forfeiture's

Investment of the

Treasury Forfeiture Fund,

$2,200,000

There is no corrective

action plan in place.

_Inspection Service Audits_

#034008 7/93 Automated Underreporter

Project Initiation and

Tax Year 1988 Limited

Pilot, $1,315,000

Determine whether

contract overcharges can

be recovered. (Five

recommendations)

#035006 9/93 Debtor Master File

Processing, $116,300,000

Improve the debtor file

validation process by

implementing all

recommended systemic

changes and assess

whether mismatch

conditions could be

resolved through the use

of IRS data files. (Five

recommendations)

#041403 1/94 Nonresident Alien

Information Documents

Enhance computer

consistency and validity

controls to ensure the

integrity of Forms 1042

submitted by withholding agents.

Improve coordination of

compliance enforcement

efforts with a systematic

approach taken to

identify the causes of

noncompliance by

withholding agents and by

recipients. (Two

recommendations)

#043501 5/94 Controls Over Access to

Credit Bureau Databases

Mandate nationwide

implementation of interim

computer security

applications until IRS'

modernization efforts

develop standardized

security programs for all

locator services.

#043303 7/94 Automated Underreporter

Systems Tax Year 1990

Development and Testing

and Tax Year 1991 Rollout

Address data access

security issues

associated with

implementation of the

Automated Underreporter

System.

#044201 8/94 Information Security Over

Small Scale Computer

Systems

Ensure greater oversight

and security over

sensitive taxpayer

information contained on

personal computers and

minicomputer systems.

Three recommendations)

#044301 8/94 Local Telecommunications

Expenses

Ensure a Cost Management

Information System is

implemented IRS-wide.

#045601 9/94 Electronic Return

Preparer Fraud,

$54,000,000

Identify and remove

dishonest preparers from

the Electronic Filing

Program.

#051205 1/95 Questionable Refund

Program, $254,000,000

Develop procedures to

ensure all service

centers more effectively

use computer capabilities

to identify fraudulent

refund scheme returns;

examine closely probable

fraudulent paper tax

returns; identify

multiple refund scheme

returns with the same

address; and communicate

uniform measurement and

performance indicators to

stakeholders. (Four

recommendations)

#051302 1/95 Readiness for the Pilot

Test of the Automated

Criminal Investigation

System

Establish plans to allow

management to monitor

progress and track

productivity increases

realized by the Automated

Criminal Investigation

System.

#051408 1/95 Opportunities for

Reducing the Collection

Queue Inventory

Reduce the risk that

unproductive collection

cases are assigned to

revenue officers, improve

the management of the

account receivable

inventory, use Inspection

Service computer programs

to identify and purge

unproductive collection

cases, and reduce

taxpayer burden. (Seven

recommendations)

#051902 1/95 Individual Retirement

Arrangement (IRA) Excise

Taxes, $315,000,000

Increase taxpayer

awareness and ensure

compliance by expanding

systems and programs to

identify taxpayers with

retirement distributions

in excess of stipulated

amounts and advise

elderly taxpayers of IRA

minimum distribution

requirements. (Three

recommendations)

#052106 2/95 National Account Profile

Improve communication and

coordination of

information between IRS

and the Social Security

Administration to improve

controls.

#052903 2/95 Controls Over the

Issuance of Employer

Identification Numbers

Modify processing

procedures to ensure

actions are taken to

obtain all necessary data

from taxpayers requesting

Employer Identification

Numbers. (Two

recommendations)

#053102 4/95 Invalid Segment of the

Individual Master File

Strengthen entity control

procedures and make

Master File programming

changes to better ensure

compliance with filing

regulations and deter

refund fraud on the

Invalid Segment of the

Individual Master File.

(Two recommendations)

052504 5/95 Integrated Case Processing (ICP) Program

Determine the focus of the District Office Concept of Operations and whether functionality will still be delivered through ICP or some other means.

Analyze and design ICP

Release 3.

#054406 5/95 Interim Evaluation of the

SCRIPS Pilot

Improve read accuracy rates on Form 1040EZ and Information Return

Program documents to meet contract specifications. (Two recommendations)

Develop the required test

deck and system report

for SCRIPS.

