Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (Chapter Report, 11/17/2000, GAO/GAO-01-42).

During fiscal year (FY) 1999, the Internal Revenue Service (IRS) made a
number of improvements to address some of the financial management
issues that GAO raised in previous reports. However, serious internal
control and financial and weaknesses continue to affect the agency's
ability to effectively manage operations and produce reliable financial
information during FY 1999. These weaknesses specifically affect IRS'
ability to: (1) manage unpaid assessments; (2) disburse taxpayer
refunds; (3) safeguard manual tax receipts and taxpayer information; (4)
account for property and equipment; (5) account for appropriated funds;
and (6) collect and report financial data. These problems resulted from:
(1) deficient operational and financial systems; (2) inadequate internal
controls; and (3) policies and procedures that were not being
consistently followed. The improvements that have been made to date
focus on ad hoc work-arounds intended to obtain immediate results for
the limited purpose of reporting reliable annual financial statement
information, but they have not corrected underlying long-term systems
deficiencies. In addition, IRS has been unable to develop and maintain
reliable and timely cost/benefit information to evaluate the relative
merits of its various tax collection and enforcement activities. Until
IRS' management makes more systemic, short- and long-term corrections,
it will continue to lack the performance information it needs to
effectively manage its operations, and losses to the federal government
and the burden to the taxpayers will likely continue.

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

 REPORTNUM:  GAO-01-42
     TITLE:  Internal Revenue Service: Recommendations to Improve
	     Financial and Operational Management
      DATE:  11/17/2000
   SUBJECT:  Financial statement audits
	     Financial management systems
	     Federal agency accounting systems
	     Accounting procedures
	     Tax administration systems
	     Internal controls
	     Reporting requirements
IDENTIFIER:  Earned Income Tax Credit
	     IRS Electronic Fraud Detection System
	     U.S. Government Standard General Ledger
	     IRS Automated Underreporter System
	     IRS Combine Annual Wage Reporting Reconciliation Program

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GAO-01-42

Today's Reports - November 17, 2000

A Daily List of Issued Reports, Testimony, and Correspondence

  The General Accounting Office (GAO) today released the following
  report:

       Internal Revenue Service: Recommendations to Improve
       Financial and Operational Management. GAO-01-42, November
       17.

  Printed copies of any of these items are available from GAO's
  Document Distribution Center , 202-512-6000. Members of the press
  may request copies from the Office of Public Affairs, 202-512-4800.

  Instructions for subscribing to this daily e-mail alert about GAO
  products can be found under the "GAO Reports" section of GAO's
  Internet site (http://www.gao.gov).

[Accountability, Integrity, Reliability]

A

Report to the Commissioner of Internal Revenue

November 2000 INTERNAL REVENUE SERVICE

Recommendations to Improve Financial and Operational Management

GAO- 01- 42

Letter 5 Executive Summary 8 Chapter 1

20 Introduction

Objectives, Scope, and Methodology 21 Chapter 2

23 Weaknesses in IRS'

Reporting Unpaid Assessments 23 Maintaining Taxpayer Accounts 27 Management
of Unpaid

Collecting Unpaid Assessments 32 Assessments

Installment Agreements 36 Federal Tax Liens 38 Conclusions 40 Matter for
Congressional Consideration 41 Recommendations 41 Agency Comments and Our
Evaluation 42

Chapter 3 44

Weaknesses in Internal Preventive Controls 44

Detective Controls 48 Controls Over Refund

Conclusions 51 Disbursements

Matter for Congressional Consideration 51 Recommendations 51 Agency Comments
and Our Evaluation 53

Chapter 4 54

Further Improvements Hiring Practices 54

Courier Security 57 Needed to Safeguard

Other Physical Safeguards 59 Manual Tax Receipts

Conclusions 64 and Taxpayer

Recommendations 64 Agency Comments and Our Evaluation 65

Information

Chapter 5 66

Inadequate Accounting IRS' Accounting System 66 Tracking P& E 69

for and Tracking of Estimate of P& E Balance 72 Property and

Conclusion 73 Equipment

Recommendations 74 Agency Comments and Our Evaluation 75

Chapter 6 77

Ineffective Controls IRS' Budgetary Transactions 77 Fund Balance With
Treasury 84

Over Appropriated Payroll Costs 89

Funds Conclusions 92

Recommendations 92 Agency Comments and Our Evaluation 94

Chapter 7 96

Deficiencies in the Financial Reporting 96

Recording Accounts Payable 99 Collecting and Reporting Tax Revenues 102
Reporting of IRS' Trust Fund Certifications 104 Financial Data

Conclusions 106 Recommendations 107 Agency Comments and Our Evaluation 108

Appendixes Appendix I: Status of GAO Recommendations on IRS' Financial and
Operational Activities 110 Appendix II: Comments From the Internal Revenue
Service 125 Related GAO Products 129 Tables Table 1: IRS Delinquent Taxpayer
Case Dispositions, Fiscal Years

1997 Through 1999 34 Table 2: Various IRS Enforcement Activities, Fiscal
Years 1997

Through 1999 35 Table 3: AUR Workload for Tax Years 1996 Through 1998 49
Table 4: Status of Open GAO Recommendations on IRS' Financial

and Operational Activities 110

Table 5: New GAO Recommendations on IRS' Financial and Operational
Activities 122

Figures Figure 1: Comparison of Unpaid Assessments Before and After Audit
Adjustments as of September 30, 1999 26 Figure 2: P& E Account Balances-
Comparison Between Fiscal

Years 1998 and 1999 73 Figure 3: Budget Fiscal Year Components of $79
Million

Deobligation 80 Figure 4: Undelivered Orders as of September 30, 1999, by
Ending Budget Fiscal Year 81

Abbreviations

ADP automated data processing AFS Automated Financial System ALS Automated
Lien System AUR Automated Underreporter System BMF Business Master File BPD
Bureau of Public Debt CAWR Combined Annual Wage Reporting CFO Chief
Financial Officer CNC currently not collectible

EFDS Electronic Fraud Detection System EITC earned income tax credit FBI
Federal Bureau of Investigation FMFIA Federal Managers' Financial Integrity
Act of 1982 FMS Financial Management Service GAO General Accounting Office
GPRA Government Performance and Results Act of 1993 GSA General Services
Administration IAFIS Integrated Automated Fingerprint Identification System
INOMS Integrated Network and Operations Management System IRC Internal
Revenue Code IRM Internal Revenue Manual IRPCA Information Returns Program
Case Analysis IRS Internal Revenue Service KPI key performance indicator NFC
National Finance Center

OIC offer in compromise OIG Office of the Inspector General OMB Office of
Management and Budget OPM Office of Personnel Management P& E property and
equipment PATS Property Asset Tracking System PCAS Project Cost Accounting
Subsystem PRIME Prime Systems Integrated Services RSSA Returned Social
Security Administration RTS/ IPS Request Tracking System/ Integrated
Procurement System SFFAS Statement of Federal Financial Accounting Standards
SGL Standard General Ledger SSA Social Security Administration TFRP trust
fund recovery penalty TIGTA Treasury Inspector General for Tax
Administration USDA U. S. Department of Agriculture W- 2 Wage and Tax
Statement

Lett er

November 17, 2000 The Honorable Charles O. Rossotti Commissioner of Internal
Revenue

Dear Mr. Rossotti: This report is a follow- on to our report on the results
of our audit of the Internal Revenue Service's (IRS) fiscal year 1999
financial statements. The matters addressed in this report relate to IRS'
activities associated with its fiscal year 1999 appropriation of $8.5
billion and issues relating to IRS' collection of federal tax revenue,
refunding of overpayments of taxes, and unpaid tax assessments. In addition
to providing the status of previous recommendations we made to IRS, this
report includes a number of new recommendations that resulted from our
fiscal year 1999 audit.

During our fiscal year 1999 financial audit, we found improvements in
several areas, including improvements in courier security. We believe that
IRS' progress during fiscal year 1999 and through the completion of our
audit was made possible in part by significant involvement of senior
management, including the Deputy Commissioner for Operations. Continued
progress by IRS will require a sustained commitment of resources and
continued involvement by senior management.

However, as you are aware, longstanding material weaknesses in IRS' systems
and internal controls remain. The issues discussed in this report fall into
four basic categories: fundamentally deficient operational and financial
systems, inadequate internal controls, policies, and procedures, policies
and procedures that are not being consistently followed, and inadequate
operational and financial information to generate reliable performance data
to support decisions on resource allocations.

We recognize that resolving these systemic deficiencies is a long- term
venture. Throughout this report are recommendations relating to capabilities
that we believe IRS should incorporate into its systems modernization plans.
Inadequate internal controls and procedures can generally be resolved with
short- term improvements, such as strengthening manual controls, that can be
incorporated into policy memorandums and the Internal Revenue Manual (IRM).
However, during fiscal year 1999, we continued to find widespread problems
with implementing policy memorandums and the IRM. Thus,

a management program of continual monitoring is needed for key policies and
controls to ensure that they are consistently applied at the many IRS
locations across the country. IRS has been receptive to our recommendations
that it develop cost/ benefit data to enable it to evaluate its tax
collection and enforcement efforts so that it can make informed funding and
staffing decisions on resource needs for these activities. However, IRS has
concerns that, in view of congressional and public sensitivity about IRS'
collection and enforcement activities, the Congress

may not be receptive to IRS' developing this type of information and
including it as part of IRS' annual budget submission. Thus we are
presenting as a matter for congressional consideration that the Congress
require IRS to include in any budget request for additional resources for
its various collection and enforcement activities relevant and reliable
aggregate cost/ benefit information.

We also recognize that IRS receives many recommendations from GAO and other
organizations. Clearly, implementing all recommendations in the short term
is not a reasonable expectation. To assist you and senior management, we
highlight for your attention the following four areas and the nine
associated short- or long- term GAO recommendations that we consider of
highest priority

(recommendations are listed by number in appendix I). Improvements are
needed in the accuracy of taxpayer accounts. Specifically, as we have
reported over the last 3 years, we

found error rates of nearly 50 percent on accounts associated with trust
fund recovery penalties that could affect as many as 80,000 taxpayers (see
recommendations 13 and 15); security over hard- copy taxpayer receipts and
data. We found in fiscal year 1999 and prior years

that IRS and related lockbox banks hired individuals to handle taxpayer
receipts and data who were later found to have unacceptable backgrounds (see
recommendations 29 and 73); controls over the release of federal tax liens.
In fiscal year 1999, we found that in many cases, IRS

did not release federal tax liens within 30 days of taxpayers' satisfying
their outstanding balances (see recommendation 67); and the development of
reliable performance information for internal management relating to the

effectiveness of tax collection and enforcement activities. During fiscal
year 1999, IRS was unable to provide internal managers with reliable
information on the net benefit of additional resources for programs such as
the Automated Underreporter (see recommendations 65, 66, 71, and 72).

We believe that successfully implementing these recommendations would
greatly assist IRS in improving its customer service while effectively
fulfilling its responsibility to enforce the tax code. Although we highlight
these nine recommendations, we believe that implementing the remaining
outstanding recommendations would also greatly improve IRS' operations.

This report contains certain new recommendations to you. The head of a
federal agency is required by 31 U. S. C. 720 to submit a written statement
on actions taken on these recommendations. You should send your statement to
the Senate Committee on Governmental Affairs and the House Committee on
Government Reform within 60 days after the date of this report. A written
statement also must be sent to the House and Senate Committees on
Appropriations with the agency's first request for

appropriations made over 60 days after the date of this report. We are
sending copies of this report to Senator Ted Stevens, Senator Robert C.
Byrd, Senator William V. Roth, Jr., Senator Daniel Patrick Moynihan, Senator
Fred Thompson, Senator Joseph I. Lieberman, Senator Pete V. Domenici,
Senator Frank R. Lautenberg, Senator Ben Nighthorse Campbell, Senator Byron
L. Dorgan, Senator Orrin G. Hatch, Senator Max S. Baucus, Senator Richard J.
Durbin, Senator George V. Voinovich, Representative C. W. Bill Young,
Representative David R.

Obey, Representative Bill Archer, Representative Charles B. Rangel,
Representative Dan Burton, Representative Henry A. Waxman, Representative
John R. Kasich, Representative John M. Spratt, Jr., Representative Stephen
Horn, Representative Jim Turner, Representative Amo Houghton, Representative
William J. Coyne, Representative Jim Kolbe, and Representative Steny H.
Hoyer in their capacities as Chair or Ranking Minority Member of Senate and
House Committees and Subcommittees. We are also sending copies of this
report to the Honorable Lawrence H. Summers, Secretary of the Treasury; the
Honorable Jacob J. Lew, Director of the Office of Management and Budget; and
other interested parties. Copies will be made available to others upon
request.

Please contact me at (202) 512- 3406 or Steven J. Sebastian, Acting
Director, at (202) 512- 9521 if you have any questions concerning this
report.

Sincerely yours, Gregory D. Kutz Director, Financial Management

and Assurance

Executive Summary Purpose In IRS' role as the nation's tax collector, its
operations dwarf most other financial activities undertaken by any single
entity, public or private, in the

world. IRS collected over $1. 9 trillion in tax revenue in fiscal year 1999
and generally processes over 200 million individual and business tax returns
each year. Despite the enormity of this task, in fiscal year 1999, IRS
responded to some previous GAO audit recommendations with certain
improvements, such as changes in the safeguarding of taxpayer receipts and
data. Most important was the clear commitment IRS' senior management
demonstrated in fiscal year 1999 to address the issues discussed in this
report. However, in a report on the results of GAO's audit

of IRS' fiscal year 1999 financial statements and in related testimony
before Congress, 1 GAO reported the continued existence of serious financial
and operational systems deficiencies and internal control weaknesses, some
of

which resulted in losses to the federal government and an unnecessary burden
to taxpayers. These IRS weaknesses cross multiple areas that GAO has
designated high risk, 2 including tax filing fraud, financial management and
receivables, tax systems modernization, and information security. 3

Over the past 8 years, GAO has issued many reports on internal control
issues affecting IRS' operations. 4 This report discusses (1) previously
reported internal control and compliance issues and the status of related

recommendations and (2) new issues identified during GAO's fiscal year 1999
financial audit, along with new recommendations to address those issues. 5
Results in Brief While IRS has made improvements since GAO began auditing
its financial statements in fiscal year 1992, serious internal control and
financial and operational system weaknesses continued to affect the agency's
ability to

1 See Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/
AIMD- 00- 76, February 29, 2000) and Internal Revenue Service: Results of
Fiscal Year 1999 Financial Statement Audit (GAO/ T- AIMD- 00- 104, February
29, 2000).

2 See High- Risk Series: An Update (GAO/ HR- 99- 1, January 1999). 3
Information security weaknesses were reported separately to IRS in a report
designated “For Limited Official Use” due to its sensitive
subject matter (June 30, 2000).

4 See “Related GAO Reports” at the end of this report. 5 See
appendix I, tables 4 and 5, respectively.

effectively manage its operations and produce reliable financial information
during fiscal year 1999. These weaknesses specifically affected IRS' ability
to

manage unpaid assessments, disburse taxpayer refunds, safeguard manual tax
receipts and taxpayer information, account for property and equipment,
account for appropriated funds, and collect and report financial data.

These problems resulted from (1) deficient operational and financial
systems, (2) inadequate internal controls, policies, and procedures, and (3)
policies and procedures that were not being consistently followed.

To date, because of its systems limitations, much of IRS' focus has been on
ad hoc work- arounds to obtain immediate results for the limited purpose of
reporting reliable annual financial statement information. However, such

work- arounds have not provided IRS' management with the systems, controls,
and timely information needed to manage its operations efficiently and
effectively. Until IRS makes more systemic, short- and longterm corrections,
it will continue to lack the performance information it needs to effectively
manage its operations, and losses to the federal government and the burden
to taxpayers will likely continue. GAO recognizes that all the problems IRS
faces cannot be solved immediately. While systems deficiencies will involve
long- term efforts, many issues can

be solved in the short term, such as those involving inadequate manual
controls or policies and procedures that are not being consistently
followed.

In addition, IRS has been unable to develop and maintain reliable and timely
cost/ benefit information to evaluate the relative merits of its various tax
collection and enforcement activities. Such aggregate information is
necessary in order for IRS to make informed resource allocation decisions.
This can also help the Congress with information to assist it in determining
if the level of funding IRS requests for its various programs is
appropriate.

Although IRS has been receptive to GAO's recommendations regarding such an
effort, IRS has concerns that in light of congressional and public
sensitivity over IRS' collection and enforcement activities, the Congress
may not be receptive to IRS' developing this type of information. Thus,

GAO is presenting a matter for congressional consideration on this issue.

During fiscal year 1999, as previously noted, IRS made a number of
improvements to address some of the management issues GAO raised in previous
reports. A high level of involvement by IRS' senior management contributed
significantly to this progress. The sustained involvement of IRS' senior
management, including monitoring to ensure that IRS' policies and controls
are being consistently followed, is paramount to IRS' resolving the serious
problems that remain. Appendix I lists previous GAO recommendations that
remain open and new recommendations that GAO is making as a result of its
fiscal year 1999 audit (see tables 4 and 5, respectively). GAO recognizes
that IRS receives numerous recommendations from GAO and other organizations
and that

IRS cannot be expected to implement all recommendations in the short term.
To assist IRS and senior management, tables 4 and 5 highlight (in boldface
type) the nine short- or long- term recommendations that GAO considers of
highest priority.

Background IRS is responsible for collecting and accounting for federal tax
revenue and refunding and accounting for tax overpayments. In fiscal year
1999, IRS

collected about $1. 9 trillion in tax revenue, issued over $185 billion in
tax refunds, and had net taxes receivable at year- end of $21 billion.
Although most of the revenue was collected by intermediaries such as
financial depository institutions and transferred directly to the Department
of the

Treasury's general fund, IRS offices and lockbox banks 6 collected about
$386 billion in fiscal year 1999. The IRS offices include 10 service centers
nationwide that have collection, refund, and enforcement responsibilities.

Many other offices that IRS has established assist taxpayers and also
perform collection and enforcement activities. Historically, most IRS
offices other than headquarters have had responsibilities tied to their
geographic location. However, in response to congressional concerns about
its operations as embodied in the Internal Revenue Service

Restructuring and Reform Act of 1998, IRS is undergoing a reorganization
that will significantly affect the roles and responsibilities of these
offices.

IRS receives the majority of its funding for its operations through three
appropriations: (1) processing, assistance, and management, (2) tax law

6 Treasury's Financial Management Service contracts with such banks on IRS'
behalf. These commercial lockbox banks also receive and process taxpayer
receipts and then forward the tax data to IRS for input and processing.

enforcement, and (3) information systems. IRS received about $8. 5 billion
in appropriations for fiscal year 1999. IRS also has other appropriations,
but expenditures related to these appropriations were not material in fiscal
year 1999.

Principal Findings Weaknesses in IRS' During fiscal year 1999, IRS was
unable to effectively manage unpaid Management of Unpaid assessments and
maximize collections. GAO found that IRS (1) continued Assessments

to lack an effective subsidiary ledger, (2) delayed recording assessments,
payments, and other activities, resulting in both a burden to taxpayers and
lost revenue to the federal government, and (3) did not actively pursue
significant amounts in outstanding taxes owed to the federal government,
primarily, according to IRS, because of resource constraints. IRS continues
to lack a subsidiary ledger that tracks and accumulates unpaid assessments 7
and their status on an ongoing basis. Thus, in fiscal year 1999, IRS was (1)
unable to promptly identify and focus collection efforts on accounts most
likely to prove collectible and (2) impeded in its ability to prevent or
detect and correct errors in taxpayers' accounts. In

addition, IRS' systems cannot automatically link multiple assessments made
for one tax liability. This deficiency caused particular problems in cases
involving unpaid payroll taxes where separate officers of a company

can each be assessed for the payroll tax liability of the company.
Consequently, if the business or one of its officers paid some or all of the
outstanding taxes, IRS' systems were unable to automatically reflect the
payment as a reduction in the related account or accounts. In fiscal year
1999, GAO found that this problem existed in nearly half the cases it
reviewed involving related accounts, and, as of September 30, 1999, over

170,000 individuals had payroll tax liability assessments. Consequently,
this deficiency potentially affected a significant number of taxpayer
accounts. IRS' efforts to address this serious system deficiency have thus
far had

7 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 are unpaid assessments that IRS
does not expect to collect because of factors such as taxpayers' death,
bankruptcy, or insolvency.

limited success in reducing the extent of inaccuracies in taxpayer accounts.
IRS continued to experience significant delays in recording both assessments
and payments in taxpayer accounts. These delays resulted in numerous errors,
such as issuing refunds to taxpayers who owed taxes and

erroneously assessing taxpayers who were actually due refunds. GAO also
found that IRS continued to allow taxpayers to enter into installment
agreements that did not provide for payment of the full amount of taxes

due, as required by Section 6159 of the Internal Revenue Code (IRC). In
addition, IRS did not always promptly release liens filed against the
property of taxpayers who previously paid off or otherwise satisfied their
outstanding tax liabilities, as required by Section 6325 of the IRC. The
failure to promptly release tax liens causes undue hardship to taxpayers who
are attempting to sell property or apply for commercial credit.

In fiscal year 1999, GAO found that IRS did not pursue significant amounts
in outstanding taxes owed to the federal government, hindering its ability
to effectively manage its inventory of unpaid assessments and maximize
collections. For example, IRS closed a number of cases as “currently
not collectible” because of new guidance IRS issued in response to,
according

to IRS, a growing workload and resource constraints. GAO identified cases
that indicated that the taxpayer had financial resources to pay at least
some of the amounts owed, yet IRS was not pursuing collections from these
delinquent taxpayers.

GAO has made or is making a number of recommendations to assist IRS in
addressing weaknesses in its management of unpaid assessments. These include
recommendations to (1) in both the short and long- term, eliminate duplicate
accounts and ensure that payments made are properly reflected in all related
taxpayer accounts, (2) implement procedures to closely monitor the prompt
release of tax liens on taxpayer accounts that have been paid off or
otherwise satisfied, and (3) develop the capability to routinely and
reliably measure the cost/ benefit of its collection activities

and to make informed resource allocation decisions.

Weaknesses in Internal Weaknesses in IRS' controls over refund disbursements
unnecessarily Controls Over Refund exposed the federal government to losses
due to disbursing improper

refunds. 8 During fiscal year 1999, IRS disbursed about 98 million tax
Disbursements refunds totaling over $185 billion. IRS recognizes that
taxpayers sometimes submit erroneous and, in some cases, fraudulent refund
claims. However, time constraints, 9 high volume, and the inherent nature of
these

transactions affected the options available to IRS in its efforts to ensure
that only valid refunds were disbursed. Within these constraints, IRS
implemented pre- refund controls designed to prevent improper refunds from
being disbursed. However, these controls did not sufficiently limit losses
from the payment of improper refunds. Consequently, IRS relies extensively
on postrefund detective controls to identify for collection

improper refunds that had been disbursed. However, for tax year 1996 (the
most recent year for which substantially complete data on estimated
underreported taxes were available), 10 IRS did not follow up on almost 9
million tax returns estimated to represent about $10 billion of potentially
underreported tax liabilities, including an unknown amount in improper
refunds.

Earned income tax credits (EITCs) have historically been vulnerable to high
rates of invalid claims. In an attempt to minimize losses due to these
claims, IRS uses the Electronic Fraud Detection System (EFDS) 11 to screen
EITCs to identify for examination those considered suspicious. However, IRS
did not screen all EITCs through EFDS or track the number of EITCs it did
screen. Instead, IRS screened EITCs through EFDS only until it had
identified the number of suspicious EITCs it believed the agency had
sufficient resources to examine. Because IRS did not screen all EITCs
through EFDS, it was unaware of how many of the over 19 million total

8 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. 9 By statute, IRS must
generally pay interest on refunds not disbursed within 45 days of receipt or
due date, whichever is later (26 U. S. C. 6611). 10 From the end of a given
tax year, it generally takes IRS over 3 years to process substantially all
the individual tax returns, perform the related document matches, and

conduct the subsequent follow- up with taxpayers on selected cases. 11 EFDS
enables IRS to electronically screen EITCs and identify those exhibiting
specific characteristics considered indicative of potentially invalid claims
based on past experience, such as EITC claimants reporting either (1)
business income or (2) head- of- household status and whose return contains
other suspicious indicators.

EITCs filed in tax year 1999 exhibited suspicious characteristics. Of the
suspicious EITCs IRS did identify and examine during fiscal year 1999, over
86 percent were found to be invalid. However, according to IRS, about

30 percent of these examinations were completed after the refund had already
been disbursed.

IRS relies extensively on detective controls to identify improper refunds
issued and underreported tax liabilities. Among the most important of these
controls are automated matching programs that are run months after tax
returns are processed, with subsequent follow- up on some identified

differences serving as a compensating detective control. However, in
addition to having run these programs too late to prevent the issuance of
erroneous or fraudulent refunds in fiscal year 1999, IRS followed up on only
a portion of the underreported taxes identified.

GAO is making several recommendations to assist IRS in addressing weaknesses
in its controls over refund disbursements. These include recommendations to
(1) determine reasons it has not been more effective

in preventing disbursements of refunds related to questionable EITC claims,
and (2) develop the capability to routinely and reliably measure the cost/
benefit of its various enforcement programs and to make informed resource
allocation decisions.

Further Improvements Although improvements have been made, IRS continued to
have Needed to Safeguard weaknesses in controls over safeguarding cash,
checks, and related hardcopy

Manual Tax Receipts and taxpayer data it manually received from taxpayers
during fiscal year Taxpayer Information

1999. These weaknesses exposed the government and taxpayers to increased
risk of losses from financial crimes committed by individuals who
inappropriately gain access to assets and confidential information entrusted
to IRS. GAO found that IRS and its lockbox banks employed individuals to
process cash, checks, and other taxpayer data before receiving satisfactory
results of their fingerprint checks to determine if the employees had a
suitable background for these positions. GAO also identified other
weaknesses, including returned refund checks that were not immediately
voided or locked up, as required by IRS policy. Similar weaknesses were
identified at all types of locations that process tax returns and taxpayer
receipts, including IRS service centers, lockbox banks, district offices,
and post- of- duty stations. Such systemic weaknesses increase IRS'
vulnerability to loss or theft. In fiscal year 1999,

IRS, itself, identified 45 actual or alleged employee thefts of receipts at
its

field offices and lockbox banks totaling over $1 million; however, the true
magnitude of actual losses will never be known. IRS addressed some of the
control deficiencies related to tax receipts and taxpayer data that GAO
reported in prior years. For example, IRS eliminated the use of bicycle or
foot couriers to transport deposits to financial institutions and issued
enhanced courier security procedures after fiscal year- end. Nonetheless, it
is important that IRS correct the remaining vulnerabilities because these
issues are critical to IRS' responsibility for safeguarding taxpayer
information and its need to meet its customer service goals.

GAO has made or is making recommendations to assist IRS in addressing these
remaining vulnerabilities over tax receipts and taxpayer data, including
recommendations to prohibit new employees from processing tax receipts and
handling taxpayer data until fingerprint checks have been received and
reviewed by management.

Inadequate Accounting for IRS did not record property and equipment (P& E)
transactions in its asset and Controlling of Property

records as they occurred and did not maintain adequate records for capital
and Equipment leases, leasehold improvements, or major systems during fiscal
year 1999. The systems that track IRS' acquisitions and disposals of P& E
were seriously deficient. IRS' procedures were also not effective in
ensuring that acquisitions and disposals were promptly and accurately
recorded into

those systems. As a result, IRS was unable to rely on its P& E subsidiary
records to appropriately account for or report its inventory of P& E assets.
IRS has known of these fundamental weaknesses since at least 1983. However,
its primary efforts during fiscal year 1999 focused on deriving year- end
balances for its financial statements rather than on implementing permanent
solutions. Specifically, IRS had to abandon use of its subsidiary records
for financial reporting for fiscal year 1999 and instead brought in
contractors to derive its ending P& E balance primarily through statistical

sampling. IRS' estimate of $1. 3 billion of net P& E as of September 30,
1999, which GAO concluded was materially reliable, resulted in an increase
of over $1 billion (600 percent) to its accounting records. In addition to
the

problems previously discussed, this substantial adjustment was necessary
because IRS excluded over $250 million of systems development costs and $65
million of assets under capital lease.

Tests by GAO and IRS' contractors demonstrated that IRS' P& E records were
unreliable. For example, items disposed of still remained on IRS' inventory
records, and items physically present at IRS locations were not on IRS'
records. Also, GAO continued to find significant errors in the

quantities of P& E included in IRS' P& E subsidiary records in fiscal year
1999. For example, at field offices GAO visited, video conferencing
equipment and three recently acquired mail- sorting machines that cost over
$800,000 each were not included in the subsidiary P& E records. GAO also
noted 200 personal computers that had been disposed of but were still
included in IRS' records. The contractors that IRS hired found unrecorded P&
E at all the sites they tested, as well as valuation errors and items no
longer in the inventory yet still in IRS' records. GAO has made or is making
a number of recommendations to assist IRS in strengthening its controls
over, and accountability for, its property and equipment.

Ineffective Controls Over IRS was unable to reliably account for, or report
to the Congress or the Appropriated Funds

public how it used the approximately $8.5 billion in appropriated funds it
received in fiscal year 1999. IRS did not have adequate budgetary controls
to ensure that budgetary balances reported on its financial statements were
reliable or that its obligations did not exceed budgetary resources.
Specifically, GAO found that: deobligations 12 were not performed in a
timely manner, obligations were not liquidated upon receipt of goods and
services as of

September 30, 1999, IRS did not promptly charge all expenditures against the
appropriations authorized to pay them, and payroll expenditures were
inappropriately reported for customer

service and compliance. GAO previously reported that IRS had not properly
reconciled its fund balance with Treasury accounts. Instead, IRS recorded
unsupported adjustments to its records to force them to agree with
Treasury's records. 12 Deobligations are downward adjustments of previously
recorded obligations.

Deobligations can occur for a variety of reasons, such as the actual expense
was less than the amount obligated, a project or contract was canceled, an
initial obligation was determined to be invalid, or previously recorded
estimates were reduced.

Thus, this created the need for IRS to expend extensive efforts during
fiscal year 1999 to clear out and adjust its accounting records for several
years of unsubstantiated entries. Although IRS reconciled the year- end
balance in aggregate, there were still unresolved differences at year- end,
most significantly $35 million of unresolved payroll transactions that had

occurred over a period of 5 years. Unresolved differences such as this and
IRS' lack of routine and complete reconciliations raise serious concerns
about IRS' ongoing ability to ensure that its financial records are accurate
and that it complies with the laws governing the use of its budget
authority.

GAO has made or is making several recommendations to assist IRS in improving
its controls over, and accountability for, its appropriated funds.

