Internal Revenue Service: Progress Made, but Further Actions
Needed to Improve Financial Management (19-OCT-01, GAO-02-35).
This report is a follow-on to GAO's report on the results of its
audit of the Internal Revenue Service's (IRS) fiscal year 2000
financial statements. Many of the issues presented throughout
this report have existed for several years, and IRS has noted
that the ultimate solution to many of these issues is
modernization of its systems. IRS plans to implement a new
financial system that includes a cost accounting module as well
as integrated administrative and custodial general ledgers that
are supported by subsidiary ledgers containing the transactional
details for key accounts such as taxes receivable and property
and equipment. IRS continues to make progress in addressing its
financial management challenges. The strong commitment and
dedication to financial management reform by IRS senior
management has played a crucial role in the progress the agency
has made to date and is critical for future improvements. IRS has
developed many workaround processes that resulted in its ability
to produce reliable financial statements for fiscal year 2000.
However, these processes take considerable time, effort, and
expense and do not fix many of the fundamental financial
management issues that continue to plague the agency.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-35
ACCNO: A02348
TITLE: Internal Revenue Service: Progress Made, but Further
Actions Needed to Improve Financial Management
DATE: 10/19/2001
SUBJECT: Appropriated funds
Auditing standards
Financial statement audits
Internal controls
Reporting requirements
Risk management
IRS Automated Underreporter System
IRS Electronic Fraud Detection System
IRS Project Cost Accounting Subsystem
Earned Income Tax Credit
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GAO-02-35
A
Report to the Commissioner of Internal Revenue
October 2001 INTERNAL REVENUE SERVICE Progress Made, but Further Actions
Needed to Improve Financial Management
GAO- 02- 35
Letter 1 Results in Brief 2 Background 8 Objectives, Scope, and Methodology
8 Weaknesses Hinder Management of Unpaid Assessments 9 Weaknesses in
Controls Over Refunds and Earned Income Tax
Credits 19 Weaknesses Over Safeguarding of Manual Tax Receipts and
Taxpayer Data Continue 25 Weaknesses in Management and Accounting for
Property and
Equipment 34 Weak Controls Over Appropriated Funds Continue 41 Deficiencies
in the Collection and Reporting of Financial Data 47 Conclusions 57 Agency
Comments and Our Evaluation 58
Appendixes
Appendix I: Scope and Methodology 64
Appendix II: Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports 66
Appendix III: Comments From the Internal Revenue Service 87
Appendix IV: GAO Contacts and Staff Acknowledgments 95 Tables Table 1:
Internal Control and Compliance Issues Related to Unpaid
Assessments 10 Table 2: Internal Control Issues Related to Refunds and
Earned
Income Tax Credit Claims 20 Table 3: AUR Cases With Discrepancies, Cases
Investigated, Cases Not Investigated and Their Estimated Underreported
Taxes 24 Table 4: Internal Control Issues Related to Manual Receipts and
Taxpayer Data 25 Table 5: IRS Employees Hired and Working, After April 3,
2000,
Prior to IRS Receipt of Fingerprint Check Results 29 Table 6: Internal
Control Issues Related to Property and
Equipment 35 Table 7: Internal Control Issues Related to Appropriated Funds
42
Table 8: Internal Control and Compliance Issues Related to Financial
Reporting 49 Table 9: Status of Open GAO Recommendations on IRS? Financial
and Operational Activities 67 Table 10: New GAO Recommendations on IRS
Financial Management 86
Figures Figure 1: Comparison of Unpaid Assessments Before and After
Adjustments as of September 30, 2000 13
Abbreviations
ADP automated data processing AUR Automated Underreporter Program CFO Chief
Financial Officer CI Criminal Investigation Division CIO Chief Information
Officer DUPREF Duplicate Refunds EFDS Electronic Fraud Detection System EITC
earned income tax credit FBI Federal Bureau of Investigation FFMIA Federal
Financial Management Improvement Act of 1996 FMFIA Federal Managers?
Financial Integrity Act of 1982 FMS Financial Management Service GPRA
Government Performance and Results Act of 1993 IAFIS Integrated Automated
Fingerprint Identification System IRM Internal Revenue Manual IRS Internal
Revenue Service JFMIP Joint Financial Management Improvement Program NFC
National Finance Center OIG Office of the Inspector General OLTP on- line
transaction processing OMB Office of Management and Budget OPM Office of
Personnel Management QRR Questionable Refund Report P& E property and
equipment PCAS Project Cost Accounting Subsystem PRIME Prime Systems
Integrated Services RTS/ IPS Request Tracking System/ Integrated Procurement
System SBR Statement of Budgetary Resources SFFAS Statements of Federal
Financial Accounting Standards
SOC Sub- Object Class SPIF Single Point Inventory Function SGL Standard
General Ledger TASL Taxpayer Account Subledger TAVS Tax Administration
Vision and Strategy TFRP trust fund recovery penalty TIGTA Treasury
Inspector General for Tax Administration USDA U. S. Department of
Agriculture W- 2 Wage and Tax Statement WCF Working Capital Fund
Lett er
October 19, 2001 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
2000 financial statements. 1 In fiscal year 2000, IRS was able to produce
for the first time combined financial statements that were fairly stated in
all material respects. This achievement was the result of the dedication and
months of efforts of IRS? management and staff working around serious
systems deficiencies and
internal control weaknesses, many of which have plagued IRS since we first
began auditing its financial statements in 1992. Although this effort
produced reliable financial statement balances, they were reliable only for
a single point in time and fell short of addressing the fundamental
weaknesses in IRS? systems and internal controls. As a result, we gave an
unqualified opinion on IRS? fiscal year 2000 financial statements but also
concluded that IRS did not maintain effective internal controls. We also
found two instances of noncompliance with laws and regulations relating
to IRS? structuring of installment agreements and the timing of the release
of tax liens. During our fiscal year 2000 audit, we noted that IRS had made
many
improvements to address some of the financial management issues we have
raised in previous reports. For example, IRS had significantly improved its
controls over reconciling its appropriated fund balance with Treasury
accounts and in minimizing the number and dollar amount of transactions held
in suspense accounts. Additionally, IRS had significantly improved the
quality of its documentation of unpaid tax assessments. IRS
had also made important improvements in its handling of taxpayer receipts
and data, and had made progress in addressing both long- standing weaknesses
in controls over its property and equipment and weaknesses in budgetary
controls. IRS? progress is attributable to the extraordinary efforts of IRS
senior management and staff and the continued strong commitment by senior
management to address the agency?s financial management issues. 1 See
Financial Audit: IRS? Fiscal Year 2000 Financial Statements (GAO- 01- 394,
March 1, 2001).
Despite this progress, a continued high level of effort by IRS is necessary
to implement long- lasting solutions to serious systems deficiencies and
internal control weaknesses. Because of the seriousness of these issues, we
continue to designate IRS financial management as high risk. 2 Furthermore,
until these problems are addressed, IRS cannot achieve the overriding
objective of the Chief Financial Officers (CFO) Act and other reform
legislation enacted during the last decade- to produce reliable,
useful, and timely financial and performance information for day- to- day
decision- making. Addressing these issues will also provide IRS with the
added benefit of improving its customer service and its operational
effectiveness as the nation?s tax collector.
The matters addressed in this report relate to IRS? activities associated
with its fiscal year 2000 appropriation of $8.3 billion and issues relating
to IRS? collection of federal tax revenue, improper refunds, and unpaid tax
assessments. This report discusses (1) the status of previously reported
internal control and compliance issues and related recommendations
associated with our annual financial statement audits and related financial
management reviews of IRS 3 and (2) new issues identified during our fiscal
year 2000 financial audit, along with recommendations to address these
issues.
Results in Brief During fiscal year 2000, IRS made significant improvements
to address financial management issues we previously reported, such as those
in the
areas of reconciling its fund balance with Treasury, documenting unpaid
assessments, and safeguarding taxpayer receipts and data. Nevertheless,
serious internal control weaknesses and systems deficiencies continue to
impede the agency?s ability to produce reliable financial information on an
ongoing basis and to effectively manage its operations. These internal
control weaknesses and systems deficiencies fall into six major areas: (1)
unpaid tax assessments, (2) refund disbursements and earned income tax
credits, (3) security over manual tax receipts and data, (4) property and
equipment, (5) appropriated funds, and (6) financial reporting. 4 Most of
the
2 See High- Risk Series: An Update (GAO- 01- 263, January 2001). 3 See
Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO- 01- 42, November 17, 2000). 4 A seventh major
area, computer security, is addressed in separate reports.
issues in these areas are long- standing. However, we have identified new
issues in some of these areas during fiscal year 2000 and are making
additional recommendations to address them. Weaknesses in the six areas
identified include the following: Unpaid tax assessments. Systems and
control weaknesses over the
management of unpaid assessments have resulted in a burden to taxpayers and
could result in financial losses to the government. IRS continues to lack a
detailed list, or subsidiary ledger, to effectively track and accumulate
unpaid assessments. As a result, IRS must rely on a workaround process to
derive and report its unpaid assessment balances for its financial
statements that is both time- consuming and labor intensive. Additionally,
consistent with prior years, we continued to find inaccuracies in taxpayer
accounts due to errors in recording taxpayer information and significant
delays in recording payments and releasing tax liens against the properties
of taxpayers who have
satisfactorily discharged their assessed federal taxes. Such errors and
delays affect IRS? workaround process for reporting unpaid assessment
balances in its financial statements, lead to unnecessary taxpayer burden,
and result in lost opportunities to collect outstanding taxes. Also
consistent with our prior audit, we continued to find that IRS was
closing unpaid tax cases without working them- a process IRS refers to as
?shelving.? As of September 30, 2000, 1. 8 million cases totaling $8. 6
billion had been shelved because IRS judged that resource constraints
precluded it from actively pursuing collection. However, because it lacks
reliable financial management data to prepare costbenefit analyses, IRS is
hindered in its ability to determine whether it is devoting the appropriate
level of resources to pursuing the collection of unpaid taxes relative to
the costs and potential benefits involved. The
lack of cost- benefit analysis, in turn, could result in billions of dollars
going uncollected, eroding taxpayers? confidence in the equity of the tax
system and adversely affecting future compliance.
Refund disbursements and Earned Income Tax Credits (EITC). Long- standing
weaknesses in IRS? controls over refund disbursements and other management
challenges continue to expose the federal government to significant losses
through the disbursement of improper
refunds, particularly with respect to EITC claims. Time constraints, 5 high
volume, reliance on information provided by taxpayers, and the timing of the
filing of information returns by third parties create inherent limitations
in IRS? options for addressing this problem. Thus, IRS relies principally on
controls to detect erroneous or fraudulent refunds after they have already
been issued instead of relying on
controls to prevent the issuance of such refunds. These detective controls,
and the preventive controls IRS has in place, are not fully effective
because they are not performed on all returns with questionable EITC claims
or other identified discrepancies. For example, from tax years 1996 to 1998,
IRS identified over 39 million individual tax returns with estimated
underreported taxes of over $49 billion, yet did not follow up on over 30
million (78 percent) of the returns which accounted for about $30 billion
(60 percent) of the total estimated underreported taxes. According to IRS,
resource constraints prevented it from further pursuing potentially
underreported taxes and potentially invalid EITC claims that had been
identified. However, because of the lack of management information, IRS
could not readily determine or justify whether it would be cost beneficial
to allocate more resources to pursue these cases.
Security over manual tax receipts and data. IRS has made marked
improvement in the security of tax receipts and taxpayer data it manually
receives from taxpayers. For example, IRS now obtains the results of
fingerprint checks on new employees faster and has issued more stringent
courier security policies. However, certain practices in effect during
fiscal year 2000 still unnecessarily exposed the government and taxpayers to
theft or losses from financial crimes. For example, we found that contrary
to a recently issued IRS policy forbidding the hiring of applicants before
fingerprint checks are completed, 145 employees hired after the policy was
issued began working at IRS campuses 6 and field offices before IRS received
the results of their fingerprint checks. Twenty- two of these employees (15
percent) were subsequently found to have potentially unsuitable
backgrounds. Additionally, this policy was not applicable to lockbox 5 Per
26 U. S. C. 6611, IRS must generally pay interest on refunds not disbursed
within 45 days of the receipt or due date of the return, whichever comes
later. 6 In conjunction with its ongoing reorganization, IRS renamed its
service centers ?campuses.?
bank 7 operations during fiscal year 2000 despite the fact that lockbox
employees handle receipts and sensitive taxpayer data on a daily basis.
Lockbox banks were also not required to meet minimum courier requirements
applicable to IRS campuses. Furthermore, we continued to find receipts
vulnerable to theft due to other weaknesses in their physical security, such
as unauthorized access to receipt processing
areas.
Property and equipment. IRS made some progress in improving the
reliability of its property and equipment (P& E) inventory records through
such actions as conducting an officewide inventory of P& E and
assigning to a senior- level official responsibility for managing automated
data processing equipment. Also, IRS devoted substantial efforts to
compensating for fundamental deficiencies in its financial reporting of P& E
during fiscal year 2000. Nonetheless, long- standing weaknesses,
such as inadequate P& E inventory systems, inadequate procedures for
maintaining current and accurate P& E inventory data, and the lack of an
integrated property management system, made it difficult for IRS to report a
reliable P& E balance in its financial statements. We continued to find
errors in IRS? inventory systems, including assets acquired or disposed of
months earlier that had not been entered or updated in the inventory
systems. Additionally, IRS? lack of an integrated property management system
continued to make IRS dependent on extensive
manual procedures and contractor support to derive a P& E balance that was
only reliable for its year- end financial statements. More importantly,
these procedures did not provide IRS management with reliable, useful, and
timely P& E information throughout the year for day- to- day decision-
making, thus hindering IRS? ability to properly manage
$1. 3 billion in assets.
Appropriated funds. IRS made substantial efforts to address previously
identified budgetary control weaknesses. For example, IRS reduced the number
of employees with authority to override automated spending controls.
Additionally, IRS substantially reduced the number and dollar amount of
transactions held in suspense and aggressively
7 A lockbox refers to a commercial bank with a designated post office box to
which taxpayers are instructed to mail their payments and related tax
documents. These lockbox banks process the documents, deposit the payments,
then forward the documents and data to IRS campuses to update taxpayers?
accounts. Treasury?s Financial Management Service
contracts with 10 lockbox banks on IRS? behalf.
implemented procedures to deobligate 8 funds no longer required. Despite
these improvements, IRS? internal controls over its appropriated funds
continued to be inadequate. We found that IRS (1) did not always
establish obligations prior to incurring costs, (2) made erroneous
adjustments to obligations, and (3) failed to reduce its balance of
undelivered orders when goods and services were received. As a result,
IRS was unable to routinely account for and report on its use of
approximately $8. 3 billion in appropriated funds and did not have reliable
budgetary information it needed on an ongoing basis to effectively manage
its operations.
Financial reporting. During fiscal year 2000, IRS revised the format of
its statement of net cost and significantly expanded and enhanced the
related disclosures in its financial statements to address an issue we
raised in our prior audit regarding the commingling of certain program
costs in its financial statements. However, IRS continued to be unable to
routinely and in a timely manner generate reliable information to manage its
operations on an ongoing basis and to prepare financial statements without
extensive and costly workaround processes. This condition continued to exist
because of serious weaknesses in IRS? financial systems, internal controls,
and processes. For example, audit trails to support material balances in
IRS? general ledger are lacking or
inadequate, and material transactions are not recorded until months after
they occur. Moreover, IRS lacks a cost- accounting system and a valid
performance monitoring system for reporting cost- based performance measures
and facilitating cost- benefit analyses. Finally, IRS continues to be unable
to determine the specific amount of revenue
it actually collects for various trust funds because taxpayers are not
required to provide payment information by type of tax when payments are
made, and IRS? systems cannot currently record such information. As a
result, IRS must determine the amounts of revenue to be distributed to
various excise tax trust funds using a complex and cumbersome certifying
process that is prone to error. We are making 10 new recommendations to IRS,
in addition to reaffirming
the 61 still open as of the date of this report, to improve internal
controls 8 Deobligations are downward adjustments to 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.
over areas such as reporting on and safeguarding P& E, accounting for
appropriated funds, and collecting and reporting financial data. We are also
closing 24 recommendations from prior years, 21 of them based on actions
taken by IRS that effectively address the issues that gave rise to the
recommendations. We believe that implementation of all the recommendations
in this report, both new ones and those from prior years, is necessary for
IRS to address if it intends to overcome its problems and achieve its goals,
including providing top- quality service to the nation?s taxpayers. We
continue to recognize, however, that IRS cannot be expected to implement all
recommendations in the short term. Thus, to assist IRS and senior
management, appendix II highlights (in boldface type) the 9 recommendations
that we consider to be of highest priority. IRS generally agreed with our
findings and recommendations and provided information regarding initiatives
it has taken to address several of them. We will evaluate the effectiveness
of these initiatives during future audits.
Although IRS generally did not dispute the facts we reported, IRS disagreed
with our including in the report some specific findings related to IRS?
management of P& E, appropriated funds, and financial reporting, because IRS
believes they do not by themselves constitute material weaknesses. In
some cases, IRS questioned whether the exceptions discussed in our report
indicated pervasive problems in controls as opposed to being isolated
instances. For example, IRS noted that it believed the two examples we cited
of IRS? failure to record obligations in a timely manner did not support a
material weakness and therefore should be excluded from the report. However,
these were 2 of 10 examples of this condition we found in our fiscal year
2000 audit. These exceptions had been brought to the attention of IRS staff
and management, in writing, throughout the audit. Additionally, it is
important to note that individually this issue and several others discussed
in the report are not in and of themselves material weaknesses. However,
when considered with other issues related to P& E, appropriated funds, and
financial reporting, these issues in the aggregate constitute material
weaknesses in IRS? internal controls over its P& E and
appropriated funds management, as well as financial reporting. Accordingly,
we have made recommendations to help IRS improve its financial management in
these and other areas.
Background IRS? mission is to provide taxpayers with top- quality service by
helping them to understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness. In fiscal year 2000, IRS
collected over $2 trillion in tax revenue, issued about $194 billion in tax
refunds, and had net taxes receivable at year- end of $22 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 collected $435
billion in fiscal year 2000. IRS has 10 campuses nationwide that have
collection, refund,
and enforcement responsibilities. IRS also has other field offices to assist
taxpayers and perform collection and enforcement activities. Ten commercial
lockbox banks also receive and process taxpayer receipts, then forward the
data to IRS for input and processing. In response to congressional concerns
as embodied in the Internal Revenue Service Restructuring and Reform Act of
1998, IRS instituted a reorganization that has significantly affected the
roles and responsibilities of its offices.
Fiscal year 2000 marked the first time IRS was able to produce combined
financial statements covering its tax custodial and administrative
activities that were fairly stated in all material aspects. This achievement
required extraordinary human effort and extensive reliance on compensating
processes to work around IRS? serious system and control weaknesses to
derive reliable year- end balances for its financial statements. However,
this approach does not fix its fundamental weaknesses nor produce the
reliable, useful, and timely financial and performance information IRS needs
for ongoing decision- making consistent with the CFO Act of 1990.
Objectives, Scope, and The objectives of this report are to (1) provide a
status of previously
Methodology reported internal control and compliance issues and related
recommendations and (2) present new issues identified during our audit of
IRS? fiscal year 2000 financial statements along with new recommendations.
Appendix I provides further details on our scope and methodology. We
performed our work from April 2000 through February 2001 in accordance with
U. S. generally accepted government auditing standards.
Weaknesses Hinder During fiscal year 2000, IRS continued to have serious
internal control
deficiencies that affected its reporting and management of unpaid Management
of Unpaid assessments. 9 IRS? lack of an appropriate general ledger system
prevented Assessments
it from properly and routinely classifying unpaid assessments without
substantial use of specialized computer programs and manual intervention.
Additionally, significant delays and errors in recording taxpayer payments
and other information adversely affected the accuracy of taxpayer accounts
and thus IRS? ability to ensure taxpayers were not unduly harmed
or burdened. Also, the lack of valid and timely cost- benefit data hindered
IRS? ability to make or justify resource allocation decisions that directly
affect the management of unpaid assessments and, thus, the collection of
federal revenue. Collectively, these issues are indications of serious
internal control deficiencies and constitute a material weakness 10 in
unpaid assessments. Additionally, the continued existence of these issues
could result in lost revenue to the government, erode taxpayer confidence in
the equity of the tax system, and adversely affect future compliance. Table
1 summarizes the issues we identified related to unpaid assessments, their
effects, and IRS? actions to address these issues. These issues were also
identified in prior years? audits, for which recommendations have
already been made. 11 Consequently, we are not making any new 9 As defined
by federal accounting standards, 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 in which neither the taxpayer nor
the court has affirmed that the amounts are owed, and (3) write- offs, which
represent unpaid assessments for which IRS expects no collection due to
factors such as the taxpayer's death, bankruptcy, or insolvency.
10 A material weakness is a condition that precludes the entity?s internal
control from providing reasonable assurance that material misstatements in
the financial statements would be prevented or detected on a timely basis.
Reportable conditions are matters coming to the auditor?s attention that, in
the auditor?s judgment, should be communicated because they represent
significant deficiencies in the design or operation of internal controls
that could adversely affect the entity?s ability to ensure that (1)
transactions are properly recorded, processed, and summarized to permit the
preparation of financial statements in conformity with U. S. generally
accepted accounting principles and assets are safeguarded against loss from
unauthorized acquisition, use, and disposition and (2) transactions are
executed in accordance with laws and regulations governing the use of budget
authority and with other laws and regulations that could have a direct and
material effect on the financial
statements and any other laws, regulations, and governmentwide policies
identified by Office of Management and Budget audit guidance. 11 See
Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/
AIMD- 99- 193, August 4, 1999) and GAO- 01- 42, November 17, 2000.
recommendations related to unpaid assessments. Appendix II lists these
previous recommendations and IRS? actions to address them.
Table 1: Internal Control and Compliance Issues Related to Unpaid
Assessments Internal control/ compliance issues, GAO recommendations, and
effects IRS actions to address issues
Issues previously reported
Issue and GAO recommendation: IRS lacks a subsidiary ledger to IRS action:
IRS plans to implement a new subsidiary ledger accumulate and track the
status of its unpaid assessments. To system for unpaid assessments as part
of its systems compensate, IRS must use ad hoc programs to classify the
modernization effort. The new subsidiary ledger is targeted for categories
of its unpaid assessments for the annual financial completion in 2004.
statements. For GAO recommendation related to this issue, see appendix II,
recommendation 8.
GAO response: Weaknesses will continue to exist in this area until an
effective subsidiary ledger is established.
Effect: IRS can only report reliable balances for taxes receivable and other
unpaid assessments at a single point in time, several months after the end
of the fiscal year, and only through a labor- intensive process that results
in adjustments totaling tens of billions of dollars.
Issue and GAO recommendations: Key IRS systems are not linked IRS action:
IRS is developing a system to automate the trust fund to ensure that all
parties with related tax assessments, i. e., ?trust recovery penalty program
to ensure that the related accounts are fund recovery penalties,? receive
proper credit for payments against
properly linked. This system is targeted for completion in 2002. those
assessments. For GAO recommendations related to this issue, see appendix II,
recommendations 6 and 25.
GAO response: Based on our fiscal year 2000 audit results, IRS? efforts to
manually fix these problems were not fully effective. Effect: IRS may
unknowingly pursue collection actions against Weaknesses will continue in
this area until an effective system for individuals or businesses for
amounts that have already been paid.
linking related taxpayer accounts, including a mechanism to capture and
update taxpayer accounts to credit them for payments received on related
assessment accounts, is established.
Issue and GAO recommendation: IRS did not always enter or
IRS action: IRS plans to issue a memorandum to its field offices reverse the
freeze or status codes on taxpayer accounts once it had emphasizing the
timely input of freeze codes and is revising its determined that the
taxpayer might be liable for unpaid taxes. For Internal Revenue Manual (IRM)
to provide for more timely posting GAO recommendation related to this issue,
see appendix II, of trust fund recovery penalty assessments. recommendation
44.
