    Financial Audit: IRS' Fiscal Year 2000 Financial Statements (Letter
    Report, 03/01/2001, GAO/GAO-01-394).

    The Internal Revenue Service's (IRS) fiscal year 2000 financial
    statements, including the accompanying notes, present fairly, in all
    material respects, in conformity with U.S. generally accepted accounting
    principles, IRS' assets, liabilities, net position, net costs, changes
    in net position, budgetary resources, reconciliation of net costs to
    budgetary obligations, and custodial activity, as of and for the fiscal
    year ended September 30, 2000. However, misstatements may nevertheless
    occur in other financial information reported by the IRS as a result of
    internal control weaknesses. Because of material weaknesses in internal
    controls, IRS did not maintain effective internal controls over
    financial reporting or compliance with laws and regulations, and thus
    did not provide reasonable assurance that losses, misstatements, and
    noncompliance with laws material in relation to the financial statements
    would be prevented or detected in an ongoing manner and on a timely
    basis. GAO's tests of compliance with selected provisions of laws and
    regulations disclosed two instances of noncompliance with laws and
    regulations that are reportable under U.S. generally accepted government
    auditing standards or Office of Management and Budget guidance.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  GAO-01-394
         TITLE:  Financial Audit: IRS' Fiscal Year 2000 Financial
    	     Statements
          DATE:  03/01/2001
       SUBJECT:  Auditing standards
    	     Reporting requirements
    	     Financial management
    	     Internal controls
    	     Financial statement audits
    	     Noncompliance

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    GAO-01-394

    Report to the Secretary of the Treasury

    March 2001 FINANCIAL AUDIT IRS' Fiscal Year 2000 Financial Statements

    GAO- 01- 394

    Letter 3 Auditor's Report 5 Management

    16 Discussion and Analysis

    Financial Statements 54 Balance Sheet 54

    Statement of Net Cost 55 Statement of Changes in Net Position 56 Statement
    of Budgetary Resources 57 Statement of Financing 58 Statement of Custodial
    Activity 59 Notes to the Financial Statements 60

    Supplemental and 77

    Other Accompanying Information Appendixes Appendix I: Material Weaknesses
    and Management Challenges,

    Reportable Conditions, and Compliance Issues 84 Appendix II: Details on
    Audit Methodology 106 Appendix III: Comments From the Internal Revenue
    Service 107

    Abbreviations

    EITC Earned Income Tax Credit FFMIA Federal Financial Management Improvement
    Act of 1996 FFMSR Federal Financial Management Systems Requirements FIA
    Federal Managers' Financial Integrity Act IRS Internal Revenue Service JFMIP
    Joint Financial Management Improvement Program OMB Office of Management and
    Budget P& E property and equipment SFFAS Statement of Federal Financial
    Accounting Standards SGL U. S. Government Standard General Ledger SSA Social
    Security Administration TIGTA Treasury Inspector General for Tax
    Administration

    Lett er

    March 1, 2001 The Honorable Paul H. O'Neill The Secretary of the Treasury

    Dear Mr. Secretary: The accompanying report presents the results of our
    audit of the financial statements of the Internal Revenue Service (IRS) as
    of and for the fiscal year ending September 30, 2000. Our audit was required
    by the Chief Financial Officers Act of 1990, as expanded by the Government
    Management Reform Act of 1994. This report contains our (1) unqualified

    opinion on IRS' financial statements, (2) opinion that internal controls at
    IRS as of September 30, 2000, were not effective, and (3) report on IRS'
    noncompliance with two provisions of laws and regulations that we tested and
    IRS' financial management systems' lack of substantial compliance with the
    requirements of the Federal Financial Management Improvement Act of 1996.

    Our unqualified opinion on IRS' fiscal year 2000 financial statements was
    due to the extraordinary efforts of IRS senior management and staff to
    compensate for serious internal control and systems deficiencies. There

    has been a tremendous amount of hard work and commitment over the last 2
    years, and there have been some significant improvements. Such efforts will
    be needed to sustain this result in future years until lasting solutions to
    IRS' internal controls and systems deficiencies are fully achieved. Despite
    these significant efforts and the resulting unqualified opinion on its
    fiscal year 2000 financial statements, IRS does not have timely, accurate,
    and useful financial information and sound controls with which to make
    informed decisions and to ensure accountability on an ongoing basis.

    The accompanying report also discusses other significant issues that we
    considered in performing our audit and in forming our conclusions that we
    believe should be brought to the attention of IRS management and users of
    IRS' financial statements. We will report our recommendations for

    corrective actions to address the weaknesses in IRS' internal controls and
    compliance with law and regulation issues in a separate report to be issued
    at a later date.

    We are sending copies of this report to the Chairmen and Ranking Members of
    the Senate Committee on Appropriations; Senate Committee on Finance; Senate
    Committee on Governmental Affairs; Senate Committee on the Budget;
    Subcommittee on Treasury, General Government, and Civil Service, Senate
    Committee on Appropriations; Subcommittee on Taxation and IRS Oversight,
    Senate Committee on Finance; Subcommittee on Oversight of Government
    Management, Restructuring, and the District of Columbia, Senate Committee on
    Governmental Affairs. We are also sending copies of this report to the
    Chairmen and Ranking Minority Members of the House Committee on
    Appropriations; House Committee on Ways and Means; House Committee on
    Government Reform; House Committee on the Budget; Subcommittee on Government
    Efficiency, Financial Management, and Intergovernmental Relations, House
    Committee on

    Government Reform; and Subcommittee on Oversight, House Committee on Ways
    and Means. In addition, we are sending copies of this report to the Chairman
    and Vice- Chairman of the Joint Committee on Taxation, the Commissioner of
    Internal Revenue, the Director of the Office of Management and Budget, the
    Chairman of the IRS Oversight Board, and other interested parties. Copies
    will be made available to others upon request.

    This report was prepared under the direction of Steven J. Sebastian, Acting
    Director, Financial Management and Assurance, who can be reached at (202)
    512- 3406. If I can be of further assistance, please call me at

    (202) 512- 5500. Sincerely yours,

    David M. Walker Comptroller General of the United States

    Audi Report tor' s To the Commissioner of Internal Revenue In accordance
    with the Chief Financial Officers (CFO) Act of 1990, as expanded by the
    Government Management Reform Act of 1994, this report presents the results
    of our audit of the financial statements of the Internal Revenue Service
    (IRS) for fiscal year 2000. The financial statements report the assets,
    liabilities, net position, net costs, changes in net position, budgetary
    resources, reconciliation of net costs to budgetary obligations,

    and custodial activity related to IRS' administration of its
    responsibilities for implementing federal tax legislation. The financial
    statements do not include a measurement of the amount of taxes legally owed
    the federal government but which have not been identified by IRS, often
    referred to as the “tax gap.” In its role as the nation's tax
    collector, IRS has a demanding responsibility in collecting taxes,
    processing tax returns, and enforcing the nation's tax laws. The size and
    complexity of IRS' operations present additional challenges to management.
    IRS is a large, complex, decentralized

    organization with about 100,000 people in 10 service centers, 1 3 computing
    centers, and many other field offices throughout the United States.
    Historically, most IRS offices other than headquarters have had
    responsibilities tied to their geographical locations. However, in response
    to congressional concerns about IRS' operations embodied in the Internal
    Revenue Service Restructuring and Reform Act of 1998, IRS is undergoing a

    reorganization that is significantly affecting the past roles and
    responsibilities of these offices. In fiscal year 2000, IRS collected over
    $2 trillion in taxes, processed over 210 million tax returns, and paid about

    $194 billion in refunds to taxpayers. 1 As part of its ongoing
    reorganization, IRS now calls these offices “campuses.”

    IRS continues to face most of the pervasive systems and internal control
    weaknesses that we have reported each year since we began auditing IRS'
    financial statements in fiscal year 1992. 2 Despite these weaknesses, in
    fiscal year 2000, IRS was able to produce for the first time combined
    financial statements covering its tax custodial and administrative
    activities that are fairly stated in all material respects. 3 This
    achievement was the culmination

    of 2 years of extraordinary effort on the part of IRS to develop
    compensating processes to work around its serious systems and control
    weaknesses to derive year- end balances for its financial statements and
    address several of the management issues we raised in previous reports. IRS
    laid the groundwork for sustainable improvements in several critical areas.
    However, IRS' approach to obtaining this unqualified opinion on its

    fiscal year 2000 financial statements relied heavily on costly,
    timeconsuming processes; statistical projections; external contractors;
    substantial adjustments; and monumental human efforts that extended

    well after the September 30, 2000, fiscal year- end. The tremendous
    commitment on the part of both IRS senior management and staff was the key
    to IRS' ability to achieve its goal of receiving an unqualified audit
    opinion on its financial statements for fiscal year 2000. At the same time,
    these costly efforts would not be necessary if IRS' systems and controls
    operated effectively. In addition, the absence of effective systems and
    controls means that IRS lacks the timely, accurate, and useful information
    to make informed management decisions and ensure adequate accountability on
    an ongoing basis.