Deficiencies in the IRS did not have policies and procedures for its
accounting and financial Collecting and Reporting of

reporting process that were adequate to provide reasonable assurance that
IRS' Financial Data its financial statements would be reliable. Like most
entities, IRS uses a general ledger system to accumulate financial
information and summarize it for financial reporting purposes. However, IRS'
general ledger comprises

two independent general ledgers which (1) are not integrated with each other
or their supporting records and, in fiscal year 1999, and (2) received
information that was often untimely or erroneous. In addition, IRS' general
ledger for its custodial activities does not use an account structure and
titles that are consistent with those in the U. S. Government Standard
General Ledger. 13 To compensate, IRS had to rely on extensive and
laborintensive procedures to prepare its financial statements at year- end.
In addition, IRS' supervisory reviews were not always effective in
identifying

and correcting errors that would have adversely affected the financial
statements. For example, GAO found errors in IRS' statement of financing
that would have caused misstatements totaling about $1.3 billion if left
uncorrected. Although IRS did make some improvements in its financial
reporting process in fiscal year 1999, significant deficiencies remain.
Also, although IRS made strides in improving the reporting of accounts
payable

on its financial statements during fiscal year 1999, it continued to have
inadequate controls over procedures to routinely and accurately determine
accounts payable. As a result of these problems, IRS could not produce 13
The U. S. Government Standard General Ledger establishes a standard chart of
accounts, including account titles, definitions, and uses. Its primary
purpose is to standardize federal

agency accounting, support the external reports and financial statements
required by the Office of Management and Budget and Treasury, and provide
comparable information among agencies.

reliable annual financial statements and, more importantly, could not
routinely produce the reliable financial information needed to effectively
manage its operations.

IRS also continued to be unable to determine the specific amount of revenue
it actually collected for Social Security, Hospital Insurance, and
individual income taxes. In addition, IRS continued to be unable to
determine reliable collections attributable to trust funds that receive
excise tax receipts at the time of deposit. These conditions existed
primarily because IRS did not obtain data from taxpayers on the amounts
deposited at the time deposits are made. The information needed to attribute
deposits to the proper trust fund is provided on the tax return, which is
received

months after the tax deposits were made. In addition, with respect to excise
taxes, delays in the receipt and processing of tax returns have resulted in
misstatements of amounts certified for a given quarter.

GAO has made or is making a number of recommendations to assist IRS in its
collection and reporting of financial data. Matter for

In order to make available information to better assist it in making
Congressional informed decisions regarding the budget and staffing of IRS,
the Congress should consider requiring that IRS include in any budget
request for Consideration

additional resources associated with its various collection and enforcement
activities reliable cost- based performance indicators and other relevant
aggregate cost/ benefit data that demonstrate the benefits of providing for
such resources.

Recommendations GAO is making 37 new recommendations to IRS, in addition to
reaffirming the 43 still open from prior years, to improve internal controls
over areas such as managing unpaid assessments, disbursing refunds,
safeguarding

manual tax receipts and taxpayer information, accounting for property and
equipment, accounting for appropriated funds, and collecting and reporting
financial data. New recommendations appear at the end of chapters 2 through
7. In addition, previous recommendations that GAO made to IRS and new
recommendations are listed in appendix I (tables 4 and 5, respectively).

All the recommendations GAO presents in this report are necessary for IRS to
address if it intends to overcome its problems and reach its goals,

including providing top- quality service to America's taxpayers. GAO
recognizes that IRS cannot be expected to implement all recommendations in
the short term. Thus, to assist IRS and senior management, tables 4 and 5

highlight (in boldface type) the nine short- or long- term recommendations
that GAO considers of highest priority. Agency Comments and

In commenting on a draft of this report, IRS generally agreed with our Our
Evaluation recommendations and provided information regarding initiatives to
address many of them. We will evaluate the effectiveness of these

initiatives during future audits. However, IRS had concerns about our
recommendations that IRS include in its annual budget submission cost/
benefit information related to its collection efforts and enforcement
programs. IRS indicated that submitting such reports for congressional
review might not be as helpful as recommending that the issues be

addressed in IRS' strategic planning process. We agree that addressing these
issues in IRS' strategic planning process would be of value and have
incorporated this in these recommendations. However, we also continue to
believe that reliable cost/ benefit performance information related to these
programs is necessary in order for IRS to make informed resource allocation
decisions. Additionally, providing such information with any request for
additional resources would better assist the Congress in determining if the
level of funding IRS requests for its various programs is appropriate.

We understand that because of concerns about its past collection and
enforcement activities, IRS is reluctant to report return on investment
information to the Congress. However, we believe that billions of dollars of

valid unpaid taxes could be collected in a cost- beneficial manner.
Accordingly, we have included a matter for congressional consideration
asking that the Congress consider requiring IRS to include in any budget
request for additional resources for its various collection and enforcement
activities relevant and reliable aggregate pertinent cost/ benefit
information. IRS also provided numerous detailed comments about the

specific findings in this report, which we have incorporated where
appropriate, and which are summarized, along with our evaluation, at the end
of each chapter. The letter from IRS' Deputy Commissioner of Operations
responding to a draft of this report is included in appendix II.

Chapt er 1

Introduction The Internal Revenue Service (IRS) is the nation's tax
collector. In this capacity, its mission is to provide America's taxpayers
with top- quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and fairness to
all. This mission encompasses the demanding responsibility of collecting
taxes, processing tax returns, and enforcing the nation's tax laws. Each
year, IRS processes over 200 million tax returns and 1 billion information
returns (such as Wage and Tax Statements [W- 2s]) and examines over 1.5
million tax returns. The size and complexity of the IRS organization that
fulfills this imposing

responsibility present challenges to its management that have been further
complicated by an ongoing reorganization. IRS is a massive, decentralized
organization with tens of thousands of employees located in offices
throughout the United States. Historically, most of IRS' offices other than
headquarters have had responsibilities tied to their geographical location.

However, in response to congressional concerns about its operations, IRS is
currently undergoing a reorganization that will significantly affect the
roles and responsibilities of these offices. When IRS' reorganization is
complete, the functions performed by these offices will be assigned to four
operating divisions, which will specialize in serving the needs and

overseeing the taxpaying responsibilities of a specific set of taxpayers
with similar characteristics. 1 Despite these substantial management
challenges, IRS achieved a commendable level of success in fiscal year 1999,
collecting $1. 9 trillion in taxes and paying about $185 billion in refunds
to taxpayers.

However, during fiscal year 1999, IRS continued to face many of the
pervasive systems and internal control weaknesses that we have been
reporting for years. Moreover, we identified new internal control problems
during our fiscal year 1999 audit. IRS has been receptive to our suggestions
that it develop cost/ benefit data to enable it to evaluate its tax
collection and enforcement efforts so that it can provide the Congress with
the information it needs to determine if the level of funding IRS requests
for its various programs is appropriate. However, IRS has concerns that, in
view

1 IRS' four operating divisions will be (1) Wage and Investment, responsible
for individual taxpayers with wage and investment income only, (2) Small
Business and Self Employed, responsible for fully or partially self-
employed individuals, and corporations and partnerships with assets of $5
million or less, (3) Large and Midsize Business, responsible for commercial
filers with assets over $5 million, and (4) Tax Exempt and Government
Entities, responsible for pension plans, exempt organizations, government
entities' accounting for employment and income tax withholding, and tax
exempt bond issuances and federally recognized Indian tribes.

of congressional and public sensitivity about IRS' collection and
enforcement activities, the Congress would not be receptive to IRS'
developing this type of information. Thus we are presenting a matter for
congressional consideration on this issue.

This report includes past recommendations for remaining issues as well as
new recommendations to address internal control issues identified during our
fiscal year 1999 audit. The recommendations we are making will have an
associated cost to IRS. However, these costs must be weighed against the
benefits that implementing the recommendations will provide for IRS, the
Congress, and the taxpayer. Many of our recommendations are aimed at
improving deficiencies that have direct consequences to the taxpayer. Our

report discusses many instances in which the federal government and
taxpayers have been adversely affected by these deficiencies. It is also
important to note that these examples are only those found during our

testing, much of which was done through the use of statistical sampling.
Consequently, the specific examples identified by our testing are likely to
be representative of the severity of problems in the various aspects of IRS'

activities discussed in this report. Therefore, IRS must consider these
recommendations in the context of its goal to provide quality service to the
nation's taxpayers.

Incorporating the recommendations we discuss here into its long- and short-
term plans, as appropriate, should help IRS overcome problems that can be
solved in the near term, while it continues its long- term effort to
modernize its financial and operational systems. We recognize that not all
the issues IRS faces can be solved immediately; however some, such as those
involving processes and controls that do not involve automated systems, can
be solved in the near term. In response to our audit findings and
recommendations made in the past, IRS has made improvements in certain
areas, such as in the safeguarding of taxpayer receipts and data.

Most important, in fiscal year 1999, IRS' management demonstrated a clear
commitment to address the issues we discuss in this report. Objectives,
Scope, and As part of our audit of IRS' fiscal year 1999 financial
statements, we Methodology evaluated IRS' internal controls and its
compliance with selected provisions of laws and regulations and followed up
on the status of open

recommendations. We designed our audit procedures to test relevant controls
and included tests for proper authorization, execution, accounting, and
reporting of transactions. Specifically, we

tested selected statistical samples 2 of unpaid assessment, revenue, refund,
payroll, and undelivered order transactions, and conducted analytical
procedures; tested a nonrepresentative selection of earned income tax
credits

(EITCs) and property and equipment (P& E) at several IRS locations and also
observed selected P& E inventories taken by IRS' contractors; tested in
detail transactions that represent the underlying basis of amounts
distributed to the Highway and the Airport and Airway trust funds;

reviewed periodic reconciliations, physical safeguards, and segregation of
duties over cash and checks received and processed at service centers,
district offices, post- of- duty offices, and lockbox banks;

reviewed specific controls over refund processing and financial reporting;
and reviewed IRS' reconciliations of its fund balance with Treasury. We
performed our work from April 1999 through February 2000 in accordance with
generally accepted government auditing standards and Office of Management
and Budget (OMB) Bulletin 98- 08, as revised. We also used the March 2000
IRS Remediation Plan to determine the status of IRS' actions to address
previous GAO recommendations; our status for each recommendation is listed
in table 4, which appears in appendix I. We have previously reported on most
of the issues in this report. We also

published a management letter addressing additional matters that we
identified during our fiscal year 1999 audit regarding accounting procedures
and internal controls that could be improved, 3 and issued a separate report
on computer security issues. 4

2 Statistical samples were selected primarily to substantiate, and in some
cases derive, balances and activity reported on IRS' financial statements.
Consequently, while dollar errors or amounts can be statistically projected
to the populations from which sample items were selected, attributes or
issues identified for items tested as part of these samples generally cannot
be statistically projected to the populations. Nonetheless, given that

sample items were selected in a statistically valid and random fashion, the
attributes or issues identified for the items tested are likely to be
representative of their respective populations.

3 See Management Letter: Suggested Improvements in IRS' Accounting
Procedures and Internal Controls (GAO/ AIMD- 00- 162R, June 14, 2000). 4
Information security weaknesses were reported separately to IRS in a report
designated “For Limited Official Use” due to its sensitive
subject matter (June 30, 2000).

Weaknesses in IRS' Management of Unpaid

Chapt er 2

Assessments During fiscal year 1999, we continued to identify serious
internal control deficiencies that affected IRS' management of unpaid
assessments. 1 IRS' lack of an appropriate general ledger system prevented
it from properly and routinely classifying and reporting unpaid assessments
without substantial use of specialized computer programs and manual
intervention. Also, because of the lack of a detailed subsidiary ledger for
unpaid assessments and transaction processing deficiencies and delays, IRS
could not ensure that taxpayer accounts were accurately maintained,
resulting in both a burden to taxpayers and lost revenue to the federal
government.

Also, IRS' failure to actively pursue significant amounts of outstanding
taxes owed to the federal government hindered its ability to effectively
manage its inventory of unpaid assessments and maximize collections,
resulting in potentially billions of dollars in lost revenue. Finally, IRS
did

not comply with two provisions of the Internal Revenue Code (IRC) by (1)
continuing to enter into installment agreements with taxpayers that required
payment of less than the full amount of taxes owed and (2) not

promptly releasing tax liens on the property of taxpayers who paid off or
otherwise satisfied their outstanding tax liabilities, contributing to
taxpayer hardship and making the federal government vulnerable to

lawsuits. These issues seriously affected all aspects of IRS' management of
unpaid assessments. Reporting Unpaid IRS' general ledger system continued to
be unable to distinguish unpaid assessments that represent gross and net
taxes receivable from those that Assessments

are either compliance assessments or write- offs. 2 Thus, the system could
not be used to support the amounts for unpaid assessments that were reported
in the financial statements and their accompanying supplemental information.
Since IRS could not rely on its general ledger system, it had to 1 Unpaid
assessments consist of taxes and related penalties and interest that IRS has
identified and recorded as due to the federal government from taxpayers for
which payment has not yet been received.

2 In accordance with Statement of Federal Financial Accounting Standards No.
7, unpaid assessments are classified in one of the following three
categories: (1) taxes receivable, which are amounts due from taxpayers for
which IRS can support the existence of a receivable through taxpayer
agreement or a court ruling in favor of IRS, (2) compliance assessments, for
which neither the taxpayer nor the court has affirmed that the amounts are
owed, and (3) write- offs, which are unpaid assessments that IRS does not
expect to collect

because of factors such as the taxpayer's bankruptcy, insolvency, or death.
Of these three categories, only taxes receivable are reported in the
financial statements, with compliance assessments and write- offs presented
as supplemental information.

use a specialized computer program and other time- consuming and labor-
intensive ad hoc procedures to derive the amounts appearing in the financial
statements and accompanying supplemental information. However, this approach
still required substantial adjustments to the initial

amounts to present reliable end- of- year balances. GAO's Standards for
Internal Controls in the Federal Government 3 requires that transactions and
other significant events be promptly recorded and properly classified to
maintain their relevance and value to management in controlling operations
and making decisions. All transactions and events are to be completely and
accurately recorded and properly classified in the summary records from
which reports and financial statements are

prepared. Therefore, it is essential for IRS to be able to appropriately
classify its unpaid assessments in order to present reliable information in
its financial statements. In addition, in accordance with Federal Financial

Management Systems Requirements, 4 an agency's core financial system should
be supported by a general ledger account structure that complies with the U.
S. Government Standard General Ledger (SGL). 5 To support the account
balances in these SGL accounts, the general ledger should be supported by
detailed records, lists, or a subsidiary ledger of individual

accounts or additional data elements. However, as is discussed later in this
report, IRS lacks a subsidiary ledger for unpaid assessments. To compensate
for the lack of an adequate general ledger system and an unpaid assessment
subsidiary ledger, IRS ran a specialized computer program to extract all the
unpaid assessments from its master files- its only detailed database of
taxpayer information- and classify them into the

three categories of unpaid assessments for annual financial reporting.
However, this approach is inherently limited. For example, the computer 3
GAO's Standards for Internal Control in the Federal Government (GAO/ AIMD-
00- 21.3.1, November 1999) contains the internal control standards to be
followed by executive agencies in establishing and maintaining systems of
internal controls as required by the Federal Managers' Financial Integrity
Act of 1982.

4 These requirements are detailed in the Financial Management Systems
Requirements series issued by the Joint Financial Management Improvement
Program, OMB Circular A- 127, Financial Management Systems, and OMB's
September 9, 1997, guidance for the implementation of the Federal Financial
Management Improvement Act of 1996. 5 The U. S. Government Standard General
Ledger establishes a standard chart of accounts, including account titles,
definitions, and uses. Its primary purpose is to standardize federal agency
accounting, support the external reports and financial statements required
by OMB and Treasury, and provide comparable information among agencies.

program could not systemically identify all possible characteristics that
would determine the appropriate classification of unpaid assessments. In
addition, the master files against which the program was run do not contain

all the information necessary to derive a reasonable estimate of
collectibility for those unpaid assessments determined to be taxes
receivable. The amounts in the financial statements and supplemental
information to the financial statements could be reliably estimated only by

statistically sampling IRS' unpaid assessments to determine (1) their proper
classification and (2) estimates of collectibility for those assessments
properly classified as taxes receivable. This approach required nearly 8
months to select the sample cases, assemble the case files, manually review
the cases, and make significant adjustments reclassifying unpaid assessments
to properly report them in IRS' financial statements.

As shown in figure 1, the amounts produced by the computer extraction
program required material adjustments totaling tens of billions of dollars
before reliable amounts were derived for each category of unpaid assessments
for fiscal year 1999.

Figure 1: Comparison of Unpaid Assessments Before and After Audit
Adjustments as of September 30, 1999

Billions of dollars 140

$127 120

$106 $100 100

80 $77

60 $49

40 $27

20 0

Taxes Compliance

Write- offs receivable

assessments Before audit adjustments After audit adjustments

Note: The adjusted balance of taxes receivable presented represents the
gross federal taxes receivable (does not include the allowance for doubtful
accounts). Also note that the total unadjusted unpaid assessments balance of
$255 billion

reflected in this figure was adjusted to $231 billion, primarily due to
duplicate assessments and errors. Source: IRS' master files and fiscal year
1999 financial statements.

The most significant adjustments involved amounts originally classified by
the extraction process as taxes receivable or compliance assessments that
were actually write- offs or partial write- offs. 6 Of the 631 unpaid
assessment

cases we and IRS sampled that were initially classified by the computer 6
Partial write- offs are unpaid assessments in which testing indicated that a
portion of the unpaid assessment balance had no potential for future
collection and thus met the criteria for write- off. This situation
typically occurred for unpaid payroll taxes in which an officer or officers
were assessed a penalty for an employee's withholding portion of the unpaid
taxes and the corporation was defunct with no assets available to repay the
outstanding taxes. In these circumstances, the portion representing the
officer's penalty for which there was some possibility of collection was
classified as either a taxes receivable or a compliance assessment,
depending on whether or not the penalty was agreed to, while the remaining
portion attributable to the defunct corporation was classified as a write-
off.

extraction program as taxes receivable or compliance assessments, 132 (21
percent) were actually total or partial write- offs.

Although IRS' process of extracting information from the master files was
labor intensive, time- consuming, and reliant on statistical projections to
derive the amounts to be reported in IRS' financial statements and
accompanying supplemental information, it was IRS' only feasible means of
reporting reliable year- end information for its unpaid assessments as of
September 30, 1999. While this process allowed IRS to report auditable
financial statement information only at fiscal year- end, it was not an
adequate substitute for appropriate general ledger and subsidiary systems
for day- to- day operations.

Maintaining Taxpayer During fiscal year 1999, IRS continued to have
weaknesses in the accuracy

Accounts and completeness of taxpayer accounts, which contributed to a
burden to taxpayers and lost revenue to the federal government. A key to
control over

taxpayer accounts is a subsidiary ledger that tracks and accumulates unpaid
assessments and their status on an ongoing basis. However, as previously
noted, IRS' general ledger system lacks such a subsidiary ledger. Lacking
such a ledger adversely affected IRS' ability to (1) determine the current
condition and status of taxpayer accounts, (2) promptly identify and focus
collection efforts on accounts most likely to prove collectible,

and (3) prevent or detect and correct errors in taxpayer accounts.
Subsidiary Ledger As discussed earlier, an entity's general ledger should be
supported by

detailed subsidiary ledgers. For IRS' unpaid assessments, such a subsidiary
ledger should be able to routinely provide information- such as a history of
payments and defaults, payment terms, and account status- useful in managing
unpaid assessments and assessing collectibility. In addition, the subsidiary
ledger should appropriately link related taxpayer accounts to ensure that
activity is promptly and properly recorded in all related accounts.

IRS' lack of a subsidiary ledger for unpaid assessments has direct
consequences on taxpayers. The unpaid assessment accounts most frequently
affected have been those representing unpaid payroll taxes, where separate
accounts are established and assessments recorded for a related tax
liability. 7 In our fiscal year 1997 and 1998 audits, 8 we reported that in
more than half the cases we reviewed, payments from trust fund recovery
penalty (TFRP) assessments were not accurately recorded to reflect each
responsible party's reduction to his or her tax liability. In some

cases, this inaccuracy resulted in refunds being withheld from certain
taxpayers and liens remaining on taxpayers' personal properties even though
the liabilities had been paid in full. Similarly, in our fiscal year 1999
financial audit, of 78 cases we reviewed involving TFRP assessments for
unpaid payroll taxes, payments in 35 cases (45 percent) were not properly
recorded to accurately reflect the reduction in each responsible party's tax
liability. According to IRS records, as of September 30, 1999, over 170, 000
individuals had outstanding TFRP assessments. Based on the percentage of
cases we reviewed in fiscal year 1999 that did not appropriately reflect

payments made to reduce the liability, nearly 80,000 individuals could be
negatively affected by this problem.

Some of the payments we identified that had not been properly reflected in
all related taxpayer accounts were made years ago. For example, in one case
we reviewed, an officer made over $250, 000 in payments toward his TFRP
assessment between July 1987 and April 1993, yet at the conclusion of our
audit in February 2000, none of these payments had been credited to the
related business account. In another case, we noted that although two
officers who were assessed TFRPs had made payments in 1989, over 10 years
ago, these payments still had not been credited to the related

business account at the conclusion of our audit. We also identified
instances in which payments made by one officer were not credited to a 7
When a company does not pay the taxes that have been withheld from
employees' wages, such as Social Security or individual income tax
withholding, IRS has the authority to assess the responsible officers
individually for the taxes withheld from employees. This assessment is
referred to as a trust fund recovery penalty (TFRP). IRS may record TFRP
assessments against each of several individuals for the employee withholding
components 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 the business officers are a necessary enforcement tool, IRS should
collect the unpaid tax only once. 8 See Financial Audit: Examination of IRS'
Fiscal Year 1997 Custodial Financial Statements (GAO/ AIMD- 98- 77, February
26, 1998) and Financial Audit: IRS' Fiscal Year 1998 Financial Statements
(GAO/ AIMD- 99- 75, March 1, 1999).

related officer's account. In one case we reviewed, an officer made over
$78,000 in payments toward his TFRP liability between 1990 and 1996, yet at
the conclusion of our audit, these payments had not been properly credited
to a related officer's account. Had the payments been correctly

recorded, the related officer's TFRP would have been fully satisfied.
Payments were not being credited to all related accounts because these
accounts are not automatically linked. The unpaid payroll tax of a business
is maintained in IRS' business master file, while the TFRP assessed against
an individual (or individuals) is maintained in IRS' individual master file.

These two separate and distinct databases are not integrated. Consequently,
if a payment is received from a business, no automated entry records the
reduction in the individual's (or individuals') TFRP account or accounts.
This lack of an automated link has led to instances in which IRS

pursued collection against officers of a corporation for amounts that had
already been paid. Moreover, accounts maintained in the same master file are
also not automatically linked, resulting in continued instances of erroneous
taxpayer accounts.

At the end of our fiscal year 1997 audit, we recommended that until IRS'
systems are appropriately modernized to ensure that related taxpayer
accounts are automatically linked, IRS should manually review accounts to
ensure that activity is appropriately credited to all related taxpayer
accounts. 9 As an alternative to our recommendation, IRS attempted to
correct this problem by manually entering a certain transaction code on
related taxpayer accounts to alert IRS personnel that related accounts exist
and should be reviewed to ensure that all transactions are appropriately
reflected in each account. However, the use of these codes, referred to as

“cross- references,” was not fully effective in providing the
compensating link between related taxpayer accounts. Although these cross-
references helped to identify some payments made after the cross- references
were entered, they did not help to identify payments made before these
crossreference

codes were entered. In 78 cases involving TFRP assessments from our sample
of 671 unpaid assessments, we noted 10 cases (13 percent) in which payments
were not posted to all related accounts even though these cross- references
were present. Consequently, IRS needs

9 See Internal Revenue Service: Immediate and Long- Term Actions Needed to
Improve Financial Management (GAO/ AIMD- 99- 16, October 30, 1998).

to fully address our prior recommendation to manually review taxpayer
accounts to ensure that all activity is appropriately reflected in the
accounts.

Recording Assessments We also continued to find significant delays and
errors in IRS' recording of assessments and other activities. Because of
this problem, which we have reported in prior years, IRS issued refunds to
taxpayers who owed outstanding tax liabilities and paid unnecessary interest
on refunds that were not promptly paid to taxpayers. For example, we found
that because IRS delayed posting TFRP assessments to responsible parties, it
issued

refunds to these individuals instead of retaining and applying the refunds
to the amounts owed. In one case we reviewed, an individual received a
$15,000 refund when he owed the federal government $350,000 in unpaid
payroll taxes. In this case, IRS did not post the assessment to the master
file until 13 months after it had determined that this person was liable for
the unpaid payroll taxes. During this time, the individual protested the

assessment, which effectively suspended any enforcement action by IRS, and
filed an individual tax return claiming a refund. IRS procedures require
personnel to enter a freeze code on all of a taxpayer's accounts once IRS
determines that the taxpayer may be liable for unpaid taxes. This freeze
code is intended to prevent any refunds from being issued until the tax
liability has been finally determined. However, in this case, no freeze code

was entered in the individual's account; thus, the refund was allowed to be
issued. As a result, IRS lost the opportunity to collect at least a portion
of the $350,000 in taxes this individual owed. We also noted instances in
which IRS delayed abating 10 assessments and, as a result of this delay, had
to pay interest on refunds it owed to taxpayers. In one case, it took IRS
293 days from the date it received documentation

supporting the need for an abatement until the assessment was actually
abated. In this case, the taxpayer had filed an amended return that showed
that the taxpayer was due a refund of over $9. 2 million. IRS received the

amended return in April 1998; however, it did not record the abatement until
over 9 months later, in January 1999. As a result of this delay, IRS had to
pay an additional $430,000 in interest to the taxpayer.

10 Under Section 6404 of the Internal Revenue Code (as well as various other
sections), IRS is authorized to abate (reduce) an assessment under certain
conditions. For example, IRS is authorized to abate erroneous assessments,
which can be caused by either IRS or taxpayer error.

We also noted instances in which taxpayer accounts were inaccurate because
of IRS errors that were not promptly identified and corrected. For example,
in one case we reviewed, IRS erroneously entered a taxpayer's $4, 668
adjusted gross income as $466,800. As a result, the taxpayer was

assessed over $160,000 in taxes when he was actually due a refund. It took
18 months for IRS to abate this erroneous assessment even though
documentation in the case file indicated that IRS personnel believed the
assessment was erroneous 10 months before they corrected the account. The
extent of errors in IRS' records of taxpayer accounts was significant in

fiscal year 1999. Although several of the abatements we reviewed were the
result of taxpayer errors, we noted that many resulted from various IRS
errors. Specifically, we noted that 5 of the 23 abatement transactions we
reviewed in fiscal year 1999 (22 percent) were due to IRS assessment errors.
In one case, IRS erroneously assessed a penalty of nearly $250 million
against a business partnership because IRS had incorrectly

entered the number of partners. Instead of calculating a penalty for the
partnership's failure to promptly file its tax return based on its actual
number of partners- two- IRS erroneously calculated the penalty using
999,000 as the number of partners. Consequently, IRS had to abate the
erroneous assessment. In another case, IRS applied a tax deposit made by a
taxpayer to the wrong taxpayer account. As a result, this taxpayer, who

actually owed nothing, was erroneously assessed over $15 million in taxes,
which was later abated. The magnitude of these errors indicates the need for
corrective action by IRS. In our previous report on IRS' custodial financial
management weaknesses, 11 we recommended that IRS (1) analyze and determine
the

factors causing delays in processing and posting TFRP assessments and, once
these factors are determined, (2) develop procedures to reduce their impact
and ensure that assessments are promptly posted to all applicable accounts
and refunds are properly offset against unpaid TFRP assessments

before they are issued. In addition, in a separate letter to IRS management
that we issued at the conclusion of our fiscal year 1998 audit, 12 we
suggested that IRS implement appropriate policies and procedures to ensure
that abatement transactions are promptly processed. We noted that 11 See
Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/
AIMD- 99- 193, August 4, 1999). 12 See Management Letter: Suggested
Improvements in IRS' Accounting Procedures and Internal Controls (GAO/ AIMD-
99- 182R, June 30, 1999).

these policies should establish appropriate time frames for processing
abatements, a methodology for monitoring the timeliness of abatement
processing, and procedures for identifying the causes for delays and
formulating corrective actions. These measures, if acted on by IRS, should
significantly reduce the severity and frequency of the errors and
inaccuracies in taxpayer accounts, as well as minimize the extent of lost
revenue or additional costs to the government associated with these

problems. Collecting Unpaid During fiscal year 1999, we found that IRS did
not actively pursue Assessments

delinquent taxpayer accounts that had some collection potential,
contributing to its overall decline in collections in recent years. IRS
closed some of these cases with no further collection effort, and other
cases, although not closed, also remained unworked. IRS' failure to pursue
certain taxpayers owing taxes to the federal government could result in
billions of dollars in outstanding amounts going uncollected and adversely
affect future compliance.

There is a point at which it ceases to be cost effective to pursue
collections. Many cases in our sample of unpaid assessments provided little
or no hope of immediate collections and were closed as “currently not
collectible” (CNC) 13 at the time we conducted our review. In fact,
IRS records indicate

that over 6.8 million of the 26. 3 million outstanding unpaid assessments
cases (26 percent) at September 30, 1999, were so designated. However, we
also identified many cases, including some cases designated CNC by IRS, in
which available information indicated that the taxpayer had financial
resources to pay at least some of the amounts owed, yet these cases were

not being actively pursued. We found a number of cases that appeared to have
some potential for at least partial collection if they were actively worked,
yet IRS was not pursuing collections from the delinquent taxpayers. For
example, in one case, a doctor with a 1998 adjusted gross

income of approximately $190,000 owed over $100,000 in unpaid taxes. While
this taxpayer had improved his recent compliance record, the earlier taxes,
which had accumulated over 6 years, remained outstanding. At the time we
conducted our fieldwork, this case was unassigned and thus was

not being worked. 13 For cases closed as CNC, IRS does not actively pursue
collection from the taxpayer because it has concluded that the taxpayer
currently does not have the financial resources to pay the outstanding tax
obligation.

In another case, we found that IRS' efforts to pursue collection ended when
the responsible revenue officer was reassigned. This case involved an
insolvent corporation owing over $180, 000 in unpaid payroll taxes, for
which three responsible officers had been assessed trust fund recovery
penalties. One of these officers was involved in five corporations owing 11
quarters in delinquent payroll taxes, while the other two officers were
involved in four corporations owing 13 quarters of unpaid payroll taxes.

