Internal Revenue Service: Status of Recommendation from Financial
Audits and Related Financial Management Reports (28-APR-04,	 
GAO-04-523).							 
                                                                 
In its role as the nation's tax collector, the Internal Revenue  
Service (IRS) has a demanding responsibility in collecting taxes,
processing tax returns, and enforcing the nation's tax laws.	 
Since GAO's first audit of IRS's financial statements in fiscal  
year 1992, a number of weaknesses in IRS's financial management  
operations have been identified. In related reports, GAO has	 
recommended corrective action to address those weaknesses. Each  
year as part of the annual audit of IRS's financial statements,  
GAO not only makes recommendations to address any new weaknesses 
identified but also follows up on the open weaknesses GAO	 
identified in previous years' audits. The purpose of this report 
is to assist IRS management in tracking the status of audit	 
recommendations and actions needed to address them.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-523 					        
    ACCNO:   A09859						        
  TITLE:     Internal Revenue Service: Status of Recommendation from  
Financial Audits and Related Financial Management Reports	 
     DATE:   04/28/2004 
  SUBJECT:   Financial management				 
	     Financial statement audits 			 
	     Tax returns					 
	     Internal controls					 
	     Tax administration 				 
	     Tax administration systems 			 
	     Performance measures				 

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GAO-04-523

United States General Accounting Office

               GAO	Report to the Commissioner of Internal Revenue

April 2004

INTERNAL REVENUE SERVICE

Status of Recommendations from Financial Audits and Related Financial Management
                                    Reports

                                       a

GAO-04-523

Highlights of GAO-04-523, a report to the Commissioner of Internal Revenue

In its role as the nation's tax collector, the Internal Revenue Service
(IRS) has a demanding responsibility in collecting taxes, processing tax
returns, and enforcing the nation's tax laws. Since GAO's first audit of
IRS's financial statements in fiscal year 1992, a number of weaknesses in
IRS's financial management operations have been identified. In related
reports, GAO has recommended corrective action to address those
weaknesses.

Each year as part of the annual audit of IRS's financial statements, GAO
not only makes recommendations to address any new weaknesses identified
but also follows up on the open weaknesses GAO identified in previous
years' audits. The purpose of this report is to assist IRS management in
tracking the status of audit recommendations and actions needed to address
them.

www.gao.gov/cgi-bin/getrpt?GAO-04-523.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Steven J. Sebastian at (202)
512-3406 or [email protected].

April 2004

INTERNAL REVENUE SERVICE

Status of Recommendations from Financial Audits and Related Financial Management
Reports

Although IRS has made improvements to address a number of financial
management weaknesses, some of the open audit recommendations have been
outstanding for an extended period of time. IRS has continued to
experience delays in the implementation of the new systems intended to
correct some of these long-standing deficiencies. Others, however, could
be resolved with additional management attention. The continued existence
of these financial management weaknesses exposes IRS to loss due to errors
or theft and impairs the availability of current, accurate financial
information that management needs to make decisions on a day-to-day basis.

Of 100 recommendations related to financial management (consisting of 78
recommendations open as of May 2003, 7 recommendations included in GAO's
July 2003 report on IRS's excise tax certification process, and 15 new
recommendations included in GAO's management report for fiscal year 2003),
GAO is closing 24 because of actions IRS has taken to address the issues
that gave rise to them. These actions were verified by GAO in the course
of conducting the audit of IRS's fiscal year 2003 financial statements.

Of the remaining 76 financial management recommendations GAO considers
open as of the date of this report, 66 are short term (capable of being
addressed within 2 years) and 10 are long term (expected to require more
than 2 years to implement). IRS considers 37 (49 percent) of the 76
recommendations to be closed. GAO considers 12 of these 37 still open
because it has not yet had an opportunity to verify the actions taken by
IRS. The actions cited by IRS for these 12 recommendations are recent and
were taken after GAO's financial statement audit work for the year was
completed. For 24 of the 37 recommendations that IRS considers closed, GAO
found that action taken by IRS has not yet been fully effective in
addressing the conditions that gave rise to the recommendations. IRS
disagrees with the remaining recommendation.

IRS continues to exhibit a strong commitment to addressing its ongoing
financial management problems and has made improvements in recent years
that have resulted in the closing of many recommendations. At the same
time, the continued existence of the serious financial management
weaknesses that gave rise to the remaining open recommendations represents
a serious obstacle that IRS needs to overcome to achieve effective
financial management.

GAO will continue to monitor IRS's progress in implementing the 76
recommendations that remain open during the fiscal year 2004 audit. IRS
said it expects GAO to find in its fiscal year 2004 financial audit that
IRS has taken corrective actions to allow closure of another 37
recommendations. In addition, IRS stated that it is actively working to
implement corrective actions to address all remaining open
recommendations.

Contents

        Letter                                                              1 
                              Status of Recommendations                     2 
                                   Agency Comments                          6 
                          Objective, Scope, and Methodology                 6 

Appendixes

                                  Appendix I:

                    Appendix II: Appendix III: Appendix IV:

Status of GAO Recommendations from Prior IRS Financial
Audits and Related Management Reports 8

Details on Audit Methodology 55

Comments from the Internal Revenue Service 57

GAO Contact and Staff Acknowledgments 58
GAO Contact 58
Acknowledgments 58

Contents

Abbreviations

CADE Customer Account Data Engine
CAP Custodial Accounting Project
FA Field Assistance
FAOP Field Assistance Operating Procedures
FMS Financial Management Service
IFS Integrated Financial System
IRM Internal Revenue Manual
IRS Internal Revenue Service
ITAMS Information Technology Asset Management System
LPG Lockbox Processing Guidelines
MOU Memorandum of Understanding
NBIC National Background Investigation Center
P&E property and equipment
SETS Security Entry and Tracking System
SLA Service Level Agreement
SPC Submission Processing Center
TAC Taxpayer Assistance Center
TFRP Trust Fund Recovery Penalty
W&I Wage and Investment

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

April 28, 2004

The Honorable Mark W. Everson Commissioner of Internal Revenue

Dear Mr. Everson:

This report provides the status of the Internal Revenue Service's (IRS)
efforts to implement recommendations we have made based on our audits of
IRS's financial statements and other efforts related to financial
management. In updating the status of these recommendations, we have
included the results of our audits of IRS's financial statements for
fiscal years 2003 and 2002.1 This report is being provided to you to (1)
assist IRS management in tracking the unresolved issues identified in our
prior audits2 and (2) report on the current status of open audit
recommendations detailed in our previous financial audit and financial
management-related reports. In cases where IRS has taken action on open
recommendations that did not result in our closing them, we explain why
this occurred. No new recommendations are being made in this report.

Since our first audit of IRS's financial statements in fiscal year 1992,
our audits have identified a number of weaknesses in IRS's financial
management operations. In related reports on IRS's internal controls, we
have recommended corrective actions to address those weaknesses. Appendix
I lists (1) recommendations we have made based on our financial audits and
other financial management-related work that we have not previously
reported as closed, (2) the status of each of these recommendations and
corrective actions taken or planned as of February 2004 as reported to us
by IRS and incorporated in appendix I, and (3) our analysis of whether the
issues that gave rise to the recommendations have been effectively and
fully addressed based on the work performed during our fiscal year 2003
financial audit. Effectively implementing recommendations is critical for
IRS to resolve its financial management challenges.

1U.S. General Accounting Office, Financial Audit: IRS's Fiscal Years 2003
and 2002 Financial Statements, GAO-04-126 (Washington, D.C.: Nov. 13,
2003).

2U.S. General Accounting Office, Internal Revenue Service: Status of
Recommendations from Financial Audits and Related Financial Management
Reports, GAO-03-665 (Washington, D.C.: May 29, 2003).

Status of Recommendations

In May 2003, we issued a report that provided (1) the status of IRS's
efforts to implement prior recommendations as of our fiscal year 2002
financial audit3 and (2) new recommendations based on the results of our
fiscal year 2002 financial audit.4 In the May 2003 report, we included 98
audit recommendations that we had not previously reported as being closed,
1 dating back as far as 1993. Of the 98 recommendations, 20 were closed at
the time that report was issued, leaving 78 that were used as a starting
point for appendix I of this report. For this year, we added 7
recommendations from our July 2003 report on the excise tax certification
process5 and 15 new recommendations included in GAO's management report
for fiscal year 2003,6 for a total of 100 recommendations. Based on the
results of our recently completed fiscal year 2003 financial audit, we are
closing 24 recommendations made in prior audits due to verified actions
IRS has taken to address the issues that gave rise to them. Therefore, as
of the date of this report, 76 financial management recommendations remain
open, 66 of which are short term and 10 of which are long term.7

3U.S. General Accounting Office, Financial Audit: IRS's Fiscal Year 2002
and 2001 Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 15,
2002).

4GAO-03-665.

5U.S. General Accounting Office, Management Report: Improvements Needed in
Controls over IRS's Excise Tax Certification Process, GAO-03-687R
(Washington, D.C.: July 23, 2003).

6U.S. General Accounting Office, Management Report: Improvements Needed in
IRS's Internal Controls and Accounting Procedures, GAO-04-553R
(Washington, D.C.: Apr. 26, 2004).

7Short-term recommendations are defined as those that could be addressed
within 2 years. Long-term recommendations are defined as those expected to
require 2 years or more to implement.

As indicated in appendix I, of the 76 recommendations we consider to be
open, IRS considers 37 (49 percent) to be closed. We consider 12 of these
recommendations to be open because IRS took corrective action to resolve
these recommendations after we completed our testing for the fiscal year
2003 audit and, as a result, we have not yet had time to verify
implementation of the corrective actions, which is a prerequisite to our
closing a recommendation. We will verify the effectiveness of IRS's
actions to address these recommendations during our fiscal year 2004
audit. For 24 of the 37 recommendations that IRS considers closed, we
found that action taken by IRS has not been fully effective in addressing
the conditions that gave rise to the recommendations. IRS disagrees with
the remaining recommendation,8 though it had agreed with the
recommendation at the time it was made.

Twenty-three of the 24 recommendations that IRS considers closed but that
we consider open involved the issuance of formal written policies or
directives aimed at addressing the internal control deficiencies that gave
rise to the recommendations. However, we found that these policies or
directives were not being adhered to or were not fully effective in
correcting the deficiencies that led to the recommendations. We also found
that the revised policies or directives intended to correct 6 of these 23
recommendations did not adequately address the underlying issues. We
believe that all these recommendations could be resolved with additional
management follow-up to ensure that the revised policies and directives
specifically address the issues and to ensure that corrective actions as
envisioned in policy and procedural changes are fully and effectively
implemented. In the interim, the underlying weaknesses will likely
continue to exist, impairing the quality and timeliness of IRS's financial
information and increasing its exposure to losses.

A number of the 76 recommendations in appendix I that we consider to be
open have been outstanding for an extended period of time. For example, 24
(32 percent) of the recommendations were made over 2 years ago, including
15 recommendations from more than 3 years ago, 4 recommendations from more
than 5 years ago, and 1 recommendation that has remained open for over 10
years. The continued existence of the issues that gave rise to these
recommendations exposes IRS to losses due to

8Recommendation 03-08 in appendix I was issued to correct a potential
conflict in the responsibilities of lockbox coordinators, who assist
lockbox banks with processing issues and who also perform the on-site
performance review of those banks.

errors or theft, and impairs the availability of the current, accurate
financial information management needs to make decisions.

The majority of the 76 recommendations we consider to be open address one
of two broad issues:

o 	Forty-one (54 percent), all of which we consider to be short term,
relate to weaknesses in (1) management controls over lockbox banks that
process taxpayer receipts and (2) controls intended to safeguard taxpayer
receipts and data at IRS sites. These continued weaknesses expose IRS to
unnecessary risk of loss and increase taxpayer exposure to losses from
financial crimes committed by individuals who inappropriately gain access
to confidential personal information. IRS considers 28 of these
recommendations closed. However, during our fiscal year 2003 financial
audit, we found that IRS's corrective actions had not fully resolved the
issues for 22 of these 28 recommendations and, for the remaining 6
recommendations, IRS's actions occurred after we completed our testing for
the fiscal year 2003 audit. For example, in November 1998, we recommended
that IRS ensure that all returned refund checks be stamped "nonnegotiable"
as soon as extracted. In May 2000, IRS updated its policies to add
instructions and establish a policy for safeguarding returned refund
checks. However, during our audits in fiscal years 2001 through 2003, we
found that IRS employees at some sites we visited were not consistently
adhering to the policy for handling returned refund checks.

o 	Fourteen (18 percent) relate to system deficiencies that will not be
fully corrected until IRS implements new financial management systems.
Prior GAO reviews have disclosed numerous modernization management control
deficiencies that have contributed to reported cost overruns and delays in
the implementation of the systems intended to resolve these issues.9 For
example, IRS had planned to implement the first release of its new
Integrated Financial System (IFS) in October 2003, but announced shortly
before the start of the new fiscal year that it was delaying
implementation until at least the middle of fiscal year 2004. As of
February 2004, implementation of IFS release 1, which is intended to
provide core financial, budget formulation, and cost accounting

9U.S. General Accounting Office, Business Systems Modernization: Internal
Revenue Service Needs to Further Strengthen Program Management,
GAO-04-438T (Washington, D.C.: Feb. 12, 2004).

systems, had been further delayed. In addition, according to IRS,
implementation of subsequent releases, which provide property,
procurement, and performance management functions, is being reevaluated
because of release 1 delays and funding availability. IRS has also
encountered delays in the implementation of the Customer Account Data
Engine (CADE), the new system designed to modernize IRS's taxpayer files,
and the Custodial Accounting Project (CAP), which is intended to provide
management information related to tax operations needed for day-to-day
decision making, performance management, and reporting. As a result of
cost overruns and delays, IRS and a contractor undertook a comprehensive
review of CADE and IRS's entire business systems modernization program.
Based on the results of the review, IRS launched an action plan to remedy
the problems plaguing its systems modernization program. However, the
program continues to face significant challenges and risks, and IRS does
not expect that its new financial management systems will be fully
implemented until at least 2007. Successful implementation of IFS, CAP,
and CADE is essential to correcting IRS's long-standing financial
management deficiencies and internal control weaknesses that prevent IRS
from producing reliable and timely financial information needed for
decision making on an ongoing basis.

Although IRS continues to experience delays in implementing the systems
intended to address many underlying financial management and operations
issues, it has made improvements in recent years that have resulted in the
closing of many recommendations. For example, IRS made significant
progress in addressing issues related to property and equipment (P&E),
which resulted in closing 5 of the 11 P&E-related recommendations.
However, delays in implementing IFS would inhibit significant additional
progress in addressing P&E issues because IFS is intended to address 5 of
the remaining 6 P&E-related recommendations. Delays in implementation of
IFS and other systems would also inhibit IRS's ability to correct 14
deficiencies related to financial reporting, unpaid tax assessments, tax
revenue, and refunds. Consequently, the continued existence of delays in
the implementation of new systems and the other serious financial
management weaknesses that gave rise to many of the remaining open
recommendations represents a serious obstacle that IRS needs to overcome
in order to achieve effective financial management and have available
accurate, timely financial reporting and other information that is useful
for day-to-day decision making. This was the overriding intent of the
Federal Managers' Financial Integrity Act, the Chief Financial Officers
Act

of 1990, the Federal Financial Management Improvement Act of 1996, and
other federal financial management reform legislation.