    IRS' achievement is an important milestone. At the same time, sustaining
    this success will require a continued high level of involvement by IRS
    senior management and further efforts to obtain lasting solutions to its
    fundamental systems and internal control deficiencies. IRS has made notable
    progress in several areas. Specifically, we noted significant improvements
    in IRS' policies and procedures over its fund balance with

    Treasury and transactions held in suspense and in its documentation of 2
    Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements
    (GAO/ AIMD- 93- 2, June 30, 1993). 3 In fiscal year 1997, IRS received for
    the first time unqualified audit opinions on separate financial statements
    covering its tax custodial activities (by GAO) and its administrative
    activities (by the Department of Treasury Office of Inspector General). In
    fiscal year 1998, IRS combined its tax custodial and administrative
    activities in one set of financial statements. GAO was able to determine in
    fiscal years 1998 and 1999 that the taxes receivable balance reported on the
    balance sheet and the tax revenue and refunds reported in the statement of
    custodial activity were fairly stated.

    unpaid tax assessments that, if effectively sustained in the future, should
    prevent a reemergence of the problems that we found in these areas in prior
    years. IRS also made improvements in computer security and

    handling of taxpayer receipts and data, although further improvement is
    needed in each of these areas. In addition, IRS is working aggressively to
    address issues we have raised regarding controls over its budgetary
    activity. While more efforts are needed in this area, measurable progress
    has been made.

    IRS senior management has continued to demonstrate a strong commitment to
    address the operational and financial management issues discussed in this
    report. This high level of involvement by IRS senior management has greatly
    contributed to actions taken to resolve some of the issues we have raised.
    Continued involvement at this level is critical to IRS' success in
    addressing the serious internal control and systems

    problems that remain. While IRS was able to produce financial statements
    that were fairly stated in all material respects using compensating
    processes, this approach does not produce the reliable, useful, and timely
    financial and performance information IRS needs for decision- making on an
    ongoing basis which is the goal of the CFO Act. Also, this approach does not
    address the underlying financial management and operational issues that
    adversely affect IRS' ability to effectively fulfill its responsibilities as
    the nation's tax collector. We reported on these continuing significant
    challenges for IRS in our recently issued high- risk and performance and
    accountability series 4 and other reports.

    The challenge for IRS will be to build on the improvements made in fiscal
    year 2000 to not only improve its compensating processes but, more
    importantly, to develop and implement the fundamental long- term solutions
    that are needed to address the management challenges we have identified.
    Some of these solutions can be addressed in the near term through the
    continued efforts and commitment of IRS senior management and staff. Others,
    which involve modernizing IRS' financial and operational

    systems, will take years to fully achieve. Until IRS' systems and processes
    are overhauled and internal controls are strengthened, “heroic”
    efforts will have to be sustained for IRS to continue to receive an
    unqualified audit opinion in future years. 4 High- Risk Series: An Update
    (GAO- 01- 263, January 2001) and Major Management Challenges and Program
    Risks: Department of the Treasury (GAO- 01- 254, January 2001).

    Opinion on IRS' IRS' financial statements, including the accompanying notes,
    present fairly, Financial Statements

    in all material respects, in conformity with U. S. generally accepted
    accounting principles, IRS' assets, liabilities, net position, net costs,
    changes in net position, budgetary resources, reconciliation of net costs to
    budgetary obligations, and custodial activity, as of and for the fiscal year
    ended September 30, 2000.

    However, misstatements may nevertheless occur in other financial information
    reported by IRS as a result of the internal control weaknesses described in
    this report. IRS' financial statements report tax revenues collected during
    the fiscal year and the cumulative amounts of unpaid taxes where there is
    agreement with IRS, either by the taxpayer or court, as to the amounts owed.
    Cumulative unpaid tax assessments where there is no future collection
    potential or where there is no agreement as to the amounts owed are not
    reported in the financial statements, but are reported as write- offs and
    compliance assessments, respectively, in supplemental information to IRS'

    financial statements. However, to the extent that taxes owed in accordance
    with the nation's tax laws are not reported by taxpayers and are not
    identified through IRS' various enforcement programs, in accordance with U.
    S. generally accepted accounting principles, they are not reported in the
    financial statements nor in supplemental information to the financial
    statements. As IRS discusses in the other accompanying information to the

    financial statements, IRS does not have current information upon which to
    base a reasonable estimate of the magnitude of these unidentified and unpaid
    taxes- referred to as the “tax gap.” We have discussed this
    issue in our recently issued high risk series. 5

    5 High Risk Series: An Update (GAO- 01- 263, January 2001).

    Opinion on Internal Because of the material weaknesses 6 in internal
    controls discussed below, Controls IRS did not maintain effective internal
    controls over financial reporting (including safeguarding of assets) or
    compliance with laws and regulations,

    and thus did not provide reasonable assurance that losses, misstatements,
    and noncompliance with laws material in relation to the financial statements
    would be prevented or detected in an ongoing manner and on a

    timely basis. Despite the material weaknesses in internal controls, IRS was
    able to prepare, through compensating processes and approaches to work
    around its serious internal control and systems deficiencies, financial
    statements that were fairly stated in all material respects for fiscal year
    2000.

    Nonetheless, IRS continues to face the following key issues which represent
    material weaknesses in internal controls and management challenges: ? an
    inadequate financial reporting process, resulting in IRS not having current
    and reliable ongoing information to support management decision- making and
    to prepare cost- based performance measures; ? weaknesses in controls and
    other limitations affecting its ability to properly manage unpaid
    assessments, resulting in both taxpayer burden

    and potentially billions of dollars in lost revenue to the government; ?
    weaknesses in controls over tax refunds, permitting the disbursement of

    potentially billions of dollars of improper refunds; ? inadequate controls
    over property and equipment, resulting in IRS' inability to reasonably
    ensure that its property and equipment is safeguarded and used only in
    accordance with management policy;

    ? inadequate budgetary controls, resulting in IRS' inability to routinely
    ensure that its budgetary resources are being properly accounted for,
    reported, and controlled; and

    ? weaknesses in computer security controls that may allow unauthorized
    individuals to access, alter, or abuse proprietary IRS programs and
    electronic data and taxpayer information.

    6 A material weakness is a condition that precludes the entity's internal
    control from providing reasonable assurance that material misstatements in
    the financial statements would be prevented or detected on a timely basis.
    Reportable conditions are matters coming to our attention that, in our
    judgment, should be communicated because they represent significant
    deficiencies in the design or operation of internal controls that could
    adversely affect IRS' ability to meet the objectives described in this
    report.

    The material weaknesses in internal control noted above may adversely affect
    any decision by IRS' management that is based, in whole or in part, on
    information that is inaccurate because of these weaknesses. In addition,
    unaudited financial information reported by IRS, including budget and
    performance information, may also contain misstatements resulting from these
    weaknesses.

    In addition to the material weaknesses discussed above, we identified two
    reportable conditions which, although not material weaknesses, represent
    significant deficiencies in the design or operation of internal controls
    that could adversely affect IRS' ability to meet the internal control
    objectives described in this report. These conditions concern:

    ? deficiencies in controls over hardcopy tax receipts and taxpayer data that
    increase the government's and taxpayers' risk of loss or inappropriate
    disclosure of taxpayer data; and ? deficiencies and limitations in revenue
    reporting and excise tax distributions, resulting in IRS' inability to
    separately report revenue

    collected for three of the federal government's four largest revenue sources
    and errors in quarterly distributions of excise tax revenue to trust funds.
    We have reported on these material weaknesses and reportable conditions in
    prior audits and have provided IRS numerous recommendations to address these
    issues, of which over 80 were still open as of the date of this

    letter. We will follow up in future audits to monitor IRS' progress in
    implementing these recommendations. For more details on these issues, see
    appendix I.

    Compliance with Laws Our tests of compliance with selected provisions of
    laws and regulations

    and Regulations and disclosed two instances of noncompliance with laws and
    regulations that are reportable under U. S. generally accepted government
    auditing

    FFMIA Requirements standards or OMB guidance. These relate to IRS'
    structuring of installment agreements to collect delinquent taxes and the
    timing of the release of tax

    liens on taxpayers' property. Also, IRS' financial management systems did
    not substantially comply with the following requirements of the Federal
    Financial Management Improvement Act of 1996 (FFMIA): (1) Federal Financial
    Management Systems Requirements, (2) applicable federal accounting standards
    (U. S. generally accepted accounting principles), and

    (3) the U. S. Government Standard General Ledger (SGL) at the transaction
    level. IRS has readily acknowledged that its financial management systems

    do not comply with FFMIA and the need to overhaul these systems as part of
    its broader systems modernization efforts. For more details on these issues,
    see appendix I. Except as noted above, our tests for compliance with the
    laws and regulations disclosed no other instances of noncompliance that
    would be reportable under U. S. generally accepted government auditing
    standards or OMB audit guidance. However, the objective of our audit was not
    to provide an opinion on overall compliance with laws and regulations.

    Accordingly, we do not express such an opinion. Consistency of Other

    Management's Discussion and Analysis, required supplemental Information
    information, and other accompanying information contain a wide range of
    data, some of which are not directly related to the financial statements. We
    did not audit and do not express an opinion on this information. However,

    we compared this information for consistency with the financial statements
    and discussed the methods of measurement and presentation with IRS
    officials. Based on this limited work, we found no material inconsistencies
    with the financial statements or nonconformance with OMB guidance. Under OMB
    Bulletin 97- 01, as amended, agencies are asked to strive to develop and
    report objective measures that, to the extent possible, provide information
    about the cost- effectiveness of their programs. However, we found that IRS
    cannot report reliable cost- based performance measures relating to its
    various programs in accordance with the Government Performance and Results
    Act of 1993.

