Internal Revenue Service: Status of Recommendations from Financial Audits and Related Financial Management Reports (29-APR-05, GAO-05-393). In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility for 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 status of 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 fully address them. -------------------------Indexing Terms------------------------- REPORTNUM: GAO-05-393 ACCNO: A22999 TITLE: Internal Revenue Service: Status of Recommendations from Financial Audits and Related Financial Management Reports DATE: 04/29/2005 SUBJECT: Financial management Financial management systems Internal controls Tax administration systems Financial statement audits Audit recommendations Corrective action ****************************************************************** ** This file contains an ASCII representation of the text of a ** ** GAO Product. ** ** ** ** No attempt has been made to display graphic images, although ** ** figure captions are reproduced. Tables are included, but ** ** may not resemble those in the printed version. ** ** ** ** Please see the PDF (Portable Document Format) file, when ** ** available, for a complete electronic file of the printed ** ** document's contents. ** ** ** ****************************************************************** GAO-05-393 * Report to the Commissioner of Internal Revenue * April 2005 * INTERNAL REVENUE SERVICE * Status of Recommendations from Financial Audits and Related Financial Management Reports * Contents * Status of Recommendations * Agency Comments and Our Evaluation * Objective, Scope, and Methodology * Status of GAO Recommendations from Prior IRS Financial Audits and Related Management Reports * Details on Audit Methodology * Comments from the Internal Revenue Service * GAO Contact and Staff Acknowledgments * GAO Contacts * Acknowledgments * http://www.gao.gov United States Government Accountability Office Report to the Commissioner of Internal Revenue April 2005 INTERNAL REVENUE SERVICE Status of Recommendations from Financial Audits and Related Financial Management Reports a GAO-05-393 INTERNAL REVENUE SERVICE Status of Recommendations from Financial Audits and Related Financial Management Reports What GAO Found As in past years, IRS has continued to make improvements to address a number of financial management weaknesses. At the same time, a number 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 118 recommendations related to financial management (consisting of 76 recommendations open as of April 2004, 9 recommendations included in GAO's January 2005 report on the timeliness of IRS lien releases, 3 recommendations included in GAO's March 2005 report on the Brookhaven Service Center Campus rampdown, and 30 new recommendations included in GAO's management report for fiscal year 2004), GAO is closing 34 due to effective 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 2004 financial statements. Of the remaining 84 financial management recommendations GAO considers open as of the date of this report, 75 are short term (capable of being addressed within 2 years) and 9 are long term (expected to require more than 2 years to implement). IRS considers 40 (48 percent) of the 84 recommendations to be closed. GAO considers 21 of these 40 to be still open because it has not yet had an opportunity to verify the actions taken by IRS. The actions cited by IRS for these 21 recommendations are recent and were taken after GAO's financial statement audit work for the year was completed. For 18 of the 40 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. IRS stated that it has begun to address the 42 new recommendations included in the report. GAO will review these corrective actions and the status of IRS's progress in implementing all open recommendations as part of the fiscal year 2005 audit. United States Government Accountability Office Contents Letter 1 Status of Recommendations 2 Agency Comments and Our Evaluation 6 Objective, Scope, and Methodology 6 Appendixes :Status of GAO Recommendations from Prior IRS Financial Audits and Related Management Reports 9 :Details on Audit Methodology 78 :Comments from the Internal Revenue Service 80 : GAO Contact and Staff Acknowledgments 81 Abbreviations AUR Automated Underreporter CADE Customer Account Data Engine CAP Custodial Accounting Project FMS Financial Management Service IFS Integrated Financial System IRM Internal Revenue Manual IRS Internal Revenue Service LPG Lockbox Processing Guidelines MOU Memorandum of Understanding NBIC National Background Investigation Center NFC National Finance Center P&E property and equipment SB/SE Small Business/Self-Employed SCC Service Center Campuses SETS Security Entry and Tracking System 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 Government Accountability Office Washington, D.C. 20548 April 29, 2005 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 2004 and 2003.1 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 and most recent financial audit and financial management-related reports.3 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 2005 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 1 GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004). 2 GAO, Internal Revenue Service: Status of Recommendations from Financial Audits and Related Financial Management Reports, GAO-04-523 (Washington, D.C.: Apr. 28, 2004). 3 GAO, Opportunities to Improve Timeliness of IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 2005); Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus, GAO-05-319R (Washington, D.C.: Mar. 10, 2005); and Management Report: Improvements Needed in IRS's Internal Controls, GAO-05-247R (Washington, D.C.: Apr. 27, 2005). Status of Recommendations work performed during our fiscal year 2004 financial audit. Effectively implementing recommendations is critical for IRS to resolve its financial management challenges. In April 2004, we issued a report that provided (1) the status of IRS's efforts to implement prior recommendations as of our fiscal year 2003 financial audit4 and (2) new recommendations based on the results of our fiscal year 2003 financial audit.5 In the April 2004 report, we included 100 audit recommendations that we had not previously reported as being closed, 1 dating back as far as 1993. Of the 100 recommendations, 24 were closed at the time that report was issued, leaving 76 that were used as a starting point for appendix I of this report. For this year, we added 9 recommendations from our January 2005 report on the timeliness of IRS lien releases, 3 recommendations from our March 2005 report on the Brookhaven Service Center Campus rampdown,6 and 30 new recommendations included in our management report related to our audit of IRS's fiscal year 2004 financial statements, for a total of 118 recommendations. Based on the results of our recently completed fiscal year 2004 financial audit, we are closing 34 recommendations made in prior audits due to effective actions IRS has taken to address the issues that gave rise to them. Therefore, as of the date of this report, 84 financial management recommendations remain open, 75 of which are short term and 9 of which are long term.7 4 GAO, Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements, GAO-04-126 (Washington, D.C.: Nov. 13, 2003). 5 GAO-04-523. 6 The term "rampdown" is used to refer to IRS's significant reduction of its submission processing functions at selected service center campuses. In fiscal year 2004, Brookhaven became the first service center campus to downsize its submission processing function. 7 Short-term recommendations are defined as those that could be addressed within 2 years at the time we made the recommendation. Long-term recommendations are defined as those expected to require 2 years or more to implement at the time we made the recommendation. As indicated in appendix I, of the 84 recommendations we consider to be open, IRS considers 40 (48 percent) to be closed. We consider 21 of these recommendations to be open because IRS took corrective action to resolve these recommendations after we completed our testing for the fiscal year 2004 audit. 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 audit of IRS's fiscal year 2005 financial statements. For 18 of the 40 recommendations that IRS considers closed, we found that the initial action taken by IRS in the current or prior years has not been fully effective in addressing the conditions that gave rise to the recommendations. For 8 of these 18 recommendations, IRS initiated additional corrective action after we completed our fiscal year 2004 audit and, as a result, we have not yet had time to verify the effectiveness of these additional actions. IRS disagrees with the remaining recommendation,8 though it had agreed with the recommendation at the time it was made. Sixteen of the 18 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 4 of these 16 recommendations did not adequately address the underlying issues. We continue to be concerned that IRS's actions in a number of cases consist of writing policies and procedures without providing a mechanism to ensure proper and ongoing implementation. We believe that the 16 recommendations could be resolved with additional management follow-up to see that the revised policies and directives specifically address the issues and that corrective actions as envisioned in policy and procedural changes are fully and effectively implemented. In the interim, to the extent the underlying weaknesses continue to exist, they will impair the quality and timeliness of IRS's financial information and increase its exposure to losses. 8 Recommendation 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. Page 3 GAO-05-393 Status of Recommendations A significant number of the 84 recommendations in appendix I that we consider open have been outstanding for an extended period of time. Twenty-eight (33 percent) of the recommendations were made over 2 years ago, including 9 recommendations from more than 3 years ago, 9 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 errors or theft and impairs the availability of current, accurate financial information management needs to make decisions. The majority of the 84 recommendations that we consider to be open address one of two broad issues: o Forty-eight (57 percent) of the recommendations, all of which we consider to be short term, relate to weaknesses in controls for safeguarding taxpayer receipts and information at lockbox banks and IRS sites. These continued weaknesses expose IRS to unnecessary risk of loss of funds and increase taxpayer exposure to losses from financial crimes committed by individuals who inappropriately gain access to confidential personal information. IRS considers 31 of these recommendations closed. However, during our fiscal year 2004 financial audit, we found that IRS's corrective actions had not fully resolved the issues for 15 of these 31 recommendations and, for the remaining 16 recommendations, IRS's actions occurred after we completed our testing for the fiscal year 2004 audit. For example, in January 2003, we recommended that IRS require lockbox bank management to ensure that returned refund checks are restrictively endorsed immediately upon extraction and that IRS take steps to monitor adherence to this requirement. IRS included the requirement in the 2004 "Lockbox Processing Guidelines"9 and stated that it evaluates adherence to this requirement during quality reviews of lockbox operations. However, extraction staff at one of the four lockbox banks we visited during our fiscal year 2004 audit informed us that returned refund checks were processed without immediately being stamped. 9 Internal Revenue Service, "2004 Lockbox Processing Guidelines" (Washington, D.C: January 2004), and subsequent 2004 updates. The 2004 Lockbox Processing Guidelines provides guidelines for processing work at lockbox banks serving IRS for the 2004 tax processing year. Page 4 GAO-05-393 Status of Recommendations o Nine (11 percent) of the recommendations relate to serious financial management weaknesses that are rooted in IRS's continued reliance on outdated automated systems. Correcting these deficiencies depends largely on the ultimate success of IRS's ongoing systems modernization effort. Our prior reviews have disclosed numerous management control deficiencies in IRS's systems modernization effort that have contributed to reported cost overruns and delays in the implementation of the systems intended to resolve financial management issues.10 For example, IRS implemented the first release of its new Integrated Financial System (IFS) in November 2004, about 2 years later than initially planned. IFS Release 1 provides core financial, budget formulation, and cost accounting capabilities. However, full cost accounting capabilities will not be realized until future releases, such as Work Management, are implemented. According to IRS, implementation of subsequent releases, which provide property, procurement, and performance management functions, is being indefinitely deferred because of Release 1 delays and funding issues. Also, after significant delays, IRS has begun processing some of the least complex individual tax returns through the first release of the Customer Account Data Engine (CADE), the new system designed to modernize IRS's taxpayer files. Due to cost overruns and delays, IRS has stopped the Custodial Accounting Project (CAP), another key financial management initiative that was intended to provide management information related to tax operations needed for day-to-day decision making, performance management, and reporting. It was initially planned that CADE would provide tax information to IFS for reporting purposes through CAP. IRS is currently examining options to implement alternative systems that would perform the functions that CAP had been intended to perform. Successful implementation of future releases of IFS, CADE, and other system initiatives 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 10 GAO, Business Systems Modernization: IRS's Fiscal Year 2004 Expenditure Plan, GAO-05-46 (Washington, D.C.: Nov. 17, 2004). Page 5 GAO-05-393 Status of Recommendations progress in addressing issues related to its administrative accounting operations, which resulted in our closing 8 of 18 recommendations related to IRS's administrative operations. However, delays in implementing subsequent releases of IFS and other systems would inhibit significant additional progress in addressing the remaining administrative accounting operation issues because these subsequent IFS releases and other system efforts would address 7 of the remaining 10 administrative accounting operations-related recommendations. Delays in implementation of other systems would also inhibit IRS's ability to correct 2 deficiencies related to unpaid tax assessments, tax revenue, and refunds. Consequently, the continued delays in the implementation of new systems and the other serious financial management weaknesses that gave rise to many of the remaining open recommendations represent a serious obstacle that IRS needs to overcome to achieve effective financial management and have available accurate, timely financial reporting and other information that is critical for effective day-to-day decision making. In commenting on a draft of this report, IRS said it has begun to aggressively address the 42 new recommendations arising from our fiscal year 2004 audit, which are included in the report. For example, IRS stated that it has developed a comprehensive action plan to address recommendations related to lockbox banks, which includes partnering with Treasury's Financial Management Service to align lockbox bank contractual requirements with IRS's physical security polices. 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 2005 IRS financial audit. Agency Comments and Our Evaluation 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 2004 as part of our fiscal years 2004 and 2003 financial audits.11 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 11 GAO-05-103. recommendation and corrective action taken or planned as of February 2005, which we included in appendix I. We compared IRS's actions to our fiscal year 2004 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 Homeland Security and Governmental Affairs; Senate Committee on the Budget; Subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development and Related Agencies, 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 District of Columbia, Senate Committee on Homeland Security and 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 Housing and Urban Development, the Judiciary, and the District of Columbia, House Committee on Appropriations; Subcommittee on Government Management, Finance, and Accountability, 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]. Ma jor 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 94-2 Monitor implementation of actions to reduce the errors in calculating and reporting manual interest on taxpayer accounts, and test the effectiveness of these actions. (short-term) Financial Management: Important IRS Revenue Information Is Unavailable or Unreliable ( GAO/AIMD-94-22, Dec. 21, 1993) Open. IRS is addressing the issue by increasing automation of restricted interest calculations, educating the workforce, and developing a quality review process. In 2004, IRS updated interest training and began quality reviews. IRS will begin to measure accuracy based on the quality reviews in 2005. Open. We will review the results of IRS's quality reviews and test the accuracy of IRS's manual interest calculations during our fiscal year 2005 financial audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 10 GAO-05-393 Status of Recommendations 2 99-1 Manually Internal Revenue ice: Open. IRS Open. We review and ServImmediate to implemented its recognize eliminate and Long-Term action plan to automation of duplicate or Actions Needed improve the the current other Improve timely TFRP program assessments Financial cross-referencing is much that have Management of Trust Fund needed. already been (GAO/AIMD-99-16, Recovery Penalty However, paid off to Oct. 30, 1998) (TFRP) payments, IRS's efforts assure that which included to date have all accounts identifying and not been related to a correcting effective. A single processing 2004 internal assessment problems, IRS report are conducting indicated appropriately training to over half of credited for provide all TFRP payments clarification of cases received. processing steps, targeted for (short-term) and implementing correction mandatory quality still reviews. In contained addition, IRS posting plans to errors. consolidate all Additionally, TFRP work in one it reported campus. This will that 1 in 3 ensure better cases with control over the recent trust quality, fund activity timeliness, and had posting accuracy of errors. In transcript fiscal year processing. As 2004, we IRS moves forward reviewed 50 with the TFRP cases consolidation and estimated that 16 percent contained payments that were not properly reflected in each responsible party's account. We will continue to review IRS's process, it will initiatives be able to use to improve the Automated posting of Trust Fund TFRP cases and test TFRP Recovery (ATFR) cases for system to perform proper automated payment postings to verifications on all related Individual Master accounts as File (IMF) part of our accounts assessed fiscal year after August 2005 2001. When the financial transcript is audit. received, ATFR verifies that all previous payments have been cross-referenced properly as well as indicates where the current payment should be cross-referenced. Currently, IRS has this capability on the campus that has been selected as the centralized site. The Chief Financial Officer (CFO) is also developing a TFRP database that will establish the links to more accurately report the single balance due from these assessments, and determine areas for improvement in the TFRP process. 