Agency Comments	In commenting on a draft of this report, IRS said it
believed that we would be able to confirm its implementation of an
additional 37 recommendations based on our fiscal year 2004 audit. IRS
stated that it is actively working to implement corrective actions to
address all remaining open recommendations. We will review the
effectiveness of these corrective actions and the status of IRS's progress
in addressing all open recommendations as part of our fiscal year 2004
financial audit.

Objective, Scope, and Methodology

The objective of this report is to assist IRS management in tracking the
status of financial audit and financial management-related recommendations
and the actions needed to address them. To accomplish this objective, we
evaluated the effectiveness of IRS's corrective actions implemented in
response to open recommendations during fiscal year 2003 as part of our
fiscal years 2003 and 2002 financial audits.10 Further details on the
scope and methodology of our IRS financial audit work are included in
appendix II. We obtained from IRS its assessment of the status of each
recommendation and corrective action taken or planned as of February 2004,
which we included in appendix I. We compared IRS's actions to our fiscal
year 2003 audit findings and noted any differences between IRS's and our
conclusions regarding the status of each recommendation. We conducted our
audit in accordance with U.S. generally accepted government auditing
standards. We requested comments on a draft of this report from the
Commissioner of Internal Revenue or his designee. We received written
comments from IRS, which are reprinted in appendix III.

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 Transportation, Treasury, and General Government,
Senate Committee on Appropriations; Subcommittee on Taxation and IRS
Oversight, Senate Committee on Finance; Subcommittee on Oversight of
Government Management, the Federal Workforce, and the

10GAO-04-126.

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 Transportation, Treasury, and Independent
Agencies, House Committee on Appropriations; Subcommittee on
Government Efficiency and Financial Management, House Committee on
Government Reform; and Subcommittee on Oversight, House Committee
on Ways and Means. In addition, we are sending copies of this report to
the
Chairman and Vice Chairman of the Joint Committee on Taxation, the
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. In
addition,
the report will be available at no charge on GAO's Web site at
http://www.gao.gov.

If you have any questions concerning this report, please contact me at
(202)
512-3406 or [email protected]. Contributors to this report are listed in
appendix IV.

Sincerely yours,

Steven J. Sebastian
Director
Financial Management and Assurance

Appendix I

Status of GAO Recommendations from Prior IRS Financial Audits and Related
Management Reports

Status of recommendations Count No. Recommendation Source report Per IRS Per GAO

1 94-2  Monitor implementation of Financial       Open. We will review the 
               actions to reduce the errors       changes IRS has implemented 
                       Management:               
          in calculating and reporting Important     and continue to test the 
                           IRS                   
                manual interest on Revenue           accuracy of IRS's manual 
          taxpayer accounts, and Information Is  interest calculations during 
                                                                          our 
          test the effectiveness of Unavailable    fiscal year 2004 financial 
                            or                                         audit. 
          these actions. (short-term) Unreliable 
                     (GAO/AIMD-94-22,            
                      Dec. 21, 1993)             

Open. IRS is addressing the issue by increasing automation of restricted
interest calculations, developing a quality review process, educating the
workforce and measuring accuracy. Specifically, IRS has completed the
rollout of the new software, provided training, and implemented a national
help desk to support the end users. Additionally, IRS plans to implement
quality reviews of the new manual interest procedures during 2004.

99-1	Manually review and Internal Revenue eliminate duplicate or other
Service: Immediate assessments that have and Long-Term already been paid
off to Actions Needed to assure that all accounts Improve Financial
related to a single Management assessment are (GAO/AIMD-99-16,
appropriately credited for Oct. 30, 1998) payments received. (shortterm)
Open. IRS is developing an automated system to manage Trust Fund Recovery
Penalties (TFRP). Phase I, to automate calculation of the penalties and
assessment process to ensure accuracy and assessment timeliness, was
implemented in July 2003, and various aspects of the implementation
continue. IRS is conducting the pilot for Phase II, which automates the
manual steps of the campus process to timely cross-reference payments.
Phase II has been delayed until at least April 2004. Software necessary
for Phase III, centralization of some TFRP functions, is scheduled for
release in 2004. IRS anticipates completing Phase III by March 31, 2005.
IRS is developing an action plan to improve timely and accurate manual
processing of TFRP transcripts. Additional reviews have been recommended
for each campus on TFRP cases. Processing problems have been identified
and recommendations for corrective actions have been made. Training was
developed to provide clarification of IRM issues. Open. This
recommendation specifically calls for IRS to review and correct its
existing taxpayer records. In fiscal year 2003 we found that 24 of the 59
caseswith Trust Fund Recovery Penalties (TFRP) had payments that were not
properly reflected in each responsible party's account. We recognize
automation of the current TFRP program is much needed. Until implemented,
TFRP cases will continue to depend on campus personnel manually inputting
the cross-reference information needed to link these assessments, but
these efforts to date have not been effective. For 17 (71 percent) of the
24 cases with mis-posted payments noted above, all necessary manual
crossindexes had been posted. Even after the new system is implemented, it
will require significant manual effort to correct existing taxpayer
records and ensure that it functions as needed for future cases. We will
continue to test TFRP cases for proper postings to all related accounts.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

99-3	Ensure that IRS's modernization blueprint includes developing a
subsidiary ledger to accurately and promptly identify, classify, track,
and report all IRS unpaid assessments by amount and taxpayer. This
subsidiaryledger must also have the capability to distinguish unpaid
assessments by category in order to identify those assessments that
represent taxes receivable versus compliance assessments and writeoffs. In
cases involving trust fund recovery penalties, the subsidiary ledger
should ensure that (1) the trust fund recovery penalty assessment is
appropriately tracked for all taxpayers liable but counted only once for
reporting purposes and (2) all payments made are properly credited to the
accounts of all individuals assessed for the liability. (short-term)
Internal Revenue Open. IRS's Custodial Accounting Service: Immediate
Project (CAP) includes and Long-Term development of a Taxpayer Actions
Needed to Account Sub Ledger, which is Improve Financial expected to
provide the ability to Management identify duplicate trust fund
(GAO/AIMD-99-16, recovery assessments, taxes Oct. 30, 1998) receivable,
compliance

assessments, and write-offs for financial reporting purposes. CAP Release
1 is behind schedule, and a new strategy is being developed. Cost and
schedules will not be known until the new strategy is validated. In
addition, IRS is developing an automated systemto manage cases with Trust
Fund Recovery Penalties (TFRP), as discussed under recommendation 99-1
above. When Phase II of the system is implemented, the Chief Financial
Officer (CFO) can establish the links to more accurately report the single
balance due from these assessments. Final phase of implementation is
anticipated in 2005.

Open. IRS's plan to address our specific recommendation regarding TFRP
cases is discussed in recommendation 99-1 above. We will continue to
monitor IRS's development of a new strategy for CAP, as well as its
implementation of the new TFRP system.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

99-17	Ensure that all returned Internal Revenue refund checks are stamped
Service: Physical "nonnegotiable" as soon as Security over they are
extracted. (short-Taxpayer Receipts term) and Data Needs

Improvement

(GAO/AIMD-99-15,

Nov. 30, 1998) Closed. IRS updated Internal Revenue Manual (IRM)
3.10.72.6(1) to reflect the policy of stamping all returned refund checks
"unless for credit to the U.S. Treasury, this instrument is nonnegotiable"
as soon as they are extracted. In May 2000, IRS added instructions to the
IRM that required extraction personnel to place returned refund checks in
a designated bucket/bin for manager review to ensure compliance. This
question is on the Submission Processing Checklist and the campuses are
reviewed monthly against the checklist to ensure compliance. A memo will
be issued to Compliance Field Functions reminding them to properly stamp
returned checks as non-negotiable. Open. IRS's action of establishing a
policy does not provide assurance that this policy is consistently adhered
to. During our fiscal year 2003 site visits, we found checks at a service
center campus that had not been stamped. Additionally, in several units of
IRS's Small Business/Self Employed division that received payments at a
field office, we found that staff were unaware of the procedures for
handling returned refund checks. Furthermore, some of these units did not
have "nonnegotiable" stamps. Additionally, the Compliance unit in another
field office did not stamp returned refund checks. Consequently, several
employees handled the checks before they were eventually restrictively
endorsed, thus increasing their risk of theft.

99-19	Ensure that walk-in payment receipts are recorded in a control log
prior to depositing the receipts in the locked container and ensure that
the control log information is reconciled to receipts prior to submission
of the receipts to another unit for payment processing. To ensure proper
segregation of duties, an employee not responsible for logging receipts in
the control log should perform the reconciliation. (short-term)

Internal Revenue Service: Physical Security over Taxpayer Receipts and
Data Needs Improvement

(GAO/AIMD-99-15, Nov. 30, 1998) Open. IRS issued guidance to the field in
August 1999 and updated the IRM in January 2000 to include instructions
for a control log and reconciliation of receipts. IRS will write new IRM
procedures relating specifically to the control and reconciliation of
remittances maintained in locked containers/safes. The draft IRM will be
completed by June 30, 2004. Operational review of the Taxpayer Assistance
Center (TAC) will include steps to ensure adherence to IRM procedures.
Open. During our fiscal year 2003 audit, at both field office units that
handle receipts, including TAC, the individual who posted receipts to the
log also reconciled the log. We will review IRS's actions during our
fiscal year 2004 audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

99-20	Analyze and determine the Internal Revenue Open. Automated Trust
Fund Open. When IRS implements factors causing delays in Service:
Custodial Recovery Penalty programming its Automated Trust Fund processing
and posting Financial continues. Phase I, to automate Recovery Penalty
Program, we TFRP assessments. Once Management calculation of the penalties
and will review its effectiveness in these factors have been Weaknesses
assessment process to ensure eliminating processing delays. determined,
IRS should (GAO/AIMD-99-accuracy and assessment In the meantime, we will
develop procedures to 193, Aug. 4, 1999) timeliness was implemented July
1, continue to monitor Trust Fund reduce the impact of these 2003. IRS is
conducting the pilot for Recovery Penalty processing factors and to ensure
Phase II, which automates the timeliness. timely posting to all manual
steps of the campus applicable accounts and process to timely
cross-reference proper offsetting of refunds payments. Phase II Pilot
solution against unpaid identified and tested: the system assessments
before works well in production and issuance. (short-term) productivity
doubled when the

campus began using the system.

99-22	Expand IRS's current review of campus deterrent controls to include
similar analyses of controls at IRS field offices in areas such as courier
security, safeguarding of receipts in locked containers, requirements for
fingerprinting employees, and requirements for promptly overstamping
checks made out to "IRS" with "Internal Revenue Service" or "United States
Treasury." Based on the results, IRS should make appropriate changes to
strengthen its physical security controls. (shortterm)

Internal Revenue Closed. Guidelines were included

Service: Custodial in the fiscal year 2003 Operating

Financial Procedures for Taxpayer

Management Assistance Centers (TAC) for

Weaknesses safeguarding receipts in locked

(GAO/AIMD-99-containers and over-stamping

193, Aug. 4, 1999)	checks made payable to IRS. Operating procedures state,
in part, that all remittances and related returns must be recorded on Form
795, Daily Report of Collection Activity, and placed in a locked container
until transmitted to the appropriate Submission Processing Center.
Payments in the form of personal checks, cashier checks, and money orders
should be made payable to "United States Treasury." Checks made out to IRS
or U.S. Treasury must be over-stamped with the words "United States
Treasury" immediately upon receipt. IRS is also including these issues in
its operational reviews of the TACs. Managers in the TACs are also
required to complete an annual review that includes these issues. In April
2003, IRM 5.1.2 was revised with new sub-sections, including: Timeliness
of Remittances and Physical Security Controls over Remittances.

Open. IRS's action of establishing a policy does not provide assurance
that this policy is consistently adhered to. We verified that IRS has
included guidelines in the fiscal year 2003 Operating Procedures for
Taxpayer Assistance Centers (TACs) for safeguarding receipts in locked
containers and over-stamping checks made payable to IRS. IRS has also
included these issues in its TAC reviews. In addition, IRS provided
evidence that it performed reviews of Forms 809 used in field collections.
However, similar to prior audits, we continued to find control weaknesses
over the safeguarding and accounting for taxpayer receipts and data in TAC
as well as in Small Business/Self Employed field office units that handle
receipts. During our fiscal year 2003 audit, we did not find any issues
with courier security and hiring practices in IRS field offices. We will
continue to monitor IRS's efforts.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

99-25	Ensure that additional staff Internal Revenue are employed or
existing Service: Custodial staff appropriately cross-Financial trained to
be able to Management perform the master file Weaknesses extractions and
other ad (GAO/AIMD-99hoc procedures needed for 193, Aug. 4, 1999) IRS to
continually develop reliable balances for financial reporting purposes.
(short-term) Open. The need to build an appropriate depth of experience is
both immediate and ongoing; resources are examined to see if work can be
realigned, and if existing employees can be retrained. Contractor support
is used to provide the support and backup necessary for preparation of the
compensating procedures, pending implementation of the Custodial
Accounting Project (CAP) and the Customer Account Data Engine (CADE). IRS
is committed to supporting the funding of contractor resources that are
used for the Custodial Financial Statement Audit. This corrective action
will be continually monitored and developed as new solutions to the
problem are identified. This recommendation will remain open until the
full implementation of CAP for the entire custodial financial audit (IMF,
BMF, INMF, and IRAF) with an anticipated date of October 1, 2007, pending
the CAP Release 1 replan and rescheduling of Release 2. Open. In fiscal
year 2003, IRS continued to utilize compensating procedures to enable it
to generate reliable information for financial reporting purposes.
Additional resources were not added in FY 2003 to perform current
compensating procedures pending implementation of CAP/CADE. IRS has noted
that the depth of IRS experience of staff is inadequate. IRS's current
position is to support the financial statement audit process with
available resources and contractors, without hiring until the full
implementation of CAP. We will continue to assess IRS's actions during our
fiscal year 2004 audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

99-29	Develop the data to Internal Revenue support meaningful cost
Service: Serious information categories and Weaknesses Impact cost-based
performance Ability to Report on measures. (long-term) and Manage

Operations

(GAO/AIMD-99

196, Aug. 9, 1999) Open. Integrated Financial System (IFS) Release 1
includes requirements for a cost module that is interfaced with program
area management information systems. Once implemented, both direct and
indirect resource cost data will be linked to the budget process and the
strategic planning goals of all business units. This will help move the
Service forward in transitioning to a Performance-Based Organization. Full
cost accounting will not be realized until future releases such as Asset
Management and Work Management are implemented. At present these releases
are being evaluated based on IFS Release 1 delays and funding
availability. All future releases have been delayed or placed on
indefinite hold. Open. We will follow up during future audits to assess
the effectiveness of the implementation of IFS's cost accounting features.