    Objectives, Scope, and Management is responsible for (1) preparing the
    annual financial Methodology

    statements in conformity with U. S. generally accepted accounting
    principles, (2) establishing, maintaining, and assessing internal control to
    provide reasonable assurance that the broad control objectives of 31 U. S.
    C. sect.3512, (c), (d), (Federal Managers' Financial Integrity Act (FIA)) are
    met, (3) complying with applicable laws and regulations, and (4) ensuring
    that the agency's financial management systems substantially comply with the
    requirements of FFMIA.

    We are responsible for obtaining reasonable assurance about whether (1) the
    financial statements are presented fairly, in all material respects, in
    conformity with U. S. generally accepted accounting principles and

    (2) management maintained effective internal controls, the objectives of
    which are the following:

    ? Financial reporting- transactions are properly recorded, processed, and
    summarized to permit the preparation of financial statements in conformity
    with U. S. generally accepted accounting principles and

    assets are safeguarded against loss from unauthorized acquisition, use, and
    disposition. ? Compliance with laws and regulations- transactions are
    executed in

    accordance with laws governing the use of budget authority and with other
    laws and regulations that could have a direct and material effect on the
    financial statements and any other laws, regulations, and governmentwide
    policies identified by OMB audit guidance. We are also responsible for
    testing compliance with (1) selected provisions of laws and regulations that
    have a direct and material effect on the financial statements, (2) laws for
    which OMB audit guidance requires testing, and (3) FFMIA requirements. In
    addition, we are responsible for

    performing limited procedures with respect to certain other information
    appearing in these annual financial statements. For more details on our
    methodology, see appendix II.

    We did not evaluate all internal controls relevant to operating objectives
    as broadly described by FIA, such as controls relevant to preparing
    statistical reports and ensuring efficient operations. We limited our
    internal control testing to testing controls over financial reporting and
    compliance. We did not test compliance with all laws and regulations
    applicable to IRS. We limited our tests of compliance to legal provisions
    that we considered applicable to the financial statements for the fiscal
    year ended September 30, 2000, and were either included in the Internal
    Revenue Code or required

    to be tested by OMB guidance. We caution that noncompliance other than that
    discussed in this report may occur and not be detected by these tests and
    that such testing may not be sufficient for other purposes.

    We performed our work in accordance with U. S. generally accepted government
    auditing standards and OMB audit guidance. Agency Comments and

    In responding to this report, IRS recognized the extraordinary efforts Our
    Evaluation necessary to overcome its serious systems deficiencies and
    internal control weaknesses in order to prepare financial statements for
    fiscal year 2000

    that were fairly stated in all material respects. IRS also acknowledged the
    need to sustain these efforts and to continue to address its systems and
    control deficiencies but noted that ultimately, long- term resolutions to
    many of these issues can only be addressed through its ongoing systems

    modernization efforts. IRS highlighted its accomplishments thus far in
    addressing these issues, and summarized many of the corrective actions it
    has in progress or planned which it believes will ultimately achieve this
    goal. For example, IRS cited improvements in areas such as routine
    reconciliations of its fund balance, proper classification of program costs,
    review and management of its suspense accounts, and substantiation of unpaid
    assessments through better documentation. IRS also cited continuing efforts
    to address issues such as accountability over property and equipment,
    computer security, and security of hard copy tax receipts and taxpayer data.
    We will evaluate the effectiveness of these efforts during

    future audits. IRS generally agreed with our discussion of its problems with
    financial reporting, but believed that our discussion of the quality of the
    data in its general ledger systems could mislead readers. We clarified our
    discussion of this issue to address IRS' concern. However, we did not accept
    IRS' suggested alternate language because we believe it gives the impression
    that the problem with IRS' general ledger data integrity relates primarily
    to IRS' practice of not posting certain types of transactions until year-
    end,

    such as the capitalization of costs incurred in purchasing property and
    equipment (P& E). However, as discussed in appendix I to this report, as of
    September 30, 2000, IRS' general ledger did not include material amounts of
    fiscal year 2000 transactions, and in fact, these transactions were not

    recorded until months after the end of the year. In addition to the
    capitalization of P& E and related depreciation expense, these included many
    other material transactions, such as recognition of expenses for goods and
    services received during fiscal year 2000 but not yet recorded. IRS also
    recorded material adjustments to correct misstatements caused by previous
    delays in recording transactions, such as fiscal year 1999

    expenses that were not recorded until fiscal year 2000. In commenting on
    this report's discussion of unpaid assessments, IRS noted that the cost-
    benefit analysis discussed in this report would not produce more resources
    nor necessarily indicate that the programs subject to such an analysis
    should be expanded. The purpose of such analysis is not to increase
    resources. Rather, the objective is to provide IRS

    management with the basic information needed to make decisions involving
    allocation of limited resources among competing priorities, and

    once such decisions are made, to enable IRS to justify its decisions. This
    analysis would also better position IRS to determine if increases in total
    resources are warranted and to support related budgetary requests to
    Congress. IRS indicated a preference for addressing this issue through its
    strategic planning and budgeting process. However, in the absence of basic
    cost- benefit information to support this process, the basis for IRS'
    decisions will remain unclear.

    IRS generally agreed with the report's discussion of weaknesses in controls
    over P& E, but believed that our report did not put into proper perspective
    the progress IRS believes it achieved in P& E management in fiscal year
    2000. As we state in appendix I, we noted progress in IRS' efforts to
    improve the timeliness and accuracy of its P& E records, nonetheless, while
    improvements were made, we found that these efforts were not fully effective
    as demonstrated by the significant number of errors in IRS' property records
    we continued to find during our testing. In addition, it was only through an
    interim process involving enormous manual efforts by IRS employees, and the
    costly assistance of a contractor, that IRS was able to report a reliable P&
    E balance in its financial statements. Throughout fiscal

    year 2000, the lack of an integrated property management system precluded
    IRS' ability to report timely, reliable P& E information. We recognize the
    extraordinary efforts of IRS staff and we applaud

    management's commitment to working to correct the long- standing weaknesses
    that we identified. However, the progress that IRS made in fiscal year 2000
    was not sufficient to correct the fundamental deficiencies in its property
    management system. We will continue to evaluate the effectiveness of IRS'
    initiatives to correct deficiencies during future audits and to assist it in
    its efforts with suggestions and recommendations.

    IRS had several other specific comments to the draft report. These comments,
    along with the complete text of IRS' response, are included in appendix III.

    David M. Walker Comptroller General of the United States

    February 9, 2001

    Management Discussion and Analysis

    Financial Statements

    Balance Sheet

    Statement of Net Cost

    Statement of Changes in Net Position

    Statement of Budgetary Resources

    Statement of Financing

    Statement of Custodial Activity

    Notes to the Financial Statements

    Supplemental and Other Accompanying Information

    Appendi xes Material Weaknesses and Management Challenges, Reportable
    Conditions, and

    Appendi x I

    Compliance Issues Material Weaknesses During our audit of IRS' fiscal year
    2000 financial statements, we identified and Management

    six material weaknesses in internal controls. Some of these material
    weaknesses and their related management challenges have allowed Challenges

    inappropriate refunds to be paid, reduced IRS' effectiveness in enforcing
    the tax code, and resulted in errors in taxpayer accounts and increased
    taxpayer burden. The issues that we have identified and discuss in this
    report relate to IRS' controls over (1) the financial reporting process,

    (2) management of unpaid assessments, (3) refunds, (4) property and
    equipment, (5) budgetary activities, and (6) computer security. We reported
    on each of these issues last year. 1 We highlight these issues in the
    following sections and plan to provide more details on them, as well as

    recommendations for corrective actions, in a subsequent report. Less
    significant matters involving IRS' system of internal controls and its
    operation will be separately reported in a management letter to IRS. In our
    previous report on the results of our audit of IRS' fiscal year 1999
    financial statements, we reported on a material weakness with respect to
    IRS' failure to routinely reconcile its fund balance with Treasury. During

    fiscal year 2000, IRS implemented monthly reconciliation procedures for its
    fund balance with Treasury that were operating effectively during fiscal
    year 2000. Accordingly, we no longer consider this to be a material
    weakness.

    Financial Reporting In fiscal year 2000, as in prior years, IRS did not have
    adequate internal controls over its financial reporting process. IRS was
    unable to routinely, reliably, and timely generate the information needed to
    prepare its financial statements and manage operations on an ongoing basis.
    IRS does not (1) have an adequate general ledger system for financial
    reporting and management purposes, (2) record material transactions in its
    general ledger system in a timely manner, and (3) have adequate detailed
    supporting records for several material accounts. To compensate for these
    weaknesses, IRS depended on extensive, labor- intensive ad hoc procedures to
    enable it to report reliable balances in its financial statements. 1
    Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/ AIMD- 00-
    76, February 29, 2000).

    IRS' general ledger system (1) comprises two independent general ledgers
    that are not integrated with each other nor with their supporting records
    for material balances, 2 (2) is not current or accurate, and (3) is not
    supported by adequate audit trails for property and equipment, federal tax

    revenue, federal tax refunds, taxes receivable, or budgetary activity. In
    addition, IRS' general ledger for its custodial activities does not use the
    standard federal accounting classification structure. Because of these
    deficiencies, IRS' general ledger system does not conform with the U. S.
    Government Standard General Ledger (SGL) as required by the Core Financial
    System Requirements of the Joint Financial Management Improvement Program 3
    or the requirements of FFMIA. Consequently, IRS continued to be unable to
    rely on its general ledger system to fully support its financial statements.