#055503 7/95 Tax Implications of the

New Earned Income Tax

Credit (EITC) Laws

Clarify EITC instructions

for defining requirements

for taxpayers without

qualifying children who

file joint returns.

Provide additional

training to employees to

emphasize EITC

requirements for filers

without qualifying

children.

#056301 8/95 Protecting the Privacy of

Third Party Taxpayer

Information

Update the Internal

Revenue Manual to include

new procedures for

controlling third party

access to tax

information.

#056703 9/95 Implementation of

Examination's Fiscal Year

1995 Refund Strategy,

$385,000,000

Track and assess the

effectiveness of actions

taken to change IRS

computer systems to

automatically adjust

taxpayer filing status

and child care credits

when dependents are

disallowed.

Take actions to alleviate

undue taxpayer burden

when there are date of

birth mismatches.

#057204 9/95 Stopping Fraudulent

Electronic Filing (ELF)

Refunds at Non-ELF

Centers During the 1995

Filing Season

Enhance listings of

stopped ELF refunds and

provide listings to all

interested users in IRS

service centers.

#060303 10/95 Electronic Return

Originator Suitability

Checks and Monitoring

Efforts

Incorporate a TIN

validation process before

information is used to

research applicant

suitability.

#061104 1/96 FOCUS: An Automated

System for Identifying

Potential Civil and

Criminal Tax Violations

Strengthen management of

the FOCUS field testing

process to ensure that

system functionality is

refined timely and

completed in an effective

and unbiased manner.

Six recommendations)

#061509 1/96 TAXLINK Processing and Related Programs

Develop additional contingency plan scenarios and test software capacity, enhance compliance procedures to ensure NAFTA requirements are consistently enforced, better protect IRS interests when dealing with other Federal a agencies, enhance TAXLINK design and programming, and develop a comprehensive marketing and enrollment methodology. (Four recommendations)

#061610 1/96 IRS' Efforts in Monitoring Trust Fund Recovery Penalty Assessments Need Improvement

Automate the processing

of adjustments resulting

from payments or credits on related Trust Fund Recovery accounts and reevaluate the definition of accounts receivable related to Trust Fund Recovery assessments. (Two recommendations)

#060402 1/96 Early Intervention

Contact Processing

Revise Early Intervention

criteria to select more

productive cases and

consider alternate

methods of obtaining

current taxpayer locator

information. (Two

recommendations)

#061714 2/96 Electronic Fraud

Detection System (EFDS)

Rollout

Ensure user passwords are

properly distributed and

controlled and former

EFDS users are timely

removed from the system.

Develop and test

comprehensive contingency

plans for the Phase II

rollout.

Standardize Form W-2 data

and establish

requirements for DPS

conversion to a machine

readable format.

#061903 2/96 The Totally Integrated

Examination System (TIES)

Establish procedures for

setting up and using TIES

to provide for adequate

internal control. (Two

recommendations)

#062208 2/96 DIS Transition/

Contingency Plan

Increase Four Phase

Computer inventories by

obtaining systems excised

by other government

agencies; ensure vendors

obtain and use diagnostic

software in scheduled

maintenance; establish

emergency back-up

equipment; and establish

a date to initiate an

alternative DIS

replacement. (Five

recommendations)

#062315 2/96 SCRIPS Rollout

Finalize throughput

requirements and conduct

tests to determine

whether the contractor is

meeting requirements;

ensure contingency plans

are adequate; determine

the cost effectiveness of

continuing SCRIPS in

light of excessive costs

and the inability to

process information at

required volumes; and

ensure final security

certifications and

accreditation are

accomplished before

rolling out future TSM

systems nationally.

(Four recommendations)

#062403 3/96 Selected Aspects of the

Service's Methodology For

Developing TSM

Assess the strengths and

weaknesses of the

Information Engineering

Facility (IEF) and manage

and control a development

environment that includes

the IEF. (Seven

recommendations)

#062705 3/96 Development of the

Revenue Accounting

Control System

Replacement

Address potential system

requirement contingencies

in the planning stage and

implement steps to meet

these requirements by the

end of the system

development.