99-30	Develop and implement procedures and controls to ensure that
detailed P&E records are accurately maintained. These procedures and
controls would include ensuring that physical inventories at field
locations are effectively performed, including prompt resolution of
discrepancies found in the inventories and appropriate adjustment of
detailed records. (short-term)

Internal Revenue Service: Serious Weaknesses Impact Ability to Report on
and Manage Operations

(GAO/AIMD-99196, Aug. 9, 1999) Closed. IRM 2.14.1, Information Technology
Asset Management, was first published in June 2002. It was updated and
republished in July 2003. Increased automation, including the expansion of
the Electronic Packing Slip initiative, helped IRS establish accurate
skeletal records in ITAMS. IRS's Asset Management office publishes
exception reports for the field Single Point Inventory Function (SPIF)
employees to reconcile on a biweekly basis. Errors and exceptions are
tracked on these exception reports for SPIF employees to use in order to
perfect incorrect P&E records. IRS also now has one authoritative IRM that
consolidates all the procedures and policies for SPIF employees in one
location. Closed. During fiscal year 2003, IRS (1) developed and
implemented procedures to use electronic data from vendors to create
inventory records, which helped ensure that assets were promptly and
accurately recorded upon receipt of the assets, (2) focused additional
effort on ensuring that assets disposals were recorded timely, (3)
expanded use of network monitoring software to track assets, and (4)
enhanced monitoring and quality control over the annual inventory process.
As a result, our testing during fiscal year 2003 indicated significant
improvement in the accuracy and reliability of IRS's P&E inventory
records.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

99-36	Make enhancements to IRS financial systems to include recording P&E
and capital leases as assets when purchased and to generate detailed
records for P&E that reconcile to the financial records. (longterm)

Internal Revenue Service: Serious Weaknesses Impact Ability to Report on
and Manage Operations

(GAO/AIMD-99196, Aug. 9, 1999) Open. In IFS Release 1, P&E and leasehold
improvements will be recorded as assets when purchased. However,
amortization will remain a manual process. The ability to tie to the
detailed physical asset information and a fully integrated system with
subsidiary records will not be available until the Asset Management module
is implemented during Release 2. All future releases are being evaluated
based on IFS Release 1 delays and funding availability and have been
delayed or placed on indefinite hold. Open. We will evaluate IFS Release 1
after it is implemented and we will continue to monitor IRS's progress
with Release 2.

01-01	Better monitor IRS's procedures requiring that a freeze code be
entered on all accounts of a taxpayer who IRS has determined is
potentially liable for unpaid payroll taxes. This should be done on all
such accounts to prevent the inadvertent release of refunds to the
taxpayer until IRS determines the validity of the tax liability.
(short-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Closed. In September 2001 IRS issued a memorandum to the field emphasizing
the timely input of the freeze code and revised Internal Revenue Manual
(IRM) procedures to allow 30 days for the assessment of the trust fund
penalty after input of the freeze code. IRS group managers are responsible
for ensuring that the IRM procedures are followed and that adherence is
tested when they review cases.

Closed. After IRS took action, our financialaudit procedures in 2002 and
2003 have not identified the inadvertent release of refunds due to lack of
freeze codes. Therefore, we are closing this specific recommendation
regarding timely input of freeze codes to prevent erroneous refunds.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

01-02	Revise policies and procedures governing the processing of abatement
transactions to establish (1) appropriate time frames for
processingabatements, (2) a methodology for monitoring the timeliness of
abatement processing, and (3) procedures to identify the causes for delays
and formulate corrective actions. Also, examine abatement transactions
arising from IRS errors to determine the causes for the errors and, based
on this examination, formulate and implement appropriate procedures to
reduce the level of errors made when entering data into taxpayer accounts.
(short-term) Internal Revenue Closed. IRS has not established Service:
specific time frames for processing Recommendations abatements because
large dollar to Improve Financial claims often require additional and
Operational documentation to verify a claim's Management (GAO-validity.
Often these cases go 01-42, Nov. 17, through examination, or have other
2000) taxpayer compliance issues.

Allowing interest on refunds for these cases taking longer than 45 days to
process is part of IRS's cost of doing business. The Office of Unpaid
Assessments reviewed abatement cases identified for the 2002 audit and
found that there were compliance activities in each case that required
interest. In addition, IRS continues to enhance its policies and
procedures to monitor the processing of abatement transactions.

Open. Although we agree that many cases may take longer than 45 days, we
believe IRS should establishgeneral targets for timeliness as well as a
method for measuring and evaluating the processing times for abatements.
In fiscal year 2003 we continued to find delays. Additionally, our
recommendation calls for a review of abatements caused by IRS input errors
to determine causes and corrections. We will continue to monitor
timeliness of abatement processing and evaluate the effectiveness of IRS
procedures for monitoring abatement transactions during our fiscal year
2004 financial audit.

14 01-03 Implement procedures to     Internal Revenue Open. IRS continues  
                                        to make                               
            monitor the age of all      Service: progress in the "closed      
                                        within six                            
            pending offers and to       Recommendations months" measure. IRS  
                                        is re-                                
            require supervisors to      to Improve Financial examining the    
                                        six-month                             
            follow up with staff to     and Operational processing time goal. 
                                        (IRS Should                           
            determine within 6 months    Management (GAO-Evaluate the Changes 
                                                              to Its Offer in 
            whether to accept or reject 01-42, Nov. 17, Compromise Program,   
                                        GAO-02-                               
            the offer. (short-term)     2000) 311).                           

Open. IRS has improved its closure rate for offers in compromise, partly
because it centralized processing at two campuses. In fiscal year 2003,
the percentage of offers closed within six months increased to 56 percent,
up from 38 percent the prior year. We will continue to monitor the
timeliness of offer in compromise processing as part of our 2004 financial
audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

01-04	As an alternative to prematurely suspending active collection
efforts, and using the best available information, develop reliable
costbenefit data relating to collection efforts for cases with some
collection potential. These costbenefit data would include the full
costassociated with the increased collection activity (i.e., salaries,
benefits, andadministrative support), as well as the expected additional
tax collections generated. (short-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Open. IRS presented to the GAO a comprehensive action plan with short and
long-term actions to address the material weakness on collection of unpaid
taxes. In addition, the IRS is developing a cost accounting module.
However, due to IFS Release 1 delays and funding availability, all future
releases have been delayed or placed on indefinite hold. Therefore, IRS
will explore currently available information and determine the feasibility
of developing a type of interim costbenefit data or take other steps to
enhance resource allocation decisions with regard to collection
activities.

Open. We will continue to monitor IRS's development of new systems and its
efforts to use currently available information to develop interim
cost-benefit data.

01-06	Implement procedures to closely monitor the release of tax liens to
ensure that they are released within 30 days of the date the related tax
liability is fully satisfied. As part of these procedures, IRS should
carefully analyze the causes of the delays in releasing tax liens
identified by our work and prior work by IRS's former internal audit
function and ensure that such procedures effectively address these issues.
(short-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Open. IRS has taken steps to improve the timeliness of lien releases
involving settlement by Offer-in-Compromise. Offer-in-Compromise tax
examiners were given access to the lien system to initiate lien releases
once an offer has been settled. IRS staff will review lien processing
units during scheduled reviews during the second and third quarters of
fiscal year 2004. They will visit Offer-in-Compromise sites during the
fourth quarter of fiscal year 2004. Additionally, they have developed an
action plan to address the root causes of untimely lien releases from the
fiscal year 2003 audit.

Open. During our fiscal year 2003 audit, we continued to find delays in
release of liens. We found 12 instances out of 59 cases tested in which
IRS did not release the applicable federal tax lien within the 30day
statutory period. The time between the satisfaction of the liability and
release of the lien ranged from 35 days to 249 days. We will review the
impact of IRS's actions to date and will continue toreview IRS's release
of tax liens.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

01-12	For (1) IRS's Automated Internal Revenue Underreporter and Service:
Combined Annual Wage Recommendations Reporting programs, to Improve
Financial (2) screening and and Operational examination of Earned
Management (GAO-Income Tax Credit claims, 01-42, Nov. 17, and (3)
identifying and 2000) collecting previously disbursed improper refunds,
use the best available information to develop reliable costbenefit data to
estimate the tax revenue collected by, and the amount of improper refunds
returned to, IRS for each dollar spent pursuing these outstanding amounts.
These data would include (1) an estimate of the full cost incurred by IRS
in performing each of these efforts, including the salaries and benefits
of all staff involved, as well as any related nonpersonnel costs, such as
supplies and utilities, and (2) the actual amount (a) collected on tax
amounts assessed and (b) recovered on improper refunds disbursed.
(long-term) Open. The key objective of IRS's efforts in developing cost
data is to use data to make informed resource allocation decisions. IRS
intends to consider cost data associated with its major programs, when
developed, in all facets of the strategic planning process. Once
implemented, the cost module of IFS, Release 1, will provide both direct
and indirect resource cost data and will be linked to the budget process
and the strategic planning goals of all business units. Full cost
accounting will not be realized until future IFS releases, including Asset
Management and Work Management, are implemented. At present these releases
are being evaluated based on IFS Release 1 delays and funding
availability. All future releases have currently been delayed or placed on
indefinite hold. Open. We will review the IFS plans to verify that it
includes requirements that meet the objectives of the recommendation. We
will continue to monitor IRS's development and use of cost data.

01-15	Ensure that all IRS units receiving collections have consistent
policies and procedures to safeguard and account for cash receipts.
(short-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Closed. Completed September 1, 2002. Multi-disciplinary teams composed of
management from Security Services, Information Services, and Agency-Wide
Shared Services will continue to work with local staff to ensure
consistent, on-going implementation of policies and procedures. In April
2003, IRM 5.1.2 was revised with new subsections, including: Timeliness of
Remittances and Physical Security Controls over Remittances.

Open. IRS's action of establishing a policy does not provide assurance
that this policy is consistently adhered to. During our FY 2003 audit, we
found that both field office TACs we visited accepted walkin payments in
an unsecured area. In addition, at one of the sites, receipts were not
stored in locked containers.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

01-17	Develop a subsidiary ledger for leasehold improvements and implement
procedures to record leasehold improvement costs as they occur.
(long-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Open. In IFS Release 1, property and equipment (P&E) and leasehold
improvements will be recorded as assets when purchased. However,
amortization will remain a manual process. The ability to tie to the
detailed physical asset information and a fully integrated system with
subsidiary records will not be available until the Asset Management module
is implemented during Release 2. All future releases are being evaluated
based on IFS Release 1 delays and funding availability and have been
delayed or placed on indefinite hold.

Open. We will evaluate IFS Release 1 after it is implemented and we will
continue to monitor IRS's progress with Release 2.

01-18	Implement procedures and controls to ensure that expenditures for
P&E are charged to the correct accounting codes to provide reliable
records for expenditures as a basis of extracting the costs for major
systems and leasehold improvements. (short-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Open. In IFS Release 1, P&E and leasehold improvements will be posted to
the correct accounting string and Release 1 ties corresponding Federal
Supply Classification codes to P&E material groups. The ability to tie to
the detailed physical asset information and a fully integrated system with
subsidiary records will not be available until the Asset Management module
is implemented during Release 2. In the interim, IRS has implemented
processes to identify, extract, and reclassify capitalized P&E
transactions into the proper general ledger accounts.

Open. During our fiscal year 2003 audit, we found that IRS, with
contractor assistance, implemented interim procedures to identify,
extract, and reclassify P&E costs. However, IRS continued to lack current,
reliable P&E information onan ongoingbasis because P&E transactionswere
not properly recorded as transactions occurred. In addition, we continued
to find that charges to accounting codes were not always correct. We will
evaluate IFS Release 1 after it is implemented and we will continue to
monitor IRS's progress with Release 2.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

01-21	Consolidate and update the P&E policies and procedures currently
documented in various handbooks and policy memorandums into a
comprehensive document that personnel responsible for maintaining
inventory records can use as a reference. (short-term)

Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO01-42, Nov. 17, 2000)

Open. IRS updated IRM 2.14.1, Information Technology Asset Management, to
include all policies and procedures pertaining to information technology
assets. IRS is in the process of revising IRM 1.14.2.49, Property
Management Handbook, which will provide policies and procedures for
noninformation technology assets. Target date for the new consolidated
handbook is April 2004. Once published, these revised IRMs will provide
authoritative guidance for both information technology and noninformation
technology assets.

Open. We will continue to monitor IRS's progress in revising and updating
its IRMs during our fiscal year 2004 audit.

22 01-27 Perform sufficient Internal Revenue Closed. IRS established an    
            supervisory reviews to help Service: Electronic Packing Slip      
            initiative,                                                       
            ensure that transactions Recommendations which helped establish   
            accurate                                                          
            recorded on P&E inventory to Improve Financial inventory records. 
            IRS also                                                          
             records are accurately and Operational implemented procedures to 
                                                                     identify 
            entered into subsidiary Management (GAO-potential errors and      
            discrepancies                                                     
            records and appropriately 01-42, Nov. 17, on inventory records    
            and produce                                                       
                       supported by 2000) exception reports that are reviewed 
            documentation. (short-by SPIF personnel on a biweekly             
            term) basis.                                                      

Closed. In fiscal year 2003, IRS developed procedures to obtain and use
electronic data from vendors to create inventory records, which helped
ensure that assets were promptly and accurately recorded upon receipt of
the assets. In addition, IRS enhanced monitoring and quality control over
the annual inventory process. As a result, our testing during fiscal year
2003 indicated significant improvement in the accuracy and reliability of
IRS's P&E inventory records.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

Count No.   Recommendation            Source report        Per IRS Per GAO 
         01-33 Establish policies and    Internal Revenue             
               procedures to ensure that Service:                     
               all administrative and,   Recommendations              
               to                                                     
               the extent possible,      to Improve Financial         
               custodial transactions    and Operational              
               are                                                    
               promptly recorded in the  Management (GAO-             
               general ledger,           01-42, Nov. 17,              
               preferably                                             
               within 30 days of the     2000)                        
               transaction. (long-term)                               

Open. As of June 1, 2002, Revenue Systems/Interim Revenue Accounting
Control System (IRACS) is using a spreadsheet to ensure that all documents
are received and recordable transactions are input into the Interim
Revenue Accounting Control System prior to month-end activities. The
capability for recording custodial transactions for taxes receivable and
refunds payable at the detail level will not be available until full
implementation of CAP with integration to IFS. Additionally, for
administrative transactions, the IRS is in the midst of an initiative to
identify all major non-payroll expense transactions that can be accrued
and/or recorded on an interim basis. During fiscal year 2003, IRS
implemented interim accruals to monthly record material non-payroll
administrative activities, such as rent, postage, and telephone expenses.