While one officer entered into an offer in compromise (OIC), and another
officer's assets were tied up in litigation, the third officer's case was
returned to a holding file 14 of unassigned cases even though his most
recent available reported adjusted gross income (in 1997) was over $100,000.
The file indicated that the case was returned to the holding file because
the revenue officer who had been pursuing collection was reassigned to
customer service duties. Another case involved two officers of a now defunct
corporation who were each assessed approximately $2. 8 million in TFRPs. One
officer was involved in four corporations with 50 quarters of delinquent
taxes, while the other officer was involved in three corporations with 44
quarters of delinquent taxes. The first officer declared bankruptcy, and his
tax debts

were fully discharged. The second officer, whose remaining tax liability
with interest and penalty accruals had increased to $4 million, refused to
file returns and attempted to transfer his assets to his ex- wife. IRS
collection personnel determined that the taxpayer's divorce and transfer of
assets and real property to his ex- wife were a deliberate attempt to avoid
his tax liability and seized a $31, 000 condominium owned by the officer.
IRS was in the process of auctioning the condominium off to collect on at
least a portion of these taxes, when, for no reasonable explanation, IRS

pulled the property from auction and later returned it to the taxpayer. We
also found a number of cases that IRS closed as CNC based solely on new
guidance that IRS issued in March 1999. The guidance was issued in response
to an increasing inventory workload and IRS' judgment that resource
constraints would not permit the agency to actively pursue certain cases.
The guidance was designed to allow field offices more flexibility in
designating cases CNC to reduce the number of cases that needed to be
actively worked. Until recently, the CNC designation was typically used when
the taxpayer owing the outstanding taxes had financial

14 IRS uses an automated holding file for delinquent tax accounts that are
awaiting assignment to revenue officers for collection.

difficulties or other hardships that made collection highly unlikely.
However, under the new guidance, cases can be designated CNC without normal
investigative action, such as collecting income/ expense and asset/
liability information from the taxpayer. IRS' records indicated that in
fiscal year 1999, the number of cases designated CNC using the criteria in
this guidance increased by a factor of 34- from 19,000 to 648, 000. The
total dollar value associated with these cases also rose, from $126 million
in fiscal year 1998 to approximately $2.4 billion in fiscal year 1999. IRS'
failure to pursue delinquent taxpayers with at least some ability to pay is
part of a broader decline in IRS' disposition of cases and its enforcement
activity in recent years. According to IRS records, between fiscal years

1997 and 1999, the number of unpaid assessment accounts increased by a net
670,000, from 25.6 million accounts in fiscal year 1997 to 26.3 million at
September 30, 1999. However, as shown in table 1, at the same time the
inventory of cases was increasing, IRS records indicate that IRS'
dispositions of delinquent accounts and investigations 15 significantly

declined. In addition, the number 16 of revenue officers responsible for
these dispositions also declined substantially during this period.

Table 1: IRS Delinquent Taxpayer Case Dispositions, Fiscal Years 1997
Through 1999 Fiscal year 1997 Fiscal year 1998 Fiscal year 1999

Number of accounts 25.6 million 26. 1 million 26. 3 million Number of
dispositions 2.0 million 1.6 million 1. 2 million Tax collections $6.0
billion $5. 3 billion $4. 4 billion Revenue officers 7,008 6, 577 6,378
Source: Unaudited IRS data.

Over the same period during which case dispositions declined, IRS also
experienced a dramatic reduction in enforcement activity. As table 2 15
Dispositions of delinquent accounts would include, but not be limited to,
any accounts that are paid off, partially paid through an offer- in-
compromise, or no longer owed because the statutory period for collecting on
these cases has expired. Dispositions of investigations would include, but
not be limited to, investigations closed as a result of assessing taxes or
determining that the potential amounts owed, in fact, are not owed by
taxpayers.

16 In full- time equivalents.

shows, various enforcement activities, such as lien filings, levy
notifications, and seizures, declined substantially between fiscal years
1997 and 1999.

Table 2: Various IRS Enforcement Activities, Fiscal Years 1997 Through 1999
Activity Fiscal year 1997 Fiscal year 1998 Fiscal year 1999

Lien filings 544, 000 383, 000 168,000 Levy notifications 3. 7 million 2. 5
million 504,000 Seizures 10,090 2, 307 161 Source: Unaudited IRS data.

At the same time that enforcement activities declined, the number of pending
OICs over 6 months old significantly increased in IRS' ending unpaid
assessments inventory. The number rose from 7,661 in fiscal year 1998 to
17,976 in fiscal year 1999, despite a drop in the number of offers received
from taxpayers with outstanding tax liabilities during the same period. This
is consistent with delays in IRS' processing of OICs that we observed in our
review of unpaid assessments in fiscal year 1999.

According to its own procedures, IRS is to determine within 14 days of
receipt of an offer from a taxpayer whether the offer is
“processable,” including whether the taxpayer is current in his
or her return filings. OIC investigations are to be completed within 6
months of receipt of the offer

unless extraordinary circumstances exist (which are to be documented in the
case file).

While we found examples of delays in OIC processing that were outside IRS'
control (such as delays caused by the taxpayer's failure to promptly provide
appropriate documents to enable IRS to assess the merits of the

OIC request), we also found examples of excessive delays in IRS' processing
of submitted OICs. In the worst case involving excessive delays that we
found in our sampling of unpaid assessments, IRS took 484 days to accept an
OIC, yet neither the case file documents nor IRS officials could explain the
reason for the delay. In another case, IRS took about 5 months to determine
whether a case could be processed. These findings are consistent with an
earlier IRS internal audit (performed by what is now the Office of the
Treasury Inspector General for Tax Administration [TIGTA]) report 17 that
studied the timeliness of OIC rejection decisions, without

regard to the cause for the rejection. The audit found that in a majority of
the sampled cases, IRS had periods of inactivity that lasted 60 days or
more.

According to IRS, the overall drop in its dispositions and enforcement
activities was due to a decrease in staff, reassignment of collection
employees to support customer service activities, and the additional
processing time associated with meeting the requirements of the Internal
Revenue Service Restructuring and Reform Act of 1998. However, IRS has

not presented information on the costs and associated benefits related to
its collection activities that could assist both IRS and the Congress in
making informed decisions with regard to resources and funding levels for
these activities. The March 1999 CNC guidance and the reassignment of
resources from collection to noncollection activities reduced the number

of delinquent taxpayer cases actively being pursued by IRS. The associated
outstanding balances for these cases will continue to age and will increase
as interest and penalties continue to accrue. Our prior work has shown that
the likelihood of collecting delinquent taxes declines with age. As a
result,

IRS' failure to pursue a growing number of taxpayers owing taxes to the
federal government could result in billions of dollars in outstanding
amounts going uncollected and adversely affect future compliance.

Installment Our fiscal year 1999 audit continued to identify installment
agreements that Agreements

did not provide for payment of the full amount of taxes due, as required by
Section 6159 of the IRC. We first disclosed this issue in our audit of IRS'

17 Review of the Offers in Compromise Program (Reference No. 091603 December
7, 1998).

fiscal year 1998 financial statements. However, even though IRS issued
instructions in 1998 reiterating the requirement for full payment of the tax
liability, it continued to enter into installment agreements with taxpayers
during fiscal year 1999 for less than the full amounts due and thus did not
always comply with the IRC.

Section 6159 of the IRC authorizes IRS to enter into installment agreements
with taxpayers to satisfy their tax liability. In March 1998, IRS' Assistant
Commissioner (Collections) issued a memorandum clearly stating that for any
new installment agreement, taxpayers must fully satisfy their tax liability.
This memorandum was followed in August 1998 by a memorandum from the Chief
Operations Officer issuing guidelines on installment agreements pending
updates to the Internal Revenue Manual (IRM). The guidelines required
installment agreements to provide for full payment of the liability. To
ensure compliance with Section 6159 of the IRC, we recommended 18 that IRS
identify and institute procedures to monitor

compliance of new installment agreements with the IRC and the recent
guidance IRS issued. We noted, for example, that IRS management could
monitor compliance by randomly selecting installment agreements from its
operating units and reviewing them for compliance with the requirements.

However, during our fiscal year 1999 audit, we continued to identify unpaid
assessment cases involving installment agreements entered into in fiscal
year 1999 with terms that will not fully pay the outstanding taxes.
Specifically, of 40 unpaid assessment cases involving installment agreements
that IRS and taxpayers entered into in fiscal year 1999, 3 (8 percent) had
payment terms that will be insufficient to satisfy the full tax liability
before the statutory collection period for these tax liabilities expires. 19
For example, IRS entered into an installment agreement with a taxpayer who
had a total outstanding balance of $115,000. However, by paying the $800
monthly payments required under the installment agreement, the taxpayer will
pay only $43,000 (37 percent) before the statutory collection period for
these tax liabilities expires, assuming that

18 See GAO/ AIMD- 99- 193, August 4, 1999. 19 The statutory collection
period for taxes is generally 10 years from the date of the tax assessment.
However, this period can be extended under a variety of circumstances, such
as agreements by the taxpayer to extend the collection period, bankruptcy
litigation, and court

appeals. Consequently, some tax assessments can and do remain on IRS'
records for decades.

the taxpayer continues to make the payments through the statutory collection
period. In responding to our report on the results of our fiscal year 1999
financial statement audit, 20 IRS stated that the instances of noncompliance
we identified reflected errors occurring during the transition to its new
procedure. We will assess IRS' success in complying with the statute during
our fiscal year 2000 financial audit.

Federal Tax Liens Our fiscal year 1999 audit disclosed that IRS did not have
adequate procedures in place to ensure that federal tax liens filed against
taxpayers' property were promptly released when taxpayers fully paid or
otherwise satisfied their outstanding tax liabilities. Errors and delays in
posting activity and apparent systems deficiencies led to numerous instances
in which tax liens were not promptly released or not released at all during
the

period covered by our audit. This condition could result in significant
hardship to the taxpayer. Under the IRC, IRS has a lien against the property
of any taxpayer who neglects or refuses to pay all assessed federal taxes.
During fiscal year 1999, IRS filed about 168,000 federal tax liens. The lien
becomes effective when it is filed with a designated office, 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 as 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 IRC, IRS is required to release a
federal tax lien within 30 days after the date the tax liability is
satisfied or has become legally unenforceable.

Our fiscal year 1999 audit disclosed that IRS did not have adequate systems
and processes in place to ensure that federal tax liens were always released
within 30 days of satisfaction of related tax liabilities, as required by
the Code. In 6 of 23 cases (26 percent) in which the taxpayer's total
outstanding tax liabilities were either paid off or abated during fiscal
year 1999, IRS did not release the applicable federal tax lien within the
required 30 days. These delays ranged from 1 to 14 months.

20 See Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/
AIMD- 00- 76, February 29, 2000).

For example, in two cases, we found that the taxpayers had paid off their
outstanding tax liabilities by September and October 1998, respectively;
however, as of December 1999- 14 months later- IRS had not filed the
necessary information to formally release the lien against these taxpayers'
properties. In both cases, IRS officials could not explain why the liens had

not been released. However, these accounts were shown as being fully paid in
IRS' master files, indicating that the breakdown occurred in transmitting
the “fully paid” status of these accounts from the master files
to IRS' Automated Lien System (ALS). 21

In another case, a lien had been filed covering four separate tax
liabilities owed by the taxpayer, each of which was recorded in a separate
account for the taxpayer. Although the statutory collection period had
expired for one of the four liabilities and was updated in the master file,
this information was not transmitted to ALS. In addition, due to a previous

input error, ALS contained an incorrect collection expiration date for the
account in which this liability was recorded. After the statutory collection
period for this account expired, in May 1999, the taxpayer paid off the
remaining three liabilities, and these payments were appropriately reflected
in the master files. However, because the tax lien covered all four accounts
and ALS continued to show the fourth tax liability account as outstanding,
ALS did not generate a certificate of release of the tax lien.

This issue was not resolved until early December 1999, when IRS manually
released the lien after being notified that the account had been selected
for review as part of our audit. In other cases, the causes for the delays
in releasing the tax liens were a combination of human error and system
limitations. For example, in one case, IRS took 359 days to release a tax
lien filed against a taxpayer's property. More than 100 days of the 359- day
delay were due to IRS' erroneously entering information related to the last
payment made by the

taxpayer to the master files. Because of these errors, the master file did
not generate a transaction code indicator to alert ALS of the need to
release the 21 IRS uses ALS to issue and release federal tax liens. ALS is
updated for new liens and tax accounts by revenue officers at IRS' district
offices. ALS generates a certificate of release of lien automatically for
liens that expire after a set period of time or when the statutory
collection period for an account expires. For accounts that are fully paid
or otherwise satisfied, the certificate of release of lien is generated by
ALS only after ALS receives the “fully paid” status of the
account through a weekly interface with the master files. The certificate of
release of lien is sent to the county courthouse where the lien was
originally filed for formal release of the lien.

federal tax lien. This initial delay was exacerbated by IRS' untimely
follow- up on researching and correcting this and other errors subsequently
recorded in the taxpayer's account. Our findings are consistent with a
report issued by the TIGTA in September 1998. 22 This report cites a
significant number of liens in the Northeast region that were not promptly
released and, in fact, some that were released only after being identified
by the auditors. Among the findings, the

report identifies deficiencies in the weekly interface between the master
files and ALS and the lack of appropriate controls to ensure that ALS prints
the certificates of release of tax liens and that these certificates are
sent to the county courthouse for the liens to be formally released.

The failure to release federal tax liens filed against taxpayers' property
has significant implications for taxpayers and IRS. Failure to promptly
release tax liens could cause an undue burden and hardship to taxpayers who
are attempting to sell property or apply for commercial credit.
Additionally, as enacted in the Omnibus Taxpayer Bill of Rights, taxpayers
can sue the

federal government if IRS knowingly or negligently fails to release a lien
within the 30- day statutory period.

In February 2000, after we completed our work for the fiscal year 1999
audit, IRS issued a draft memorandum outlining a new utility program that it
plans to run weekly to confirm that all tax liabilities related to a lien
are properly indicated as satisfied so that the lien can be released in a
timely manner. IRS will track the progress of the lien release process by
storing and saving data files that can be sampled and tested on request in
one

selected test district in each of its four regions. IRS also plans to
monitor lien release transactions more closely in its accounting operations
in light of the issues identified in our fiscal year 1999 audit. We will
assess the

progress of the proposed monitoring program and other planned follow- up
efforts as part of our fiscal year 2000 financial audit. Conclusions Serious
control deficiencies continued to affect IRS' management of unpaid
assessments during fiscal year 1999. These deficiencies prevented IRS from

having the routine information it needed to make informed decisions and
hindered its ability to properly and routinely report reliable information
on

22 Controls for Ensuring That Federal Tax Liens are Promptly Released in the
Northeast Region (Report No. 682302, September 8, 1998).

unpaid assessments to interested parties. As a result, IRS could not ensure
that taxpayers were not unduly harmed or burdened by its errors, nor could
it maximize collections. Also, IRS' failure to actively pursue taxpayers
owing delinquent taxes to the federal government could result in billions of
dollars going uncollected, erode the confidence of taxpayers in the equity
of the nation's tax system, and, in turn, adversely affect future
compliance.

Matter for In order to make available information to better assist it in
making

Congressional informed decisions regarding the budget and staffing of IRS,
the Congress should consider requiring that IRS include in any budget
request for Consideration

additional resources associated with its various collection and enforcement
activities reliable cost- based performance indicators and other relevant
aggregate cost/ benefit data that demonstrate the benefits of providing for
such resources.

Recommendations To increase IRS' ability to collect outstanding amounts owed
by taxpayers, we recommend that IRS better monitor adherence to its own
procedures

requiring that a freeze code be entered on all accounts of a taxpayer whom
IRS has determined is potentially liable for unpaid payroll taxes. This
should be done on all such accounts to prevent the inadvertent release of
refunds to the taxpayer until IRS determines the validity of the tax
liability.

To improve the accuracy of taxpayer accounts, reduce the potential for a
taxpayer burden, and reduce the cost associated with interest IRS must pay
on refunds issued to taxpayers, we recommend that IRS

revise policies and procedures governing the processing of abatement
transactions to establish (1) appropriate time frames for processing
abatements, (2) a methodology for monitoring the timeliness of abatement
processing, and (3) procedures to identify the causes for delays and
formulate corrective actions, and examine abatement transactions arising
from IRS errors to determine the causes for the errors and, based on this
examination, formulate and

implement appropriate procedures to reduce the level of errors made when
entering data into taxpayer accounts. To reduce delays in processing offers-
in- compromise, we recommend that IRS implement procedures to monitor the
age of all pending offers and to

require supervisors to follow up with staff to determine within 6 months
whether to accept or reject the offer.

To provide IRS management with the information it needs to make informed
funding and staffing decisions regarding resource needs for federal tax
revenue collection activities, we recommend that IRS

in the short term, as an alternative to prematurely suspending active
collection efforts and using the best available information, develop
reliable cost/ benefit data relating to collection efforts for cases with
some collection potential. These cost/ benefit data would include the full
cost associated with the increased collection activity (i. e., salaries,

benefits, administrative support), as well as the expected additional tax
collections generated, and in the long term, incorporate into its systems
modernization blueprint

and strategic planning process the capability to routinely and reliably
measure the cost/ benefit of its collection activities and make informed
resource allocation decisions. To improve compliance with Section 6325 of
the IRC, we recommend that IRS implement procedures to closely monitor the
release of tax liens so that they are released within 30 days of the date
the related tax liability is fully satisfied. As part of these procedures,
IRS should carefully analyze the causes of the delays in releasing tax liens
identified by our work and prior work by IRS' former internal audit function
and ensure that such procedures effectively address these issues.

Agency Comments and In commenting on a draft of this report, IRS generally
agreed with our Our Evaluation

recommendations related to the management of unpaid assessments and provided
information regarding initiatives to address many of them. We will evaluate
the effectiveness of these initiatives during future audits. However, IRS
had concerns about our recommendations that it include in its annual budget
submission cost/ benefit information related to its collection efforts. IRS
indicated that submitting such reports for congressional review may not be
as helpful as recommending that these issues be addressed in IRS' strategic
planning process. We agree that addressing these issues in IRS' strategic
planning process would be of value and have incorporated this in our
recommendation. However, we also continue to believe that reliable cost/
benefit performance information relating to these programs is necessary in
order for IRS to make informed

resource allocation decisions. Additionally, providing such information

with any request for additional resources would better assist the Congress
in determining if the level of funding IRS requests for its various programs
is appropriate. We understand that because of concerns about its past
collection and

enforcement activities, IRS is reluctant to report return on investment
information to the Congress. However, we believe that additional billions of
dollars of valid unpaid taxes could be collected in a cost- beneficial
manner. Accordingly, we have included a matter for congressional
consideration asking that the Congress consider requiring IRS to include in
any budget request for additional resources for its various collection and
enforcement activities relevant and reliable aggregate cost/ benefit
information. IRS also provided numerous detailed comments about the specific
findings in this chapter, which we have incorporated where appropriate. The
letter from IRS' Deputy Commissioner of Operations responding to this report
is

included in appendix II.

Weaknesses in Internal Controls Over Refund

Chapt er 3

Disbursements Weaknesses in IRS' controls over refund disbursements
unnecessarily exposed the federal government to losses due to the issuance
of improper refunds during fiscal year 1999. 1 During this period, IRS
disbursed about 98 million tax refunds totaling over $185 billion. Time
constraints, high volume, and reliance on information submitted by taxpayers
affect IRS' ability to ensure that all refunds are proper. However, while
IRS recognizes that taxpayers sometimes submit erroneous or fraudulent
refund claims, its

preventive (pre- refund) and detective (post- refund) controls did not
sufficiently limit losses due to payment of improper refunds. IRS'
preventive controls were not always effectively and consistently applied,
and its key detective controls were not applied to millions of tax returns
estimated to represent billions of dollars of underreported tax liabilities.
The full magnitude of improper refunds disbursed by IRS is unknown, but
could be billions of dollars. Preventive Controls IRS' controls to prevent
improper refund disbursements were not effective

during fiscal year 1999. Statutory requirements generally call for IRS to
disburse refunds within 45 days of the receipt or due date of the return,
whichever is later. 2 Within this framework, IRS implemented various
internal controls to prevent improper refunds from being issued. These

controls include the electronic screening of tax returns to identify invalid
refund claims, a procedure that successfully prevents thousands of improper
refunds each year. 3 However, other IRS preventive controls were less
effective, such as (1) procedures to identify and examine suspicious

earned income tax credits (EITCs) to identify invalid claims and (2) the
review of taxpayer accounts before disbursing manual refunds to verify that
IRS is not duplicating a previously issued refund. For example,

(1) EITC claims were not all subject to IRS' primary EITC screening program,
and when suspicious EITCs were identified, they often were not 1 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 in his or her return. 2 By statute, IRS must
generally pay interest on refunds not disbursed within 45 days of

receipt or due date, whichever is later {26 U. S. C. 6611}. 3 Additional
controls over tax return accuracy and validity include (1) identifying and
correcting computation errors and qualifying errors, (2) screening
electronic tax submissions for accuracy and completeness, (3) checking the
qualifications of tax preparers

who apply to participate in the electronic filing program, and (4) checking
for missing or incorrect social security numbers.

examined until after related refunds were disbursed, and (2) procedures to
identify and stop duplicate refunds were not always conducted promptly and
consistently. Historically, EITCs have been vulnerable to high rates of
invalid claims. 4 Since most EITC claims result in refunds, the risk of
disbursing improper refunds is significantly increased. During fiscal year
1999, about $26 billion (87 percent) of the over $30 billion in total EITCs
resulted in refunds. 5 However, IRS' preventive controls did not
sufficiently reduce its exposure

to losses from payment of improper refunds based on invalid EITCs. To
prevent such payments, IRS relied on its Electronic Fraud Detection System
(EFDS), 6 and other less significant related efforts, 7 to screen EITCs and
identify those considered suspicious. Suspicious EITCs were then subject to
examination to identify actual invalid claims. 8 EFDS is IRS' most
comprehensive program for EITC screening in terms of the scope of the
characteristics it checks. However, IRS did not screen all EITCs with EFDS.
Instead, IRS screened EITCs with EFDS only until it had identified

the number of suspicious EITCs it believed the agency had sufficient
resources to examine. Since IRS did not screen all EITCs through EFDS, it
was unaware of how many of the more than 19 million EITCs filed in fiscal
year 1999 actually exhibited suspicious characteristics. In addition, IRS
did

not keep a record of how many EITCs it did screen through EFDS.
Consequently, IRS did not have a basis for judging if the numbers of EITCs
it screened through EFDS and examined were appropriate in relation to the

risks and losses involved. Also, because suspicious EITCs often were not 4
See High- Risk Series: An Update (GAO/ HR- 99- 1, January 1999); Major
Management Challenges and Program Risks: Department of the Treasury (GAO/
OCG- 99- 14, January 1999); and GAO/ AIMD- 00- 76, February 29, 2000. 5 The
remaining about $4 billion was used to reduce tax assessments.

6 EFDS enables IRS to electronically screen EITCs and identify those
exhibiting specific characteristics considered indicative of potentially
invalid claims based on past experience, such as EITC claimants reporting
either (1) business income or (2) head- of- household status and whose
return contains other suspicious indicators. 7 These related IRS efforts
include targeting (1) multiple taxpayers claiming the same qualifying child
and (2) taxpayers whose previous EITC had been denied. 8 In these
examinations, IRS tax examiners correspond with taxpayers through the mail
and request from the taxpayers third- party documentation, such as copies of
business receipts and expenses, school records, birth certificates, and
social security cards, supporting the

taxpayer's and, if applicable, qualifying child's, EITC eligibility.

examined until after any related refund had been disbursed, examinations did
not always prevent improper refunds.

In fiscal year 1999, IRS examined about 573,000 EITCs claiming $1. 25
billion that were considered suspicious and found that about $1. 08 billion
in claims (86 percent) was invalid. However, according to IRS, about 30
percent of these examinations (over 171,000 EITCs) were conducted after the
refund had been disbursed. Based on an average

refund per EITC of 87 percent of the amount claimed, over $280 million may
have been refunded on these invalid EITCs before they were examined. In
addition, we found that procedures designed to hold a refund while an
examination was in progress were not always effective in preventing refunds
based on invalid EITCs. If a refund related to a

suspicious EITC has not yet been disbursed, IRS procedures require that the
refund be held until after the EITC claim has been examined. However, in a
nonrepresentative selection of 67 examination cases we reviewed at three
service centers, we found that 7 cases (10 percent) involved invalid EITC
claims that resulted in refund disbursements totaling about $14, 000 before
the examination was completed. According to IRS, 5 of these were due to
processing errors, 1 was refunded before it was examined, 9 and 1 occurred
because of time constraints. 10

The Taxpayer Relief Act of 1997 requires that beginning with tax year 1997,
taxpayers who were denied an EITC through an examination must provide
supporting evidence of eligibility before they can claim the EITC in
subsequent years. 11 However, at two service centers, we reviewed IRS'
procedures intended to ensure compliance with this requirement and found

that the procedures were not always effective. Of the 67 EITC examination
cases that we reviewed, we found 6 cases (at two service centers) whose 1997
EITC claims IRS found to be invalid. Of these 6 cases, 3 (50 percent) 9 This
was one of the more than 171, 000 returns examined after the refund had been
disbursed.

10 IRS service centers have from 1 to 10 days to stop a questionable refund
from being disbursed. 11 Although taxpayers claiming the EITC must meet
certain eligibility criteria, new claimants or claimants who were not denied
credit in tax year 1997 are not required to submit evidence of having met
these criteria. The Taxpayer Relief Act of 1997 also has provisions that are
intended to prevent a taxpayer from receiving an EITC for (1) the next 10
years if IRS determined that the taxpayer had fraudulently claimed the
credit or (2) the next 2 years if IRS determined that the taxpayer
negligently claimed the credit.

resulted in refunds, totaling about $11,000, that were disbursed in 1998
without the taxpayers' providing the documentation required by the act. As a
result, an unknown number of taxpayers did not substantiate their 1998 EITC
even though, through examination, their 1997 EITC was found to be improper.
The amount of improper refunds disbursed related to these claims is unknown.

IRS has also had a problem with issuing duplicate refunds. This occurs
because IRS' (1) automated and manual refund systems are not adequately
coordinated to prevent duplicate refunds, 12 (2) manual refunds bypass most
of IRS' automated validity checks, and (3) manual refunds may not be posted
to the master file until 6 weeks after the refund is issued. If a duplicate
automated refund is issued within that period, the master file will not
reflect that a previous refund has already been disbursed. To prevent
duplicate refunds from being issued, IRS implemented the following

short- term corrective actions; however, these actions had significant
problems that limited their effectiveness. IRS policy requires employees who
have initiated a manual refund that has not yet been posted to the affected
taxpayer account to monitor that account to ensure that a duplicate
automated refund does not post in

the interim as a pending transaction. The posting of an automated refund
indicates that disbursement is imminent, and the employee is supposed to
take the necessary action to stop it. However, we found that IRS employees
did not always follow this policy, and supervisors did not always promptly
review monitoring actions to ensure that these actions were being properly
conducted. There were no written policies and procedures requiring (1)
employees to document their monitoring

actions on case history sheets 13 or (2) supervisors to review the
monitoring actions to ensure that they were performed or to document their
review. IRS developed a computer program to generate a “Questionable
Refund

Report,” which is intended to identify multiple refunds posted to the
same taxpayer account that are within $10 for review as potential

12 IRS issues most refunds through an automated system; however, refunds
meeting certain criteria are separated for manual processing, including (1)
refunds over $1 million, (2) refunds below $1, and (3) refunds based on a
taxpayer's request for immediate payment due to hardship. 13 Case history
sheets are forms maintained by refund initiators for manual refund cases and
are used to document actions taken while the manual refund is being
processed.

duplicates. However, at the two service centers we visited, IRS was not
using this program because either officials considered it to be flawed and
ineffective in detecting potential duplicate manual refunds as intended or
the program was not generating this report. At the time of our review, IRS
had not determined the nature of the problem with this

program. These weaknesses indicate that in addition to the basic limitations
on preventive controls that are inherent in refund transactions, the
preventive controls IRS implemented were not always effectively and
consistently applied. Detective Controls IRS also had weaknesses in its
detective controls that limited its

effectiveness in identifying improper refunds not caught and stopped by its
preventive controls. Among IRS' most important detective controls are its
programs to compare tax returns to third- party documentation, such as

W- 2s, which are intended to identify underreported income so that related
taxes due can be assessed and collected. To the extent that individuals with
underreported income had been issued refunds, some or all of that amount
might have been improper. Because of the high volume of refund

transactions, time constraints involving payment of refunds, and the timing
of the receipt of third- party data, IRS does not perform these comparisons
when the tax returns are processed. Rather, IRS compares them months later
using automated matching programs. 14 Identified discrepancies are then
selectively investigated, and collection efforts are initiated for
underreported taxes and previously issued refunds that are identified as
improper. However, in addition to having been run months after the tax
returns were processed and the refunds disbursed, these controls were not
applied to tens of millions of tax returns estimated to have represented
billions of dollars of underreported tax liabilities over the last several
years. The magnitude of improper refunds disbursed to these taxpayers is
unknown. 14 The primary purpose of IRS' matching programs is to identify
underreported income and estimate the amount of taxes due for potential
follow- up and collection. However, these

programs also identify overreported taxes that result in refunds. In tax
year 1996, IRS' Information Returns Program Case Analysis (IRPCA) identified
about $97 million in refunds due.

IRS' Automated Underreporter Program (AUR) follows up on discrepancies
identified by IRS' Information Returns Program Case Analysis (IRPCA), which
electronically compares information taxpayers

report to IRS on tax returns to related information employers and financial
institutions provide on information returns. AUR then categorizes cases with
discrepancies by income type and calculates the estimated underreported tax
for each case. IRS decides how many discrepancy cases it believes it has
sufficient resources to investigate out of the total number identified. IRS
then selects specific income types for investigation based on past
experience of taxes actually assessed.

As shown in table 3, IRS investigated only a small percentage of total AUR
cases with identified discrepancies from tax years 1996 through 1998. In
addition, while the number of cases with identified discrepancies increased
by over 18 percent during this period, the rate at which IRS investigated
discrepancy cases decreased by over 32 percent. According to IRS, resource
constraints precluded it from working on a larger percentage of discrepancy
cases.

Table 3: AUR Workload for Tax Years 1996 Through 1998 (in millions) Tax year

Tax year Tax year 1996 1997 1998

Number of individual tax returns matched by 155.0 159. 4 164. 3 a IRPCA
Number of individual tax returns identified with

11. 9 13. 4 14. 1 discrepancies Number of cases selected for investigation
by 3.1 3. 0 2.5

AUR Cases selected for investigation as a 26. 1% 22. 4% 17. 7% percentage of
cases identified with discrepancies a IRS estimate.

Source: Unaudited IRS data.

For tax year 1996, 15 the 3.1 million returns investigated accounted for
about $5. 2 billion in underreported taxes due. However, according to IRS
data, 15 At the time of our review, tax year 1996 was the most recent year
for which substantially complete matching program results were available.

the almost 9 million cases IRS did not investigate represented about $10
billion in potential underreported taxes. In tax years 1996 through 1998,
IRS did not investigate over 30 million AUR cases. Because IRS did not
investigate these cases, the actual amount of underreported taxes due is
unknown. In addition, IRS did not have data available to demonstrate whether
pursuing these 30 million cases would have benefited the government.

In an attempt to maximize the tax revenues IRS realizes on the cases it does
investigate, IRS developed a model to predict the expected actual effect
working on the cases would have on the amount of tax assessed (net of the
cost of salaries and benefits of staff working on the cases), which IRS
refers to as the “average yield.” However, the average yield
excludes nonpersonnel costs, such as supplies and utilities. Additionally it
is calculated based on the amount assessed, not on the amount actually

collected. Consequently, although the average yield may be a useful tool for
selecting cases to work on, it is not an accurate measure of AUR
costeffectiveness.