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 subsidiary ledger 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 write-offs. 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 Service: Immediate and Long-Term Actions Needed to Improve Financial Management ( GAO/AIMD-99-16, Oct. 30, 1998) Open. The Custodial Accounting Project (CAP) is being stopped due to budget cuts. IRS is currently examining other options for addressing this recommendation using alternative approaches that leverage IRS's existing Financial Management Information System (FMIS) and the Interim Revenue Accounting Control System (IRACS) used to support the custodial balances on the financial statements. The CFO is also developing a TFRP database that can establish the links to more accurately report the single balance due from these assessments and determine areas for improvement in the TFRP process. The CFO is developing a business case and will pursue opportunities to identify resources within IRS's IT budget to fund this effort. IRS is continuing to develop the automated system to manage TFRP, as discussed under recommendation 99-1. Final phase of implementation for the automated trust fund system is anticipated in 2005. Open. We will continue to monitor IRS's development of an alternative strategy for CAP, as well as its implementation of the new TFRP system and its other initiatives to improve the TFRP process. IRS's plan to address our specific recommendation regarding TFRP cases is discussed in recommendation 99-1. 99-17 Ensure that all returned refund checks are stamped "nonnegotiable" as soon as they are extracted. (short-term) Internal Revenue Service: Physical Security over Taxpayer Receipts and Data Needs Improvement ( GAO/AIMD-99-15, Nov. 30, 1998) Closed. In January 2005, the Submission Processing Director's Office contacted each Submission Processing Center (SPC) to address deficiencies identified by GAO in 2004 regarding overstamping of returned refund checks. Local management was asked to discuss the deficiencies with their employees on a regular basis and ensure corrective action is taken. This issue will be reviewed monthly by the campus security review team and findings will be shared with the Submission Processing Field Directors for additional action, if required. Open. During our fiscal year 2004 audit, we continued to observe that IRS staff were not consistently aware of the requirement for overstamping returned refund checks. At one service center campus we visited, the Refund Inquiry Unit staff explained that the checks received from some Small Business/Self-Employed (SB/SE) units had "void" written on them but were not overstamped with the appropriate stamp. IRS's reported actions to address deficiencies in overstamping returned refund checks occurred after our fiscal year 2004 fieldwork. We will review the results of IRS's actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 13 GAO-05-393 Status of Recommendations 5 99-19 Ensure that Internal Revenue Closed. The Open. During walk-in payment Service: Physical Internal our fiscal receipts are Security over Revenue Manual year 2004 recorded in a Taxpayer Receipts (IRM) was audit, we control log and Data Needs updated to found that IRS prior to Improvement require had updated depositing the (GAO/AIMD-99-15, employees to the IRM and receipts in the Nov. 30, 1998) record payments Taxpayer locked container on Form 795, Assistance and ensure that Daily Report of Center (TAC) the control log Collection operational information is Activities, and reviews to reconciled to to immediately require receipts prior place the employees to to submission of payment in a record the receipts to locked payments on another unit for container. IRM Form 795 and payment procedures also to immediately processing. To provide for a place payments ensure proper reconciliation in a locked segregation of process. The container and duties, an procedures provide for a employee not require the reconciliation responsible employee who process for prepared Form these 795 to payments. reconcile all However, receipts with during our the payment 2004 audit information on visits to IRS Form 795 before field offices, we continued to find that checks were not for logging forwarding to always stored receipts in the SPC. The SPC in locked or control log also performs secured should perform reconciliation containers. In the by placing a addition, the reconciliation. distinct mark IRM (short-term) on Form 795 to reconciliation indicate the procedures for documents payments do listed were not provide received. The for adequate SPC returns the segregation of Form 795 to the duties between manager the employee acknowledging who prepares receipt of Form the Form 795 795 and all upon accepting attachments. a receipt and These the employee procedures are who reconciles consistent with the Form 795 procedures prior to followed by forwarding to other IRS SPC. functions. 6 99-20 Open. Open. IRS's Implementation plan to Analyze and of the ATFR address our determine the system specific factors causing Internal Revenue continues. recommendation delays in Service: Custodial Phase I, which regarding TFRP processing and Financial automates cases is posting TFRP Management calculation and discussed in assessments. Weaknesses assessment of recommendation Once these (GAO/AIMD-99-193, penalties to 99-1. When IRS factors have Aug. 4, 1999) ensure accuracy completes been determined, and timeliness, implementation IRS should was implemented of its ATFR develop in July 2003. program, we procedures to Phase II, which will review reduce the automates the its impact of these manual steps of effectiveness factors and to the campus in eliminating ensure timely process to processing posting to all timely delays. In the applicable cross-reference meantime, we accounts and payments, was will continue proper implemented on to monitor offsetting of one campus in trust fund refunds against 2004. IRS began recovery unpaid its Phase III penalty assessments centralization processing before issuance. process in timeliness. (short-term) January 2005 by directing the new assessment work from one campus to the centralized site as a test. 7 99-22 Expand IRS's current Internal Revenue Service: Closed. The guidelines in the Open. We verified that IRS's review of campus Custodial Financial Fiscal Year 2003 Operating guidelines for safeguarding deterrent controls to Management Procedures for TACs for receipts in locked containers include similar analyses Weaknesses safeguarding receipts in locked and over-stamping checks of controls at IRS field ( GAO/AIMD-99-193, containers and over-stamping made payable to "IRS" with offices in areas such as Aug. 4, 1999) checks made payable to IRS "United States Treasury" were courier security, were incorporated into the IRM included in the IRM and in TAC safeguarding of receipts in June 2003. IRS monitored operational reviews. However, in locked containers, adherence to these procedures during our fiscal year 2004 requirements for during operational reviews of audit visits to IRS field offices, fingerprinting employees, the TACs conducted in fiscal we continued to find that and requirements for year 2004 and found no checks were not always stored promptly overstamping discrepancies. Operating in locked or secured containers. checks made out to "IRS" procedures state, in part, that In addition, we found that with "Internal Revenue all remittances and related checks made out to "IRS" were Service" or "United States returns must be recorded on not always immediately Treasury." Based on the Form 795, Daily Report of overstamped with "United results, IRS should make Collection Activity, and placed States Treasury" because staff appropriate changes to in a locked container until was unaware of the policy or strengthen its physical transmitted to the appropriate because some units did not security controls. SPC. Payments in the form of have the appropriate stamp. (short-term) personal checks, cashier Some of IRS's reported actions checks, and money orders to strengthen its controls for should be made payable to storing and overstamping "United States Treasury." checks occurred subsequent to Checks made out to IRS or U.S. our fiscal year 2004 fieldwork. Treasury must be overstamped We will continue to evaluate with the words "United States IRS's correction actions during Treasury" immediately upon our fiscal year 2005 audit. 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. Also, the Small Business and Self Employed Division (SB/SE) will issue a reminder on the SB/SE Web site to all employees that payments received from taxpayers must be made out to the United States Treasury. Any payments received not made out to the United States Treasury will be overstamped with the correct wording. staff are employed or Custodial Financial stopped due to budget cuts. continued to augment its own existing staff Management IRS is currently examining resources with contractor appropriately cross-Weaknesses other options for addressing support to produce auditable trained to be able to ( GAO/AIMD-99-193, this recommendation using financial statements. We will perform the master file Aug. 4, 1999) alternative approaches that continue to assess IRS's extractions and other ad leverage on IRS's existing FMIS actions during our fiscal year hoc procedures needed and IRACS used to support the 2005 audit. for IRS to continually custodial financial audit. The develop reliable balances CFO is developing a business for financial reporting case and will pursue purposes. (short-term) opportunities to identify resources within IRS's information technology budget to fund this effort. The need to build an appropriate depth of experience is still an immediate and ongoing issue. We continue to examine our resources 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 an alternative CAP solution 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. 99-29 Develop the data to support meaningful cost information categories and cost-based performance measures. (long-term) Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD- 99-196, Aug. 9, 1999) Open. Integrated Financial System (IFS) Release 1, which was implemented on November 10, 2004, includes a cost module that will interface with program area management information systems. 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 IRS forward in transitioning to a performance-based organization. Full cost accounting will not be realized until future releases, such as Work Management, are implemented. At present these releases are being reevaluated based on funding availability. All future releases have been delayed or placed on indefinite hold. Open. We will follow up during future audits to assess IRS's progress in implementing a cost-accounting system and loading it with the cost information needed to support cost-based performance measures. 10 99-36 Make Internal Open. In the Open. IRS enhancements to Revenue November 10, implemented the Service: IRS financial Serious 2004, IFS first release of systems to Weaknesses Release 1, P&E the new IFS on is include Impact Ability being recorded November 10, recording plant to Report as an asset 2004, which will and equipment on and Manage when purchased. allow recording (P&E) and The ability to P&E and capital capital leases Operations tie to the leases as assets as assets (GAO/AIMD- detailed when physical asset when purchased 99-196, Aug. information and purchased. and to 9, 1999) a fully However, generate integrated implementation of detailed records system with a property for P&E that subsidiary asset module that reconcile to records will is intended to not be the financial available until generate detailed records. the IFS Asset records for (long-term) Management P&E that will module is reconcile to the implemented. At financial records present, all is being future releases deferred are being indefinitely due to reevaluated funding based on constraints. We funding will availability continue to and have been monitor IRS's delayed or progress in placed on implementing indefinite hold. subsequent IFS releases and the property asset module. Revise policies and procedures governing the processing of abatement transactions to establish (1) appropriate time frames for processing abatements, (2) a methodology for monitoring the timeliness of abatement processing, and (3) procedures to identify the causes for delays and formulate corrective actions. 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 Service: Recommendations to Improve Financial and Operational Management ( GAO-01-42, Nov. 17, 2000) Closed. IRS has not established specific time frames for processing abatements because large dollar claims often require additional documentation to verify a claim's validity. Often these cases go through examination, or have other 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 enhanced its policies and procedures to monitor the processing of abatement transactions. Closed. IRS enhanced its policies and procedures to monitor the processing of abatement transactions. However, due to the complex nature of resolving underlying issues for certain types of abatements, IRS did not establish specific time frames for processing abatements. For example, large dollar claims often require additional documentation to verify a claim's validity. Often these claims go through examination, or have other taxpayer compliance issues. Based on our fiscal year 2004 audit, we found that IRS was processing abatements in a reasonable manner. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 12 01-03 Implement Internal Revenue Closed. Over the Closed. IRS procedures to Service: last several improved its monitor the Recommendations years, IRS has procedures for age of all to Improve made significant monitoring the pending offers Financial and improvements in age of pending and to require Operational the timeliness of offers and it supervisors to Management Offer in significantly follow up with (GAO-01-42, Nov. Compromise (OIC) increased its staff to 17, 2000) investigations. closure rate determine IRS implemented for offers in within 6 two Centralized compromise. months whether Offer in to accept or Compromise (COIC) reject the sites that process offer. lower dollar and (short-term) less complex offers. The COIC sites also complete the front-end processing for the field offers. Because front-end processing and statutory back-end reviews added approximately 90 days or more to processing time for field offers, IRS adjusted the processing goal for field-based offers to 9 months, effective October 2004. IRS strengthened management controls by creating additional management reports on OIC inventories, closely monitoring age and inventory levels, and developing more specific expectations for timely case actions. As of December 2004, 95 percent of OIC work in process in our COIC sites was 6 months old or less and 70 percent of the field open inventory was 9 months old or less. As an alternative to Internal Revenue Service: prematurely suspending Recommendations to active collection efforts, Improve Financial and and using the best Operational Management available information, ( GAO-01-42, Nov. 17, develop reliable cost-2000) benefit data relating to collection efforts for cases with some collection potential. These cost-benefit data would include the full cost associated with the increased collection activity (i.e., salaries, benefits, administrative support), as well as the expected additional tax collections generated. (long-term) Open. IFS Release 1, which was implemented on November 10, 2004, includes a cost module that will interface with program area management information systems. However, full cost accounting will not be realized until future releases, such as Work Management, are implemented. At present these releases are being reevaluated based on funding availability. All future releases have been delayed or placed on indefinite hold. IRS has implemented sophisticated modeling technology to identify productive and less productive cases in order to make better decisions on resource allocation. These models use a multitude of taxpayer attributes to assess likelihood of collection and then feed results into the prioritization risk factors currently in place. While not actual "cost-benefit" analyses, these models help IRS ensure that resources are devoted to cases with a high likelihood of collection, and also help prevent premature suspension of collection efforts on these particular cases. IRS is working on an initiative to approach collection inventory with a corporate perspective. This study will assess the functional impact of changes on individual collection components and result in short- and long-term recommendations. These recommendations will help increase collection coverage and leverage existing resources by allocating workload to existing treatment streams based on capacity and authorities. Open. We will continue to review IRS's initiatives to manage resource allocation levels for its collection efforts. 