Open. We verified that during fiscal year 2003, IRS implemented interim
accrualsto more timely record material administrative activities, such as
rent, postage and telephone expenses. This has significantly improved the
reliability of related balances during the year. However, for taxes
receivable and the related balances due to Treasury, the balances reported
are not based on the routine recording of transactions. We will continue
to monitor IRS's progress during our fiscal year 2004 financial audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

01-39	Develop a mechanism to Management Letter: track and report the
actual Improvements costs associated with Needed in IRS' reimbursable
activities. Accounting (long-term) Procedures and

Internal Controls

(GAO-01-880R,

July 30, 2001) Open. IRS has developed guidance for costing reimbursable
agreements. This guidance includes instructions on tracking labor and was
completed February 1, 2002. IFS Release 1 includes requirements for a cost
module that is interfaced with program area management information
systems. Once implemented, both direct and indirect resource cost data
will be linked to the budget process and the strategic planning goals of
all business units. This will help move the Service forward in
transitioning to a Performance-Based Organization. Full cost accounting
will not be realized until future releases, such as Asset Management and
Work Management, are implemented. At present these releases are being
evaluated based on IFS Release 1 delays and funding availability. All
future releases have been delayed or placed on indefinite hold. Open. We
confirmed that IRS completed procedures for costing reimbursable
agreements that provides the basic framework for the accumulation of both
direct and indirect costs at the necessary level of detail. IRS plans to
implement these procedures over several years as it phases in various
program area management information systems that will provide critical
information to its new cost accounting system. However, as indicated by
IRS, these systems have been placed on indefinite hold. We will continue
to monitor IRS's efforts to fully implement its cost accounting system
and, once it has been fully implemented, evaluate the effectiveness of IRS
procedures for developing cost information for its reimbursable
agreements.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

25 02-01 Implement policies and Internal Revenue    Open. We will continue 
                                                                           to 
             procedures to record  Service: Progress             evaluate the 
                                                             effectiveness of 
                capitalizable      Made, but Further IRS's interim procedures 
                 acquisition                                              for 
            costs for P&E, capital Actions Needed to   capitalizing P&E costs 
                                                                        under 
              leases, leasehold    Improve Financial      the pooling concept 
                                                                   during our 
            improvements, and      Management (GAO-          fiscal year 2004 
            major                                            financial audit. 
            systems in the          02-35, Oct. 19,      We will evaluate IFS 
            appropriate                                             Release 1 
              P&E general ledger         2001)        after it is implemented 
                                                                       and we 
                 accounts as                         will continue to monitor 
                 transactions                                           IRS's 
              occur. (long-term)                     progress with Release 2. 

Open. IRS P&E capitalization policies and procedures provide for use of
the pooling concept to capitalize costs associated with ADP equipment with
a useful life of greater than 1 year. The pooling method is used, as
opposed to the preferred process of capturing costs on a transactional
basis, due to system limitations. In IFS Release 1, P&E and leasehold
improvements will be recorded as assets when purchased. P&E will also be
posted to the correct accounting string and Release 1 ties corresponding
Federal Supply Classification codes to P&E material groups. However, a
fully integrated system with subsidiary records will not be available
until the Asset Management module is implemented during Release 2. All
future releases are being evaluated based on IFS Release 1 delays and
funding availability and have been delayed or placed on indefinite hold.

02-03	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. (short-term)

Internal Revenue Service: Progress Made, but Further Actions Needed to
Improve Financial Management (GAO02-35, Oct. 19, 2001)

Closed. IRS issued guidance to all business units requesting a complete
review of obligations to be completed monthly and certified quarterly and
a complete review of commitments to be certified quarterly. Obligation
guidance was completed June 26, 2001. Commitment guidance was completed
December 31, 2002.

Closed. During our fiscal year 2003 audit work, we verified that IRS
implemented its commitment guidance, which requires business units to
certify that unliquidated commitments were reviewed to determine whether
the commitments should be converted into obligations. In addition, we
found that IRS promptly established obligations in its accounting system.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-05	Develop, document, and implement policies and procedures to require
that reconciliations between proprietary and budgetary accounts be
performed monthly so that differences can be identified in a timely
manner, and, if necessary, adjusted. (short-term)

Internal Revenue Service: Progress Made, but Further Actions Needed to
Improve Financial Management (GAO02-35, Oct. 19, 2001)

Closed. Policies and procedures addressing monthly reconciliations were
documented on June 1, 2002. Monthly reconciliations are currently being
prepared between proprietary and budgetary accounts and differences are
adjusted when identified. During fiscal year 2003, IRS implemented interim
accruals to monthly record material administrative activities, such as
rent, postage, and telephone expenses. These accruals have resulted in
significantly reduced suspense amounts at all reporting periods.

Closed. We confirmed that quarterly reconciliations between budgetary and
proprietary accounts are performed and documented. Informal
reconciliations are prepared monthly. During fiscal year 2003, IRS
implemented interim accruals to monthly record material administrative
activities, such as rent, postage, and telephone expenses. In addition,
IRS implemented procedures to accrue user fees on a quarterly basis. This
has significantly improved the reliability of the related balance during
the year and has reduced the balance of the suspense account at June 30,
2003, to $22 million and as of year-end $6 million.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-08	Implement policies and Internal Revenue procedures to require that
Service: Progress all employees itemize on Made, but Further their time
cards the time Actions Needed to spent on specific projects. Improve
Financial (long-term) Management (GAO

02-35, Oct. 19, 2001) Open. IRS agreed with the objective of this
recommendation, which is to allow it to collect and report the full
payroll costs associated with its activities. While IRS indicated that
most of its employees already itemize their time charges in functional
tracking systems, it has acknowledged that full implementation of the IFS
cost accounting module is required to close this recommendation. IFS
Release 1 includes requirements for a cost module that is interfaced with
program area management information systems. Once implemented, both direct
and indirect resource cost data can be linked to the budget process and
the strategic planning goals of all business units. This will help move
the Service forward in transitioning to a Performance-Based Organization.
Full cost accounting will not be realized until future releases, such as
Asset Management and Work Management, are implemented. At present these
releases are being evaluated based on IFS Release 1 delays and funding
availability. All future releases have been delayed or placed on
indefinite hold. Open. We confirmed that IRS employees use functional
tracking (workload management) systems to itemize and track their time
charges. However, this recommendation remains open because its objective
is to allow IRS to collect and report the full payroll costs associated
with its activities. During our fiscal year 2003 audit, we continued to
find that the functional tracking systems are insufficient for this
purpose because they do not interface with each other or the general
ledger to allow management to use them to readily accumulate the time
charged to specific projects. The new cost accounting module of IFS is
expected to track IRS's costs at the activity level and, thus, may address
the recommendation. However, IRS plans to fully implement cost accounting,
which are expected to require several years to execute, are currently on
hold. We will continue to monitor IRS's progress in implementing the IFS
cost accounting module.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-09	Implement policies and Internal Revenue procedures to allocate
Service: Progress nonpersonnel costs to Made, but Further programs and
activities on Actions Needed to a routine basis throughout Improve
Financial the year. (long-term) Management (GAO

02-35, Oct. 19, 2001) Open. IRS agreed with this recommendation and
indicated plans to address this issue with the cost accounting module that
will be part of IFS. IFS Release 1 includes requirements for a cost module
that is interfaced with program area management information systems. Once
implemented, both direct and indirect resource cost data can be linked to
the budget process and the strategic planning goals of all business units.
This will help move IRS forward in transitioning to a performance-based
organization. Full cost accounting will not be realized until future
releases, such as Asset Management and Work Management, are implemented.
At present, these releases are being evaluated based on IFS Release 1
delays and funding availability. All future releases have been delayed or
placed on indefinite hold. Open. We confirmed that the IFS plans include
requirements that meet the objectives of this recommendation; however, in
fiscal year 2003 IRS delayed, or placed on hold, the implementation of
these requirements for an indefinite period. IRS plans to implement these
requirements are expected to be executed over several years as IRS phases
in various program area management information systems that will provide
critical information to the cost accounting system. We will continue to
monitor IRS's efforts and, once IFS is completed, follow up on IRS's
implementation of these plans.

02-11	Develop policies and procedures to require that field office
employees provide taxpayers receipts for all walk-in payments.
(short-term)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. IRS issued the Field Assistance (FA)
IRM in June 2003, which instructs TAC employees to issue Form 809, Receipt
for Payment of Taxes, when taxpayers request a receipt as proof of payment
even if cash was not received. (IRM 21.3.4.7.1.1(4). The IRM also states
Document 10161-Payments May Be Made By- will be posted in all TACs. IRS
monitored adherence to these requirements during operational reviews
conducted in the TACs during fiscal year 2003. Closed. We verified that
IRS has incorporated guidelines in its FY 2002 & 2003 Field Assistance
Operations Procedures (FAOP) to instruct employees to issue receipts to
taxpayers upon request.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-12	Develop policies and procedures to require that field offices post
signs in the most visible locations to remind taxpayers to obtain receipts
for payments. (short-term)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. IRS issued the FA IRM in June 2003,
which lists the required signs for each TAC. Sign #10161 is the Payment
Upon Request sign and each TAC is required to display the sign where it
can be seen (IRM 21.3.4.3(4). IRS monitored adherence to these procedures
during operational reviews of the TACs conducted in fiscal year 2003.
Signs were posted in TACs as required and additional employees have been
assigned 809 books in various TACs. Periodic reviews and verification of
the requirement are required at a minimum during the annual filling season
readiness operational review. Open. IRS's action of establishing a policy
does not provide assurance that this policy is consistently adhered to. We
verified that IRS included instructions in its FY 2003 FAOP but the
instructions did not specify that the signs be posted in the most visible
location. During our FY 2003 audit we found that no signs were posted in
one of the two field offices we visited.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-14	Develop policies and procedures to require that IRS and lockbox
employees performing final candling record receipts in a control log at
the time of discovery, recording at a minimum the total number of payments
found, the amount of each payment, and the taxpayer who submitted the
payment. (short-term)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. The 2003 Lockbox Processing
Guidelines (LPG), 3.2.8.1(1), directs "Lockbox employees to complete Form
9535, Record of Lockbox Discovered Remittance and Correspondence" when
receipts are discovered during candling. The employee must record the type
of document and remittance found, dollar amount, taxpayer's name and
address, Social Security Number/Taxpayer Identification Number, and
discoverer's name on Form 9535. Each remittance must be listed as a
separate entry. The 2003 Extracting, Sorting & Numbering IRM, 3.10.72.6.2,
requires "management to maintain a log identifying the employees
responsible for overlooking the items and items discovered." The 2003 LPG
was updated January 31, 2003. Open. IRS's action of establishing a policy
does not provide assurance that this policy is consistently adhered to.
During our FY 2003 audit we verified that IRS revised the LPG to direct
employees to complete Form 9535, Record of Lockbox Discovered Remittance
and Correspondence when receipts are discovered during candling and
specified information to be recorded. We also verified that the IRM,
updated May 28, 2003, requires management to maintain a log identifying
the employees responsible for overlooking the items and information on the
items discovered (check amount/form number). However, at 2 service centers
and at one lockbox bank we found that staff did not immediately record
items found during final candling in a control log. Furthermore, 1 service
center's candling log did not capture the minimum information in this
recommendation. Since IRS's action relating to the IRM occurred after our
site visits, we will continue to monitor IRS's efforts.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-15	Develop policies and procedures to require that IRS and lockbox
managers or designated officials reconcile logs of payments found during
final candling to the related receipts and documents. (short-term)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. The 2003 LPG, 3.2.8.1(1), directs the
responsible manager to validate that the information was correctly entered
on Form 9535 for every shift worked. The 2003 Extracting, Sorting &
Numbering IRM, 3.1072.6.2(1)e, states, "management shall immediately
reconcile the discovered remittances with the final candling log." The
2003 LPG was updated January 31, 2003. Open. IRS's action of establishing
a policy does not provide assurance that this policy is consistently
adhered to. We verified that the LPG directs lockbox managers to daily
validate Form 9535 and the IRM, which was updated on May 28, 2003, to
coordinate with the LPG, requires that management initial the log to
validate that all available information is correctly entered and ensure
that all remittances listed in the log are brought to the deposit function
on a daily basis. However, at 1 service center we found that items
discovered during candling were not reconciled.

02-16	Ensure that field office management complies with existing receipt
control policies that require a segregation of duties between employees
who prepare control logs for walk-in payments and employees who reconcile
the control logs to the actual payments. (shortterm)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. IRS had issued guidance to TAC
managers requiring the separation of duties. Further, this item is
included in the selfassessment, which is to be conducted periodically. IRS
monitored adherence to the existing procedures during operational reviews
of the TACs conducted in fiscal year 2003. Open. IRS's action of
establishing a policy does not provide assurance that this policy is
consistently adhered to. In addition, the applicable IRM no longer
requires segregation of duties. During our fiscal year 2003 audit, at both
field office units that handle receipts, including TAC, the individual who
posted receipts to the log also reconciled the log.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-17	Clarify that the intent of the requirement for background
investigations is meant to apply to personnel being entrusted with
taxpayer receipts and information rather than just personnel being granted
access to an IRS facility. (short-term)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. On October 3, 2002, IRS issued a
memorandum, "Clarification of Background Investigation Requirements for
Contractors" to clarify that the intent of the requirement for background
investigations is meant to apply to personnel being entrusted with
taxpayer receipts and information rather than just personnel being granted
access to an IRS facility. Additionally, banks have been required to
ensure that courier services employees working with the lockbox facility
are getting Federal Bureau of Investigation fingerprint checks (LPG,
January 2003). Closed. During our fiscal year 2003 audit we verified that
the October 3, 2002, memorandum reiterated the IRS requirement that all
contractor employees who have access to taxpayer receipts and information
must have an approved background investigation conducted by the IRS
National Background Investigations Center (NBIC). In addition, we found
that IRS was pursuing courier background investigations at all ten of its
campuses.