GAO response: We will follow up on the effectiveness of IRS? Effect: IRS
issued refunds to taxpayers with outstanding tax actions during our fiscal
year 2001 financial statement audit. liabilities rather than applying the
refunds to the amounts owed.
(Continued From Previous Page)
Internal control/ compliance issues, GAO recommendations, and effects IRS
actions to address issues Issue and GAO recommendations: IRS does not have
reliable IRS action: IRS plans to develop a cost accounting module as cost-
benefit data related to collection efforts that would allow it to
part of its effort to develop and implement an integrated financial make
informed resource allocation decisions. For GAO management system. This is
scheduled for completion in October recommendations related to this issue,
see appendix II, 2003. IRS also proposes to address this issue as part of a
new recommendations 47 and 48.
strategic process designed to identify and allocate finite resources to
processes that would best improve the effectiveness of the Effect: Billions
of dollars in outstanding amounts could go agency and provide better service
to the tax paying public. uncollected and adversely affect government
revenues and future compliance.
GAO response: IRS will continue to be hindered in its ability to make
informed decisions involving the allocation of limited resources against
competing priorities, or to justify such decisions, until it can develop
reliable cost- benefit data on its collection activities.
Issue and GAO recommendation: IRS did not always process
IRS action: IRS plans to improve the timeliness in this area by pending
offers- in- compromise in a timely manner. For GAO centralizing the
processing of smaller- dollar, less complex offers. recommendation related
to this issue, see appendix II, recommendation 46.
GAO response: We will follow up on this issue during our fiscal year 2001
financial statement audit.
Effect: Interest and penalties continue to accumulate while the offerin-
compromise is pending. At the same time, the taxpayers? economic situation
may worsen. These factors may adversely affect IRS? ability to collect on
taxes due.
Issue and GAO recommendation: IRS did not always process
IRS action: IRS reported that it has developed automated abatements in a
timely manner. For GAO recommendation related to
approaches to further study the causes for delays in processing this issue,
see appendix II, recommendation 45.
abatements. Effect: To the extent the abatements result in the issuance of
GAO response: We will continue to follow up on this issue during refunds,
taxpayers do not have timely access to funds to which they our fiscal year
2001 financial statement audit. are entitled.
Issue and GAO recommendation: IRS did not always promptly IRS action: IRS
reported it enhanced its lien system for more release tax liens after
taxpayers had fully satisfied the outstanding
timely identification and release of liens, and planned to make tax
liabilities that gave rise to the imposed liens. For GAO other changes to
improve the release of liens. recommendation related to this issue, see
appendix II, recommendation 49.
GAO response: We continued to find instances in fiscal year 2000 in which
IRS did not release federal tax liens in a timely manner
Effect: Failure to promptly release tax liens could cause undue after
taxpayers had fully satisfied the outstanding tax liabilities. burden and
hardship to taxpayers who are attempting to sell property or apply for
commercial credit. In addition, IRS is not in compliance with Section 6325
of the Internal Revenue Code. Issue and GAO recommendation: IRS did not
always ensure that IRS action: IRS updated its IRM to reiterate that the
terms of installment agreement payments and terms would be sufficient to
installment agreements must fully satisfy the tax liability and
satisfy the taxpayers? outstanding tax liability. For GAO reported that it
is requiring that IRS campuses monitor recommendation related to this issue,
see appendix II,
compliance. recommendation 26.
GAO response: We continued to find cases where the terms of Effect: IRS is
not always collecting on the full tax liability as required the installment
agreements taxpayers entered into with IRS during by Section 6159 of the
Internal Revenue Code. fiscal year 2000 did not fully satisfy the taxpayers?
liabilities.
Reporting Reliable Balances In an integrated financial management system,
the general ledger is supported by subsidiary ledgers, which contain
detailed records of transactions and automatically update the appropriate
general ledger account balances as transactions occur. Throughout the year,
detailed records in the subsidiary ledger would then support key account
balances in the general ledger. However, throughout fiscal year 2000, IRS
continued to lack an effective subsidiary ledger system that could
accumulate and track the status of unpaid assessments on an ongoing basis.
This deficiency continued to necessitate the use of an extensive workaround
process in order for IRS to derive the balances in the three categories of
unpaid assessments as defined by federal accounting standards- taxes
receivable, compliance assessments, and write- offs- for year- end financial
reporting.
This workaround process is costly, labor- intensive, and time- consuming. It
involves the use of a specialized computer program to extract all unpaid
assessment data from IRS? master files- its only detailed database of
taxpayer information- and classify them for financial reporting. However,
the master files do not contain all the details necessary to properly and
fully classify unpaid assessment accounts. Therefore, the workaround process
also includes the need to select statistical samples of IRS? unpaid
assessments and manually review the sampled accounts to (1) determine
their proper classification and (2) estimate collectibility for those
assessments properly classified as taxes receivable. As in past years, this
statistical sampling has resulted in the need to materially adjust the
amounts generated by the computer extraction program- by tens of billions of
dollars- to produce reliable amounts for taxes receivable and other unpaid
assessments. In fiscal year 2000, of a total of 474 unpaid assessment sample
items selected for detail testing that IRS? computer extraction program
originally classified as taxes receivable, 158 items were misclassified and
were actually write- offs or partial write- offs, 12 compliance assessments,
or were deemed not to be unpaid assessments.
Based on our work, we estimate that 12.6 percent of unpaid assessments 12
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.
originally classified by IRS? computer extraction program as taxes
receivable were misclassified. 13
Figure 1 below illustrates the problem by showing the level of adjustments
needed to the amounts generated by the computer extraction program in fiscal
year 2000 to arrive at reliable amounts for each category of unpaid
assessments.
Figure 1: Comparison of Unpaid Assessments Before and After Adjustments as
of September 30, 2000
140 Billions of Dollars
129 120
113 104 100
81 80
60 46
40 30
20 0
Taxes receivable Compliance assessments Write- offs
Before adjustments After adjustments
Note: The adjusted balance of taxes receivable represents the gross taxes
receivable (i. e., does not include the allowance for doubtful accounts).
Also, the total unadjusted unpaid assessment balance of $263 billion was
adjusted to $240 billion primarily to compensate for errors and instances in
which multiple taxpayers are liable for paying the same taxes. The adjusted
balances of taxes receivable, 13 We are 95 percent confident that the
confidence interval around this estimate ranges from 7.4 percent to 18
percent.
compliance assessments, and write- offs are statistical estimates at a 95-
percent confidence level (for taxes receivable) and a 90- percent confidence
level (for compliance assessments and write- offs). The confidence intervals
are included in these estimates.
Source: IRS? master files and fiscal year 2000 financial statements.
Although the workaround processes allowed IRS to report reliable year- end
information for unpaid assessments in its financial statements, these
balances are reliable only for a single point in time and are not available
until several months after the end of the fiscal year. Additionally, the
magnitude of the adjustments needed demonstrate that the data provided
by IRS? automated system for unpaid assessments but not supplemented by
these workaround procedures and adjustments are unreliable for financial
reporting. They cannot be used to track the overall status of IRS? unpaid
assessments and cannot be relied upon by IRS management and Congress to make
policy and budgetary decisions. Maintaining Accurate Maintaining accurate
taxpayer accounts is important for properly Taxpayer Accounts
managing activity and ensuring the fair and equitable treatment of
taxpayers, and it is necessary for reliable financial reporting. However,
significant delays and errors in updating taxpayers? accounts further
exacerbated problems related to the reliability of unpaid assessment
balances in general and the reliability and management of individual
taxpayer accounts in particular throughout the fiscal year. Errors and
delays in recording activity also continued to lead to instances in which
tax liens were not promptly released or not released at all during the
period covered by our audit. These conditions continued to result in
instances of taxpayer burden and lost opportunities to collect outstanding
taxes owed.
As in previous years, we found delays and errors in recording payments for
unpaid payroll taxes where separate accounts are established and assessments
recorded for a related tax liability. 14 IRS' systems cannot automatically
link to each other the multiple assessments made for the one
tax liability. Consequently, IRS? systems are unable to automatically reduce
the balance in the related account (or accounts) if the business or an
officer pays some or all of the outstanding taxes. To compensate, IRS
established procedures to manually link the related accounts. However, we
still found many instances in which payments were not posted to accounts 14
While IRS can make assessments against more than one officer for payroll
taxes collected from its employees but not remitted to the government, IRS
should collect the unpaid payroll tax only once and should credit all
related accounts for any payments received.
that had been linked. The statistical sample of 474 unpaid tax assessment
cases reviewed included 68 unpaid payroll cases involving multiple
assessments. Of these 68, we found that
29 cases contained payments that IRS either had not recorded, or had
failed to record in a timely manner, to all related accounts. Some of these
amounts were paid by taxpayers in the late 1980s. Based on the
results of our work, we estimate that 42 percent of the population of unpaid
payroll tax accounts involving multiple assessments as of September 30,
2000, had this characteristic; 15 and
of these 29 cases, 28 (96 percent) had a manual code cross- referencing
them to related accounts, yet the payments were still not recorded in all of
the related accounts.
We also found other delays and errors. For example, we found that IRS?
failure to enter or reverse status or freeze codes 16 into the taxpayers?
accounts resulted in improper refunds 17 being issued- in two cases, more
than $4, 000 each- to taxpayers who had other outstanding liabilities. In
another case, IRS recorded an estate payment of $68 million to the wrong
taxpayer account. Though the taxpayer?s estate was owed a refund of almost
$7 million, this error was not corrected until almost 2 years later, and
thus the refund was not issued for nearly 2 years after it was owed.
Delays and errors in recording activity in taxpayer accounts complicate IRS?
efforts to derive a reliable balance for taxes receivable and other unpaid
assessments in its financial statements. The accuracy of taxpayer accounts
affects the determination of both the appropriate classification of these
accounts under federal accounting standards and the basis for
estimating collectibility for those accounts determined to represent taxes
receivable. For example, to determine whether an unpaid payroll tax
liability related to a defunct business should be classified as a write-
off, IRS must first determine that no outstanding penalty assessments
against
15 We are 95 percent confident that the confidence interval around this
estimate ranges from 19. 6 percent to 64. 5 percent. 16 Once IRS has
determined that a taxpayer may be liable for unpaid taxes, a freeze code is
to be placed on all accounts belonging to the taxpayer to prevent any
refunds from being issued before all taxes are paid. 17 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.
officers of the business exist or have any future collection potential. If
the accounts representing penalty assessments against officers continue to
show outstanding balances solely because payments have not been
appropriately recorded in these accounts, IRS could erroneously conclude
that the unpaid tax owed by the business still has some collection potential
from the officers and thus erroneously classify the account as a tax
receivable. Delays in updating taxpayer accounts and taking appropriate
actions also led to instances in which IRS did not release federal tax liens
applied against the property of taxpayers within 30 days after the taxpayers
had satisfactorily discharged their tax liabilities as required by Section
6325 of the Internal Revenue Code. In fiscal year 2000, we found that IRS
continued to experience significant delays in releasing some tax liens.
Specifically, in 3 of the 38 tax lien cases we reviewed in fiscal year 2000,
we found that it took IRS more than 100 days, and in one case 583 days, to
release the liens against the taxpayers? properties after the taxpayers had
satisfied their outstanding tax liabilities. Based on our work, we estimate
that during
fiscal year 2000, for 11 percent of resolved unpaid assessment cases that
had tax liens, IRS did not release the liens within the 30- day requirement.
18 The failure to promptly release liens could cause undue hardship and
burden to taxpayers who may want to sell property or apply for commercial
credit.
Pursuing Collections of As with any large agency, IRS is confronted by the
ongoing management
Unpaid Taxes challenge of allocating its limited resources among competing
priorities.
However, IRS does not have the management data necessary to prepare reliable
cost- benefit analyses 19 to make more informed decisions about how best to
allocate its resources. Consequently, IRS is hindered in its ability to
determine whether it is devoting the appropriate level of 18 We are 95
percent confident that the confidence interval around this estimate ranges
from 3 percent to 26 percent.
19 A cost- benefit analysis would consider the costs, both direct and
indirect, in increasing resources to pursue collections of outstanding taxes
along with the associated expected benefits. These benefits could include
not only increased collections of outstanding taxes, but also benefits to
taxpayers through earlier action by IRS that might prevent a build- up of
the outstanding tax liabilities owed by the taxpayer, and improved
compliance by taxpayers with the nation?s tax laws.
resources to identifying and pursuing collection of unpaid taxes relative to
the costs and potential benefits involved. During fiscal year 2000, we
continued to find that IRS was closing delinquent tax cases without working
them- that is, without making collection contact with taxpayers through
either telephone calls or field
visits. This type of case closure is referred to as ?shelving.? The process
of shelving cases began in mid 1999 in response to an increasing inventory
workload and IRS? assessment that resource constraints and decisions
regarding where to deploy these resources would not permit it to actively
pursue the cases. According to IRS records, as of September 30, 2000, 1. 8
million cases totaling $8. 6 billion- compared to 648,000 cases totaling $2.
4 billion at September 30, 1999- were shelved because IRS judged that
resource constraints would not allow it to actively pursue collection on
these cases. 20 We also continued to find unpaid assessment cases that had
collection potential but were not being actively worked by IRS. We found at
least six cases in our testing of unpaid assessments constituting taxes
receivable for which information in the case files indicated some collection
potential, but for which IRS had taken no collection action. In two of these
cases, IRS was not actively pursuing collection of taxpayers who owed $23,
000 and
$88,000, respectively, in outstanding taxes and who each had annual incomes
in subsequent years of at least $110, 000.
How IRS derives its balance for taxes receivable in its financial statements
is affected by actions taken by IRS to collect outstanding taxes. In
estimating collectibility for those accounts in its statistical samples that
are appropriately classified as taxes receivable, IRS reviews case file
information and considers whether the agency is pursuing collection through
such means as levies, seizures, offers- in- compromise, or installment
agreements. To the extent these files contain no evidence of such efforts,
IRS must assess collectibility for the account at zero. This ultimately
affects the balance of both net taxes receivable and the related allowance
for doubtful accounts reported in its financial statements.
20 The number of cases and the amount of unpaid assessments, including
penalties, and interest, has continued to grow since the end of fiscal year
2000. As of March 31, 2001, about 2. 5 million cases totaling almost $12
billion in outstanding taxes, penalties, and interest had been shelved. See
IRS Modernization: Continued Improvement in Management
Capability Needed to Support Long- Term Transformation (GAO- 01- 700T, May
8, 2001).
IRS? failure to pursue delinquent taxpayers with at least some ability to
pay is part of a broader and continued decline in IRS? enforcement
activities and disposition of delinquent tax cases. For example, according
to IRS
records, between fiscal years 1998 and 2000, enforcement activities such as
levy notifications experienced a substantial decline, from more than 9
percent to less than 1 percent of these unpaid assessment accounts. During
the same period, the dispositions of delinquent accounts and
investigations 21 as a percentage of total outstanding cases decreased from
6.1 to 3.5 percent, a reduction of more than 43 percent. According to IRS
records, collections on delinquent taxpayer accounts also decreased by 28
percent during this period, from $5. 3 billion in fiscal year 1998 to $3. 8
billion in fiscal year 2000.
While there is a point at which it ceases to be cost effective to pursue
collection, we believe that these decisions should be based on reliable
costbenefit data. Without valid cost- benefit analyses, IRS is hindered in
its ability to make sound comparisons among competing priorities and to most
effectively allocate resources among these priorities. One element that is
critical to such a cost- benefit analysis is a measure of taxpayers?
voluntary
compliance with the nation?s tax laws. However, as we have previously
reported, 22 IRS lacks such a measure. Consequently, it does not know the
impact of the recent declines in enforcement activities and delinquency
collections on taxpayer compliance. Congress and tax practitioners have
expressed concerns that declines in pursuing potential unpaid taxes and in
enforcing and collecting on delinquent accounts may increase incentives
for taxpayers either to not report or to underreport their tax obligations.
The lack of reliable cost- benefit information with which to make informed
decisions could result in billions of dollars in outstanding amounts going
uncollected and could lead to further erosion in taxpayers? confidence in
the equity of the tax system and adversely affect future compliance. 21
Dispositions of delinquent accounts would include, but not be limited to,
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. 22 See GAO- 01- 263, January 2001; Major Management Challenges
and Program Risks: Department of the Treasury (GAO- 01- 254, January 2001);
Internal Revenue Service: Progress Continues but Serious Management
Challenges Remain (GAO- 01- 562T, April 2, 2001); and IRS Modernization:
Continued Improvement in Management Capability Needed to Support Long- Term
Transformation (GAO- 01- 700T, May 8, 2001).
Weaknesses in During fiscal year 2000, IRS disbursed over 101 million tax
refunds totaling
Controls Over Refunds about $194 billion. However, because of long- standing
weaknesses in IRS? controls over refund disbursements and other management
challenges, the and Earned Income
federal government continued to be exposed to material losses through the
Tax Credits
issuance of improper refunds, particularly with respect to EITC claims. Time
constraints, 23 high volume, reliance on information supplied by taxpayers,
and the timing of filing of information returns by third parties create
inherent limitations in IRS? options for addressing the problem of improper
refunds. Consequently, in fiscal year 2000 IRS continued to
(1) issue improper refunds associated with invalid EITC claims and (2) rely
extensively on post- refund (detective) controls that were not fully
effective in identifying and limiting the losses associated with improper
refunds. This, in turn, continued to expose the government to financial
losses, possibly in the billions of dollars, through the disbursement of
improper refunds.
Table 2 summarizes issues we found relating to refund processing controls,
their effects, and IRS? actions to address these issues. These issues were
also identified in prior years? audits, for which recommendations have
already been made. Consequently, we are not making any new recommendations
related to refund processing controls. Appendix II lists the previous
recommendations and IRS? actions to address them.
23 Per 26 U. S. C. 6611, IRS must generally pay interest on refunds not
disbursed within 45 days of the receipt or due date of the return, whichever
comes later.
Table 2: Internal Control Issues Related to Refunds and Earned Income Tax
Credit Claims
Internal control issues, GAO recommendations, and effects IRS actions to
address issues
Issues previously reported
Issue and GAO recommendations: IRS does not have reliable IRS action: IRS
plans to develop a cost accounting module as data to perform the necessary
cost- benefit analyses that would allow part of its effort to develop and
implement an integrated financial it to identify the resources needed to
effectively pursue examination
management system. IRS also proposes to address this issue as and any
resultant collection efforts for the underreporter matching part of a new
strategic process designed to identify and allocate program, previously
disbursed improper refunds, and potentially finite resources to processes
that would best improve the invalid EITC claims. For GAO recommendations
related to this issue, effectiveness of the agency and provide better
service to the taxpaying see appendix II, recommendations 53 and 54.
public.
Effect: IRS cannot ensure that it is prioritizing and allocating its GAO
response: IRS will continue to be hindered in its ability to resources
effectively. The potentially lost revenue that might be make informed
decisions involving the allocation of limited recovered by more active
pursuit of these efforts may far exceed the resources against competing
priorities, or to justify such decisions, cost IRS currently spends on
present enforcement activities.
until it can develop reliable cost- benefit data on the underreporter
Furthermore, IRS? decision to forgo examination and collection matching
program, previously disbursed improper refunds, and efforts on some
underreported tax liabilities, potentially invalid EITC the screening and
examination of potentially invalid EITC claims. claims, and improper refunds
could erode taxpayer confidence in the equity of the tax system and reduce
compliance with tax laws.
Issue and GAO recommendation: IRS did not consistently request IRS action:
IRS reported that it recently implemented procedures documentation
demonstrating eligibility from taxpayers previously to automatically freeze
EITC- related refunds when there is an denied EITC for improper claims as
provided in the Taxpayer Relief open examination of the taxpayer EITC
eligibility until such time as Act of 1997. For GAO recommendation related
to this issue, see the exam results conclude that the taxpayer was eligible
to the
appendix II, recommendation 52. claim. Effect: This could result in the
issuance of improper
GAO response: We will follow up on this issue as part of our fiscal refunds
and in financial losses to the government. year 2001 audit.
Issue and GAO recommendation: IRS does not compare tax
IRS action: IRS? Tax Administration Vision and Strategy (TAVS) returns with
W- 2 and other third- party data at the time of filing and
proposed including in IRS? systems modernization the ability to instead
relies on comparisons several months later to detect compare electronically
submitted W- 2 and other third- party differences. For GAO recommendation
related to this issue, see information to electronically filed tax returns,
thus accelerating the appendix II, recommendation 12.
matching process to help prevent the disbursement of improper refunds. If
the proposal is approved, IRS estimates that it will be
Effect: The federal government is exposed to financial losses implemented by
late 2003. through the disbursement of improper refunds and the incurring of
additional expenses to fund subsequent collection efforts. GAO response: The
IRS modernization blueprint architecture
discusses electronic submission of tax returns and third- party data but is
unclear about the comparison between the two sets of data. Additionally, IRS
will continue to have difficulty making such
comparisons prior to the issuance of refunds due to the constraints it faces
in issuing refunds in a timely manner and the later time frames allowed for
the filing of information returns.
(Continued From Previous Page)
Internal control issues, GAO recommendations, and effects IRS actions to
address issues
Issue and GAO recommendation: IRS employees who initiate IRS action: In
October 2000, IRS revised its procedures to require manual refunds do not
always monitor taxpayer accounts as required the documentation of monitoring
actions and the related to prevent the issuance of duplicate refunds.
Additionally, the supervisory review of such actions.
monitoring and related supervisory reviews are not always documented. For
GAO recommendation related to this issue, see
GAO response: We confirmed that IRS revised its written appendix II,
recommendation 50. procedures. We will follow up on the implementation of
these requirements during our fiscal year 2001 audit.
Effect: Duplicate refunds may be disbursed and financial losses incurred for
uncollectible duplicate refunds. Issue and GAO recommendation: IRS employees
do not always IRS action: IRS reported that it has refined another program
review the Questionable Refund Reports (QRR) that list potentially
instead of the QRR to aid IRS employees in monitoring and duplicate refunds.
At the IRS campuses we visited, employees did
preventing the issuance of duplicate refunds. not review the QRR because
they thought the computer program that generated the QRR was flawed and
ineffective, the computer GAO response: We will follow up on the usefulness
of this new
program was not generating the report, or responsible employees tool during
our fiscal year 2001 audit. never received the reports. For GAO
recommendation related to this issue, see appendix II, recommendation 51.
Effect: Duplicate refunds may be disbursed and financial losses incurred for
uncollectible duplicate refunds.
Preventive Controls The options available to IRS in its efforts to ensure
that only valid refunds are disbursed are currently limited. For example,
while it processes hundreds of millions of tax returns each filing season,
IRS must also issue refunds within certain time constraints or be subject to
interest charges. At the same time, IRS must contend with the fact that
third- party information, such as form 1099s, 24 are not required to be
filed prior to the start of the tax
filing season. 25 Comparison of such information with tax return data is
problematic because IRS does not have time to prepare the third- party data
for matching prior to the receipt of individual tax returns. Nonetheless,
IRS does have some preventive controls which, if effectively implemented,
could help to reduce the level of risk associated with issuing improper
refunds related to EITC claims. For example, IRS? Examination Branch is
responsible for performing examinations on tax returns with potentially 24
IRS 1099 forms are used by third parties, such as financial institutions, to
report taxpayers? interest income, dividend distributions, and other
miscellaneous income.
25 The tax- filing season occurs from January 1 through April 15 of each
year.
invalid EITC refund claims 26 to determine the validity of the claim.
However, it has not performed a cost- benefit analysis to determine whether
it is focusing the appropriate level of resources on this effort. Without
this,
IRS is unable to determine the extent to which refunds associated with
invalid EITC claims could be prevented or minimized had IRS devoted more
resources to its examination efforts. The Electronic Fraud Detection System
(EFDS) 27 is an automated screening tool IRS? Criminal Investigation
Division (CI) uses to identify EITC refund claims with the highest potential
to be fraudulent or invalid. CI
uses EFDS to score each EITC claim, using a set of screening criteria. CI
retains those cases that indicate a high potential for fraud for follow- up
and forwards all other cases that score above a certain level to the
Examination Branch. For each of its 10 campuses, the Examination Branch
determines a set number of cases that it perceives as the workload each
campus?s resources can handle. It then refers cases to each campus for
examination up to that campus?s established workload amount.