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 ( GAO-01-42, Nov. 17, 2000) Open. IRS staff conducted reviews of the lien processing units and OIC sites in 2004. In addition, IRS staff has developed an overall action plan to address untimely lien releases, including identification of root causes and where they occur organizationally, and development and implementation of sub-action plans to address each specific root cause. Open. During our fiscal year 2004 audit, we continued to find delays in release of liens. We found 13 instances out of 59 cases tested in which IRS did not release the applicable federal tax lien within the 30-day statutory period. The time between the satisfaction of the liability and release of the lien ranged from 34 days to 2,100 days. We also performed a review of IRS operations at lien units and have identified some of the causes for delays in the timely release of liens. Specifically, we identified that exception reports generated during the lien process were not being resolved or were not being resolved timely by the lien units. We made separate recommendations to correct these weaknesses ( GAO-05-26R ). We will review the impact of IRS's actions and will continue to review IRS's release of tax liens as part of our fiscal year 2005 financial audit. For (1) IRS's Automated Underreporter and Combined Annual Wage Reporting programs, (2) screening and examination of Earned Income Tax Credit claims, and (3) identifying and collecting previously disbursed improper refunds, use the best available information to develop reliable cost-benefit data to estimate the tax revenue collected by, and the amount of improper refunds returned to, IRS for each dollar spent pursuing these outstanding amounts. These data would include (1) an estimate of the full cost incurred by IRS in performing each of these efforts, including the salaries and benefits of all staff involved, as well as any related nonpersonnel costs, such as supplies and utilities and (2) the actual amount (a) collected on tax amounts assessed and (b) recovered on improper refunds disbursed. (long-term) Internal Revenue Service: Recommendations to Improve Financial and Operational Management ( GAO-01-42, Nov. 17, 2000) Open. During fiscal year 2004, IRS conducted risk assessments on programs with funding greater than $10 million to implement the Improper Payments Information Act of 2002 (IPIA) PL 107-300 (Nov. 26, 2002). IRS determined that the Earned Income Tax Credit (EITC) was its only risk area. IRS has a comprehensive action plan to address the risk in this program including several measures being used to report on this program. IRS plans to continue to report to GAO separately on this program. For the Automated Underreporter (AUR) program, IRS completed several data analyses and identified reports during its risk assessment that reflect the amounts it assessed and collected on refund returns through the AUR process. Its assessment of the Combined Annual Wage Reporting program found that this program did not produce refunds that would warrant further analysis and study. In addition, IRS is developing cost data to consider in making informed resource allocation decisions for all major programs. The cost module of the IFS, Release 1, was implemented on November 10, 2004; however, full cost accounting will not be realized until future IFS releases are implemented. At present, future releases are being reevaluated based on funding availability and have been delayed or placed on indefinite hold. Open. We will continue to monitor IRS's progress in implementing the IFS cost accounting module and loading it with appropriate cost information. 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 ( GAO-01-42, Nov. 17, 2000) Closed. Multidisciplinary teams composed of management from Mission Assurance and Security Services, Information Services, and Agency-Wide Shared Services will continue to work with local staff to ensure consistent, ongoing 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. Closed. We verified that the IRM sections applicable to field offices, TACs, and SPCs contained consistent policies and procedures to safeguard and account for cash receipts. 17 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 ( GAO-01-42, Nov. 17, 2000) Open. In IFS Release 1, implemented on November 10, 2004, P&E and leasehold improvements are recorded as assets when purchased. However, amortization will remain a manual process. The ability to tie the detailed physical asset information and a fully integrated system with subsidiary records will not be available until the Asset Management module is implemented. At present, all future releases are being reevaluated based on funding availability and have been delayed or placed on indefinite hold. Open. IRS implemented the first release of the new IFS on November 10, 2004, which will allow recording of leasehold improvements as assets when purchased. However, implementation of a property asset module that is intended to generate detailed records for P&E that will reconcile to the financial records is being deferred indefinitely due to funding constraints. We will continue to monitor IRS's progress in implementing subsequent IFS releases and the property asset module. 18 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 ( GAO-01-42, Nov. 17, 2000) Closed. In IFS Release 1, implemented on November 10, 2004, P&E and leasehold improvements are posted to the correct accounting code at the time of purchase. IRS has improved the definitions of P&E and has provided guidance on appropriate coding classifications to end users. Routine control reviews have been established to ensure the accuracy and appropriate coding classifications. Open. IRS implemented the first release of the new IFS on November 10, 2004, which will incorporate procedures that will allow IRS to record P&E additions as they occur. We will review the effectiveness of these procedures during our fiscal year 2005 audit. 01-21 Consolidate and update Internal Revenue Service: Closed. IRS has published Closed. IRS has effectively the P&E policies and Recommendations to procedures for all property consolidated and published procedures currently Improve Financial and management in the IRM. procedures for all property documented in various Operational Management Policies and procedures management in the IRM. handbooks and policy ( GAO-01-42, Nov. 17, pertaining to the property memorandums into a 2000) management of Information comprehensive document Technology (IT) assets are that personnel provided in IRM 2.14.1- responsible for Information Technology Asset maintaining inventory Management. Policies and records can use as a procedures for non-IT assets reference. (short-term) were published on January 1, 2005, in IRM 1.14.4-Personal Property Management. The IRM is now the one source that provides authoritative guidance for the management of all property. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 20 01-33 Establish Internal Revenue Closed. Closed. We policies and Service: Regarding confirmed the procedures to Recommendations administrative improvements ensure that all to Improve transactions, IRS made in administrative Financial and IRS has accounting for and, to the Operational successfully its extent possible, Management implemented its administrative custodial (GAO-01-42, Nov. monthly and custodial transactions, 17, 2000) nonpayroll transactions. are promptly expense accruals recorded in the initiative. For general ledger, custodial preferably transactions, within 30 days IRS records its of the receipts and transaction. refund (long-term) transactions into IRACS within 30 days of the transaction. IRS also records the assessed portion of its unpaid assessment balance in total within 30 days based on the transactions that have posted to the taxpayer accounts. Each month and within 3 days of the closing of the month IRS estimates its taxes receivable balance, and the net taxes receivable balance, by applying the error rates and rates of collection produced for the year-end financial statements to each month's taxes receivable inventory. Steps to develop a subsidiary ledger to accurately and promptly identify, classify, track, and report all IRS unpaid assessments by amount and taxpayer and distinguish those that represent taxes receivable are being addressed in recommendation 99-3. 01-39 Develop a mechanism to Management Letter: track and report the Improvements Needed in actual costs associated IRS' Accounting with reimbursable Procedures and Internal activities. (long-term) Controls ( GAO-01-880R , July 30, 2001) Open. IRS has developed guidance for costing reimbursable agreements, which includes instructions on tracking labor. IFS Release 1, implemented on November 10, 2004, includes a cost module that will interface with program area management information systems. Full cost accounting will not be realized until future releases, such as Work Management, are implemented. Actions will be initiated in fiscal year 2006 or fiscal year 2007 to begin gathering the real cost of certain reimbursable projects. Future releases are being evaluated based on funding availability and 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. 22 02-01 Open. IRS implemented the first release of the new IFS on November 10, 2004, which will allow IRS to record P&E additions in the appropriate general ledger accounts as they occur. We will evaluate the effectiveness of the system for recording capitalizable costs during our fiscal year 2005 audit. Implement policies and Internal Revenue Closed. In IFS Release 1, Service: procedures to record Progress Made, but implemented on November 10, capitalizable Further Actions Needed 2004, property and acquisition equipment costs for P&E, capital to Improve Financial are recorded as assets when leases, leasehold Management (GAO-02- purchased. improvements, and major 35, Oct. 19, 2001) systems in the appropriate P&E general ledger accounts as transactions occur. (long-term) (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 23 02-08 Implement Internal Open. IRS agreed Open. We confirmed policies and Revenue with the objective that IRS employees procedures to Service: of this use functional require that Progress recommendation, tracking (workload all employees Made, but which is to itemize on Further Actions Needed their time to Improve allow it to collect management) systems cards the Financial and report the full to itemize and time spent on Management payroll costs track their time specific (GAO-02-35, associated with its charges. However, projects. Oct. 19, activities. While this (long-term) 2001) IRS indicated that most recommendation of its employees remains open already itemize because its their time charges objective is to in functional allow IRS to collect and report the full tracking systems, payroll costs it has acknowledged associated with its that full activities. During implementation of our fiscal year the IFS cost 2004 audit, we continued to find accounting module that the functional is required to tracking systems close this are insufficient recommendation. IFS for this purpose Release 1, because they do not implemented on November 10, 2004, interface with each includes other or the requirements for a general ledger to cost module that allow management to will be interfaced use them to with program area readily accumulate management the time charged to information specific projects. systems. Both direct and indirect The new cost resource cost data accounting module can be linked to of IFS may be able the budget process to track IRS's and the costs at the activity strategic planning level and, thus, goals of all help to address the business units. recommendation. This will help move However, IRS's IRS forward in plans to fully implement transitioning to a cost accounting, performance-based which are expected organization. Full to require several cost accounting years to execute, will not be are currently realized until future on hold. We will releases, such as continue to Work Management, monitor IRS's are implemented. At progress in present these implementing the IFS cost releases are being accounting module. reevaluated based on funding availability and all future releases have been delayed or placed on indefinite hold. 02-09 Implement policies and Internal Revenue Service: procedures to allocate Progress Made, but nonpersonnel costs to Further Actions Needed programs and activities to Improve Financial on a routine basis Management ( GAO-02- throughout the year. 35, Oct. 19, 2001) (long-term) 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, implemented on November 10, 2004, includes a cost module that is interfaced with program area management information systems. Both direct and indirect resource cost data can be linked to the budget process and the strategic planning goals of all business units. This helps move IRS forward in transitioning to a performance-based organization. Full cost accounting will not be realized until future releases, such as Work Management, are implemented. At present, these releases are being evaluated based on funding availability and all future releases have been delayed or placed on indefinite hold. Open. We confirmed that IRS's plans include requirements that meet the objectives of this recommendation; however, IRS has delayed or indefinitely placed on hold the implementation of these requirements. IRS's plans to implement these requirements were expected to be executed over several years as IRS phases in various program area information systems that will provide critical information to the cost accounting system. We will continue to monitor IRS's efforts to address this issue. 25 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 Field Assistance IRM in June 2003, which lists the required signs for each taxpayer assistance center (TAC). Signs to remind taxpayers to obtain a receipt for payment are posted in the most visible locations in each TAC office as required by IRM 21.3.4.3(4). IRS monitored adherence to these procedures during operational reviews of the TACs in fiscal years 2003 and 2004 and found signs were properly posted. Additionally, periodic reviews and verification of the requirement are required, at a minimum, during the annual filing season readiness operational review. Closed. During our fiscal year 2004 audit, we verified that IRS had implemented policies and procedures requiring field offices to post signs reminding taxpayers to obtain receipts for payments. At the two field offices we visited, we observed that signs containing the required information had been posted in highly visible locations. 02-14 Develop policies and Management Report: procedures to require that Improvements Needed in IRS and lockbox IRS's Accounting employees performing Procedures and Internal final candling record Controls ( GAO-02-746R , receipts in a control log at July 18, 2002) 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) Closed. The 2005 Lockbox Processing Guidelines (LPG) (3.2.8.3), Documentation of Items Found in Candling (Form 9535), directs the responsible manager to initial Form 9535 every day for each shift. An entry must be made each shift, whether or not items have been found. A manager will initial Form 9535 to validate all of the following: All available information is correctly entered. Items found have been reconciled with Form 9535 entries. Items have been correctly categorized as processable or unprocessable. All processable work has been cleared after each shift, i.e., the work has been put back into the stream of work. The received date has been entered correctly. Only Form 9535 will be used for documenting items found during candling. In addition, during June 2004 a new candling log, Form 13592, was created. Procedures were also added to IRM 3.10.72 for recording items found during final candling using the new form. In January 2005, the submission processing director's office contacted each SPC to address deficiencies identified by GAO in 2004 regarding final candling. Local management was asked to discuss the deficiencies with their employees on a regular basis and ensure corrective action is taken. This issue will be reviewed monthly by the campus security review team and findings will be shared with the appropriate directors for additional actions, if required. Open. During our fiscal year 2004 audit visits to four lockbox banks, we found no weaknesses in recording information about discovered receipts in candling logs. However, at two of the SPCs we visited, we found that candling staff did not immediately record in a control log the items found during final candling. In addition, candling staff at one of the SPCs did not capture the minimum information as required by the updated guidance. IRS's reported actions to strengthen its controls for items found during candling at the SPCs occurred subsequent to our fiscal year 2004 fieldwork. We will monitor the effectiveness of IRS's updated policies and procedures during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 27 02-15 Develop policies and Management Report: Closed. The 2003 LPG Closed. We verified that the procedures to require that Improvements Needed in 3.2.8.1(1) directs the LPG directs lockbox managers IRS and lockbox IRS's Accounting responsible manager to to validate Form 9535 daily and managers or designated Procedures and Internal validate that the information that the updated IRM requires officials reconcile logs of Controls (GAO-02-746R, was correctly entered on that management initial the log payments found during July 18, 2002) Form 9535 for every shift to validate that all available final candling to the worked. The 2003 Extracting, information is correctly entered related receipts and Sorting & Numbering IRM, and ensure that all remittances documents. (short-term) 3.10.72.6.2(1) states, listed in the log are brought to "management shall the deposit function on a daily immediately reconcile the basis. We found no instances in discovered remittances with the which IRS or lockbox managers final candling log." The 2003 were not performing the LPG was updated January 31, required reconciliations during 2003. IRM 3.10.72 has been our fiscal year 2004 audit. updated with procedures that direct the responsible manager to validate that all information was correctly entered on Form 13592. In January 2005, the Submission Processing Director's Office contacted each SPC to address deficiencies identified by GAO in 2004 regarding reconciliation of the candling log. Local management was asked to discuss the deficiencies with their employees on a regular basis and ensure corrective action is taken. This issue will be reviewed monthly by the campus security review team and findings will be shared with the appropriate director for additional action, if required. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 28 02-16 Ensure that Management in Closed. IRM Open. During field office Report: lR, procedures our fiscal year management Improvements provide for a 2004 audit, we complies with NeededIRS's reconciliation found that existing Accounting process. The IRS's receipt Procedures and procedures procedures control InternaControls require the relating to the policies that (GAO-02-746July employee who control and require a 18, 2002) prepared Form reconciliation segregation 795, Daily of receipts at of duties Report of its field between Collection offices do not employees who Activity, to provide for prepare reconcile all segregation of control logs receipts with duties between for walk-in the payment those employees payments and information on who prepare the employees who Form 795 before Form 795 and reconcile the forwarding to those who control logs the SPC. The reconcile the to the actual SPC also receipts prior payments. performs a to sending them (short-term) reconciliation to the SPC. We by placing a found that the distinct mark employees who on Form 795 to posted receipts indicate the to the log also documents reconciled the listed were log at both of received. The the field SPC returns the offices we visited, Form 795 to the including the manager TACs. acknowledging receipt of Form 795 and all attachments. These procedures are consistent with procedures followed by other IRS functions. 