    IRS often does not record material transactions in its general ledger system
    until months after they occur. As a result, material balances in the general
    ledger systems cannot be used by managers as a reliable source of current
    financial data at interim periods. Consequently, for IRS to use its general
    ledger system for financial reporting or other management purposes, IRS

    must first supplement it with extensive analysis and material adjustments to
    recognize transactions that have not yet been recorded. This approach is
    costly, labor- intensive, and typically requires several months to complete.
    For fiscal year 2000, this process was not completed until February 2001,
    and required billions of dollars in adjustments to recognize fiscal year
    2000 transactions that were not yet recorded in the general ledger. This
    approach is also prone to errors that are not always caught and corrected by
    management. For fiscal year 2000, substantial additional audit adjustments
    were necessary to prevent the resultant financial statements from being
    materially misstated. As a result of these problems, IRS cannot

    produce reliable financial statements or financial performance information
    throughout the year as a management tool, as is standard practice in private
    industry and some federal entities.

    2 IRS' two independent general ledgers support its administrative and
    custodial operations. 3 The Joint Financial Management Improvement Program
    (JFMIP) is a cooperative undertaking of the Office of Management and Budget,
    the Department of the Treasury, the Office of Personnel Management, and GAO
    working in cooperation with each other and with operating agencies to
    improve financial management practices.

    We previously reported that IRS commingled customer service and compliance
    costs on its statement of net costs. 4 To address this issue, IRS revised
    the format of its statement of net cost and significantly expanded and
    enhanced the related disclosures in fiscal year 2000. The resulting
    presentation appropriately classified the cost of IRS' programs.

    Management of Unpaid Tax During fiscal year 2000, we found that serious
    internal control issues and

    Assessments other management challenges continued to affect IRS' management
    of

    unpaid assessments. IRS was able to report amounts for taxes receivable and
    other unpaid assessments 5 in its financial statements and supplemental
    information that were fairly stated in all material respects, using
    statistical sampling techniques and estimation procedures. However, the lack
    of an effective subsidiary ledger; errors and delays in recording taxpayer
    information, payments, and other activities; and the inability to actively
    pursue significant amounts in outstanding taxes owed to the federal
    government continue to hinder IRS' ability to effectively manage unpaid
    assessments.

    4 GAO/ AIMD- 00- 76, February 29, 2000. 5 Unpaid assessments consist of (1)
    taxes due from taxpayers for which IRS can support the existence of a
    receivable through taxpayer agreement or a favorable court ruling (federal
    taxes receivable), (2) compliance assessments where neither the taxpayer nor
    the court has affirmed that the amounts are owed, and (3) write- offs, which
    represent unpaid assessments for which IRS does not expect further
    collections due to factors such as the taxpayer's death, bankruptcy, or
    insolvency. Of these three classifications of unpaid assessments, only
    federal taxes receivable are reported on the principal financial statements.
    As of September 30, 2000, IRS reported $22 billion (net of an allowance for
    doubtful accounts of $59 billion),

    $30 billion, and $129 billion in these three categories, respectively.

    IRS continues to lack a detailed listing, or subsidiary ledger, that tracks
    and accumulates unpaid assessments and their status on an ongoing basis. The
    lack of such a subsidiary ledger renders IRS unable to promptly identify and
    focus collection efforts on accounts most likely to prove collectible 6 and
    impedes its ability to prevent or detect and correct errors in taxpayers'
    accounts. As in prior years, 7 IRS' records contained errors and there were

    significant delays in IRS recording activity in taxpayer accounts. While
    these conditions in isolation may not rise to the level of material
    weakness, collectively they are indications of serious internal control
    deficiencies. These conditions continued to result in instances of
    unnecessary taxpayer burden and lost opportunities to collect outstanding
    taxes owed.

    During our testing of statistical samples of 508 8 unpaid tax assessment
    cases as part of our fiscal year 2000 audit, we found the following:

    ? Significant delays- of up to 12 years- in recording payments made by
    taxpayers to related taxpayer accounts. We also found payments that were not
    recorded at all in related taxpayer accounts. Some of these delayed or
    unrecorded payments were made in the late 1980s. ? Delays in updating
    information in taxpayer accounts. In some instances,

    because IRS delayed entering taxpayer information such as bankruptcy status
    or codes to prevent the release of refunds, it lost opportunities to offset
    refunds owed to taxpayers for subsequent tax periods against their
    outstanding tax liabilities. In two cases, IRS' failure to input or reverse
    information resulted in refunds that should not have been issued because the
    taxpayer had other outstanding tax liabilities. In each of these cases, the
    inappropriate refund was for more than $4, 000.

    ? Other errors in taxpayer's accounts. We found at least eight cases in our
    sample in which errors other than those noted above existed in taxpayer
    accounts. In some cases, the errors directly affected the taxpayer. In one

    6 It should be noted that although certain taxpayer accounts have little
    likelihood of collection, IRS would generally continue some collection
    efforts to reinforce continued compliance by taxpayers who appropriately
    report and pay their tax obligations and to increase compliance by taxpayers
    who are delinquent in reporting and paying their tax obligations.

    7 GAO/ AIMD- 00- 76, February 29, 2000; and Financial Audit: IRS' Fiscal
    Year 1998 Financial Statements (GAO/ AIMD- 99- 75, March 1, 1999). 8 These
    statistical samples were selected primarily to substantiate, and in some
    cases derive, balances and activity reported on IRS' financial statements.
    Consequently, dollar errors or amounts can and have been statistically
    projected to the population of transactions from which they were selected.

    case, we found that a deceased individual's estate sent a payment of $68
    million to IRS in January 1999, but IRS recorded the payment to the wrong
    taxpayer account. The taxpayer's estate was actually owed a refund of almost
    $7 million. This input error was not corrected until almost 2 years later.
    Consequently, IRS did not pay the refund to the

    estate for nearly 2 years after it was owed. We have found and reported on
    these issues in previous audits. 9 IRS has acknowledged the seriousness of
    these issues and continues to take remedial steps to correct them, but has
    noted in the past and continues to note that the ultimate solution to many
    of these issues is modernization of its systems. As in prior years, the
    unpaid assessment accounts in which we

    found significant delays in recording payments primarily were those
    representing unpaid payroll taxes, where separate accounts are established
    and assessments recorded for a related tax liability. 10 IRS' current
    systems cannot automatically link each of the multiple assessments made for
    the one tax liability. Consequently, if the business or an officer pays some
    or all of the outstanding taxes, IRS' systems are unable to automatically
    reflect

    the payment as a reduction in the related account or accounts. In 29 of 68
    (43 percent) unpaid payroll tax cases we reviewed involving multiple
    assessments, we found that payments were not accurately recorded to

    reflect each responsible party's reduction in tax liability. This is
    approximately the same rate of occurrence that we identified during our 1999
    audit (45 percent). IRS has attempted to compensate for the lack of an
    automated link between related accounts by manually inputting a code in each
    account that cross- references it to other related accounts. However,

    in the 29 cases mentioned above, 28 (96 percent) had cross- references, yet
    the payments still were not accurately recorded. 9 GAO/ AIMD- 00- 76,
    February 29, 2000; GAO/ AIMD- 99- 75, March 1, 1999. 10 When a company does
    not pay the taxes that have been withheld from employees' wages, such as
    Social Security or individual income tax withholdings, IRS has the authority
    to assess the responsible officers individually for the taxes withheld from
    employees. Thus, IRS may record the assessments against each of several
    individuals for the employeewithholding component of the payroll tax
    liability of a given business in an effort to collect the total tax
    liability of the business. While the assessments made against business
    officers- known as trust fund recovery penalties- are a necessary
    enforcement tool, IRS should only collect the unpaid tax once.

    As with any large agency, IRS is confronted by the ongoing management
    challenge of allocating its limited resources among competing priorities. As
    we reported previously, IRS does not have the management data necessary

    to prepare reliable cost- benefit analyses to ensure that its resource
    allocation decisions are appropriate. Consequently, IRS is hindered in its
    ability to determine whether it is devoting an appropriate level of
    resources to collecting unpaid taxes relative to the costs and potential
    benefits involved. During fiscal year 2000, we found potential additional
    collection

    opportunities that IRS was not pursuing, according to IRS, due to resource
    constraints. We continued to identify instances in which IRS was not
    actively pursuing accounts that appeared to have some collection potential.
    IRS officially stopped collection efforts on some of these cases 11 while
    other cases remained unworked although collection efforts were not
    officially stopped. In our review of one of our statistical samples of
    unpaid tax assessments consisting of 474 cases, we found (1) 9 cases in
    which IRS

    officially stopped collection activity due to resource constraints and (2)
    several other cases for which information in the case files we reviewed
    indicated some collection potential but on which IRS had not taken
    collection action. For example, in one case, a taxpayer owed over $23,000 in
    taxes, and despite this taxpayer's annual income in subsequent years of over
    $110,000, IRS was not actively pursuing collection. There is a point at
    which pursuing collection on a case ceases to be cost effective, and clearly

    many cases in our sample provided little or no hope of future collections.
    IRS' challenge is to determine the appropriate level of resources needed to
    fulfill its mission and the most appropriate utilization of its existing

    resources. Without sound management data in which to make these decisions,
    IRS is hindered in its ability to justify its resource utilization
    decisions, which could result in billions of dollars in outstanding amounts
    going uncollected and could affect future compliance.