During fiscal year 2000, the Examination Branch reduced the number of cases
referred by CI for examination by choosing a higher minimum score level for
each case and reviewing other factors such as how recently the taxpayer was
last examined. Additionally, it discontinued referring cases associated with
a particular campus once it reached the determined
workload level it established for that campus. Consequently, the number of
EITC refund claims subject to examination by IRS was predetermined by the
available resources rather than based on an analysis of what the optimum
score level should be for selecting cases to examine based on the expected
yield at each level and the associated resource cost.
26 Because it is a tax credit, an EITC claim always results in a reduction
of the taxpayer?s calculated tax liability. However, depending on the
taxpayer?s amount of taxes withheld, it may or may not result in a refund
for a particular tax year. 27 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.
The government could be losing billions of dollars through improper refunds
associated with invalid EITC claims. For example, in a study of tax year
1997 returns, IRS estimated that of approximately $30. 3 billion EITC claims
received, about $9. 3 billion (30. 6 percent) were invalid claims. IRS did
not know the exact amount of the related improper refunds, but based on IRS?
fiscal year 1998 refund rate of about 78 percent of EITC claims, we
estimate the amount of improper EITC refunds to be about $7. 3 billion. 28
In the same study, IRS estimated that it would not be able to recover 84
percent of the total invalid EITC claims. Applying this rate to the refunds
portion only, we estimate that $6.1 billion of the improper refunds could be
unrecoverable. With such a potential for invalid refunds, IRS must better
ensure that it is devoting the appropriate level of resources to examining
these claims. Detective Controls IRS? primary detective controls are its
automated matching programs to match tax returns against third- party data.
Identified discrepancies may
indicate underreported tax liabilities and possible improper refunds, to the
extent that the underreporting resulted in refunds being disbursed. IRS has
separate automated matching programs for individual and employer tax returns
which are performed several months after the returns are filed. However, IRS
did not perform follow- up examinations on millions of identified tax
returns estimated to have billions of dollars of underreported
tax liabilities. As a result, to the extent these taxpayers had received
improper refunds by underreporting their taxes, IRS did not pursue recovery
of these refunds. Table 3 presents IRS? workload for the matching program
for individual returns referred to as the Automated Underreporter
Program (AUR). 28 When computing our estimate of tax year 1997 invalid EITC
refunds, we used the fiscal year 1998 refund rate because IRS processed the
majority of tax year 1997 returns during fiscal year 1998.
Table 3: AUR Cases With Discrepancies, Cases Investigated, Cases Not
Investigated and Their Estimated Underreported Taxes
(Counts and dollars in millions)
Tax year Individual returns Returns not with discrepancies Returns
investigated investigated Count Amount Count Amount Count Amount
1996 11.9 $15, 490 3.1 $5, 255 8.8 $10, 235 1997 13.4 18,556 3. 0 7,831 10.4
10, 725 1998 14.1 15,434 2. 5 6,479 11.6 8, 955
Total 39.4 $49, 480 8.6 $19, 565 30. 8 $29, 915
Source: Unaudited IRS data using IRS estimates.
As shown in this table, in tax years 1996 through 1998, IRS did not
investigate over 30 million AUR cases with about $30 billion in estimated
underreported taxes which may have also resulted in the issuance of improper
refunds. Because IRS did not investigate these cases, the exact amount of
underreported taxes due and any resulting improper refunds
disbursed are unknown. Allocating Resources for
IRS? decision to forgo follow- up examinations and collection efforts on
Refund Controls
potentially underreported tax liabilities, improper refunds, and invalid
EITC claims was based on perceived resource constraints. However, as
discussed later in this report, IRS? financial management systems do not
currently provide reliable information for cost- benefit analyses.
Consequently, IRS management cannot determine whether the cost associated
with the level of resources it expends on various refund control projects is
commensurate with the benefits that could be realized from such efforts.
Additionally, IRS cannot determine whether it is effectively directing its
resources to the areas with the most potential benefit. As a result,
billions of dollars of improper refunds could be disbursed as a result of
invalid EITC claims and underreported tax liabilities and could remain
uncollected. This in turn could erode taxpayer confidence in the equity of
the tax system and reduce compliance with the tax laws.
Weaknesses Over IRS? controls over cash, checks, and related hard- copy
taxpayer data it Safeguarding of
receives from taxpayers continue to be inadequate. While IRS has made some
improvements, further action and policy changes are needed to Manual Tax
Receipts further mitigate risks. Without adequate controls, IRS cannot
ensure proper and Taxpayer Data
safeguarding of assets and taxpayer data. Table 4 summarizes the issues we
identified in this area, their effects, and IRS? actions to address these
Continue
issues. Most of these issues were also identified in prior years? audits, 29
for which recommendations have already been made. Appendix II lists these
previous recommendations and IRS? actions to address them.
Table 4: Internal Control Issues Related to Manual Receipts and Taxpayer
Data
Internal control issues, GAO recommendations, and effects IRS actions to
address issues
Issues previously reported
Issue and GAO recommendations: New hires were allowed to IRS action: In
1999, IRS issued policy memos that required process taxpayer receipts and
taxpayer data before IRS received fingerprinting applicants at the earliest
possible time in the job and evaluated the results of their fingerprint
checks. This occurred in application process. In April 2000, IRS issued
another policy part because, in many instances, newly hired employees were
not requiring managers to receive and evaluate the results of fingerprinted
until or after their entrance on duty dates. For GAO fingerprint checks
before an IRS employee could begin working. recommendations related to this
issue, see appendix II, recommendations 15, 16, and 17.
GAO response: Our analysis of IRS? FY 2000 hiring data revealed that IRS
hiring offices did not always comply with these policies.
Effect: IRS may unknowingly place individuals with unsuitable IRS continued
to allow new hires to work prior to obtaining and backgrounds in positions
that could compromise the security of evaluating the results of their
fingerprint checks, even after the cash, checks, and sensitive taxpayer
data.
issuance of the April 2000 policy. In addition, many employees were not
fingerprinted until or after their entrance on duty dates.
29 See GAO- 01- 42, November 17, 2000.
(Continued From Previous Page)
Internal control issues, GAO recommendations, and effects IRS actions to
address issues
Issue and GAO recommendation: Hiring policies and courier
IRS actions: IRS reported that security and hiring standards for security
standards for lockbox banks were less stringent than those lockbox banks
consistent with those required of IRS campuses required for IRS locations.
For example, lockbox banks are not
were approved and would be included in the fiscal year 2002 prohibited from
hiring permanent employees prior to the bank?s
lockbox contracts. These include background investigation and receipt and
evaluation of the results of the applicants? fingerprint
courier standards that are consistent with those required of IRS checks, and
are not required to conduct fingerprint checks on operations. temporary
employees. Additionally, while IRS courier standards required that two
bonded couriers be present for each IRS deposit
GAO response: We will follow up on these actions as part of our pick- up,
there was no similar requirement for lockbox courier audit of IRS? fiscal
year 2001 financial statements. services. For GAO recommendation related to
this issue, see appendix II, recommendation 55.
Effect: With less stringent standards for hiring practices and courier
services, IRS has less assurance that lockbox staff processing taxpayer
receipts and data are appropriate for the job and that
lockbox courier services consistently provide adequate security for deposits
in transit. Both of these conditions increase the government?s and the
taxpayers? exposure to loss or theft.
Issue and GAO recommendations: Receipts particularly IRS action: In May
2000, IRS changed its policy from requiring vulnerable to theft were not
adequately safeguarded and accounted staff to void returned refund checks
upon extraction to placing for in accordance with IRS policies and
procedures. For example, them in bins for periodic review by more
experienced employees to returned refund checks were not consistently
stamped
determine if the checks should be processed or voided. This ?nonnegotiable?
when extracted. ?Discovered remittances? a were not change in policy was due
to less experienced staff voiding other always stored in locked containers
and recorded on control logs government checks which, unlike returned refund
checks, could upon discovery. Checks written out to ?IRS? were not always be
processed and deposited. In the meantime, IRS is developing
overstamped with the words ?Internal Revenue Service? or ?United new
procedures to place restrictive endorsements on returned States Treasury?
upon receipt. For GAO recommendations related to refund checks as soon as
they are they are extracted. Additionally, this issue, see appendix II,
recommendations 21, 22, and 27.
in February 1999, IRS issued instructions emphasizing the safeguarding of
and accounting for ?discovered remittances.? Effect: These weaknesses expose
the government and taxpayers to theft or loss. Moreover, since some checks
contain taxpayer GAO response: During our review of IRS campuses and field
information such as social security numbers, taxpayers are exposed offices
as part of our fiscal year 2000 audit, we continued to find to losses from
financial crimes committed by individuals who IRS employees failing to
comply with IRS policies to adequately inappropriately gain access to
confidential information entrusted to
safeguard and account for taxpayer receipts. Additionally, IRS? IRS. current
practice of placing unvoided returned refund checks in open bins increases
their risk of theft and misuse. We will follow up on this issue as part of
our audit of IRS? fiscal year 2001 financial statements.
(Continued From Previous Page)
Internal control issues, GAO recommendations, and effects IRS actions to
address issues
Issue and GAO recommendations: Policies and procedures to IRS actions: IRS
reported that it would expand deterrent controls establish minimum standards
for the safeguarding and accounting of implemented at IRS campuses to other
field offices to ensure taxpayer receipts were not consistently applied to
all IRS units that uniformity and consistency in its implementation of these
controls collected and processed taxpayer receipts. For example, IRS
by 2001. IRS also reported that its Director of Security and Privacy
currently prohibits personal belongings from being stored in receipts
Oversight would lead efforts to ensure consistent implementation processing
areas at IRS campuses but not at field offices where
of policies and procedures. payments from walk- in taxpayers are received.
Various units that handle taxpayer receipts within field offices also did
not have GAO response: Until IRS establishes and successfully consistent
policies and procedures for such receipts, such as implements consistent,
minimum standards to safeguard and
stamping restrictive endorsements on checks. For GAO account for taxpayer
receipts for all units that process receipts,
recommendations related to this issue, see appendix II, receipts in some
units are placed at greater risk of loss or theft recommendations 23, 27,
56, and 57.
than those at other units. For example, at three of the five field offices
we visited in fiscal year 2000 we continued to find personal Effect:
Inconsistent application of policies and procedures to belongings being
stored in receipt processing areas. We will follow safeguard and account for
taxpayer receipts will continue to expose up on this issue as part of our
audit of IRS? fiscal year 2001
such receipts to theft or loss and make such incidents difficult to
financial statements. detect in units that handle receipts but are not
subject to such policies and procedures. Issue and GAO recommendations:
Controls to deter unauthorized IRS actions: IRS reported that it would
assess the physical access to receipt processing areas at IRS campuses and
field
security status of restricted access areas in campuses and offices were not
always adequate. For example, campuses whose develop a plan to correct
deficiencies. IRS also reported that it receipt processing areas did not
have perimeter walls to adequately would expand deterrent controls
implemented at IRS campuses to deter unauthorized access did not always have
compensating other field offices to ensure uniformity and consistency in its
controls, such as intrusion detecting devices. Some field offices did
implementation of these controls. IRS intends to strengthen these not have
physical barriers or secured/ locked doors restricting controls by 2001.
unauthorized access to receipt processing areas. For GAO recommendations
related to this issue, see appendix II, GAO response: We will follow up on
this issue as part of our audit recommendations 9, 27, and 57.
of IRS? fiscal year 2001 financial statements.
Effect: The lack of effective barriers and other compensating devices to
hinder unauthorized access to receipt processing areas at campuses and field
offices increases IRS? exposure to loss or theft.
Newly reported issue
Issue: 18 U. S. C. 5038 prevents the release of records on juveniles, IRS
action: IRS reported that its Personnel Policy Division began i. e., youths
under 18 years of age, when the request for information reviewing relevant
regulations and discussing with the Office of is related to an application
of employment. Consequently, IRS? Personnel Management a policy consistent
with applicable laws current process of screening out questionable
applicants is
and regulations that IRS can use to screen out questionable ineffective for
juveniles. juvenile applicants. Based on these efforts, IRS plans to issue a
policy to serve the needs and protect the interest of IRS as well as Effect:
IRS can unknowingly hire juveniles with unsuitable the applicant and issue
operating guidelines to field personnel backgrounds thus increasing the risk
of theft of receipts and misuse offices. of sensitive taxpayer data.
GAO response: We will follow up on this issue as part of our audit of IRS?
fiscal year 2001 financial statements. a ?Discovered remittances? are cash
or checks discovered by IRS units outside the specially secured receipts
processing areas. This usually occurs because the cash or checks were
overlooked during the normal extraction process.
Hiring Practices for IRS As part of its procedures to determine suitability
of an applicant for
Employees employment, IRS requires permanent and temporary applicants to
undergo
a fingerprint prescreening check. During a fingerprint check, an applicant?s
fingerprints are processed through the FBI?s national database to identify
those with arrest records. However, further review of the disposition of the
case is necessary to determine if the applicant was convicted of the crime.
We previously reported on several weaknesses related to this fingerprinting
process. 30 Although IRS significantly improved the turnaround time for
obtaining the fingerprint results, other weaknesses persisted. IRS issued
new policies to address these weaknesses. However, we found that the new
policies were not consistently applied throughout IRS during fiscal year
2000. Additionally, Treasury Inspector General for Tax Administration
(TIGTA) auditors found that the IRS? current fingerprinting process was
ineffective in screening out juvenile applicants with questionable
backgrounds.
In response to a recommendation we had made previously, IRS issued, on April
3, 2000, a policy that prohibited the hiring and placement of an applicant
at any IRS location until the applicant?s fingerprint checks had been
received and case disposition evaluated. This policy applied to permanent
and temporary employees. However, we found that IRS offices did not
consistently comply with this new hiring policy. Out of the approximately
19, 600 employees hired during fiscal year 2000, about 4, 900 (25 percent)
were hired and began working prior to IRS? receipt and evaluation of their
fingerprint checks. As IRS did most of its hiring from October through April
in preparation for the peak tax- filing period, the new policy was not in
place in time to affect many of these new hires. 31 Nonetheless, there were
about 2, 700 persons hired after the April 2000
policy was issued, of which 145 (5 percent) were hired and began working
with taxpayer receipts and sensitive taxpayer data without IRS first
receiving the results of their fingerprint checks. The following table
shows,
on a monthly basis, the number of persons who were hired and reported for
duty without IRS having first received the results of their fingerprint
checks out of the total number hired after the issuance of the April 3,
2000, hiring policy. Although the table shows a downward trend in the number
of
violations after the April 2000 policy, we cannot determine to what extent
30 See GAO- 01- 42, November 17, 2000. 31 During fiscal year 2000, IRS hired
almost 94 percent of the total applicants given job offers (18, 356 of the
19, 571 hired in fiscal year 2000) from October 1999 through April 2000.
this is due to compliance with the new policy or due to IRS? not hiring as
many staff in May through September. Table 5: IRS Employees Hired and
Working, After April 3, 2000, Prior to IRS Receipt of Fingerprint Check
Results
Hired and working without Total hired after April 3,
Month fingerprint results 2000, hiring policy
April 4 - 30 62 1, 508 May 32 132 June 26 167 July 13 287 August 7 145
September 5 484
Total 145 2, 723
Source: Unaudited IRS Security Entry and Tracking System data for fiscal
year 2000.
To compound this problem, IRS staff also did not comply with its April and
June 1999 policies which require the fingerprinting of all filing season
applicants at the earliest possible time in the job application process.
According to IRS? personnel database, about 2,200 employees out of
approximately 19, 600 (11 percent) hired during fiscal year 2000 were not
fingerprinted until they first reported for duty or several days- and in
some
instances months- later. The delays in initiating the fingerprinting process
delayed IRS management?s receipt of the fingerprint results. This, combined
with the pressing need for more resources to meet the increased workload
during the tax- filing period, was a contributing cause for new employees
entering on duty before the results of fingerprints were
received. Consequently, as a result of noncompliance with IRS? hiring
policies, IRS managers could have unknowingly allowed employees with
unsuitable backgrounds to handle cash, checks, and sensitive taxpayer
information, thus increasing their risk of theft and misuse. In fact, from
April through September, of the 145 persons who entered on duty before IRS
received their fingerprint checks, 22 (15 percent) were subsequently found
to have had potentially unsuitable backgrounds, such as drug use
and assault.
Additionally, a TIGTA audit 32 completed in May 2000 found that IRS?
fingerprint prescreening procedures were ineffective for juvenile
applicants, i. e., those under 18 years of age, due to mitigating
circumstances involving the release of juvenile records. IRS campuses often
hire high school students to fill short- term positions to process income
taxes. IRS? policy to complete fingerprint prescreening checks applies to
all new hires, even short- term temporary employees.
As of April 2000, TIGTA found that at the two campuses it reviewed, 192
juveniles were hired to work in the receipts processing areas and all of
them had fingerprint checks completed. However, 18 U. S. C. 5038 states that
information about a juvenile?s record may not be released when the
request for information is related to an application for employment. It
further states that responses to such inquiries shall not be different from
responses made about persons who have never been arrested. Therefore, the
case disposition from any juvenile arrest could not be released or otherwise
known. According to TIGTA, because juveniles? records are sealed, it was not
certain whether local authorities, which provide information for the FBI?s
national database, forward juvenile arrest records to the FBI. Even if the
fingerprint check identified a juvenile arrest record, current laws prevent
investigators from determining whether the juvenile was convicted or
acquitted. TIGTA recommended that IRS develop a
process to more effectively screen out juvenile applicants with questionable
backgrounds for receipt processing positions. IRS agreed to look into this
matter.
IRS? lack of a process to screen out juvenile applicants with questionable
backgrounds could result in IRS? unknowingly hiring persons with unsuitable
backgrounds to process receipts and sensitive taxpayer data, thus increasing
the risk of theft. In fact, TIGTA special agents have already investigated
juvenile employees for theft of receipts. Given these risks, we agree with
TIGTA?s recommendation for IRS to develop procedures to more
effectively screen out juvenile employees with questionable backgrounds. 32
See The Internal Revenue Service Should Take Additional Actions to Protect
Taxpayer Remittances (Treasury Inspector General for Tax Administration,
Report No. 2000- 30- 153, September 25, 2000).
Hiring Practices for We found that the scope of background checks required
of lockbox bank
Lockbox Employees employees was inconsistent with IRS? hiring policy and was
less than that
required of IRS employees. The Treasury?s Financial Management Service (FMS)
contracts with 10 commercial banks to process taxpayers? payments and tax
data for IRS. Lockbox banks are staffed with both permanent bank
employees and temporary employees. As previously discussed, the new IRS
hiring policy prohibits the hiring and placement of an IRS applicant, for
permanent or temporary position, at any IRS location until the applicant?s
fingerprint checks have been received and
evaluated. Despite the fact that lockbox employees also handle taxpayer
receipts and data, IRS? new hiring policy does not apply to them. At two
lockbox banks we visited, we found that 63 permanent employees were hired
and began working in fiscal year 2000 prior to the banks? receipt of their
fingerprint checks. We also found that fingerprint checks were not
required at all for temporary lockbox employees. Neither the IRS guidelines
for lockbox operations nor the FMS contracts with lockbox banks required
fingerprint checks for temporary employees of the lockbox. 33 The lockbox
guidelines required only a police check for all temporary employees.
However, a police check, which is a records check
for arrests and legal proceedings, is limited to the jurisdictions that the
employee states he or she resided in within the past 7 years. In contrast,
the FBI fingerprint checks required of IRS applicants do not depend on the
individual to accurately state where he or she lives because the FBI obtains
information for its national database from law enforcement agencies. We also
found that the length of time it took for the lockbox banks to get the
results of fingerprint checks varied widely. For example, officials at one
of the lockbox banks we visited informed us they received the results of the
fingerprint checks in 8 business days while the officials at a second
lockbox bank stated they received the results in 3 to 6 months. As a result
of the above weaknesses in lockbox hiring practices, taxpayers and the
government were unnecessarily exposed to potential financial losses and
fraud that could have occurred if lockbox employees with unsuitable
backgrounds were unknowingly hired to process sensitive taxpayer information
and receipts.
33 The FMS contracts set forth the duration of the contract, the
compensation, and the terms of services to be provided by lockbox banks. The
lockbox guidelines are developed and annually updated by IRS for lockbox
banks and set forth specific standard operating procedures for lockbox
processing of receipts and tax data as well as hiring requirements.
IRS Courier Practices We previously reported on various security weaknesses
related to courier services. IRS uses couriers to transport deposits of
taxpayer receipts to financial institutions. On March 14, 2000, IRS issued a
revision to its minimum courier service requirements for IRS campuses to
address the
security weaknesses we previously reported. 34 As a result of this new
policy, we noted additional improvements over courier security that helped
reduce the vulnerability of taxpayer receipts and taxpayer data recorded on
checks from theft, loss, or misuse. For example, the revised courier
standards limit courier access on campus premises and require campus
personnel to deliver the deposits to a designated point of transfer. At two
campuses we visited, we observed that the campus personnel complied
with this policy. However, some weaknesses still remain. For example, the
courier standards require two courier service employees to pick up and
deliver deposits in order to increase security and help ensure that such
deposits are never left unattended while in the courier service?s custody.
At one of the campuses we visited, only one courier showed up to pick up the
deposits. According to IRS campus officials, this was because IRS did not
directly contract with the courier service. Instead, the contract was
between the depository institution and the courier service. Therefore, IRS
had less control over the security requirements included in the courier
contract. Regardless of who contracts directly with the courier service, IRS
has a fiduciary responsibility to the taxpayers and the government to
safeguard taxpayer receipts with which it was entrusted. An IRS official
stated that IRS plans to issue new guidance that will require all IRS campus
courier service contracts to include IRS? minimum courier security
standards, regardless of who contracts for the courier services.
Recognizing its responsibility to protect taxpayer information and receipts,
IRS has clearly made a concerted effort to address courier security
weaknesses by adopting a more stringent requirement on courier security
standards. However, unless IRS consistently implements this policy, 34 IRS
field offices also receive payments directly from taxpayers but in a much
smaller
amount and volume relative to IRS campuses. The IRS policy requires field
offices to transmit these receipts to their respective campuses by traceable
overnight mail. As such, IRS field offices do not use courier services to
transport deposits to financial institutions. Therefore, the March 2000
minimum security requirements for courier services do not apply to field
offices.
taxpayers and the government will still be unnecessarily exposed to
financial losses.
Lockbox Bank Courier We also found that lockbox banks were not required to
have the same level Practices
of courier security as IRS campuses. The lockbox courier service
requirements are listed in the Lockbox Processing Guidelines. Based on our
comparison of the January 2000 lockbox processing guidelines to IRS? courier
requirements in effect during our review, significant requirements from IRS?
courier guidelines were absent from the lockbox processing
guidelines. For example, the lockbox guidelines did not require use of two
insured couriers nor did they require all courier service employees to pass
a limited background investigation. During our site visits at two lockbox
banks, we noted that a single courier was used at both locations. IRS
officials stated that the fiscal year 2002 lockbox contracts would contain
courier standards for lockbox banks consistent with requirements at IRS
campuses. However, until these standards are required and
implemented, taxpayer receipts and data are unnecessarily exposed to theft
and fraud, such as identity theft schemes, while in the custody of the
lockbox courier services. Other Taxpayer Receipts
Despite some improvements, we continued to find other internal control and
Taxpayer Data Control
weaknesses over the safeguarding and accounting of manual payments and
Weaknesses
taxpayer data. Appendix II lists the improvements IRS made in this area
during fiscal year 2000. However, during our fiscal year 2000 visits to
various IRS locations and lockbox banks, we found that other previously
reported weaknesses, such as the issues outlined in table 4, persisted. For
example, we continued to find weaknesses regarding access to receipt
processing areas. IRS security guidelines designate the receipts processing
area as a restricted area to be accessed only by authorized personnel. As
such, this area should be physically secured from the rest of the processing
units of the IRS campus. Nonauthorized persons entering the receipt
processing area must sign in with a door monitor, wear a special badge, and
be escorted. Cleaning personnel are only to be allowed access to this area
during operating hours when they can be observed. However, at one campus, a
GAO auditor was allowed access through the rear entrance of the receipt
processing area by an employee who did not know the auditor, and the auditor
had unescorted access once inside. At four field offices, we found similar
access problems where entrances to walk- in payment
processing areas were left open or were inadequate to prevent nonemployees
from entering. In the same TIGTA review discussed earlier, TIGTA found that
physical barriers for receipt processing areas at two other campuses were
not adequate for various reasons, such as (1) receipt processing areas with
walls or partitions that were inadequate to secure the areas and not
supplemented by intrusion detecting devices, (2) doors that were left open
after hours, and (3) door locks that did not meet minimum
security standards. At the same campuses, they also found that cleaning
personnel were allowed unescorted access to receipt processing areas during
nonoperating hours. At one of these campuses, the security guards did not
respond to motion sensor alarms set off by a TIGTA auditor before regular
duty hours because, according to the guards, they assumed that the
alarms were set off by the janitor who was generally in that area at that
time. We have previously reported, and continued to find, receipts in
receipt processing areas vulnerable to theft or loss because accountability
for them was not always established as soon as they were received and
because the receipts were stored in easily accessible containers. As such,
physical access controls to these areas are particularly important to reduce
the risk of theft of taxpayer receipts and data. The weaknesses cited above
unnecessarily expose taxpayer receipts and accompanying data to theft by
unauthorized persons.