Capture development costs

for each project level to

enable managers to

improve development

methods and control

costs. (Two

recommendations)

Revised Management Decisions

The Inspector General Act requires Inspectors General to provide a description and explanation of the reasons for any significant revised management decisions made during the reporting period. There were no such decisions during this reporting period.

Legislative and Regulatory Review

The Inspector General Act requires the Inspector General to review existing and proposed legislation and regulations relating to the programs and operations of the Department and to make recommendations concerning their impact. The OIG reviewed and commented on numerous Treasury Directives and Treasury Orders in the 6 months ended September 30, 1996. The Department reviewed its internal management regulations as part of the Administration's regulation reduction initiative, as mandated by Executive Order 12861, "Elimination of One-Half of Internal Regulations." In addition, the OIG reviewed a total of four existing and proposed legislative items. Of this number, the OIG provided comments on two items.

Hotline Allegations

The table below summarizes allegations of fraud, waste,

misconduct, mismanagement, and assault received through "800" hotline numbers during the 6 months ended September 30, 1996. It does not include (1) allegations received by the OIG and Treasury Offices of Inspection and Internal Affairs through other sources; (2) inquiries on taxes and other matters which are referred informally to Treasury program managers and others for appropriate disposition; or (3) pending allegations for which dispositions have not been determined.

Organization

_Disposition of Allegations_ _Total_ _OIG_ _USCS_ _IRS_

Referred for investigative

or audit inquiry 32 23 2 7

Referred to program managers 15 0 0 15

Referred to other agencies _90_ _90_ _0_ _0_

Totals 137 113 2 22

1-800-359-3898 OIG Hotline

1-800-829-2996 Customs Hotline

1-800-366-4484 IRS Hotline

Caseload Accounting

This table accounts for the caseload of the OIG and Offices of Internal Affairs and Inspection for the 6 months ended September 30, 1996. The beginning balance of cases, plus the cases opened, minus the cases closed, equals the ending balance of open cases.

Organization

Total OIG ATF USCS IRS USSS

Number of open

cases at the

beginning of

the period 2,406* 180 117 502* 1,591 16*

Number of cases

opened during

the period 2,017 60 105 151 1,666 35

Number of cases

closed during

the period 2,210 70 94 304 1,724 18

Number of open

cases at the end

of the period 2,213 170 128 349 1,533 33

*Adjusted figures.

Nature of Allegations

The table below classifies the nature of allegations for investigative cases opened during the period. The number of allegations equals the number of cases opened because only the most significant allegation per case was counted.

Organization

Total OIG ATF USCS IRS USSS

Bribes, graft,

kickbacks 119 1 0 22 96 0

Procurement and

contract

irregularities 9 4 0 0 5 0

Assaults/threats 583 0 10 6 564 3

False statements

and claims 188 10 12 14 150 2

Theft/misuse of

funds/property 370 10 24 31 299 6

Drug abuse and

control 32 1 4 4 23 0

Impersonating a

Government

official 87 0 0 0 87 0

Criminal -- Other 242 4 4 1 231 2

Sexual Harassment 33 2 1 23 7 0

Improper conduct

or disclosure 277 18 32 38 174 15

Non-Criminal

-- Other _77_ _10_ _18_ _12_ _30_ _7_

Total Allegations 2,017 60 105 151 1,666 35

Prosecutive Actions

The chart below accounts for the prosecutive actions of the OIG and Offices of Internal Affairs and Inspection for the 6 months ended September 30, 1996. The number of pending cases at the beginning of the period, plus the cases referred to prosecutive authorities, less the cases accepted for prosecution, less the declinations, equals the pending cases at the end of the period.

Organization

Total OIG ATF USCS IRS USSS

Number of cases

pending prosecutive

decision at the

beginning of the

period 650* 15 4 19* 609 3*

Number of cases

referred to

prosecutive

authorities during

the period 854 16 9 17 806 6

Number of cases

accepted for

prosecution during

the period 199 11 0 19 167 2

Number of

declinations

during the period 557 2 7 4 541 3

Number of cases

pending prosecutive

decision at the

end of the period 748 18 6 13 707 4

*Adjusted figures.