    In fiscal year 2000, we noted substantial improvement in IRS' ability to
    locate and provide adequate supporting documentation for unpaid assessments.
    The cases we reviewed in fiscal year 2000 generally contained sufficient
    detailed information to determine the appropriate classification 11 These
    accounts had been designated by IRS as “currently not
    collectible.” Until recently, the designation “currently not
    collectible” was typically used for cases in which the taxpayer

    was experiencing financial difficulties or other hardships that made
    collection highly unlikely. However, during fiscal year 1999, IRS modified
    the criteria under which unpaid assessment cases could be designated as
    currently not collectible in response to an increasing inventory workload
    and its judgment that resource constraints would not permit

    the agency to actively pursue the cases.

    of the unpaid assessment and to provide a basis for estimating
    collectibility for cases determined to be taxes receivable. We identified
    only one case this year in which IRS' inability to provide documentation
    resulted in the need to reclassify the case.

    Controls Over Refunds As we have reported in previous audits, weaknesses in
    IRS' controls over refund disbursements and other management challenges
    expose the federal government to material losses due to disbursing improper
    refunds. 12 During fiscal year 2000, IRS disbursed tax refunds totaling
    about $194 billion. IRS has implemented various controls, such as electronic
    screening, that prevent thousands of improper refunds from being

    disbursed each year. However, time constraints, 13 high volume, and reliance
    on information supplied by taxpayers affected the options available to IRS
    in its efforts to prevent improper refunds from being disbursed.
    Consequently, IRS relies extensively on postrefund (detective) controls,
    such as automated matching of returns with third- party data such as W- 2s
    (wage and tax statements), to identify for collection improper refunds that
    have been disbursed. However, each year, IRS does not apply these

    controls to millions of tax returns it estimates to have billions of dollars
    of underreported tax liabilities. Consequently they cannot be considered
    effective detective controls. Inevitably, IRS must balance the cost of all
    its refund controls against the benefits to be realized through their use.
    However, as we previously reported, 14 IRS' financial management systems do
    not provide the reliable information needed to support such decisions.

    12 An improper refund is defined as any refund of tax payments from IRS to
    which the taxpayer is not entitled. The taxpayer may or may not have made an
    intentional misstatement on his or her return. 13 By statute, IRS must pay
    interest on refunds not paid within 45 days of receipt or due date,
    whichever is later (26 U. S. C. 6611). 14 Internal Revenue Service:
    Recommendations to Improve Financial and Operational Management (GAO- 01-
    42, November 17, 2000).

    IRS does not always review Earned Income Tax Credit (EITC) claims in time to
    identify invalid claims before issuing refunds. Historically, EITCs have
    been vulnerable to high rates of invalid claims, 15 and because most EITCs
    result in refunds, 16 the risk of disbursing improper refunds is
    significantly increased. In an effort to minimize this risk, IRS, relying on

    past experience, screens tax returns claiming EITCs to identify (for
    detailed examination) those considered most likely to be invalid. During
    fiscal year 2000, IRS examiners completed the detail examinations of about
    257,000 tax returns claiming approximately $587 million in EITC and found

    that about 173,000 of these tax returns claiming $395 million in EITC (67
    percent) were invalid. When performed before refunds are disbursed, these
    examinations are an important control to prevent disbursement of improper
    refunds. However, because IRS often performs them after any related refunds
    are disbursed, they are not an effective preventive control overall. 17 The
    full magnitude of refunds resulting from invalid EITCs is unknown. However,
    in September 2000, IRS estimated that in tax year 1997,

    taxpayers filed about $9.3 billion in invalid EITCs, 18 of which $1.5
    billion (16 percent) either was recovered or was expected to be recovered
    through compliance efforts. The dollar amount of improper refunds disbursed
    related to these EITCs is unknown. However, based on the refund rate of
    about 78 percent of EITC in tax year 1997, IRS may have disbursed

    approximately $7. 3 billion in improper refunds for EITC in tax year 1997,
    about $6.1 billion (84 percent) of which may never be recovered. IRS began
    implementing a 5- year initiative in fiscal year 1998 to address
    noncompliance problems with EITCs.

    To compensate for the inherent limitations of its preventive controls, IRS
    performs automated matches between tax returns and related third- party data
    to identify underreported taxes, improper refunds, and other errors.
    However, these programs are not run until months after the returns have

    15 High- Risk Series: An Update (GAO- 01- 263, January 2001 ); Major
    Management Challenges and Program Risks: Department of the Treasury (GAO-
    01- 254, January 2001); and GAO/ AIMD 00- 76, February 29, 2000. 16 During
    fiscal year 2000, IRS processed about $31 billion in EITCs. Of this amount,
    about $26 billion (84 percent) was refunded, and the rest reduced tax
    assessments. 17 IRS estimated that of the 573,000 EITC tax returns examined
    in fiscal year 1999, approximately 172,000 (30 percent) were conducted after
    the refund had been disbursed

    (GAO/ AIMD- 00- 76, February 29, 2000). 18 Compliance Estimates for Earned
    Income Tax Credit Claimed on 1997 Returns (Internal Revenue Service,
    September 2000).

    been filed. As a result, they are used too late to prevent improper refunds
    from being disbursed. There are factors that affect IRS' ability to
    accelerate the timing of its automated matches, such as the limitations of
    its current automated systems and the timing of filing requirements for
    preparers of third- party documents, which are beyond IRS' control. In
    response to a

    previous GAO recommendation, IRS indicated that it has incorporated in its
    systems modernization blueprint the capability to perform automated matching
    against available data before issuing refunds. However, implementing this
    feature is still years in the future. As noted above, IRS does not have the
    management data necessary to prepare reliable cost- benefit analyses to
    ensure that its resource allocation decisions are appropriate. Consequently,
    IRS is hindered in its ability to determine the appropriate level of
    resources to devote to following up on

    the underreported taxes and improper refunds identified by its automated
    matching programs. However, the results of IRS efforts to follow up on the
    findings of its automated matches in recent years suggests that a

    substantial amount of additional revenue might be realized if additional
    resources were devoted to these efforts. 19 For example, for tax year 1998,
    IRS' screening program for individuals identified 14.1 million individual
    tax returns that had potential underreported taxes totaling at least $15.4
    billion. IRS investigated about 2.5 million (18 percent) of these cases
    accounting for about $6.5 billion (42 percent) of the total potential
    underreported taxes. Also, IRS did not investigate any of the 636,000

    discrepancies its matching program found for employment tax returns filed by
    employers during tax year 1998. According to IRS, resource constraints
    prevented it from investigating more of these discrepancies. However,
    because of the lack of management information discussed above, IRS

    cannot determine whether it would be cost beneficial to allocate more
    resources to its automated matching programs and related follow- up. As
    previously discussed, we also continued to find instances in which
    inappropriate refunds were issued as a result of delays in recording
    information in taxpayers' accounts. IRS also continued to be vulnerable to
    issuing duplicate refunds allowed by gaps in its internal controls. IRS'
    manual and automated systems are not properly coordinated to prevent

    identical refunds from being processed through both systems, and controls
    designed to compensate for this are not always effective. All the above19
    GAO- 01- 42, November 17, 2000.

    mentioned conditions expose the government to potentially significant losses
    due to inappropriate refund disbursements. Property and Equipment During
    fiscal year 2000, IRS continued to work to compensate for serious

    deficiencies in systems and controls over its property and equipment (P& E).
    Specifically, IRS worked hard to improve the reliability of its P& E
    inventory records by conducting physical inventories at its headquarters and
    its field offices, and used the results of these physical inventories to
    update its P& E inventory records. Also, IRS worked to sustain a reliable
    balance for P& E on its fiscal year 2000 financial statements by engaging
    the

    services of a contractor to extract and compile P& E transaction data for
    year- end financial reporting. IRS' efforts resulted in it being able to
    report a balance for P& E on its financial statements at September 30, 2000,
    that was

    fairly stated in all material respects. Nonetheless, serious weaknesses in
    its P& E systems and controls continue to prevent it from having P& E
    information available on an ongoing basis for management purposes and from
    having reasonable assurance that its assets are properly safeguarded and
    used only in accordance with management policy. IRS has reported a material
    weakness in its controls over P& E in its assurance statement to Treasury
    under 31 U. S. C. sect.3512 (c), (d) (Federal Managers' Financial Integrity Act
    (FIA)) every year since 1983.

    In prior years, IRS' procedures were not effective in ensuring that
    acquisitions, disposals, and transfers were promptly and accurately recorded
    in its P& E inventory records. As a result, IRS' P& E records were not
    adequate to maintain accountability over its property. While we noted
    progress in IRS' efforts to improve the timeliness and accuracy of recording
    P& E activity, we nonetheless continued to find a significant number of
    errors in IRS' property records. Specifically, IRS was unable to locate 35
    of 220 sample items (16 percent) selected from P& E records, including
    computers, monitors, printers, and computer software. IRS later determined
    that 23 of these 35 items had been disposed of months earlier, but P& E
    records had not been updated to reflect the disposal. In addition, we found
    that 14 of 219 sample items (6 percent) selected at 22 sites we visited
    could not be traced to IRS' P& E records. At 18 of the 22 IRS buildings we
    visited, we found inaccurate P& E records consisting of either items not at
    the site as recorded or items at the site but not on the records. Accurate
    records are essential for maintaining control over P& E to ensure

    that assets are properly accounted for and safeguarded.