29 02-18 Work with the Management Report: Closed. NFC is Open. We will National Improvements Needed in the process continue to Finance in IRS's Accounting of upgrading monitor IRS's Center (NFC) Procedures and the SETS actions in to resolve Internal Controls application to addressing this the technical (GAO-02-746R, July a Web version, recommendation limitations 18, 2002) which it during our that exist anticipates fiscal year within the deploying in 6 2005 audit. Security to 9 months. Entry and Treasury has Tracking requested that System (SETS) NFC include IRS database and as a continue to participant in periodically the design and review SETS development data to sessions. In detect and the interim, correct NFC will continue to errors. address any (short-term) problems reported by IRS. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Establish Management Closed. IRS Closed. During 30 02-20 procedures to Report: issued a our fiscal year track the Improvements memorandum 2004 audit, we release of liens Needed in dated verified that IRS up to the point IRS's January 28, substantially of delivery Accounting 2003, with implemented the to the local Procedures and instructions new jurisdiction to Internal for tracking procedures. when ensure liens are Controls the released (GAO-02-746R, certificates of lien release timely to avoid July 18, 2002) leave its unduly immediate control. burdening Certificates taxpayers once must be generated they have at least satisfied their weekly. Based on the tax liability. results of the (short-term) 2003 audit, IRS drafted a detailed action plan for lien release issues, which includes operational reviews. The new procedures call for Automated Lien System units to date-stamp a duplicate copy of the lien release-billing voucher so that IRS has actual knowledge of when lien releases are no longer under its direct control. This was issued in the Internal Revenue Manual on October 1, 2003. Certificates must be generated weekly. A memo was also issued January 28, 2003, on Payment Compliance, which was reinforced via e-mail 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. IRS completed lien processing site reviews in 2004 and verified implementation. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 31 02-23 Develop and Management Closed. IRS has Closed. IRS implement Report: developed and continued to procedures to Improvements implemented work with ensure that Needed in procedures that vendors and procurement award IRS's ensure award and improved the and requisition Accounting requisition process of numbers recorded Procedures and numbers are using on property Internal accurately electronic records are Controls recorded on packing slips complete, (GAO-02-746R, property records to ensure accurate, and July 18, 2002) and are linked to that property linked to the the accounting records are accounting records. For complete and records. example, IRS linked to the (long-term) implemented an accounting Electronic records. Packing Slip During our initiative with fiscal year vendors. Using an 2004 audit, automated we noted transfer method, improvements the vendors in the provide accuracy of electronic data, acquisitions such as recorded in procurement award the P&E and requisition inventory numbers, for all records and equipment that is linked to the shipped. IRS accounting updates its records. inventory records with this information and establishes skeletal records before the equipment is received at IRS locations. 32 03-01 Document IRS's IRS Lockbox Closed. The Closed. oversight roles Banks: More Memorandum of During our and Effective Understanding fiscal year responsibilities Oversight, (MOU) between the 2004 audit, in agency policy Stronger Financial we confirmed and procedure Controls, and Management that IRS's manuals and Further Study Service (FMS) and MOU was determine of Costs and IRS, detailing incorporated appropriate level Benefits Are the roles and into an of IRS oversight Needed responsibilities update of the of lockbox sites (GAO-03-299, of each IRM and in throughout the Jan. 15, 2003) organization in the 2004 LPG. year, particularly administering the during peak IRS Lockbox processing Program, was periods. signed April 30, (short-term) 2003. In addition, IRM 3.0.230, Lockbox Processing Procedures, and the LPG (2003 and 2004) outline the duties and responsibilities of FMS and IRS. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 33 03-02 Establish and IRS Lockbox Closed. IRS/FMS Open. During our document Banks: More prepared a fiscal year 2004 guidelines and Effective reimbursement audit, we procedures in Oversight, process. The confirmed that policy and Stronger procedures IRS had procedure Controls, and include the use incorporated manuals for Further Study of a special reimbursement implementing the of Costs and Lockbox Program procedures in new penalty Benefits Are code to delineate the 2004 LPG. provision for Needed IRS rework costs IRS's update to lockbox banks to (GAO-03-299, as a result of the LPG and IRM reimburse the Jan. 15, errors made by occurred government for 2003) the lockbox subsequent to direct costs sites. The our fiscal year incurred in Lockbox Policy 2004 fieldwork. correcting Reimbursement We will continue errors made by procedures are to evaluate lockbox banks. included in the IRS's planned (short-term) 2005 Lockbox corrective Processing actions during Guidelines under our fiscal year LPG 2.1.9 and 2005 audit. 2005 Lockbox Processing Procedures under IRM 3.0.230.9.3. 34 03-04 Establish and IRS Lockbox Closed. The Closed. During document a Banks: More Security MOU, fiscal year process in IRS Effective completed on 2004, we policy and Oversight, April 1, 2003, verified that procedure Stronger documents the IRS outlined the manuals to Controls, and roles and oversight duties ensure that Further Study responsibilities and lockbox bank of Costs and of the Security responsibilities management Benefits Are Review Team, for FMS and IRS formally Needed which is in the IRM and responds to IRS (GAO-03-299, comprised of FMS in the 2004 LPG. oversight Jan. 15, and IRS security In addition, IRS findings and 2003) experts. IRS also documented recommendations documents its the oversight promptly and findings, which role and that corrective are sent to FMS responsibilities actions taken by to be included in in the 2005 LPG. lockbox bank a final report to management are the banks. This appropriate. report covers (short-term) findings, recommendations, and due dates for all corrective actions. IRS receives a copy of the final report. IRS's oversight roles and responsibilities can be found in the 2005 LPG under 2.1.2.2, Revenue and Deposit Branch, Lockbox Policy and Procedures (LPP), LPG 2.1.2.3, Revenue and Deposit Branch, Lockbox Field Operations (LFO), and the Lockbox IRM 3.0.230. 03-06 Ensure that the results of IRS Lockbox Banks: More on-site compliance Effective Oversight, reviews are completed Stronger Controls, and and promptly submitted to Further Study of Costs IRS's National Office. and Benefits Are Needed (short-term) ( GAO-03-299, Jan. 15, 2003) Closed. Lockbox banks underwent security reviews in 2003 and 2004. 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. Reviews were submitted timely to the National Office. Document Collection Instrument (DCI) reviews were examined for completeness and accuracy. Closed. During our fiscal year 2004 audit, we reviewed the results of IRS and FMS April peak-season security reviews, captured in joint IRS/FMS consolidated trip reports for each lockbox site, and concluded these reviews were timely completed and submitted to IRS's National Office. 36 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 ( GAO-03-299, Jan. 15, 2003) Closed. IRS updated the security check sheet 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 filing season. Lockbox coordinators are responsible for reviewing the candling log and cash log. Open. We determined during our fiscal year 2004 visits to four lockbox banks that the lockbox coordinator's on-site review check sheet included the requirement to ensure that the cash and candling logs are being kept and updated daily. Further, we found that management at the four lockbox banks we visited performed and adequately documented candling reviews. However, the review check sheet does not include the requirement to ensure that contractors have completed and obtained favorable results on IRS fingerprint checks. In addition, we found that a contractor at two of the lockbox banks we visited did not have the required background investigation and was incorrectly being granted unescorted access to the processing area. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 35 GAO-05-393 Status of Recommendations 37 03-08 Assign IRS Lockbox Closed. IRS Open. Some of individuals, Banks: More retains the IRS's procedures other than the Effective position that were implemented lockbox Oversight, the lockbox subsequent to our coordinators, Stronger coordinators fiscal year 2004 responsibility Controls, and were peak-season site for completing Further Study specifically visits. Although on-site of Costs and hired to conduct we did not performance Benefits Are the performance identify any reviews. Needed reviews and specific issues (short-term) (GAO-03-299, represent IRS's relating to the Jan. 15, 2003) interests during lockbox on-site peak coordinators' processing. completion of the During fiscal on-site year 2004, the performance on-site reviews at the administrative lockbox banks and procedural during our 2004 DCIs were site visits, we standardized and will further prioritized. evaluate IRS's Conference calls process during were routinely our fiscal year conducted with 2005 audit. lockbox field staff to address any consistency issues or concerns. Backup field coordinators have been designated and cross-trained. Newly implemented performance measures concentrate heavily on the on-site and SPC DCI reviews, the combination of which effectively serves as a system of checks and balances. 38 03-10 Require lockbox IRS Lockbox Closed. The Open. During our management to Banks: More requirement to fiscal year 2004 ensure that Effective ensure that door audit, we guards are Oversight, alarms are verified that the responsive to Stronger responded to by LPG required alarms and that Controls, and the guards was lockbox bank IRS takes steps Further Study previously management to to monitor of Costs and established in ensure that adherence to Benefits Are the 2002 LPG guards responded this Needed issued January to alarms and requirement. (GAO-03-299, 1, 2002. IRS and that IRS was (short-term) Jan. 15, 2003) FMS security continuing to teams observe monitor the the guards banks' adherence responding to to this door alarms, requirement. etc., by However, we performing tests continued to find during on-site weaknesses in the security guards' reviews: responsiveness to documented in alarms at two of Section 2.4 of the four lockbox 2003 (revised banks we visited. April 8, 2003) At one lockbox and 2004 LPG bank, we observed (issued December that guards did 1, 2003). not respond to door alarms. At another lockbox bank, the guards were not able to locate where the alarms had originated. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 39 03-14 Require lockbox IRS Lockbox Closed. Closed. During management to Banks: More Surveillance our fiscal ensure that Effective cameras have been year 2004 surveillance Oversight, installed at all audit, we cameras and Stronger lockbox sites. found no monitors are Controls, and Security review instances in installed in Further Study teams continually which a bank ways that allow of Costs and monitor compliance. did not have for effective, Benefits Are These procedures surveillance real-time Needed were updated in cameras and monitoring of (GAO-03-299, Section 2.4.1 of monitors lockbox Jan. 15, 2003) the 2003 (revised installed that operations and April 8, 2003) and allowed for that IRS take the 2004 LPG, effective, steps to issued December 1, real-time monitor 2003. The 2005 LPG, monitoring of adherence to under receipt this processing operations at the four lockbox banks we visited. requirement. LPG 4.1.4.1.4, (short-term) directs the documentation of the role and responsibilities for closedcircuit television (CCTV) monitoring by security guards. In order to help ensure compliance to LPG requirements, an IRS and FMS task group has developed a performance measures process to include a category for security and internal control to be piloted January-September 2005, and to be implemented October 2005. This process will use a DCI check sheet that will list as line items the requirements as outlined in the LPG. It will be used as a tool to identify varying levels of performance and provide incentives and disincentives based on those levels of performance. This will help ensure compliance with the requirements as set forth in the LPG and will help IRS identify if and where improvements are necessary. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 37 GAO-05-393 Status of Recommendations 40 03-15 Require lockbox IRS Lockbox Closed. The 2005 Open. During management to Banks: More LPG 3.2.8.3, our fiscal year ensure that Effective Documentation of 2004 audit envelopes are Oversight, Items Found in visits, we Stronger Candling (Form found one Controls, and 9535) (1), lockbox bank did not perform properly Further Study was revised to adequate candled and of Costs and require the candling of that IRS takes Benefits Are responsible manager items opened steps to Needed to initial the Form automatically monitor (GAO-03-299, 9535 every day for by an OPEX adherence to Jan. 15, machine. This this machine requirement. 2003) each shift. An did not use a (short-term) entry must be made light source each shift, whether and no other or not items have candling was been found. A performed on envelopes manager will processed by initial Form 9535 it. to validate all of Furthermore, the following: All the 2004 LPG available candling information is requirement was unclear as to correctly entered. the number of Items found have candlings been reconciled required in with Form 9535 this situation. entries. Items have In addition, we observed some been correctly manual candling categorized as staff were not processable or adequately unprocessable. All viewing processable work envelopes as has been they were passed over a cleared after each light source. shift, i.e., the Some of IRS's work has been put corrective back into the actions, including stream of work. The revising the received date has 2005 LPG to been correctly address entered. candling Additionally, under requirements for specific types of mail, LPG 3.2.8, IRS occurred revised the subsequent to requirement to our fiscal year state that 2004 fieldwork. envelopes opened In addition, manually or IRS reports that a new by the OPEX mail performance machine must be measurement opened on three or process will be more sides and are implemented in required to October 2005 to ensure be candled once; compliance with all others must be these new LPG candled twice. In requirements. order to help To the extent ensure compliance IRS has to implemented its the LPG new requirements, an requirements, IRS and FMS task we will group has developed continue to a performance evaluate IRS's corrective actions during our measures process to fiscal year include a category 2005 audit. for security and internal control that will be implemented in October 2005. This process will use a DCI check sheet that will list by line item the requirements as outlined in the LPG. It will be used as a tool to identify varying levels of performance and provide incentives and disincentives based on those levels of performance. This will help ensure compliance with the LPG requirements. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 38 GAO-05-393 Status of Recommendations 41 03-16 Require lockbox IRS Lockbox Closed. The 2005 Closed. management to Banks: More LPG 3.2.8.3, During our perform and Effective Documentation of fiscal year adequately Oversight, Items Found in 2004 audit, document Stronger Candling (Form we found that candling reviews Controls, and 9535) (1), was management at and that IRS Further Study of revised to the four take steps to Costs and require the lockbox banks monitor Benefits Are responsible we visited adherence to Needed manager to performed and this (GAO-03-299, initial the Form adequately requirement. Jan. 15, 2003) 9535 every day documented (short-term) for each shift. candling An entry must be reviews. made each shift, whether or not items have been found. A manager will initial Form 9535 to validate all of the following: All available information is correctly entered. Items found have been reconciled with Form 9535 entries. Items have been correctly categorized as processable or unprocessable. All processable work has been cleared after each shift, i.e., the work has been put back into the stream of work. The received date has been correctly entered. Additionally, under LPG 3.2.8, IRS revised the requirement to state that envelopes opened manually or by OPEX mail machine that must be candled on three or more sides are required to be candled once; all others must be candled twice. In order to help ensure compliance to the LPG requirements, an IRS and FMS task group has developed a performance measures process to include a category for security and internal control that will be implemented in October 2005. This process will use a DCI check sheet that will list by line item the requirements as outlined in the LPG. It will be used as a tool to identify varying levels of performance and provide incentives and disincentives based on those levels of performance. This will help ensure compliance with the LPG requirements. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 39 GAO-05-393 Status of Recommendations 42 03-17 Require that IRS Lockbox Closed. The Open. During our returned refund Banks: More requirement to fiscal year 2004 checks are Effective ensure that audit, we Oversight, returned refund verified that the restrictively Stronger checks are LPG required endorsed Controls, and restrictively that returned immediately upon Further Study endorsed refund checks be extraction and of Costs and immediately upon restrictively that IRS take Benefits Are extraction was endorsed steps to monitor Needed previously immediately upon (GAO-03-299, listed in extraction and Jan. 15, Section 3.2.1 of that IRS monitor the 2002 adherence to 2003) LPG issued adherence to this January 1, 2002, this requirement. as well as the requirement. (short-term) 2003 (revised However, IRS April 8, 2003) extraction staff and 2004 LPG, at one of the issued December four lockbox 1, 2003. banks we visited informed us that During the returned refund on-site security checks were reviews, IRS and processed FMS security without teams reviewed immediately adherence to being stamped as this nonnegotiable. requirement. Additionally, adherence to this requirement is evaluated during the daily SPC quality reviews. 