Successful Prosecutions

This chart shows the number of successful prosecutions

involving the cases of the OIG and Offices of Internal Affairs and Inspection during the 6 months ended September 30, 1996. Successful prosecutions include the number of individuals who as a result of investigations (1) are found guilty by a Federal or state court, (2) are accepted for pretrial diversion agreements by the Department of Justice, or (3) are granted plea bargaining agreements.

_Organization_ _Prosecutions_

OIG 2

ATF 1

USCS 34

IRS 144

USSS _2_

Total _183_

Administrative Sanctions

This chart shows the number of personnel actions and the number of suspensions and debarments of contractors involving cases of the OIG and Offices of Internal Affairs and Inspection.

_Personnel _Suspensions and

_Organization_ Actions_ Debarments_

OIG 14 4

ATF 39 0

USCS 62 0

IRS 347 0

USSS _2_ _0_

Total 464 4

Investigative Monetary Benefits

This table summarizes monetary benefits relating to

investigations of the OIG and Offices of Internal Affairs and Inspections.

Adminis­

Organi- Criminal trative

zation Total Recoveries Penalties Penalties Savings

OIG $4,839,382 $144,093 $388 $0 $4,694,901

ATF 550,672 550,672 0 0 0

USCS 29,955 29,955 0 0 0

IRS 9,732,563 9,427,635 304,928 0 0

USSS _0_ _0_ _0_ _0_ _0_

Total $15,152,572 $10,152,355 $305,316 $0 $4,694,901

Access to Information

The Inspector General Act requires Inspectors General to report on unreasonable refusals of information available to the agency which relate to programs and operations for which the Inspector General has responsibilities. There were no instances to report where information or assistance requested by the Inspector General or the Offices of Internal Affairs and Inspection were unreasonably refused.

APPENDIX A: AUDIT REPORT LISTING 1/

April 1, 1996 Through September 30, 1996

OIG Audits

Bureau of Alcohol, Tobacco and Firearms

Initial Pricing Proposal Submitted in Response to Solicitation BATF-95-26 for Automated Data Processing Support Services, OIG-96-056, 4/4/96

Costs Incurred Under Contracts TATF-90-4 and TC-91-030 for Fiscal Year 1991, OIG-96-058, 4/16/96

Alcohol, Tobacco and Firearms Fiscal Year 1995 Statement of Financial Position, OIG-96-059, 5/2/96

Initial Pricing Proposal Submitted in Response to Solicitation BATF-96-4 for Software Library Support Services, OIG-96-080, 6/26/96, $260,200 S

Final Report - ATF and Customs Need to Better Regulate the Sale of Tax-Exempt Cigarettes to the Fishing Industry, OIG-96-099, 9/30/96, $210,000 S

Office of the Comptroller of the Currency

Audited Calendar Year 1995 Financial Statements of the Office of the Comptroller of the Currency, OIG-96-078, 4/11/96

U.S. Customs Service

U.S. Customs Service's Fiscal Years 1995 and 1994 Consolidated Financial Statements, OIG-96-060, 4/25/96

Final Vouchers Submitted Under Contract TC-88-013 for Preventive and Corrective Vessel Maintenance, OIG-96-072, 5/30/96, $67,600 Q

Incurred Costs Submitted on Final Voucher No. 23 Under Contract No. TC-KSA-91-001, OIG-96-076, 6/12/96

Initial Pricing Proposal Submitted in Response to Solicitation CS-96-026 for Cargo Search X-Ray Inspection Systems, OIG-96-087, 8/1/96

Pricing Proposal Submitted Under Contract TC-96-001 for the Management and Sale of Seized Property, OIG-96-091, 8/21/96, $178,200 S

Incurred Costs Submitted on Final Vouchers Under Contracts TC-87-004, TC-87-005 and TC-89-006, OIG-96-092, 8/30/96, $4,700 Q

____________________________________________________________

1/ Amounts shown for some reports represent recommended monetary benefits. Q = Questioned Costs; S = Savings; R = Revenue Enhancements.