IRS uses another matching program, the Combined Annual Wage Reporting (CAWR)
program, to compare employers' data provided to IRS with data provided to
the Social Security Administration (SSA). CAWR consists of two basic
components: the Business Master File (BMF) component, which is operated by
IRS, and the Returned Social Security Administration component, which is
performed by SSA. 16 The CAWR- BMF component compares the employer's data
provided to IRS on the employer's federal tax returns with the data provided
to SSA on information returns such as W- 2s. In addition, CAWR compares data
provided on information returns with the employer's federal tax returns as
part of CAWR balancing. 17 According to IRS, of approximately 11 million
employers' tax returns CAWR- BMF

16 IRS takes part in the Returned Social Security Administration (RSSA),
which is designed to determine if taxpayers filed all W- 2s and to ensure
that taxpayers' social security wage accounts are properly credited. SSA
compares the same documents as CAWR- BMF, with the

exception of various forms. SSA initiates correspondence with employers if
there is a mismatch. If such attempts are unsuccessful in resolving the
discrepancy, SSA refers the cases to IRS because SSA does not have authority
to assess or collect taxes or penalties from employers. RSSA does not affect
the amount of taxes due IRS or the amount of refunds due taxpayers.

17 CAWR balancing is the process of reconciling dollar amounts employees
report to IRS, such as federal income tax withheld, to corresponding dollar
amounts employers report to the SSA.

analyzed in tax years 1996 and 1997, about 1.3 million (12 percent) were
determined to have differences. However, according to IRS, it has not funded
the BMF component of the CAWR program since fiscal year 1995. As a result,
no CAWR- BMF program cases were investigated, and the amount of
underreported taxes and improper refunds is unknown.

Conclusions Weaknesses in IRS' controls over refund payments have allowed
the potential disbursement of billions of dollars in improper refunds.
Characteristics inherent in the nature of the processing of refund
transactions narrow IRS' ability to effectively respond to the many
erroneous and, in some cases, fraudulent refund claims it receives. However,
within these limitations, opportunities exist for IRS to reduce the

losses incurred by the federal government from these improper refund claims.
Controls IRS has implemented to prevent or detect improper refunds have
achieved a level of success. However, the effectiveness of these controls
was hampered by flawed implementation and, according to IRS management,
resource constraints.

Matter for In order to make available information to better assist it in
making

Congressional informed decisions regarding the budget and staffing of IRS,
the Congress should consider requiring that IRS include in any budget
request for Consideration

additional resources associated with its various collection and enforcement
activities reliable cost- based performance indicators and other relevant
aggregate cost/ benefit data that demonstrate the benefits of providing for
such resources.

Recommendations To ensure that IRS staff members who initiate manual refund
processing appropriately monitor taxpayer accounts in accordance with IRS
policy, we

recommend that IRS revise the IRM to require that IRS employees who initiate
manual refunds document their monitoring

actions on case history sheets and supervisors review monitoring actions and
document their review.

To improve procedures for electronically identifying duplicate refunds to
prevent their issuance, we recommend that IRS determine why the program that
generates the Questionable Refund Report was not

functioning as intended during fiscal year 1999 and implement appropriate
corrective actions.

To maximize the effectiveness of existing IRS initiatives in reducing the
rate of improper EITCs, we recommend that IRS

determine why service centers have not been more effective in stopping
refunds associated with questionable EITCs and make changes to current
procedures as appropriate, review its procedures for enforcing taxpayer
compliance with the

Taxpayer Relief Act of 1997 and implement actions to prevent taxpayers who
had been denied an EITC for tax year 1997 or any subsequent year from being
granted an EITC in successive years until such time as they have provided
the requisite supporting documentation, and

track the total number of and dollars in EITCs subjected each year to EFDS
screening and related efforts to enable IRS to estimate the full magnitude
of suspicious EITCs and determine the level of resources to be devoted to
EFDS screening and investigative follow- up appropriate for the risks and
potential losses involved. To provide IRS management with the information it
needs to make informed funding and staffing decisions concerning (1) IRS'
AUR and CAWR programs, (2) IRS' screening and examination of EITC claims,
and (3) identifying and collecting previously disbursed improper refunds, we

recommend that IRS in the short term, and using the best available
information, develop

reliable cost/ benefit data to estimate the tax revenue collected by, and
the amount of improper refunds returned to, IRS for each dollar spent
pursuing these outstanding amounts. These data would include (1) an estimate
of the full cost incurred by IRS in performing each of these efforts,
including the salaries and benefits of all staff involved, as well as any
related nonpersonnel costs, such as supplies and utilities, and (2) the
actual amount (a) collected on tax amounts assessed and (b) recovered on
improper refunds disbursed. in the long term, incorporate in its systems
modernization blueprint and

strategic planning process capabilities for routinely and reliably measuring
the cost/ benefit of each of these efforts, based on the factors indicated
above, and make informed resource allocation decisions.

Agency Comments and In commenting on a draft of this report, IRS generally
agreed with our Our Evaluation

recommendations related to controls over refunds and provided information
regarding initiatives to address many of them. We will evaluate the
effectiveness of these initiatives during future audits. However, IRS had
concerns about our recommendations that IRS include in its annual budget
submission cost/ benefit information related to its enforcement and
collection programs. IRS indicated that submitting such reports for
congressional review may not be as helpful as recommending that the issues
be addressed in IRS' strategic planning process. We agree that addressing
these issues in IRS' strategic planning process would be of value and have
incorporated this in our recommendation. However, we also continue to
believe that reliable internal cost/ benefit analyses related to these
programs is necessary in order for IRS to make informed resource allocation
decisions. Additionally, providing such information with any request for
additional resources would better assist the Congress in determining if the
level of funding IRS requests for its various programs is appropriate.

We understand that because of concerns about its past collection and
enforcement activities, IRS is reluctant to report return on investment
information to the Congress. However, we believe that billions of dollars of

valid unpaid taxes could be collected in a cost- beneficial manner.
Accordingly, we have included a matter for congressional consideration
asking that the Congress consider requiring IRS to include in any budget
request for additional resources for its various collection and enforcement
activities relevant and reliable aggregate cost/ benefit information. IRS
also stated that it does screen all EITCs through EFDS and keeps a

record of the results of the screening. However, as of the date of this
report, IRS had not provided support for this statement. IRS also provided
numerous detailed comments about the specific findings in this chapter,
which we have incorporated where appropriate. The letter from IRS' Deputy
Commissioner of Operations responding to this report is included in appendix
II.

Further Improvements Needed to Safeguard Manual Tax Receipts and Taxpayer

Chapt er 4

Information During fiscal year 1999, IRS' internal controls over cash,
checks, and hardcopy taxpayer data subjected IRS to unnecessary risk of
theft or loss of tax receipts and exposed taxpayers to increased risk of
losses from financial crimes committed by individuals who inappropriately
gain access to confidential information entrusted to IRS. We recognize that
because receipts and taxpayer data are inherently vulnerable, some theft is
inevitable. IRS made improvements in this area; however, additional actions
and policy changes are needed to further mitigate such risks. For

example, since fiscal year 1997, we have reported that delays in obtaining
the results of fingerprint checks have resulted in IRS' employing
individuals with backgrounds that were unsuitable for handling taxpayer
receipts and

data. Although IRS started using electronic fingerprinting equipment, which
helped reduce the number of illegible fingerprints, and began fingerprinting
applicants earlier in the hiring process, IRS still allowed thousands of
employees to handle tax receipts and taxpayer data during the 1999 tax
return filing season before it received the results of their

fingerprint checks. IRS improved security over transporting receipts and
data to depository institutions with measures such as eliminating bicycle
couriers; however, we continued to find other control weaknesses over the
transport of IRS

deposits. Other previously reported weaknesses also remained, such as the
failure to secure returned refund checks in locked containers. While IRS
responded to our prior reports on many of these weaknesses by issuing new
policies or memos reiterating existing policies, we found that this guidance
was not consistently complied with and, thus, did not adequately

address these weaknesses. In fiscal year 1999, IRS identified 45 actual or
alleged employee thefts of receipts at its field offices and lockbox banks
totaling over $1 million; however, the true magnitude of actual losses will
never be known. Until IRS' management actively addresses these

weaknesses, taxpayer receipts and data will continue to be vulnerable to
theft, loss, or misuse. Hiring Practices IRS allowed new employees to begin
work and handle tax receipts and

taxpayer data before it received and evaluated the results of their
fingerprint checks. During the hiring for the 1999 peak filing season, the
most recent peak season completed as of the end of our audit, IRS did not
fingerprint applicants early enough in the application process or have a
system to quickly process fingerprints before the new staff reported to
work. As a result, IRS unknowingly hired new employees with unsuitable
backgrounds and allowed them to begin working before it knew whether

they were suitable for the positions hired. This control weakness existed at
most IRS service centers and at the IRS district offices and lockbox banks
we reviewed. Generally in the fall, IRS begins hiring thousands of employees
for the upcoming peak filing season. IRS' policy is to require fingerprint
checks of all permanent, seasonal, and temporary employees to identify those
who

might pose a potential threat to IRS' operations and resources. In early
1999, many of IRS' locations upgraded their manual fingerprinting process to
an electronic one. However, at the time of our audit, not all locations had
been upgraded; thus some locations still used the manual system, whereby IRS
manually fingerprinted applicants and mailed the fingerprint cards to

the Office of Personnel Management (OPM). In the manual system, OPM recorded
selected data- such as the applicant's name, social security number, and
date of birth- and then sent the information with the manual fingerprint
cards to the Federal Bureau of Investigations (FBI) for analysis.

FBI analyzed the fingerprints and sent the results to OPM who then forwarded
them to IRS. According to FBI and OPM officials, this process ideally should
have taken about 25 days. However, as we reported in prior years, there were
often delays in obtaining the results, with some delays lasting several
months. 1

Our Standards for Internal Controls in the Federal Government calls for
employees to have personal and professional integrity and to maintain a
level of competence that allows them to accomplish their assigned duties.
Because IRS employees are entrusted with handling taxpayer information, as
well as billions of dollars in receipts, ensuring worker suitability through

a carefully managed recruiting and hiring program is an area demanding
special attention from IRS management. However, IRS often did not have the
results of fingerprint tests before assigning new employees to work because
(1) it did not fingerprint applicants early in the application process and
(2) the process to obtain the results of the fingerprint checks took too
long. For example, one service center did not fingerprint applicants until 2
weeks before the applicants reported for work; thus, all 1,414 staff hired
at that service center for the 1999 filing season began working before IRS
obtained the results of their fingerprint checks. Nationwide, for the seven
service centers that provided 1 See Internal Revenue Service: Physical
Security Over Taxpayer Receipts and Data Needs Improvement (GAO/ AIMD- 99-
15, November 30, 1998).

hiring data, 4,835 employees were hired to process receipts and/ or taxpayer
data for the 1999 filing season before IRS obtained the results of their
fingerprint checks. Results of fingerprint checks for these employees later
revealed that 65 had unsuitable backgrounds, and these employees were
terminated from IRS. By the spring of 1999, IRS had installed electronic
fingerprint scanning machines at its service centers. These machines were
expected to be compatible with the FBI's Integrated Automated Fingerprint
Identification System (IAFIS). This equipment was installed too late to
affect the hiring for the 1999 filing season. However, IRS officials
expected OPM to be

connected to IAFIS by about July 1999 so that IRS would be able to obtain
expedited fingerprint results in time for the 2000 filing season. However,
as of September 1999, this connection had not yet been established.

In the interim, IRS used the electronic scanning machines to begin
automating the fingerprint process. The sites that had the equipment began
taking fingerprints electronically rather than using the manual paper cards
and ink pads. The machines provide staff with immediate feedback while the
applicant is still there about whether the fingerprints taken are legible

or need to be retaken. Once accepted, the fingerprints can be electronically
sent to OPM. However, because there was still no direct link to IAFIS, OPM
had to print out the fingerprints and send them by post to the FBI for
research. As a result, even after the machines were operational, IRS still
experienced delays in obtaining the results of fingerprint checks. For
example, at one service center, IRS submitted fingerprints in July 1999 and

still had not obtained the results at the time of our September 1999 visit 2
months later. To help address such delays, IRS issued guidance on April 30,
1999, directing staff to fingerprint applicants as early as possible in the
job

application process. The guidance states that filing season hires should be
fingerprinted at the time of application or testing, which may occur months
before new hires report for work. Since this new policy was to be
implemented by September 1, 1999, it generally did not affect the hiring for
the 1999 filing season. 2 IRS also recently reported that OPM now has a

direct connection to IAFIS and will be able to electronically transmit
fingerprints directly to the FBI for analysis, thus reducing the amount of
time it takes to obtain the results of fingerprint checks. We will examine
the 2 Most seasonal hiring takes place from about October to March preceding
the April peak.

effect that this system and other initiatives in this area have on IRS
hiring during our audit of IRS' fiscal year 2000 financial statements. We
also found that temporary employees at lockbox banks were processing
taxpayer receipts and data before the results of their fingerprint checks
were received. IRS reported that it revised the February 2000 Statement of
Work for lockboxes, requiring that police clearance checks be performed for
all temporary employees before they are employed. According to IRS, these
measures were completed in March 2000. We will also monitor implementation
of this requirement during our fiscal year 2000 audit.

Courier Security IRS made some significant improvements in the security of
receipts in transport to its financial depository institutions. 3 For
example, district offices no longer transport deposits on foot or by
bicycle, and we did not observe couriers leaving deposits unattended nor
friends and family

members accompanying couriers as we had in the past. Nonetheless, we
continued to find other weaknesses with IRS' courier services. For example,
one lockbox courier was not wearing and did not possess an identification
badge that identified him as an authorized messenger for the

courier service, which is contrary to IRS' minimum security standards. 4
Also, service center deposits were not always taken directly to the bank in
accordance with IRS policy. Our Standards for Internal Control in the
Federal Government states that an agency must establish physical control to
secure and safeguard assets. At IRS, such assets include billions of dollars
of cash and checks and taxpayer data that are transported daily to
depository institutions. Therefore, adequate courier security is important
for protecting these assets. In response to our previously reported findings
in this area, IRS issued a policy in April 1999 establishing new
requirements for courier security. In general, IRS service centers are
surrounded by perimeter fencing with gates and posted security guards. The
security guards posted at the gates

3 IRS uses various commercial couriers to transport its daily deposits from
the service centers and lockbox banks to depository institutions. In
addition, district and post- of- duty office receipts are transported daily
to designated service centers. 4 Internal Revenue Manual (IRM) 1( 16) 12- 4,
“Managers Security Handbook.”

are required to verify the identification of visitors and contractors and to
deny access to the grounds if these individuals are not listed on an
authorized access list. However, at one service center we visited, the
security guards did not verify the specific name or check the identification
of the courier even though he was not the regular courier. In that instance,
the security guards only verified that the courier wore a uniform with the
courier company's name. Once this substitute courier passed the guards and
gained access to the service center grounds, IRS service center officials
did not verify the courier's photo badge before handing him a

$28 million dollar deposit. Similarly, we noted that the regular courier at
one of the lockbox banks we visited was not wearing an identification badge
and did not have a badge with him. Although there was no contractual
requirement that the courier have a badge, without proper credentials that
identify authorized couriers and procedures to verify their identities,
taxpayer receipts and data are exposed to increased risk of losses. IRS'
April 1999 policy required couriers to go directly to the financial

depository institution with no stops in between. However, we found that
couriers at one service center did not do so. Because of the large volume of
receipts, this service center used two couriers to deliver its receipts in
two deposits to two separate banks. One courier drove the first deposit 100
miles from the service center and transferred it to another of his company's
couriers to drive the remaining 100 miles to the bank depository. As a
result, receipts were not adequately secured from the time they were
received at the service center or lockbox bank until the time they were
delivered to the financial depository institutions.

To further improve courier security, IRS issued a revised courier policy in
November 1999. The revised policy requires that all couriers be bonded or
insured for $6 million. The policy also requires service centers to (1)
maintain a typed list of authorized courier service employees on the
company's official letterhead with each employee's name, title, signature,
and social security number and (2) daily validate the courier employee
against a company- issued photo identification badge. Furthermore, the

policy requires that deposits not be transferred to another courier or
courier vehicle after the deposits are picked up, except in emergency
situations, and that the courier deliver government packages or containers
to their destination on the same day he or she receives them from IRS. We
will follow up in future audits on the implementation of these new

requirements.

Other Physical We continued to find additional weaknesses in IRS' controls
to safeguard Safeguards

and account for tax receipts and taxpayer data similar to those reported in
prior years. For example, we found personal belongings in areas where
receipts were processed and certain vulnerable checks stored in unlocked
containers. GAO's Standards for Internal Control in the Federal Government
specifies that an agency establish physical control to secure and safeguard
vulnerable assets, such as cash and checks. Taxpayer data,

which contains personal and financial information, should also be
safeguarded from unauthorized disclosure and use in the commission of
financial crimes. IRS management has issued new policies and procedures as
well as memos reiterating existing policies and procedures to address some
of these weaknesses. However, our visits to IRS service centers,

lockbox banks, and district and post- of- duty offices revealed that the
policies and procedures had not been fully implemented or were not being
consistently followed.

Storing Personal Belongings Previously, we reported that IRS allowed its
staff to store personal in Receipt Processing Areas

belongings, such as purses and lunch boxes, in receipt processing areas. 5
Since some past thefts have involved IRS employees who concealed stolen
receipts in personal belongings, the restriction of such items from receipt
processing areas is a prudent business practice. IRS originally cited space
and cost considerations for lockers as a cause for this condition. However,
IRS subsequently began installing lockers at service centers that did not
have them. IRS did not expect to complete installation of lockers at all

service centers until December 1999. Consequently, during our September 1999
site visits, we found personal belongings in receipt processing areas at two
service centers.

Although installing lockers and requiring their use should address the
problem at service centers, these measures did not address this issue at
other locations. For example, at one district office, we observed purses and

briefcases under counters and workstations where employees received and
processed receipts submitted by walk- in taxpayers. District management
informed us that these items belonged to temporary employees who did not

have assigned cabinets, as permanent staff do, to lock up their personal
belongings. At one lockbox bank, we observed several employees bringing
personal belongings into receipt processing areas, even though it was

5 See GAO/ AIMD- 99- 193, August 4, 1999.

against lockbox policy. Until the restriction of personal belongings in
receipt processing areas is fully implemented and enforced, individuals will
have increased opportunity to conceal stolen receipts and taxpayer data.

Safeguarding Checks We previously reported weaknesses in the safeguarding of
certain receipts susceptible to theft, such as returned refund checks and
“discovered remittances.” The latter are receipts inadvertently
forwarded to units outside the receipt processing area of the service center
and discovered by

other units within the center. Although IRS took steps to address these
issues, we found that these weaknesses persisted:

Returned refund checks were not immediately voided or stored in locked
containers. These are Treasury refund checks that taxpayers have returned
uncashed to IRS, usually to apply against other outstanding tax liabilities.
In November 1998, IRS issued a memorandum to all service centers instructing
them to stamp returned refund checks “nonnegotiable” as soon as
they are extracted from their envelopes. 6 However, we found this stamping
was not being done as soon as the checks were removed from the envelopes and
that these checks were stored in open bins or unlocked containers. Both
lockbox and district office guidelines 7 contain similar requirements, yet
we found unvoided, returned refund checks stored in open baskets at two
lockbox banks. In some cases, district office units did not void the checks
before sending them to a service center for processing. Because some of
these checks may already be endorsed by taxpayers, returned refund checks
are highly negotiable and susceptible to theft. For example, one IRS
employee was prosecuted for stealing an endorsed

returned refund check of over $25,000. 6 IRS also included this guideline in
the January 2000 update of the Internal Revenue Manual. 7 IRS' procedures
manuals Internal Revenue Manual 592( 12). 2, “Perfection of
Remittance” and Internal Revenue Manual 21. 4. 3. 3, “Initial
Processing of Returned Checks” instruct collection support function
and customer service staff to void returned refund checks.

Discovered remittances were not being logged in upon receipt or stored in
locked containers. While the receipt processing area is a restricted access
area, most units outside the receipt processing area are accessible to most
IRS employees, as well as to contractors, vendors, and visitors.
Consequently, discovered remittances found outside the

receipt processing area are more vulnerable to theft or loss. According to
IRS requirements, employees must secure discovered remittances in locked
containers if they are not immediately delivered to the receipt processing
area and record them in a control log as each cash amount or check is
discovered. 8 Although IRS issued a February 1999

memorandum to reemphasize the above requirements, in September 1999, we
found discovered remittances stored in open baskets at two service centers.
At one of these sites, the basket was clearly labeled “discovered
remittances.” In addition, at three service centers, these receipts
were not recorded in control logs immediately upon discovery. Under these
conditions, not only are unsecured discovered remittances exposed to greater
risk of theft, but the timely detection of such theft is

hampered if IRS has no record of ever receiving the payment. Until IRS fully
implements additional safeguards or enforces compliance with existing
guidelines over unmatched checks, returned refund checks, and discovered
remittances, such checks will be exposed to greater risk of theft. Securing
Receipts at

We found that district office walk- in units, which assist walk- in
taxpayers, Smaller Field Offices

did not always store receipts in locked containers, record them in control
logs, or reconcile receipts to control logs to ensure completeness. Although
IRS had issued a memorandum to its walk- in units reiterating its policy in
these areas, we found that issuance of a memo did not ensure compliance with
the guidelines. Furthermore, we found that similar weaknesses existed in
other units that handle receipts at district and post- of- duty offices.
Since instances of theft and embezzlement have occurred at district offices,
it is important that proper controls be instituted to help deter such
instances.

In March 1999, IRS issued a memorandum to reiterate its current security
requirements. The memorandum required that staff working in the walk- in 8
These guidelines are contained in Internal Revenue Manual 38( 43) 3.2,
section (10) “Service Center Deposit Activity.”

units store cash and noncash payments in a locked container and limited the
number of employees who had access to such containers. At two district
office walk- in units, we found that the receipts were stored in locked
containers, but everyone in the unit could gain access to the contents of
the containers. At one of these units, as many as 20 employees had access to
keys for the container. The memorandum also required walk- in unit staff to
record receipts in control logs before depositing them in locked containers
and to reconcile the control log to receipts before submitting them to
another unit for payment processing. However, at three

district offices visited, walk- in unit staff did not record receipts in
control logs until the day following receipt. At one district office, walk-
in unit staff did not reconcile receipts to control logs before submitting
them to the service center for payment processing. In several instances,
local managers stated that they were not aware of these requirements.

When we expanded our review beyond the walk- in unit, we found similar
problems in other units that handle receipts at district and post- of- duty
offices, such as the Collection and Terminal Remittance units. In these
units, receipts were stored in unlocked containers or open bins and were not
always reconciled to control logs before submission to the service center.
Although the March 1999 memorandum applies only to walk- in units, cash and
checks are just as vulnerable to theft or loss in these other units. Until
all field offices and units within those offices are required to meet
consistent, minimum security standards and these standards are effectively
implemented, the potential for theft of receipts at field offices remains
unnecessarily high.

Protecting Checks Against Although not as inherently vulnerable to theft as
cash, checks are still Alteration and Misuse

negotiable instruments. Therefore, preventive controls are necessary to
protect tax payment checks IRS receives against alteration and diversion. In
recognition of this, IRS guidelines require walk- in unit and collection
support function staff to stamp checks and money orders with the words
“United States Treasury” if the payee section is blank or made
out to “IRS” to reduce the potential for altering the name of
the payee and thus the potential for theft. 9 However, we found this
stamping was not always done

at three district offices we visited. Since IRS has identified instances in
which stolen checks made out to “IRS” were easily altered and
cashed, this control is necessary to help prevent the theft of such checks.
IRS guidelines require the district collection support function to endorse
the back of each check with the words “For Credit to U. S.
Treasury.” 10 While not required of other units, such as the walk- in
unit, similar requirements should be followed to better safeguard checks
received from taxpayers. We observed that staff from various units at four
district offices did not restrictively endorse checks before forwarding them
to the service centers for payment processing. While not required at walk-
in units, this control is even more critical now that district offices no
longer deposit checks directly to banks but instead forward the checks to
service centers where the checks are exposed to additional handlers before
they are finally

deposited. 9 Internal Revenue Manual 21. 1. 6. 6.1 “Non- Cash
Payments” and Internal Revenue Manual 592 (12). 2 “Perfection of
Remittances” provide the stamping guidelines for checks received by
walk- in unit and collection support staff. 10 Internal Revenue Manual 5923.
2 “Endorsement to be Shown on Remittances” contains the
guidelines for restrictive endorsement of checks.

Conclusions Although most of the $1. 9 trillion in fiscal year 1999 tax
revenue was collected electronically or by depository institutions,
taxpayers paid almost $400 billion of the total directly to an IRS service
center, district or post- ofduty

office, or lockbox bank. Consequently, the potential for financial loss and
the resultant taxpayer burden is great if these receipts and the related
taxpayer data are not adequately protected. If a deposit were lost or
stolen, IRS would have to expend substantial efforts to initiate actions to
recover stolen checks and prevent them from being negotiated. Even if the
stolen checks were not cashed, they could be used for check cloning schemes,
11 and sensitive personal information on these checks could be used to

perpetrate identity fraud. Such an incident of loss or theft could result in
the loss of funds and other financial damage, imposing a considerable burden
on taxpayers and greatly reducing the taxpayers' confidence in IRS' ability
to safeguard tax receipts and taxpayers' personal data. We recognize that
the inherent risk of theft or loss of taxpayer receipts and data can never
be completely eliminated and that IRS made significant progress in
addressing many of the weaknesses we previously reported. Nonetheless,
further improvements, which would not require substantial effort or
resources to implement, could reduce the risk even further and

help prevent the type of thefts IRS reported in fiscal year 1999. Overall,
the types of weaknesses we have identified can be fixed with short- term
corrective actions that will go a long way toward reducing taxpayer burden

and ensuring the public that its money and personal information are being
adequately protected. Therefore, it is imperative that IRS make further
improvements to mitigate these losses. Recommendations To improve controls
at IRS lockbox banks, we recommend that IRS work

with Treasury's Financial Management Service (FMS) to revise the current
lockbox contracts to emphasize security requirements and to specifically
require that

fingerprint checks be completed before employees begin working, 11 Once a
perpetrator obtains information from a valid check, such as the bank and
account number, that information can be used to “clone” or
duplicate the original check into multiple fraudulent blank checks. These
blank checks can then be made out to different payees, the signature forged,
and the checks deposited into the perpetrator's accounts.

temporary employees be subjected to background checks that are consistent
with those required for IRS employees, and at a minimum, the lockbox bank
courier services meet the service center requirements contained in IRS'
November 16, 1999, policy.

To obtain a minimum level of consistency in the policies and procedures
related to the safeguarding of receipts, all IRS units receiving collections
should have consistent policies and procedures to safeguard and account for
cash receipts.

To help ensure that staff consistently comply with new policies and
procedures issued, we recommend that IRS perform and document periodic
observations and reviews to monitor and enforce compliance with

policies addressing the safeguarding of cash receipts. Agency Comments and

In commenting on a draft of this report, IRS generally agreed with our Our
Evaluation recommendations related to safeguarding manual taxpayer receipts
and taxpayer information and provided information regarding initiatives to
address them. We will evaluate the effectiveness of these initiatives during

future audits. IRS also provided additional detailed comments about the
specific findings in this chapter, which we have incorporated where
appropriate. The letter from IRS' Deputy Commissioner of Operations
responding to this report is included in appendix II.

Inadequate Accounting for and Tracking of

Chapt er 5

Property and Equipment During fiscal year 1999, IRS continued to have
seriously flawed systems and controls over its property and equipment (P&
E). IRS was not recording P& E transactions in its asset records as they
occurred and was not maintaining adequate records for capital leases,
leasehold improvements, or major systems. In addition, IRS had serious
deficiencies in the systems that track its acquisitions and disposals of P&
E. IRS' procedures were also

not effective in ensuring that acquisitions and disposals were promptly and
accurately recorded into those systems. As a result, IRS was unable to rely
on its P& E subsidiary records to account for or report on its inventory of
P& E assets.

IRS has known of these fundamental weaknesses since at least 1983. 1
However, its primary efforts during fiscal year 1999 focused on procedures
to derive year- end balances for its financial statements, rather than on
implementing permanent solutions to its P& E problems. IRS spent significant
internal resources and over $1 million on contracting services to derive
year- end P& E balances for fiscal year 1999. These efforts resulted in an
estimate of $1.3 billion in net P& E at September 30, 1999- an increase of

more than $1 billion (600 percent) over IRS' September 30, 1998, balance.
Federal accounting standards permit estimation of the value of existing P& E
if necessary historical information has not been maintained. However, this
estimate of the P& E balance was a one- time effort and is not the solution
to the fundamental weaknesses that remain. IRS' Accounting

IRS does not have an integrated property management system that records
System

P& E additions and disposals as they take place. Its two inventory systems
that serve as subsidiary records for P& E are not linked to the general
ledger. In addition, P& E transactions are not recorded on IRS' asset
records

as they occur. Instead, IRS relies on extensive manual procedures to
determine adjustments to P& E general ledger accounts at fiscal year- end.
Because of these deficiencies, IRS had to hire a contractor to develop the
P& E balance as of September 30, 1999, for financial reporting purposes.

1 We have reported system and management control weaknesses since we began
auditing IRS' financial statements in fiscal year 1992. See Financial Audit:
Examination of IRS' Fiscal Year 1992 Financial Statements (GAO/ AFMD- 93- 2,
June 30, 1993). IRS has reported deficiencies in its property management
controls since 1983 in its Federal Managers' Financial Integrity Act of 1982
report.

Accounting System for IRS' accounting system was not designed to capture
certain key

Recording P& E Costs information that is necessary to properly record and
report P& E balances in accordance with federal accounting standards. IRS
initially records P& E

purchases as expenses rather than as assets. This includes transactions
related to capital leases, leasehold improvements, or the development of
major systems. Statement of Federal Financial Accounting Standards (SFFAS)
No. 6 states that P& E includes assets acquired through capital leases 2 and
leasehold improvements and that the cost of general P& E acquired under a
capital lease shall be equal to the amount recognized as a liability for the
capital lease 3 at its inception. However, IRS did not have procedures to
identify and record either the assets or the corresponding liability that
results from capital lease agreements as these transactions

occurred. Before fiscal year 1999, IRS recorded no capital leases on its
financial statements. In addition, IRS' method for recording lease costs on
its two P& E systems was inconsistent. IRS records leased automated data

processing (ADP) equipment at the monthly lease cost, but non- ADP equipment
at the annual lease cost. There was no distinction made between assets
acquired under capital leases and operating leases.