    As we have previously reported, IRS does not have an integrated property
    management system that appropriately records P& E additions and disposals as
    they occur and links cost recorded in the accounting records to property
    records. Instead, IRS expenses property purchases during the year, and then
    records adjustments at year- end to remove property purchases from expenses
    and capitalize them as P& E based on analyses of

    expense records. For its September 30, 1999, P& E balance, IRS recorded a
    balance based primarily on a statistical estimation process developed and
    implemented by a contractor. 20 While the effort resulted in a reasonable
    estimate of the September 30, 1999, P& E balance, it did nothing to address
    the fundamental deficiencies in IRS' accounting and property management

    systems. Consequently, for fiscal year 2000, IRS hired a contractor to
    develop and implement an interim process to enable IRS to continue to report
    a reliable P& E balance in its financial statements until it has an

    integrated accounting and property system. 21 Although we determined through
    detailed tests of transactions and analyses of the contractor's work that
    IRS' reported September 30, 2000, P& E balance was fairly stated,
    longstanding weaknesses in IRS' property and accounting systems continue to
    affect IRS' ability to account for its property and report a reliable P& E
    balance. In addition, these weaknesses result in a recurring annual expense
    of hiring a contractor to develop a P& E balance at fiscal year- end.

    Budgetary Controls During fiscal year 2000, IRS devoted substantial effort
    to addressing the budgetary control weaknesses that we reported in fiscal
    year 1999. 22 For

    example, during the fiscal year, IRS significantly reduced the number of
    employees with authority to override automated spending controls. Also, IRS
    substantially reduced the dollar amount and duration of transactions held in
    suspense. Finally, IRS issued numerous policy memoranda and implemented
    procedures to deobligate funds no longer required for a specific purpose.
    However, IRS' internal controls continued to be inadequate in providing
    reasonable assurance that its budgetary resources

    20 GAO/ AIMD- 00- 76, February 29, 2000. 21 IRS plans to acquire and
    install, in October 2003, an integrated financial system that will include
    recording P& E as assets when purchased and generating detailed records for
    P& E that reconcile to the financial records. 22 GAO/ AIMD- 00- 76, February
    29, 2000.

    were routinely accounted for, reported, and controlled. These weaknesses
    significantly affect the reliability of key budgetary information IRS needs
    on an ongoing basis to effectively manage its operations and ensure that its

    resources do not exceed budgetary authority. We found that undelivered
    orders 23 were not always reduced to reflect goods and services received or
    were understated due to inappropriate deobligating of funds. For example, in
    our testing of statistical samples of both the beginning and ending balances
    of undelivered orders, we found error rates of 32 and 25 percent,
    respectively, for the transactions tested.

    These errors were primarily due to goods and services having been received
    but not deducted from undelivered orders. For example, in testing one fiscal
    year 2000 undelivered order totaling $7. 9 million for computer equipment,
    we found that approximately $3.4 million of the equipment had been delivered
    but had not been removed from the undelivered orders balance. We also found
    instances in which IRS incurred costs before the

    obligations were recorded in the accounting system. In one case tested in
    our sample of beginning year undelivered orders, an obligation for over $9
    million for software and maintenance was not recorded in the accounting
    system until September 30, 1999, although the software was received and
    maintenance commenced by the end of July 1999. Incurring costs without
    timely recording obligations in the accounting system creates the risk that
    IRS personnel could rely on an overstatement of available budget authority

    to enter into additional obligations for which there is inadequate budget
    authority to cover. We also found that IRS' efforts to address the need to
    deobligate amounts no longer needed resulted in instances in which the
    amounts were prematurely deobligated. In testing a separate statistical
    sample of deobligations, we found that in 17 percent of the cases, IRS later
    had to reobligate funds in whole or in part. These errors resulted in
    misstatements of IRS' beginning and ending undelivered orders balances and
    its records of outstanding obligations.

    Also, we found significant errors in IRS' accrued expenses recorded at the
    end of fiscal year 1999, which resulted in misstating the beginning balance
    of undelivered orders for fiscal year 2000. In testing a statistical sample
    of these accruals, we identified errors in 36 percent of the sample cases.
    For example, IRS allocated $209,500 of the total invoice cost of $260,130
    related to an information systems service contract to fiscal year 1999, and
    the 23 Undelivered orders represent the value of goods and services ordered
    that have been obligated but have not been received.

    remaining $50,630 to fiscal year 2000. However, based on the terms of the
    service contract, we determined that only $1,724 of the invoice cost related
    to services for fiscal year 1999, while the remaining $258, 406 related to
    services to be rendered in fiscal year 2000. This resulted in an

    overstatement of the expense for fiscal year 1999 and an understatement of
    the beginning undelivered order balance for fiscal year 2000. We identified
    errors throughout IRS' $121 million of accruals that resulted in both
    understatements and overstatements of the beginning undelivered orders

    balance. We also found that, during fiscal year 2000, IRS recorded incorrect
    activity as adjustments to obligations. 24 IRS recorded a total of $277
    million in adjustments to obligations in fiscal year 2000. However, in
    reviewing statistical samples of these adjustments, we found that 61 percent
    of the items we reviewed were not valid adjustments and, in fact, many were
    simply changes in internal accounting codes. For example, in one case we

    reviewed, IRS recorded a change in an internal accounting code as a new $15
    million obligation and erroneously adjusted the original $15 million
    obligation downward, thereby misstating its reported level of adjustments to
    obligations. While adjustments were made to correct the amounts recorded in
    the financial statements, errors such as these affect the accuracy and
    reliability of routine information on both total budgetary resources and
    obligations. Computer Security IRS has corrected a significant number of the
    computer security weaknesses identified in our previous reports and is
    implementing a

    servicewide computer security planning and management program that should,
    when fully implemented, help IRS effectively manage its computer security
    risks. However, IRS has not yet fully implemented its security program
    across the service. Much remains to be done to resolve the significant
    control weaknesses that continue to exist within the IRS computing
    environment. IRS places extensive reliance on computer information systems
    to perform basic functions such as processing tax returns and payments,
    maintaining sensitive taxpayer data, calculating interest and penalties, and
    generating refunds. These computer control weaknesses could impair IRS'
    ability to

    24 An adjustment to an obligation is recorded when the dollar amount
    previously recorded is affected by a subsequent event, such as a change in
    the price of goods or services.

    perform these vital functions and increase the risk of the unauthorized
    disclosure, modification, or destruction of taxpayer data. We found that IRS
    continued to have serious weaknesses with general controls designed to
    protect computing resources such as networks, computer equipment, software
    programs, data, and facilities from unauthorized use, modification, loss,
    and disclosure. IRS did not always

    ? effectively implement physical controls to prevent or detect individuals
    from gaining unauthorized access to its data processing facilities, ?
    adequately restrict logical access to its computer networks and systems, ?
    appropriately segregate system administration and security

    administration responsibilities, ? optimally configure system software to
    ensure the security and integrity

    of system programs, files, and data, ? sufficiently plan or test the
    activities required to restore critical business

    systems when unexpected events occur, and ? adequately monitor key networks
    and systems to identify unauthorized

    activities and inappropriate system configurations. In addition, internal
    controls over IRS' key computer applications that IRS personnel used to
    process tax returns, research and adjust taxpayer records, generate notices,
    and detect and investigate fraudulent tax returns

    do not provide adequate assurance that only authorized personnel have access
    to the application and related taxpayer data.

    These weaknesses increased the risk that data processed by IRS' computer
    systems were not reliable and were vulnerable to unauthorized disclosure.
    For example, IRS did not promptly revoke the access privileges of separated
    employees to a key system used to view and adjust taxpayer records. Weak
    physical security at one of IRS' data processing facilities could have
    allowed separated employees to enter the facility without

    challenge, gain physical access to the system's terminals, and use their
    unrevoked system access privileges to make unauthorized changes to taxpayer
    records. If IRS does not adequately mitigate these weaknesses, unauthorized
    individuals could gain access to critical hardware and software where they
    may intentionally or inadvertently add, alter, or delete sensitive data or
    computer programs. Such individuals could also obtain

    personal taxpayer information and use it to commit financial crimes in the
    taxpayer's name (identity fraud), such as fraudulently establishing credit
    and running up debts.

    Reportable Conditions In addition to the material weaknesses and management
    challenges discussed above, we identified two reportable conditions. These
    conditions concern weaknesses in IRS' (1) internal controls over manually
    processed tax receipts and taxpayer information and (2) revenue reporting
    and distribution process. We reported on both issues in prior years. 25

    Manual Tax Receipts and IRS has acted to address some of its control
    deficiencies related to

    Taxpayer Information safeguarding cash, checks, and related hardcopy
    taxpayer data it manually receives from taxpayers. For example, IRS has
    significantly reduced the average amount of time it takes to obtain the
    results of employee applicant fingerprint checks, now requires the use of
    two bonded or insured couriers

    to transport service center deposits, and has limited courier access within
    service center premises. However, weaknesses that we have reported in prior
    years continue to exist. To address these issues, IRS issued new policies
    and procedures regarding handling of taxpayer receipts and data at sites
    that collect and process tax revenue. However, we found that some of these
    sites were not aware of the new policies, other sites did not adhere to

    them, and some sites were not covered by the new policies and procedures
    because they were not contractually bound to IRS.