Final Report on Customs Officers Pay Reform Amendments, OIG-96-094, 9/13/96, $15,200,000 R

Incurred Costs Under Contract TC-91-022 for Fiscal Years 1991, 1992, and 1993, OIG-96-095, 9/17/96

Proposal Submitted Under Contract TC-95-011 for Field and Depot Support and Technical Training, OIG-96-097, 9/20/96

Harbor Maintenance Fee Collections, OIG-CA-96-004, 9/24/96

Additional Information on Reportable Matters Related to the Audit of the U.S. Customs Service's Fiscal Year 1995 Consolidated Financial Statements, OIG-96-098, 9/30/96

Departmental Offices

Audited Calendar Years 1995 and 1994 Financial Statements of the Working Capital Fund, OIG-96-064, 4/30/96

Community Development Financial Institutions Fund Award Monitoring Procedures, OIG-96-E15, 5/96

Treasury Forfeiture Fund Annual Report for Fiscal Year 1995, OIG-96-070, 5/16/96

Audited Fiscal Years 1995 and 1994 Financial Statements of the Exchange Stabilization Fund, OIG-96-079, 6/21/96

Physical Security and Internal Management Controls Over the Transfer of Check Production Facilities for the Department of the Treasury Were Adequate, OIG-96-082, 7/2/96

Budget Proposal Submitted Under Contract TSW-93-11 for a Medical Administration Program System, OIG-96-084, 7/9/96, $16,600 S

Costs Incurred Under Contract TOS-92-70 for Contract Audit Services, OIG-96-086, 7/26/96, $14,200 Q

Cost of Good O' Boy Policy Review, OIG-CA-96-003, 8/2/96

Incurred Costs Under Contract TSW-93-11 for Fiscal Years 1993 and 1994,

OIG-96-088, 8/12/96, $7,300 Q

Bureau of Engraving and Printing

Incurred Costs Under Contract TEP-92-39(N) Covering Fiscal Year 1992 and 1993, OIG-96-065, 5/2/96, $13,000 Q

Incurred Costs Under Contracts TEP-91-66 and TEP-95-06(TN) for Fiscal Years 1993, 1994 and July 11, 1995, OIG-96-077, 6/12/96, $279,000 Q

Improvements Needed in Controls Over Bureau of Engraving and Printing's Police Services Division's Time and Attendance Process, OIG-96-066, 8/1/96

Financial Management Service

Fiscal Year 1995 Financial Statements of the Financial Management Service's Salaries and Expenses Appropriation, OIG-96-063, 6/13/96

Cash Management Improvement Act Study Performed by the State of California, OIG-96-090, 8/20/96

Internal Revenue Service

Proposal Submitted in Response to Solicitation IRS-96-0005 for Architectural and Engineering Support Services, OIG-96-067, 5/13/96

Proposed Direct Labor and Indirect Cost Rates Submitted in Response to Solicitation IRS-96-0004 for Architectural and Engineering Support Services, OIG-96-068, 5/13/96

Proposal Submitted Under Contract TIR-94-0042 for the Wage Reporting Simplification Project Feasibility Study, OIG-96-073, 6/4/96, $151,200 S

Subcontractor's Accounting System, Applicable to Contract TIR-94-0042, OIG-96-074, 6/12/96

Fiscal Year 1996 Provisional Bidding and Billing Rates Submitted Under Contract TIR-94-0090, OIG-96-081, 6/26/96

Public Voucher No. 21 Submitted Under Contract TIR-94-0042 for the Wage Reporting Simplification Project Feasibility Study, OIG-96-083, 7/9/96

Proposal Submitted Under Contract TIR-93-0025 for Service Center Recognition/Image Processing System Maintenance, OIG-96-085, 7/10/96, $1,369,500 S

Contractor's Noncompliance With Cost Accounting Standards 401, 410, and 418, OIG-96-089, 8/13/96

Quality Control Review of the Internal Revenue Service Office of Audit Projects, OIG-96-093, 9/11/96

Public Vouchers Submitted Under Contract TIR-95-0066 for Treasury Information Processing Support Services, OIG-96-096, 9/17/96

Indirect Costs and Rates Claimed for Fiscal Year 1995, OIG-96-101, 9/30/96

Contractor's Billing System, OIG-96-102, 9/30/96

U.S. Mint

Audited Statements of Custodial Gold and Silver Reserves for the United States Mint as of September 30, 1995, and 1994, OIG-96-061, 5/8/96