Because IRS' systems did not record the information needed to properly
report financial information on capital leases, IRS did not report any
liability for capital leases on its accounting records in fiscal year 1998
or prior years. In fiscal year 1999, IRS engaged contractors to identify and
compile financial information on capital lease agreements. The contractors
identified capital lease liabilities of $65 million that had not been
recognized in IRS' accounting records because of IRS' inadequate accounting
systems. Contractors were able to compile IRS' capital lease liabilities by
gathering lease agreements and reviewing them to determine if the agreements
should be properly classified as operating or capital leases.

IRS did not adjust its inventory records to record the asset cost at the
amount recognized as a liability. Instead, IRS valued the related P& E
assets in the statistical estimate of P& E. 2 Capital leases are leases that
transfer substantially all the benefits and risks of ownership to the
lessee. 3 SFFAS No. 5, Accounting for Liabilities of the Federal Government
(February 28, 1997), states that the liability for capital leases shall be
the lesser of the net present value of the lease payments or the fair value
of the asset.

To meet its reporting requirements, at fiscal year- end, IRS had to analyze
expenditures charged to repairs and space alterations to determine whether
the expenditures should be recorded as leasehold improvements. This analysis
is labor intensive and time consuming because it requires obtaining and
reviewing documentation for a full year of expenditures. In

fiscal year 1999, IRS hired contractors to perform this analysis. The
analysis took several months to complete and, based on our review, needed
significant changes to (1) correct prior year inaccuracies in the
amortization of leasehold improvements and (2) adjust the useful life to
better reflect IRS' utilization of leasehold improvements.

IRS spent hundreds of millions of dollars to develop the major systems that
it uses to perform its mission. However, in fiscal year 1998 and prior
years, IRS did not report any development cost for major systems on its
financial statements. During our fiscal year 1998 audit, we identified two
major systems that had incurred substantial development costs. 4 To meet
fiscal

year 1999 reporting requirements, IRS hired a contractor to analyze prior
years' expenditures charged to its major projects and to compile costs by
major system. The contractor identified fiscal year 1998 and 1999
development costs totaling $104 million for the two systems we identified in
1998. However, this initial amount did not include costs associated with
these two major systems that were incurred by IRS during fiscal year 1997.
We also identified three additional major systems that had significant
associated development costs. Based on this, IRS' contractor determined that
IRS had actually expended $288 million to develop the five major systems. In
addition, we found that $34 million recorded as work- inprocess

should have been allocated to portions of the major systems that were
complete and in use. During their review, the contractors hired by IRS to
compile the cost for the major systems found that expenditures were not
always charged to the correct accounting codes. The contractors found that
of 50 expenditures reviewed, 3 (6 percent) were charged to an incorrect
account. Expenditures totaling $1.5 million for ADP equipment had been
improperly charged to data processing services. The contractors also found
that

charges to accounting codes totaling $5. 7 million, or 8 percent of the $71
million total for the Integrated Submission and Remittance Processing
System, did not agree with supporting documentation. Accurately 4 See I
nternal Revenue Service: Serious Weaknesses Impact Ability to Report on and
Manage Operations (GAO/ AIMD- 99- 196, August 9, 1999).

recording expenditures to the various accounting codes is important because
IRS uses these records to determine major system costs at fiscal year- end.
If expenditures are not charged to the correct accounting codes, IRS will be
unable to rely on those codes to compile the cost of major systems.

In addition, IRS is undertaking a major initiative to modernize its outdated
systems using a Prime Systems Integrated Services (PRIME) contract. To date,
IRS has received $506 million in appropriations to fund its systems
modernization and has requested another $494 million. However, during

fiscal year 1999, IRS did not have a system in place to capture all costs
related to its systems modernization efforts. IRS also did not have
procedures to reliably report the cost of internally developed software, as
federal accounting standards will require in fiscal year 2001. SFFAS No. 10,
Accounting for Internal Use Software, requires federal agencies to
capitalize the cost of internal use software, whether it is purchased
externally, developed by contractor, or developed internally. IRS spends
millions of dollars each year to develop the application and operating
software it uses in its operations. Beginning October 1, 2000, IRS needed to
have procedures in place to track and report the costs of its software
projects.

Tracking P& E IRS' records for physically tracking its P& E continued to be
inadequate during fiscal year 1999. IRS maintains two separate automated
systems to track its P& E: the Property Asset Tracking System (PATS), which
tracks

acquisitions and disposals of non- ADP assets, and the Integrated Network
and Operations Management System (INOMS), which tracks acquisitions and
disposals of ADP equipment. However, in fiscal year 1999, as in prior

years, we found these systems records to be unreliable because IRS'
procedures were not effective in ensuring that acquisitions and disposals
were promptly and accurately recorded. IRS owns hundreds of thousands of P&
E items at over 1,000 locations throughout the country. On a daily basis,
new items are received, old ones disposed of, and others transferred to new
locations. Maintaining accurate records and control for a vast inventory
that is constantly changing

requires that IRS have in place clear, well- documented procedures;
personnel who are adequately trained and knowledgeable of IRS' procedures;
and adequate management oversight. IRS' policies and procedures for control
and inventory of P& E are documented in various

manuals and guidebooks, which have been updated by the issuance of policy
memorandums. Consequently, personnel responsible for maintaining inventory
records did not have a comprehensive, authoritative

reference source that specified policies and procedures for the accounting
and reporting of P& E. In addition, IRS has not established a senior- level
position with overall responsibility for the accounting and reporting of P&
E. IRS relies on individuals across the country to inform those responsible
for maintaining the PATS and INOMS records of any P& E additions, transfers,
or disposals. Individuals responsible for purchasing, receiving, and

disposing of P& E notify the individuals responsible for recording P& E
transactions by telephone, fax, or e- mail that P& E has been received,
moved, or disposed of. However, there was no effective process to ensure
that the individuals responsible for updating the P& E records ever received
accurate or timely notification of P& E transactions. IRS' inventory

procedures state that new assets should be recorded within 10 working days
of receipt, but we found that some P& E purchases were not promptly recorded
in INOMS or PATS. For example, three automated mailprocessing systems,
costing $865,000 each, were installed from January through April 1999, yet
they were not recorded on the PATS inventory records as of September 1999.
Tests of IRS' P& E records indicate that unrecorded P& E was widespread
throughout IRS during fiscal year 1999. For example, contractors hired by
IRS to develop a statistical projection of the fiscal year 1999 P& E balance
found unrecorded P& E at all 15 sites they

tested. We also found that some locations were not recording P& E when it
was received but when it was placed in use, which in some cases was months
later. OMB Circular A- 123 states that each agency shall establish and
maintain control of assets. However, at one location, we found ADP equipment
at a cost of $1. 8 million that was received on September 30, 1999, but
still had not been recorded on the inventory system at December 1999. At
another location, 60 telecommunications equipment items costing

$2, 600 each were received in August 1999, but had not been recorded as late
as December 1999 because the equipment had not been installed. IRS' ability
to maintain reliable P& E records was further compromised because its
procedures were not adequate to ensure that inventory records were promptly
updated when items were disposed of or moved to other locations.
Consequently, IRS was unable to locate some of the P& E items recorded on
PATS and INOMS. The contractor hired by IRS also found that

some P& E items on IRS' inventory records could not be located. At various
locations, we found computers, printers, software, videoconferencing
equipment, and a forklift that were not recorded on IRS' P& E inventory
records. In addition, property is sometimes disposed of without having
inventory records updated to reflect the disposal. For example, at one
location we visited, a leased automobile that had been disposed of in April
1999 was still on the inventory records on June 30, 1999. At another
location, 200 disposed personal computers were still on IRS' inventory
records. Accurate records are essential for maintaining control over P& E

to ensure that assets are properly and effectively used and not
misappropriated. TIGTA has reported similar weaknesses in IRS' controls over
its P& E, such as the following.

In February 1999, 5 TIGTA reported that a significant amount of
telecommunications equipment sampled from the floor of IRS sites was not
recorded on the inventory records. At the Tennessee Computing Center, only 4
of 27 telecommunications equipment items were recorded, and at the Cleveland
Customer Service site, only 6 of 55 items were recorded. In December 1999, 6
TIGTA reported that IRS' inventory significantly

understated the amount of telecommunications equipment in use throughout
IRS. When it compared samples of telecommunications equipment at 24 IRS
sites to the inventory records, TIGTA found that only 45 percent of the
items at the sites were included in the inventory.

P& E Data Entry IRS' data entry controls did not adequately ensure that the
entries made to inventory records were accurate and complete. Additions,
deletions, and

edits to inventory records were not reviewed to ensure that entries were
valid and accurate. We found numerous errors in the data entered on IRS'
inventory records. For example, we found a software license that cost over
$8 million that was recorded twice. 5 Review of the Internal Revenue
Service's Year 2000 Efforts to Inventory Telecommunications and Commercial
Off- the- Shelf Products (Reference No. 092402, February 10, 1999). 6 The
Internal Revenue Service Needs to Significantly Improve the Inventory Used
to Monitor Its Year 2000 Conversion Efforts (Reference No. 2000- 20- 021,
December 1999).

In addition, we found numerous items on IRS' inventory records with
incorrect data, such as incorrect serial or model numbers and manufacturer
names. We also found errors in the recorded status of P& E. For example, at
one location, two mail processing equipment items that had been disposed of
were still on the inventory. In addition, two copy

machines were still on the inventory records even though the lease had
expired and the equipment had been replaced; this was due to an error in
recording the code to reflect the disposal of the equipment. Estimate of P&
E IRS has reported deficiencies in its property management records since
Balance

1983. In its fiscal year 1999 Federal Managers' Financial Integrity Act of
1982 (FMFIA) report, IRS again reported that it had a material weakness in
procedures and controls over the use and accountability of its P& E. IRS
also reported that without a reliable system of accounting for its property,
it is unable to determine if property is being properly used or
misappropriated. Without current and accurate P& E records, IRS management
does not have the information that it needs to effectively manage and
safeguard its assets. A recent example of the impact of not having reliable
P& E records occurred when IRS' Chief Information Officer had to have a
costly inventory of computer equipment and software conducted to ensure that
all of IRS' critical systems were Year 2000

compliant. Because of the weaknesses described above, IRS was unable to rely
on its accounting and P& E inventory systems during fiscal year 1999. SFFAS
No. 6 permits estimation of the value of existing P& E if necessary
historical information has not been maintained. Therefore, in fiscal year
1999, as

noted previously, IRS hired a contractor to develop a balance for its P& E
based on a statistical estimate and to compile the historical costs for
leasehold improvements, capital leases, and major systems. At a cost of over
$1 million, IRS determined that a reasonable estimate of its P& E

balance as of September 30, 1999, was $1. 3 billion- nearly a 600- percent
increase over the $164 million reported on its prior- year balance sheet. 7
As shown in figure 2, prior year P& E at IRS was materially understated.

7 We reported in our audit of the fiscal year 1998 financial statements that
the P& E balance was likely materially understated. See GAO/ AIMD- 99- 75,
March 1, 1999.

Figure 2: P& E Account Balances- Comparison Between Fiscal Years 1998 and
1999 Millions of dollars $1,400 $1,200 $1,000

$800 $600 $400 $200

$0 Capital

Leasehold Major

P& E Total

leases improvements

systems estimate P& E

FY 1998 FY 1999

Source: IRS' fiscal year 1998 and 1999 financial statements.

Although we found the estimate to be materially reliable, this estimate of
the P& E balance was a one- time effort that resulted in a balance only at a
point in time; it is not the solution to the fundamental weaknesses that
remain. Before IRS undertook its costly year- end estimate of P& E, we
recommended that management first ensure that systems and controls were in
place to reliably control and report its P& E assets. At the

conclusion of our fieldwork, IRS had yet to derive a means of sustaining the
one- time effort.

Conclusion The pervasive weaknesses in systems and management controls over
P& E that we first reported in our audit of IRS' financial statements in
fiscal year

1992 continued to exist in fiscal year 1999. As a result, IRS invested
substantial internal personnel resources, as well as significant funds to
procure contracting services, to derive year- end balances for its fiscal
year

1999 financial statements. While this approach improved the reliability of
IRS' reported September 30, 1999, year- end financial information, it did
not address the underlying deficiencies in IRS' systems and controls. Until
IRS

corrects the fundamental problems with its systems and controls, it will not
have timely, reliable information to properly manage and report on the
hundreds of millions of dollars that it spends annually on P& E and the
billions of dollars it will be spending to modernize its computer systems.
Recommendations We recommend that the Commissioner of Internal Revenue
implement the following interim measures to help ensure proper accounting
and

accountability over fiscal year 2000 and future P& E additions and
disposals. Develop a subsidiary ledger for leasehold improvements and
implement procedures to record leasehold improvement costs as they occur.

Implement procedures and controls so that expenditures for P& E are charged
to the correct accounting codes to provide reliable records for extracting
the costs for major systems and leasehold improvements. Establish a system
to capture all costs related to the PRIME effort to modernize IRS' computer
systems.

Develop procedures and systems to capture and capitalize the cost of
internally developed software in accordance with SFFAS No. 10, Accounting
for Internal Use Software. Consolidate and update the P& E policies and
procedures currently documented in various handbooks and policy memorandums
into a comprehensive document that personnel responsible for maintaining
inventory records can use as a reference.

Assign a senior- level position with overall responsibility for verifying
that P& E records are accurate and P& E are properly accounted for. Develop
and implement procedures so that personnel responsible for maintaining P& E
inventory records receive prompt notification when

P& E is received, moved, or disposed of. Procedures should help ensure that
those responsible for maintaining inventory records promptly receive
documentation supporting P& E transactions, such as receiving reports,
invoices, and disposal documents. Revise guidance on recording P& E to
clearly state that P& E is to be

recorded when title passes to IRS or when delivered, based on the terms of
the contract regarding shipping and delivery. This is to clarify that P& E
and related accounts payable should be promptly recorded when

received, in accordance with SFFAS No. 6, rather than when P& E is placed in
service. Provide training on P& E policy and procedures to personnel
responsible for maintaining inventory records to help ensure that P& E
transactions are promptly and accurately recorded.

Review, and correct as necessary, data in inventory records, such as serial
or model numbers and manufacturer names, during periodic inventories of P&
E. Perform sufficient supervisory reviews to help ensure that transactions
recorded on P& E inventory records are accurately entered into subsidiary
records and appropriately supported by documentation.

Agency Comments and In commenting on a draft of this report, IRS generally
agreed with our Our Evaluation

recommendations related to P& E and provided information regarding
initiatives to address many of them. We will evaluate the effectiveness of
these initiatives during future audits. However, IRS disagreed with our
recommendation that it establish a system to capture all costs related to
the “PRIME” effort to modernize IRS' computer systems. IRS noted
that PRIME is not a project but a contractual instrument for specific
projects,

and that related costs should not be capitalized. However, the intent of our
recommendation was that IRS establish a system to accumulate full costs
related to all projects initiated under PRIME, whether capitalizable or not,
so that IRS will be able to determine the full cost of its systems
modernization initiative. This is particularly of interest to congressional
oversight committees who are closely monitoring IRS' systems

modernization. IRS also indicated that our discussion of its P& E did not
appropriately reflect (1) its approach to property valuation in fiscal year
1999 or (2) the pooling concept IRS subsequently adopted. With respect to
the first issue,

we disagree. Our report discusses IRS' use of a contractor and statistical
sampling methodology to develop a reliable P& E balance at year- end.
However, as our report also states, this approach was made necessary by the
pervasive and long- standing weaknesses in IRS' controls over its P& E that
rendered it unable to rely on the detailed P& E records that it had been
using to support its general ledger P& E balance in previous years. The
second issue, IRS' current pooling approach, is not discussed in our report
because (1) it was adopted after the period covered by this report and (2)
similar to the statistical estimation process used by IRS in fiscal year
1999, IRS' problems current pooling concept derives a reliable balance only
at a point in time, as well as deriving estimates of additions and
dispositions. It is not a solution to IRS' establishing and maintaining
accountability over P& E that is the subject of this report. IRS'
implementation of this pooling approach will be reviewed as part of our
audit of IRS' fiscal year 2000 financial statements.

IRS also provided additional detailed comments about the specific findings
in this chapter, which we have incorporated where appropriate. The letter
from IRS' Deputy Commissioner of Operations responding to this report is
reprinted in appendix II.

Chapt er 6

Ineffective Controls Over Appropriated Funds Because of material weaknesses
in internal controls over budgetary resources and lack of cost accounting
capability, IRS could not reliably determine or report how it expended its
budgetary resources. IRS was unable to generate reliable cost- based
performance or budgetary information to enable management, the Congress, or
the public to assess the effectiveness of its operations. Because of these
weaknesses, IRS was also unable to reliably assess the level of additional
resources it believes it needs to achieve desired future results. Thus, IRS
is unable to provide assurance to the Congress concerning the benefits to be
expected if the requested funding is provided.

IRS' Budgetary IRS did not ensure that budgetary activity and balances
reported on its

Transactions financial statements were reliable or that its obligations did
not exceed its

available budgetary resources. This condition contributed to our inability
to determine whether four of IRS' six financial statements for the fiscal
year ending September 30, 1999, were reliable, as well as whether the
components of net position as of September 30, 1999, were reliable. More
important, IRS did not have current, accurate budgetary information

needed to effectively manage operations on an ongoing basis. We found that

deobligations 1 were not performed in a timely manner, obligations were not
liquidated upon receipt of goods and services as of September 30, 1999, and
IRS did not promptly charge all expenditures against the appropriations

authorized to pay them. We also found weaknesses in IRS' automated controls
over budgetary resources. IRS has indicated that these problems have been
resolved. We will follow up in future audits to assess IRS' response to this
issue.

1 Deobligations are downward adjustments of previously recorded obligations.
Deobligations can occur for a variety of reasons, such as if the actual
expense was less than the amount obligated, a project or contract was
cancelled, an initial obligation was determined to be invalid, or previously
recorded estimates were reduced.

Deobligating Funds IRS was not effectively identifying obligated funds that
were no longer needed and should have been deobligated. According to the
IRM, unliquidated obligations may be deobligated at any time during the year
if it is known that the obligations are no longer valid or needed.
Furthermore, IRS policy requires financial plan managers 2 to review aged
obligation reports on a quarterly basis and identify all obligations that
are no longer active and thus would need to be deobligated. Our testing of
undelivered

orders 3 and a previous IRS internal audit report 4 indicate that the
procedure was not effectively executed. We also reported in fiscal year 1994
5 that obligations were not being reviewed and recommended that IRS

periodically review them, adjusting the records to amounts expected to be
paid. We found 11 cases (8 percent) from a statistical sample of 130
undelivered orders at September 30, 1999, in which IRS did not deobligate
undelivered orders that were no longer valid. For instance, we found $2. 8
million for an

undelivered order relating to computer services that was still obligated
even though the services had been completed and the last invoice for these
services was paid in fiscal year 1996. In another example, we found a $1
million undelivered order relating to lockbox fees for fiscal year 1998,
when all services had already been delivered and paid for.

2 Financial plan managers are responsible for managing the spending plans
under their control. 3 Undelivered orders represent the value of goods and
services that were ordered and obligated but have not been received. This
term is synonymous with unliquidated obligations.

4 Review of the Need to Deobligate Unliquidated Obligations (IRS Internal
Audit Report No. 084602, June 26, 1998). 5 Financial Management: IRS Does
Not Adequately Manage Its Operating Funds (GAO/ AIMD- 94- 33, February 9,
1994).

Before we tested the ending undelivered orders, we tested the beginning
(September 30, 1998) undelivered orders balance to help IRS identify and
correct any errors that might exist in the ending (September 30, 1999)
balance. We found 7 cases (16 percent) from a statistical sample of 45

undelivered orders as of September 30, 1998, that should have been
deobligated. For example, for $1 million worth of a fiscal year 1997
printing obligation, no expenditures had been incurred and, according to
IRS, none would be incurred in the future against the obligation. IRS
recorded and charged other obligations for printing services and, during the
deobligation process, overlooked that this outstanding obligation was no
longer needed. In another case, an undelivered order for an employee's
relocation expenses remained on IRS' accounting records although the
relocation was completed in fiscal year 1997 and no further charges were
expected. Based

on our findings, IRS performed a year- end analysis of outstanding
undelivered orders and, as shown in figure 3, deobligated $79 million worth
of obligations from budget fiscal years 6 1995 to 1997.

6 Budget fiscal year is the fiscal year to which the obligation was charged.

Figure 3: Budget Fiscal Year Components of $79 Million Deobligation

Dollars in millions 35

31 30

25 25

23 20 15 10

5 0

Budget fiscal year 1995 1996 1997

Source: Unaudited IRS data.

However, this action did not completely resolve the issue, as evidenced by
our year- end testing. Figure 4 shows the undelivered orders as of September
30, 1999, classified by ending budget fiscal year. As shown in this figure,
14 percent of the total undelivered orders of about $950 million had ending
budget fiscal years of 1998 or earlier.

Figure 4: Undelivered Orders as of September 30, 1999, by Ending Budget
Fiscal Year

About $950 million total 40%

44% 14%

2% 1998 or prior 1999 2000/ 2001 no year

Source: Unaudited IRS data.

Our testing and the $79 million deobligation of old undelivered orders
performed by IRS indicates that the older the undelivered orders are, the
more likely that they are not valid. For example, of the September 30, 1998,
balance of undelivered orders, approximately $123 million were from 1997 or
before, and IRS deboligated $79 million (or 64 percent) of these orders
after performing the analysis we recommended.

By not promptly deobligating funds, IRS affected its ability to reliably
report on the status of its budgetary resources and to use its financial
resources effectively. For example, had IRS deobligated the funds within the
period of availability, the funds could have been used for other initiatives
and programs. In addition, for the past several years, IRS has been given
legislative authority to carry forward 50 percent of the prior year's
unobligated balances available for salaries and expenses to the

current year. In fiscal year 1999, IRS carried over $5.6 million from fiscal
year 1998. To the extent that IRS failed to deobligate fiscal year 1998
undelivered orders, it could not include these amounts in the unobligated
funds to be carried forward to the next year.

Liquidating Obligations IRS records an obligation when it orders goods and
services for use in its operations. Outstanding obligations should be
liquidated when goods and

services are received, with simultaneous recording of accounts payable. IRS'
year- end procedures require program personnel to review outstanding
obligations to determine whether goods and services have been received
before year- end. However, we found that program office personnel generally
did not provide receipt and acceptance acknowledgment to the

accounting office until they received an invoice. Often, IRS did not receive
invoices until months after the goods were delivered or the services had
been performed. In these situations, IRS did not attempt to estimate a
liability even though the charges may have been for services that were
performed consistently from month to month and were known to have been
received. We also found several cases in which IRS personnel used

the date that they entered the receipt and acceptance into the accounting
system as the acceptance date rather than the actual date the goods and
services were received. For example, we found several cases where IRS
personnel entered receipt and acceptance in October 2000 for goods and
services received as of September 30, 1999. As a result, in addition to
undelivered orders being overstated, the accounts payable was understated

at year- end. We found 42 cases (32 percent) from a statistical sample of
130 undelivered orders at September 30, 1999, in which IRS had already
received the goods or services, yet the amount still was not removed from
IRS' undelivered orders. For example, we found $16 million in unliquidated
obligations for fiscal year 1999 lockbox bank fees at year- end that IRS
still showed as an

undelivered order although services were performed during the fiscal year.
In another case, we found $2.2 million of computer services that had been
received before September 30, 1999, but which were still shown as an
undelivered order. In both cases, IRS did not receive the corresponding
invoices until well after the fiscal year- end, but did have a basis on
which to

estimate a liability. In another case, a $7.5 million licensing agreement
entered into in fiscal year 1999 was still shown as an undelivered order
because receipt and acceptance was entered into the accounting system in
October 1999 and the input date was incorrectly used as the acceptance date.
The accounts payable and corresponding liquidation of the undelivered order
were recorded in fiscal year 2000. These results were consistent with our
testing of accounts payable, where we found a significant number of cases in
which liabilities were not recorded for goods and services received on or
before September 30, 1999.

Recording Certain As we previously reported, 7 IRS did not promptly record
all expenditures in Expenditures Against

the accounts of the appropriations authorized to pay them. To help ensure
Appropriations that funds are actually used for the appropriated purposes
and within prescribed dollar limits, agencies need to promptly match
disbursements against applicable obligations. However, for some expenditures
for which

the funding information, supporting documentation, or both are incomplete,
IRS recorded the transactions in suspense accounts while awaiting supporting
documentation. Reasons for placing items in the suspense account included
(1) not having received a breakdown of the charges from the billing agency,
(2) not having a receipt and acceptance certification, and (3) not having
sufficient funds obligated. 8 IRS substantially improved its handling of
suspense items. In fiscal year 1998,

IRS' records showed a net 9 suspense balance of $140 million. IRS was able
to reduce the net suspense balance to about $8 million as of September 30,
1999. Nonetheless, transactions continued to remain in the suspense account
for months.

It is unclear just how long some of the items had been in suspense as a
result of inconsistencies between IRS' general ledger and a log IRS
maintains of suspense items. The general ledger reflects balances in the
suspense account dating back as far as fiscal year 1989. However, IRS' log
of suspense account items shows transactions dating back to fiscal year

1997. Thus it is unclear precisely how old some of the items were that made
up the $8 million in the suspense account at September 30, 1999. Most of the
dollar value remaining in the suspense account related to transactions in
which another federal agency charged IRS for goods or services using
Treasury's electronic bill- paying system. For example, IRS

had a number of charges from the General Services Administration (GSA) that
were recorded in its suspense account from 1996. In one case, GSA charged
IRS $832,000 on November 21, 1996, for motor vehicle purchases. IRS did not
begin clearing the transaction out of the suspense account until July 29,
1999, and a balance of $268,000 remained as of September 30, 1999.

In another case, GSA charged IRS $820,000 on August 23, 1996, for supplies.
7 See GAO/ AIMD- 99- 196, August 9, 1999. 8 If IRS receives an invoice for
more than 10 percent above the obligated amount, the transaction will be
posted to the suspense account until additional funds are obligated.

9 Net amount represents the net of debits (positive) and credits (negative).

IRS did not begin recording the charge until October 29, 1999, because it
first had to record an increase to the obligation to cover the expenditure,
which was done on October 14, 1999. Transactions where sufficient funds have
not been obligated are of particular concern because, until the funds are
obligated, IRS does not have reliable information on the status of its
budgetary resources. Also, to the extent that there were outstanding amounts
in the suspense account for which obligations had not been recorded,
obligations would be understated.

Until the transactions in IRS' suspense account are recorded in the proper
appropriation account, IRS cannot ensure that its outstanding obligations
and disbursements do not exceed available budget authority. In addition, IRS
cannot report reliable budget information until its suspense account is
cleared.

Fund Balance With Despite substantial efforts on its part, IRS was unable to
reconcile its

administrative fund balance with Treasury accounts 10 throughout fiscal
Treasury year 1999. Although we were able to conclude that the amount
reported by IRS on its balance sheet for fund balance with Treasury was
reliable at September 30, 1999, unresolved reconciling items continue to
raise serious

questions about IRS' ability to ensure that its operating funds are being
properly spent and that it complies with the laws governing its use of
budget authority. Treasury policy and prudent financial management

practices require an agency to reconcile its fund balance with Treasury
accounts to Treasury's records monthly. These reconciliations should
identify differences between IRS' and Treasury's records. Resolving such
differences could involve adjustments to either IRS' records, Treasury's
records, or both. This process, while more complex, is similar to companies
or individuals reconciling their checkbooks to monthly bank

statements. 10 Like other agencies, IRS records administrative budget
spending authorizations in the asset account titled “Fund balance with
Treasury.” The funds maintained in the fund balance with Treasury
account are used to fund IRS' operations. IRS' fund balance with Treasury
account includes 43 appropriation accounts. IRS increases or decreases these
accounts as it receives or disburses funds.

We reported IRS' failure to promptly and routinely reconcile its fund
balance with Treasury accounts in previous years, dating back to 1992, the
first year that IRS' financial statements were subject to audit. We had
previously recommended that IRS perform prompt reconciliations, including
investigating and resolving reconciling items. In fact, we reported in our
fiscal year 1996 audit report 11 that IRS had completed a major effort to
clear up unresolved differences between its records and Treasury's that
dated back years. In that effort, IRS used the help of contractors to
analyze

and resolve old unreconciled differences in the fiscal year 1996 fund
balance with Treasury accounts. With this effort, IRS was able to reconcile
its fund balance with Treasury accounts to Treasury records to within an
immaterial amount. However, IRS' failure to continue routinely reconciling
its fund balance with Treasury accounts after this substantial cleanup
effort eventually led to its inability to reconcile its fund balance with
Treasury

accounts in fiscal years 1997 and 1998. This, in turn, led to our inability
to determine whether IRS' recorded fund balance with Treasury amount at
September 30, 1998, was reliable. In our August 1999 report on IRS'
weaknesses in internal controls over its administrative activities, 12 we
again

recommended that IRS perform prompt reconciliations, including investigating
and resolving the differences between its records and Treasury's for
appropriation account balances and adjusting account balances accordingly.

11 See Financial Audit: Examination of IRS' Fiscal Year 1996 Administrative
Financial Statements (GAO/ AIMD- 97- 89, August 29, 1997). 12 See GAO/ AIMD-
99- 196, August 9, 1999.

In August 1999, IRS began extensive efforts to reconcile its fund balance
with Treasury accounts, first to determine the appropriate balances at the
beginning of the fiscal year, and then to attempt to determine reliable
balances as of March 31, 1999, and June 30, 1999. These efforts included
bringing in temporary assistance from the Department of Veterans Affairs, as
well as employing a significant number of its own staff. However, IRS'
efforts were hindered due to past extensive, unreconciled differences and
unsupported adjustments. Specifically, IRS' failure to properly and
routinely reconcile its fund balance with Treasury accounts resulted in the
accumulation of substantial differences between its records and Treasury's
over the last several years. In an attempt to resolve these differences, IRS

recorded unsupported adjustments to its general ledger in fiscal years 1997
and 1998 to force its records to match Treasury's- in essence, to
“plug” its balance. 13 These adjustments for fiscal years 1997
and 1998 totaled

approximately $84 million and $60 million, respectively. IRS posted these
adjustments in fiscal years 1997 and 1998 without first performing the
necessary research to determine whether adjustments to the general ledger
were, in fact, needed or whether some or all of these

differences were attributable to errors in Treasury's records. This is
similar to an individual not reconciling his or her checkbook with monthly
bank statements for years, and then adjusting the checkbook to agree with
the balance on the latest bank statement without first verifying that the
bank had not made any mistakes. Because some of IRS' adjustments related to
differences going back as far as fiscal year 1995, its ability to research
and properly correct entries was further hindered. IRS had to devote
significant time and staff resources to try to correct its records for the
effects of these adjustments.