02-18	Work with the National Management Open. NFC is in the process of
Open. We will continue to Finance Center (NFC) to Report: upgrading the
SETS application to monitor IRS's actions. resolve the technical
Improvements a web version, which they limitations that exist within
Needed in IRS's anticipate deploying in six to nine the Security Entry and
Accounting months. Treasury has requested Tracking System (SETS)
Procedures and that NFC include IRS as a database and continue to Internal
Controls participant in the design and periodically review SETS
(GAO-02-746R, development sessions. In the data to detect and correct July
18, 2002) interim, NFC will continue to errors. (short-term) address any
problems reported by

                                      IRS.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

Count No.   Recommendation               Source report     Per IRS Per GAO 
         02-20 Establish procedures to      Management                
               track the release of liens   Report:                   
               up                                                     
               to the point of delivery to  Improvements              
               the local jurisdiction to    Needed in IRS's           
               ensure liens are released    Accounting                
               timely to avoid unduly       Procedures and            
               burdening taxpayers once     Internal Controls         
               they have satisfied their    (GAO-02-746R,             
               tax                                                    
               liability. (short-term)      July 18, 2002)            

Closed. IRS issued a memorandum dated January 28, 2003, with instructions
for tracking when the certificates of lien release leave our immediate
control. Certificates must be generated at least weekly. Based on the
results of the 2003 audit, IRS has drafted a detailed action plan for lien
release issues, which includes operational reviews. The new procedures are
for Automated Lien System Units to date stamp a duplicate copy of the line
release-billing voucher so that the Service has actual knowledge of when
line releases are no longer under our direct control. This was issued in
the Internal Revenue Manual on October 1, 2003. Certificates must be
generated weekly. A memo was issued January 28, 2003, on Payment
Compliance, which was reinforced via email on April 1, 2004, to Territory
Managers in Case Processing, emphasizing that the requirements and the
procedures have been incorporated into IRM 5.12.6.4.1. Reviews will be
conducted at all management levels to ensure that these procedures are
being followed.

Open. Although IRS established procedures for tracking liens, none of the
7 lien units that we visited in 2003 had properly implemented the
datestamping procedures. We will continue to review the implementation of
IRS's corrective actions during our 2004 financial audit.

02-21	Ensure that complete skeletal records are created and available for
the SPIF units to update upon receipt of P&E. (short-term)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. IRS successfully implemented an
Electronic Packing Slip initiative with its primary hardware vendor. Using
an automated transfer method, the vendor provides an electronic feed of
all equipment that was shipped. IRS updates the Information Technology
Asset Management System with that information and has skeletal records
established before the equipment reaches a Single Point Inventory
Function's loading dock. Closed. IRS implemented a process for suppliers
to provide "electronic packing slip" information when equipment is
purchased and shipped. This information is used to establish skeletal
records on ITAMS before property is received at the loading dock. During
our fiscal year 2003 audit, we found that skeletal records were almost
always available for Single Point Inventory Function units to update upon
receipt of P&E.

Appendix I
Status of GAO Recommendations from Prior
IRS Financial Audits and Related
Management Reports

                           Status of recommendations

39 02-23 Develop and implement     Management      Open. During our fiscal 
                                                                         year 
            procedures to ensure        Report:      2003 audit, we continued 
            that                                                      to find 
            procurement award and    Improvements             that accounting 
                                                                 transactions 
             requisition numbers    Needed in IRS's       could not always be 
                                                                    linked to 
             recorded on property     Accounting       P&E inventory records. 
                                                                      We will 
            records are complete,   Procedures and   continue to review IRS's 
            accurate, and linked   Internal Controls       corrective actions 
            to the                                                 during our 
            accounting records.      (GAO-02-746R,           fiscal year 2004 
            (long-                                           financial audit. 
                    term)           July 18, 2002)   

Open. IRS's Information Technology Services is working with Procurement
and vendors to establish a reliable vehicle for transmitting packing slip
information. IRS will continue to work with Procurement to see that these
fields are made a part of every procurement and that the necessary
procurement award and requisition numbers are established on ITAMS at the
time of purchase via an electronic feed from Procurement and matched via
the electronic packing slip IRS will receive from vendors. A fully
integrated system that provides the ability to tie to the detailed
physical asset information will not be available until the Asset
Management module is implemented during IFS Release 2. All future releases
are being evaluated based on IFS Release 1 delays and funding availability
and have been delayed or placed on indefinite hold.

         Record software                         Closed. All       Closed. In 
02-24 licenses            Management      software valued      fiscal year 
                                                     at more        2003, IRS 
         in IRS's property     Report:     than $25,000 was   developed and   
                                           recorded into       implemented    
            management      Improvements     ITAMS by June      policy and    
              system.                       2003. IRS also    procedures to   
           (short-term)    Needed in IRS's   developed and     identify and   
                                              implemented    record software  
                             Accounting      procedures to      licenses.     
                                            update software  
                           Procedures and  information on an 
                                           on-going basis.   
                           Internal                          
                           Controls                          
                           (GAO-02-746R,                     
                           July 18, 2002)                    

           Develop an                         Closed. IRS          Closed. In 
02-25  approach to      Management        developed and        fiscal year 
                                                                    2003, IRS 
         assess IRS's        Report:          implemented      implemented a  
         compliance                          procedures to      process to    
         with the terms                   reconcile the             inventory 
            of these      Improvements    number of software         software 
                                                                 licenses and 
         software                         users with the          assess      
         licenses.      Needed in IRS's   number of licenses  compliance with 
         (short-                                                    the       
             term)         Accounting       purchased. This    terms of the   
                                             allows IRS to       licenses.    
                        Procedures and    determine           
                                          compliance with the 
                        Internal Controls terms of software   
                                          licenses and to     
                                          know when to        
                          (GAO-02-746R,   purchase more or    
                                          less software based 
                         July 18, 2002)   on usage.           

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

02-26	Ensure that, in the absence of an integrated general ledger system
for IRS's custodial and administrative activities, IRS strengthens
monitoring and analysis of receivables to ensure that receivables are not
being erroneously recorded as a result of the lack of integration between
these two activities. (shortterm)

Management Report: Improvements Needed in IRS's Accounting Procedures and
Internal Controls

(GAO-02-746R, July 18, 2002) Closed. IRS agrees with this recommendation
and has taken steps to better manage reimbursable activity. IRS is now
reconciling all reimbursable receivable accounts with the appropriate
general ledger accounts monthly and is monitoring activities between
custodial and administrative accounts as part of this process.
Additionally, IRS has implemented a process to routinely review open
receivables and take action to write off amounts, as appropriate. Closed.
During our fiscal year 2003 audit, we verified that IRS initiated
corrective actions, that involved monitoring and detailed analysis of its
reimbursable receivables that effectively addressed this recommendation.
We found that, at fiscal yearend, IRS had identified and written off most
of its old reimbursable receivable accounts and maintained no receivable
balances that were due from its custodial activities.

03-01	Document IRS's oversight IRS Lockbox Banks: Closed. The MOU between
FMS Open. During our fiscal year roles and responsibilities in More
Effective and IRS, detailing the roles and 2003 audit, we reviewed the
agency policy and Oversight, Stronger responsibilities of each MOU in
draft form and have procedure manuals and Controls, and organization in
administering the since confirmed its ratification. determine
appropriatelevel Further Study of IRS Lockbox Program, was signed We will
evaluate IRS's of IRS oversight of lockbox Costs and Benefits April 30,
2003. In addition, IRM documentation of its oversight sites throughout the
year, Are Needed (GAO-3.0.230, Lockbox Processing roles and
responsibilities in particularly during peak 03-299, Jan. 15, Procedures,
and the Lockbox agency policy and procedure processing periods.
(short-2003) Processing Guidelines (2003) and manuals as part of our
fiscal term) (2004) outline the duties and year 2004 financial audit.

responsibilities of FMS and IRS.

03-02	Establish and document guidelines and procedures in policy and
procedure manuals for implementing the new penalty provision for lockbox
banks to reimburse the government for direct costs incurred in correcting
errors made by lockbox banks. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Open. Rescheduled to November 15, 2004. IRS/FMS has drafted a high-level
reimbursement process. The plan includes the use of a special Lockbox
Program code to delineate IRS rework costs as a result of errors made by
the lock box sites. Currently the IRS/FMS is working on further detailing
the plan for approval by FMS/IRS management. Once the plan is approved,
IRS will incorporate the procedures in both the Lockbox Processing
Guidelines and the Lockbox Processing IRM.

Open. We will evaluate IRS's corrective actions in future financial
audits.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

45 03-03 Finalize and document   IRS Lockbox Banks:     Closed. During our 
            the                                                   fiscal year 
            recently developed        More Effective       2003 IRS financial 
            waiver                                                  audit, we 
            process in IRS policy   Oversight, Stronger verified that the new 
            and                                                        waiver 
             procedure manuals and     Controls, and     process is described 
                                                                   in the LPG 
             ensure that decisions   Further Study of   and that the internal 
                      on                                              process 
             requests for waivers   Costs and Benefits    between IRS and FMS 
                      are                                                  is 
             formally and promptly   Are Needed (GAO-       documented in the 
                                                                         MOU. 
            communicated to lockbox  03-299, Jan. 15,   
            management.                                 
            (short-term)                   2003)        

Closed. Both the new waiver process, which is described in section 2.1.3.1
of the 2003 and 2004 Lockbox Processing Guidelines (LPG), revised April 8,
2003, and issued December 1, 2003, respectively, and the Security
Memorandum of Understanding (MOU), which was used to document the internal
process between the IRS and the FMS, and completed on April 1, 2003,
address this recommendation.

03-04	Establish and document a process in IRS policy and procedure manuals
to ensure that lockbox bank management formally responds to IRS oversight
findings and recommendations promptly and that corrective actions taken by
lockbox bank management are appropriate. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. The Security MOU, completed on 04/01/03, documents the roles and
responsibilities of the Security Review Team, which is comprised of FMS
and IRS security experts. IRS documents our findings, which are sent to
FMS to be included in a final report to the banks. This report covers
findings, recommendations, and due dates for all corrective actions. IRS
receives a copy of the final report.

Open. During our fiscal year 2003 IRS financial audit, we verified that a
process to ensure that lockbox bank management formally responds to IRS
and FMS was documented in the Security MOU. The MOU does not however
document IRS's oversight roles and responsibilities in IRS policy and
procedure manuals.

03-05	Establish and document a IRS Lockbox Banks: Closed. The Security
MOU, which Closed. During our fiscal year process in IRS policy and More
Effective was completed on April 1, 2003, 2003 IRS financial audit, we
procedure manuals to Oversight, Stronger documents the roles and verified
that the roles and ensure that IRS officials Controls, and
responsibilities of the Security responsibilities of the security with the
appropriate levels Further Study of Review Team, which is comprised review
team were documented of expertise continue to Costs and Benefits of FMS
and IRS security experts. in the Security MOU. participate in announced
Are Needed (GAOand unannounced security 03-299, Jan. 15, reviews of
lockbox banks. 2003) (short-term)

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-06	Ensure that the results of on-site compliance reviews are completed
and promptly submitted to IRS's National Office. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. Lockbox banks underwent security reviews in 2003. The banks were
required to respond officially to the items identified in the security
report. Security reviews were based on the lockbox sites' compliance with
the LPG. IRS is represented on the security review team, provides input
related to the review to FMS, and then receives a copy of the final
response sent by FMS to the lockbox bank.

Open. Based on our review during our fiscal year 2003 IRS financial audit,
the lockbox coordinators completed a compliance review checklist during
January and April 2003 peak for the 4 lockbox banks we visited. However,
we noted that in some instances the coordinator did not complete all the
steps noted on the checklist. We were unable to determine whether or not
the reviews were submitted promptly to IRS's National Office. We will
continue to monitor IRS's efforts in our fiscal year 2004 financial audit.

03-07	Revise the guidance used for compliance reviews so it requires
reviewers to (1) determine whether lockbox contractors, such as couriers,
have completed and obtained favorable results on IRS fingerprint checks
and (2) obtain and review all relevant logs for cash payments and candled
items to ensure that all payments are accounted for. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. IRS updated the security checksheet to instruct reviewers to
determine whether contractors have completed and obtained favorable
fingerprint results and to review all relevant logs for cash payments and
candling logs. In addition, IRS and FMS personnel review all contractor
(including courier) documentation during peak. Lockbox Coordinators are
responsible for reviewing the candling log and cash log.

Open. During our fiscal year 2003 financial audit, we verified that IRS
updated FMS's check sheet and found it contained all of the recommended
requirements. In addition, we verified that the LPG was updated to revise
guidance for candling. However, we also reviewed the lockbox coordinators'
on-site review checksheet and found that it did not contain the courier or
the candling log requirements. We will continue to monitor IRS's efforts
in our fiscal year 2004 financial audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-08	Assign individuals, other IRS Lockbox Banks: than the lockbox More
Effective coordinators, responsibility Oversight, Stronger for completing
on-site Controls, and performance reviews. Further Study of (short-term)
Costs and Benefits

Are Needed (GAO03-299, Jan. 15, 2003) Closed. IRS disagrees with this
recommendation. The Lockbox Coordinators were specifically hired to
conduct the performance reviews and to represent the IRS interests at the
banks during peak processing. IRS has increased the monitoring of the
Lockbox Coordinator's performance by establishing direct report of these
positions to a newly established organization in the Revenue and Deposit
Branch. Reports prepared by the Lockbox Coordinators are analyzed and
reviewed by the manager of the Lockbox Coordinators, also the Lockbox
Policy and Procedure Section and FMS. This review will identify any
inconsistencies with other on-site observations and findings by other
staff. In addition, each Submission Processing Center conducts a review of
the documents and remittances returned by the Lockbox Bank. The role of
the Lockbox Coordinators is not only to ensure the proper reviews are
completed for each site but also to be the Liaison for the Bank and
related Submission Processing Center. They will respond to questions and
provide direction based on established guidelines in the Lockbox
Processing Guidelines. To ensure Lockbox Coordinators are able to perform
all of the prescribed reviews the Revenue and Deposit Branch will ensure
additional staff is available as needed. GAO's concern regarding the
objectivity and integrity of each individual Lockbox Coordinator becoming
questionable will be addressed through monitoring of individual
performance by the newly assigned manager. IRS is also working towards
standardization of the review process that should decrease this concern as
well. Open. We continue to believe the current lockbox coordinator
structure, where lockbox coordinators are responsible for performing
performance reviews as well as assisting lockbox banks with processing
issues, does not alleviate the potential conflict of competing
responsibilities in completing on-site performance reviews. However, we
will review IRS's actions during our fiscal year 2004 audit to determine
their effect on this issue. IRS previously agreed with this recommendation
in its comments on the lockbox report dated December 20, 2002.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

Count  No.  Recommendation    Source       Per IRS          Per GAO        
                                 report                  
                               IRS Lockbox    Closed.                         
         03-09                 Banks:        Security      Closed. During our 
               Require lockbox             reviews have           fiscal year
                                  More         been      2003 IRS financial   
                management to   Effective  completed to  audit, we            
                   ensure                  address this  
               that perimeter  Oversight,  requirement.  verified that IRS    
                  doors are    Stronger                  had taken            
                 locked and     Controls,                steps to monitor     
                  alarms on        and                   compliance           
               perimeter doors   Further                      with this       
                     are        Study of                     requirement.     
               functioning and Costs and                  Additionally, this  
                  that IRS     Benefits                        item is        
                take steps to  Are Needed                 included in FMS's   
                   monitor     (GAO-                     
                adherence to     03-299,                 monitoring/oversight 
                    this        Jan. 15,                            checklist 
               requirement.       2003)                  used to monitor      
               (short-term)                              compliance           
                                                              with this       
                                                             requirement.     