Audited Fiscal Year 1995 Financial Statements of the United States Mint, OIG-96-069, 5/14/96

Bureau of the Public Debt

Survey of the Bureau of Public Debt's Administration Operations, OIG-96-075, 7/12/96

Office of Thrift Supervision

Audited Calendar Year 1995 Financial Statements of the Office of Thrift Supervision, OIG-96-062, 4/30/96

Independent Entity

PCIE Survey of Office of Inspector General Involvement in GPRA Activities, OIG-96-E16, 8/96

Audited Fiscal Year 1995 Financial Statements of the Federal Financing Bank, OIG-96-071, 8/6/96

Final Report - Review of Closures of Thrift Depositor Protection Oversight Board Staff Offices, OIG-96-100, 9/30/96

Inspection Service Audits

Internal Revenue Service

Small Purchase Card Program, 062807, 4/1/96

Contracted Services Database Controls, 360605, 4/2/96

Southeast Region Problem Resolution Program, 160300, 4/3/96

Controls Over Office Audit Examinations - Southeast Region, 160401, 4/3/96

Follow-Up Review of the Federal Tax Deposit Alert Program, 062500, 4/10/96

Criminal Investigation Requests for Taxpayer Information - Southeast Region, 160500, 4/11/96

Implementation of the Resources Management Support Strategy - Northeast Region, 660402, 4/15/96

Dyed Diesel Fuel Enforcement Program, 063203, 4/18/96

Ensuring Taxpayer Compliance with Estate and Gift Tax Laws, 063105, 4/19/96

Factors Affecting Yield from Office Audit Examinations - Midwest Region, 360700, 4/22/96

Follow-Up Review of Employment Tax Compliance Efforts Within the Service, 063302, 4/26/96

Parent and Dependent Duplicate Exemption Claims, 063502, 4/30/96, $30,800 R

Budget Execution System and Related AFS Subsystems, 360804, 5/8/96

Processing of Remittances and Misapplied Payments, 063404, 5/10/96

Conditions Affecting Yield on Examination of Small Corporation Income Tax Returns - Midwest Region, 360901, 5/10/96

Service Center Recognition/Image Processing System Procurement, 063708, 5/17/96, $970,293 S

Midstates Region's Efforts to Reduce the Rental Deficit, 361003, 5/20/96

Service's Background Investigation and Security Clearance Programs, 062904, 5/22/96

Other Deductions Claimed on Corporation Tax Returns, 063602, 5/22/96

Effectiveness of Exempt Organization's Examination Division, 063800, 5/23/96

Seizure and Sale Activity in Selected Districts - Southeast Region, 160600, 5/24/96

Risk Assessment of Midstates Region Remittance Processing Controls, 361101, 5/24/96

Preparer Program, 064102, 5/31/96

Correspondence Support Unit Workload - Memphis Service Center, 160903, 6/6/96

The Financial Accounting and Reporting of Collection's Seized Assets Could Be Improved, 064008, 6/7/96

Electronic Federal Tax Payment System Implementation, 064202, 6/10/96

Ensuring That Federal Tax Liens are Promptly Released to Protect Taxpayer's Rights, 160702, 6/10/96

Space Utilization - National Office, 064503, 6/11/96

B-Freeze Code - Atlanta Service Center, 160801, 6/11/96

1996 Telefile Program, 064401, 6/14/96

Effectiveness of the Computer Assisted Pipeline Review - Memphis Service Center, 161101, 6/17/96

Controls Over Remittance Processing in the Southeast Region Can Be Enhanced to Reduce the Risk For Integrity Breakdowns, 161003, 6/20/96

Implementation of the Electronic Audit Research Log, 064810, 6/21/96

1996 Filing Season - Cincinnati Service Center, 161200, 6/26/96

National Office Mailroom Operation, 064905, 7/3/96

Investigative Equipment - Criminal Investigation Division, 660601, 7/3/96

Total Energy Plant - Brookhaven Service Center, 660700, 7/8/96

Collection Division Transition - Southwest District, 960602, 7/8/96

Processing Of 1995 Individual Income Tax Returns - Brookhaven Service Center, 660501, 7/11/96