    We previously reported that IRS was hiring individuals and allowing them
    access to cash, checks, and other taxpayer data before it received
    satisfactory results of their fingerprint checks. 26 In response, IRS issued
    a new policy in April 2000 prohibiting the hiring of applicants in any IRS
    office until fingerprint checks were completed. However, we found that

    throughout the rest of the fiscal year, some new employees began working
    before the hiring office received the results of fingerprint checks. Because
    most of IRS' hiring occurs in the several months leading up to the April
    peak processing period, the policy was not yet in place to affect most of
    its

    fiscal year 2000 hiring. However, we found that 83 of the 2,526 staff hired
    from the time the policy was issued through September 30, 2000, began
    working before IRS received the results of their fingerprint checks.

    IRS also issued a new policy in fiscal year 2000 strengthening its courier
    requirements for all IRS locations, and we noted marked improvements at 25
    GAO/ AIMD- 00- 76, February 29, 2000; GAO/ AIMD- 99- 75, March 1, 1999. 26
    GAO/ AIMD- 00- 76, February 29, 2000.

    most sites we visited. The new policy's requirements include that the
    courier services use two bonded or insured couriers, that all courier
    service employees with IRS access pass a limited background investigation
    and have the courier company be insured for $1 million. We did continue to
    find other weaknesses in controls over taxpayer receipts and taxpayer data
    that have not yet been adequately addressed. For example, we continued to
    find field office receipts and discovered remittances stored in open,
    unlocked containers, contrary to IRS policy. Also, we noted that certain
    problem areas have been addressed at service

    centers but not at other field offices that handle taxpayer receipts. For
    example, although IRS installed lockers at service centers for employees
    that handle receipts to store their personal belongings, we continued to
    find personal belongings such as handbags stored in receipt processing areas
    at several field offices.

    These inconsistencies by type of location are further illustrated by
    weaknesses found at commercial lockbox banks that process tax receipts on
    behalf of IRS. Since these lockbox banks operate under contract with
    Treasury's Financial Management Service (FMS), many of IRS policies are

    not applicable to their operations. For example, under their contract with
    FMS, the lockbox banks are not required to follow IRS' policy prohibiting
    the hiring of any new employee before the results of fingerprint checks are
    received and reviewed. Consequently, at the lockbox banks we visited, we
    found that fingerprint checks were not required for either permanent or
    temporary employees. Similarly, IRS' new courier policy that applies to all
    IRS locations has not been extended to the lockbox banks.

    These weaknesses increase IRS' vulnerability to theft or loss and expose
    taxpayers to increased risk of losses from financial crimes committed by
    individuals who inappropriately gain access to confidential information
    entrusted to IRS. Although we do not consider these to be material
    weaknesses for financial reporting purposes, it is important that IRS
    continue efforts to address these matters because they are critical to IRS'
    successfully meeting its customer service goals. Revenue Reporting and

    IRS continues to be unable to determine the specific amount of revenue it
    Distribution actually collects for three of the federal government's four
    largest revenue sources- Social Security, Hospital Insurance, and individual
    income taxes. In addition, IRS continues to be unable to determine, at the
    time payments are received, collections for the Highway Trust Fund or other
    trust funds

    that receive excise tax receipts. This is primarily because the accounting
    information needed to validate the taxpayer's liability and record the
    payment to the proper trust fund is provided on the tax return, which is
    received months after the payment is submitted. Further, the information

    on the return pertains only to the amount of the tax liability, not to the
    distribution of the amount previously collected. As a result, IRS cannot
    report the specific amount of revenue it actually collected for these large
    revenue sources without first requiring taxpayers to submit the needed
    information at the time of payment. IRS believes that imposing such a
    requirement could create an additional burden to taxpayers.

    Because collection data are not available to allocate excise taxes to the
    appropriate trust funds when deposits are made, Treasury's Office of Tax
    Analysis uses economic models to estimate the initial distribution of excise
    tax receipts. Six months later, to prepare adjustments to the initial
    distribution, IRS certifies the amounts that should have been distributed to
    the excise- tax- related trust funds using its records of payments received

    and the subsequently provided tax returns. This certification process is
    complex, cumbersome, and error- prone. Because of continued weaknesses in
    fundamental internal controls, such as inadequate reviews, undetected

    errors in the certification process occurred that directly affected the
    distribution of revenue to the trust funds. Although IRS had implemented
    additional review procedures over its certification process in response to
    our previous reports, these reviews have not been fully effective. For
    example, IRS' failure to follow required review procedures at the service
    center resulted in unsubstantiated credits or reductions made to the tax
    liability of taxpayers who had not submitted required documentation with
    their return.

    Also, we continued to find delays in posting tax returns that resulted in
    IRS omitting collections from certifications for a given quarter. For
    example, the amount IRS certified to the Highway Trust Fund for the quarter
    ended

    September 30, 1999, 27 included nearly $346 million in collections from
    previous quarters, and the amount it certified for the Airport and Airway
    Trust Fund for the quarter ended June 30, 2000, included nearly $34 million
    in collections from previous quarters. Delays by IRS in processing tax
    returns and late filing of returns by taxpayers, the latter of which is
    outside IRS' control, are factors that contributed to delays in posting
    return

    information. Taxpayers are not required to provide detailed information on
    the type of tax when they pay their taxes. Also, IRS officials stated that
    their systems cannot capture the additional detailed information.
    Consequently, IRS is working on systems improvements to accommodate this
    type of information in the future. In addition, IRS plans to initiate in 3
    to 4 years a follow- up study to a previous study to gauge taxpayer ability
    and readiness to provide detailed information by type of tax at the time of
    payment without imposing an additional burden on taxpayers. Until IRS has
    the systems capability to record, and makes a decision with respect to
    whether taxpayers should provide, specific information on the type of taxes
    being

    paid at the time of payment, it will continue to be unable to report revenue
    actually collected for three of the federal government's four largest
    revenue sources and continue using a process for distributing excise tax
    revenue to trust funds that is susceptible to errors.

    Noncompliance With Our tests of compliance with selected provisions of laws
    and regulations

    Laws and Regulations disclosed two instances of noncompliance that are
    reportable under U. S. generally accepted government auditing standards and
    OMB guidance.

    and FFMIA These relate to IRS' structuring of installment agreements to
    collect Requirements

    delinquent taxes and the timing of the release of federal tax liens against
    taxpayers' property. We also found that IRS' financial management systems do
    not substantially comply with the requirements of FFMIA.

    27 Since certifications usually are not completed until 6 months after the
    end of the quarter, the certification for the quarter ended September 30,
    1999, was actually performed in fiscal year 2000 and thus affected excise
    tax distributions in fiscal year 2000.

    IRS' Structuring of Section 6159 of the Internal Revenue Code authorizes IRS
    to enter into

    Installment Agreements Did installment agreements with taxpayers to fully
    satisfy the taxpayer's liability. During two previous audits, 28 we
    identified instances in which IRS Not Always Comply With

    entered into installment agreements with payments and terms that would the
    Internal Revenue Code

    not be sufficient to satisfy the taxpayers' outstanding tax liability,
    including future interest accruals, before the statutory collection period
    for these tax liabilities expires. 29 In March 1998, IRS issued a memorandum
    requiring that installment agreements provide for the full payment of a
    taxpayer's outstanding tax liability. However, as in our fiscal year 1999
    audit, we continued to find that these guidelines were not consistently
    followed in fiscal year 2000. Consequently, IRS continued to be noncompliant
    with Section 6159 of the Internal Revenue Code.

    In fiscal year 1999, we found that of 40 unpaid tax cases involving new
    installment agreements, 8 (20 percent) did not comply with the Internal
    Revenue Code. In our testing of 86 unpaid assessments involving taxpayers

    who entered into installment agreements to pay their outstanding tax
    liabilities in fiscal year 2000, we found 2 cases (2 percent) that contained
    payment terms that will be insufficient to satisfy the full tax liability
    before the statutory collection period for these tax liabilities expires.
    The

    presence of such cases in fiscal year 2000 indicates that IRS continues to
    be noncompliant with this provision of the Internal Revenue Code. IRS Did
    Not Always Release

    The Internal Revenue Code grants IRS the power to file a lien against the
    Federal Tax Liens in property of any taxpayer who neglects or refuses to pay
    all assessed federal Accordance With the

    taxes. The lien becomes effective when it is filed with a designated office,
    Internal Revenue Code

    such as a courthouse in the county where the taxpayer's property is located.
    The lien serves to protect the interest of the federal government and serves
    as a public notice to current and potential creditors of the government's
    interest in the taxpayer's property. For example, federal tax liens are
    disclosed in credit reports of individuals. Under Section 6325 of the
    Internal Revenue Code, IRS is required to release a federal tax lien within
    30 days after the date the tax liability is satisfied or has become 28 GAO/
    AIMD- 00- 76, February 29, 2000 and Financial Audit: IRS' Fiscal Year 1998
    Financial Statements (GAO/ AIMD- 99- 75, March 1, 1999).

    29 The statutory collection period for taxes is generally 10 years from the
    date of the tax assessment. However, this period can be extended by
    agreement with the taxpayer.

    legally unenforceable or the Secretary of the Treasury has accepted a bond
    for the assessed tax.