03-10	Require lockbox management to ensure that guards are responsive to
alarms and that IRS takes steps to monitor adherence to this requirement.
(short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. The requirement to ensure that door alarms are responded to by the
guards was previously established in the 2002 LPG issued January 1, 2002.
During on-site reviews, IRS and FMS security teams observe the guards
responding to door alarms, etc., by performing tests during on-site
security review. Documented in Section 2.4 of 2003 (revised April 8, 2003)
and 2004 LPG (issued December 1, 2003).

Open. During our fiscal year 2003 IRS financial audit, we noted that IRS
had taken steps to monitor compliance with this requirement. Additionally,
this item is included in FMS's monitoring/oversight checklist used to
monitor compliance with this requirement. However, in our fiscal year 2003
audit, we observed that guards did not respond to alarms at one of the
four lockbox banks we visited.

53 03-11   Require lockbox IRS Lockbox      Closed. During our fiscal year 
                         Banks:              
               management to ensure More         2003 IRS financial audit, we 
                       Effective             
                that employees' identity       noted that IRS had taken steps 
                  Oversight, Stronger        
               and employment status are      to monitor compliance with this 
                     Controls, and           
               verified prior to granting     requirement. Additionally, this 
                    Further Study of         
             access to the processing Costs         item is included in FMS's 
                      and Benefits           
              floor and that IRS take Are      monitoring/oversight checklist 
                      Needed (GAO-           
               steps to monitor adherence          used to monitor compliance 
                    03-299, Jan. 15,         
                  to this requirement.       with this requirement as well as 
                      (short-2003)           
                         term)                    in the LPG. Furthermore, we 
                                               noted no exceptions during our 
                                                      observations.           

Closed. The requirement to ensure that employee identity and employment
status are verified prior to granting access to the processing floor was
previously listed in the 2002 LPG issued January 1, 2002. During the
on-site security reviews, the security review teams ensure the banks meet
this requirement by reviewing personnel folders for temporary employees,
bank officials, couriers, and guards. Documented in Section 2.5 of the
2003 (revised April 8, 2003) and 2004 LPG (issued December 1, 2003).

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

54 03-12   Require lockbox     IRS Lockbox       Closed. During our fiscal 
                                     Banks:                              year 
            management to ensure More Effective  2003 IRS financial audit, we 
            that visitor access    Oversight,     verified that IRS had taken 
            to and                  Stronger    
              activity in the    Controls, and    steps to monitor compliance 
                 processing                     
            area are adequately  Further Study         with this requirement. 
                                       of       
            controlled and that    Costs and       Additionally, this item is 
                    IRS             Benefits    
               take steps to       Are Needed         included in FMS's       
                  monitor            (GAO-      
             adherence to this    03-299, Jan.           monitoring/oversight 
                                      15,                           checklist 
            requirement.             2003)         used to monitor compliance 
            (short-term)                        
                                                       with this requirement. 

Closed. The requirement to control visitor access was previously listed in
the 2002 LPG issued January 1, 2002. During the on-site security reviews,
IRS/FMS security teams observe the sites' handling of visitors to ensure
that the banks meet this requirement. Additionally, during peak visits a
lockbox coordinator observes adherence to this requirement. Documented in
Section 2.6.2 of the 2003 (revised April 8, 2003) and 2004 LPG (issued
December 1, 2003).

03-13	Require lockbox management to ensure that employee access and items
brought into and out of the processing area are closely monitored by
guards and that IRS take steps to monitor adherence to this requirement.
(shortterm)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. The requirement to ensure that employee access and items brought
into and out of the processing area are closely monitored by guards was
previously listed in the 2002 LPG issued January 1, 2002. Additionally,
Post Orders are required to be developed and reviewed with security guards
prior to each peak to reinforce this requirement. On-site security review,
as well as Lockbox Coordinator visits, monitors the adherence to this
requirement. During the on-site security reviews, IRS and FMS security
teams observe the sites handling of visitors to ensure the banks meet this
requirement. Documented in Section 2.7 of the 2003 (revised April 8, 2003)
and 2004 LPG (issued December 1, 2003).

Closed. During our fiscal year 2003 IRS financial audit, we verified that
IRS had taken steps to monitor compliance with this requirement.
Additionally, this item is included in FMS's monitoring/oversight
checklist used to monitor compliance with this requirement as well as in
the LPG. Furthermore, we noted no exceptions during our observations.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-14	Require lockbox management to ensure that surveillance cameras and
monitors are installed in ways that allow for effective, real-time
monitoring of lockbox operations and that IRS take steps to monitor
adherence to this requirement. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. Surveillance cameras have been installed at all lockbox sites.
Security review teams continually monitor compliance. These procedures
were updated in Section 2.4.1 of the 2003 (revised April 8, 2003) and the
2004 LPG, issued December 1, 2003.

Open. IRS's action of establishing a policy does not provide assurance
that this policy is consistently adhered to. During our fiscal year 2003
financial audit we found that at one of four lockbox banks we visited,
guards did not use the cameras to monitor external activity when the door
alarm was activated. At another site, we found that guards did little to
no monitoring of the cameras while at the guard console.

03-15	Require lockbox management to ensure that envelopesare properly
candled and that IRS take steps to monitor adherence to this requirement.
(shortterm)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. These procedures were updated in Section 3.5.1.1 of the 2003
(revised April 8, 2003) and the 2004 LPG, issued December 1, 2003.
Candling procedures are clarified to ensure envelopes are properly
candled. Adherence to the requirements was added to the Lockbox Security
Check Sheet. Adherence will be monitored by the lockbox FMS and IRS
security team announced and unannounced visits.

Open. IRS needs to ensure that all requirements are consistently and
routinely adhered to by lockbox management at all of the lockbox sites.
During our review of lockbox banks in 2003, we found one lockbox bank
where envelopes thatwere not opened on 3 sides were not candled twice and
at another bank employees were unable to determine whether 2 candlings had
been performed.

03-16	Require lockbox management to perform and adequately document
candling reviews and that IRS take steps to monitor adherence to this
requirement. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. The requirement to perform and adequately document candling
reviews was added in Section 3.5.1.1 of the 2003 (revised 04/08/03) and
2004 LPG, issued 12/01/03. Adherence to the requirements was added to the
Lockbox Security Check Sheet. Adherence will be monitored by the lockbox
FMS and IRS security team during announced and unannounced visits.
Additionally Lockbox Coordinators review candling as part of their quality
review checks during each peak.

Open. While IRS has added candling reviews requirement to LPG 3.5.1.1 and
has taken steps to monitor adherence to this requirement by including this
requirement in FMS's oversight/monitoring checklist, its actions have not
been sufficient to ensure compliance. During our fiscal year 2003 IRS
financial audit, we found that at three of the four sites we visited,
reviews of final candled envelopes were not performed as required and/or
was not documented.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-17	Require that returned refund checks are restrictively endorsed
immediately upon extraction and that IRS take steps to monitor adherence
to this requirement. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. The requirement to ensure that returned refund checks are
restrictively endorsed immediately upon extraction was previously listed
in Section 3.2.1 of the 2002 LPG issued January 1, 2002, as well as the
2003 (revised April 8, 2003) and 2004 LPG, issued December 1, 2003. During
the onsite security reviews, IRS and FMS security teams reviewadherence to
this requirement. Additionally, adherence to this requirement is evaluated
during the daily SPCa quality reviews.

Open. During our fiscal year 2003 IRS financial audit, we verified that
IRS had taken steps to monitor compliance with this requirement.
Additionally, this item is included in FMS's monitoring/oversight
checklist used to monitor compliance with this requirement. However, we
found that at three of the four sites we visited, returned refund checks
were not consistently restrictively endorsed immediately upon extraction.

03-18	Require that lockbox IRS Lockbox Banks: Closed. The 2003 LPG,
Section Closed. During our fiscal year couriers are properly More
Effective 2.8.7, effective January 1, 2003, 2003 audit, we verified that
IRS identified prior to granting Oversight, Stronger specifies that guards
identify had taken steps to monitor them access to taxpayer Controls, and
couriers before granting access. compliance with this data and receipts
and that Further Study of Adherence to the requirements requirement. IRS
take steps to monitor Costs and Benefits was added to the Lockbox Security
adherence to this Are Needed (GAO-Check Sheet. Adherence is requirement.
(short-term) 03-299, Jan. 15, monitored by the Lockbox FMS and

2003)	IRS security team during their announced and unannounced security
visits.

61 03-19  Require that employees IRS Lockbox    Closed. In our fiscal year 
                           Banks:                                        2003 
                have received favorable More        financial audit, we found 
                         Effective                                       that 
             results on fingerprint Oversight,       IRS had made significant 
                          Stronger               
            checks before they are Controls, and     improvements in ensuring 
                                                                         that 
             granted access to taxpayer Further        lockbox bank employees 
                          Study of               
            data and receipts and that Costs and           received favorable 
                          Benefits                                fingerprint 
            IRS take steps to monitor Are Needed  checks before being granted 
                           (GAO-                 
             adherence to this 03-299, Jan. 15,   access to taxpayer data and 
              requirement. (short-term) 2003)      receipts and no exceptions 
                                                     were noted in this area. 

Closed. The requirement for lockbox sites to obtain favorable results on
employees' fingerprint checks before allowing them access to the
processing floor was previously listed in the 2002 LPG. The 2003 LPG,
Section 2.6.1, effective January 1, 2003, was updated to reflect the new
requirements. The FMS and IRS security team review personnel files to
ensure employees currently working with taxpayer remittances have
fingerprint clearance.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-20	Revise the LPG to require that before lockbox bank couriers receive
access to taxpayer data and receipts they undergo and receive favorable
results on background investigations that are deemed appropriate by IRS
and are consistent across lockbox banks. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. On September 23, 2003, at the annual Lockbox Conference, NBICb
presented the new background investigation requirements for permanent
Lockbox bank employees, couriers and guards. The new procedures require a
moderate risk National Agency Check with Law and Credit investigation on
all permanent bank employees, couriers and guards. The banks were given an
implementation schedule beginning October 1, 2003 with full implementation
by April 1, 2004. On December 15, 2003, the Lockbox Project Office sent
out a Lockbox Electronic Bulletin with the 2004 Lockbox Processing
Guidelines (LPG) containing the revised background investigation
requirements under L.P.G.4.2, Personnel Security and L.P.G.5.1.2(5).

Open. During our fiscal year 2003 financial audit, we continued to find
that lockbox couriers were not undergoing background investigations. In
our fiscal year 2004 financial audit, we will evaluate the recent actions
taken by IRS.

03-21	Revise the LPG to require that before permanent lockbox bank
employees receive access to taxpayer data and receipts they undergo and
receive favorable results on background investigations that are deemed
appropriate by IRS and are consistent across lockbox banks. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. On September 23, 2003, at the annual Lockbox Conference, NBIC
presented the new background investigation requirements for permanent
Lockbox bank employees, couriers and guards. The new procedures require a
moderate risk National Agency Check with Law and Credit investigation on
all permanent bank employees, couriers and guards. The banks were given an
implementation schedule beginning October 1, 2003 with full implementation
by April 1, 2004. On December 15, 2003, the Lockbox Project Office sent
out a Lockbox Electronic Bulletin with the 2004 Lockbox Processing
Guidelines (LPG) containing the revised background investigation
requirements under L.P.G.4.2, Personnel Security and L.P.G.5.1.2(5).

Open. In our fiscal year 2004 financial audit, we will evaluate the recent
actions taken by IRS.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-22	Revise the LPG to require IRS Lockbox Banks: Closed. The 2003 LPG,
Section Closed. During fiscal year 2003 that guards inspect courier More
Effective 2.7.4, which was effective we reviewed a Lockbox vehicles for
unauthorized Oversight, Stronger January 1, 2003, was updated to
Electronic Bulletin (LEB) alert passengers and unlocked Controls, and
include this requirement. that revised the LPG to require doors.
(short-term) Further Study of that guards inspect courier

Costs and Benefits vehicles for unauthorized
Are Needed (GAO-passengers and unlocked
03-299, Jan. 15, doors. During our audit, we did
2003) not identify any instances

where guards did not inspect courier vehicles for unauthorized passengers
and unlocked doors.

03-23	Revise the LPG to require that candling procedures for the various
types of extraction methods be clarified. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. In the 2003 LPG, Section 3.2.8, effective January 1, 2003,
candling procedures for the various types of extraction methods were
clarified. Splitting the envelope on three sides and flattening the
envelope is sufficient to meet candling requirements. This process is
sufficient to meet the candling requirements without further light source
viewing. All other methods of extraction require viewing the envelope
twice, through a light source, to meet the candling requirement.

Closed. During our fiscal year 2003 financial audit, we verified that the
LPG revision clarified the candling procedures for the various types of
extraction methods.

03-24	Revise the LPG to require that during candling, lockbox bank
employees record which machines and which extraction clerks missed items.
(short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. On April 2, 2003, IRS instructed the banks to change the quality
review process for candling. The new procedures require that banks track
which machines and which employees missed items. The procedures were
effective April 14, 2003 and included in the 2004 LPG, issued December 1,
2003.

Open. IRS's action of establishing a policy does not provide assurance
that this policy is consistently adhered to. During our fiscal year 2003
audit, we verified that IRS included this requirement in the April 2003
LPG. However, we found at two of the four sites we visited that neither
the machines nor the clerks responsible for overlooking discovered items
were recorded on the candling logs.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-25	Revise the LPG to require that lockbox bank management reconcile
items found during candling to the candling records. (short-term)

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
Further Study of Costs and Benefits Are Needed (GAO03-299, Jan. 15, 2003)

Closed. Instructions for candling have been revised to require management
to reconcile items to the Form 9535. The 2003 LPG was updated on January
31, 2003, via Lockbox Electronic Bulletin alert, to include this
requirement in the LPG. LPG reference 3.2.8.2.

Open. IRS's action of establishing a policy does not provide assurance
that this policy is consistently adhered to. During our fiscal year 2003
IRS financial audit we verified that the LPG had been revised to
incorporate this requirement. However, we found at one of four sites we
visited that management did not initial the candling log for each shift,
whether or not items were found to validate that information was entered
correctly and items found had been reconciled to the Form 9535.

03-26	Revise the LPG to require IRS Lockbox Banks: Closed. All cash
receipts are Open. IRS's action of that lockbox bank More Effective
documented on Form 9535. LPG establishing a policy does not management
reconcile Oversight, Stronger 2003 was updated on January 31, provide
assurance that this cash payments to internal Controls, and 2003, via
Lockbox Electronic policy is consistently adhered cash logs and the cash
Further Study of Bulletin, to include the requirement to. During our
fiscal year 2003 logs they provide to IRS. Costs and Benefits to document
immediately and for financial audit, we verified that (short-term) Are
Needed (GAO-management to reconcile the LPG had been revised to

03-299, Jan. 15, payments. LPG reference 3.3.2.14. incorporate this
requirement.