IRS management decided to abandon its efforts to reconcile its fund balance
with Treasury accounts as of March 31, 1999, and June 30, 1999, because of
its inability to correct its records for the unsupported plug adjustments it
made to its general ledger in fiscal years 1997 and 1998. Instead, IRS
management elected to focus its efforts on completing the September 30,
1999, reconciliation of its fund balance with Treasury accounts and to
resolve the uncorrected errors existing in the fund balance 13 The problems
related to adjusting agency records to match the amounts reported by

Treasury have been noted in other GAO reports. For example, see Financial
Audit: Issues Regarding Reconciliations of Fund Balance With Treasury
Accounts (GAO/ AIMD- 99- 271, September 17, 1999).

with Treasury accounts that resulted from the absence of reconciliations
over the past several years. This effort identified the need for IRS to
adjust its records for approximately $77 million in errors and for Treasury
to adjust its records for approximately $55 million in errors. In addition,
because IRS had not implemented the necessary controls, such as management
review, to ensure that its fund balance with Treasury accounts would be
promptly and routinely reconciled, other related problems went undetected
until the 1999 fiscal year- end cleanup effort. For example, IRS made
several of the adjustments to its records to account for

voluntary separation incentive payments 14 and administrative billing and
collection 15 transactions that the U. S. Department of Agriculture's (USDA)
National Finance Center (NFC) 16 reported to IRS, but which IRS had never
previously recorded in its general ledger. These transactions, which were

recorded against IRS' appropriation accounts at Treasury, accounted for
approximately $12 million of the difference between IRS' and Treasury's
records.

Another problem that IRS identified through this cleanup effort concerned
certain entries IRS budget staff had made in the past that resulted in
overstatements of IRS' fund balance with Treasury. Specifically, when

trying to post entries to establish “no- year” monies into new
Treasury symbols within the general ledger, IRS' budget staff failed to
delete the same entries that had been automatically posted by the general
ledger system. Consequently, the entries posted by the budget staff
represented duplicate postings to the fund balance with Treasury accounts,
resulting in an overstatement of the general ledger balances. This condition
resulted in

approximately $43 million of overstatements in IRS' fund balance with
Treasury accounts. IRS officials informed us that they have developed plans
to electronically reconcile the proprietary balances with budgetary balances
for the fund balance with Treasury accounts beginning in fiscal 14 Voluntary
separation incentive payments are buyout payments provided to employees who

voluntarily leave jobs. The amount is determined by the employee's length of
service and salary, but in no event should the buyout payment exceed
$25,000. 15 Administrative billing and collection transactions represent
receivables and collections owed to IRS by its employees. These receivables
are usually due to salary overpayments, holdover benefit payments made by
IRS for seasonal employees who maintain benefits while they are not working,
and other overpayments or errors.

16 The NFC processes IRS' payroll and reports the expense amounts associated
with the payroll to IRS for accounting purposes.

year 2000. However, had IRS been promptly and routinely reconciling its fund
balance accounts over the past several years, it would have identified these
problems in the reconciliation and had an early opportunity to address them.

IRS was able to provide sufficient evidence that its September 30, 1999,
reported fund balance with Treasury amount was reliable. Although IRS'
September 30, 1999, reconciliation showed differences between IRS' and

Treasury's records, these differences were not material enough to affect the
reliability of the year- end overall reported balance. The most significant
unresolved differences identified in the reconciliation were related to

payroll transactions. According to IRS, the payroll differences resulted
from NFC's reporting to Treasury's FMS 17 cash disbursement information
related to payroll expense charges that was different from what IRS had
actually recorded in its financial records. However, this explanation could
not be supported by any readily available documentation. Consequently, IRS
was unable to record an adjustment to its general ledger or advise Treasury
of the need to adjust its records. These payroll differences totaled
approximately $35 million at September 30, 1999, $17.8 million of which we
believe could be the maximum misstatement (overstatement) of IRS' fund
balance with Treasury at September 30, 1999. IRS is continuing to do the
research necessary for resolving this difference.

The unresolved differences and other identified problems discussed above
relating to IRS' lack of routine and complete reconciliations raise serious
concerns about IRS' ongoing ability to ensure that it complies with the laws
governing the use of its budget authority. Without this crucial control, it
is difficult, if not impossible, for IRS to determine if operating funds are
being

properly spent or if reported amounts for program costs, assets, and
liabilities are reliable. This concern is illustrated by the $35 million of
unresolved payroll transactions discussed above. If these differences were
the result of errors in IRS records, such errors could have resulted in the
exclusion of payroll expenses from various appropriations expense totals.
This exclusion would have made it difficult for IRS to determine if total
program costs associated with the affected appropriations were accurate.
Consequently, IRS may not have been able to ensure compliance with budget or
spending authority provisions associated with these appropriations.

17 FMS provides agencies such as IRS with banking services, including
assistance in the monthly reconciliation of their fund balance with Treasury
accounts.

IRS has indicated that it has already implemented procedures to ensure that
reconciliations are performed monthly. We will follow up on the status of
IRS' efforts as part of our fiscal year 2000 financial audit. Payroll Costs
In fiscal year 1999, IRS reported about $6 billion in total payroll costs,

which make up over 70 percent of IRS' $8. 5 billion total program costs.
However, as we previously reported, 18 IRS' policies and procedures did not
provide reasonable assurance that its payroll and related costs were
appropriately classified in its financial statements or that they could be
used as a basis for reliable cost- based performance information.

Specifically, IRS intermingled the costs of customer service and compliance,
making it unable to reliably report the full cost of either program. In
addition, IRS' payroll system did not reliably capture costs at the
individual project level. Consequently, IRS was unable to generate reliable
cost- based performance information to support measurement of its

success in meeting goals reported in accordance with the Government
Performance and Results Act (GPRA) of 1993. 19 In addition, IRS had not
implemented adequate control procedures to verify the accuracy of its
payroll information processed by NFC and, therefore, lacked assurance that
its reported payroll costs were reliable.

Classifying Customer In our testing of IRS' payroll transactions for fiscal
year 1999, we found a Service and Compliance significant number of employees
who were assigned to support Program Costs

compliance- related activities, such as examinations or collections, but had
charged their time to customer service. In our review of a statistical
sample of 70 payroll transactions, we found that in 8 cases (11 percent),
employees

working on compliance- related activities charged their time to the customer
service accounting code. As a result, substantial portions of the total
reported cost of these programs were misclassified on the statement

18 See GAO/ AIMD- 00- 76, February 29, 2000. 19 GPRA requires IRS to prepare
an annual performance plan covering each program activity set forth in the
budget. This plan is required to (1) establish performance goals and express
them in objective, quantifiable, and measurable form, (2) describe the
operational

processes, skills, and technology and the human capital information, or
other resources required to meet the performance goals, (3) establish
performance indicators to be used in measuring or assessing the relevant
outcomes of each program activity, (4) provide a basis for comparing actual
program results, and (5) verify and validate the measured values or results.

of net cost. According to IRS, this was the result of a policy decision,
effective October 1, 1996, to reorganize by combining the staffs and
functions of the Assistant Commissioners for Taxpayer Services and
Collection under a single Customer Service Division. Resources affected were
realigned to mirror the related personnel actions and funding through
customer service.

IRS' Cost Accounting IRS' payroll system did not track personnel time
charges in a manner that System

could support full cost accounting for its programs and activities as
required by SFFAS No. 4, Managerial Cost Accounting Standards, and
consistent with GPRA. In addition, effective fiscal year 2001, federal
accounting standards will require IRS to account for the full cost of
internal use software. 20 IRS' lack of full cost information will present a
major obstacle to it conforming with this standard as well. IRS employees'
time

charges are accumulated into an accounting code, known as a management
activity code, that identifies the broad area of work being performed, such
as collection or customer service. However, this level of information does
not provide the detailed information needed to support a cost accounting
system that captures the full costs of specific projects, jobs, and
activities the employees' work supports.

While IRS has implemented the Project Cost Accounting Subsystem (PCAS)
coding structure to capture cost at the detailed project and subproject
level, this system was not being consistently and accurately used to capture
the full cost of individual projects. For example, IRS employees were
required to use PCAS codes only for charging costs related to information
system projects. Use of PCAS codes was not required for activities related
to either of IRS' two largest appropriations- Processing Assistance and
Management and Tax Law Enforcement- which accounted for over 77 percent of
IRS' total administrative appropriations in fiscal year

1999. 20 See SFFAS No. 10, Accounting for Internal Use Software (June 1998).

In our review of a statistical sample of 70 payroll transactions, we noted
that employees had their time charged to a management activity code.
However, PCAS codes were identified with the time charges of only six
employees (9 percent), three of whom were assigned to information systems
projects. Sixty- four (91 percent) of the sample items did not identify a
PCAS code or otherwise provide information that could be used to generate
detailed cost information below the management activity level.

In addition, we found two instances in which employees performed duties to
help prepare IRS' automated systems to meet the year 2000 challenges but did
not charge PCAS codes that had been specifically designated to capture this
type of cost. As a result, IRS was unable to capture the full cost of its
activities to prepare for the Year 2000. This finding was consistent with
that of the TIGTA, who reported that IRS employees who are required to use
PCAS codes did not charge their time to these codes consistently or
accurately. 21 Also, it is unclear whether IRS' current plans to improve its
financial management systems will address its need to report the full cost
of its programs or to provide reliable cost- based performance information.
In June 2000, IRS updated its Federal Financial Management Improvement Act
Remediation Plan to address cost accounting. However, the plan did

not specify the nature of the cost accounting capability that IRS is
planning. We plan to follow up on this issue as part of our future audits of
IRS' financial statements.

Processing IRS' Payroll IRS did not implement sufficient internal control
procedures to verify that Costs

its payroll costs were properly accounted for and controlled by USDA's NFC,
the service organization IRS relies on to process the biweekly payroll for
its employees. As we previously reported, 22 any agency that uses a service
organization, such as NFC, to process payroll transactions should establish
adequate policies and procedures to verify that payroll data received by the
agency are reliable. Such procedures are particularly critical when it has
been determined that the service organization's internal

controls do not provide reasonable assurance that payroll transactions are
processed and reported accurately. 21 See Review of the Internal Revenue
Service's Effectiveness in the Monitoring and Reporting of Year 2000 Funds
(Reference No. 092204, January 1999). 22 See GAO/ AIMD- 99- 182R, June 30,
1999.

In the case of NFC, the USDA Office of the Inspector General (OIG) 23 and
GAO 24 have reported material weaknesses in controls over its payroll
processing, including those affecting the accuracy and reliability of data
processed by NFC. Also, as the OIG has noted, the accuracy and reliability
of data processed by NFC and any resulting reports ultimately depend on

the user agency, such as IRS, and any controls implemented by that agency.
However, IRS had not implemented compensating controls to ensure that NFC
accurately processed and reported its $6 billion in payroll and related
benefits. Although IRS did have procedures in place to verify that NFC's
records reflected the appropriate number of hours, these procedures did not
verify that the total dollars expended agreed with IRS' records. Through our
audit procedures, we were able to determine that payroll reports generated
by NFC were consistent with the information IRS provided to NFC for the
processing of its payroll activity. However, IRS' lack of controls over data
received from NFC increased the risk that errors in payroll costs could have
occurred and not been detected in time to

prevent affecting reported cost information. Conclusions Because of material
weaknesses in its internal controls over its budgetary

resources and cost accounting, IRS was unable to reliably report how it
expended its resources in fiscal year 1999. IRS could not generate reliable
cost- based performance or budgetary information for management, the
Congress, or the public to use in assessing the cost/ benefit of its
operations. Because of these weaknesses, IRS was also unable to reliably
assess, and support its requests for, the level of additional resources it
believes it needs to achieve desired future results. Thus, IRS has been

unable to assure the Congress of the benefits of the requested funding.
Recommendations To effectively manage and report its undelivered orders, we
recommend

that the office of IRS' Chief Financial Officer (CFO) periodically analyze
outstanding obligations. This would include developing and analyzing an
aging of obligations to identify potential items that may require 23 See U.
S. Department of Agriculture Office of Inspector General Fiscal Year 1998
National Finance Center: Review of Internal Control Structure (Audit Report
No. 11401- 4- FM, September 1999).

24 See USDA Information Security: Weaknesses at National Finance Center
Increase Risk of Fraud, Misuse, and Improper Disclosure (GAO/ AIMD- 99- 227,
July 30, 1999).

deobligation. The CFO office should then coordinate with the financial plan
managers to help ensure that invalid undelivered orders are promptly
deobligated. This would enable IRS to use those funds deobligated within the
period of obligational authority to acquire items it needs.

To assist IRS in resolving and clearing outstanding items in its suspense
account, we recommend that IRS develop a subsidiary ledger that shows
underlying detailed transactions and reconciles, by year, to the balances in
the administrative general ledger. IRS should first clear old outstanding

items in the general ledger to reflect actual balances by fiscal year. To
help ensure that payroll and related costs of IRS' programs are reliably and
clearly reported in IRS' financial statements, we recommend that IRS develop
policies and procedures to classify program costs according to the nature of
the work performed and in a manner commonly understood by users of financial
statements. This classification should also be consistent with the
classification of related funding requirements in IRS' budgetary

requests to the Congress. To (1) assist in the management of IRS' programs
and (2) enable IRS to generate and report reliable cost- based performance
data for all programs and activities to support its reporting under GPRA and
in accordance with federal accounting standards, we recommend that IRS
incorporate into its tax systems modernization plans, as they relate to
financial management, the development of a cost accounting system that will
track and report, in appropriate detail, the full costs associated with its
activities and programs at the project and subproject level. This system
should include a payroll system that provides for activity- based costing of
individual jobs to which

staff are assigned. To obtain reasonable assurance that its payroll
information is not adversely affected by weaknesses in NFC's internal
controls, we recommend that IRS review the USDA OIG annual audit report on
NFC's internal control structure and any relevant GAO reports, evaluate the
risk in the control environment at NFC, and implement control procedures as
necessary to mitigate the risks associated with the weaknesses identified in
NFC's

payroll processing systems. These procedures could include but are not
limited to (1) selecting a random sample of NFC payroll disbursements, at
least quarterly (e. g., 25 per quarter), and comparing the payroll cost
information received from NFC to corresponding data provided to NFC and (2)
periodically analyzing overall payroll expenses to determine their

reasonableness. IRS should appropriately document how it implements and
executes these compensating controls. Agency Comments and

In commenting on a draft of this report, IRS generally agreed with our Our
Evaluation recommendations related to controls over appropriated funds and
provided information regarding initiatives to address them. We will evaluate
the effectiveness of these initiatives during future audits.

However, IRS disagreed with our conclusion that it was unable to reliably
account for or report how it used its approximately $8.5 billion in
appropriated funds in fiscal year 1999, and stated its belief that it is in
conformance with SFFAS No. 4. IRS also stated that its statement of net cost
had been formatted in accordance with our suggestions and that we had not
informed them that this format would prevent IRS from reliably reporting on
the costs of its programs. IRS noted that payroll accounted for over 70
percent of IRS' appropriated funds, and that we have never taken exception
to IRS' reported total payroll expenses. We disagree with IRS' belief that
it is in conformance with SFFAS No. 4,

whose central requirement is reliable reporting on the costs of federal
programs. As we reported, 25 IRS was unable to reliably report on the costs
of its programs for fiscal year 1999 due to a lack of evidence about its
opening balances for fund balance with Treasury, P& E, accounts payable,

and net position. Moreover, IRS' payroll system is not designed to track
costs by job or task, nor can IRS generate reliable cost- based performance
measures to facilitate decision- making. We agree that IRS' reported total
payroll costs were reliable for fiscal year 1999. However, we disagree with
IRS' suggestion that this constituted adequate reporting on the use of its

approximately $8. 5 billion budget during fiscal year 1999. IRS' total
payroll costs are not adequate information to enable IRS management to make
informed decisions concerning IRS' resources. Details concerning how payroll
costs were applied to IRS' various programs are also needed. However, as we
have reported, IRS could not reliably report how its total payroll was
actually used in fiscal year 1999 because (1) IRS employees' time was often
being charged to a program other than the one they were working on and (2)
IRS' PCAS system for accumulating costs was unreliable during fiscal year
1999. During fiscal

25 See GAO/ AIMD- 00- 76, February 29, 2000.

year 1999, most IRS employees were not required to use PCAS, and employees
that did use PCAS did not always use correct PCAS codes. We also disagree
with IRS' suggestion that the format of its statement of net

cost prevented it from reliably reporting the cost of its programs. As
discussed above, it was deficiencies in IRS' underlying cost accounting
system that rendered IRS unable to reliably report the cost of its major
programs on its statement of net cost. Federal financial reporting
standards, not system deficiencies, should drive the format of IRS'
financial

statements. IRS indicated it has initiated internal controls to compensate
for the material weaknesses in NFC's internal control environment reported
by the USDA OIG and GAO, including reviewing the reasonableness of payroll
expenses each pay period and verifying that total dollars expended for
payroll agree with IRS' records. We will follow up during our fiscal year

2000 audit to assess the effectiveness of these compensating controls. IRS
also provided additional detailed comments about the specific findings in
this chapter, which we have incorporated where appropriate. The letter from
IRS' Deputy Commissioner of Operations responding to this report is
reprinted in appendix II.

Deficiencies in the Collecting and Reporting

Chapt er 7

of IRS' Financial Data Because of serious deficiencies in its systems and
internal controls and processes, IRS was unable to report reliable
information in its financial statements without extensive workaround
processes. These processes have thus far provided IRS only limited success
in reporting certain reliable information, and what reliable information was
derived from these processes was available only after fiscal year- end.
Consequently, the information was not routinely available and thus could not
be used throughout the year for day- to- day decision- making. These
weaknesses adversely affected IRS' ability to (1) prepare reliable financial
reports, (2) account for and manage accounts payable, (3) accurately report
on tax revenues, and (4) certify excise taxes distributed to trust funds.

Financial Reporting In fiscal year 1999, IRS prepared six financial
statements that reported to the Congress and the public on IRS' (1)
custodianship of the more than

$1. 9 trillion in federal taxes it collected, $185 billion in payments it
refunded, and $21 billion in net taxes receivable due from taxpayers and (2)
management of its approximately $8.5 billion appropriated by the Congress.
IRS' controls over financial reporting have improved since our audit of its
fiscal year 1998 financial statements. However, these improvements in
controls did not ensure that IRS' financial statements were fairly
presented. Through extensive audit procedures, we were able to determine
that IRS' ad hoc procedures had resulted in custodial activities that were
fairly stated, as was its balance sheet, with the exception of the

components of net position. However, we were unable to determine if IRS'
statements of budgetary resources, changes in net position, financing, and
net cost were reliable. According to our Standards for Internal Controls in
the Federal Government, internal controls should provide reasonable
assurance that

financial reports are reliable. During our audit of IRS' fiscal year 1999
financial statements, we found that IRS' financial reporting process did not
meet these standards because (1) IRS' general ledger system does not support
the preparation of financial statements and (2) deficiencies in IRS' process
of preparing financial statements allowed material errors to occur without
prompt detection or correction.

IRS' General Ledger Like most entities in government and private industry,
IRS relies on a general ledger system to accumulate and summarize financial
information

for financial reporting purposes. IRS' overall general ledger system
consists of two independent general ledger systems, one for its custodial
activities and one for its administrative activities. 1 However, the two
general ledgers IRS uses have not been adequate for financial reporting
purposes. They are not integrated with each other or their supporting
subsidiary records nor are they current, accurate, or supported by adequate
audit trails for material balances. IRS' custodial general ledger does not
have adequate audit trails for federal taxes receivable, federal tax
revenue, or federal tax refunds. Similarly, IRS' administrative general
ledger lacks audit trails for P& E and program costs. Consequently, IRS'
general ledgers did not provide the information that IRS needed to prepare
reliable annual financial statements and other financial reports in fiscal
year 1999. In addition, IRS' custodial general ledger commingled tax revenue
and refund transactions during the year, thereby distorting balances in both
types of accounts until year- end, when adjustments were recorded to correct
this problem. Also,

neither of IRS' two general ledgers complies with the U. S. Government
Standard General Ledger (SGL) at the transaction level and cannot be used to
support the preparation of financial statements without material financial
reporting adjustments. In addition to not supporting accurate year- end
reporting, IRS' general ledgers could not be relied on to provide the
reliable information needed throughout the year as a management tool. This
is because (1) there were often significant delays in IRS' recording of
material financial transactions in its general ledgers, (2) weaknesses in
controls over recording

transactions allowed significant errors to occur without prompt detection or
correction, and (3) tax revenue and refund transactions were commingled in
the same custodial general ledger accounts during the year. For example:

IRS did not record significant transactions during the year as they occurred
(such as capitalizing P& E, as previously discussed, and recognizing related
depreciation expense); rather, IRS recorded them

1 IRS' custodial activities consist of tax receipts collected, refunds paid,
and amounts recognized for unpaid taxes due. Administrative activities
consist of the budgetary resources that fund the custodial activities and
the costs incurred in performing those activities.

once at year- end. As a result, affected balances in IRS' administrative
general ledger were inaccurate at interim periods during the year. Several
accounts in IRS' administrative general ledger remained

incorrect for at least 13 months because errors totaling $102 million in
IRS' fiscal year 1999 opening balances were not corrected until November
1999. Several accounts in IRS' custodial general ledger remained inaccurate
during fiscal year 1999 until year- end because IRS commingled refund

transactions in tax receipt accounts. This included (1) $1. 5 billion in
excess Federal Insurance Contribution Act reimbursements from the Social
Security Administration, (2) $403.5 million of excise tax refunds,

and (3) $95 million of advance earned income tax credits. Ultimately, the
financial statements were not affected because all these amounts were
reclassified out of the tax receipt accounts at fiscal year- end.

In addition, IRS provides a service to taxpayers involving issuing
determination letters and rulings on (1) organizations' requests for
exemption from federal income taxes and (2) retirement plans' compliance
with regulations, for which it received $39 million in user fee revenue in

fiscal year 1999. Because IRS deposits these fees directly in Treasury and
does not use them in its operations, it records them in its custodial
general ledger system, in a manner similar to its recording of tax revenue.
However,

because IRS incurs costs and provides a service for these fees, they are
considered exchange revenue and, unlike tax revenue, are appropriately
reported on the statement of net costs along with the costs incurred by IRS
in providing these services. However, since IRS uses its administrative (not
custodial) general ledger system to prepare its statement of net cost, these
user fees were initially omitted from the statement of net cost. This

omission was corrected based on a proposed audit adjustment posted before
the financial statements were issued. As previously discussed, IRS' general
ledgers were not supported by adequate audit trails for taxes receivable, P&
E, or program costs. This was also true for federal tax revenue and federal
tax refunds. The transactionlevel details for federal tax revenue and
federal tax refunds are contained in IRS' master files, which are not
integrated with IRS' custodial general ledger. As a result, since IRS'
general ledgers were not supported by

adequate audit trails, they did not comply with the SGL at the transaction
level. In addition, IRS' custodial general ledger system does not use an
account structure and account titles that are consistent with those in the
SGL.

Financial Statement IRS did not have adequate controls over its financial
reporting process to

Preparation provide reasonable assurance that the data in its accounting
records were

properly reflected in its financial statements. As a result, material errors
occurred during IRS' financial reporting process that were not promptly
detected and corrected. For example, on the statement of financing,
depreciation expense totaling $332 million was initially reported as a
reduction in costs that do not require resources, rather than as a component
of these costs, and capitalized costs totaling $614 million were initially
omitted.

Based on audit adjustments, these errors were corrected in time to prevent
the financial statements from being misstated. However, errors such as these
contributed to our inability to determine if IRS' statements of financing or
budgetary resources were reliable.

To compensate for its financial reporting weaknesses, IRS relied on
timeconsuming ad hoc procedures to generate reliable balances. However,
since this approach, when successful, yields reliable balances only once
each year at a point in time, it is inherently incapable of producing the
accurate, timely information managers need as a basis for informed decision-
making throughout the year. Some of the problems that forced IRS to follow
this approach are the limitations of the automated systems that IRS
currently relies on, and these problems will likely continue until these

systems are enhanced or replaced. However, there were also weaknesses in
controls over existing financial reporting processes, and correcting these
should not require long- term efforts. We previously recommended that IRS
establish procedures for the review of financial statements at the
appropriate levels within the CFO's office. 2 However, the problems noted
above indicate that for IRS' fiscal year 1999 financial statements, this
recommendation had not been effectively implemented.

Recording Accounts As an improvement over last year, IRS was able to provide
us with a list of Payable

accounts payable that could be tested for completeness and validity.
However, we found that the list was incomplete and included invalid items,
principally because liabilities generally were not recorded for goods and
services when received but later, when an invoice was received. Also,
receipt and acceptance and the related electronically processed accounts 2
See GAO/ AIMD- 99- 196, August 9, 1999.

payable were not promptly recorded for capture in the year- end accounting
records. Until it enhances its procedures and controls, IRS will continue to
face challenges in readily determining at any given point whom it owes and
how much it owes.

In fiscal year 1998, IRS was only able to generate a transaction history
that included all transactions that had been recorded in accounts payable
since 1991, including amounts that had since been paid and were therefore no
longer payables. The transaction history included numerous debit and

credit entries of hundreds of millions of dollars each. In fiscal year 1999,
with the assistance of a contractor, IRS performed extensive procedures to
match and remove the related entries from the list and was able to offset
most of the entries, leaving an immaterial amount of debits.

However, we found a significant number of exceptions when testing the
underlying data supporting the accounts payable list. In testing a sample of
30 items from the accounts payable list, we found that 3 (10 percent) were

not valid accounts payable. For example, in one case, IRS inappropriately
included in its fiscal year 1999 accounts payable balance $12 million in
printing services to be rendered in fiscal year 2000. In another case, the
fiscal year 1999 accounts payable list inappropriately included a $200,000
invoice that was received in, and related mostly to services to be rendered
in, fiscal year 2000. Conversely, we also found that of 66 items selected in
a statistical sample of subsequent disbursements, 13 (20 percent) were
inappropriately excluded from accounts payable. For example, IRS' September
30, 1999, accounts payable list excluded $362,037 of unpaid fiscal year 1999
rent charges and $2.7 million for unpaid lockbox bank

services provided from October 1998 through March 1999. These results were
consistent with our testing of undelivered orders, in which we found a
significant number of cases in which accounts payable were not recorded for
goods and services that were received before year- end but not paid (see
chapter 6).

IRS records an accounts payable when an invoice has been received and
receipt and acceptance of the goods or services have been entered into the
accounting system. IRS purchases its goods and services from both outside
vendors and other government agencies. For most of the purchases from

outside vendors, IRS' program offices enter receipt and acceptance of goods
and services through the Request Tracking System/ Integrated Procurement
System (RTS/ IPS). When the receipt and acceptance is entered into the
procurement system, an accounts payable is automatically

generated in the general ledger through an electronic interface. Most of the

purchases from government agencies, however, are processed outside of RTS/
IPS. In these cases, the program offices notify the accounting office (by
mailing or faxing receiving reports) that goods and services have been
received. The accounting office then matches the invoice with the receiving
report and manually records an accounts payable into the general ledger.
IRS' controls over September 30, 1999, accrual procedures were not
completely effective for transactions processed both electronically into
RTS/ IPS and outside RTS/ IPS. IRS' year- end accrual procedures require IRS
personnel to enter electronic receipt and acceptance in RTS/ IPS for goods

and services received as of September 30. The accounts payable is then
automatically recorded, through an electronic interface, in the year- end
accounting records for transactions entered with an acceptance date of
September 30 or earlier. However, in our statistical sample of accounts

payable, we found several cases in which IRS personnel entered the date on
which they electronically input receipt and acceptance into RTS/ IPS as the
receipt and acceptance date rather than the date they actually received the
goods and services. For example, we found that IRS personnel entered the
electronic receipt and acceptance in October (data input date) for

goods and services received as of September 30, 1999. As a result, accounts
payable at September 30, 1999, was incomplete. For transactions processed
outside RTS/ IPS, IRS year- end procedures require personnel to review
outstanding obligations to determine which goods and services have been
received before year- end but will be paid for in the next fiscal year. This
process is extremely labor intensive and dependent on IRS' program offices'
providing the accounting office with information on goods and services
received. We found that the program

offices generally provided receipt and acceptance information only when an
invoice was received. However, based on the results of our statistical
sampling, invoices were not always provided to IRS on a timely basis. For
example, IRS did not receive an invoice for computer services performed in
September 1999 until December 1999, 3 months after the fiscal year- end. IRS
did not estimate a liability for these services even though the computer
service charges were consistent from month to month. Thus, if IRS had not

yet received the invoice, or the incorrect acceptance date was entered into
RTS/ IPS, liabilities would generally not have been recorded in the
accounting records as of fiscal year- end.

Reporting Tax During fiscal year 1999, IRS continued to be unable to
determine the Revenues

specific amount of revenue it actually collected for three of the federal
government's four largest revenue sources- Social Security, Hospital
Insurance, and individual income taxes. In addition, IRS continued to be
unable to reliably determine collections at the time of deposit attributable

to the Highway Trust Fund and other trust funds that receive excise tax
receipts. These conditions existed primarily because taxpayers are not
required to provide information on the specific taxes that they are paying
at the time of deposit and because IRS' systems are not capable of capturing

such information for reporting purposes. These conditions limit IRS' ability
to report tax revenue collections in its financial statements and have
resulted in the need to use a complex and error- prone process to distribute
excise taxes to the relevant trust funds.

The accounting information needed to attribute tax deposits to the proper
trust fund is provided on the tax return, which IRS receives months after
the deposits are made. Further, the information on the return pertains only

to the amount of the tax liability by type of tax, not to the distribution
of the amounts previously collected. This condition limits IRS in its
reporting of federal tax collections. Specifically, IRS is unable to
separately report Social Security, Hospital Insurance, and individual income
taxes in its financial statements or other financial reports. Also, to the
extent that the taxpayer does not pay the full amount of taxes owed, the
government's general revenue fund subsidizes the Social Security and
Hospital Insurance

trust funds for the amount that annual payroll tax collections are less than
the actual tax liabilities. 3 However, the annual amount of this subsidy is
unknown because IRS cannot determine the specific amount of revenue it
actually collects for Social Security and Hospital Insurance taxes. 4 Having
the capability to report actual collections of significant taxes such as
Social 3 This is in accordance with existing statute. Specifically, under 42
U. S. C. sections 401 and

1395i, amounts to be transferred by Treasury to the Social Security and
Hospital Insurance trust funds are based on applying the applicable Federal
Insurance Contribution Act and/ or Self- Employment Contribution Act tax
rates to wage amounts certified by the Commissioner of Social Security.

4 As of September 30, 1999, the estimated amount of unpaid taxes and
interest in IRS' unpaid assessments balance was approximately $43 billion
for Social Security and Hospital Insurance. While these totals do not
include amounts no longer in the unpaid assessment balance because the
statutory collection period expired, they nevertheless indicate the
cumulative amount of the subsidy provided from the general fund.