Weaknesses in During fiscal year 2000, IRS made progress in improving the
reliability of its Management and property and equipment (P& E) inventory
records. IRS began implementing
a new process for managing and maintaining records for its automated data
Accounting for
processing (ADP) P& E, assigned a senior- level official responsibility for
Property and
management and control of ADP P& E, and conducted an officewide Equipment
inventory of all P& E. IRS also continued to develop and implement interim
procedures to compensate for fundamental deficiencies in its financial
accounting system. Specifically, it developed manual procedures to extract
the costs of P& E acquisitions from its accounting records.
Although these efforts allowed IRS to report in its fiscal year 2000
financial statements a P& E balance that was fairly stated, these
compensating procedures were labor intensive and required extensive
contractor support
to arrive at a reliable P& E balance months after fiscal year- end.
Additionally, these procedures did not address long- standing, fundamental
weaknesses in IRS? property and financial systems. As a result, we continued
to find problems with (1) the accuracy and reliability of IRS?
P& E inventory records and (2) IRS? ability to record P& E transactions in
its financial system as transactions occur. Until these problems are
addressed, IRS will continue to rely on costly and labor- intensive
compensating procedures to arrive at a P& E balance that is only reliable
for its year- end financial statements. More importantly, the procedures IRS
employed during fiscal year 2000 did not provide management with reliable,
useful, and timely P& E information throughout the year for day- to- day
decisionmaking, thus hindering IRS? ability to properly manage $1.3 billion
in assets. Table 6 summarizes the issues relating to P& E, along with their
effects and IRS? actions to address these issues.
Table 6: Internal Control Issues Related to Property and Equipment Internal
control issues, GAO recommendations, and effects IRS actions to address
issues
Issues previously reported
Issue and GAO recommendations: IRS? P& E inventory systems IRS action: To
address the deficiencies in its current P& E inventory and procedures for
maintaining those systems were not adequate systems, IRS has begun to
implement a new inventory system and for maintaining accountability over its
property. Acquisitions, expects to complete implementation by late 2002. In
the interim, IRS disposals, and transfers were not always promptly and
accurately has issued guidelines and begun implementing revised procedures
recorded. Information needed to identify and locate property, such
to improve the reliability of its current ADP inventory system. as serial
numbers and locations were also incorrect in some Specifically, during
fiscal year 2000, IRS began implementing the cases. For GAO recommendations
related to this issue, see Single Point Inventory Function (SPIF), for which
it intends to
appendix II, recommendations 35, 62, 64, 66, 67, and 68. establish a
dedicated staff at local sites around the country with
identified responsibilities and procedures for the management and Effect:
Incomplete and inaccurate data make it difficult to identify execution of
ADP P& E. IRS also reported that it is currently and locate specific assets,
thus compromising IRS? ability to consolidating all policies and procedures
for ADP P& E. ensure that its assets are properly safeguarded from misuse
and theft. GAO response: As of our September 2000 visits to IRS sites, we
found that the SPIF procedures were not fully implemented and SPIF
teams not completely staffed at various IRS locations. Furthermore, we
continued to find errors in IRS? P& E inventory records.
(Continued From Previous Page)
Internal control issues, GAO recommendations, and effects IRS actions to
address issues Issue and GAO recommendations: IRS does not record P& E
IRS action: IRS plans to install, by late 2004, an integrated financial
transactions as they occur and does not have an integrated
system as part of its overall systems modernization. This system will
property and accounting system that facilitates the recording of integrate
its P& E inventory system with its accounting system. such transactions in
accordance with federal accounting standards. Instead, acquisitions of
capitalizable P& E and their
GAO response: Until IRS fully implements its integrated financial related
liabilities, such as leasehold improvements, are initially
system and begins recording P& E transactions as they occur, IRS expensed
and adjustments made after fiscal year- end.
will continue to go through a laborious, time- consuming process to
Consequently, during fiscal year 2000, account balances for P& E
produce financial statement balances months after the fiscal yearend were
understated, and capital lease liabilities and expenses were that will not
help in the ongoing management of its resources. overstated. For GAO
recommendations related to this issue, see
appendix II, recommendations 2, 39, 40, 41, 58, 59, 61, 65, and 86.
Effect: Current and reliable P& E data are not available on an ongoing basis
for managing assets and for financial reporting. A significant investment in
time and resources is needed to extract, analyze, and compile the data
needed to adjust P& E and expense account balances at fiscal year- end.
Newly reported issue
Issue and GAO recommendation: Current definitions of
IRS action: IRS has not yet reported plans to address this issue. accounting
codes do not facilitate the recording of P& E transactions in the correct
general ledger accounts because, in some instances, they allow IRS to record
both capitalizable and noncapitalizable costs under the same code. For GAO
recommendation related to this issue, see appendix II,
recommendation 87.
Effect: Extensive year- end analysis of charges in these accounts is
necessary to ensure that all costs for capitalizable P& E are included and
all noncapitalizable expenses are excluded to derive a reliable balance for
P& E in IRS? financial statements. Tracking of P& E in For many years, IRS?
P& E records were not adequate for maintaining
Inventory Systems accountability over its property. IRS has acknowledged the
deficiencies in its property management controls since 1983. 35 In the long-
term, IRS plans to acquire and implement a new P& E inventory management
system to address the deficiencies in its current P& E inventory systems. In
the
interim, IRS has taken steps to improve the reliability of its P& E
inventory records during fiscal year 2000. However, these interim measures
have not
35 We have reported system and management control weaknesses related to IRS?
P& E 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 31 U. S. C. 3512
(Federal Managers? Financial Integrity Act) report.
been fully implemented, and we continued to find errors in IRS? P& E
inventory records during our fiscal year 2000 financial audit.
IRS maintains two P& E inventory systems, one to manage ADP P& E and another
to track non- ADP P& E. These systems provide data, such as a description of
the item, its location, and current status (e. g., disposed versus in
service) that assist property managers and officials in managing property.
In an effort to address its long- standing inability to maintain complete
and accurate records in the ADP inventory system, IRS issued interim Single
Point Inventory Function (SPIF) operating guidelines and
procedures in June 2000. SPIF centralized responsibility for managing ADP
property and maintaining ADP inventory records into a single dedicated unit
at each IRS location, thus establishing clear accountability for the
receipt, management, and disposal of ADP assets.
Although this was a significant step, we found during our visits to IRS
campuses and field offices in September 2000 that SPIF teams had not been
fully staffed and SPIF procedures had not been fully implemented at all IRS
facilities. Thus, as in prior years, 36 we found that IRS? procedures for
recording P& E acquisitions, disposals, and transfers still did not ensure
that transactions were promptly recorded. Specifically, we found that 35 of
220 P& E items we selected from IRS records at 22 sites could not be
located at the time of our review. 37 These items were eventually accounted
for when IRS later reported that 23 of the items had been disposed of months
earlier (including one disposed of in 1998) but IRS had failed to update the
records, 8 items were subsequently located, and 4 items were
erroneous records of software. Nonetheless, based on our work, we estimate
that 16 percent of the items in IRS? P& E inventory records at September 30,
2000, were erroneously included as IRS assets. 38 36 See GAO- 01- 42,
November 17, 2000. 37 For our book- to- floor sample, we obtained a
representative selection of P& E items with a two- stage cluster sample. In
the first stage, we selected a representative sample of 22 buildings. In the
second stage, we selected a representative sample of 10 assets located at
each of the 22 buildings from the asset records of the ADP and non- ADP P& E
inventory
tracking systems. 38 We are 90 percent confident that the confidence
interval around this estimate ranges from 10. 7 percent to 21 percent.
The GAO Standards for Internal Control in the Federal Government 39 requires
that qualified and continuous supervision be provided to ensure that
internal control objectives are achieved. It is particularly important for
IRS to have strong management oversight to help compensate for the
limitations of its current P& E systems. IRS partially addressed the issue
of management oversight in November 1999 by providing its Chief Information
Officer (CIO) the authority over and overall responsibility for ownership,
management, and control of all ADP property. 40 In addition, SPIF procedures
assigned ADP property managers responsibility for reviewing the accuracy and
completeness of P& E information. Specifically, the IRS policy states that
ADP property managers are responsible for maintaining a management and
quality review program to ensure the timeliness, completeness, and accuracy
of the inventory records and to conduct annual property management
evaluations at selected sites. These
types of managerial review serve as a key internal control in ensuring the
accuracy, completeness, and timely recording of inventory data that will
subsequently be used to prepare reports for management decision- making.
However, based on the errors we found during our testing of the P& E
inventory records, these managerial reviews did not appear to be effective.
Consequently, the information in IRS? P& E inventory tracking systems was
unreliable and fell short of meeting management reporting needs.
Recording P& E in the As in prior years, IRS was unable to record P& E
assets and corresponding Accounting System
liabilities in its accounting system as the transactions occurred due to
inadequate accounting procedures and systems design flaws. Consequently, IRS
hired a contractor who implemented extensive and timeconsuming manual
procedures to derive a reliable P& E balance for IRS? financial statements.
IRS did not have policies and procedures in accordance with federal
accounting standards to identify and record in its general ledger accounts
its P& E assets and corresponding liabilities as the transactions occurred.
For example, federal accounting standards require agencies to record a
capital lease asset and its corresponding liability at the inception of the
39 Standards for Internal Control in the Federal Government (GAO/ AIMD- 00-
21. 3. 1, November 1999). 40 The Chief Information Officer will eventually
have oversight over non- ADP P& E as well once it is consolidated with ADP
P& E in the new property management system.
lease agreement. 41 However, neither IRS? inventory system nor its
accounting system was designed to capture key information on capital leases
to enable it to report the asset or the corresponding capital lease
liability as the transactions occurred. IRS expensed all property purchases
during the year, including major acquisitions such as capital leases,
leasehold improvements, and major systems. 42 A contractor then analyzed and
extracted from IRS? automated expense records purchases of P& E,
leasehold improvements, major systems, and capital leases based on codes
within IRS? accounting system to derive the fiscal year- end amounts that
should have been capitalized as P& E. IRS then recorded adjusting entries
to transfer these P& E acquisitions to the appropriate general ledger
account. This process was time- consuming and did not always result in
accurate information as we found during our review of fiscal year 2000
nonpayroll expenses and P& E transactions. For example:
Of 156 statistically sampled nonpayroll expenses we reviewed, 3
transactions totaling $1.7 million that should have been recorded as P& E
had not been properly extracted by the contractors from the
population of fiscal year 2000 expenses and transferred to the P& E general
ledger account. Based on our work, we estimate that the most likely
understatement of the P& E balance as a result of P& E
transactions being incorrectly recorded as expenses was $50 million, with an
upper error limit of $127 million. 43
Of 60 statistically sampled P& E transactions we reviewed, 8 transactions
totaling $879, 000 were inappropriately identified by the contractors as
fiscal year 2000 P& E acquisitions. Two of the 8 transactions were fiscal
year 1999 transactions, and the remaining 6 items were non- P& E items that
should have remained as expenses. Based on our work, we estimate that the
most likely overstatement of 41 A capital lease is a lease that transfers
substantially all the benefits and risks of ownership
to the lessee. 42 All relevant costs for the purchase of an asset that is
material and will benefit several accounting periods should be capitalized,
recorded as an asset, and depreciated over the useful life of that asset. In
contrast, costs associated with other acquisitions that do not meet the
above criteria should be expensed when purchased. 43 Our estimate is based
on a 95- percent confidence level and the use of a test materiality of $87
million.
the P& E balance as a result of transactions incorrectly recorded as fiscal
year 2000 P& E was $61 million, with an upper error limit of $106 million.
44 Additionally, IRS uses financial accounting codes that classify expenses
by type to extract P& E, leasehold improvements, major systems, and capital
leases from its automated records of expenses. These Sub- Object Class (SOC)
codes appear on all basic accounting documents and provide detailed cost
data on the types of expenses that are significant to IRS? operations.
However, IRS recorded both capitalizable and noncapitalizable P& E
transactions under the same SOC codes. This complicated the process of
extracting capitalizable P& E transactions based on SOC codes because
additional analysis was required to determine whether the transactions
represented an expense or a capitalizable P& E purchase. For example, in
fiscal year 2000, the contractor determined that more than $43 million in
software license fees, which should have been expensed, were charged to an
SOC code defined as capitalized software.
Lack of an Integrated IRS? costly, time- consuming process for determining a
year- end P& E
Inventory and Accounting balance was necessary because IRS? procurement
system, inventory System tracking systems, and the general ledger are not
integrated. In an integrated
financial management system, the general ledger is supported by subsidiary
ledgers, which contain detailed records of transactions and automatically
update the appropriate general ledger balances as transactions occur.
Therefore, on an on- going basis, detailed records in the
subsidiary ledgers should support the P& E balances in the general ledger.
However, during fiscal year 2000 IRS did not have subsidiary ledgers for its
P& E. Instead, the two inventory tracking systems served as subsidiary
records for P& E. However, property acquisitions and dispositions recorded
in the inventory tracking systems did not automatically update appropriate
P& E balances in the general ledger system because the two systems were not
integrated. Additionally, unlike true subsidiary ledgers, the inventory
tracking systems did not record the cost of assets that tie to the general
ledger balances at a summary level. Consequently, P& E balances recorded in
general ledger P& E accounts could not be easily reconciled to IRS? 44 Our
estimate is based on a 95- percent confidence level and the use of a test
materiality of $87 million.
subsidiary records to verify that such balances were supported by actual
assets recorded in the inventory tracking systems. IRS plans to install an
integrated financial system by late 2004 to address the design flaws of its
current systems. In the meantime, due to the systems
and control weaknesses discussed above, IRS management continues to rely on
a contractor and a labor- intensive procedure to derive a reliable P& E
balance for its financial statements. Because this procedure only provides a
reliable balance for the fiscal year- end date, IRS does not have reliable
P& E data on an ongoing basis to make operational decisions related to the
purchase, disposition, and use of its P& E. Moreover, errors in IRS?
inventory tracking systems continue to compromise IRS management?s ability
to safeguard $1.3 billion of government assets.
Recommendations To address weaknesses in the timely recording of P& E
transactions while an integrated P& E financial system is being developed,
we recommend that IRS implement policies and procedures to record
capitalizable acquisition costs for property and equipment, capital leases,
leasehold improvements, and major systems in the appropriate P& E general
ledger accounts as transactions occur. To ensure that SOC codes facilitate
compilation of capitalizable P& E
transactions in the proper general ledger asset accounts and, if applicable,
lease liability accounts, we recommend that IRS revise the definitions of
SOC codes pertaining to P& E or establish new codes so that individual SOC
codes cannot be used for both capitalizable purchases (assets) and
noncapitalizable purchases (expenses). For example, the SOC code used to
record capitalizable software costs should not be used to record
noncapitalizable software license fees.
Weak Controls Over In fiscal year 2000, IRS made substantial progress in
addressing previously Appropriated Funds identified budgetary control
weaknesses. IRS (1) reduced the number of employees with authority to
override automated spending controls;
Continue (2) decreased the number, dollar amount, and duration of items held
in suspense; and (3) implemented procedures to deobligate funds no longer
required for a specific purpose.
Despite this progress, IRS? internal controls were inadequate for providing
reasonable assurance that the $8. 3 billion in fiscal year 2000 budgetary
authority 45 was routinely accounted for, reported, and controlled.
Specifically, we found that IRS (1) incurred costs prior to establishing an
obligation, (2) inappropriately recorded unrelated activities as adjustments
to obligations, and (3) failed to reduce undelivered orders 46 when goods
and services were received. As a result, IRS was unable to ensure the
reliability of key budgetary information it needs on an ongoing basis to
effectively manage its operations and ensure that its resources do not
exceed budgetary authority. While these conditions in isolation may not
rise to the level of material weakness, collectively they are indications of
serious deficiencies in internal controls over appropriated funds. Table 7
summarizes the issues we identified related to obligations and undelivered
orders, along with their effects and IRS? actions to address these issues.
Table 7: Internal Control Issues Related to Appropriated Funds Internal
control/ compliance issues, GAO recommendations, and effects IRS actions to
address issues
Issue previously reported
Issue and GAO recommendations: IRS personnel did not
IRS actions: IRS reported that it issued guidance requiring that its
accurately record receipt of goods and services in the accounting
staff record the receipt of goods and services based on the date the system
based on the date the goods were received or services goods were received or
services performed, regardless of whether rendered. For GAO recommendations
related to this issue, see
an invoice was received. appendix II, recommendations 76 and 77.
GAO response: During our fiscal year 2000 review, we still found Effect:
IRS? undelivered orders were overstated, and accrued instances in which IRS
did not record the receipt of goods and expenses were understated. services
until the related invoice was received. We will continue to monitor IRS?
progress in implementing its procedures in this area.
Newly reported issues
Issue and GAO recommendation: IRS incurred costs before
IRS actions: IRS has not yet reported plans to address this issue. recording
the corresponding obligation in its accounting system. For GAO
recommendation related to this issue, see appendix II, recommendation 88.
Effect: IRS could incur expenses without sufficient budget authority to fund
them.
45 Budget authority is the authority provided by law to enter into financial
obligations that will result in immediate or future outlays involving
federal government funds. An appropriation is the most common means of
providing budget authority. 46 Undelivered orders represent the value of
goods and services that have been ordered and obligated but have not been
received. This term is synonymous with unliquidated obligations.
(Continued From Previous Page)
Internal control/ compliance issues, GAO recommendations, and effects IRS
actions to address issues
Issue and GAO recommendation: IRS recorded as adjustments
IRS actions: IRS has not yet reported plans to address this issue.
to prior years? obligations activities that were not adjustments to prior
years? obligations. For GAO recommendation related to this issue, see
appendix II, recommendation 89.
Effect: IRS? draft Statement of Budgetary Resources (SBR) contained
inaccuracies in some line items that required substantial adjustments to
materially comply with U. S. generally accepted accounting principles. The
Standard Form 133 used to report IRS? September 30, 2000, budgetary
activities to OMB contained some line items that were misstated and
therefore unreliable.
Recording Obligations In the federal budgeting process, agencies? operations
are funded by appropriations. Appropriations typically provide agencies with
budgetary
authority, i. e., the legal right to obligate- and ultimately to spend-
funds for specific purposes, within a specific period of time, up to a
specific amount. An obligation is a definite commitment by an agency of the
government, which creates a legal liability to another party. To prevent
obligations in excess of available funding, OMB Circular A- 34 gives
instructions to federal agencies as to when an obligation of funds should be
recorded in the agency?s financial system. For example, an obligation for
reimbursable travel expenses incident to employee relocation should be
recorded when a travel order is approved; an obligation for a contract
should be recorded in the month that the contract is let; and an obligation
for an order for goods or services is to be recorded at the time the order
is placed. In addition, GAO?s Standards for Internal Control in the Federal
Government requires that transactions be promptly recorded to maintain their
relevance and value to management in controlling operations and making
decisions. However, during our fiscal year 2000 audit, we found that IRS did
not always record obligations in its accounting system prior to incurring
costs. For example:
IRS received software maintenance services for the period May 1, 2000,
through April 31, 2001, totaling $415,000. However, IRS did not generate a
purchase order to record the obligation of funds until July 28, 2000-
almost 3 months after the services were received. An IRS site accepted
delivery of services for which funds were not available at that site. In
this instance, a contracting officer at an IRS site ordered services
totaling more than $15, 000 for transporting and installing systems
furniture in June 1999. However, the obligation was
not recorded before the cost was incurred. When the voucher was submitted in
November 1999, IRS discovered that the amount exceeded what was available to
the site at the time the order was placed. Although
IRS was able to make up for the deficiency by transferring fiscal year 1999
funds from another site, had there not been funds available at that time IRS
may have run the risk of spending more than it was authorized to spend.
As a result of not recording obligations in a timely manner, IRS cannot
routinely rely on its financial records to provide reliable information on
the status of its budgetary resources for day- to- day decision- making.
Until the obligation of funds is recorded, the balance in obligations
incurred would
be understated. This could lead IRS management to believe that the agency
has more funding than is actually available. Consequently, IRS management
and personnel might enter into additional obligations in excess of the
budgetary authority made available by Congress.
Adjusting Obligations During fiscal year 2000, IRS recorded certain
activities as adjustments to prior years? obligations 47 that were not valid
adjustments to those obligations. In fiscal year 2000, $167 million of the
$277 million (over 60 percent) that were recorded in IRS? accounting system
as adjustments to prior years? obligations were not valid upward or downward
adjustments. IRS subsequently adjusted its records to correct these
erroneous
transactions. However, these errors adversely affected IRS? ability to
routinely report accurate and reliable information on total budgetary
resources and obligations. GAO?s Standards for Internal Control in the
Federal Government requires that transactions and other significant events
be properly classified to maintain their relevance and value to management
in controlling
operations and making decisions. Furthermore, transactions and events are to
be completely and accurately recorded and classified in the summary records
from which reports and financial statements are prepared. Adjustments to
prior years? obligations are recorded when the obligation amount that was
previously recorded is affected by a subsequent event, such as a change in
the price or quantity of goods or services. For example,
47 An adjustment to a prior year?s obligation is recorded when the dollar
amount previously recorded is affected by a subsequent event, such as a
change in the price of goods or services.
if an undelivered order for a good was established for $1,000, but the good
was delivered in a later year at $1, 250, then an upward adjustment of $250
to obligations would be recorded. An upward adjustment would increase
obligations incurred and reduce the unobligated balance. Similarly, if an
undelivered order was established for $1, 000 but the good was delivered in
a later year for $750, then a downward adjustment to prior years?
obligations of $250 would be recorded. However, we found that IRS overstated
both the upward and downward adjustment accounts during fiscal year 2000.
Many activities that were recorded as adjustments to the prior years?
obligations were not actual upward or downward adjustments but were related
to changes in accounting codes, travel, and adjustments for doubtful
accounts. Of the
$277 million in adjustments IRS recorded in its accounting system in fiscal
year 2000, $82 million in upward adjustments and $85 million in downward
adjustments were not valid adjustments to the prior years? obligated
balance. These errors were attributed to IRS? accounting system, which,
according to IRS personnel, recorded all adjustments that affect a prior
year?s appropriation, including those that did not affect the obligated
amount, as upward or downward adjustments to prior years? obligations.
Through adjusting entries totaling $167 million, IRS was able to correct
these errors in time to prevent the financial statements from being
misstated. However, upward adjustments to prior years? obligations are also
reported on the SF133 Report on Budget Execution and Budgetary Resources
that federal agencies submit to OMB quarterly 48 as ?obligations incurred,?
while downward adjustments to prior years? obligations are
reported on the SF133 as ?recoveries to prior year obligations.? Because the
upward and downward adjustment accounts were misstated during the year, data
IRS reported to OMB on its budgetary activities may not be reliable.
