The Internal Revenue Service has insufficient controls over the outside employment or business activities of its employees, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, noted that IRS employees are generally allowed to engage in outside employment or business activities after obtaining written approval. However, effective controls over outside employment can reduce the risk of conflicts of interest that could result in decisions that are not in the best interest of American taxpayers, TIGTA noted.

IRS records indicate that, in calendar year 2011, nearly 3,000 of the more than 6,000 active, full-time IRS employees who held jobs or participated in business activities outside the IRS did not have approval for outside employment or the activities were not documented on the IRS’s Outside Employment System as required. IRS Human Capital Office management was generally not aware of the number of employees with unapproved outside employment because responsibility has not been assigned for overseeing the overall outside employment process.

In addition, the IRS said it does not have authorization to use taxpayer information such as W-2 forms to identify employees with unapproved outside income because Section 6103 of the Tax Code does not clearly provide that tax data can be used for this purpose.

“Our report found that it will be difficult for the IRS to monitor outside employment because 93 percent of the existing records in the database used to compile outside employment requests are out of date,” said TIGTA Inspector General J. Russell George in a statement. “Moreover, approval of outside employment requests is not always documented on the database or in Official Personnel Folders, in part because of confusing and incomplete guidance.”

Improving controls will be important, TIGTA pointed out, because it identified both current and former IRS employees with both actual and potential conflicts of interest. One employee pled guilty to engaging in a criminal conflict of interest for accessing taxpayer information for the purpose of conducting a private tax and accounting business, while 44 IRS employees prepared tax returns for compensation, which is a prohibited practice.

TIGTA’s analysis also identified 20 employees with a high risk of potential conflicts of interest who received outside income without documented approval.

For example, four employees operated businesses with annual gross receipts ranging from more than $500,000 to more than $7 million, and six employees had wages of more than $50,000 from outside of the IRS. Significant outside income could affect the employee’s effectiveness on the job, the report noted.

TIGTA recommended that the IRS human capital officer update its outside employment guidance, appoint management responsibility for overseeing the outside employment process, evaluate whether legislation would be needed to authorize the IRS to perform analyses of employee income information to identify employees with unapproved outside employment, and perform a one-time cleanup of the outside employment database.

In response, IRS management agreed with three of TIGTA’s recommendations. However, the IRS did not agree that income information should be used to detect IRS employees engaging in potential conflicts of interest.

“We do not believe that sensitive taxpayer information should be used to oversee the IRS' outside employment program,” wrote IRS human capital officer Daniel T. Riordan in response to the report. “Further, we do not agree the IRS should be singled out to utilize such a method for oversight simply because we are the repository for, and custodians of, such information.”

For its part, TIGTA said it continues to believe that the IRS should evaluate whether legislation would be needed to allow it to detect employees with outside employment.

Riordan also disagreed with TIGTA’s methodology for identifying employees who were required to request approval to engage in an outside activity and with TIGTA’s estimate that 2,656 employees are engaged in outside employment without documented approval. He also disagreed with the statement that employees who “spend much of their workday outside the office” or “can access taxpayer account information” are at higher risk for a conflict of interest.

“As stated in the Plain Talk about Ethics and Conduct handbook, a conflict of interest occurs when the employee's outside employment violates a regulation or causes an employee to have to be recused from official matters to such an extent that it impedes the employee's ability to perform his job,” he wrote. “Management regularly monitors employees’ performance and conduct regardless of their work location. Engaging in an outside activity while on-duty is an example of employee misconduct (e.g., misuse of official time), not a conflict of interest. Additionally, IRS maintains a robust system to monitor all access to taxpayer data and ensure employees only access information as required to perform their official duties. As noted in the report, from October 1, 2009, through July 31, 2013, 54 employees engaging in prohibited outside employment or with a conflict of interest were referred to TIGTA for investigation. We believe this reflects the strength of the controls in place to identify these issues.”

The IRS also sent an email Thursday to Accounting Today with further comments on the report. "The IRS takes the findings of this report seriously and notes that TIGTA did not find any cases of actual conflict of interest or prohibited outside activities that had not been previously identified and referred for action by the IRS," the IRS said in the statement. "It is important to highlight that TIGTA found only 0.3 percent of active full-time employees with an outside employment agreement and/or who earned significant outside income could potentially result on a conflict with their official duties or impact their job effectiveness. The IRS disagrees with TIGTA’s methodology to identify employees who were required to request approval to engage in an outside activity.While TIGTA identified employees with income reported on Form W-2 or Schedule C, the receipt of income reported on these forms does not determine whether an employee is required to request approval. We also disagree with the TIGTA’s statement that employees who work remotely or have access to taxpayer data are at higher risk of a conflict of interest. We maintain a robust system to monitor all access to taxpayer data and employees only receive access to taxpayer information if required to perform their official duties. Additionally, IRS managers regularly monitor employees’ performance and conduct regardless of their work location."