2003)	However, we found that at one of four sites we visited cash was not
always recorded immediately upon discovery. In addition, there was no
documentation that management had reconciled the log.

03-27	Revise the LPG to require IRS Lockbox Banks: Closed. The January 1,
2003, LPG Closed. During our fiscal year that lockbox employees More
Effective included a requirement for a 2003 financial audit, we verified
immediately seek Oversight, Stronger lockbox site to notify the SPC that
the LPG had been revised processing guidance from Controls, and Lockbox
Coordinator if it receives to incorporate this requirement. the lockbox
coordinator if Further Study of timely postmarked mail after the envelopes
with timely Costs and Benefits grace period. The Lockbox postmark dates
are Are Needed (GAO-Coordinator will provide received after the postmark
03-299, Jan. 15, instructions for processing and review period has ended.
2003) assess the need for further (short-term) postmark review. See LPG

                             reference 3.2.2.1(2).

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-28	Enforce 180-day expiration Management period for fingerprint check
Report: results required when an Improvements individual enters on duty.
Needed in IRS's (short-term) Internal Controls

(GAO-03-562R, May 20, 2003) Closed. IRS re-emphasized this policy by
e-mail to Background Investigations Coordinators and Personnel Officers on
September 30, 2002, and during a conference call on October 9, 2002. In
addition, the Personnel Security and Investigations staff created and
distributed an Excel file that calculates the date when fingerprint
results expire. IRS staffs have received instructions on how to use the
spreadsheet and to annotate Case Closing documentation. As a result,
Personnel Offices are enforcing the 180-day policy for fingerprint
results. Closed. During our fiscal year 2003 financial audit we noted only
5 instances in over 12,000 hires where individuals were hired with
fingerprint results over 180 days old.

03-29	Confirm with FMS that Management IRS's requirements for Report:
background and fingerprint Improvements checks for courier services Needed
in IRS's are met regardless of Internal Controls whether IRS or FMS
(GAO-03-562R, negotiates the service May 20, 2003) agreement. (short-term)
Closed. On October 7, 2002, FMS issued an amendment to the Courier MOU,
which included the requirement that all courier employees satisfy the
basic investigation including an Federal Bureau of Investigation
fingerprint and name check. All 10 IRS campuses now have a contact
responsible for submitting paperwork to the National Background
Investigation Center (NBIC) and ensuring courier employees are granted
clearance. On April 10, 2003, IRS requested that NBIC provide a monthly
status report of the campus compliance to the Wage and Investment (W&I)
Division. The 2004 LPG (issued December 1, 2003) includes Guidelines for
Background Investigations under Personnel Security in Section 4.2. Open.
During our fiscal year 2003 audit, we found that the five service centers
with Financial Management Service (FMS) negotiated service agreements were
not compliant with the revised courier standards requiring couriers to
undergo NBIC background investigations.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-30	Establish procedures to verify that courier services are adhering to
the standards established for them by IRS, including the requirement that
the courier service have insurance coverage. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls

(GAO-03-562R, May 20, 2003) Closed. The Security Review Team of Receipt
and Control reviews monthly compliance with the courier requirements. For
the five campuses where IRS holds the courier contract, the Security
Review Team was required to verify the campus has a valid insurance
certificate valued at $1 million. For the five campuses with FMS
negotiated agreements, FMS drafted a memorandum to the financial
institutes advising them to regularly provide a copy of the insurance
certificates to IRS. The 2003 LPG included this procedure in Section
2.8.4.1. Open. During our fiscal year 2003 audit, we reviewed the Campus
Security Checklist and found it included a question on whether the
Contracting Officer Technical Representative for campuses with
IRS-negotiated courier agreements had a copy of the bonding/insurance
certificate valued at $1 million. However, it did not request this
information for campuses with FMS-negotiated courier agreements. For four
of the five campuses withFMS-negotiated courier agreements, we reviewed an
amendment to the agreements and found that three amendments required that
the courier service provide its bonding or insurance certification on an
annual basis to FMS and one required the service to provide insurance
certification to the IRS campus. However, we found during our audit that
the IRS campuses had not received the insurance statement as required by
the agreement.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

Count  No.    Recommendation            Source report      Per IRS Per GAO 
          03-31  Enforce consistent        Management                 
                 implementation of policy  Report:                    
                 limiting personal         Improvements               
                 belongings in receipt     Needed in IRS's            
                 processing areas at       Internal Controls          
                 service center campuses.  (GAO-03-562R,              
                 (short-term)              May 20, 2003)              

Closed. On February 6, 2004, IRS issued information alert
W&I-IA2002-63-2004 specifying the items that are prohibited from the
secure receipt processing areas and requiring that employees use clear
plastic bags to transport small items not carried on their person in and
out of the secure areas. First line managers or a designated
representative conduct, at minimum, monthly random reviews of employee
compliance with all security policies as they relate to personal
belongings in the secure receipt processing areas. In addition, Campus
Security Review Teams conduct monthly reviews to ensure compliance with
these procedures. These procedures were added via Information Alerts to
IRMs pertaining to the secure receipt processing areas.

Open. During our fiscal year 2003 financial audit, we found that one of
four campuses we visited allowed prohibited items such as newspapers,
books, and purses into receipt processing areas. Additionally, at the same
campus, items transported in and out of the processing area in clear
plastic bags were not clearly visible and not all temporary employees had
lockers to store personal belonging. Since IRS's actions occurred after
our site visits, we will continue to evaluate IRS's corrective actions.

03-32	Prohibit the storage of employees' personal belongings with cash
payments and receipts at IRS's TACs. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls

(GAO-03-562R, May 20, 2003) Closed. On June 3, 2003, FAc included a
requirement in IRM 21.3.4.7.3.1(2), which states that cash payments and
Form 809 (Receipt for Payment of Taxes) must be stored separately from
personal belongings. This issue was also included in operational reviews
of the TACs conducted during fiscal year 2003. Open. During our fiscal
year 2003 financial audit, we verified that IRS included this requirement
in the IRM guidelines dated June 27, 2003. However, this IRM was completed
at the end of our site visits. We found that at one of the two field
offices we visited, personal belongings such as purses and briefcases were
allowed in areas where taxpayer receipts were received. Since IRS's action
occurred near the end of our audit, we will continue to evaluate the
effectiveness of IRS's corrective actions during our fiscal year 2004
financial audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

75 03-33 Revise candling         Management             Closed. On May 28, 
                                                                2003, the IRM 
            procedures to specify   Report:               candling procedures 
            the                                                  were updated 
            precise candling        Improvements          with an Information 
            methods                                            Alert (W&I-IA- 
            to be used based on the Needed in IRS's   2002-730) to specify    
                                                      precise first           
            dimensions of the mail  Internal Controls      and final candling 
                                                                methods based 
            processed and the       (GAO-03-562R,        on dimensions of the 
                                                               mail and first 
            extraction method used  May 20, 2003)     and final candling.     
            for                                       
            both the first and the                    
            final                                     
            candling. (short-term)                    

Open. We verified that IRS included this requirement in the IRM
guidelines. However, during our fiscal year 2003 financial audit, we found
that at two of four campuses we visited, not all envelopes were
illuminated at least once. Since IRS's action occurred after our site
visits, we will continue to evaluate IRS's corrective actions during our
fiscal year 2004 financial audit.

03-34	Establish and implement procedures prohibiting a single employee
from performing the final candling in a remote location. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls

(GAO-03-562R, May 20, 2003) Closed. On May 28, 2003, the IRM candling
procedures were updated with an Information Alert (W&I-IA2002-730)
implementing procedures prohibiting a single employee from performing the
final candling in a remote location. This requirement was also added to
the 2004 revision of IRM 3.10.72. Open. During our fiscal year 2003 IRS
financial audit we verified that IRS included this requirement in the IRM
guidelines. However, we found at one campus that while two employees
performed candling in a separate room together, there were so many crates
and boxes in the area that the two employees could not see one another.
Since IRS's action occurred after our site visits, we will continue to
evaluate IRS's corrective actions during our fiscal year 2004 financial
audit.

03-35	Determine which TACs do Management Closed. Completed June 5, 2003.
Closed. We verified that IRS not presently accept Report: IRS included
guidelines in its Fiscal incorporated guidelines in its payment of taxes
in cash Improvements Year 2003 Field Assistance fiscal year 2003 FAOP
stating and issue a memorandum Needed in IRS's Operating Procedures (FAOP)
that all TACs will accept all reminding them of the Internal Controls
stating that all TACs will accept all standard forms of payments
requirement that cash be (GAO-03-562R, standard forms of payments from
from customers including accepted. (short-term) May 20, 2003) customers,
including checks, checks, money orders, and

money orders, and cash. cash.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-36	Establish a mechanism to periodically review adherence to IRS's
policy that payment of taxes in cash be accepted. (shortterm)

Management Report: Improvements Needed in IRS's Internal Controls

(GAO-03-562R, May 20, 2003) Closed. IRS monitored adherence to these
guidelines during operational reviews of the TACs conducted in fiscal year
2003. The FA IRM, issued in June 2003, states "There will be at least one
employee in each TAC that is issued a Form 809 Receipt Book". This gives
each TAC the ability to issue the official receipt to taxpayers when
paying by cash or when a receipt is requested. (IRM 21.3.4.7.3(3).
Managers in the TACs are also required to complete an annual review to
address this issue. Open. Actions taken thus far have not been effective.
During our fiscal year 2003 financial audit, we found at one field office
TAC that taxpayers wishing to pay in cash were encouraged to obtain a
money order from a nearby bank. At the other TAC in that same field office
we found that the Compliance unit manager was unaware of the procedures
for receiving cash payments.

03-37	Develop and implement post-input review procedures to verify the
accuracy of excise tax credit information in the master file. (short-term)

Management Report: Improvements Needed in Controls over IRS's Excise Tax
Certification Process (GAO-03687R, July 23, 2003)

Closed. In July 2003, the Cincinnati Compliance Campus implemented Program
Analysis System reviews on Gasoline Wholesale Distributor/End User/Diesel
claims submitted on Forms 8849. In August 2003 they implemented and
increased the responsibility for managers to review all work including
fuel claims as part of their performance review for employees. In December
2003, Excise is included in the Embedded Quality Review System expansion
rollout and fuel claims are also included in this review. The Embedded
Quality Review System is performed by the employer's manager and is part
of the employee's performance rating.

Open. IRS's corrective actions were completed after the cut-off period of
transactions included in our fiscal year 2003 testing. We will review the
effectiveness of these actions during our fiscal year 2004 audit.

03-38	Investigate why Management Closed. In October 2003, IRS Open. IRS's
corrective action certification errors continue Report: reiterated to
management the was completed after we to go undetected through
Improvements importance of reviewing and reviewed its final excise tax
IRS's review procedures. Needed in Controls understanding the
Certification receipt certification affecting (short-term) over IRS's
Excise process. fiscal year 2003 distributions.

Tax Certification We will review the effectiveness
Process (GAO-03-of this action during our fiscal
687R, July 23, year 2004 audit.
2003)

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

03-39	Develop and implement an Management Closed. In October 2003, IRS
Open. IRS's corrective action action plan to improve the Report:
reiterated to management the was completed after we certification review
Improvements importance of reviewing and reviewed its final excise tax
process. (short-term) Needed in Controls understanding the Certification
receipt certification affecting

over IRS's Excise process. fiscal year 2003 distributions.
Tax Certification We will review the effectiveness
Process (GAO-03-of this action during our fiscal
687R, July 23, year 2004 audit.
2003)

03-40	Communicate in writing Management Open. IRS has implemented the
Open. We will review the status any potential changes in Report: taking of
minutes at all Treasury of IRS's corrective actions IRS's certification
process Improvements Excise Tax Working meetings, and during our fiscal
year 2004 to other Treasury entities Needed in Controls will also have a
Memorandum of financial audit. that use the certification over IRS's
Excise Understanding (MOU) signed by information, and obtain Tax
Certification the Treasury Excise Tax Working concurrence from these
Process (GAO-03-Group. entities prior to 687R, July 23, implementing such
2003) changes. (short-term)

03-41	Implement procedures to Management Closed. IRS has identified Open.
We verified that IRS had annually identify excise Report: Employer
Identification Numbers of identified the excise taxpayers taxpayers with
the largest Improvements the largest excise tax liabilities with the
largest excise tax excise tax liabilities Needed in Controls beginning
with tax period 200209. liabilities when we reviewed its affecting the
Highway Trust over IRS's Excise IRS identified the largest excise tax
pre-certification of excise tax Fund and the Airport and Tax Certification
filers to both Cincinnati Submission receipts for the quarter ended Airway
Trust Fund. (short-Process (GAO-03-Processing and Compliance June 30,
2003. We will continue term) 687R, July 23, Campuses in August 2003. The
to monitor IRS's actions during

2003)	Employer Identification Numbers our 2004 audit to verify that IRS
will be updated annually using the has implemented this as a September tax
periods. recurring annual procedure.

03-42	Implement procedures to track the status of tax return filings for
the largest payers of excise taxes and contact these taxpayers if the
submission processing campus has not received their tax returns by 2 weeks
after the due date. (short-term)

Management Report: Improvements Needed in Controls over IRS's Excise Tax
Certification Process (GAO-03687R, July 23, 2003)

Open. IRS is conducting a pilot to analyze the receipt pattern of the
largest excise taxpayers. The Cincinnati Submission Processing and
Compliance Campuses have entered into a Service Level Agreement (SLA) to
jointly monitor receipts and processing of excise tax returns. IRS
implemented a 6day cycle for expedited processing of all Form 720s. This
pilot is on schedule to be completed by November 2004. The SLA was signed
in October 2003 and revised in November 2003.

Open. We will review the progress of IRS's pilot during our fiscal year
2004 audit.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

85 03-43  Implement procedures      Management      Open. IRS's corrective 
                      to                                               action 
             monitor the receipt        Report:        was completed after we 
                     and                              
            processing status of      Improvements         reviewed its final 
            large                                                  excise tax 
            excise tax returns to  Needed in Controls   receipt certification 
                                                                    affecting 
             ensure that they are  over IRS's Excise         fiscal year 2003 
                                                               distributions. 
            promptly recorded in   Tax Certification       We will review the 
            IRS's                                               effectiveness 
             master file prior to   Process (GAO-03-    of this action during 
                                                                   our fiscal 
            certifying excise tax    687R, July 23,      year 2004 audit.     
                distributions.                        
                 (short-term)            2003)        

Closed. The Campus' Program Analyst staff and Reports Excise Analysts are
monitoring to ensure timely posting of the largest taxpayers. The SLA
between the Cincinnati Submission Processing and Compliance Campuses
ensures monitoring and processing of all Form 720 returns on a 6-day
cycle. Compliance has verified that Form 720 returns are being processed
on a six-day cycle, procedures are in place, and IRS is monitoring to
ensure timely posting of the largest taxpayers.