Specifically, the September 2000 SF133 IRS submitted to OMB misstated both
the obligations incurred and recoveries to prior years? obligations line
items. 48 OMB requires that each agency submit SF133s on a quarterly basis
to report on each agency?s budget execution as well as the status of its
budgetary resources. The Statement of Budgetary Resources (SBR) is one of
the annual audited financial statements required of federal agencies. Both
provide similar information.
Recording Receipt of IRS records an undelivered order when it orders a good
or service for use Undelivered Orders
in its operations. It then reduces the undelivered order balance and records
an expense when the good or service is received. However, we found instances
in which IRS did not reduce the balance in undelivered orders when the goods
and services were received. As a result, the balance of undelivered orders
and accrued expenses were misstated.
We tested statistical samples of 83 and 78 transactions from fiscal year
2000 beginning and ending balances of undelivered orders, respectively. 49
For both samples, we found instances in which IRS received goods and
services during one fiscal year but did not reduce the undelivered orders
balance reflected in its accounting system until the following fiscal year.
This was caused, in part, by IRS personnel?s incorrectly recording into its
accounting system the dates that the goods and services were received. This
resulted in IRS? overstating the beginning and the ending fiscal year 2000
undelivered order balances and understating accrued expenses. For example:
In fiscal year 2000, IRS recorded an obligation and a corresponding
undelivered order for computer equipment totaling $7.9 million. As of
September 30, 2000, IRS had received equipment totaling $3.4 million.
However, its records as of September 30, 2000, still showed that the entire
undelivered order amount was still outstanding, i. e., $3.4 million was not
yet removed from the undelivered order balance.
Telephone support services for the month of September 1999 were entered
into the receipt and acceptance system as being received on October 5, 1999.
Consequently, the beginning fiscal year 2000 balance in undelivered orders
was overstated.
IRS failed to remove more than $4.1 million from the ending undelivered
order balance for lockbox services received from July through September
2000. Consequently, the fiscal year 2000 ending undelivered order balance
was overstated.
The errors in the beginning undelivered orders balance totaled $2. 9
million, while errors in the ending undelivered orders balance totaled $12.
4 million. Based on our work, we estimate (1) the most likely overstatement
of the fiscal year 2000 beginning undelivered orders balance as a result of
these 49 These samples were selected using a 95- percent confidence level.
The test materiality
associated with these samples is $87 million.
errors was $65 million, with an upper error limit of $111 million and (2)
the most likely overstatement of the ending undelivered orders balance and
corresponding understatement of accrued expenses was $47 million, with an
upper error limit of $87 million.
Because of the deficiencies in controls over the accurate recording of
undelivered orders, IRS? balances in undelivered orders and accrued expenses
were misstated during fiscal year 2000. These deficiencies continued to
affect IRS? ability to report reliable, timely, and routine information
critical for making sound day- to- day decisions and effectively
managing its operations. Recommendations To ensure effective management of
available funding and accurate
reporting of obligations, we recommend that IRS perform periodic reviews to
monitor and ensure that obligations are promptly established in the
accounting system. Such reviews would assist IRS in maintaining accurate and
complete records of its obligations, and in reducing the risk of obligations
exceeding available funding.
To ensure that reported budget data are reliable on a routine basis, we
recommend that IRS incorporate into its systems modernization blueprint the
capability to differentiate prior- year adjustments between activities that
are valid upward and downward adjustments to obligations and activities
that are not valid adjustments to obligations. Such actions would help
ensure that activities that are not valid adjustments to obligations are not
recorded as adjustments to obligations. Deficiencies in the
In fiscal year 2000, IRS revised the format of its statement of net cost and
Collection and significantly expanded and enhanced the related disclosures
in its financial statements to address an issue we had raised in our prior
audit regarding Reporting of Financial the commingling of certain program
costs in its financial statements. The Data
resulting presentation appropriately classified the cost of IRS? programs.
However, in fiscal year 2000, as in prior years, 50 IRS was unable to
generate reliable financial information on a day- to- day basis to support
decisionmaking.
IRS lacked a financial management system that complies with the requirements
of the Federal Financial Management Improvement Act of
50 See GAO- 01- 42, November 17, 2000.
1996 (FFMIA). 51 In addition, IRS did not record transactions in a timely
manner and perform routine reconciliations necessary to ensure the
reliability of general ledger data. Finally, IRS lacked an effective system
that can report on the full costs of its activities and on cost- based
performance measures consistent with the Government Performance and
Results Act (GPRA) of 1993. 52 These weaknesses affected IRS? ability to (1)
routinely prepare reliable periodic financial reports, (2) generate routine
and reliable cost- based information, (3) accurately determine the amount of
revenue collected for specific tax types, and (4) certify excise taxes
distributed to trust funds. Collectively, these issues are indications of
serious internal control deficiencies and constitute a material weakness in
controls over financial reporting. As noted earlier, in fiscal year 2000,
due to monumental efforts and extensive workaround processes, IRS was able
to produce for the first time combined financial statements that were fairly
stated in all material respects. However, the information reported in the
financial statements
was reliable only for a single point in time. Financial data not subjected
to these compensating procedures may not be reliable and cannot be used to
effectively manage IRS? day- to- day operations. Ultimately, Congress, IRS
management, and the public do not routinely have timely and accurate
information to evaluate IRS? performance and make informed management and
policy decisions. Table 8 summarizes the issues we identified in this area,
together with their effects and IRS? actions to address these issues. 51
FFMIA requires that agencies implement and maintain financial management
systems that substantially comply with Federal Financial Management System
Requirements, applicable federal accounting standards, and the U. S.
Government Standard General Ledger at the transaction level. 52 GPRA
requires federal agencies 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, technology,
and 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 outputs, service levels, and outcomes of
each program activity; (4) provide a basis for comparing actual program
results; and (5) verify and validate the measured values or results.
Table 8: Internal Control and Compliance Issues Related to Financial
Reporting Internal control/ compliance issues, GAO recommendations, and
effects IRS actions to address issues
Issues previously reported
Issue and GAO recommendation: IRS? financial management IRS action: IRS
plans to implement an integrated financial systems do not comply with
Federal Financial Management management system that will meet the necessary
federal System Requirements, federal accounting standards, and the U. S.
requirements as part of its systems modernization effort. In the
Government Standard General Ledger. For GAO meantime, IRS must continue to
use ad hoc processes and
recommendations related to this issue, see appendix II, procedures to
prepare its financial statements. recommendation 75.
GAO response: Weaknesses will continue to exist in this area until
Effect: IRS cannot rely on its financial management systems to an effective
financial management system that complies with federal support related
amounts on the principal financial statements. It requirements and is
integrated with supporting subsidiary records is must rely on costly, labor-
intensive, and time- consuming established.
workaround processes to extract data, analyze it, and make significant
adjustments to it before it can produce reliable annual financial
statements. Consequently, IRS cannot routinely generate periodic statements
or other reliable information as a management tool.
Issue and GAO recommendations: IRS does not record IRS actions: IRS reported
that it is in the process of developing and transactions in its general
ledger in a timely manner and ensure implementing internal procedures to
ensure timely recording of that ongoing monitoring of the general ledger
occurs in the normal transactions in the general ledger. It also reported
that it has course of operations consistent with GAO?s Standards for
Internal
established procedures that require a multilevel review of the
Control in the Federal Government. For GAO recommendations financial
statements. related to this issue, see appendix II, recommendations 74, 90,
91, and 92.
GAO response: Based on our fiscal year 2000 financial audit, IRS? procedures
were not adequate to prevent material inaccuracies in Effect: IRS? fiscal
year 2000 draft financial statements contained IRS? draft financial
statements. Until IRS develops an effective material inaccuracies and
required extensive modifications and system of internal controls over
financial reporting, weaknesses will adjustments to materially comply with
U. S. generally accepted continue to exist in this area. accounting
principles.
Issue and GAO recommendations: IRS cannot track and report,
IRS actions: IRS plans to acquire a cost accounting module as part in
appropriate detail, the full costs of its activities and programs. of its
effort to develop and implement an integrated financial For GAO
recommendations related to this issue, see appendix II, management system.
recommendations 47, 48, 53, 54, 71, 72, 93, and 94.
GAO response: Weaknesses will continue to exist in this area until
Effect: IRS is unable to report on the costs of projects and an effective
cost accounting module is implemented that can track subprojects, and is
therefore unable to report cost- based and report, in appropriate detail,
the full costs of IRS? activities and performance information consistent
with the Government programs. Performance and Results Act.
Issue and GAO recommendation: IRS? workaround processes
IRS action: IRS has hired additional staff to assist in these used to
generate its custodial balances rely on extensive technical workarounds but
recognizes that more staff are needed to fully expertise with IRS? master
files that only a limited number of address this recommendation. individuals
possess. For GAO recommendation related to this issue, see appendix II,
recommendation 30.
GAO response: We will continue to assess IRS? efforts to address and correct
this problem.
Effect: Should these individuals become unavailable for any reason, IRS
would experience significant difficulty in preparing reliable custodial
balances for its financial statements.
(Continued From Previous Page)
Internal control/ compliance issues, GAO recommendations, and effects IRS
actions to address issues Issue: IRS is unable to routinely track and report
actual revenue IRS actions: IRS plans to include in its new financial
management collected for specific trust funds and individual income taxes.
system the ability to capture revenue by type of tax and to conduct a new
study in 3 to 4 years to gauge taxpayer ability and readiness to
Effect: IRS must go through a complex process to determine provide detailed
information by type of tax at the time of payment.
(certify) the amounts that should be distributed to the excise tax trust
funds and cannot separately report the amount of revenue GAO response:
Weaknesses will continue to exist in this area until collected for Social
Security, Hospital Insurance, and individual
an effective financial management system is established to capture income
taxes. revenue by type of tax and until taxpayers are ready to provide
detailed tax type information at the time of payment.
Issue and GAO recommendation: IRS does not record excise IRS actions: IRS
implemented procedures in 1999 to improve timely tax return information in
its systems in a timely manner. For GAO recording of excise tax returns by
requiring IRS campuses to recommendation related to this issue, see appendix
II, express mail their Form 720s to the Cincinnati campus daily,
recommendation 29. ensuring that Form 720s over $1 million are batched
separately and expedited, and by closely following up on overdue returns.
Effect: The amounts initially distributed to excise tax- related trust funds
may not be adjusted in a timely manner through IRS? GAO response: Based on
our fiscal year 2000 audit results, IRS? certification process. As a result,
these trust funds may not be efforts to record excise tax returns in a
timely manner were not receiving the proper amounts on a timely basis.
effective. We continued to find delays in recording tax return information
in IRS systems that resulted in collections being omitted from
certifications for a given quarter. Newly reported issue
Issue and GAO recommendation: IRS could not provide
IRS actions: IRS has not yet developed plans to address this issue.
documentary evidence that key performance indicators provided in the fiscal
year 2000 ?Management Discussion and Analysis? were reviewed for accuracy
and completeness. For GAO recommendation related to this issue, see appendix
II,
recommendation 95.
Effect: This increases the risk that errors or omissions in key performance
indicators could occur and not be detected and corrected in a timely manner.
Reporting Year- End As the table above indicates, IRS does not have an
adequate financial Balances management system. As a result, IRS is hindered
in its ability to produce
reliable financial statements and to generate timely and accurate
information needed to make management and operational decisions.
An adequate financial management system is one that can provide complete,
reliable, consistent, timely, and useful financial management information.
Such a system comprises, among other elements, an integrated general ledger
system using common data elements and transaction processing that is
supported by transactional details and a system of internal controls to
ensure that reliable data are obtained, maintained, and disclosed in
reports. Such a system is also capable of
capturing and reporting reliable performance information. However, IRS?
financial management system is made up of two independent general ledgers-
custodial and administrative- that are not integrated with each other nor
with their supporting records for material balances. 53 Specifically, IRS?
custodial general ledger does not have adequate audit trails for federal
taxes receivable, federal tax revenue, or federal tax refunds, while its
administrative general ledger lacks audit trails for P& E and program costs.
For example, as discussed earlier in this report, the lack of clear
traceability between the general ledger and underlying financial
transactions required IRS to use extensive ad hoc procedures and statistical
methods to derive reliable balances for taxes receivable and other unpaid
assessments. In addition, as discussed further below, because of weaknesses
in internal controls, IRS could not demonstrate that reported performance
indicators were reliable. Consequently, neither of IRS? two general ledgers
complies with the requirements of the U. S. Government Standard General
Ledger 54 (SGL) at the transaction level and
cannot be used to support the preparation of financial statements without
material financial reporting adjustments, nor do they comply with the
requirements of FFMIA.
One important requirement of an effective financial management system is
that it can be relied upon to support the timely production of auditable
financial statements. At IRS, this is not the case. Although IRS was able to
produce financial statements that were fairly stated in all material
respects for fiscal year 2000, these statements required monumental human
efforts
that extended well after the September 30, 2000, fiscal year- end. In
addition, information produced by IRS? financial management system required
billions of dollars in adjustments to derive reliable financial statement
balances. As mentioned earlier, substantial adjustments totaling
53 IRS? custodial activities consist of tax receipts collected, refunds
paid, and taxes receivable. Administrative activities consist of the
budgetary resources that fund the custodial activities and the costs
incurred in performing those activities. 54 The U. S. Government Standard
General Ledger establishes a standard chart of accounts with common account
titles, definitions, and uses to standardize federal agency accounting,
support the external reports and financial statements required by OMB and
Treasury, and provide comparable information among agencies. These and other
financial management system requirements are detailed in the Financial
Management Systems Requirements series issued by the Joint Financial
Management Improvement Program, OMB Circular A127,
Financial Management Systems, and OMB?s January 4, 2001, revised guidance
for the implementation of FFMIA.
billions of dollars had to be made to reliably report the balance for taxes
receivable. These adjustments, as well as the balance in net taxes
receivable, were not available until well after the fiscal year had ended.
Similarly, fiscal year 2000 administrative activities totaling over $3.7
billion were either recorded in the wrong general ledger accounts or were
not yet recorded in IRS? general ledger as of September 30, 2000. For
example, as
of fiscal year- end, accrued payroll and depreciation expenses totaling $480
million had yet to be recorded in IRS? general ledger, while P& E
acquisitions that should have been capitalized were recorded as expenses.
These activities had to be analyzed and recorded or reclassified, a
timeconsuming process that took several months to complete.
Though IRS achieved an important milestone in receiving an unqualified
opinion on its fiscal year 2000 financial statements, the approach used to
achieve this goal did not address the underlying purpose of sound financial
management as envisioned by the CFO Act- to produce reliable, useful,
and timely financial and performance information on a routine basis for day-
to- day decision- making. Furthermore, until lasting improvements are
achieved, IRS will have to continue to rely on extensive efforts to produce
reliable financial statements.
Maintaining Accurate and During fiscal year 2000, IRS did not timely record
transactions and perform
Timely Financial Data the necessary reconciliations to ensure that the data
contained in its
general ledger systems were up- to- date and accurate. Consequently, IRS did
not have reliable, timely, and routine financial information to effectively
manage its operations. GAO?s Standards for Internal Control in the Federal
Government requires that transactions and events be recorded accurately and
timely and that ongoing monitoring occur in the course of normal operations
to provide
reasonable assurance that financial reporting is reliable. These internal
control processes and procedures are crucial to ensuring that an agency?s
financial management systems produce information that is reliable, timely,
and useful. Without these processes and procedures, a modern and integrated
financial management system by itself does not guarantee that an agency will
be able to prepare financial statements that are fairly stated
and generate financial data that can be relied upon for day- to- day
decisionmaking. During fiscal year 2000, IRS? internal controls over
financial reporting were not consistent with these standards. Specifically,
IRS did not record
material transactions in the general ledger until months after they
occurred. For example:
Depreciation expenses totaling more than $350 million were not recorded
throughout the year, but only at year- end. As a result, the balance in
depreciation was inaccurate at interim periods during the year.
Imputed financing costs totaling nearly $400 million were not recorded in
the general ledger throughout the year but rather as a lump sum amount
several months after the fiscal year- end. While IRS made the necessary
adjustments to produce reliable year- end financial statements, the balance
for imputed financing costs was incorrect throughout fiscal year 2000.
In addition, IRS lacked adequate policies and procedures for ensuring that
financial data would be adequately reviewed on an ongoing basis.
Specifically, IRS management informed us that it did not have policies and
procedures requiring systematic reviews and analyses of account balances at
interim periods. Consequently, errors and omissions were allowed to arise
without prompt detection and correction, and adjusting entries that should
have been made throughout the year were allowed to build up until they
became material and time- consuming to correct. IRS also did not have
policies and procedures requiring reconciliation between its proprietary and
budgetary accounts during fiscal year 2000. 55 IRS had to make
adjustments totaling more than $160 million several months after the fiscal
year- end to bring the net cost of operations derived from the budgetary
accounts and the net cost of operations derived from the proprietary
accounts into agreement. The failure to maintain accurate and up- to- date
financial data impeded IRS management in its ability to use the general
ledger as a reliable source of financial data at interim periods to make
managerial and operational decisions. 55 The budgetary accounting system is
used to track spending authority at all stages from appropriation to
expenditure. Proprietary accounts are used to record all nonbudgetary
activity, such as information about the entity?s assets, liabilities, and
operations. However, many activities in the proprietary accounts affect
obligated budgetary resources and need to have related entries in the
budgetary records. Consequently, routine reconciliations are necessary to
ensure that these two sets of accounts are consistent and reliable during
interim periods.
Reporting on and Managing IRS did not track the cost accounting information
needed to prepare costbased Performance
performance information consistent with GPRA. Deficiencies in IRS? systems
and internal controls discussed above mean that IRS cannot routinely
generate reliable financial and performance data for cost- benefit analyses.
This could adversely affect IRS management?s and Congress? ability to make
informed management decisions related to resource allocation and other
aspects of IRS? operations throughout the year. The Joint Financial
Management Improvement Program?s (JFMIP) System Requirements for Managerial
Cost Accounting requires that, at a minimum, agencies have cost accounting
information to support the aggregation of financial information related to
programs and projects, each of which could have several levels, such as
subprograms. In order for IRS
to aggregate cost information by program and project to conform to this
standard, it must first capture costs at the detail level as they are
incurred. However, IRS did not have a systematic process in place to capture
costs at the project level during fiscal year 2000. Though IRS had a Project
Cost Accounting Subsystem (PCAS) coding structure that can capture personnel
costs at the detailed project and subproject level, IRS did not require that
all of its employees use PCAS to itemize the time spent on specific projects
on their time cards. 56 Consequently, during fiscal year 2000, IRS staff did
not use PCAS codes for time charged to either of IRS? two largest
appropriations, which collectively accounted for 74 percent of IRS?
budgetary resources. 57 Similarly, except for information technology
projects, PCAS did not collect nonpersonnel costs such as equipment
depreciation, rent, and utilities by projects and subprojects. At year- end,
IRS extracted data from its accounting system, imported the data into a
database, and used a spreadsheet to allocate these nonpersonnel costs to the
different projects and subprojects in an effort to derive reliable net
operating cost data for the Statement of Net Cost. However, these data were
not available until months after the fiscal year- end, were only reliable
for a single point in time, and thus were not available on an ongoing basis
for management 56 Only employees who worked on information technology
projects or various projects supporting financial statement audits were
required to record time spent on these projects using PCAS. 57 IRS? two
largest appropriations are (1) Processing, Assistance, and Management and
(2) Tax Law Enforcement.
purposes. The failure to fully and accurately capture cost at the project
level affected IRS? ability to produce reliable cost data. Specifically, IRS
was unable to report on the costs associated with each of the 15 key
performance indicators it reported in the ?Management Discussion and
Analysis? that accompanied its fiscal year 2000 financial statements. As a
result, IRS cannot be consistent with GPRA in reporting cost- based
performance measures related to its various programs.
In addition, IRS was unable to provide evidence that supervisory review was
performed to ensure that the performance indicators, and data used to derive
these indicators, were complete, accurate, and reliable. For example, IRS
did not have documentation demonstrating that a responsible
official had reviewed the data to ensure that all data that should be
collected for a specific performance indicator was collected, and that only
pertinent data was included. This increases the risk that any errors or
omissions affecting IRS? key performance indicators will not be detected
and corrected in a timely manner. Finally, IRS faces an additional challenge
in the fact that its custodial and administrative general ledgers are
independent of each other and are not integrated. Since cost data are
primarily contained in the administrative general ledger while critical
performance data comes from the custodial general ledger, IRS needs to be
able to link these two general ledgers before
it can calculate reliable, cost- based performance measures. IRS plans to
implement a major portion of an integrated financial and taxpayer account
management system by fiscal year 2005. Consequently, this link between the
custodial and administrative general ledgers will not occur before then.
Reporting Tax Revenues IRS continues to be unable to determine the specific
amount of revenue it actually collects for Social Security, Hospital
Insurance, individual income taxes, and excise tax trust funds. These
conditions exist primarily because
(1) at the time of payment, taxpayers are not required to provide
information on the specific taxes that they are paying and (2) IRS? systems
are not capable of capturing such information. Although the tax returns,
which the taxpayers file months after the deposits are made, do contain a
breakdown on the type of tax, this information pertains only to the amount
of the tax liability and not to the amount of taxes paid to IRS. This
condition restricts IRS? ability to report actual collections of significant
taxes, such as Social Security, that would be of interest to many parties,
including Congress. IRS is developing a system to capture detailed
collection information by type of tax and plans to initiate a study, in 3 to
4 years, to gauge taxpayers? readiness to provide such detailed information.
Trust Fund Certification Because data are not available for the allocation
of excise taxes to the appropriate trust funds when deposits are made, IRS
uses a certification process that is complex, cumbersome, and prone to error
in order to distribute excise tax receipts to the respective trust funds. In
response to
our previous reports, IRS implemented procedures to improve controls over
the certification process. However, we continued to find weaknesses in the
excise tax certification process. For example, due to delays in recording
tax return information in its systems, the amount IRS certified to the
Highway Trust Fund for the quarter ended September 30, 1999, 58 included
nearly $346 million in collections from previous quarters. These delays
resulted in delays in transferring these amounts to the trust funds, thus
reducing the amount of interest income the trust funds earn on these
receipts. This reduction in interest income could adversely affect
distributions of trust fund receipts to the states because the amounts
distributed would be based on inaccurate data. Recommendations To reduce the
magnitude of year- end adjustments and assist IRS in
improving the reliability of its financial data on a routine basis, we
recommend that IRS develop, document, and implement policies and procedures
to require
monthly reconciliations between proprietary and budgetary accounts so that
differences can be identified promptly and, if necessary, adjusted;
routine reviews and analyses of general ledger account balances to
promptly identify errors and omissions; and
recording corrections and adjusting entries throughout the year to reduce
the magnitude of year- end adjustments and improve the reliability of
interim financial data. To i mprove I RS? ability to collect and report on
the full costs of its
activities, we recommend that IRS implement policies and procedures to 58
Since certifications usually are not completed until 6 months after the end
of the quarter, the certification for the quarter ended September 30, 1999,
was actually performed in fiscal year 2000 and thus affected fiscal year
2000 excise tax distributions.
require that all employees itemize the time spent on specific projects on
their time cards and
allocate nonpersonnel costs to programs and activities routinely
throughout the year. To provide assurance on the reliability of performance
data, we recommend that IRS document reviews performed to validate that
performance data are complete, accurate, and reliable.
Conclusions Many of the issues presented throughout this report have existed
for several years, and IRS has noted that the ultimate solution to many of
these
issues is modernization of its systems. As part of this modernization
initiative, IRS plans to implement a new financial system that includes a
cost accounting module as well as integrated administrative and custodial
general ledgers that are supported by subsidiary ledgers containing the
transactional details for key accounts such as taxes receivable and property
and equipment. The modernized environment is expected to provide IRS with,
among other things, the ability to (1) track and report on
the status of each unpaid assessment category, amount, and taxpayer, (2)
record P& E transactions in its general ledger accounts as they occur, and
(3) prepare cost- benefit analyses and cost- based performance measures.