Security would enable IRS to report information useful to interested
parties, including the Congress. In addition, IRS uses a complex and
cumbersome process to distribute excise tax revenue to the appropriate trust
funds. Generally, taxpayers are required to make semimonthly deposits to IRS
for their expected excise tax liability each quarter. However, taxpayers are
not required to file their quarterly Form 720 excise tax returns until up to
2 months after the end of

the quarter. Because data on the specific tax type are not available to
allocate excise taxes to the appropriate trust funds when deposits are made,
Treasury uses a process to estimate the initial distribution of excise

taxes. This process involves the use of economic models prepared by
Treasury's Office of Tax Analysis to estimate the initial distribution of
tax receipts. Treasury's FMS uses these estimates to prepare entries for the

initial distribution to the trust funds. These entries are then recorded by
Treasury's Bureau of Public Debt (BPD) in the books and records of the trust
funds maintained by Treasury. After the initial distribution, IRS certifies
quarterly the amounts that should have been distributed to the excise- tax-
related trust funds using its records of deposits made and tax returns. FMS
uses these certifications to prepare adjustments to the initial trust fund
distributions, which are then recorded by BPD. This process is complex,
cumbersome, and prone to error. During fiscal year 1999, IRS completed a
study to consider whether it should require taxpayers to provide detailed
information on the type of tax

they are paying when they make their semimonthly deposits. The study showed
that taxpayers could provide this information for Social Security and
Hospital Insurance taxes. However, the study also concluded that it would be
potentially burdensome for taxpayers to provide this information

for excise taxes because large corporations would have to collect this
information from multiple plants in various states. The study cited some
respondents as saying that it would be impossible for them to collect this
information during the quarter. In addition, IRS concluded that the quality
of the data would be poor because the respondents stated that if required to
provide this information with their deposits, they would use an estimate
based on the previous quarter rather than actual amounts from the current
quarter. IRS officials also stated that their current systems cannot capture
the

additional detailed information. As we reported in 1998, Treasury's
Electronic Federal Tax Payment System, which allows taxpayers to deposit
federal taxes electronically, can capture the detailed payment data

necessary to record collections by trust fund. However, IRS' systems are
unable to record and report trust- fund- related data. Specifically, the
systems account for transactions by aggregate tax class, which combines
several tax types (e. g., trust fund categories) into one category. Although
the tax returns do contain the details of amounts owed by subcategory, in
some cases, the returns are not required to be filed until as late as 4- 1/
2

months after the quarterly tax deposits are made. Consequently, IRS is
working on developing an information database to accommodate this type of
information in the future and plans to initiate another study in 3 to 4
years to gauge taxpayer readiness at that time. Trust Fund

IRS' process for certifying excise taxes to be distributed to recipient
trust Certifications funds is complex and cumbersome, resulting in delays
and errors in amounts distributed to the trust funds. These delays and
errors, in turn, could result in the misstatement of annual receipts in
trust fund financial statements and could affect the amounts of certain
highway funds distributed to states in a given year.

Since IRS is unable to determine the amount of distributions to excise tax
trust funds until it receives and processes the related tax returns, delays
in the receipt and processing of tax returns result in misstatements of
amounts certified. At the conclusion of our fiscal year 1998 financial
audit, we recommended that IRS establish procedures to ensure that returns
are promptly processed and implement controls to ensure that excise tax
returns are promptly recorded and included in the appropriate quarterly
trust fund certifications. Although IRS implemented procedures to expedite
the processing of returns of over $1 million as a result of our prior

report, 5 these delays continued. During our fiscal year 1999 audit, we
continued to find that not all tax returns were filed in a timely manner by
taxpayers and that IRS did not record all tax returns in time to include
them in the quarterly certifications.

For example, the amount IRS certified to the Highway Trust Fund for the
quarter ending March 31, 1999, included approximately $699 million that was
related to excise taxes from previous quarters. Of this amount,

$527 million was a result of the late posting of one return from a large
petroleum company. The amounts certified to the Airport and Airway Trust 5
See GAO/ AIMD- 99- 193, August 4, 1999.

Fund also included amounts related to excise tax returns from previous
quarters, exceeding 1 percent of the total, for three of the four quarters
during fiscal year 1999. These amounts ranged from $27 million to $104
million. Although these misstatements are corrected in the following
quarters when the tax returns are recorded and related collections are
certified to the trust funds, the condition demonstrates that IRS'
certification process did not ensure that amounts distributed to excise-
tax- related trust funds were promptly adjusted. This delay could result in
the misstatement for financial reporting of annual trust fund receipts,
which are affected by a fiscal year

cutoff. This misstatement could reduce the amount of interest income the
trust funds earn on federal tax receipts. In turn, for excise taxes
collected for and distributed to the Highway Trust Fund, distributions to
the states would be affected because the Federal Highway Administration uses
these financial reporting data as a source for determining amounts to be
distributed to the states in a given year.

In addition to the delays in certifying the amounts collected, in fiscal
year 1999, we found that IRS continued to have other fundamental weaknesses
in internal controls over the certification process. These weaknesses
included inadequate supervisory reviews and the lack of written

procedures, both of which allowed errors in the certification process to go
undetected. GAO's Standards for Internal Controls in the Federal Government
specifies

that qualified and continuous supervision is to be provided to ensure that
internal control objectives are achieved. The lack of adequate supervisory
review can lead to incorrect certifications and inaccurate distributions to
trust funds.

Although IRS implemented additional review procedures as a result of our
prior audit recommendations, 6 these reviews have not been fully effective.
We continued to find errors during fiscal year 1999, including (1) taxpayer
errors on excise tax returns that IRS did not identify, (2) data input
errors made by IRS when recording excise tax information in its master
files, and

(3) errors made in IRS' preparation of the excise tax certifications. For
example, during our tests of transactions at the Cincinnati Service Center,
6 See Excise Taxes: Internal Control Weaknesses Affect Accuracy of
Distributions to the Trust Funds (GAO/ AIMD- 99- 17, November 9, 1998).

we found one case in which a taxpayer claimed an erroneous credit of
$187,000, but IRS nevertheless posted it to the master file, inappropriately
reducing the taxpayer's liability. In another case, IRS entered a $1.4
million credit to a taxpayer's account twice, once as a refund and again as
a credit transferred to the next year. IRS corrected this error only after
being

notified by the taxpayer. In our examination of IRS' certifications of
excise tax distributions, we again found errors that were not detected by
supervisory review. In one instance, the analyst transferred the wrong
amounts from supporting documentation and understated certified refunds to
the Highway Trust Fund by $8 million. In another instance, the analyst
erroneously reduced the amount of a prior period adjustment, causing
certified receipts to excise tax trust funds to continue to be overstated by
$17.6 million through the quarter ending December 31, 1999.

IRS' lack of detailed written procedures for its certification process also
contributed to undetected errors, despite supervisory reviews of the
certifications. Because the process is complex and involves many manual
transfers of data, it is essential that IRS document the steps taken to
derive the amounts it reports to FMS. Moreover, the process for certifying
excise tax distributions was fully understood by only one full- time
analyst, increasing the need for detailed written procedures in case this
individual

were to leave or be otherwise unavailable to continue to perform this
function. Without clearly defined procedures to follow, reviewers also have
difficulty comprehending from the supporting schedules what is being done on
the certifications. For example, when we notified IRS of the error related
to the prior- period adjustment, the analyst attempted to correct this error
on a subsequent certification. However, he erroneously recorded the

correcting entry, increasing certified receipts by the adjustment amount
rather than decreasing them. The subsequent certification was reviewed by
another individual, but because the reason for this adjustment was not fully
documented, the reviewer had little basis for determining whether the
adjustment was valid. Consequently, the resulting $17.6 million

overstatement to total certified receipts was not detected or prevented.
Conclusions The substantial deficiencies in IRS' internal controls and
underlying

systems and processes continued to preclude it from reporting reliable,
timely, and routine information critical for effectively managing its
operations. Although the use of extensive and labor- intensive workaround

processes and procedures enabled IRS to report certain year- end information
that was reliable, this effort was costly and time consuming and, in several
critical areas, was not successful. These internal control and

systems deficiencies continued to affect IRS' ability to report fully
reliable financial statements and prevented IRS from having the information
it needed for day- to- day decision- making. Moreover, some of these
deficiencies affected other entities and recipients of tax revenue
collections.

Recommendations For IRS' financial statements to be supported by, and
traceable to, a general ledger that accurately and promptly recognizes all
of IRS' financial transactions, we recommend that, in the short term, IRS
establish policies

and procedures to help ensure that all administrative and, to the extent
possible, custodial transactions are promptly recorded in the appropriate
general ledger accounts, preferably within 30 days of the transaction.

In the long term, we recommend that IRS incorporate into its systems
modernization plan requirements and specifications for a general ledger
system that (1) accumulates and summarizes IRS' custodial and administrative
transactions for financial reporting, (2) is integrated with its supporting
subsidiary records, and (3) is fully compliant with the SGL at the
transaction level.

To effectively determine its accounts payable balance, we recommend that IRS
enhance its year- end accrual procedures and controls by helping to ensure
that

procedure manuals require that accruals be recorded when services have been
performed and goods received, regardless of whether an invoice has been
received. This may require recording estimates of costs incurred based on
reliable data. In these cases, additional detailed guidance should be
provided in determining the amounts. the acceptance date entered in RTS/ IPS
represents the date that IRS

received the goods and services rather than the date acceptance was entered
into the system. To implement the procedures successfully, we recommend that
IRS provide

training to key program offices on the accrual process. To ensure
consistency, strengthen internal controls, and reduce IRS' dependence on one
individual for its process of certifying excise tax distributions to trust
funds, we recommend that IRS develop, document, and implement detailed
written procedures for summarizing data used to produce the trust fund
certifications. IRS should clearly define the steps

being performed and consistently apply them throughout the year. Whenever
deviations are required, such as for prior- period adjustments, explanations
should be properly documented. Agency Comments and

In commenting on a draft of this report, IRS generally agreed with our Our
Evaluation recommendations related to financial reporting and provided
information regarding initiatives to address them. We will evaluate the
effectiveness of these initiatives during future audits. IRS also provided
additional detailed

comments about the specific findings in this chapter, which we have
incorporated where appropriate. The letter from IRS' Deputy Commissioner of
Operations responding to this report is reprinted in appendix II.

Status of GAO Recommendations on IRS'

Appendi x I

Financial and Operational Activities Appendix I consists of two tables.
Table 4 lists our recommendations from prior audits and reports. Table 5
lists new recommendations resulting from our fiscal year 1999 audit. From
prior years' reports on IRS' financial activities, 1 61 recommendations
remained open as of September 30, 1999 (1 through 61 in table 4). We are
closing 18 of these recommendations primarily because IRS has acted to
address them or because they are being

superseded by updated or more detailed recommendations. Thus, 43 of these
prior recommendations remain open. The column “GAO status of
recommendations” in table 4 lists the current status of these
recommendations and indicates whether we believe that each open
recommendation could be addressed in the short term (such as inadequate
internal controls, policies, and procedures or procedures that are not being
consistently followed) or whether each would require long- term changes

for fundamentally deficient operational and financial systems or other more
extensive changes. 2 We are also making 36 new recommendations in this
report as a result of our fiscal year 1999 audit (numbered 62 through 97 in
table 5, with short- or long- term changes also indicated). Consequently, 80
recommendations are open as of the date of this report. In both tables,

we have highlighted in bold the nine recommendations we consider of highest
priority for IRS to address. These are recommendations 13, 15, 29, 65, 66,
67, 71, 72, and 73. We will continue to monitor IRS' progress toward
addressing each of these recommendations during our fiscal year 2000 audit.

Table 4: Status of Open GAO Recommendations on IRS' Financial and
Operational Activities Status of GAO recommendations Recommendations
reported by IRS a GAO status of recommendations Financial Management: IRS
Lacks Accountability Over Its ADP Resources (GAO/ AIMD- 93- 24, August 5,
1993) 1. Oversee efforts for ensuring that property and

Open. IRS reported that it completed a Open. (Long- term)

equipment (P& E) inventory data, including manual inventory of ADP assets in
telecommunications and electronic filing December 1999. In addition, it is
planning to equipment, are complete and accurate.

replace its current ADP equipment inventory system by late 2002.

1 See GAO/ AIMD- 99- 193, August 4, 1999, and GAO/ AIMD- 99- 196, August 9,
1999. 2 In making this determination, we are defining as short- term
recommendations those that could be addressed within the next 1 to 2 years
and would not require any computer systems changes. We are defining as long-
term recommendations those that would require computer systems changes and
thus would likely take several years to fully implement.

(Continued From Previous Page)

Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

2. Determine what information related to ADP Open. Recommendation not
addressed in Open. (Short- term)

resources, such as equipment condition and IRS remediation plan. remaining
useful life, would be most useful to IRS

managers for financial management purposes and develop a means for
accounting for these data. 3. Develop an interim means to capture relevant
Open. Recommendation not addressed in Closed. This recommendation is costs
related to in- house software development. IRS remediation plan. superseded
by recommendation 91.

Financial Management: Important IRS Revenue Information Is Unavailable or
Unreliable (GAO/ AIMD- 94- 22, December 21, 1993) 4. Identify reporting
information needs, develop

Closed. IRS reported that its contractor Open. IRS has developed a set of
related sources of reliable information, and

developed a comprehensive set of policies policies and procedures for
preparing establish and implement policies and procedures and procedures for
preparing its custodial its custodial financial statements, but for
compiling this information. These procedures financial statements. It also
reported that it has not yet formalized such should describe any (1)
adjustments that may be completed a comprehensive analysis of the procedures
for its administrative needed to available information and (2) analyses
administrative financial statement process.

financial statements. Additionally, to that must be performed to determine
the ultimate

close this recommendation IRS needs disposition and classification of
amounts to address proper review procedures associated with in- process
transactions and to limit the types of errors we found in amounts pending
investigation and resolution. the draft fiscal year 1999 financial
statements that had not been detected by IRS. (Short- term)

5. Monitor implementation of actions to reduce Open. IRS reported that its
Total Interest Open. (Short- term)

the errors in calculating and reporting manual Program (TIPS) to automate
manual interest interest on taxpayer accounts, and test the

calculations should be fully functional in the effectiveness of these
actions. first quarter of fiscal year 2001. Training will be provided and
accuracy measured in fiscal year 2000.

Financial Management: IRS Does Not Adequately Manage Its Operating Funds
(GAO/ AIMD- 94- 33, February 9, 1994) 6. Perform periodic reviews of
obligations, Open. Recommendation not addressed in Closed. This
recommendation is adjusting the records for obligations to amounts IRS
remediation plan. superseded by recommendation 88. expected to be paid and
removing expired appropriation balances from IRS records as stipulated by
the National Defense Authorization

Act for Fiscal Year 1991. 7. Revise procedures to incorporate the

Closed. IRS reported that it completed a Closed. IRS has taken corrective
requirements that accurate receipt and Receipt and Acceptance Guide and
action to address this acceptance data on invoiced items are obtained
conducted receipt and acceptance training.

recommendation. prior to payment and that supervisors ensure that these
procedures are carried out.

8. Revise document control procedures to require Closed. IRS reported that
it implemented Closed. IRS has taken corrective IRS units that actually
receive goods or services procedures to disseminate automatic action to
address this to promptly forward receiving reports to payment notices to
requisitioners and approvers recommendation.

offices so that payments can be promptly reminding them to promptly input
receiving processed. reports after the anticipated due dates for goods or
services ordered had passed.

(Continued From Previous Page)

Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

9. Use the Automated Financial System's Open. Recommendation not addressed
in Closed. This recommendation is enhanced cost accumulation capabilities to
IRS remediation plan. superseded by recommendation 91. monitor and report
costs by project in all appropriations.

10. Require payment and procurement personnel, Closed. Closed. The
procurement system is until the integration of the Automated Financial fully
integrated with AFS. System (AFS) and the procurement system is completed as
planned, to periodically (monthly or

quarterly) reconcile payment information maintained in the AFS to amounts in
the procurement records and promptly resolve any discrepancies.

Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements
(GAO/ AIMD- 94- 120, June 15, 1994) 11. Establish a method to continuously
monitor

Closed. Closed. We are closing this and correct actions to ensure that
progress is recommendation and will evaluate IRS' achieved.

monitoring and corrective actions taken on individual recommendations. 12.
Use current information to periodically update Open. Recommendation not
addressed in Open. (Short- term) estimated future Tax Systems Modernization
IRS remediation plan. costs.

Internal Revenue Service: Immediate and Long- Term Actions Needed to Improve
Financial Management (GAO/ AIMD- 99- 16, October 30, 1998)

13. Manually review and eliminate duplicate or Open. IRS reported that it is
developing a Open. IRS' efforts to manually other assessments that have
already been system to automate the trust fund recovery eliminate duplicate
or other

paid off to assure all accounts related to a penalty (TFRP) program. IRS
expects that assessments that have already been single assessment are
appropriately credited this will eliminate the opportunity for errors paid
in full from taxpayer accounts for payments received.

that plague the current manual process. The have been ineffective as
payments new system has a target date of calendar

were not properly recorded to year 2001 for completion.

accurately reflect each responsible party's reduction in tax liability.
(Shortterm)

14. Establish minimum documentation standards Closed. IRS reported that it
issued two Open. Although substantial or checklists for collection files.
These standards memos in November and December 1999

improvements were noted during the or checklists should include minimum that
addressed case file management

fiscal year 1999 audit, IRS continued documentation and file organization
requirements guidelines and records retention to experience problems in
providing for all taxes receivable and compliance

requirements. support for nonestate installment

assessment cases, specifying the types of agreements and older cases. As
these documentation required, standard file memos were issued after fiscal
year organization, and the retention period that will 1999, we will follow-
up during our

ensure that such documents are maintained until fiscal year 2000 audit.
(Short- term)

the statute of limitations has expired.

(Continued From Previous Page)

Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations 15. Ensure that IRS' modernization blueprint

Open. IRS is planning a Custodial Open. The ability to track and link
includes developing a subsidiary ledger to

Accounting Project that will include the multiple TFRP assessments depends

accurately and promptly identify, classify, development of a Taxpayer
Account on service center personnel manually track, and report all IRS
unpaid assessments Subledger to provide the ability to identify inputting
the cross- reference

by amount and taxpayer. This subsidiary duplicate trust fund recovery
assessments, information needed to link these ledger must also have the
capability to taxes receivable, compliance assessments, assessments. This
process is labor

distinguish unpaid assessments by category and write- offs for financial
reporting intensive and not always effective, as in order to identify those
assessments that purposes. It also plans to develop an on- line

we found cases in which payments represent taxes receivable versus
compliance

transaction processing system to ensure were not posted to all related
accounts assessments and write- offs. In cases that duplicate trust fund
recovery even though the cross- references involving trust fund recovery
penalties, the assessments are properly credited when were present. Thus,
even after the

subsidiary ledger should ensure that (1) the payments are received. The
Custodial subsidiary ledger is implemented, it trust fund recovery penalty
assessment is Accounting Project is currently targeted for

will require significant manual effort to appropriately tracked for all
taxpayers liable 2004. ensure that it functions as needed.

but counted only once for reporting purposes

(Long- term)

and (2) all payments made are properly credited to the accounts of all
individuals assessed for the liability.

16. Examine and consider options to increase Open. IRS reported that it
explored and Open. We continued to find deterrent controls at service
centers. Some analyzed all potential deterrents, and weaknesses in service
center options IRS should examine and consider include

implemented various physical security deterrent controls during our
enhancements. In addition, it procured September 1999 visits. We will
installing surveillance cameras to monitor staff lockers and expected them
to be installed by continue to follow up during our fiscal when they are
opening, extracting, and sorting July 2000. Once these are installed, it
year 2000 audit. (Short- term)

the mail and when they are processing receipts, considers this
recommendation closed.

restricting personal items that can be brought into the receipt processing
areas, such as handbags, briefcases, and bulky outerwear, and

providing lockers and requiring their use for storing personal belongings
outside of the receipt processing areas.

17. Provide adequate training and monitoring of Closed. IRS reported that it
developed a

Open. We will follow up on IRS' extraction unit staff to ensure staff are
informed national training course that began implementation during our
fiscal year and properly trained on the proper procedures, December 1999 and
continued through April 2000 audit. (Short- term) and that the procedures
are being followed.

2000 as new staff were brought on board. 18. Limit the units that may
receive unopened Closed. IRS reported that it updated the Open. We will
follow up on IRS' mail directly to only those units that require Internal
Revenue Manual (IRM) to reflect the

implementation during our fiscal year confidentiality due to the nature of
their work. At a policy of routing mail through Receipt and

2000 audit. (Short- term) minimum, mail addressed to off- site locations
Control beginning January 1, 1999, and also should be routed through the
service center first

issued revised procedures on January 1, to identify mail that may contain
taxpayer receipts. 2000.

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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

19. Conduct a cost/ benefit study to evaluate Closed. IRS reported that it
completed the Closed. Based on additional whether preventive controls, such
as manually

cost/ benefit study and found the cost to be information obtained and
further study comparing W- 2 and other third party information

prohibitive. However, it reported requesting a of this issue, we have
formulated an

to tax returns at the time returns are received programming change to better
identify alternative recommendation (see

rather than many months later, would be cost returns that may have
discrepancies, recommendation 71). beneficial. This study should include a
complete

expected to be implemented in the 2001 analysis of the projected costs and
associated

processing year. benefits of increases to preventive controls. If such
controls are determined to be beneficial, IRS

should implement them to the extent practical to reduce the amount of
inappropriate refund payments. 20. Ensure that IRS' modernization blueprint

Closed. IRS reported that its modernization Open. We will review IRS' most
recent includes the ability to compare W- 2 and other

blueprint now subjects all returns with modernization blueprint to verify
that third- party information to tax returns as they are earned income tax
credit (EITC) claims to these features are included. (Shortterm) processed
to further prevent improper refunds further fraud analysis. It reported that
the from being issued.

blueprint also provides for the comparison of returns against data available
prior to refund issuance. This processing is expected to be installed
beginning 2003. 21. Implement Phase 0 of IRS' systems

Closed. Phase 0 of the systems Closed. As Phase 0 is no longer modernization
plan as quickly as possible. In modernization plan has been superseded by
planned, we will follow up on the doing so, IRS should incorporate plans to
ensure a data warehouse that IRS believes will implementation of the new
initiative in that the resulting system can routinely generate produce
timely and reliable financial

future audits. timely and reliable financial management reports information
with full traceability. IRS is which can be used by internal and external
users scheduled to implement this feature in 2004.

and which will increase the timeliness of Until then, current procedures for
extracting,

preparation and audit of its annual financial reconciling, and reporting
financial data will statements. Until Phase 0 is implemented, IRS

continue to be used. should continue to utilize special computer programs
and prepare manual adjustments, as needed, to derive amounts to be reported
in the financial statements.

Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions
to the Trust Funds (GAO/ AIMD- 99- 17, November 9, 1998) 22. Determine if it
would be cost- effective to Closed. IRS reported that it established

Closed. We noted during our audit that develop and implement procedures
requiring post- input controls to review all returns with these controls
were implemented. either key verification of the assessment amount
assessments of $1 million and over and all by excise tax type before final
processing or to returns reporting coal tax assessments of implement other
post- input controls to verify the

$100,000 or more. IRS estimated that this accuracy of assessment amounts by
tax type. In review would cover 92 percent of the excise making the
determination, IRS should consider tax assessments. establishing a dollar
threshold that would ensure coverage of 90 percent of total excise tax
assessments from the tax returns.

(Continued From Previous Page)

Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

23. Revise the Form 720 tax return to reflect a Open. IRS reported that it
formed a task Open. (Short- term)

separate column adjacent to the column for group to examine ways to amend
Form 720 entering the tax assessment, by abstract number, reporting, with
implementation by 2002. for the taxpayer to report on pages 1 and 2 of the
tax return claims and adjustments, by abstract

number, based on the information the taxpayer reports on Schedule C.

24. Develop, document, and implement review Closed. IRS reported that two
additional Open. During our fiscal year 1999

procedures over the adjustment and staff were added to analyze the audit, we
found that the check sheets

summarization of assessment data used in the certifications, and three
separate check were used and properly signed off by certifications.
Specifically, IRS should require that

sheets developed to ensure the quality of the supervisors. However, we still
detailed supervisory review be performed and each Excise Tax Certification
as of found errors attributed to the lack of documented to ensure that
adjustments are December 1998.

written procedures that provide a reasonable and adequately supported,
description of the process and a guide calculations are appropriately
performed, and the

to the logic for the procedures used. certification letter agrees with the
supporting Written procedures would help schedules. supervisors better
determine if both the math accuracy and procedures to arrive at the correct
amounts were adequate. (Short- term)

25. Establish and implement specific procedures Closed. As of August 1998,
IRS' legal Closed. During our fiscal year 1999 requiring that IRS personnel
review the counsel verified OTA's rate charts for each of audit, we found
that staff from IRS' distribution rates provided by the Office of Tax

the trust fund agencies. chief counsel's office reviewed and Analysis (OTA)
prior to those rates being used in documented the OTA- developed tax the
certification of Highway Trust Fund rate table. distributions and document
evidence of those reviews. Internal Revenue Service: Physical Security Over
Taxpayer Receipts and Data Needs Improvement (GAO/ AIMD- 99- 15, November
30, 1998)

26. Re- evaluate the risk classification of all Closed. IRS reported that it
determined that Closed. Action not planned. IRS stated positions in IRS'
Receipt and Control Branch and no reclassifications were needed in the

that it chose to use other options to reclassify such positions where
appropriate. Receipt and Control positions, adding that it

mitigate the risks in the Receipt and had taken several other steps to
mitigate the Control Branch. We will continue to risk of theft in Receipt
and Control.

follow up on these other options to determine if they adequately mitigate
the risk. 27. Establish procedures to review the Closed. IRS reported that
it issued a

Open. Because IRS issued this new applications and associated documents for
all memorandum in July 1999 establishing

guidance after the 1999 hiring season, applicants given job offers to ensure
that

procedures to better ensure that fingerprint we will monitor IRS'
implementation fingerprint checks are initiated on those

checks are initiated and supervisory during the fiscal year 2000 financial
individuals. Implement procedures to provide feedback is provided to ensure
that IRS staff statement audit. (Short- term) supervisory feedback on these
reviews as comply with fingerprint check requirements. necessary to ensure
personnel staff are aware of and follow IRS' policy requiring fingerprint
checks.

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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

28. Continue with the agency's plans to develop Closed. IRS issued policies
in April and June

Open. As these policies were issued and implement a policy to fingerprint
filing season 1999 that required fingerprints of all filing

too late to affect hiring for the 1999 applicants at the earliest possible
time in the job

season applicants at the earliest possible filing season, we will monitor
IRS' application process.

time in the job application process. implementation of this policy during
the fiscal year 2000 financial statement audit. (Short- term)

29. Until the problems with delays in

Open. As of the end of fieldwork, IRS had Open. We will continue to monitor

fingerprint checks are resolved, develop and

not yet issued such a policy. implementation in our fiscal year 2000

implement a policy prohibiting new employees

audit. (Short- term)

from being assigned to process receipts until the results of fingerprint
checks are received and reviewed by management.

30. Continue the agency's efforts to explore the Open. IRS reported that in
August 1999 it Open. (Short- term)

feasibility of obtaining local police checks on IRS approved a
recommendation not to adopt a

applicants and evaluate the efficiency and servicewide policy requiring
local police effectiveness of the Philadelphia Service Center's checks on
applicants due to various electronic fingerprinting system in order to

limitations outlined in a decision document. supplement FBI fingerprint
checks.

IRS reported that it would evaluate the effectiveness of the pilot with the
Philadelphia Police Department when the report is issued July 2000.

31. Continue the agency's efforts to negotiate with Closed. IRS reported
that as of November Open. We will evaluate the

OPM and the FBI and procure the necessary 29, 1999 it was participating in
FBI's IAFIS. effectiveness and timeliness of IRS'

equipment so that it can participate in the FBI's The live- scan fingerprint
equipment had participation in IAFIS during our fiscal Integrated Automated
Fingerprint Identification

been procured and installed at OPM and 22 year 2000 audit. (Short- term)
System (IAFIS) program by August 1999.

IRS sites, including the 10 service centers. 32. Improve the physical
security over receipts

Open. IRS reported that while all 10 service Open. Although improved, we and
returns stored in unsecured overflow areas. centers have mail in secured and
restricted continued to find locations that needed

These controls might include limiting unnecessary areas during off- peak
times, some store mail correction. (Short- term) traffic by temporarily
designating these overflow in unrestricted areas during peak times due areas
as restricted access areas and/ or posting

to space and resource limitations. IRS additional security guards over such
areas during reported that it intended to ensure year the peak filing
season.

round compliance with this recommendation by April 2000. 33. Ensure that all
final candling activities are Closed. IRS reported that as of January 1,
Closed. We confirmed that IRS has consistently located in a restricted
access area. 2000 the final candling activities at all 10

corrected this problem. service centers were located in restricted access
areas.

34. Provide secure containers for service center Closed. IRS reported that
each service Open. During our September 1999 employees to store
“discovered remittances” prior

center currently has locked containers to visits, we continued to find
discovered to inventory and submission to the Receipt and store the
discovered remittances. In remittances stored in unlocked Control Branch.
Immediately upon discovery, the addition, IRS reported that it issued
containers at sites where they were receipts should be recorded into a
control log, the

instructions to the service centers on not immediately logged in when they
receipts secured in a locked container, and the

February 17, 1999, to emphasize the were discovered. We will continue to
discovered receipts reconciled to the control log handling and recording of
these remittances monitor this area. (Short- term) prior to submission for
processing.

to ensure reconciliation.

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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

35. Ensure that all unmatched checks are stored Closed. IRS reported that
because these Closed. Action not planned. IRS stated in locked containers
until they can be researched checks are located in Receipt and Control

that it chose to use other options to and processed for deposit. and they
have taken other steps to mitigate

mitigate the risks in the Receipt and the risk of theft in Receipt and
Control, no Control Branch. We will continue to further action is planned.

follow -up on these other options to determine if they adequately mitigate
the risk. 36. Ensure that all returned refund checks are

Closed. IRS reported that it updated the IRM Open. We continued to find
returned stamped “nonnegotiable” as soon as they are in January
1999 to reflect the policy of refund checks that were not stamped extracted.

stamping all returned refund checks as “nonnegotiable” upon
extraction that “nonnegotiable” as soon as they are were also
being stored in unlocked extracted.

containers. (Short- term) 37. Require district office employees to store
Closed. IRS reported that it communicated

Open. We continued to find violations walk- in payments in secure containers
in these requirements to the field offices of policy in this area. (Short-
term) accordance with IRM 1( 16) 41, section 500.

through its new Customer Service Operating District office management should
ensure that

Guidelines for fiscal year 2000. this policy is followed and should limit
the number of employees with access to the keys or

combinations to these containers. 38. Ensure that walk- in payment receipts
are

Closed. IRS reported that it issued guidance Open. We will monitor IRS'
recorded in a control log prior to depositing the to the field in August
1999 and updated the

implementation during the fiscal year receipts in the locked container and
ensure that IRM in January 2000 to include instructions 2000 financial
statement audit. (Short the control log information is reconciled to for a
control log and reconciliation of

term) receipts prior to submission of the receipts to receipts. another unit
for payment processing. To ensure proper segregation of duties, an employee
not

responsible for logging receipts in the control log should perform the
reconciliation. 39. Study the feasibility of improving security for Closed.
After studying this issue, IRS issued

Closed. If effectively implemented, the deposits in transit. In conducting
this study, IRS

new courier requirements in April and new courier policies should greatly
should consider a number of alternatives November 1999 and reported that it
would

reduce the vulnerability and risk including the use of depositories in close
continue to conduct reviews at service

associated with transporting IRS proximity to its various field locations
and centers to ensure that the requirements are deposits by courier.
employing security guards to accompany couriers followed. to the
depositories.