43 03-20 Revise the LPG IRS Lockbox Closed. On Closed. During to require that Banks: More September 23, our fiscal year before lockbox Effective 2003, at the 2004 audit, we bank couriers Oversight, annual lockbox verified that receive access Stronger conference, the the LPG had been to taxpayer data Controls, and National revised to and receipts Further Study Background require that they undergo and of Costs and Investigation before lockbox receive Benefits Are Center (NBIC) bank couriers favorable Needed presented the receive access results on (GAO-03-299, new background to taxpayer data background Jan. 15, 2003) investigation and receipts investigations requirements for they undergo and that are deemed permanent receive appropriate by lockbox bank favorable IRS and are employees, results on consistent couriers, and background across lockbox guards. The new investigations. banks. procedures We found no (short-term) require a instances where moderate risk couriers National Agency received access Check with Law to taxpayer data and Credit and receipts (NACLC) without having investigation on undergone and all permanent received bank employees, favorable couriers, and results on guards. The background banks were given investigations. 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 LPG containing the revised background investigation requirements under LPG 4.2, Personnel Security and LPG 5.1.2(5). (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 44 03-21 Revise the LPG IRS Lockbox Closed. On Closed. We to require that Banks: More September 23, verified that before permanent Effective 2003, at the the 2004 LPG was Oversight, annual lockbox revised to lockbox bank Stronger conference, NBIC require all employees Controls, and presented the permanent receive access Further Study new background employees to taxpayer data of Costs and investigation assigned to a and receipts Benefits Are requirements for lockbox bank to they undergo and Needed permanent have a NACLC receive (GAO-03-299, lockbox bank investigation. favorable Jan. 15, 2003) employees, We did not results on couriers, and identify any background guards. The new instances during investigations procedures our fiscal year that are deemed require a 2004 audit in appropriate by moderate risk which permanent IRS and are NACLC employees with consistent investigation on unescorted across lockbox all permanent access to the banks. bank employees, processing area (short-term) couriers, and did not have a guards. The NACLC background banks were given investigation. 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 LPG containing the revised background investigation requirements under LPG 4.2, Personnel Security and LPG 5.1.2(5). 45 03-24 Revise the LPG IRS Lockbox Closed. On April Closed. During to require that Banks: More 2, 2003, IRS our fiscal year during candling, Effective instructed the 2004 audit, we lockbox bank Oversight, banks to change verified that employees record Stronger the quality procedures which machines Controls, and review process requiring that and which Further Study for candling. lockbox banks extraction of Costs and The new track which clerks missed Benefits Are procedures machines and items. Needed require that which employees (short-term) (GAO-03-299, banks track missed items Jan. 15, 2003) which machines were included in and which the 2004 LPG. In employees missed our visits to items. The four lockbox procedures were banks, we did effective April not identify any 14, 2003, and instances where included in the lockbox bank 2004 LPG, issued December 1, employees did 2003. not record which machines and which extraction clerks missed items during candling. 03-25 Revise the LPG to require IRS Lockbox Banks: More that lockbox bank Effective Oversight, management reconcile Stronger Controls, and items found during Further Study of Costs candling to the candling and Benefits Are Needed records. (short-term) ( GAO-03-299, Jan. 15, 2003) Closed. The 2005 LPG 3.2.8.3, Documentation of Items Found in Candling (Form 9535) (1), was revised to require the responsible manager to initial the Form 9535 every day for each shift. An entry must be made each shift, whether or not items have been found. A manager will initial Form 9535 to validate all of the following: All available information is correctly entered. Items found have been reconciled with Form 9535 entries. Items have been correctly categorized as processable or unprocessable. All processable work has been cleared after each shift, i.e., the work has been put back into the stream of work. The received date has been correctly entered. Note: Only Form 9535 will be used for documenting items found in candling. Closed. During our fiscal year 2004 audit, we verified that the 2004 LPG had been updated to require that lockbox bank management reconcile items found during candling to the candling records. Per IRS, additional detailed instructions were included in the fiscal year 2005 LPG. We did not identify any instances during our fiscal year 2004 audit visits to four lockbox banks where lockbox bank management did not reconcile items found during candling to the candling records. 47 03-26 Revise the LPG to require that lockbox bank management reconcile cash payments to internal cash logs and the cash logs they provide to IRS. (short-term) IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and Further Study of Costs and Benefits Are Needed ( GAO-03-299, Jan. 15, 2003) Closed. The 2005 LPG has been revised under LPG 3.3.2.15 as follows: Discovered Remittances-Cash. (1) All employees identifying discovered remittances that are cash or other items of value must immediately notify their manager or designee. A manager or designee must be available at all times during business hours to receive and immediately log each discovered cash remittance on Form 9535; (2) All cash payments received must be immediately logged on a Form 9535 that is dedicated to cash-only entries. Closed. During our fiscal year 2004 audit, we verified that the 2004 LPG had been updated to require that lockbox bank management reconcile cash payments to internal cash logs and the cash logs they provide to IRS. Per IRS, additional detailed instructions were included in the fiscal year 2005 LPG. We did not identify any instances during our fiscal year 2004 visits to four lockbox banks where cash payments were not reconciled to the internal cash logs that lockbox bank management provided to IRS. 03-29 Confirm with FMS that Management Report: IRS's requirements for Improvements Needed in background and IRS's Internal Controls fingerprint checks for ( GAO-03-562R , May 20, courier services are met 2003) regardless of whether IRS or FMS negotiates the service 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 basicinvestigation including a Federal Bureau of Investigation fingerprint and name check. All 10 IRS campuses now have a contact responsible for submitting paperwork to 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 Division. The 2004 LPG (issued December 1, 2003) includes Guidelines for Background Investigations under Personnel Security in Section 4.2. As of December 31, 2004, all parties are adhering to these requirements. Open. During our fiscal year 2004 audit, we reviewed FMS- and IRS-negotiated courier agreements for the SPCs and found that the agreement at one SPC did not contain IRS's requirements for background and fingerprint checks for courier services. We will evaluate the compliance of the 2005 courier agreements during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 49 03-30 Establish Management Closed. The Closed. During procedures to Report: Security Review our fiscal verify that Improvements Team reviews year 2004 courier Needed in IRS's monthly compliance audit, we services are Internal with the courier determined adhering to the Controls requirements. For that IRS had standards (GAO-03-562R, the five campuses established established for May 20, 2003) where IRS holds procedures to them by IRS, the courier verify that including the contract, the courier requirement Security Review services are that the Team was required adhering to courier service to verify the the standards have insurance campus has a valid established coverage. insurance for them by (short-term) certificate valued IRS, including at $1 million. For the the five campuses requirement with that the FMS-negotiated courier agreements, FMS service have drafted a insurance memorandum to the coverage. This financial was also institutes included in advising them to the 2004 LPG. regularly provide We found no a copy of the instances in insurance which the certificates to required proof IRS. The 2003 of insurance was not available during our fiscal year 2004 visits to four SPCs and four lockbox banks. LPG included this procedure in Section 2.8.4.1. The campus now has a bonded courier who is delivering the deposits to the depository on a daily basis. All procedures are in place to provide a copy of the $1 million insurance binder to all campuses and headquarters on an annual basis. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 44 GAO-05-393 Status of Recommendations 50 03-31 Enforce consistent Management Report: Closed. On February 6, 2004, Closed. We did not find any implementation of policy Improvements Needed in IRS issued information alert instances of inappropriate limiting personal IRS's Internal Controls W&I-IA-2002-63-2004 personal belongings in receipt belongings in receipt (GAO-03-562R, May 20, specifying the items that are processing areas at the four processing areas at 2003) prohibited from the secure SPCs we visited during our service center campuses. receipt processing areas and fiscal year 2004 audit. (short-term) 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 Internal Revenue manuals pertaining to the secure receipt processing areas. 51 03-32 Prohibit the storage of Management Report: Closed. IRM procedures were Open. During our fiscal year employees' personal Improvements Needed in revised during fiscal year 2004 2004 audit, we verified that belongings with cash IRS's Internal Controls with specific guidelines IRS's guidelines prohibiting the payments and receipts at (GAO-03-562R, May 20, prohibiting the storage of storage of personal belongings IRS's TACs. (short-term) 2003) personal belongs under the with cash payments and same locking device with receipts at IRS's TACs were taxpayer data. IRS monitored included in IRM. However, adherence to IRM procedures during our visits to two TACs, during operational reviews we continued to find weakness conducted in fiscal year 2004. in adherence to these No discrepancies were guidelines. At one TAC, we identified. found personal belongings being stored in filing cabinets directly adjacent to the file cabinet storing receipts and in drawers located directly underneath the TAC counters. At another TAC, we found a Form 809 book being stored with personal belongings. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Management Closed. On May Open. During 52 03-33 Revise candling Report: 28, 2003, the our fiscal year procedures to Improvements IRM candling 2004 audit, specify the Needed in procedures were we verified that IRS precise IRS's Internal updated with an had revised candling Controls information candling methods to be used (GAO-03-562R, alert procedures in based on the May 20, (W&I-IA-2002-730) the IRM to to dimensions of 2003) specify precise specify the mail first and final precise candling processed and candling methods methods based the based on on mail extraction dimensions of the dimensions method used mail and first and the extraction for both the and final method used first and the candling. In for the first and final candling. January 2005, the final Submission candling. However, during (short-term) Processing our fiscal Director's Office year 2004 visits to two contacted each SPCs, we SPC to address continued to find deficiencies weaknesses in identified by GAO candling in 2004 regarding procedures. the revision At one SPC, we of candling found procedures. Local extractors improperly management was using the asked to light source when discuss the candling deficiencies with items. Furthermore, in their employees certain on a regular candling tables, the basis and ensure intensity of corrective the light source was action was taken. insufficient. This issue will In addition, not all be reviewed items monthly by the requiring opening on campus security three sides review team were being so and findings will opened. At be shared with another SPC, we the appropriate found that director for not all extractors had additional operational action, if candling required. lights on their tingle tables and, thus, were not performing two candlings as required nor had these extractors been provided compensating instructions. Some of IRS's actions to address deficiencies in candling procedures occurred subsequent to our fiscal year 2004 fieldwork. We will continue to evaluate IRS's corrective actions during our fiscal year 2005 audit. 03-34 Establish and implement Management Report: procedures prohibiting a Improvements Needed in single employee from IRS's Internal Controls performing the final ( GAO-03-562R , May 20, candling in a remote 2003) location. (short-term) Closed. On May 28, 2003, the IRM candling procedures were updated with information alert (W&I-IA-2002-730) 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. In January 2005, the Submission Processing Director's Office contacted each SPC to address deficiencies identified by GAO in 2004 regarding single employees performing final candling in a remote location. Local management was asked to discuss the deficiencies with their employees on a regular basis and ensure corrective action is taken. This issue will be reviewed monthly by the campus security review team and findings will be shared with the appropriate director for additional action, if required. Open. During our fiscal year 2004 audit, we verified that IRS had established procedures prohibiting a single employee from performing the final candling in a remote location. However, at one SPC we visited, we observed that boxes stacked in the middle of the final candling room prevented employees from seeing each other's work area. The effect of this operation was similar to that of having a single employee performing final candling in a remote location. Some of IRS's actions to address deficiencies in this area occurred subsequent to our fiscal year 2004 fieldwork. We will continue to evaluate IRS's corrective actions during our fiscal year 2005 audit. 03-36 Establish a mechanism to Management Report: periodically review Improvements Needed in adherence to IRS's policy IRS's Internal Controls that payment of taxes in ( GAO-03-562R , May 20, cash be accepted. 2003) (short-term) Closed. IRS monitored adherence to the policy of accepting cash payments during operational reviews conducted in fiscal year 2004. No discrepancies were identified. The Director, Field Assistance, granted an exception to the requirement of accepting cash payments in some TACs with two or fewer persons. These are locations where the volume of cash payments received is minimal. TACs have agreements with other functions to accept cash payments or TACs will convert the cash payments into money orders at financial institutions nearby, making payments easy for the taxpayers. IRS revised the IRM in fiscal year 2004 to reflect these exceptions. Closed. During our fiscal year 2004 audit, we found that IRS monitored adherence to its policy of accepting cash payments during operational reviews it conducted in fiscal year 2004 at the TACs we visited. We did not identify any issues with regard to IRS refusing to accept cash payments of taxes. 55 03-37 Develop and implement Management Report: post-input review Improvements Needed in procedures to verify the Controls over IRS's accuracy of excise tax Excise Tax Certification credit information in the Process (GAO-03-687R, master file. (short-term) 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 Form 8849. In August 2003, the campus 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 taxes were included in the Embedded Quality Review System (EQRS) expansion rollout, and fuel claims were also included in this review. EQRS is performed by the employee's manager and is part of the employee's performance rating. Closed. During our testing of sample items over the past 2 years, we found no significant data entry errors relating to excise tax credits. We also verified during our fiscal year 2004 audit that fuel claim reviews were being performed as part of the Embedded Quality Review System. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 03-38 Investigate why certification errors continue to go undetected through IRS's review procedures. (short-term) Management Report: Improvements Needed in Controls over IRS's Excise Tax Certification Process ( GAO-03-687R , July 23, 2003) Closed. IRS reviewed existing written procedures for the certification process and determined that the procedures, if properly followed, were adequate. To ensure that the procedures were properly implemented, a new section chief was appointed. Also, in October 2003, IRS reiterated to management the importance of reviewing and understanding the certification process. Closed. IRS's actions have resulted in improvements to the excise tax certification review process. In the past 2 years, we found no significant errors related to IRS's certification process that were not detected by IRS's review procedures. 57 03-39 Develop and implement Management Report: an action plan to improve Improvements Needed in the certification review Controls over IRS's process. (short-term) Excise Tax Certification Process (GAO-03-687R, July 23, 2003) Closed. IRS reviewed existing written procedures for the certification process and determined that the procedures, if properly followed, were adequate. To ensure that the procedures were properly implemented, a new section chief was appointed. Also, in October 2003, IRS reiterated to management the importance of reviewing and understanding the certification process. Closed. IRS's actions have resulted in improvements to the excise tax certification review process. In the past 2 years, we found no significant errors related to IRS's certification process that were not detected by IRS's review procedures. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 58 03-40 Communicate in writing Management Report: Closed. MOU signed Open. We verified that the any potential changes in Improvements Needed in December 15, 2004, by the Treasury Excise Tax Trust Fund IRS's certification process Controls over IRS's Chairman, Excise Tax Trust Working Group signed an MOU to other Treasury entities Excise Tax Certification Fund Working Group. The IRS to establish a process for that use the certification Process (GAO-03-687R, Treasury Excise Tax Trust Fund documenting issues related to information, and obtain July 23, 2003) Working Group has established IRS's trust fund certifications. concurrence from these a process of recording minutes We will review the effectiveness entities prior to of the Working Group meetings of this action during our fiscal implementing such in order to document issues year 2005 audit. changes. (short-term) related to trust fund certification procedures/processes and proposed or passed legislative changes impacting trust fund investments. Recording of minutes will be taken by a representative of Treasury member offices or bureaus on a rotating basis. Draft minutes will be shared with all participants for concurrence prior to final approval and distribution. IRS will discuss and make a presentation to advise the members of any changes to the trust fund certification process. 59 03-41 Implement procedures to Management Report: Closed. IRS has identified Closed. We verified that IRS annually identify excise Improvements Needed in employer identification numbers has implemented procedures to taxpayers with the largest Controls over IRS's (EINS) of the largest excise tax identify taxpayers with the excise tax liabilities Excise Tax Certification liabilities beginning with tax largest excise tax liabilities affecting the Highway Process (GAO-03-687R, period September 2002. IRS affecting the Highway Trust Trust Fund and the July 23, 2003) identified the largest excise tax Fund and the Airport and Airport and Airway Trust filers to both Cincinnati Airway Trust Fund. Fund. (short-term) Submission Processing and Compliance campuses in August 2003. EINS will be updated annually using the September tax periods. Status of recommendations Per Count No. Recommendation Source report IRS Per GAO 60 03-42 Implement Management Report: Closed. IRS implemented Cl procedures to track the status of tax Improvements in procedures in March 2003 Needed return filings for the Controls over to track and monitor the IRS's largest payers of excise Excise Tax Certification top 100-plus list of excise largest-dollar exc taxes and contact these Process (GAO-03-687R, taxpayers and to call them for taxpayers if the July 23, 2003) tax return(s) when necessary for thei submission processing prior to certification cutoff. The campus has not received top 100-plus list is composed of cutoff. their tax returns by taxpayers with the largest 2 weeks after the due excise tax liability. These date. (short-term) procedures have been validated by inclusion of all top 100-plus taxpayer returns in fiscal year 2004 certifications. osed. IRS has implemented procedures to track the status of tax return filings for the ise taxpayers and to contact these taxpayers r returns when necessary prior to certification 03-43 Implement procedures to monitor the receipt and processing status of large excise tax returns to ensure that they are promptly recorded in IRS's master file prior to certifying excise tax distributions. (short-term) Management Report: Improvements Needed in Controls over IRS's Excise Tax Certification Process ( GAO-03-687R , July 23, 2003) Closed. The Cincinnati Campus's program analyst staff and reports excise analysts are monitoring to ensure timely posting of returns of the largest-dollar excise taxpayers. The Service Level Administration 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 6-day cycle, procedures are in place, and IRS is monitoring to ensure timely posting of returns of the largest-dollar excise taxpayers. Closed. IRS's Internal Revenue Manual was modified to require that all excise tax returns be processed on a 6-day cycle. The 6-day cycle begins after the returns are batched, which is normally within a week. We verified during our fiscal year 2004 audit that IRS had implemented procedures to monitor excise tax returns to ensure that it meets this requirement. Require lockbox bank Management Report: Closed. The current LPG managers to maintain Improvements Needed requires appropriate appropriate in IRS's Internal documentation for couriers and documentation on site Controls and guards before contractors are demonstrating that Accounting Procedures granted access to taxpayer satisfactory (GAO-04-553R, Apr. 26, receipts. To ensure fingerprint compliance results have been 2004) with the LPG, IRS and FMS will received before include this as a review item contractors are when performing security and granted access to taxpayer administrative reviews. The receipts and data. procedures will be included in (short-term) the 2005 LPG with an effective date of January 17, 2005. Open. During our fiscal year 2004 audit, we verified that the LPG required appropriate documentation prior to couriers and guards being granted access to taxpayer receipts. However, we found at two of the four lockbox banks we visited that contractors who had not undergone fingerprinting or background investigations were granted unescorted access to the lockbox bank. Some of IRS's corrective actions to address on-site documentation deficiencies occurred subsequent to our fiscal year 2004 fieldwork. We will continue to evaluate these actions during our fiscal year 2005 audit. 04-02 Revise its policy on two-person courier teams to prohibit the use of courier teams consisting of closely related individuals to further minimize the risk of collusion in the theft of taxpayer receipts and data. (short-term) Management Report: Improvements Needed in IRS's Internal Controls and Accounting Procedures ( GAO-04-553R , Apr. 26, 2004) Open. Additional background investigation requirements for all couriers have been implemented. IRS is researching the feasibility and impacts of changing current contracts with couriers for SPC. The LPG will be updated to prohibit immediate family members from traveling in pairs on courier routes. The update will be made by February 15, 2005, with an effective date to be determined before the April peak. Open. During our fiscal year 2004 audit visits to two SPCs and one lockbox bank, we found that closely related individuals were operating as deposit couriers. We will continue to evaluate IRS's corrective actions during our fiscal year 2005 audit. Status of recommendations Source report Per Count No. Recommendation IRS Per GAO 64 04-03 Develop procedures to Management Report: Closed. The LPG instructs the Open. Duri require lockbox managers Improvements Needed banks to perform numerous 2004 audit, we ver to provide satisfactory in IRS's Internal managerial reviews. IRS will LPG i evidence that managerial Controls and consider the risk level of each reviews are performed in Accounting Procedures of the documented logs and managerial rev accordance with (GAO-04-553R, Apr. 26, assess each one to determine established guidelines. At 2004) the appropriate level of review lockbox banks we v a minimum, reviewers and if more guidelines are should sign and date the necessary. LPG 3.5.1.3(3) reviewed documents and Desk and Work Area Reviews and reviewi provide any comments was updated to state that the that may be appropriate reviewing manager's initial is desk check rev in the event that their required as well as the site were not foll reviews identified manager's initial. This will be problems or raised effective January 17, 2005. Any questions. (short-term) discovered remittances must be recorded on Form 9535. In the remarks section the site must indicate how the item was found. This was effective February 2005. ified that the nstructs the lockbox bank managers to perform numerous iews. However, we found that three of the four isited did not adhere to the LPG requirements for maintaining ng courier logs. In addition, we found that LPG iew procedures owed at two of the lockbox banks. Many of IRS's corrective actions addressing documentation of required reviews occurred subsequent to our fiscal year 2004 field work. We will continue to evaluate IRS's actions during our fiscal year 2005 audit. 04-04 Revise 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 ( GAO-04-553R , Apr. 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 its current guidelines for possible inclusion of testing standards for equipment with automated candling equipment. LPG 3.2.8.1(1) Candling Equipment Maintenance, was developed and states, "All candling equipment, including OPEX mail machines, must be maintained to ensure maximum efficiency. Maximum efficiency is determined by testing at least 10 envelopes daily." This will be effective as of January 3, 2005. Open. We will evaluate IRS's corrective actions during our fiscal year 2005 audit. 04-05 Require lockbox managers to maintain logs of these tests and to periodically review their logs. (short-term) Management Report: Improvements Needed in IRS's Internal Controls and Accounting Procedures ( GAO-04-553R , Apr. 26, 2004) Closed. Testing standards were implemented in the January 1, 2005, LPG. However, we revised the requirements on January 31, 2005, to ensure clarification of peak-versus-nonpeak testing requirements. The supporting LPG requirement follows: LPG 3.2.8.1 Candling Equipment Maintenance (1) All candling equipment, including OPEX machines, must be maintained to ensure maximum efficiency. Maximum efficiency is determined by testing at least 10 envelopes daily during nonpeak and for each shift during peak. (2) Management shall maintain a log of all equipment tests. This log shall be justification for requesting machine servicing. (3) A monthly review report must be sent to the Lockbox Field Coordinator. (see LPG 3.5.1(2)). (4) Each site must keep vendor maintenance records available for immediate review. IRS Lockbox Policy and Procedures and IRS Mission Assurance updated the security section of the 2005 LPG. A security review checklist was also developed requiring the security team to conduct periodic security reviews to verify all requirements in the LPG are being met. Open. We found that one lockbox bank we visited during our fiscal year 2004 audit did not maintain a maintenance log for an automated extraction and candling machine. Instead, the vendor maintained the log in a locked drawer accessible only to the vendor. IRS's actions to increase testing for automated extraction and candling equipment, and documentation of these tests by management, occurred subsequent to our fiscal year 2004 fieldwork. We will evaluate IRS's actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 67 04-06 Discontinue the Management Report: Closed. Written procedures Closed. practice We verified that IRS of storing taxpayer Improvements Needed have been provided to TAC included monitoring of its policy receipts and data in IRS's Internal employees for safeguarding and outside procedures regarding TAC secured areas Controls and taxpayer receipts when receiving and storing taxpayer without storing the Accounting Procedures received. IRM 21.3.4.7(6), data in secured areas during receipts in a (GAO-04-553R, Apr. 26, issued in June 2003, provides secured operational reviews conducted locked container. 2004) guidance stating that payments in fiscal year 2004. In addition, (short-term) received from taxpayers will be we did not find any instances immediately placed in a locked during our fiscal year 2004 container. The receipts are also audit visits to IRS field offices in stored away from employees' which taxpayer receipts and personal belongings. IRS will data stored outside the TAC continue to conduct operational secured areas were not stored reviews at TAC offices to in a secured locked container. 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. IRS monitored adherence to IRM procedures related to receiving and storing taxpayer data in secured areas during operational reviews conducted in fiscal year 2004. No discrepancies were noted. 04-07 Develop procedures to enhance adherence to existing instructions on safeguarding discovered remittances at service center campuses. (short-term) Management Report: Improvements Needed in IRS's Internal Controls and Accounting Procedures ( GAO-04-553R , Apr. 26, 2004) Closed. In 2003, IRM 3.8.46 was written and distributed to all campuses. Form 4287 (Record of Discovered Remittances) has been revised to enhance adherence to existing instructions by including a check box for managers to indicate that reconciliation has been performed. Also, IRS revised the monthly security checklist to include a review of the discovered remittance procedures. In addition, IRS added this item to the monthly security checklist to include a review of the discovered remittance procedures. Open. During our fiscal year 2004 audit, we verified that IRS had revised the IRM to require managers to indicate that a reconciliation of discovered remittances had been performed and also included this item in the monthly security checklist. However, we found that three of the four SPCs we visited did not adhere to the IRM procedures for Form 4287 ("Record of Discovered Remittances"). 69 04-08 Enforce policies and Management Report: procedures to ensure that Improvements Needed service center campus in IRS's Internal security guards respond Controls and to alarms. (short-term) Accounting Procedures (GAO-04-553R, Apr. 26, 2004) Closed. Beginning October 1, 2004, all campuses and computing centers were tasked to perform ongoing monthly unannounced alarm tests and to report the results to the Physical Security Program Office. Tests and results are being maintained by the Physical Security Program Office. IRM 1.16.12, Security Guard Service and Explosive Detector Dog Program, was rewritten October 18, 2004, to include the requirement that contracting officers' technical representatives conduct random exercises on a quarterly basis, at a minimum, using mock scenarios to measure response times, actions, tactics, techniques, and procedures of uniformed guard forces. Final issuance is expected by not later than September 30, 2005. Open. During our fiscal year 2004 audit, we continued to find weakness in IRS's enforcement of policies and procedures to ensure that service center campus security guards respond to alarms. At one SPC we visited, we found that an off-site code and edit function was located in a building without on-site security guards and access was controlled only with proximity cards. When we tested two exit door alarms, the door alarms were inaudible and there was no response from the alarm monitoring company because, according to IRS, the company only responds to after-hours alarms. IRS's implementation of new procedures to address guard response issues occurred subsequent to the end of our fiscal year 2004 fieldwork. We will evaluate IRS's corrective actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 70 04-09 Establish Management Closed. The IRS Open. IRS's compensating Report: physical implementation controls in the Improvements security of new event that Needed in IRS's programs within procedures to automated Internal Mission address guard security Controls and Assurance and response issues systems Accounting Security occurred malfunction, Procedures Services subsequent to such as (GAO-04-553R, developed the end of our notifying Apr. 26, 2004) procedures to be fiscal year 2004 guards and used in fieldwork. managers of the conjunction with Although we did malfunction, the policies not observe any and immediately developed in instances in deploying recommendation which guards did guards to 04-08 to ensure not respond due better protect that local to a malfunction the processing management is in an automated center's notified security system perimeter. whenever there during our (short-term) is a malfunction fiscal year 2004 of alarms and visits to four that guards are SPCs, we will deployed or evaluate IRS's doors are newly secured, as implemented necessary, corrective either during actions during tests or when our fiscal year otherwise 2005 audit. needed. Procedures will include management notification of alarm test failure. The project manager for the guard force contract is required to sign off on all unannounced alarm test reports. 71 04-10 Modify Aged Management Closed. IRS has Closed. During Unliquidated Report: revised the our fiscal year Obligations Improvements Aging 2004 audit, we (AUO) reports Needed in IRS's Unliquidated verified that to ensure that Internal Obligations IRS modified AUO they report the Controls and report to reports to last activity Accounting accurately capture the last date for each Procedures capture the last activity date outstanding (GAO-04-553R, activity date for each obligation line Apr. 26, 2004) for each obligation line amount. obligation line amount. (short-term) amount. Require procurement Management Report: Closed. In fiscal year office staff to review Improvements Needed in 2004, IRS implemented new and sign off on whether IRS's Internal guidelines for the quarterly review and obligations are valid Controls and certification of all or require deobligation Accounting Procedures outstanding obligations. before business units (GAO-04-553R, Apr. 26, The procurement office conducted reviews to complete their 2004) ensure the accuracy of the quarterly unliquidated balances. certifications. Financial plan managers (short-term) reviewed procurement responses prior to processing deobligations and completing their quarterly certifications. Closed. During our fiscal year 2004 audit, we verified that IRS implemented new guidelines for the quarterly review and certification of all outstanding obligations. As part of the review process, the procurement office staff reviews the AUO reports and determines whether obligations that they are responsible for reviewing are valid or need to be deobligated. The financial plan managers review procurement office staff responses prior to completing their quarterly certifications. In addition, during our fiscal year 2004 testing, we found that obligations were being properly and timely deobligated. 04-12 Enhance compensating internal controls by including tests or recalculations of payroll computations performed by NFC for the IRS employees selected for review each pay period. (short-term) Management Report: Improvements Needed in IRS's Internal Controls and Accounting Procedures ( GAO-04-553R , Apr. 26, 2004) Closed. A detailed Standard Operation Procedures (SOP) was developed and implemented on July 1, 2004, to review the full gross to net pay calculation for a random sample of IRS employees each pay period. The first quarterly review was accomplished on October 1, 2004. Closed. In fiscal year 2004, we confirmed that IRS developed and implemented procedures to review the full gross to net pay calculation for a random sample of IRS employees each pay period. 