04-01	We recommend that IRS Management Open. The current LPG requires
Open. This is a new require lockbox bank Report: appropriate documentation
for recommendation. We will managers to maintain Improvements couriers and
guards before review IRS's corrective action appropriate documentation
Needed in IRS's contractors are granted access to during our fiscal year
2004 on-site demonstrating that Internal Controls taxpayer receipts. To
ensure audit. satisfactory fingerprint and Accounting compliance with the
LPG, IRS and results have been received Procedures (GAO-FMS include this
as a review item before contractors are 04-553R, April 26, when performing
security and granted access to taxpayer 2004) administrative reviews.
receipts and data. (shortterm)

04-02	We recommend that IRS Management Open. Additional background Open.
This is a new revise its policy on two-Report: investigation requirements
for all recommendation. We will person courier teams to Improvements
couriers have been implemented. review IRS's corrective actions prohibit
the use of courier Needed in IRS's However, Wage and Investment will
during our fiscal year 2004 teams consisting of closely Internal Controls
confer with Mission Assurance to audit. related individuals to and
Accounting assess their current guidelines. further minimize the risk of
Procedures (GAOcollusion in the theft of 04-553R, April 26, taxpayer
receipts and data. 2004) (short-term)

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

04-03	We recommend that IRS develop procedures to require lockbox managers
to provide satisfactory evidence that managerial reviews are performed in
accordance with established guidelines.At a minimum, reviewers should sign
and date the reviewed documents and provide any comments that may be
appropriate in the event that their reviews identified problems or raised
questions. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. The LPG instructs the banks to perform numerous managerial reviews.
IRS will consider the risk level of each of the documented logs, and
assess each one to determine the appropriate level of review and if more
guidelines are necessary.

Open. This is a new recommendation. We will continue to review IRS's
efforts during our fiscal year 2004 audit.

04-04	We recommend that IRS revise its candling procedures at lockbox
banks to require testing of automated candling machines at appropriate
intervals, taking into account such factors as use time, volume processed,
machine requirements, and shift cycles. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. IRS requires an additional candling of all envelopes processed by
extractors using machines that have automated candling equipment. This
requirement mitigates the risk identified by GAO. However, IRS agrees to
assess their current guidelines for possible inclusion of testing
standards for equipment with automated candling equipment.

Open. This is a new recommendation. We will monitor IRS's actions during
our fiscal year 2004 audit.

04-05   We recommend     Management    Open. IRS will    Open. This is a   
             that IRS                      include this           new         
         require lockbox     Report:     recommendation as recommendation. We 
         managers                           part of the    will               
         to maintain logs  Improvements  assessment of          monitor IRS's 
             of these                    testing standards     actions during 
           tests and to     Needed in      for machines    our fiscal year    
           periodically       IRS's        (04-04) with    2004 audit.        
           review their      Internal    automated         
          logs. (short-      Controls    candling          
                                         equipment.        
              term)       and Accounting                   
                          Procedures                       
                          (GAO-                            
                          04-553R, April                   
                          26,                              
                              2004)                        

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

04-06	We recommend that IRS discontinue its practice of storing taxpayer
receipts and data outside TAC secured areas without storing the receipts
in a secured locked container. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. Written procedures have been provided to TAC employees for
safeguarding taxpayer receipts when received. IRM 21.3.4.7(6), issued in
June 2003, provides guidance stating that payments received from taxpayers
will be immediately placed in a locked container. The receipts are also
stored away from employees' personal belongings. IRS will continue to
conduct operational reviews at TAC offices to ensure IRM procedures are
being followed. The TAC location that was noted for securing payments from
taxpayers outside the secure area of the TAC was contacted and the
location of the desk has been moved inside the secured area of the TAC.
The TAC manager was informed to ensure all TAC operations are conducted
inside the secured area of the TAC.

Open. This is a new recommendation. We will review IRS's corrective
actions during our fiscal year 2004 audit.

04-07 We recommend      Management     Open. In 2003,    Open. This is a   
         that IRS                         IRM 3.8.46 was          new         
             develop                       produced and    recommendation. We 
          procedures to      Report:      distributed to          will        
                                                all        
             enhance      Improvements   campuses. Form          review IRS's 
          adherence to                   4287 (Record of   corrective actions 
            existing                     Discovered        during our fiscal  
         instructions on Needed in IRS's Remittances) has      year 2004      
                                         been              
          safeguarding   Internal           revised to           audit.       
           discovered    Controls        include a box for 
         remittances at  and Accounting     managers to    
             service                       indicate that   
         center          Procedures      reconciliation    
         campuses.       (GAO-           has been          
         (short-                         performed.        
              term)      04-553R, April   Also, IRS added  
                         26,              to the monthly   
                                             security      
                              2004)        checklist to    
                                            review the     
                                         discovered        
                                         remittance        
                                         procedures.       

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

04-08	We recommend that IRS Management enforce its policies and Report:
procedures to ensure that Improvements service center campus Needed in
IRS's security guards respond to Internal Controls alarms. (short-term)
and Accounting

Procedures (GAO04-553R, April 26, 2004) Open. The IRS Physical Security
Programs within Mission Assurance will modify IRM 16.12, Facility and
Property Protection, to require the following: development of self
assessments, which may be used to test the response capabilities for
guards, as these relate to alarms; integrate self assessments into IRM
1.16; conduct initial and then periodic security exercises, which are
realistic, to ensure security guards respond to alarms, required by
Operational Assurance personnel; Operational Assurance will provide
written reports to the Physical Security Program Office to support the
conducting of security exercises; review self assessment reports for alarm
response and coordinate corrective action of outstanding issues; and,
conduct annual security exercise at each of their assigned facilities to
test alarm responses by October 31, 2005. Open. This is a new
recommendation. We will review IRS's corrective actions during our fiscal
year 2004 audit.

04-09	We recommend that IRS establish compensating controls in the event
that automated security systems malfunction, such as notifying guards and
managers of the malfunction, and immediately deploying guards to better
protect the processing center's perimeter. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. The IRS Physical Security Programs within Mission Assurance will
develop procedures by August 30, 2004, to be used in conjunction with the
policies developed in Recommendation 0408 to ensure that local management
is notified whenever there is a malfunction of alarms and that guards are
deployed or doors are secured, as necessary, either during tests or when
otherwise identified. Procedures will include management notification of
alarm failure when reported to the Situational Awareness Management
Center/Computer Security Incident Response Center (SAMC/CSIRC).

Open. This is a new recommendation. We will continue to review IRS's
corrective actions.

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

04-10   We recommend     Management      Closed. The     Open. This is a   
             that IRS                     Beckley Finance         new         
            modify AUO                       Center has    recommendation. We 
            reports to        Report:       revised the           will        
                                               Aging       
         ensure that they                 Unliquidated           review IRS's 
         report the        Improvements   Obligations      corrective actions 
                                          report to        
          last activity                   accurately       during our fiscal  
          date for each   Needed in IRS's capture the last     year 2004      
                                          activity         
         outstanding         Internal      date for each         audit.       
         obligation line     Controls     obligation line  
             amount.      and Accounting      amount.      
           (short-term)                                    
                          Procedures                       
                          (GAO-                            
                          04-553R, April                   
                          26,                              
                               2004)                       

04-11	We recommend that IRS require procurement office staff to review and
sign off on whether obligations are valid or require deobligation before
business units complete their quarterly certifications. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. IRS is evaluating its current approach toward reviewing open
obligations and approving those that require deobligation. This includes
studying the relative responsibilities of the procurement office, business
units, and the Beckley Finance Center with respect to validating and
certifying deobligations. New guidelines will be issued at the conclusion
of this internal review.

Open. This is a new recommendation. We will review IRS's corrective
actions during our fiscal year 2004 audit.

04-12	We recommend that IRS Management Open. The IRS Transactional Open.
This is a new enhance its compensating Report: Processing Operations
division will recommendation. We will internal controls by Improvements
expand its current random sample monitor IRS's corrective actions
including tests or Needed in IRS's payroll review/validation process to
during our fiscal year 2004 recalculations of payroll Internal Controls
include the recalculation of agency audit. computations performed by and
Accounting Thrift Saving Plan contributions. A NFC for the IRS employees
Procedures (GAO-detailed Standard Operating selected for review each
04-553R, April 26, Procedure outlining the complete pay period.
(short-term) 2004) review process is being developed,

with implementation expected by June 2004.

04-13 We recommend      Management      Open. The IRS    Open. This is a   
         that IRS                          Transactional          new         
             timely                      Processing        recommendation. We 
         investigate and     Report:     Operations               will        
                                         division is       
           resolve any    Improvements    responsible for        review IRS's 
           identified                      following up    actions during our 
             errors.     Needed in IRS's immediately on     fiscal year 2004  
          (short-term)                   any discrepancies       audit.       
                            Internal     with NFC and      
                            Controls     ensuring that NFC 
                         and Accounting  takes corrective  
                                          action within a  
                         Procedures        timely basis.   
                         (GAO-                             
                         04-553R, April                    
                         26,                               
                              2004)                        

                                   Appendix I
                    Status of GAO Recommendations from Prior
                        IRS Financial Audits and Related
                               Management Reports

                           Status of recommendations

04-14	We recommend that IRS establish review procedures for amounts being
reported in Supplemental Information to the financial statements for Other
Claims for Refund. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. The IRS's Appeals and Chief Counsel provide estimated amounts on
Other Claims for Refund to the Office of Revenue Reports. For information
received from Appeals, IRS management will perform a second level of
review to ensure the accuracy of the amounts to be included in the
financial statements. In addition, IRS management will work closely with
Chief Counsel to find ways to accelerate getting information on claims
pending review by federal courts.

Open. This is a new recommendation. We will review IRS's corrective
actions during our fiscal year 2004 audit.

100 04-15	Until BPMS is fully operational, we recommend that IRS implement
procedures to ensure that all performance data reported in the MPS report
are subject to effective, documented reviews to provide reasonable
assurance that the data are current at interim periods. (short-term)

Management Report: Improvements Needed in IRS's Internal Controls and
Accounting Procedures (GAO04-553R, April 26, 2004)

Open. IRS has taken steps to ensure that the performance measures data
reported in the monthly report is properly reviewed before being
published. IRS is increasing the control over data by increasing the
number of measures reported through the automated Business Performance
Management Systems, requiring the submitting divisions to certify that
their data is accurate, and reducing the number of measures manually
reported in the monthly report. In addition, Corporate Planning and
Performance Unit staff continues to complete the manual review process as
described by GAO, which requires the staff to review the draft document,
to compare it to the data provided to the divisions, and to compare it to
the previous month's report for consistency, thereby validating the
accuracy of the manual input of data to the report.

Open. This is a new recommendation. We will review IRS's corrective
actions during our fiscal year 2004 audit.

Source: GAO.

aIn reporting on the status of this recommendation, IRS refers to SPC,
which is an acronym for Submission Processing Center.

bIn reporting on the status of this recommendation, IRS refers to NBIC,
which is an acronym for National Background Investigation Center.

cIn reporting on the status of this recommendation, IRS refers to FA,
which is an acronym for Field Assistance.

Appendix II

Details on Audit Methodology

To fulfill our responsibilities as the auditor of the Internal Revenue
Service's (IRS) financial statements, we did the following:

o 	Examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. This included testing selected
statistical samples of unpaid assessment, revenue, refund, accrued
expenses, payroll, nonpayroll, property and equipment, and undelivered
order transactions. These statistical samples were selected primarily to
substantiate balances and activities reported in IRS's 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 either significant deficiencies in the design or
operation of internal control or compliance with provisions of laws and
regulations. These attributes, where applicable, can be and have been
statistically projected to the appropriate populations.

o 	Assessed the accounting principles used and significant estimates made
by management.

o  Evaluated the overall presentation of the financial statements.

o 	Obtained an understanding of internal controls related to financial
reporting (including safeguarding assets), compliance with laws and
regulations (including the execution of transactions in accordance with
budget authority), and performance measures reported in the Management's
Discussion and Analysis.

o 	Tested relevant internal controls over financial reporting (including
safeguarding assets) and compliance, and evaluated the design and
operating effectiveness of internal controls.

o 	Considered the process for evaluating and reporting on internal
controls and financial management systems under the Federal Managers'
Financial Integrity Act.

o 	Tested compliance with selected provisions of the following laws and
regulations: Anti-Deficiency Act, as amended (31 U.S.C. S: 1341(a)(1) and
31 U.S.C. S: 1517(a)); agreements for payment of tax liability in
installments (26 U.S.C. S: 6159); Purpose Statute (31 U.S.C. S: 1301);
release of lien or discharge of property (26 U.S.C. S: 6325); interest on
underpayment, nonpayment, or extensions of time for payment of tax

Appendix II Details on Audit Methodology

(26 U.S.C. S: 6601); interest on overpayments (26 U.S.C. S: 6611);
determination of rate of interest (26 U.S.C. S: 6621); failure to file tax
return or to pay tax (26 U.S.C. S: 6651); failure by individual to pay
estimated income tax (26 U.S.C. S: 6654); failure by corporation to pay
estimated income tax (26 U.S.C. S: 6655); Prompt Payment Act (31 U.S.C. S:
3902 (a), (b), and (f), and 31 U.S.C. S: 3904); Pay and Allowance System
for Civilian Employees (5 U.S.C. S:S: 5332 and 5343, and 29 U.S.C. S:
206); Federal Employees' Retirement System Act of 1986, as amended (5
U.S.C. S:S: 8422, 8423 and 8432); Social Security Act, as amended (26
U.S.C. S: 3101 and 3121, and 42 U.S.C. S: 430); Federal Employees Health
Benefits Act of 1959, as amended (5 U.S.C. S:S: 8905, 8906, and 8909); and
Consolidated Appropriations Resolution, 2003 (Pub. L. No. 108-7).

o 	Tested whether IRS's financial management systems substantially comply
with the three requirements of the Federal Financial Management
Improvement Act of 1996.

                                  Appendix III

                   Comments from the Internal Revenue Service

Appendix IV

                     GAO Contact and Staff Acknowledgments

GAO Contact Steven Sebastian, (202) 512-3406

Acknowledgments	In addition to the person named above, Paul Foderaro,
Chuck Fox, Larry Malenich, Charles Payton, Ted Hu, Yola Lewis, John Davis,
William Cordrey, Valerie Freeman, Alain Dubois, George Jones, Gloria Cano,
and Nina Crocker made key contributions to this report.

GAO's Mission	The General Accounting Office, the audit, evaluation and
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