40. Develop a policy to ensure that contracts Closed. IRS issued new minimum
courier Closed. If effectively implemented, the

related to courier services do not unduly expose requirements and reported
that it would new courier policies should greatly

the government to losses in the event of lost, continue to conduct reviews
at service

reduce the vulnerability and risk stolen, or damaged deposits in transit.
centers to ensure that the requirements are associated with transporting IRS
followed.

deposits by courier. 41. Ensure that courier access is limited to Closed.
IRS issued new courier procedures Closed. We confirmed that couriers service
center premises. Deposit Unit employees that limited courier access within
service

are no longer allowed access to should deliver the deposits to couriers
waiting at center premises. IRS was confident that all service centers
beyond the guard the guard station instead of providing courier

service centers complied with this stations. badges allowing them
unnecessary service

procedure. center access.

(Continued From Previous Page)

Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations Internal Revenue Service: Custodial Financial Management
Weaknesses (GAO/ AIMD- 99- 193, August 4, 1999) 42. Analyze and determine
the factors causing Open. IRS reported that it has convened a

Open. We will evaluate the delays in processing and posting trust fund task
group to design an automated TFRP

effectiveness and timeliness of IRS' recovery penalty assessments. Once
these

system that can properly cross- reference automated TFRP system during
future factors have been determined, IRS should payments received and thus
eliminate the audits. (Short- term)

develop procedures to reduce the impact of these opportunity for errors that
plague the current

factors and to ensure timely posting to all manual process. IRS has targeted
2001 for applicable accounts and proper offsetting of

implementation. refunds against unpaid assessments before issuance.

43. Identify and institute procedures to monitor Closed. IRS updated the IRM
and issued a

Open. While we noted improved compliance of installment agreements. Such new
one in October 1999 to state that compliance after IRS issued its monitoring
should ensure that the installment installment agreements must stipulate
full memorandum and guidelines,

agreements provide for full payment of the taxes payment for liabilities.
Service centers are implementation of the guidelines owed. For example,
management could randomly also required to monitor compliance.

remained a problem. We will continue select installment agreements from all
of its units

to monitor compliance during our fiscal to review for compliance with the
Internal year 2000 audit. (Short- term) Revenue Code. 44. Expand IRS'
current review of service center

Open. IRS reported that it will initiate efforts Open. (Short- term)

deterrent controls to include similar analyses of to expand deterrent
controls at the district controls at IRS district offices and post- of- duty
and post- of- duty offices. Completion dates

offices in areas such as courier security, are not yet determined.

safeguarding of receipts in locked containers, requirements for
fingerprinting employees, and requirements for promptly over- stamping
checks made out to the “IRS” with “Internal Revenue

Service” or “United States Treasury.” Based on the
results, IRS should make appropriate changes to strengthen its physical
security controls.

45. IRS should work with Treasury's Financial Closed. IRS reported that it
revised the Closed. This recommendation is Management Service (FMS) to
revise the current

February 2000 Statement of Work for superseded by recommendation 73.

lockbox contracts to specifically require that lockboxes requiring that
police clearance checks be performed for all temporary fingerprint checks be
completed before employees prior to employment. Temporary employees begin
working,

employees are required to provide specific temporary employees be subjected
to background information and fingerprints, background checks that are
consistent with and additional measures for courier those required of IRS
employees, and

transport are now required. According to taxpayer data and receipts in
transit to and from IRS, these measures were completed in the lockbox banks
be appropriately protected.

March 2000.

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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

46. Require service center staff to provide Closed. IRS reported
implementing new Open. As of the end of fieldwork, we receipts to all walk-
in taxpayers regardless of the procedures by January 2000 for all service
noted that receipts were not routinely method of payment. In addition, IRS
should post centers. These included posting signs in provided for all types
of payments and signs reminding taxpayers to request receipts. At lobbies
reminding taxpayers to request a

that signs were not posted reminding service centers not normally equipped
to receive receipt if a payment is made, maintaining an

taxpayers to request receipts. (Shortterm) walk- in payments, payments
received should be inventory of Form 809 cash receipts and a logged in and
witnessed to ensure that they are

master logbook of the receipts issued, properly accounted for and deposited
by the

storing the logbook and receipt books in deposit unit. locked containers,
and reconciling the receipts and the logbook.

47. Establish procedures to ensure the prompt Closed. IRS reported
implementing several Open. Although the Cincinnati Service

recording of tax returns. IRS should implement IRM procedures throughout
1999 to address Center established expedited

controls to ensure that excise tax returns are this issue. These include
requiring service

processing procedures for tax returns recorded timely and included in the
quarterly centers to express mail their Form 720s to $1 million and over, we
continue to find excise tax trust fund certifications. the Cincinnati
Service Center daily, ensuring delays in IRS' certifications of receipts.
that Form 720s over $1 million are batched We still found cases involving
separately and expedited, and closely

significant amounts that were not following up on overdue returns.

promptly recorded and included in the proper quarterly excise tax trust fund
certifications. (Short- term)

48. Ensure that additional staff are employed or Open. IRS reported hiring
two additional Open. (Short- term) existing staff appropriately cross-
trained to be

persons to perform master file extractions able to perform the master file
extractions and and other ad hoc procedures. However, other ad hoc
procedures needed for IRS to additional staff are needed for extractions
continually develop reliable balances for financial and analysis. reporting
purposes.

Financial Management: Serious Weaknesses Impact IRS' Ability to Reliably
Report and Manage Its Operations (GAO/ AIMD- 99- 196, August 9, 1999)

49. Promptly resolve differences between IRS Closed. IRS reported that by
October 1999 it Open. While IRS was able, in January and Treasury records of
IRS' appropriation

had developed a series of new reports and 2000, to furnish explanations and

account balances and adjust accounts worksheets to assist in the cash
support to allow us to conclude that its accordingly. For example,
reconciliations should reconciliation process, finalized fiscal year
September 30, 1999, fund balance be performed promptly every month, with
1998 and 1999 reconciliations, and with Treasury was reliable,

Treasury and IRS amounts in agreement and reconciled unresolved differences.
unreconciled differences between IRS

reconciling items properly resolved. and Treasury still existed. We will
evaluate the actions IRS reported as part of our fiscal year 2000 audit.

(Short- term) 50. Strengthen control over IRS' operating funds Open. IRS
reported that it would implement

Open. In fiscal year 1999, IRS made by promptly investigating and clearing
suspense

an edit on the suspense account that substantial progress in clearing out
its account items. For example, outstanding amounts prevents entries older
than 5 fiscal years, suspense account. However, this was in the suspense
account should be reviewed develop an aging report for suspense items,
primarily due to an extensive year- end every month to try to resolve and
clear

and develop a new process requiring a effort. IRS should investigate and
clear outstanding balances. monthly reconciliation certifying the validity

outstanding balances monthly until of all suspense items. substantially all
amounts are resolved. (Short- term)

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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

51. Develop subsidiary records for its accounts Open. Recommendation not
addressed in Open. In fiscal year 1999, IRS was payable and undelivered
orders and a list of IRS remediation plan. able to provide us with lists of
accounts current year nonpayroll operating expenses that payable and
outstanding undelivered will provide reliable accounts payable, undelivered
orders, but only after performing laborintensive

orders, and nonpayroll operating expense data. ad hoc procedures to develop
the lists. IRS should develop a

subsidiary ledger from which it can routinely provide outstanding balances.
Also, IRS was unable to provide us with a list of current year nonpayroll
operating expenses. (Longterm)

52. Develop the data to support meaningful cost Open. Recommendation not
addressed in Open. (Short- term) information categories and cost- based IRS
remediation plan. performance measures.

53. Develop and implement procedures and Open. IRS reported that it has
planned

Open. IRS' plan does not address controls to ensure that detailed property
and actions to transition to a new property

improving the accuracy of its non- ADP equipment (P& E) records are
accurately management process for automated data equipment records. We found
maintained. These procedures and controls would processing (ADP) equipment
by early 2001. numerous problems with the accuracy include ensuring that
physical inventories at field

of the detailed P& E records for both locations are effectively performed,
including ADP and non- ADP property. (Short prompt resolution of
discrepancies found in the

term) inventories and appropriate adjustment of detailed records. 54.
Consider directing that a physical inventory of Open. IRS performed an
inventory of ADP

Open. IRS could not rely on its P& E be performed with adjustments being
made equipment as of December 31, 1999, and property records to determine a
to IRS' detailed records accordingly. To ensure changed the inventory cycle
for non- ADP

September 30, 1999, P& E balance that such efforts are not wasted IRS first
needs to equipment to an annual cycle. It reported

and thus, developed a balance based establish and implement effective
procedures to that it is currently developing interfaces to

on statistical and other estimates ensure that the accuracy of detailed
records, once

automate its hardware and software provided by a consulting firm. corrected,
is maintained. inventory by late 2001 and replace its

However, it still has not developed current ADP inventory system by late
2002.

effective procedures to ensure the ongoing accuracy of its records. (Short-
term)

55. In conjunction with or shortly after a physical Closed. IRS reported
that in March 2000 it Open. We found that IRS has yet to inventory, we
recommend that IRS perform a

established interim procedures to ensure the establish an effective property
systematic validation of the P& E amounts reliability of its fiscal year
2000 ADP

management system for either its ADP (valuation) for items in IRS' detailed
records.

equipment inventory. It also reported that it or non- ADP equipment. Despite
its validates both ADP and non- ADP P& E annual reviews, we continue to find
amounts through annual financial and errors in its detailed P& E records
each Federal Managers' Financial Integrity Act of year. (Short- term)

1982 (FMFIA) reviews.

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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations

56. Develop a means to capture and capitalize all Closed. IRS reported that
as of March 31,

Open. IRS did report, as of September costs incurred to bring P& E to a form
and location

2000, invoiced costs such as shipping, 30, 1999, $288 million as the cost of
suitable for its intended use in accordance with delivery, and installation
are captured in the major systems. However, IRS still SFFAS No. 6, including
design and installation

process of identifying and capitalizing the needs to implement an effective

costs and the cost of externally developed costs of the assets. system to
capture and capitalize all software.

costs incurred to bring P& E to a form and location suitable for its
intended use, including costs that are not included as part of the property
item's invoice. (Short- term)

57. Revise the current capitalization policy to Open. IRS reported it
revised its Open. We will monitor implementation

ensure that material P& E acquisitions are not capitalization policy but did
not expect to during our fiscal year 2000 audit. expensed.

formalize this policy until June 2000. (Short- term)

58. Review all lease agreements to determine Open. IRS reported that
contracting officers Open. We will monitor implementation

whether they meet the criteria for capital leases are required to notify the
office of the Chief during our fiscal year 2000 audit. and capitalize and
properly record any leases that

Financial Officer (CFO) of all lease (Short- term)

meet the criteria. acquisitions with total payments in excess of $50,000
beginning April 1, 2000. The CFO's office will then review to determine
whether

they represent capital leases. IRS reported that by September 30, 2000, the
CFO's office will also review leases for all leased assets acquired prior to
April 1, 2000, and make adjustments as necessary. 59. Make enhancements to
IRS financial systems Open. IRS reported that it intends to acquire

Open. (Long- term) to include recording P& E and capital leases as and
install an integrated financial system assets when purchased and to generate
detailed that will meet this recommendation as part records for P& E that
reconcile to the financial

of its overall systems modernization. It records. expects to complete its
systems plan by June 30, 2000. 60. Ensure that additional knowledgeable
staff are

Open. IRS reported that it has added new Open. We will evaluate the employed
or that existing staff are appropriately management team members to the CFO

implementation of these actions during cross- trained to be able to develop
IRS' financial organization to add stability and expertise to

our fiscal year 2000 audit. (Short- term) statements and perform its
accounting and

the accounting operations and financial financial functions or are able to
perform the statement process and is conducting a necessary supervision
needed to obtain reliable training program for its accounting staff.

and supportable financial data on time. 61. Establish procedures for the
financial Closed. IRS reported that it has developed

Open. We identified errors in the draft statements to undergo review at the
appropriate

an evaluation process to include two levels fiscal year 1999 financial
statements levels within the CFO office, with documented of management
review in the CFO indicating that this has not been evidence of the reviews.
organization.

effectively implemented. We will continue to evaluate the implementation of
these actions during our fiscal year 2000 audit. (Short- term) a The
“Status of GAO recommendations reported by IRS” is based
primarily on the following IRS documents: Internal Revenue Service
Remediation Plan, March 31, 2000, and an October 6, 1999, letter from IRS to
Congress responding to recommendations in GAO/ AIMD- 99- 196.

Table 5: New GAO Recommendations on IRS' Financial and Operational
Activities Recommended effort Recommendations involved Internal Revenue
Service: Recommendations to Improve Financial and Operational Management
(GAO- 01- 42, November 17, 2000) 62. Better monitor IRS' procedures
requiring that a freeze code be entered on all accounts of a taxpayer whom
Short- term IRS has determined is potentially liable for unpaid payroll
taxes. This should be done on all such accounts to prevent the inadvertent
release of refunds to the taxpayer until IRS determines the validity of the
tax liability.

63. Revise policies and procedures governing the processing of abatement
transactions to establish Short- term (1) appropriate time frames for
processing abatements, (2) a methodology for monitoring the timeliness of
abatement processing, and (3) procedures to identify the causes for delays
and formulate corrective actions and examine abatement transactions arising
from IRS errors to determine the causes for the errors and, based on this
examination, formulate and implement appropriate procedures to reduce the
level of errors made when entering data into taxpayer accounts.

64. Implement procedures to monitor the age of all pending offers and to
require supervisors to follow up with Short- term staff to determine within
6 months whether to accept or reject the offer. 65. As an alternative to
prematurely suspending active collection efforts, and using the best
available

Short- term

information, develop reliable cost/ benefit data relating to collection
efforts for cases with some collection potential. These cost/ benefit data
would include the full cost associated with the increased collection
activity (i. e., salaries, benefits, and administrative support) as well as
the expected additional

tax collections generated. 66. Incorporate into its systems modernization
blueprint and strategic planning process the capability to

Long- term

routinely and reliably measure the cost/ benefit of its collections
activities and make informed resource allocation decisions. 67. Implement
procedures to closely monitor the release of tax liens to ensure that they
are released

Short- term

within 30 days of the date the related tax liability is fully satisfied. As
part of these procedures, IRS should carefully analyze the causes of the
delays in releasing tax liens identified by our work and prior work by IRS'
former internal audit function and ensure that such procedures effectively
address these issues.

68. Revise the IRM to require that Short- term

IRS employees who initiate manual refunds document their monitoring actions
on case history sheets and supervisors review monitoring actions and
document their review.

69. Determine why the program that generates the Questionable Refund Report
was not functioning as intended Short- term during fiscal year 1999 and
implement appropriate corrective actions. 70. Determine why service centers
have not been more effective in stopping refunds associated with Short- term

questionable EITCs and make changes to current procedures, as appropriate,
review procedures for enforcing taxpayer compliance with the Taxpayer Relief
Act of 1997 and implement actions to prevent taxpayers who had been denied
an EITC for tax year 1997 or any subsequent year from being granted an EITC
in successive years until they have provided the requisite supporting
documentation, and

track the total number of and dollars in EITCs subjected each year to the
Electronic Fraud Detection System (EFDS) screening and related efforts to
enable IRS to estimate the full magnitude of suspicious EITCs and determine
the level of resources to be devoted to EFDS screening and investigative
follow- up appropriate for the risks and potential losses involved.

(Continued From Previous Page)

Recommended effort Recommendations involved 71. For (1) IRS' Automated
Underreporter and Combined Annual Wage Reporting programs,

Short- term

(2) screening and examination of EITC claims, and (3) identifying and
collecting previously disbursed improper refunds, use the best available
information to develop reliable cost/ benefit data to estimate the tax
revenue collected by, and the amount of improper refunds returned to, IRS
for each dollar spent

pursuing these outstanding amounts. These data would include (1) an estimate
of the full cost incurred by IRS in performing each of these efforts,
including the salaries and benefits of all staff involved, as well as any
related nonpersonnel costs, such as supplies and utilities, and (2) the
actual amount

(a) collected on tax amounts assessed and (b) recovered on improper refunds
disbursed. 72. Incorporate in IRS' systems modernization blueprint and
strategic planning process capabilities for

Long- term

routinely and reliably measuring the cost/ benefit of each of the efforts
listed in recommendation 71 and make informed resource allocation decisions.

73. Work with Treasury's Financial Management Service (FMS) to revise the
current lockbox contracts to

Short- term

emphasize security requirements and to specifically require that

fingerprint checks be completed before employees begin working,

temporary employees be subjected to background checks that are consistent
with those required for IRS employees, and

at a minimum, the lockbox bank courier services meet the service center
requirements contained in IRS' November 16, 1999, policy.

74. Ensure that all IRS units receiving collections have consistent policies
and procedures to safeguard and Short- term account for cash receipts. 75.
Perform and document periodic observations and reviews to monitor and
enforce compliance with policies Short- term

addressing the safeguarding of cash receipts. 76. Develop a subsidiary
ledger for leasehold improvements and implement procedures to record
leasehold Long- term improvement costs as they occur. 77. Implement
procedures and controls to ensure that expenditures for P& E are charged to
the correct Short- term accounting codes to provide reliable records for
expenditures as a basis of extracting the costs for major systems and
leasehold improvements.

78. Establish a system to capture all costs related to the PRIME effort to
modernize IRS' computer systems. Short- term 79. Develop procedures and
systems to capture and capitalize the cost of internally developed software
in Short- term accordance with SFFAS No. 10, Accounting for Internal Use
Software. 80. Consolidate and update the P& E policies and procedures
currently documented in various handbooks and Short- term policy memorandums
into a comprehensive document that personnel responsible for maintaining
inventory records can use as a reference. 81. Assign a senior- level
position with overall responsibility for ensuring that P& E records are
accurate and P& E

Short- term is properly accounted for. 82. Develop and implement procedures
so that personnel responsible for maintaining P& E inventory records Short-
term

receive prompt notification when P& E is received, moved, or disposed of.
Procedures should help ensure that those responsible for maintaining
inventory records promptly receive documentation supporting P& E
transactions, such as receiving reports, invoices, and disposal documents.
83. Revise guidance on recording P& E to clearly state that P& E is to be
recorded when title passes to IRS or Short- term when delivered, based on
the terms of the contract regarding shipping and delivery. This is to
clarify that P& E and related accounts payable should be promptly recorded
when P& E is received, in accordance with SFFAS No. 6, rather than when it
is placed in service. 84. Provide training on P& E policy and procedures to
personnel responsible for maintaining inventory records to Short- term help
ensure that P& E transactions are promptly and accurately recorded.

(Continued From Previous Page)

Recommended effort Recommendations involved

85. Review, and correct as necessary, data in inventory records, such as
serial or model numbers and Short- term manufacturer names, during periodic
inventories of P& E. 86. Perform sufficient supervisory reviews to help
ensure that transactions recorded on P& E inventory records Short- term

are accurately entered into subsidiary records and appropriately supported
by documentation. 87. Periodically analyze outstanding obligations,
including an aging of obligations to identify potential items that Short-
term may require deobligation, and remove expired appropriation balances
from IRS records as stipulated by the National Defense Authorization Act for
Fiscal Year 1991. The CFO office should then coordinate with the financial
plan managers to help ensure that invalid undelivered orders are promptly
deobligated.

88. Develop a subsidiary ledger that shows underlying detailed transactions
and reconciles by year to the Short- term balances in the administrative
general ledger. IRS should first clear old outstanding items in the general
ledger to reflect actual balances by fiscal year.

89. Develop policies and procedures to classify program costs according to
the nature of the work performed Short- term and in a manner commonly
understood by users of financial statements. This classification should also
be consistent with the classification of related funding requirements in
IRS' budgetary requests to the Congress.

90. Incorporate into its tax systems modernization plans, as they relate to
financial management, the Long- term

development of a cost accounting system that will track and report, in
appropriate detail, the full costs associated with its activities and
programs at the project and subproject level. This system should include a
payroll system that provides for activity- based costing of individual jobs
to which staff are assigned. 91. Review the Department of Agriculture's
(USDA) Office of the Inspector General (OIG) annual audit report on Short-
term the National Finance Center's (NFC) internal control structure and any
relevant GAO reports, evaluate the risk in the control environment at NFC,
and implement control procedures as necessary to mitigate the risk
associated with the weaknesses identified in NFC's payroll processing
systems. These procedures could include but not be limited to (1) selecting
a random sample of NFC payroll disbursements, at least quarterly (e. g., 25
per quarter),

and comparing the payroll information received from NFC to corresponding
data provided to NFC and (2) periodically analyzing overall payroll expenses
to determine their reasonableness. IRS should appropriately document how it
implements and executes its compensating controls.

92. Establish policies and procedures to ensure that all administrative and,
to the extent possible, custodial Short- term transactions are promptly
recorded in the general ledger, preferably within 30 days of the
transaction. 93. Incorporate into its systems modernization plan
requirements and specifications for a general ledger system Long- term

that (1) accumulates and summarizes IRS' custodial and administrative
transactions for financial reporting purposes, (2) is integrated with its
supporting subsidiary records and (3) is fully compliant with the SGL at the
transaction level. 94. Revise procedure manuals to require that accruals be
recorded when services have been performed and Short- term goods received,
regardless of whether an invoice has been received. This may require
recording estimates of costs incurred based on reliable data. In these
cases, additional detailed guidance should be provided in determining the
amounts.

95. Ensure that the acceptance date entered in Request Tracking System/
Integrated Procurement System Short- term (RTS/ IPS) represents the date
that IRS received the goods and services rather than the date acceptance was
entered into the system.

96. Provide training to key program offices on the accrual process. Short-
term 97. Develop, document, and implement detailed written procedures for
summarizing data used to produce the

Short- term trust fund certifications. IRS should clearly define the steps
being performed and consistently apply them throughout the year. Whenever
deviations are required, such as for prior period adjustments, explanations
should be properly documented.

Appendi x II

Comments From the Internal Revenue Service Note: The enclosures referred to
in this letter were provided by IRS in response to our draft report. These
enclosures contain additional detailed comments that we reviewed and, where
appropriate, incorporated into this report. However, as we discussed with
IRS, only

the letter from Deputy Commissioner Wentzel is reproduced in this report.

Related GAO Products Management Letter: Suggested Improvements in IRS'
Accounting Procedures and Internal Controls (GAO/ AIMD- 00- 162R, June 14,
2000).

Internal Revenue Service: Results of Fiscal Year 1999 Financial Statement
Audit (GAO/ T- AIMD- 00- 104, February 29, 2000).

Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/ AIMD- 00-
76, February 29, 2000).

Standards for Internal Control in the Federal Government (GAO/ AIMD- 00- 21.
3.1, November 1999). Financial Audit: Issues Regarding Reconciliations of
Fund Balance with Treasury Accounts (GAO/ AIMD- 99- 271, September 17,
1999).

Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and
Manage Operations (GAO/ AIMD- 99- 196, August 9, 1999).

Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/
AIMD- 99- 193, August 4, 1999). Payroll Taxes: Billions in Delinquent Taxes
and Penalties Due But Unlikely to Be Collected (GAO/ T- AIMD/ GGD- 99- 256,
August 2, 1999). Unpaid Payroll Taxes: Billions in Delinquent Taxes and
Penalty Assessments Are Owed (GAO/ AIMD/ GGD- 99- 211, August 2, 1999). USDA
Information Security: Weaknesses at National Finance Center Increase Risk of
Fraud, Misuse, and Improper Disclosure (GAO/ AIMD- 99- 227, July 30, 1999).

Management Letter: Suggested Improvements in IRS' Accounting Procedures and
Internal Controls (GAO/ AIMD- 99- 182R, June 30, 1999).

Internal Revenue Service: Results of Fiscal Year 1998 Financial Statement
Audit (GAO/ T- AIMD- 99- 103, March 1, 1999).

Financial Audit: IRS' Fiscal Year 1998 Financial Statements (GAO/ AIMD- 99-
75, March 1, 1999). Major Management Challenges and Program Risks:
Department of the Treasury (GAO/ OCG- 99- 14, January 1999).

High- Risk Series: An Update (GAO/ HR- 99- 1, January 1999). IRS Systems
Security: Although Significant Improvements Made, Tax Processing Operations
and Data Still at Serious Risk (GAO/ AIMD- 99- 38, December 14, 1998).

Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data
Needs Improvement (GAO/ AIMD- 99- 15, November 30, 1998).

Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions
to the Trust Funds (GAO/ AIMD- 99- 17, November 9, 1998). Internal Revenue
Service: Immediate and Long- Term Actions Needed to Improve Financial
Management (GAO/ AIMD- 99- 16, October 30, 1998).

Internal Revenue Service: Composition and Collectibility of Unpaid
Assessments (GAO/ AIMD- 99- 12, October 29, 1998). Internal Revenue Service:
Remaining Challenges to Achieve Lasting Financial Management Improvements
(GAO/ T- AIMD/ GGD- 98- 139, April 15, 1998).

Financial Audit: Examination of IRS' Fiscal Year 1997 Custodial Financial
Statements (GAO/ AIMD- 98- 77, February 26, 1998).

Tax Systems Modernization: Blueprint Is a Good Start But Not Yet
Sufficiently Complete to Build or Acquire Systems (GAO/ AIMD/ GGD- 98- 54,
February 24, 1998). Financial Audit: Examination of IRS' Fiscal Year 1996
Custodial Financial Statements (GAO/ AIMD- 98- 18, December 24, 1997).

Financial Audit: Examination of IRS' Fiscal Year 1996 Administrative
Financial Statements (GAO/ AIMD- 97- 89, August 29, 1997).

Financial Audit: Examination of IRS' Fiscal Year 1995 Financial Statements
(GAO/ AIMD- 96- 101, July 11, 1996). Financial Audit: Examination of IRS'
Fiscal Year 1994 Financial Statements (GAO/ AIMD- 95- 141, August 4, 1995).

Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements
(GAO/ AIMD- 94- 120, June 15, 1994). Financial Management: IRS Does Not
Adequately Manage Its Operating Funds (GAO/ AIMD- 94- 33, February 9, 1994).

Financial Management: Important IRS Revenue Information is Unavailable or
Unreliable (GAO/ AIMD- 94- 22, December 21, 1993).

Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements
(GAO/ AFMD- 93- 2, June 30, 1993). Financial Audit: IRS Significantly
Overstated its Accounts Receivable Balance (GAO/ AFMD- 93- 42, May 6, 1993).
Federal Tax Deposit System: IRS Can Improve the Federal Tax Deposit System
(GAO/ AFMD- 93- 40, April 28, 1993).

(919457) Lett er

GAO United States General Accounting Office

Page 1 GAO- 01- 42 IRS Financial and Operational Management

Contents

Contents Page 2 GAO- 01- 42 IRS Financial and Operational Management

Contents Page 3 GAO- 01- 42 IRS Financial and Operational Management

Contents Page 4 GAO- 01- 42 IRS Financial and Operational Management

United States General Accounting Office Washington, D. C. 20548

Page 5

Page 6

Page 7

Page 8 GAO- 01- 42 IRS Financial and Operational Management

Executive Summary Page 9 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 10 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 11 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 12 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 13 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 14 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 15 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 16 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 17 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 18 GAO- 01- 42 IRS Financial and Operational
Management

Executive Summary Page 19 GAO- 01- 42 IRS Financial and Operational
Management

Page 20 GAO- 01- 42 IRS Financial and Operational Management

Chapter 1

Chapter 1 Introduction

Page 21 GAO- 01- 42 IRS Financial and Operational Management

Chapter 1 Introduction

Page 22 GAO- 01- 42 IRS Financial and Operational Management

Page 23 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 24 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 25 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 26 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 27 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 28 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 29 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 30 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 31 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 32 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 33 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 34 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 35 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 36 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 37 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 38 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 39 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 40 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 41 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 42 GAO- 01- 42 IRS Financial and Operational Management

Chapter 2 Weaknesses in IRS' Management of Unpaid Assessments

Page 43 GAO- 01- 42 IRS Financial and Operational Management

Page 44 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 45 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 46 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 47 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 48 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 49 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 50 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 51 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 52 GAO- 01- 42 IRS Financial and Operational Management

Chapter 3 Weaknesses in Internal Controls Over Refund Disbursements

Page 53 GAO- 01- 42 IRS Financial and Operational Management

Page 54 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 55 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 56 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 57 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 58 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 59 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 60 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 61 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 62 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 63 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 64 GAO- 01- 42 IRS Financial and Operational Management

Chapter 4 Further Improvements Needed to Safeguard Manual Tax Receipts and
Taxpayer

Information Page 65 GAO- 01- 42 IRS Financial and Operational Management

Page 66 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 67 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 68 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 69 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 70 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 71 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 72 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 73 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 74 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 75 GAO- 01- 42 IRS Financial and Operational Management

Chapter 5 Inadequate Accounting for and Tracking of Property and Equipment

Page 76 GAO- 01- 42 IRS Financial and Operational Management

Page 77 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 78 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 79 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 80 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 81 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 82 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 83 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 84 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 85 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 86 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 87 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 88 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 89 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 90 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 91 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 92 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 93 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 94 GAO- 01- 42 IRS Financial and Operational Management

Chapter 6 Ineffective Controls Over Appropriated Funds

Page 95 GAO- 01- 42 IRS Financial and Operational Management

Page 96 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 97 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 98 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 99 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 100 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 101 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 102 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 103 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 104 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 105 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 106 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 107 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 108 GAO- 01- 42 IRS Financial and Operational Management

Chapter 7 Deficiencies in the Collecting and Reporting of IRS' Financial
Data

Page 109 GAO- 01- 42 IRS Financial and Operational Management

Page 110 GAO- 01- 42 IRS Financial and Operational Management

Appendix I

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 111 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 112 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 113 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 114 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 115 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 116 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 117 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 118 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 119 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 120 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 121 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 122 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 123 GAO- 01- 42 IRS Financial and Operational Management

Appendix I Status of GAO Recommendations on IRS' Financial and Operational
Activities

Page 124 GAO- 01- 42 IRS Financial and Operational Management

Page 125 GAO- 01- 42 IRS Financial and Operational Management

Appendix II

Appendix II Comments From the Internal Revenue Service

Page 126 GAO- 01- 42 IRS Financial and Operational Management

Appendix II Comments From the Internal Revenue Service

Page 127 GAO- 01- 42 IRS Financial and Operational Management

Appendix II Comments From the Internal Revenue Service

Page 128 GAO- 01- 42 IRS Financial and Operational Management

Page 129 GAO- 01- 42 IRS Financial and Operational Management

Related GAO Products Page 130 GAO- 01- 42 IRS Financial and Operational
Management

Related GAO Products Page 131 GAO- 01- 42 IRS Financial and Operational
Management

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