However, these systems will take years to implement. IRS continues to make
progress in addressing its financial management challenges. The strong
commitment and dedication to financial management reform by IRS senior
management has played a crucial role in the progress the agency has made to
date and is critical for future
improvements. IRS has developed many workaround processes that resulted in
its ability to produce reliable financial statements for fiscal year 2000.
However, these processes take considerable time, effort, and expense and do
not fix many of the fundamental financial management issues that continue to
plague the agency. Until these issues are addressed, IRS cannot achieve the
overriding objective of the CFO Act and other reform legislation enacted
during the last decade- to produce reliable, useful, and timely financial
and performance information for day- to- day decision- making.
Agency Comments and In commenting on a draft of this report, IRS agreed
that, in order to Our Evaluation
improve financial management, it must sustain a high level of effort to
implement solutions that will address systems deficiencies and internal
control weaknesses. IRS also provided information regarding past and current
initiatives to address GAO?s audit recommendations. For example, during
fiscal year 2000, IRS (1) routinely reconciled its fund balance, (2)
reviewed and managed suspense items, (3) eliminated unneeded obligations,
(4) installed and used live- scan fingerprint equipment, and (5) implemented
procedures and processes to improve the reliability of P& E records. IRS
also noted that it has undertaken additional initiatives to address
remaining internal control deficiencies. For example, it noted that it
implemented a new inventory system for its P& E and enforced standards
to improve inventory practices, developed a standard checklist and conducted
monthly security reviews in fiscal year 2001, and hired additional staff to
support the master file extract process. We will follow up during our fiscal
year 2001 audit to assess the effectiveness of these initiatives. While
agreeing with the overall thrust of our report, IRS disagreed with
some of the specific report findings and recommendations. Specifically, in
the area of P& E, IRS disagreed that in the short term, property
acquisitions should be recorded as capital assets as the transactions occur.
IRS noted that, until an integrated property management system is acquired,
it should continue the current practice of recording property acquisitions
as expenses and then transferring these expenses to capital assets in the
general ledger after a review process. We disagree. As our report states,
IRS? process for deriving a reliable P& E balance for its annual financial
statements involves the use of extensive manual procedures by a contractor
to extract and analyze IRS? data on expenses to identify items that should
be classified as assets. This process is time- consuming, occurs months
after the acquisition of the assets, and only provides a reliable
balance for P& E for a single point in time. This process does not provide
IRS with reliable P& E data on an ongoing basis for use in operational
decision- making.
IRS also disagreed with our conclusions regarding the timeliness of IRS?
recording of obligations. IRS believed that the 2 instances we cited of IRS?
failure to timely record obligations were isolated and thus did not
constitute a material weakness in controls over appropriated funds. The 2
instances cited in our report were illustrative examples of IRS? failure to
record obligations before goods and services were received, and did not
represent the total number of errors found in our testing. In fact, we found
10 instances in which IRS failed to record obligations before goods and
services were received. These exceptions were brought to the attention of
IRS staff and management, in writing, throughout the audit. These 10
instances together represent more than isolated instances of IRS? not
recording obligations before goods and services are received. It is also
important to note that we did not characterize in our report the issue of
IRS not timely recording obligations in and of itself as a material
weakness. However, taken collectively, this, plus other issues in the area
of appropriated funds management, constitute a material weakness in IRS?
internal controls over its appropriated funds that preclude IRS from
providing reasonable assurance that material misstatements would be
prevented or detected on a timely basis.
In addition, IRS disagreed that we should include its failure to properly
record adjustments to obligations as a material weakness. IRS also requested
that we reconsider our recommendation that it include in its systems
modernization blueprint the capability to differentiate between
valid and invalid adjustments to prior- year obligations. IRS stated that
the issue stemmed from our and its different interpretations of the
definition of upward and downward adjustments. IRS believed that it had
successfully resolved this issue because it made audit adjustments we
proposed prior to
issuing its final fiscal year 2000 financial statements and stated that it
would continue to make these adjustments in the future. While we agree that
IRS made the audit adjustments we proposed to its financial statements, we
disagree that this issue has been resolved and should be excluded from our
report. As discussed above, our report does not characterize this issue in
and of itself as a material weakness. As stated in our report, we requested
that IRS make adjustments in instances involving changes in accounting codes
and travel entries that do not meet the definition of upward and downward
adjustments. IRS made these adjustments to its fiscal year 2000 financial
statements. These adjustments eliminated the type of known errors found
during our testing and reduced the dollar amounts of these accounts to
levels not considered material for
purposes of fairly presenting the financial statements as a whole. These
adjustments do not, however, correct the underlying problems that gave rise
to the errors in these accounts that required adjusting. Also, while IRS
took exception to our recommendation, it noted that the CFO has included
this issue in the functional requirements for IRS? new financial management
system, and that, in the short term, it will continue to make
these adjustments manually. These corrective actions, if effectively
implemented, should address our recommendation regarding this issue. We will
evaluate the effectiveness of these actions during the fiscal year 2001
audit. IRS also contested our including an example in the report to
illustrate its failure to record the liability for goods and services when
received. IRS stated that it had entered into an agreement with us to
exclude invoices received after November 30, 2000, from fiscal year 2000
audit procedures. As the invoice for this particular transaction was
received on December 6, 2000, IRS believed that this transaction fell
outside the agreed- to cutoff date and should thus not be cited.
We disagree with IRS? characterization of what was agreed to. The agreement
between IRS and us related to our testing of subsequent disbursements. In
previous years, we tested disbursements made within the 3 months following
fiscal year- end to identify transactions that should
have been, but were not, recorded as a transaction in the year under audit.
In fiscal year 2000, we agreed to reduce the test period to 2 months
following the fiscal year- end, that is, we would test only subsequent
disbursements made from October 1 through November 30 after the fiscal year-
end. However, the particular example in our report that IRS is taking
issue with was identified during our testing of IRS? ending undelivered
orders balance- this was separate and apart from the testing of subsequent
disbursements. Further, lockbox services are recurring transactions covered
by 5- year contracts. Consequently, IRS had the capability to accrue for
these services without waiting for the invoice. As our report states, the
most likely misstatement of the ending undelivered orders balance resulting
from the failure to timely record receipt of undelivered orders was $47
million, with an upper error limit of $87 million. The magnitude of these
errors reinforces the need for IRS to act to ensure that goods and
services are recorded when received. With respect to financial reporting,
IRS took issue with our findings that material inaccuracies were found in
the fiscal year 2000 financial statements and that these inaccuracies were
not effectively detected in IRS? review of these financial statements. IRS
disagreed that these findings should be cited as a material reporting
weakness. IRS further stated that it was aware of only two material
adjustments we proposed that fell within the purview of financial reporting.
Again, we disagree. Each of the internal control deficiencies over financial
reporting cited in our report do not individually constitute a material
weakness- it is the combination of these deficiencies that constitutes a
material weakness. Further, as our report states, IRS? draft financial
statements contained material inaccuracies and the review procedures
instituted by IRS were not effective in identifying and addressing errors
and omissions material to the financial statements. For example, the first
two draft financial statements prepared in January and early February 2001
omitted a material footnote comparing IRS? Statement of Budgetary Resources
with the President?s Budget as required by U. S. generally accepted
accounting principles and OMB 97- 01, despite the fact that we had indicated
to IRS in October 2000 that the footnote was necessary. An
effective review procedure would have identified this material omission.
Further, we proposed not 2, but 14 audit adjustments, which IRS accepted and
recorded. The aggregate absolute value impact of these adjustments was (1)
$160 million to assets and liabilities, (2) $140 million to net cost,
and (3) $227 million to the statements of financing and budgetary resources.
In the area of refunds, IRS disagreed with our finding that IRS does not
screen all EITC claims through EFDS. IRS stated that all EITC claims are run
through the EFDS program, which prioritizes returns according to criteria
that were based on the 1997 EITC Compliance study. We agree that all cases
with EITC refund claims are run through the EFDS program by IRS? Criminal
Investigation Division and assigned a score to assist in prioritizing which
cases to work. CI, in turn, refers cases above a certain score to the
Examination Branch for examination. However, the
Examination Branch only examines a subset of those cases referred for
examination based upon its perceived level of available resources without
collecting the data necessary to determine whether it is focusing the
appropriate level of resources on this effort. Without such data, IRS is
unable to determine the extent to which refunds associated with invalid
EITC claims could be prevented or minimized had IRS devoted more resources
to its examination efforts. We have modified our report to provide a more
detailed explanation of the EITC examination selection process. IRS also
disagreed with our recommendation that it implement policies and procedures
requiring all employees to itemize their time on their time cards. IRS
stated that it currently tracks itemized information for most employees
through its functional tracking systems. We will follow up
during our fiscal year 2001 audit to assess the adequacy of this approach.
Again, we recognize that IRS achieved an important milestone in producing
for the first time combined financial statements in fiscal year 2000 that
were fairly stated in all material respects. However, as we state in our
report, the tremendous efforts undertaken by IRS staff and management to
produce reliable financial statements do not result in reliable, useful, and
timely financial and performance information IRS needs for decisionmaking on
an ongoing basis. This approach does not address the underlying financial
management and operational issues that adversely affect IRS? ability to
effectively fulfill its responsibilities as the nation?s tax
collector. As we have reported for several years, long- term and systematic
improvements in IRS? processes and systems are needed to address the
management challenges we have identified. During fiscal year 2000, IRS
demonstrated a strong commitment to address the operational and financial
management issues raised by us in previous financial statement audits. It
successfully implemented a number of initiatives to address outstanding
financial- related recommendations and
laid the groundwork for continued sustainable improvements in financial
management. We will continue to work closely with IRS to build on the
improvements made in fiscal year 2000 and to achieve sustained progress in
these areas. The complete text of the IRS? Deputy Commissioner for
Operations? response to this report is reprinted in appendix III. This
report contains 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 the Chairmen and Ranking Minority Members of the Senate Committee on
Appropriations; Senate Committee on Finance; Senate Committee on
Governmental Affairs; Senate Committee on the Budget; Subcommittee on
Treasury, General Government, and Civil Service, Senate Committee on
Appropriations; Subcommittee on Taxation
and IRS Oversight, Senate Committee on Finance; Subcommittee on Oversight of
Government Management, Restructuring, and the District of
Columbia, Senate Committee on Governmental Affairs; House Committee on
Appropriations; House Committee on Ways and Means; House Committee on
Government Reform; House Committee on the Budget; Subcommittee on Government
Efficiency, Financial Management, and
Intergovernmental Relations, House Committee on Government Reform; and
Subcommittee on Oversight, House Committee on Ways and Means. In addition,
we are sending copies of this report to the Chairman and ViceChairman of the
Joint Committee on Taxation, the Secretary of the Treasury, the Director of
the Office of Management and Budget, the Chairman of the IRS Oversight
Board, and other interested parties. Copies will be made available to others
upon request. This report was prepared under the direction of Steven J.
Sebastian, Acting
Director, Financial Management and Assurance, who can be reached at (202)
512- 3406. If I can be of further assistance, please call me at (202) 512-
2600. Sincerely yours,
Jeffrey C. Steinhoff Managing Director Financial Management and Assurance
Appendi Appendi xes x I
Scope and Methodology As part of our audit of IRS? fiscal year 2000
financial statements, we evaluated IRS? internal controls and its compliance
with selected provisions of laws and regulations, and we followed up on the
status of open recommendations from prior financial audits and related
financial management reports. 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 of unpaid assessment, revenue, refund,
accounts payable, accrued expense, payroll, nonpayroll and undelivered order
transactions. These statistical samples were selected primarily to
substantiate, and in some cases derive, balances and
activities reported on IRS? financial statements. Consequently, dollar
errors or amounts can and have been statistically projected to the
population of transactions from which they were selected. In testing these
samples, certain attributes were identified that indicated significant
deficiencies in the design or operation of internal control. These
attributes can be and have been statistically projected to the
appropriate populations.
Conducted analytical testing procedures where appropriate.
Evaluated relevant internal controls over financial reporting and reviewed
the overall form and content of the financial statements.
Reviewed the IRS contractor?s methodology and procedures for compiling the
fiscal year 2000 P& E additions.
Tested detailed purchasing transactions of P& E, major systems, capital
leases, and leasehold improvements and a statistical sample of P& E items at
several IRS locations.
Compared EITC amounts from IRS and Treasury reports, and reviewed EITC
audit cases.
Tested transactions that represent the underlying basis of amounts
distributed to various trust funds, primarily the Highway Trust Fund and
Airport and Airway Trust Fund.
Reviewed the IRS certifications of excise tax revenue distributed to the
Highway Trust Fund and Airport and Airway Trust Fund.
Reviewed IRS? reconciliations and specific controls over refund processing
and financial reporting.
Observed physical safeguards over cash and checks received and processed
at campuses, field offices, and lockbox banks.
Interviewed and observed management and personnel at campuses, field
offices, and lockbox banks.
Reviewed relevant audit reports from the Office of the Treasury Inspector
General for Tax Administration.
Reviewed IRS? fiscal year 2000 Federal Managers? Financial Integrity Act
Annual Assurance Statement, IRS? January 2001 letter to Congress responding
to Recommendations to Improve Financial and Operational Management (GAO- 01-
42), and IRS? April 2001 Remediation Plan. 1
We performed our work from April 2000 through February 2001 in accordance
with U. S. generally accepted government auditing standards. We have also
issued a management letter addressing additional matters that we identified
during our fiscal year 2000 audit regarding accounting procedures and
internal controls that could be improved, and we have
issued separate reports on computer security issues. 1 The Federal Financial
Management Improvement Act of 1996 (FFMIA) requires that if the head of an
agency determines that the agency?s financial management systems do not
comply with the requirements of FFMIA, then the head of the agency shall
establish a remediation plan that includes resources, remedies, and
intermediate target dates necessary to bring the agency?s financial
management systems into substantial compliance.
Status of GAO Recommendations From Prior IRS Financial Audits and Related
Financial
Appendi x II
Management Reports Appendix II consists of two tables. Table 9 lists our
recommendations from prior financial statement audits and related financial
management reports. Table 10 lists new recommendations resulting from our
fiscal year 2000 audit. From our previous reports on IRS? financial
activities, 1 85
recommendations remained open as of the date of this report (1 through 85 in
table 9). We are closing 24 of these recommendations primarily because IRS
has addressed them or because they are being superseded by updated or more
detailed recommendations. Thus, 61 of these prior recommendations remain
open. The column ?GAO status of
recommendations? in table 9 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 enforcing
policies that are not being consistently followed) or whether each would
require long- term changes for fundamentally deficient financial systems or
other more extensive changes. 2 We are also making 10 new recommendations in
this report, numbered 86 through 95 in table 10, with short- or long- term
changes also indicated. Consequently, 71
recommendations are open as of the date of this report. We have highlighted
in bold the 9 recommendations we consider of highest priority for IRS to
address. These are recommendations 6, 8, 17, 47, 48, 49, 53, 54, and 55. We
will continue to monitor IRS? progress toward addressing each of the
recommendations in this appendix during our fiscal year 2001 audit.
1 See GAO- 01- 42, November 17, 2000 and Management Letter: Improvements
Needed in IRS? Accounting Procedures and Internal Controls (GAO- 01- 880R,
July 30, 2001). 2 In making this determination, we are primarily 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.
Table 9: 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
Closed. IRS reported that it had Closed - superseded. Although IRS equipment
(P& E) inventory data, including completed an inventory of its
conducted an inventory, we continued to find telecommunications and
electronic filing Automatic Data Processing (ADP)
inaccuracies in the property records. We will equipment, are complete and
accurate. assets.
continue to track IRS? efforts to improve the accuracy of the property
records under recommendation number 35 below. 2. Determine what information
related to ADP Open. IRS intends to implement a Open. We will continue to
monitor IRS? resources, such as equipment condition and system that will
integrate its P& E
progress in implementing the new system. remaining useful life, would be
most useful to IRS
inventory system with its financial (Long- term) managers for financial
management purposes system. This integrated system, and develop a means for
accounting for these
currently targeted for late 2004, is data. expected to include information
related to equipment resources and
to incorporate a means of accounting for such data.
Financial Management: Important IRS Revenue Information Is Unavailable or
Unreliable
(GAO/ AIMD- 94- 22, December 21, 1993) 3. Identify reporting information
needs, develop Closed. IRS reported that it had Closed. We confirmed that
IRS has taken the related sources of reliable information, and developed a
comprehensive set of actions stated. establish and implement policies and
procedures
policies and procedures for preparing for compiling this information. These
procedures
its custodial financial statements. It should describe any (1) adjustments
that may be also reported that it had completed a needed to available
information and (2) analyses
comprehensive analysis of the that must be performed to determine the
ultimate
administrative financial statement disposition and classification of amounts
process. associated with in- process transactions and amounts pending
investigation and resolution.
4. Monitor implementation of actions to reduce Open. IRS reported that it is
testing a
Open. We will monitor IRS? progress during the errors in calculating and
reporting manual software package to automate its
our fiscal year 2001 financial statement audit interest on taxpayer
accounts, and test the manual interest calculations and
of IRS. (Short- term) effectiveness of these actions.
expects to complete testing, implementation, and staff training by June
2002.
Financial Audit: Examination of IRS? Fiscal Year 1993 Financial Statements
(GAO/ AIMD- 94- 120, June 15, 1994) 5. Use current information to
periodically update
Closed. The Tax Systems Closed. As reported in recommendation 60 estimated
future Tax Systems Modernization
Modernization Project is now part of below, IRS captured and capitalized
major
costs. IRS? overall modernization and thus, systems costs in fiscal year
2000. the recommendation is no longer
applicable.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
Internal Revenue Service: Immediate and Long- Term Actions Needed to Improve
Financial Management (GAO/ AIMD- 99- 16, October 30, 1998)
6. Manually review and eliminate duplicate or Open. IRS reported that it is
Open. The ability to track and link multiple
other assessments that have already been developing a system to automate the
TFRP assessments depends on IRS paid off to assure all accounts related to a
trust fund recovery penalty (TFRP) personnel?s manually inputting the
crossreference
single assessment are appropriately credited program. IRS expects that this
will information needed to link these
for payments received.
eliminate the opportunity for errors assessments. This process is labor
intensive
that plague the current manual and, as we found in FY 2000, often
ineffective. process. The new system is currently Specifically, of 29 unpaid
payroll tax cases we targeted to be completed in late reviewed involving
multiple assessments for 2002.
which payments were not posted to all related accounts, 28 of these had the
crossreferences. We will continue to monitor the effectiveness of IRS?
efforts to address this
issue. (Short- term) 7. Establish minimum documentation standards Closed.
IRS reported that it issued Closed. We noted substantial improvement in or
checklists for collection files. These standards two memos in November and
IRS? ability to locate and provide adequate or checklists should include
minimum December 1999 that addressed case
supporting documentation for unpaid documentation and file organization
requirements file management guidelines and
assessments. The cases we reviewed in fiscal for all taxes receivable and
compliance records retention requirements. year 2000 generally contained
sufficient assessment cases, specifying the types of detailed information
for determining the documentation required, standard file appropriate
classification and estimating
organization, and the retention period that will collectibility for cases
determined to be taxes ensure that such documents are maintained until
receivable. the statute of limitations has expired.
8. Ensure that IRS' modernization blueprint
Open. IRS? Custodial Accounting Open. We will continue to monitor IRS?
includes developing a subsidiary ledger to
Project includes the development of progress in developing these systems to
accurately and promptly identify, classify,
a Taxpayer Account Subledger address the weaknesses noted during our
track, and report all IRS unpaid assessments (TASL) which is expected to
provide fiscal year 2001 audit. (Long- term)
by amount and taxpayer. This subsidiary the ability to identify duplicate
trust
ledger must also have the capability to
fund recovery assessments, taxes distinguish unpaid assessments by category
receivable, compliance
in order to identify those assessments that
assessments, and write- offs for
represent taxes receivable versus compliance financial reporting purposes.
Its online
assessments and write- offs. In cases transaction processing (OLTP)
involving trust fund recovery penalties, the system is expected to identify
subsidiary ledger should ensure that (1) the
duplicate trust fund recovery trust fund recovery penalty assessment is
assessments and assure that appropriately tracked for all taxpayers liable
payments are properly credited when but counted only once for reporting
purposes received. Development of both TASL
and (2) all payments made are properly
and OLTP is underway, and they are
credited to the accounts of all individuals
targeted for completion in January assessed for the liability.
2006.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
9. Examine and consider options to increase Closed. IRS reported that it (1)
hired Open. Though we noted improvements in deterrent controls at service
centers. b Some a contractor in June 2001 to conduct some deterrent
controls, such as the options IRS should examine and consider include
a risk assessment to determine installation of lockers, controls were not
installing surveillance cameras to monitor staff proper mitigating security
controls in consistently enforced at all locations. We will when they are
opening, extracting, and sorting
the Receipt and Control areas, continue to evaluate the effectiveness of
IRS? the mail and when they are processing receipts, (2) established cross-
functional efforts during our fiscal year 2001 audit. restricting personal
items that can be brought into review teams to conduct monthly (Short- term)
the receipt processing areas, such as handbags, reviews at each campus using
a
briefcases, and bulky outerwear, and standard checklist, and (3) plans to
providing lockers and requiring their use for reemphasize that personal
storing personal belongings outside of the receipt
belongings are prohibited in receipt processing areas.
processing areas. 10. Provide adequate training and monitoring of Closed.
IRS reported that it
Closed. We confirmed that IRS had provided extraction unit staff to ensure
staff are informed developed a national training course the training to
extraction staff. and properly trained on the proper procedures, that began
December 1999 and and that the procedures are being followed.
continued through April 2000 as new staff were brought on board. 11. Limit
the units that may receive unopened
Closed. IRS reported that it had Closed. We confirmed that almost all mail,
mail directly to only those units that require updated the Internal Revenue
with a few exceptions, was routed through the confidentiality due to the
nature of their work. At a
Manual (IRM) to reflect the policy of Mail Unit.
minimum, mail addressed to off- site locations routing mail through Receipt
and should be routed through the service center first
Control beginning January 1, 1999, to identify mail that may contain
taxpayer receipts. and had also issued revised procedures on January 1,
2000.
12. Ensure that IRS' modernization blueprint Closed. IRS reported that
version 1. 0 Open. We will review IRS? most recent includes the ability to
compare W- 2 and other
of the Modernization Blueprint, modernization blueprint to verify that these
third- party information to tax returns as they are issued January 2001,
includes at a features are included during our fiscal year
processed to further prevent improper refunds high level a process to match
2001 financial statement audit. (Short- term) from being issued.
information return data to tax returns and to prevent erroneous refund
situations. Excise Taxes: Internal Control Weaknesses Affect Accuracy of
Distributions to the Trust Funds
(GAO/ AIMD- 99- 17, November 9, 1998) 13. Revise the Form 720 tax return to
reflect a
Open. IRS reported that it plans to Open. We will continue to monitor IRS?
efforts separate column adjacent to the column for
implement a programming change by and implementation in future audits.
(Shortterm) entering the tax assessment, by abstract number,
2002 for processing and validating for the taxpayer to report on pages 1 and
2 of the Schedule C data that uses credit tax return claims and adjustments,
by abstract
reference numbers for claimed number, based on the information the taxpayer
credits with respect to each abstract reports on Schedule C. number.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
14. Develop, document, and implement review Closed. IRS reported that two
Open. In fiscal year 2000, IRS prepared and procedures over the adjustment
and
additional staff had been added to implemented written procedures for their
summarization of assessment data used in the analyze the certifications and
three excise tax certification process. While we certifications.
Specifically, IRS should require that
separate check sheets had been noted improvements in the certification
detailed supervisory review be performed and developed to ensure the quality
of process, we continued to find weaknesses documented to ensure that
adjustments are each Excise Tax Certification. In such as inadequate reviews
that resulted in reasonable and adequately supported, addition, IRS reported
that it had
undetected errors in the data used for calculations are appropriately
performed, and the
prepared written procedures for certification. We will continue to evaluate
the
certification letter agrees with the supporting preparing the certifications
and effectiveness of IRS? efforts in our fiscal year schedules.
changed their review process to now 2001 financial statement audit of IRS.
require a second level review to ensure accuracy.
Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data
Needs Improvement (GAO/ AIMD- 99- 15, November 30, 1998) 15. Establish
procedures to review the Closed. IRS reported that it
Open. We continued to find that in many applications and associated
documents for all established procedures in July 1999 instances IRS did not
take fingerprint checks applicants given job offers to ensure that to better
ensure that fingerprint
until after the new employees reported on fingerprint checks are initiated
on those checks are initiated and supervisory
duty. We will continue to evaluate the individuals. Implement procedures to
provide feedback is provided to ensure that effectiveness of IRS? efforts
during the fiscal supervisory feedback on these reviews as IRS staff comply
with fingerprint
year 2001 financial statement audit. (Shortterm) necessary to ensure
personnel staff are aware of
check requirements. and follow IRS? policy requiring fingerprint checks.
16. Continue with the agency?s plans to develop Closed. IRS issued policies
in 1999 Open. Despite these policies, we found that and implement a policy
to fingerprint filing season that required fingerprinting all filing IRS
continued to hire employees and allowed applicants at the earliest possible
time in the job
season applicants at the earliest them to report on duty prior to initiating
a application process.
possible time in the job application fingerprint check. We will continue to
evaluate process. the effectiveness of IRS? efforts to implement
this policy during the fiscal year 2001 financial statement audit. (Short-
term)
17. Until the problems with delays in Closed. In April 2000 IRS issued a
Open. Although IRS issued this policy, it did
fingerprint checks are resolved, develop and
policy memo requiring fingerprint not consistently implement it. Through the
end implement a policy prohibiting new checks be received and results of
fiscal year 2000 IRS continued to hire employees from being assigned to
process
evaluated before an employee in any employees before it received the results
of
receipts until the results of fingerprint checks IRS office can begin
working, and it their fingerprint checks. We will continue to are received
and reviewed by management.
issued a further clarifying memo in evaluate the effectiveness of IRS?
August 2000. implementation efforts in our fiscal year 2001 audit. (Short-
term)
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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
18. Continue the agency?s efforts to explore the Closed. IRS reported that
it Closed. An alternative action effectively feasibility of obtaining local
police checks on IRS
evaluated the effectiveness of the addressed the weakness for which this
applicants and evaluate the efficiency and pilot with the Philadelphia
Police recommendation was made. Specifically, we effectiveness of the
Philadelphia Service Center?s
Department in June 2000 and found that IAFIS reduced the turnaround time
electronic fingerprinting system in order to determined that with the
for IRS to receive the FBI fingerprint check supplement FBI fingerprint
checks. implementation of the Integrated results for its applicants to an
average of 11 Automated Fingerprint Identification
days, thus addressing the need to obtain System (IAFIS) in November 1999
earlier indications of potential background and the April 2000 policy
prohibiting problems than IRS had previously. Effective the employment of
new hires until the
implementation of the April 2000 policy would results of FBI fingerprint
checks are further improve the process. received and evaluated, the pilot
program no longer adds value. 19. Continue the agency?s efforts to negotiate
Closed. IRS reported that as of
Closed. We confirmed that IRS is participating with the Office of Personnel
Management (OPM) November 29, 1999 it was
in IAFIS, and we found that IAFIS has and the FBI and procure the necessary
participating in IAFIS. The live- scan significantly reduced IRS? turnaround
time for equipment so that it can participate in the FBI?s
fingerprint equipment had been receiving the results of fingerprint checks.
IAFIS program by August 1999.
procured and installed at OPM and 22 IRS sites, including the 10 service
centers.
20. Improve the physical security over receipts Closed. IRS reported that
all service Closed. We noted marked improvement in and returns stored in
unsecured overflow areas. centers were in compliance with this their storage
of receipts and returns in These controls might include limiting
recommendation by April 2000. overflow areas. unnecessary traffic by
temporarily designating these overflow areas as restricted access areas and/
or posting additional security guards over such areas during the peak filing
season.
21. Provide secure containers for service center Closed. IRS reported that
each
Open. During our fiscal year 2000 visits, we employees to store ?discovered
remittances? prior service center currently has locked
continued to find discovered remittances that to inventory and submission to
the Receipt and
containers to store the discovered were not stored in locked containers and
were Control Branch. Immediately upon discovery, the
remittances. In addition, IRS not immediately logged in when they were
receipts should be recorded into a control log, the reported that it issued
instructions to
discovered. We will continue to evaluate IRS? receipts secured in a locked
container, and the the service centers on February 17,
efforts in our fiscal year 2001 financial discovered receipts reconciled to
the control log
1999, to emphasize the handling and statement audit of IRS. (Short- term)
prior to submission for processing. recording of these remittances to ensure
reconciliation. IRS also reported that it had developed revised procedures
for handling
discovered remittances and plans to include a review of discovered
remittance procedures in its monthly reviews of each service center campus.
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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
22. Ensure that all returned refund checks are Open. IRS reported that it
plans to
Open. We continued to find returned refund stamped ?nonnegotiable? as soon
as they are require that checks be stamped at checks that were not stamped
?nonnegotiable? extracted.
the moment of extraction with a new upon extraction that were also being
stored in stamp that reads ?unless for credit to unlocked containers. We
will continue to the U. S. Treasury, this instrument is evaluate IRS?
efforts in our fiscal year 2001 nonnegotiable.? It plans to implement
financial statement audit of IRS. (Short- term)
this procedure in January 2002. 23. Require district office employees to
store
Closed. IRS reported that it had Open. During our September 2000 visits, we
walk- in payments in secure containers in communicated these requirements to
continued to find instances in which walk- in accordance with IRM 1( 16) 41,
section 500. the field offices through its new
payments were not stored in locked containers District office management
should ensure that Customer Service Operating or access to the keys to
locked containers this policy is followed and should limit the number
Guidelines for fiscal year 2000 and
were not always secured. We will continue to of employees with access to the
keys or that it plans to conduct monthly onsite evaluate IRS? efforts in our
fiscal year 2001 combinations to these containers. reviews of field offices
using a
financial statement audit of IRS. (Short- term) checklist to test compliance
with current policies and procedures.
24. Ensure that walk- in payment receipts are Closed. IRS reported that it
issued Open. We continued to find instances in which recorded in a control
log prior to depositing the guidance to the field in August 1999 walk- in
payments were not logged as soon as receipts in the locked container and
ensure that and updated the IRM in January they were received and payments
were not
the control log information is reconciled to 2000 to include instructions
for a reconciled before being shipped to the receipts prior to submission of
the receipts to
control log and reconciliation of designated service center. We will
continue to another unit for payment processing. To ensure
receipts and that it plans to conduct evaluate IRS? efforts in our fiscal
year 2001 proper segregation of duties, an employee not
monthly on- site reviews of field financial statement audit of IRS. (Short-
term)
responsible for logging receipts in the control log offices using a
checklist to test should perform the reconciliation.
compliance with current policies and procedures.
Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/
AIMD- 99- 193, August 4, 1999) 25. Analyze and determine the factors causing
Open. IRS reported that it has Open. We will continue to monitor the delays
in processing and posting trust fund convened a task group to design an
timeliness and completeness of IRS? recovery penalty assessments. Once these
automated TFRP system that can processing of these transactions during our
factors have been determined, IRS should properly cross- reference payments
fiscal year 2001 audit. (Short- term)
develop procedures to reduce the impact of these received and thus eliminate
the
factors and to ensure timely posting to all opportunity for errors that
plague the applicable accounts and proper offsetting of current manual
process. IRS has refunds against unpaid assessments before targeted fiscal
year 2002 for
issuance. implementation.
26. Identify and institute procedures to monitor Closed. IRS updated the IRM
and Open. While we continued to note improved
compliance of installment agreements. Such issued a new one in October 1999
to compliance, the guidelines were not always monitoring should ensure that
the installment
state that installment agreements followed. We still found instances of
agreements provide for full payment of the taxes
must stipulate full payment for installment agreements entered into in
fiscal
owed. For example, management could randomly liabilities. Service centers
are also year 2000 that did not comply with the Internal select installment
agreements from all of its units required to monitor compliance.
Revenue Code. We will continue to evaluate to review for compliance with the
Internal IRS? compliance during our fiscal year 2001 Revenue Code.
financial statement audit of IRS. (Short- term)
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
27. Expand IRS? current review of service center Open. IRS reported that it
will initiate Open. We will continue to evaluate the deterrent controls to
include similar analyses of
efforts to expand deterrent controls effectiveness of IRS? efforts in our
fiscal year controls at IRS district offices and post- of- duty implemented
at service centers to 2001 audit. (Short- term) offices in areas such as
courier security,
ensure uniformity and consistency, safeguarding of receipts in locked
containers, and that it intends to strengthen requirements for
fingerprinting employees, and
these controls by 2003. In addition, requirements for promptly over-
stamping checks IRS reported that it plans to conduct made out to the ?IRS?
with ?Internal Revenue monthly on- site reviews of field Service? or ?United
States Treasury.? Based on offices using a checklist to test the results,
IRS should make appropriate compliance with current policies and changes to
strengthen its physical security
procedures. controls.
28. Require service center staff to provide Closed. IRS reported issuing a
Closed. We noted that service centers visited receipts to all walk- in
taxpayers regardless of the
memo in June 2000 to reinforce and generally issued receipts for all types
of
method of payment. In addition, IRS should post clarify its policy regarding
payments payments and that signs were posted signs reminding taxpayers to
request receipts. At made at service centers. Specifically,
reminding taxpayers to request receipts. service centers not normally
equipped to receive
signs must be posted in lobbies walk- in payments, payments received should
be reminding taxpayers to request a logged in and witnessed to ensure that
they are receipt if a payment is made, receipts
properly accounted for and deposited by the are to be provided to all
taxpayers deposit unit.
making such payments, and all receipts are to be logged in as well as
entered in the Form 809 cash receipts book. 29. Establish procedures to
ensure the prompt Closed. IRS reported implementing Open. During our fiscal
year 2000 review we recording of tax returns. IRS should implement
several IRM procedures throughout still found tax returns involving
significant controls to ensure that excise tax returns are 1999 to address
this issue. These
amounts that were not promptly recorded and recorded timely and included in
the quarterly include requiring service centers to
thus not included in the proper quarterly excise tax trust fund
certifications. express mail their Form 720s to the
excise tax trust fund certifications. We will Cincinnati service center
daily,
continue to evaluate IRS? efforts in our fiscal ensuring that Form 720s over
year 2001 financial statement audit of IRS. $1 million are batched
separately (Short- term) and expedited, and closely following up on overdue
returns.
30. Ensure that additional staff are employed or Open. IRS reported hiring
two Open. We will continue to evaluate IRS? existing staff appropriately
cross- trained to be additional persons to perform master
progress during our fiscal year 2001 financial able to perform the master
file extractions and file extractions and other ad hoc statement audit of
IRS. (Short- term) other ad hoc procedures needed for IRS to procedures.
However, IRS continually develop reliable balances for financial
acknowledged that additional staff reporting purposes.
are still needed for extractions and analysis.
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Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and
Manage Operations (GAO/ AIMD- 99- 196, August 9, 1999) 31. Promptly resolve
differences between IRS
Closed. IRS reported that it had Closed. During our FY 2000 audit, we found
and Treasury records of IRS' appropriation
committed additional resources to that IRS had successfully implemented
account balances and adjust accounts
resolve identified differences and policies and procedures to promptly
identify
accordingly. For example, reconciliations should adjust accounts
accordingly. This differences between IRS and Treasury records be performed
promptly every month, with included establishing a system in
of IRS? appropriation account balances and to Treasury and IRS amounts in
agreement and fiscal year 2000 to provide
appropriately resolve identified differences. reconciling items properly
resolved.
management oversight to assure that the accounts are reconciled each month.
32. Strengthen control over IRS? operating funds Closed. IRS reported that
it had Closed. In fiscal year 2000, IRS substantially
by promptly investigating and clearing suspense implemented an edit on the
reduced the amount and duration of account items. For example, outstanding
amounts suspense account that prevents
transactions held in suspense as compared to in the suspense account should
be reviewed entries older than 5 fiscal years, prior years. At fiscal year-
end, we found no every month to try to resolve and clear developed an aging
report for
material transactions in the suspense account outstanding balances. suspense
items, and developed a
that were older than one year. new process requiring a monthly
reconciliation certifying the validity of all suspense items. 33. Develop
subsidiary records for its accounts Open. Using ad hoc programs, IRS
Closed. In fiscal year 2000, IRS provided the payable and undelivered orders
and a list of
provided GAO with listings of listings stated. current year nonpayroll
operating expenses that accounts payable, undelivered
will provide reliable accounts payable, orders, and nonpayroll operating
undelivered orders, and nonpayroll operating expense data for the fiscal
year 2000 expense data. audit. It reported plans to implement
an enhanced financial system to include subsidiary records for accounts
payable, undelivered orders, and nonpayroll operating expenses in late 2003.
34. Develop the data to support meaningful cost Open. IRS reported that its
Open. IRS addressed the need for meaningful information categories and cost-
based integrated financial management cost information categories by
expanding the performance measures.
system, currently under format of its statement of net cost to provide
development, will include a cost more cost information on a larger number of
accounting system that will provide programs in a manner that is consistent
with management with timely and information provided in related funding
accurate cost information on requests. However, it does not yet have the
programs as well as products and
means to measure cost- based performance. services. It is currently targeted
for implementation in late 2003.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
35. Develop and implement procedures and Open. In fiscal year 2000 IRS
issued Open. During our fiscal year 2000 audit we controls to ensure that
detailed property and guidelines establishing a Single Point
continued to find problems with the accuracy equipment (P& E) records are
accurately Inventory Function (SPIF) to of the detailed P& E records for
both ADP and maintained. These procedures and controls establish
accountability for its ADP non- ADP property. We also found that
would include ensuring that physical inventories assets. This includes
establishing property management reviews were not at field locations are
effectively performed,
SPIF teams at each service center, effective during the year to ensure the
including prompt resolution of discrepancies computing center, and district
office. timeliness, completeness, and accuracy of the found in the
inventories and appropriate IRS also reported that it had records. We will
continue to evaluate IRS? adjustment of detailed records. converted all data
to a new inventory efforts during our fiscal year 2001 financial system and
had established an Asset
statement audit of IRS. (Long- term) Management Office to monitor the
resolution of inventory discrepancies.
36. Consider directing that a physical inventory of Closed. IRS now performs
annual Closed. We confirmed that annual physical P& E be performed with
adjustments being made physical inventories of both ADP and inventories are
now being performed. to IRS? detailed records accordingly. To ensure non-
ADP assets. It has also begun However, because of long- standing problems
that such efforts are not wasted IRS first needs to establishing SPIF teams
to improve
with its overall property system, IRS still establish and implement
effective procedures to the accuracy of its property and cannot ensure the
accuracy of its detailed ensure that the accuracy of detailed records,
equipment records.
records. We will continue to monitor the once corrected, is maintained.
accuracy of its property and equipment records under recommendation 35
above.
37. In conjunction with or shortly after a physical Closed. IRS reported
that it validates Closed. IRS no longer records the cost of P& E inventory,
we recommend that IRS perform a its P& E amounts through annual
in its detailed ADP property records. Instead, systematic validation of the
P& E amounts financial and Federal Managers? IRS has implemented interim
procedures to (valuation) for items in IRS? detailed records.
Financial Integrity Act of 1982 determine year- end balances for its P& E
(FMFIA) reviews.
accounts until its new integrated financial system is implemented, currently
targeted for late 2004. We will monitor IRS? recording of P& E under this
new system under
recommendation number 41. 38. Develop a means to capture and capitalize all
Closed. IRS reported that as of Closed. IRS has issued a policy to account
for
costs incurred to bring P& E to a form and location March 31, 2000, invoiced
costs such software costs and has implemented an suitable for its intended
use in accordance with as shipping, delivery, and installation interim
process for reporting the full cost of SFFAS No. 6, including design and
installation are captured in the process of P& E at fiscal year- end until
its integrated costs and the cost of externally developed
identifying and capitalizing the costs financial system is implemented. We
will software. of the assets.
monitor IRS? progress in properly capturing and capitalizing P& E costs in
the new integrated financial system under recommendation 41. 39. Revise the
current capitalization policy to Open. IRS reported that its pooling
Open. As of the fiscal year 2000 audit, IRS ensure that material P& E
acquisitions are not
approach of capitalizing ADP has not formalized its policy for
capitalization expensed.
equipment essentially reduces the of major projects and has not revised its
capitalization threshold to zero, thus capitalization policy for ADP and
non- ADP ensuring that material acquisitions P& E. We will continue to
evaluate IRS? efforts are not expensed. It reported that it
in our fiscal year 2001 financial statement plans to include internal use
software
audit of IRS. (Short- term) in this approach in fiscal year 2001, and that
management emphasis and oversight will reduce the risk of expensing material
P& E acquisitions.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
40. Review all lease agreements to determine Open. IRS reported that
contracting
Open. For fiscal year 2000, IRS hired a whether they meet the criteria for
capital leases officers are required to notify the contractor to review its
lease agreements to and capitalize and properly record any leases that
office of the Chief Financial Officer
identify those that met the criteria for capital meet the criteria.
(CFO) of all lease acquisitions with leases. However, IRS still does not
have a total payments in excess of $50,000
systematic process for ensuring that capital so that the CFO?s office can
review leases are properly identified and recorded. In them to determine
whether they addition, for fiscal year 2001 IRS will also represent capital
leases. IRS also need to review contracts for software license reported that
in November 2000 the fees to determine whether those contracts CFO?s office
completed reviewing meet capitalization criteria. (Short- term)
documentation for all leased assets acquired in fiscal year 2000 to
determine the status of prior year balances, whether additional capital
lease liabilities should be recorded, and to make other accounting
adjustments as necessary. IRS reported that it now reviews all lease
agreements on a periodic basis to identify capital leases.
41. Make enhancements to IRS financial systems Open. IRS reported that its
new Open. We will continue to evaluate IRS? to include recording P& E and
capital leases as integrated financial system, currently progress in
addressing these issues in its new assets when purchased and to generate
detailed targeted for late 2004, will allow system. (Long- term) records for
P& E that reconcile to the financial recording P& E and capital leases as
records. assets when purchased and will
generate detailed records for P& E that will reconcile to the financial
records.
42. Ensure that additional knowledgeable staff Closed. IRS reported that it
has Open. We confirmed individuals have been are employed or that existing
staff are added new management team hired and put in place to develop IRS?
financial appropriately cross- trained to be able to develop members to the
CFO organization to statements and perform accounting and
IRS? financial statements and perform its add stability and expertise, is
financial functions. However, in fiscal year accounting and financial
functions or are able to conducting a training program for
2000 we continued to find problems with IRS? perform the necessary
supervision needed to accounting staff, and is cross- training
preparation and development of its financial obtain reliable and supportable
financial data on accounting staff to reduce reliance statements. We will
evaluate the effectiveness time. on single individuals.
of the new team in our fiscal year 2001 audit. (Short- term)
43. Establish procedures for the financial Closed. IRS reported that it has
Open. As in prior years, we identified errors statements to undergo review
at the appropriate developed procedures that require a and omissions in the
draft fiscal year 2000
levels within the CFO office, with documented multilevel review of the
financial
financial statements indicating that this has evidence of the reviews.
statements and documentation of not been effectively implemented. We will
such reviews. continue to evaluate the effectiveness of these actions during
our fiscal year 2001 financial statement audit. (Short- term)
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
Internal Revenue Service: Recommendations to Improve Financial and
Operational Management
(GAO- 01- 42, November 17, 2000) 44. Better monitor IRS? procedures
requiring that
Open. IRS reported that it will issue a Open. We will evaluate the
effectiveness of a freeze code be entered on all accounts of a
memorandum to the field IRS? actions during our fiscal year 2001
taxpayer whom IRS has determined is potentially emphasizing the timely input
of the financial statement audit. (Short- term) liable for unpaid payroll
taxes. This should be freeze code and will revise the IRM done on all such
accounts to prevent the procedures to allow 30 days for the inadvertent
release of refunds to the taxpayer assessment of the trust fund penalty
until IRS determines the validity of the tax liability. after input of the
freeze code.
45. Revise policies and procedures governing the Closed. IRS reported that
it has Open. We continued to find delays in the
processing of abatement transactions to establish begun using a new Customer
processing of abatements during our fiscal (1) appropriate time frames for
processing Service Management Information year 2000 financial statement
audit. We will abatements, (2) a methodology for monitoring the Report,
which includes categories of evaluate the effectiveness of IRS? actions
timeliness of abatement processing, and (3) cases that often result in tax
during our fiscal year 2001 financial statement procedures to identify the
causes for delays and abatements, and has developed
audit. (Short- term) formulate corrective actions; and, examine other
automated approaches to abatement transactions arising from IRS errors to
further study the causes for delays in determine the causes for the errors
and, based processing abatements. IRS on this examination, formulate and
implement reported that it has existing appropriate procedures to reduce the
level of procedures for processing claims for
errors made when entering data into taxpayer abatements that are specific to
the accounts. type and amount claimed.
46. Implement procedures to monitor the age of Open. IRS reported plans to
Open. We will evaluate the effectiveness of all pending offers and to
require supervisors to centralize the processing of smallerdollar, IRS?
actions during our fiscal year 2001 audit.
follow up with staff to determine within 6 months less complex offers by the
end (Short- term) whether to accept or reject the offer.
of fiscal year 2001. As managers currently conduct regular workload reviews,
IRS believes this centralization will better address this
problem.
47. As an alternative to prematurely
Open. IRS reported that it planned to Open. We agree that addressing these
issues suspending active collection efforts, and address this issue in its
new strategic in IRS? strategic planning process is using the best available
information, develop
planning process, which is designed beneficial. However, we continue to
believe reliable cost- benefit data relating to collection
to identify and allocate finite that reliable internal cost- benefit data
and
efforts for cases with some collection resources to processes that would
analysis related to these programs is potential. These cost- benefit data
would
best improve the effectiveness of the necessary for IRS to make informed
resource include the full cost associated with the agency and provide better
service to
allocation decisions. We will continue to
increased collection activity (i. e., salaries,
the tax paying public. IRS reported evaluate IRS? efforts in our fiscal year
2001 benefits, and administrative support) as well
that because it is not possible to financial statement audit of IRS. (Short-
term)
as the expected additional tax collections
provide cost- benefit data in its generated.
current financial system, this issue will be addressed through the
implementation of a JFMIPcompliant standard general ledger, currently
targeted for implementation in late 2004.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
48. Incorporate into its systems
Open. IRS reported that in its plans Open. We will continue to monitor IRS?
modernization blueprint and strategic
for a data warehouse and a JFMIPcompliant progress in this area. (Long-
term)
planning process the capability to routinely
standard general ledger, it and reliably measure the cost- benefit of its
will include the structure for a cost collection activities and make
informed
accounting system. Implementation resource allocation decisions.
is currently targeted for late 2004.
49. Implement procedures to closely monitor
Open. IRS reported taking actions to Open. We will evaluate the
effectiveness of
the release of tax liens to ensure that they are
better ensure that liens that should IRS? efforts during our fiscal year
2001 audit.
released within 30 days of the date the related
be released are not overlooked and (Short- term)
tax liability is fully satisfied. As part of these
is in the process of negotiating
procedures, IRS should carefully analyze the
changes in procedures to improve causes of the delays in releasing tax liens
the identification and timeliness of identified by our work and prior work
by IRS? liens to be released.
former internal audit function and ensure that such procedures effectively
address these issues.
50. Revise the IRM to require that Closed. In October 2000, IRS revised
Closed. We confirmed that IRS has revised its IRS employees who initiate
manual refunds their procedures to require written procedures. We will
follow up on document their monitoring actions on case history documentation
and supervisory implementation of these requirements during sheets and
supervisors review monitoring actions review of monitoring actions.
our fiscal year 2001 financial statement audit. and document their review.
51. Determine why the program that generates Closed. IRS reported that it
had Open. Similar to our finding in fiscal year the Questionable Refund
Report was not refined its criteria for identifying
1999, in fiscal year 2000 we found that the functioning as intended during
fiscal year 1999
potential duplicate refunds under QRR was not consistently reviewed by and
implement appropriate corrective actions.