    During our fiscal year 1999 audit, we found that IRS did not release the
    applicable federal tax lien within the 30- day requirement stipulated in the
    Internal Revenue Code for 26 percent of the cases we reviewed where the tax
    liability was either paid off or abated. While we noted significant
    improvement, we found that this condition continued to exist during fiscal
    year 2000. Specifically, in our testing of 38 tax cases with liens in which
    the taxpayers' total outstanding tax liabilities were either paid off or
    abated during fiscal year 2000, we found 3 instances (8 percent) in which
    IRS did not release the applicable federal tax lien within the 30- day
    statutory requirement. The time between satisfaction of the liability and
    release of the lien ranged from about 100 to over 500 days. In one case, we
    found that although the taxpayer had paid off the outstanding tax liability
    by August

    1998, IRS did not formally release the lien against the taxpayer's property
    until March 2000- 583 days later. The failure to promptly release tax liens
    could cause undue burden to taxpayers who are attempting to sell property or
    apply for commercial credit.

    IRS' Financial Management In fiscal year 2000, we continued to find that
    IRS' financial management

    Systems Are Not in systems did not substantially comply with the
    requirements of the Federal Compliance With FFMIA Financial Management
    Improvement Act of 1996. Specifically, IRS' systems

    Requirements did not comply with Federal Financial Management Systems
    Requirements,

    federal accounting standards (U. S. generally accepted accounting
    principles), and the SGL at the transaction level. We found that IRS (1)
    cannot rely on information from its general ledger to prepare its financial
    statements, (2) does not have a general ledger that conforms to the SGL, (3)
    lacks a subsidiary ledger for its unpaid assessments, (4) lacks a

    reliable subsidiary ledger for its P& E, and (5) lacks an effective audit
    trail from its general ledger back to subsidiary detailed records and
    transaction source documents for material balances. Other material
    weaknesses we discussed earlier- controls over refunds, P& E, budget, and
    computer

    security- are also conditions indicating that IRS' systems do not comply
    with FFMIA. As a result, IRS' financial management systems cannot produce
    auditable financial statements and related disclosures in conformance with
    federal accounting standards (U. S. generally accepted accounting
    principles) without substantial compensating processes and significant
    adjustments. These weaknesses also indicate that IRS' systems cannot
    routinely

    accumulate and report the full cost of its activities. Since IRS' systems do
    not comply with FFMSR, federal accounting standards (U. S. generally
    accepted accounting principles), and the SGL, they also do not comply with

    OMB Circular A- 127, Financial Management Systems. In its FIA assurance
    statement to Treasury, IRS reported that its financial management systems
    did not substantially comply with FFMIA in fiscal year 2000.

    IRS' FFMIA remediation plan issued on September 30, 2000, did not always
    describe the resources devoted to address the issues that prevent IRS'
    financial management systems from complying with the requirements of the
    act. FFMIA requires that if the head of an agency determines that its
    financial management systems do not substantially comply with the act, a
    remediation plan must be developed, in consultation with OMB, that describes
    the resources, remedies, and intermediate target dates for achieving
    substantial compliance. The act also requires OMB concurrence

    with any plan not expected to bring the agency's systems into substantial
    compliance with the act no later than 3 years after a determination of
    noncompliance is made. IRS structures its FFMIA remediation plan to

    respond to the recommendations of GAO and other auditors, such as the
    Treasury Inspector General for Tax Administration (TIGTA), who review
    various aspects of IRS' operations. However, of the 16 GAO recommendations
    that IRS and GAO considered open at the time this remediation plan was
    issued, 8 (50 percent) did not specify the resources to

    be devoted to the actions planned. These include recommendations related to
    IRS' weaknesses in controls over P& E, operating funds, and refunds. In
    addition, IRS' remediation plan did not specify steps to ensure that
    adequate security is built into new systems and networks before they are
    placed in operation to prevent future recurrence of the computer security
    weaknesses in its existing systems that we have been reporting. Also,
    although some of IRS' remedial actions were not scheduled for completion
    within the 3- year statutory time frame, IRS had requested but not yet
    received OMB concurrence with the extended time frames of these plans as of
    the end of our fieldwork.

    These findings are consistent with those of TIGTA, which reported similar
    deficiencies in IRS' December 31, 1999, FFMIA remediation plan. 30 When IRS
    updated its remediation plan on December 31, 2000, we noted marked 30
    Improvements Are Needed in the Internal Revenue Service's Federal Financial
    Management Improvement Act Remediation Plan (Reference Number 2000- 10- 105,
    August 2000).

    improvement, and IRS considered two additional recommendations to have been
    closed. However, of the 14 remaining recommendations, IRS' plans to address
    2 (14 percent) still did not indicate the resources to be devoted to
    implementing them.

    Appendi x II

    Details on Audit Methodology To fulfill our responsibilities as the auditor
    of IRS' financial statements, we ? examined, on a test basis, evidence
    supporting the amounts and

    disclosures in the financial statements, ? assessed the accounting
    principles used and significant estimates made

    by management, ? evaluated the overall presentation of the financial
    statements, ? obtained an understanding of internal controls related to
    financial reporting (including safeguarding assets and compliance with laws
    and

    regulations, including the execution of transactions in accordance with
    budget authority), and performance measures reported in Management's
    Discussion and Analysis, ? tested relevant internal controls over financial
    reporting (including safeguarding assets) and compliance, and evaluated the
    design and

    operating effectiveness of internal controls, ? considered compliance with
    the process for evaluating and reporting on

    internal controls and financial management systems under FIA, ? tested
    compliance with selected provisions of the following laws and

    regulations: Anti- Deficiency Act, as amended (31 U. S. C. sect.1341 (a)( 1));
    Agreements for Payment of Tax Liability in Installments (26 U. S. C. sect.6159);
    Use of Appropriations (31 U. S. C. sect.1301); Release of Lien as Discharge of
    Property (26 U. S. C. sect.6325); Interest on Underpayment,

    Nonpayment, or Extension of Time for Payment of Tax (26 U. S. C. sect.6601);
    Interest on Overpayments (26 U. S. C. sect.6611); Determination of Rate of
    Interest (26 U. S. C. sect.6621); Failure to File Tax Return or to Pay Tax (26
    U. S. C. sect.6651); Failure by Individual to Pay Estimated Income Tax (26 U. S.
    C. sect.6654); Failure by Corporation to Pay Estimated Income

    Tax (26 U. S. C. sect.6655); Civil Service Reform Act of 1978 (5 U. S. C. sect.sect.
    5332, 5303, 5304); Fair Labor Standard Act of 1938, as amended (29 U. S. C.
    sect.206); Civil Service Retirement Act of 1930, as amended (5 U. S. C. sect.8334);
    Federal Employees' Retirement System Act of 1986, as amended (5 U. S. C.
    sect.8423); Social Security Act, as amended (26 U. S. C. sect.sect. 3101, 3121 and 42 U.
    S. C. sect.430); Federal Employees Health Benefits Act of 1959, as amended (5 U.
    S. C. sect.sect. 8905, 8906, and 8909); and Federal Employees' Group Life Insurance
    Act of 1980 (5 U. S. C. sect.sect. 8701, 8702,

    8704, 8707, and 8708), and ? tested whether IRS' financial management
    systems substantially comply with FFMIA requirements, using the
    implementation guidance and OMB

    guidance.

    Appendi x II I Comments From the Internal Revenue Service

    (919500) Lett er

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    GAO United States General Accounting Office

    Page 1 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Contents

    Contents Page 2 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Page 3 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements United States
    General Accounting Office

    Washington, D. C. 20548 Comptroller General

    of the United States

    Page 4 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Page 5 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements United States
    General Accounting Office

    Washington, D. C. 20548 Comptroller General

    of the United States

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    Management Discussion and Analysis Page 17 GAO- 01- 394 IRS' Fiscal Year
    2000 Financial Statements

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    2000 Financial Statements

    Management Discussion and Analysis Page 19 GAO- 01- 394 IRS' Fiscal Year
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    2000 Financial Statements

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    Financial Statements Page 55 GAO- 01- 394 IRS' Fiscal Year 2000 Financial
    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Statements

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    Supplemental and Other Accompanying Information Page 78 GAO- 01- 394 IRS'
    Fiscal Year 2000 Financial Statements

    Supplemental and Other Accompanying Information Page 79 GAO- 01- 394 IRS'
    Fiscal Year 2000 Financial Statements

    Supplemental and Other Accompanying Information Page 80 GAO- 01- 394 IRS'
    Fiscal Year 2000 Financial Statements

    Supplemental and Other Accompanying Information Page 81 GAO- 01- 394 IRS'
    Fiscal Year 2000 Financial Statements

    Supplemental and Other Accompanying Information Page 82 GAO- 01- 394 IRS'
    Fiscal Year 2000 Financial Statements

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    Appendix I

    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix I Material Weaknesses and Management Challenges, Reportable
    Conditions, and Compliance Issues

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    Appendix II

    Page 107 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Appendix III

    Appendix III Comments From the Internal Revenue Service

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    Appendix III Comments From the Internal Revenue Service

    Page 109 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Appendix III Comments From the Internal Revenue Service

    Page 110 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Appendix III Comments From the Internal Revenue Service

    Page 111 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Appendix III Comments From the Internal Revenue Service

    Page 112 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

    Appendix III Comments From the Internal Revenue Service

    Page 113 GAO- 01- 394 IRS' Fiscal Year 2000 Financial Statements

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