IRS system fails to bring envisioned benefits

Treasury Inspector General For Tax Administration audit report

An electronic system expected to speed forms-processing times for tax-exempt organizations actually slowed processing and exceeded cost estimates, a recent audit found.

Internal Revenue Service officials expected the Tax Exempt Determination System (TEDS) to automate processes that determine whether tax-exempt organizations meet legal standards for employee pension plans. Ultimately, TEDS was supposed to improve customer service.

Instead, cycle times for making the determinations increased from 208 days to 324 days from fiscal 2004 to 2005, according to a report from the Treasury Inspector General for Tax Administration. Moreover, the cost to develop and maintain TEDS through Feb. 17 was more than $2.3 million higher than the IRS’ estimate of $16.9 million.

The IRS launched TEDS in March 2004, several months later than planned. The delay caused a backlog of incoming applications, the audit states.

TEDS users could access information from electronic versions of necessary forms. But the auditors found that the IRS’ Tax Exempt/Government Entities Division had not fully incorporated the use of electronic images into its operating procedures.

The TEDS business case from August 2003 showed that the division had estimated that the system would save more than $788,000 in labor costs in fiscal 2004 and 2005. Those savings were never achieved because the system's automated case-closure and letter-generation features did not work as envisioned, the audit states.

The IG recommended that the director of Exempt Organizations Division track actual costs against the estimated costs of processing applications.

The auditors also asked the director to revise the TEDS business case and budget when changes in scope extend the completion date by more than 10 percent or when project costs increase by more than 10 percent. IRS officials can then make better investment decisions, the audit states.

Division managers agreed with the IG’s recommendations, according to the audit.