Duplicate Refund (DUPREF) responsible employees because they did not
transcripts and had worked with the
receive the report. We will follow up on the service centers to implement a
new effectiveness of IRS? corrective actions in this diagnostic tool for
verifying
area during our fiscal year 2001 audit. (Short payments.
term)
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
52. IRS should (1) determine why service centers Closed. IRS reported that
it has Open. We confirmed that in fiscal year 2000 have not been more
effective in stopping refunds recently implemented several IRS retained the
data on the number and
associated with questionable EITCs and make measures to help prevent
improper dollar amount of claims screened through
changes to current procedures, as appropriate; EITC refunds, such as
automatically EFDS. We will follow up on the effectiveness (2) review
procedures for enforcing taxpayer freezing refunds when there is an
of the remaining measures during our fiscal compliance with the Taxpayer
Relief Act of 1997
open examination, using expanded year 2001 financial statement audit.
(Shortterm) and implement actions to prevent taxpayers who data such as
child support orders to were denied an EITC for tax year 1997 or any
identify questionable claims, and subsequent year from being granted an EITC
in
reducing examination cycle time. IRS successive years until they provide the
requisite
reported that it is currently reviewing supporting documentation; and (3)
track the total
its procedures to ensure that they are number of and dollars in EITCs
subjected each in accordance with the Taxpayer year to Electronic Fraud
Detection System Relief Act of 1997 and has (EFDS) screening and related
efforts to enable
implemented an indicator to help IRS to estimate the full magnitude of
suspicious prevent taxpayers from receiving an EITCs and determine the level
of resources to be EITC if they have previously been
devoted to EFDS screening and investigative found ineligible. IRS reported
that in follow- up appropriate for the risks and potential fiscal year 2000
it began collecting
losses involved. data on the number and dollar
amount of EITC claims screened through EFDS.
53. For (1) IRS? Automated Underreporter and
Open. IRS reported that it plans to Open. We agree that addressing these
issues Combined Annual Wage Reporting programs,
address this issue in its new strategic in IRS? strategic planning process
is (2) screening and examination of EITC claims, planning process, which is
designed beneficial. However, we continue to believe and (3) identifying and
collecting previously to identify and allocate finite
that reliable internal cost- benefit data and
disbursed improper refunds, use the best resources to processes that would
analysis related to these programs is available information to develop
reliable costbenefit
best improve the effectiveness of the necessary for IRS to make informed
resource data to estimate the tax revenue
agency and provide better service to allocation decisions. We will continue
to
collected by, and the amount of improper
the tax paying public. IRS reported evaluate IRS? efforts in our fiscal year
2001 refunds returned to, IRS for each dollar spent
that because it is not possible to financial statement audit of IRS. (Short-
term)
pursuing these outstanding amounts. These provide cost- benefit data in its
data would include (1) an estimate of the full
current financial system, this issue
cost incurred by IRS in performing each of
will be addressed through the
these efforts, including the salaries and implementation of a JFMIPcompliant
benefits of all staff involved, as well as any
standard general ledger,
related nonpersonnel costs, such as supplies
currently targeted for implementation
and utilities, and (2) the actual amount
in late 2004.
(a) collected on tax amounts assessed and (b) recovered on improper refunds
disbursed.
54. Incorporate in IRS? systems modernization Open. IRS reported that in its
plans Open. We will continue to monitor IRS? blueprint and strategic
planning process
for a data warehouse and a JFMIPcompliant progress in this area. (Long-
term)
capabilities for routinely and reliably
standard general ledger, it measuring the cost- benefit of each of the
will include the structure for a cost efforts listed in recommendation 53
and make accounting system. Implementation informed resource allocation
decisions.
is currently targeted for late 2004.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
55. Work with Treasury?s Financial Open. IRS reported that security Open. We
will monitor IRS? progress in Management Service (FMS) to revise the
standards for lockbox banks
implementing these requirements during our
current lockbox contracts to emphasize
consistent with security requirements fiscal year 2001 financial statement
audit of security requirements and to specifically at IRS campuses have been
IRS. (Short- term)
require that
approved and will be included in the
(1) fingerprint checks be completed before lockbox contracts effective
January employees begin working;
1, 2002. According to IRS, these (2) temporary employees be subjected to
standards include courier and
background checks that are consistent with background investigation
standards those required for IRS employees; and
that are consistent with IRS campus (3) at a minimum, lockbox bank courier
requirements.
services meet the service center requirements contained in IRS? November 16,
1999, policy.
56. Ensure that all IRS units receiving collections Closed. IRS reported
that it plans to Open. We will continue to monitor IRS? have consistent
policies and procedures to
conduct monthly on- site reviews of progress in this area during our fiscal
year safeguard and account for cash receipts.
service center campuses and field 2001 financial statement audit. (Short-
term)
offices using a checklist to test compliance with existing policies and
procedures. 57. Perform and document periodic observations Closed. IRS
reported that it plans to
Open. We will continue to monitor IRS? and reviews to monitor and enforce
compliance conduct monthly on- site reviews of progress in this area during
our fiscal year with policies addressing the safeguarding of cash service
center campuses and field
2001 financial statement audit. (Short- term) receipts.
offices using a checklist to test compliance with existing policies and
procedures. 58. Develop a subsidiary ledger for leasehold Open. IRS reported
that a subsidiary Open. We will continue to evaluate the improvements and
implement procedures to
ledger for leasehold improvements effectiveness of IRS? efforts in this
area. record leasehold improvement costs as they will be acquired as part of
an
(Long- term) occur.
integrated financial system that IRS plans to implement as part of its
overall systems modernization effort.
It is currently targeted for late 2004. 59. Implement procedures and
controls to ensure Closed. IRS reported that as of
Open. We will evaluate the effectiveness of that expenditures for P& E are
charged to the December 2000 its accounting IRS? efforts during our fiscal
year 2001 audit of correct accounting codes to provide reliable
system requires entering the Project IRS. (Short- term)
records for expenditures as a basis of extracting Cost Accounting System
code to
the costs for major systems and leasehold identify expenditures for specific
improvements.
major systems. At the same time, IRS reported that it has implemented an
interim procedure to use the subobject code to track leasehold improvements.
60. Establish a system to capture all costs related
Closed. IRS reported that projects Closed. We confirmed that IRS capitalized
its to the PRIME effort to modernize IRS? computer under the PRIME contract
that meet major systems costs in fiscal year 2000. systems.
the definition of a major system will be capitalized under each system.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
61. Develop procedures and systems to capture Closed. IRS reported that in
October Open. We will evaluate the effectiveness of
and capitalize the cost of internally developed 2000 it implemented a
tracking this new system in meeting SFFAS No. 10 software in accordance with
SFFAS No. 10,
system to capture internally requirements during our fiscal year 2001
Accounting for Internal Use Software.
developed software data. financial statement audit. (Short- term) 62.
Consolidate and update the P& E policies and Open. IRS reported that a task
force Open. We will monitor IRS? progress during procedures currently
documented in various
is currently consolidating all ADP our fiscal year 2001 financial statement
audit.
handbooks and policy memorandums into a IRM and supplemental procedural
(Short- term) comprehensive document that personnel
guide system documentation into a responsible for maintaining inventory
records can
single IRM for asset management. It use as a reference.
plans to merge non- ADP equipment into its new integrated property system,
which will then control all of IRS? P& E.
63. Assign a senior- level position with overall Closed. IRS reported that
the Chief
Closed. We are closing this recommendation responsibility for ensuring that
P& E records are Information Officer now has the
based on the action taken by IRS. However, accurate and P& E is properly
accounted for. authority and responsibility for
we will continue to monitor IRS? progress in management and control of all
ADP developing a new property system and the property. Once non- ADP
property is effectiveness of management?s P& E policies consolidated into
the new, single
and procedures. inventory system, the CIO will have responsibility for all
property.
64. Develop and implement procedures so that Open. IRS reported that
effective Open. During fiscal year 2000 we found that personnel responsible
for maintaining P& E fiscal year 2000, SPIF procedures SPIF teams were not
staffed at all sites and inventory records receive prompt notification were
established to ensure prompt SPIF procedures had not been fully when P& E is
received, moved, or disposed of. notification of P& E when received,
implemented. We continued to find problems Procedures should help ensure
that those moved, or disposed of. IRS also with the timely recording of P& E
acquisitions responsible for maintaining inventory records reported that on-
line tools have been and disposals and with the accuracy of data
promptly receive documentation supporting P& E developed to ensure that
appropriate
on detailed P& E records. We will continue to transactions, such as
receiving reports, invoices,
procurement information is recorded evaluate IRS? efforts in our fiscal year
2001 and disposal documents. on assets received by SPIF financial statement
audit of IRS. (Short- term) personnel.
65. Revise guidance on recording P& E to clearly Closed. IRS reported that
new Open. During fiscal year 2000 we continued to state that P& E is to be
recorded when title passes procedures had been established to find
unrecorded items. We will evaluate the to IRS or when delivered, based on
the terms of
require project offices to notify the effectiveness of IRS? procedures
during our the contract regarding shipping and delivery. This SPIF corporate
office of P& E
fiscal year 2001 audit. (Short- term) is to clarify that P& E and related
accounts deployments and that a new module payable should be promptly
recorded when P& E
had been established in the SPIF is received, in accordance with SFFAS No.
6,
system to allow assets to be received rather than when it is placed in
service.
and validated electronically. 66. Provide training on P& E policy and
Open. IRS reported that SPIF Open. We will evaluate the effectiveness of
procedures to personnel responsible for personnel have now received formal
IRS? actions during our fiscal year 2001 maintaining inventory records to
help ensure that training related to recording financial statement audit.
(Short- term) P& E transactions are promptly and accurately transactions in
the ADP inventory
recorded. system.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
67. Review, and correct as necessary, data in Closed. IRS reported that it
has Open. During fiscal year 2000 we continued to inventory records, such as
serial or model begun an effort at database cleanup,
find errors in IRS? P& E records. We will numbers and manufacturer names,
during and that new SPIF procedures have evaluate the effectiveness of IRS?
corrective periodic inventories of P& E. been developed and implemented for
actions during our fiscal year 2001 audit. fiscal year 2001.
(Short- term) 68. Perform sufficient supervisory reviews to help
Closed. IRS reported that it recently Open. We will evaluate the
effectiveness of ensure that transactions recorded on P& E developed quality
review procedures these planned actions during our fiscal year inventory
records are accurately entered into
that require an annual audit of each 2001 financial statement audit. (Short-
term) subsidiary records and appropriately supported site?s property records
and inventory by documentation.
results. These audits will verify that property management procedures are
being followed, are effective, and
that inventories are being properly conducted. IRS also reported that it has
drafted Quality Assurance
Standards and will begin performing quality reviews in fiscal year 2002. 69.
Periodically analyze outstanding obligations,
Closed. IRS reported that it has Closed. During our fiscal year 2000 audit,
we including an aging of obligations to identify implemented procedures to
found that IRS analyzed its obligations and potential items that may require
deobligation. The periodically review obligations,
deobligated those that it deemed were no CFO office should then coordinate
with the including requiring managers to longer valid. financial plan
managers to help ensure that justify keeping obligations on the invalid
undelivered orders are promptly books. This will be an ongoing effort
deobligated.
that the CFO will oversee. 70. Develop a subsidiary ledger (for suspense
Closed. IRS reported that it had Closed. In fiscal year 2000, IRS provided a
accounts) that shows underlying detailed
developed a subsidiary ledger that detailed listing of suspense items that
transactions and reconciles by year to the reconciles to the general ledger.
reconciled to its general ledger and balances in the administrative general
ledger. IRS substantially reduced the number and dollar should first clear
old outstanding items in the value of items in the suspense account.
general ledger to reflect actual balances by fiscal year. 71. Develop
policies and procedures to classify
Open. IRS reported that as it Open. We will continue to monitor IRS? program
costs according to the nature of the work reorganizes and implements a cost
progress in this area. (Short- term) performed and in a manner commonly
accounting system, it will classify understood by users of financial
statements. This program costs to ensure program classification should also
be consistent with the managers are accountable for the full classification
of related funding requirements in costs of their programs and in a IRS'
budgetary requests to the Congress.
manner understandable to the users of its financial statements. 72.
Incorporate into its tax systems modernization Open. IRS reported that it
plans to
Open. We will continue to monitor IRS? plans, as they relate to financial
management, the include the structure for a cost progress in this area.
(Long- term) development of a cost accounting system that will accounting
process in its plans for a track and report, in appropriate detail, the full
data warehouse and JFMIP costs associated with its activities and programs
compliant general ledger for both its at the project and subproject level.
This system custodial and administrative should include a payroll system
that provides for
accounting. Implementation is activity- based costing of individual jobs to
which currently targeted for late 2004. staff are assigned.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
73. Review the U. S. Department of Agriculture?s Closed. IRS reported
implementing Closed. We tested the reasonableness of (USDA) Office of the
Inspector General (OIG)
compensating control procedures, payroll expenses, verified and confirmed
that annual audit report on the National Finance including checking the
total dollars disbursed by NFC agreed with Center?s (NFC) internal control
structure and any
reasonableness of payroll expenses that shown in IRS? general ledger, and
relevant GAO reports, evaluate the risk in the by pay period, verifying
dollars reviewed IRS? random sample of employees, control environment at
NFC, and implement expended per Treasury against IRS? and we found no
discrepancies. control procedures as necessary to mitigate the
general ledger, and testing the risk associated with the weaknesses
identified in accuracy of payroll data against NFC?s payroll processing
systems. These
timesheets and personnel records for procedures could include but not be
limited to a random sample of employees. (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.
74. Establish policies and procedures to ensure Open. IRS reported
developing
Open. During our fiscal year 2000 financial that all administrative and, to
the extent possible, internal procedures to ensure that statement audit, we
found substantial delays custodial transactions are promptly recorded in
transactions are recorded in a timely in the recording of transactions in
the custodial the general ledger, preferably within 30 days of manner in the
administrative general and administrative general ledgers. We will the
transaction. ledger and plans to discuss the
continue to monitor IRS? progress in this area. reporting of custodial
revenue and
(Short- term) refund transactions with OMB and Tr eas ur y.
75. Incorporate into its systems modernization Open. IRS reported that these
Open. We will continue to monitor IRS? plan requirements and specifications
for a general requirements have been included in progress in this area.
(Long- term) ledger system that (1) accumulates and the blueprint for its
systems summarizes IRS? custodial and administrative modernization.
transactions for financial reporting purposes, (2) is integrated with its
supporting subsidiary records and (3) is fully compliant with the U. S.
Standard General Ledger at the transaction level.
76. Revise procedure manuals to require that Closed. IRS reported that it
had Open. During our fiscal year 2000 review, we accruals be recorded when
services have been issued guidance requiring that
continued to find accruals of goods and performed and goods received,
regardless of
accruals be recorded when services services that were not recorded in a
timely whether an invoice has been received. This may have been performed or
when goods
manner. We will continue to monitor the require recording estimates of costs
incurred are received, regardless of whether
effectiveness of IRS? efforts in this area. based on reliable data. In these
cases, additional
an invoice has been received. (Short- term)
detailed guidance should be provided in determining the amounts.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
77. Ensure that the acceptance date entered in Closed. IRS reported that it
had Open. During our fiscal year 2000 review, we Request Tracking System/
Integrated issued guidance directing staff to continued to find errors
related to the date Procurement System (RTS/ IPS) represents the record the
date that goods and used to record acceptance of goods and
date that IRS received the goods and services services are received as the
services. We will continue to monitor the
rather than the date acceptance was entered into acceptance date, rather
than the effectiveness of IRS? efforts in this area.
the system. date the acceptance was input into
(Short- term) the system.
78. Provide training to key program offices on the Closed. IRS reported that
its Annual Closed. IRS revised its accrual process in accrual process. Close
Guidelines for closing out the fiscal year 2000 and no longer relies on
year- end books includes a
program managers to determine the accrual discussion of the accrual process.
amounts. Instead, for fiscal year 2000, IRS based its accrual estimates on
payments processed, manual document tracking and
estimated costs for major contracts. 79. Develop, document, and implement
detailed Closed. Procedures were revised Closed. In fiscal year 2000, IRS
prepared and written procedures for summarizing data used to and documented
to provide a more
implemented written procedures for their produce the trust fund
certifications. IRS should comprehensive instruction on the
excise tax certification process. We found no clearly define the steps being
performed and steps necessary to prepare excise manual errors in our fiscal
year 2000 review of consistently apply them throughout the year. tax
certifications.
IRS certifications. Whenever deviations are required, such as for prior
period adjustments, explanations should be properly documented.
Management Letter: Improvements Needed in IRS? Accounting Procedures and
Internal Controls (GAO- 01- 880R, July 30, 2001) 80. Develop a mechanism to
track and report the Open. IRS reported that it plans to
Open. We will continue to monitor IRS? actual costs associated with
reimbursable prepare and issue guidance on the
progress in this area. (Short- term) activities.
costing of reimbursable agreements and on acceptable methods to track actual
costs as work is accomplished and billed. IRS reported that, in the long
term, its new financial system will include a cost management system. 81.
Establish procedures to periodically reconcile
Open. IRS reported that it is using Open. We will continue to monitor IRS?
the subsidiary records to the control account for newly designed subsidiary
reports progress in this area. (Short- term)
reimbursable receivables to ensure that the that detail all transactions
related to
balance is adequately supported. reimbursable activities to ensure the
accuracy of its general ledger
balance for reimbursable receivables. 82. Routinely age and review currently
open Closed. IRS reported that it is Open. We will continue to monitor IRS?
reimbursable receivable accounts to identify currently aging open
reimbursable
progress in this area. (Short- term) accounts that are no longer valid or
collectible.
receivable accounts, reviewing all reimbursable and accounts receivable, and
forwarding accounts older than 180 days for collection or write- off. IRS
also reported that it is reviewing all advance collections to ensure that
they are properly applied.
(Continued From Previous Page)
Status of GAO recommendations Recommendations reported by IRS a GAO status
of recommendations
83. Develop and implement procedures to require Closed. IRS indicated that
it is Open. Most of the equipment purchased by that prepayments be recorded
as assets routinely charged depreciation expenses and
the WCF that benefits IRS for more than 1 at the time the cost is incurred
in accordance with not the full cost of the assets
year is expensed by the WCF in the year of GAAP. Services that are provided
to IRS that will
acquired under the Working Capital purchase because it does not meet the
WCF?s
benefit IRS for more than 1 year should be Fund (WCF). capitalization
threshold. Therefore, by using established as prepaid expenses and amortized
WCF data as a basis for determining how over the period of the benefit. much
of the cost of an asset should be expensed, IRS effectively expenses this
equipment in the year of purchase even though it will benefit IRS for more
than 1 year. We will follow up during our fiscal year 2001 audit. (Short-
term) 84. Ensure that IRS personnel maintain effective
Closed. IRS reported that it is Open. We will continue to monitor IRS?
oversight of the completeness and accuracy of overseeing contractors and
reviewing progress in this area. (Short- term) contractor- generated
information.
contractor- generated information. 85. Ensure compliance with Treasury
regulations Closed. IRS reported that it has Open. We will continue to
monitor IRS? requiring that all transfers of funds between developed reports
to track transfers, progress in this area. (Short- term)
appropriations be properly approved and and that it has implemented
documented prior to being recorded in the
procedures to verify that each financial records. transfer is validated by
supporting documentation. a The ?Status of GAO recommendations reported by
IRS? is based primarily on the following IRS documents: Internal Revenue
Service Remediation Plan,
April 30, 2001, a January 16, 2001 letter from IRS to Congress responding to
recommendations in GAO- 01- 42, November 17, 2000, and a schedule provided
by IRS on August 31, 2001, of IRS actions to address GAO?s recommendations
related to IRS? financial and operational activities. b As part of its
ongoing reorganization, IRS now calls these offices ?campuses.?
Table 10: New GAO Recommendations on IRS Financial Management
Recommendations Recommended effort involved
Internal Revenue Service: Progress Made, but Further Actions Needed to
Improve Financial Management
(GAO- 02- 35, October 19, 2001) 86. Implement policies and procedures to
record capitalizable acquisition costs for property and Short- term
equipment, capital leases, leasehold improvements and major systems in the
appropriate P& E general ledger accounts as transactions occur. 87. Revise
the definitions of Sub- Object Class (SOC) codes pertaining to P& E or
establish new Short- term
codes so that individual SOC codes cannot be used for both capitalizable
purchases (assets) and noncapitalizable purchases (expenses). For example,
the SOC code used to record capitalizable software costs should not be used
to record noncapitalizable software license fees. 88. Perform periodic
reviews to monitor and ensure that obligations are promptly established in
the Short- term accounting system. Such reviews would assist IRS in
maintaining accurate and complete records of its obligations and in reducing
the risk of obligations exceeding available funding.
89. Incorporate into the systems modernization blueprint the capability to
differentiate prior- year Short- term
adjustments between activities that are valid upward and downward
adjustments to obligations and activities that are not valid adjustments to
obligations. Such actions would help ensure that activities that are not
valid adjustments to obligations are not recorded as adjustments to
obligations. 90. Develop, document, and implement policies and procedures to
require that reconciliations Short- term between proprietary and budgetary
accounts be performed monthly so that differences can be identified
promptly, and if necessary, adjusted.
91. Develop, document, and implement policies and procedures to require that
routine reviews and Short- term
analyses of general ledger account balances be conducted to promptly
identify errors and omissions.
92. Develop, document, and implement policies and procedures to require that
corrections and Short- term
adjusting entries be recorded throughout the year to reduce the magnitude of
year- end adjustments and improve the reliability of interim financial data.
93. Implement policies and procedures to require that all employees itemize
on their time cards the Short- term
time spent on specific projects. 94. Implement policies and procedures to
allocate nonpersonnel costs to programs and activities on Short- term a
routine basis throughout the year. 95. Document reviews performed to
validate that performance data are complete, accurate, and Short- term
reliable.
Appendi x II I Comments From the Internal Revenue Service
Appendi x I V
GAO Contacts and Staff Acknowledgments GAO Contacts Steve Sebastian, (202)
512- 3406 Doreen Eng, (206) 287- 4858 Acknowledgments In addition to those
named above, Tuyet- Quan Thai, Delores Lee, Richard
Harada, George Jones, and William Cordrey made key contributions to this
report.
191002 Lett er
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Page i GAO- 02- 35 IRS Financial Management
Contents
Contents
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Appendix I
Appendix I Scope and Methodology
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Appendix II
Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix II Status of GAO Recommendations From Prior IRS Financial Audits
and Related Financial Management Reports
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Appendix III
Appendix III Comments From the Internal Revenue Service
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Appendix III Comments From the Internal Revenue Service
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Appendix III Comments From the Internal Revenue Service
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Appendix III Comments From the Internal Revenue Service
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Appendix III Comments From the Internal Revenue Service
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Appendix III Comments From the Internal Revenue Service
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Appendix IV
United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300
Address Correction Requested Presorted Standard
Postage & Fees Paid GAO Permit No. GI00
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Contents Table 1: Internal Control and Compliance Issues Related to Unpaid
Assessments 10 Table 2: Internal Control Issues Related to Refunds and
Earned
Income Tax Credit Claims 20 Table 3: AUR Cases With Discrepancies, Cases
Investigated, Cases Not Investigated and Their Estimated Underreported
Taxes 24 Table 4: Internal Control Issues Related to Manual Receipts and
Taxpayer Data 25 Table 5: IRS Employees Hired and Working, After April 3,
2000,
Prior to IRS Receipt of Fingerprint Check Results 29 Table 6: Internal
Control Issues Related to Property and
Equipment 35 Table 7: Internal Control Issues Related to Appropriated Funds
42 Table 8: Internal Control and Compliance Issues Related to
Financial Reporting 49 Table 9: Status of Open GAO Recommendations on IRS?
Financial
and Operational Activities 67 Table 10: New GAO Recommendations on IRS
Financial Management 86
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Contents Figure 1: Comparison of Unpaid Assessments Before and After
Adjustments as of September 30, 2000 13
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