1996 Filing Season - Fresno Service Center, 960702, 7/18/96

Efforts to Increase Examination Corporate Yield - Southeast Region, 161303, 7/19/96

Implementation of the Document Processing System, 064302, 7/22/96

1996 Tax Filing Season - Kansas City Service Center, 361305, 7/23/96

Opportunities for Improving the Automated Collection System, 064604, 7/24/96

Service's Use of Federal Contractor Information, 065103, 7/24/96

Receipt and Control Internal Controls, 065303, 7/24/96

Processing Of 1995 Individual Income Tax Returns - Andover Service Center, 660903, 7/26/96

Validity of Assessments, 065002, 7/31/96

1996 Filing Season - Austin Service Center, 361203, 8/1/96

Rocky Mountain District Transition, 960802, 8/1/96

Ogden Service Center's 1996 Processing Season, 960904, 8/1/96

Trust Fund Recovery Penalties - Northeast Region, 660801, 8/2/96

High Risk Transaction Program - Service Centers, 064703, 8/5/96

IRS Quality and Productivity Improvement Efforts, 065401, 8/7/96

Internal Control Environment - South Texas District, 361500, 8/9/96

IRS' Administration of the Low-Income Housing Credit (Reissuance of Report No. 057102), 065202, 8/12/96

Controls Over Forms 809 - ATSC, 161403, 8/13/96

Business Resumption Planning - Northeast Region, 661001, 8/15/96

Selected Areas of the Atlanta Service Center Collection Branch, 161504, 8/19/96, $21,868 S

Collection Appeals Program, 065601, 8/21/96

Small Scale Computer Security - Midstates Region, 361403, 8/21/96

B-Freeze Code - Memphis Service Center, 161601, 8/22/96

Control Environment - Houston District, 361700, 8/23/96

Employment Tax Nonfiler Program, 065503, 8/24/96

Summary of FY 1995 Financial Audits of Closed Criminal Investigation Group I Undercover Operations, 065900, 8/26/96

Railroad Retirement Trust Fund Program, 065705, 9/5/96

Controls Over Cash Collections - Michigan District's Taxpayer Service Walk-In Area, 661404, 9/5/96

Streamlined Trust Fund Recovery Penalty Process, 361801, 9/9/96

Fraud Control Techniques for Paper Returns, 065806, 9/10/96

Transition Issues - Northeast Region, 661300, 9/10/96

Rent Expenditures, 066203, 9/11/96

Examination Processing Section - Atlanta Service Center, 161702, 9/11/96, $386,936 R

Internal Controls Over the Processing and Issuance of Refunds, 066002, 9/13/96

Risk Assessment of Midstates Region Examination Inventory Controls, 362005, 9/16/96

Philadelphia Service Center Electronic Bulletin Board Cost Benefit Analysis, 661100, 9/16/96

IRS Reimbursable Program, 066302, 9/17/96

Internal Controls - Washington, D.C. Appeals Post-Of-Duty, 161804, 9/20/96

Levy Actions and Taxpayer Rights - Southeast Region, 161901, 9/20/96

Contract Administration, 066502, 9/24/96

IRS Representation Fund, 066604, 9/24/96

Service's Transition Planning and Implementation, 066702, 9/24/96

Information Gathering Activities - Southeast Region, 162002, 9/24/96

Physical Security - Midstates Region, 362102, 9/24/96

Control Environment - Kansas-Missouri District, 362300, 9/24/96

Midstates Region Assessment Statute Controls, 361903, 9/25/96

Office Audit Productivity - Northeast Region, 661604, 9/25/96

Control Environment - North Texas District, 362201, 9/27/96

Implementation of Allowable Expense Standards - Northeast Region, 661501, 9/27/96

Follow-Up Review of Information Security Over Small Scale Computer Systems, 066401, 9/30/96

Software Change Controls and Testing Procedures, 066806, 9/30/96

Corporate Education, 066901, 9/30/96

Control Environment - Illinois District, 362400, 9/30/96

Collection Field Function Productivity - Former Seattle District, 961001, 9/30/96

*** Last update 12/24/96 (sgb) ***