04-13 Timely investigate and Management Report: resolve any identified Improvements Needed errors. (short-term) in IRS's Internal Controls and Accounting Procedures ( GAO-04-553R , Apr. 26, 2004) Closed. Procedures outlined in the SOP noted above found no significant discrepancies in NFC payroll calculations. The discrepancies found were primarily rounding issues. The findings were forwarded to the Department of the Treasury to be shared with NFC in October 2004. The process is now in place to forward findings to the Department of the Treasury and NFC each quarter. Closed. In fiscal year 2004, we confirmed that IRS implemented procedures to review the full gross to net pay calculation for a random sample of IRS employees each pay period and satisfactorily resolved any errors or exceptions found. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Page 58 GAO-05-393 Status of Recommendations 75 04-14 Establish Management Closed. On Closed. The review Report: October 29, amounts reported procedures for Improvements 2004, IRS as supplemental amounts being Needed in IRS's implemented a information as of reported in Internal second level of September 30, supplemental Controls and management 2004, agreed with information to Accounting review to the documentation the financial Procedures identify and provided by IRS's statements for (GAO-04-553R, report any chief counsel. Other Claims Apr. 26, 2004) changes in the for Refund. final financial (short-term) statements. 76 04-15 Until the Management Closed. IRS has Open. In fiscal Business Report: taken steps to year 2004, we Performance Improvements ensure that the continued to find Management Needed in IRS's performance errors in IRS's System (BPMS) Internal measures data interim is fully Controls and reported in the performance operational, Accounting monthly report measures data. implement Procedures are properly GAO will continue procedures to (GAO-04-553R, reviewed before to monitor IRS's ensure that Apr. 26, 2004) being published. progress in this all All divisions area during our performance now submit most fiscal year 2005 data reported of their financial audit. in the MPS performance report are measures data subject to directly to effective, BPMS. The documented divisions are reviews to required to provide verify/certify reasonable the accuracy of assurance that the data before the data are uploading to current at BPMS. Corporate interim Performance periods. Budgeting staff (short-term) implemented additional manual quality control procedures that include reviewing all tables, charts, and line graphs and visually inspecting the numbers and comparing the information to the previous month's report for consistency. In addition, IRS is working with Treasury to streamline its current set of performance measures. Its purpose is to increase the value of the information provided to stakeholders, focus priorities, and reduce administrative burden. 77 05-01 Expedite Opportunities Open. IRS Open. This is a efforts to to Improve established a new resolve the Timeliness of team at the recommendation. backlog of IRS Lien Cincinnati We will review unpostable Releases campus's IRS's corrective liens, (GAO-05-26R, Centralized Lien actions during releasing Jan. 10, 2005) Processing Unit our fiscal year liens as to resolve the 2005 audit. appropriate. backlog of (short-term) unpostable liens. Resolution of the backlog of 8,900 unpostables is ongoing daily with managerial oversight. IRS expects completion by July 15, 2005. 05-02 Keep current on all new Opportunities to Improve unpostable liens. Timeliness of IRS Lien (short-term) Releases ( GAO-05-26R , Jan. 10, 2005) Open. IRS established a team at the Cincinnati campus's Centralized Lien Processing Unit to resolve the unpostable lien exception reports. Lien transactions that do not post to a taxpayer's account will now be resolved weekly. Managers will monitor reports to ensure timely resolution and take appropriate corrective actions when necessary. Collection Policy will conduct an on-site review no later than September 2005. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. 79 05-03 Research and resolve the Opportunities to Improve current backlog of Timeliness of IRS Lien unresolved unmatched Releases (GAO-05-26R, exception reports. Jan. 10, 2005) (short-term) Open. Managers and employees have received training on the entity portion of the Satisfied Module (SATMOD) Reject Report. Resolution of the backlog will be conducted by the centralized site. Anticipated time for resolution is being extended to May 2006 in order to complete a workshop, compile the extract from the master file, and establish a specific group of employees to work on the backlog. Open. This is a new recommendation. We will review IRS's corrective actions during future audits. 05-04 Research and resolve Opportunities to Improve unmatched exception Timeliness of IRS Lien reports weekly. Releases ( GAO-05-26R , (short-term) Jan. 10, 2005) Open. IRS developed new procedures for working on the unmatched exception reports. Accounts on the unmatched exception report will be resolved by matching information between the master file and the Automated Lien System (ALS). Timely report resolution is an integral function of the Centralized Lien Unit, and time frames and managerial oversight are built into report resolution processes. Managers and employees have received training on the entity portion of the reject report. Training will be ongoing as new employees are assigned to the unit. IRM provisions require resolution of rejected accounts within 5 business days. Managers will monitor timeliness and will report weekly on the outstanding inventory. The Collection Policy unit will conduct on-site reviews to determine if procedural changes are required. The review will be conducted no later than September 2005. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. 05-05 Provide training to designated staff on how to resolve exception reports. (short-term) Opportunities to Improve Timeliness of IRS Lien Releases ( GAO-05-26R , Jan. 10, 2005) Open. Managers and employees have received training on the resolution of the restricted interest portion of the SATMOD reject report. Managers will report weekly on the outstanding inventory. The Collection Policy unit will conduct reviews to determine if procedural changes are required. Anticipated time for resolution is being extended to May 2006 in order to complete a workshop, establish a specific group to work on the backlog, and complete the extract of Master File data. Open. This is a new recommendation. We will review IRS's corrective actions during future audits. 82 05-06 Research and resolve the Opportunities to Improve current backlog of Timeliness of IRS Lien unresolved manual Releases (GAO-05-26R, interest or penalties Jan. 10, 2005) reports. (short-term) Open. Managers and employees have received training on the resolution of the manual computation portion of the reject report. IRM provisions require resolution of the rejected accounts within 5 business days. Managers will monitor timeliness and will report weekly on the outstanding inventory. The Collection Policy unit will conduct an on-site review. Training will be given to all new employees as they are assigned to the group. The anticipated completion date is September 2005. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 83 05-07 Research and Opportunities to Open. IRS Open. This is a new resolve Improve developed new exception reports Timeliness of IRS procedures for recommendation. We Lien working on will containing liens Releases exception reports review IRS's with (GAO-05-26R, containing corrective actions manually Jan. 10, 2005) liens with during future calculated manually audits. calculated interest or interest. penalties Accounts listed on the weekly, as called exception report for in the containing Internal Revenue manually Manual calculated interest or and the ALS User penalties will Guide. now be sent to the (short-term) Examination Case Processing function for computation and then returned to the Centralized Lien Processing Unit for either lien release or other appropriate action. Timely report resolution is an integral function of the Centralized Lien Unit, and time frames and managerial oversight are built into report resolution processes. Managers and employees have received training on the resolution of the manually computed interest portion of the SATMOD reject report. A Master File extract has been requested. The anticipated completion date is May 2006 in order to complete the extract, conduct a workshop, and establish a specific group to work on the backlog. Management will report weekly on the outstanding inventory and the Collection Policy unit will conduct on-site reviews. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 84 05-08 Provide Opportunities to Open. Open. This is a training to Improve Management has new designated Timeliness of provided recommendation. staff on how to IRS Lien training to We will review resolve Releases employees and IRS's corrective exception (GAO-05-26R, will train all actions during reports Jan. 10, 2005) new employees our fiscal year containing assigned to the 2005 audit. accounts with group. A manually workshop will calculated be conducted to interest or cover the resolution of these penalties. reports and (short-term) management will report weekly on the outstanding inventory. The Collection Policy unit will conduct on-site reviews. Anticipated completion date is September 15, 2005. 85 05-09 Improve the Opportunities to Open. Requests Open. This is a current Improve for additional new unmatched Timeliness of enhancements to recommendation. exception IRS Lien cumulate the We will review report by Releases reject report IRS's corrective including a (GAO-05-26R, have been actions during cumulative list Jan. 10, 2005) initiated. In future audits. of all the interim, unmatched area managers taxpayer are required to accounts that print and have not been resolve reports resolved to based on IRM date. procedures. (short-term) Anticipated date of completion is January 2007. 86 05-10 Revise Accounts Management Open. IRS has Open. This is a Report: submitted a new new Management Mail Unit Review of IRM update, recommendation. We Controls over scheduled for will procedures, Safeguarding publication in review IRS's scheduled to Taxpayer December 2005, corrective actions be incorporated into Receipts and to address during future the Information issues regarding audits. IRM, to include at the Brookhaven transshipped detailed documents and instructions for Service Center cash receipts. Campus In the interim, (1) monitoring (GAO-05-319R, IRS will Mar. 10, continue using the transshipped 2005) Standard documents Operating and (2) handling Procedures that cash contain receipts found detailed during information for extraction. Where document transmittals and the adequate guidance monitoring and exists control of cash elsewhere, IRS receipts. should include these through cross-references. (short-term) (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 87 05-11 Enforce Management Closed. IRS has Open. This is a adherence to Report: Review taken corrective new existing of Controls action to ensure recommendation. instructions on over that IRS's actions safeguarding Safeguarding employees and occurred taxpayer Taxpayer managers are subsequent to receipts and Receipts and fully familiar the completion information, Information at with the correct of our fiscal such as the Brookhaven procedures for year 2004 audit. securing access Service Center safeguarding We will review and candling Campus taxpayer IRS's corrective procedures, at (GAO-05-319R, receipts and actions during service center Mar. 10, 2005) information. our fiscal year campuses (SCC) Corrective 2005 audit. selected for actions taken significant include reductions in counseling their employees on submission proper processing procedures; functions. holding a (short-term) meeting with security clerks to review procedures for issuing badges granting access to secured areas; taking inventories of badges after each shift; implementing new procedures to secure taxpayer data and related information awaiting destruction; holding a meeting with mail employees to review the candling procedures; and continuing to perform management reviews to ensure adherence to the candling procedures. 88 05-12 Document a Management Open. IRS will Open. This is a methodology for Report: Review use historical new estimating of Controls data obtained recommendation. anticipated over from the We will review rapid changes Safeguarding Brookhaven IRS's corrective in mail volume Taxpayer Campus rampdown, actions during at future SCCs Receipts and and any other our fiscal year selected for Information at prior 2005 audit. significant the Brookhaven consolidations, reductions in Service Center to develop and their Campus document a submission (GAO-05-319R, methodology for processing Mar. 10, 2005) estimating functions, future mail taking into volumes. This consideration methodology will factors be used in future consolidations to such as the ensure that IRS prior rampdown has reliable experience at data to Brookhaven. effectively (short-term) manage resources during and after the consolidation period. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO Enforce its Management Closed. IRS Open. This is a 89 05-13 existing Report: has new implemented requirement Improvements steps to recommendation. that Needed in monitor and IRS's actions enforce appropriate IRS's Internal the occurred background Controls requirements subsequent to issued on the investigations (GAO-05-247R, September 29, completion of be Apr. 27, 2003, on the our fiscal year completed for 2005) issuance of ID 2004 audit. We contractors cards to will review IRS's before they are contractors. corrective granted This guidance actions during our staff-like requires that fiscal year 2005 access to a letter from audit. the service National centers. Background (short-term) Investigation Center (NBIC) indicating successful completion of at least an interim background investigation be received by the issuing office before a contractor can be approved for staff-like access to IRS. The guidance further stipulates that Physical Security staff would, at least every 6 months, ensure that a re- certification had been received from the Contracting Officer's Technical Representative (COTR) confirming the contractors' need for continued staff-like access to the IRS facility. Additionally, as part of the required records and accountability process, non- federal photo ID cards are audited annually by the issuing office to reconcile numerical and alphabetical files and ensure that ID cards have been recovered upon separation or termination of the contract. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 90 05-14 Require that Management Report: Open. In the guidance Open. This background is a new investigation Improvements Needed in memorandum IRS issued on results for recommendation. We will contractors (or IRS's Internal Controls September 29, 2003, the evidence review the status of IRS's thereof) be on file (GAO-05-247R, Apr. 27, Physical Security Program where planned corrective actions necessary, including 2005) Office requires the COTR to during our fiscal at year 2005 contractor worksites complete and submit a request audit. and security offices form for every contract responsible for employee. Implementation of controlling access to sites the standardized form assures containing taxpayer receipts that all required information is and information. provided in order for the (short-term) contractor to receive its IRS photo ID card. This guidance also requires that a copy of the letter from NBIC indicating successful completion of at least an interim background investigation be attached to the request form or no ID card will be issued. Both documents are maintained by the issuing office. The IRS COTR for the lockbox banks verified that all six banks currently maintain background investigation records, including copies of documents submitted to NBIC and lists of cleared personnel. The Physical Security Program Office will work with the Business Operating Divisions (BOD) and Procurement to determine if the interagency agreement with Financial Management Services (FMS) should be modified to include a requirement for lockbox banks to maintain background investigation files. The estimated completion date for the review of the interagency agreement is November 2005. 05-15 Require that courier contracts call for couriers to submit contingency plans to lockbox banks. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. IRS updated LPG 4.2.3.1, Courier Contingency Plan, on January 1, 2005, to require that prior to implementation of the contract, the courier service must provide the lockbox with a disaster contingency plan. The contingency plan must cover labor disputes, employee strikes, inclement weather, natural disasters, traffic accidents, and unforeseen events. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. 05-16 Review lockbox bank courier contingency plans to help ensure that they incorporate all contingencies specified in the LPG. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. Contingency plans were provided by all lockbox sites and are part of the Filing Season Readiness (FSR) Plan. LPG 4.2.3.1 states "the contingency plan must cover labor disputes, employee strikes, inclement weather, natural disasters, traffic accidents, and unforeseen events." The Lockbox Coordinators reviewed the contingency plans to ensure that these issues were addressed. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's actions during our fiscal year 2005 audit. 93 05-17 Revise the LPG to specify Management Report: that courier contingency Improvements Needed in plans be available at IRS's Internal Controls lockbox banks. (GAO-05-247R, Apr. 27, (short-term) 2005) Open. LPG 2.1.7 requires each lockbox bank to submit an annual FSR Plan. The plan must be submitted to the Lockbox Field Coordinators for review to ensure each site is prepared for the filing season. Lockbox Field Coordinators will ensure all contingencies specified in the LPG are incorporated in the contract. Additionally, the LPG will be updated by April 15, 2005, to require all lockbox banks to have the courier contingency plan available on site. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. Status of recommendations Source report Per Count No. Recommendation IRS Per GAO 94 05-18 Review lockbox bank Management Report: Closed. LPG 4.2.3(2), Courier Open. This is a new courier and shredding Improvements Needed in Services, updated January 1, contracts to ensure that IRS's Internal Controls 2005, requires lockbox banks to our f they address all privacy- (GAO-05-247R, Apr. 27, ensure all bonded completion of related criteria and 2005) courier/armored car include clear reference to agreements specifically privacy-related laws and address privacy-related criteria fiscal regulations. (short-term) and include references to the Privacy Act of 1974 and the Internal Revenue Code (IRC) Sections 6103, 7213, and 7131. IRS will monitor this action during on-site reviews. recommendation. IRS's actions occurred subsequent to the iscal year 2004 audit. We will review IRS's corrective actions during our year 2005 audit. 95 05-19 Revise the LPG to require that (1) lockbox couriers promptly return deposit receipts to the lockbox banks following delivery of taxpayer remittances to depositories and, (2) lockbox banks promptly review the returned deposit receipts. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. LPG 4.2.3.1.8, Receipt for Transport of IRS Lockbox Bank Deposit Form, updated January 1, 2005, requires the lockbox site receive back, by the next business day, the original completed Receipt for Transport of IRS Lockbox Bank Deposit Form with the depository representative's name, signature, and date and time the deposit was received by the depository. The lockbox banks are to reconcile the Receipt for Transport of IRS Lockbox Bank Deposit Form(s) daily to ensure receipt of dedicated service (e.g., the time between release of the deposit to the courier and its release to the depository is not in excess). If discrepancies are found, the Lockbox Field Coordinator should be notified immediately. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. 05-20 Revise the LPG to require that deposit receipts for taxpayer remittances be time- and date-stamped. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. LPG 4.2.3.1.8, Receipt for Transport of IRS Lockbox Bank Deposit Form, was updated on January 1, 2005, to require the courier service employee to return the deposit receipt form to the lockbox site on the next business day and ensure the form contains the depository bank employee's name and signature, the date the deposit was received by the depository, and the time the deposit was received by the depository. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. 05-21 Better enforce the LPG requirement that lockbox bank couriers annotate the time of delivery on receipts for deposits of taxpayer remittances. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. LPG 4.2.3.1.8, Receipt for Transport of IRS Lockbox Bank Deposit Form, was updated on January 1, 2005, to require lockbox bank couriers to annotate the time of delivery of receipts for deposits of taxpayer remittances. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. 05-22 Provide a written reminder to courier contractors of the need to adhere to all courier service procedures. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Open. IRS will develop an annual memorandum by January 1, 2006, requiring banks to remind courier contractors to adhere to all courier service procedures in the LPG. IRS will monitor adherence during site reviews. Open. This is a new recommendation. We will review the status of IRS's planned corrective actions during our fiscal year 2005 audit. 99 05-23 Periodically verify that contractors entrusted with taxpayer receipts and information offsite adhere to IRS procedures. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. The 2005 LPG 4.2.3.1.8(1) has been updated and the procedures will be monitored during the periodic security reviews. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 100 05-24 Develop alternative, back-Management Report: Open. IRS will work with FMS Open. This is a new up plans that are Improvements Needed in to develop an alternative back-recommendation. We will consistent with IRS IRS's Internal Controls up plan by June 30, 2005. review the status of IRS's courier policies and (GAO-05-247R, Apr. 27, planned corrective actions procedures to address 2005) during our fiscal year 2005 instances in which only audit. one courier reports for transport of taxpayer receipts or information, such as requiring that a service center or lockbox bank employee accompany the courier to the depository. (short-term) 101 05-25 Formulate a policy to Management Report: Open. IRS will ensure policy Open. This is a new require that critical utility Improvements Needed in guidelines address protection recommendation. We will or security controls not be IRS's Internal Controls of critical or security controls review IRS's corrective actions located in areas requiring (GAO-05-247R, Apr. 27, and will work with the business during our fiscal year 2005 frequent access. 2005) operating divisions and audit. (short-term) Procurement to incorporate any revised requirements into updated and future interagency agreements with FMS. 05-26 Require lockbox bank Management Report: Open. The LPG requires 102 the Open. This is a new management to position Improvements Needed in closed-circuit television IRS's Internal Controls cameras (CCTV) to ( GAO-05-247R , Apr. 27, enable monitoring of 2005) secured areas containing sensitive systems or controls. (short-term) lockbox banks have installed cameras to monitor critical areas and assets in those parts of a facility controlled by the banks. IRS will review, through its Mission Assurance review process, the use of CCTV at the banks and, within local constraints, expand surveillance capabilities to include utility controls. recommendation. We will review IRS's actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 103 05-27 Periodically monitor Management Report: Open. The LPG requires that Open. This is a new lockbox banks' adherence Improvements Needed in keys and security panels recommendation. We will to the LPG requirement IRS's Internal Controls controlled by the banks be review IRS's actions during our that keys be kept in (GAO-05-247R, Apr. 27, properly stored and secured. fiscal year 2005 audit. secured containers within 2005) IRS's Mission Assurance will the secured perimeter. include controls over keys as (short-term) part of any and all reviews. As part of the review process, IRS will work with the banks and lessors to improve security for keys and security panels, irrespective of ownership. 104 05-28 Assess technologies that Management Report: Closed. IRS determined that Open. This is a new may be exempt from the Improvements Needed in current technologies are not recommendation. IRS's actions visual inspection IRS's Internal Controls exempt from the candling occurred subsequent to the requirement to determine (GAO-05-247R, Apr. 27, requirement and added to the completion of our fiscal year whether they are 2005) 2005 LPG 3.2.8(1) that 2004 audit. We will review IRS's acceptable methods of envelopes opened (either corrective actions during our satisfying candling manually or by OPEX) on three fiscal year 2005 audit. objectives and, if so, add or more sides must be candled such technologies to the once on the candling tables. All LPG list of accepted other envelopes must be candling methods. candled twice on the candling (short-term) tables. 105 05-29 Conduct an assessment Management Report: Closed. IRS assessed the Open. This is a new of the costs and benefits Improvements Needed in candling functions on recommendation. IRS's actions of relying on only one IRS's Internal Controls automated equipment and occurred subsequent to the candling when using (GAO-05-247R, Apr. 27, included in the 2005 LPG 3.2.8 completion of our fiscal year certain automated 2005) section (1) a requirement that 2004 audit. We will review IRS's equipment. (short-term) envelopes opened (either corrective actions during our manually or by OPEX equipment) on three or more sides must be candled once on the candling tables. IRS will monitor adherence during site reviews. fiscal year 2005 audit. 106 05-30 Clarify the LPG to eliminate confusion about the number of candlings required for different extraction methods. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. IRS updated the 2005 LPG 3.2.8, Candling, to require that envelopes opened (either manually or by OPEX) on three or more sides must be candled once on the candling tables. All other envelopes must be candled twice on the candling tables. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 107 05-31 Establish guidelines Management Report: Open. IRS is in the and process of Open. This is a new a testing requirement to Improvements Needed in reviewing and strengthening recommendation. We will ensure satisfactory IRS's Internal Controls current procedures contained in review the status of IRS's lighting conditions for (GAO-05-247R, Apr. 27, IRM 3.10.72, Batching, Sorting planned corrective actions effective candling. 2005) and Numbering. during our fiscal year 2005 (short-term) audit. 108 05-32 Establish policies Management Report: Open. IRS will establish and a Open. This is a new procedures to require Improvements Needed in procedure(s) for SB/SE field recommendation. We will appropriate segregation IRS's Internal Controls office units to track Document review the status of IRS's of duties in small (GAO-05-247R, Apr. 27, Transmittal forms and corrective actions during our business/self-employed 2005) acknowledgments of receipt of fiscal year 2005 audit. (SB/SE) units of field Document Transmittal forms. offices with respect to IRS will also strengthen preparation of Payment guidance to revenue officers Posting Vouchers, and will develop procedures Document Transmittal specifically for its field clerical forms, and transmittal staff. IRS's procedures will packages. (short-term) clarify that revenue officers are responsible for submitting an appropriately labeled sealed envelope containing the Daily Report of Collection Activity form to a designated clerical contact in the Post of Duty (POD). This guidance will apply unless the revenue officers are working away from the POD on extended field calls, flexiplace, or are working in a single revenue officer POD. Those revenue officers will send the envelope directly to Submission Processing. 109 05-33 Enforce the requirement Management Report: that a document Improvements Needed in transmittal form listing the IRS's Internal Controls enclosed Daily Report of ( GAO-05-247R , Apr. 27, Collection Activity forms 2005) be included in transmittal packages, using such methods as more frequent inspections or increased reliance on error reports compiled by the service center teller units receiving the information. (short-term) Open. IRS procedures will clarify that the designated clerical contacts are responsible for bundling sealed envelopes into a single package for overnight mail to Submission Processing pursuant to the IRM. The procedures will also clarify that the designated clerical contacts will prepare a Document Transmittal form and send the prepared package to Submission Processing via overnight mail. The procedures will direct the designated clerical contact to retain a control copy of the Document Transmittal form and the overnight mail transmittal until the receipted copy of the Document Transmittal form is returned from Submission Processing. The IRS will also require that the transmittal and the acknowledgment be reconciled on a monthly basis, with appropriate follow-up as required. IRS will also issue a memorandum to all Field Assistance employees reminding them to adhere to these IRM requirements. IRS will also add this as a review item for operational reviews conducted by Field Assistance headquarters and area personnel. Open. This is a new recommendation. We will review the status of IRS's corrective actions during our fiscal year 2005 audit. 110 05-34 Establish a procedure for SB/SE field office units to track Document Transmittal forms and acknowledgments of receipt of Document Transmittal forms. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Open. IRS will update its procedures to clarify that the managers should ensure continuous coverage of the designated clerical contact duties so that absence due to illness or leave does not disrupt the processing of remittances. Open. This is a new recommendation. We will review the status of IRS's planned corrective actions during our fiscal year 2005 audit. 111 05-35 Require evidence of Management Report: managerial review of Improvements Needed in recording, transmittal, IRS's Internal Controls and receipt of ( GAO-05-247R , Apr. 27, acknowledgments of 2005) taxpayer receipts and information. (short-term) Open. IRS will establish a procedure(s) to require evidence of managerial review of recording, transmittal, and receipt of acknowledgments of taxpayer receipts and information. However, IRS will not implement any procedure requiring 100 percent managerial review. IRS's new procedures will call for random managerial spot-checking of packages prepared for submission to Submission Processing by revenue officers working in PODs or by the designated clerical contacts in the PODs. The new procedure(s) will not call for any random managerial spot-checking of packages prepared by revenue officers working away from the POD on extended field calls or flexiplace. Instead, on those packages, IRS will continue to rely on the remittance reviews conducted by remittance processing personnel in Submission Processing. These reviews will be documented by the revenue officer group manager and be retained for the appropriate period required under record management guidelines. Open. This is a new recommendation. We will review the status of IRS's planned corrective actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 112 05-36 Assess options Management Closed. IRS Open. This is a to prevent the Report: believes that, new generation or Improvements if followed, recommendation. disbursement of Needed in the procedures We will assess refunds IRS's Internal it has in place IRS's adherence associated with Controls adequately to its existing accounts with (GAO-05-247R, address procedures and unresolved AUR Apr. 27, 2005) preventing the other actions it discrepancies, generation or plans to take including disbursement of during our placement of a refunds fiscal year 2005 freeze or hold associated with audit. on all such AUR accounts. accounts, until IRM 3.8.45 the AUR review requires has employees receiving an unidentified remittance to conduct Individual been completed. Data Retrieval (short-term) System (IDRS) research to determine if there is an open account that allows for posting of the remittance. Also, AUR will partner with Submissions Processing to ensure that employees receiving unidentified remittances are aware of the need to conduct IDRS research and how to properly post AUR remittances in these instances. 113 05-37 Enforce Management Open. IRS will Open. This is a documentation Report: enforce new requirements Improvements requirements to recommendation. relating to Needed in document We will review authorizing IRS's Internal monitoring by IRS's corrective officials Controls reminding actions during charged with (GAO-05-247R, management our fiscal year approving manual Apr. 27, 2005) officials 2005 audit. refunds. annually via a (short-term) memorandum, notice, or an Alert. As part of the reminder, the IRM check sheets will be included and a response will be required confirming these actions have been taken. In addition, IRS will consider including this item in the Management Accountability Review Process. 114 05-38 Enforce requirements for monitoring accounts and reviewing monitoring of accounts. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Open. IRS will enforce monitoring requirements by reminding management officials annually via a memorandum, notice, or an Alert. As part of the reminder, the IRM check sheets will be included and a response will be required confirming these actions have been taken. In addition, IRS will consider including this item in the Management Accountability Review Process. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. 115 05-39 Enforce requirements for Management Report: documenting monitoring Improvements Needed in actions and supervisory IRS's Internal Controls review. (short-term) (GAO-05-247R, Apr. 27, 2005) Open. IRS will enforce requirements to document monitoring by reminding management officials annually via a memorandum, notice, or an Alert. As part of the reminder, the IRM check sheets will be included and a response will be required confirming these actions have been taken. In addition, IRS will consider including this item in the Management Accountability Review Process. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. 116 05-40 Enforce the requirement Management Report: that command code Improvements Needed in profiles be reviewed at IRS's Internal Controls least once annually. (GAO-05-247R, Apr. 27, (short-term) 2005) Open. IRS will enforce annual review of command code profiles by reminding management officials annually via a memorandum or notice. As part of the reminder, the IRM check sheets will be included and a response will be required confirming these actions have been taken. In addition, IRS will consider including this in the Management Accountability Review Process. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. (Continued From Previous Page) Status of recommendations Count No. Recommendation Source report Per IRS Per GAO 117 05-41 Specify in the IRM that staff members are not to review their own command code profiles. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Open. The IRM wording will be updated and recommendations will be included in annual reminders (memos/notices, etc.) to management officials that the approver's manager is responsible for ensuring that approvers' profiles have appropriate restrictions and have been reviewed. Open. This is a new recommendation. We will review IRS's corrective actions during our fiscal year 2005 audit. 118 05-42 Specify in the IRM how to properly verify interest and penalties for accounts with liens with manually calculated interest or penalties. (short-term) Management Report: Improvements Needed in IRS's Internal Controls ( GAO-05-247R , Apr. 27, 2005) Closed. IRS revised the IRM to instruct employees to check the Integrated Data Retrieval System (IDRS) to determine if restricted interest or penalty is due. The IRM now clearly states that there are only two instances where restricted interest and penalty should not be computed, offer-in-compromise and bankruptcy cases. Also, instructions for computing restricted interest and penalty are found in the Automated Lien System (ALS) User Guide as well as in training material and desk guides. In addition, tax examiners hired to staff the Centralized Case Processing (CCP), Lien Processing Unit were provided hands-on training in the computation of restricted interest and penalty. Resolution of these cases moved to CCP effective February 2005. The centralized site has created a special group of employees who were trained in the resolution of restricted interest and penalty cases. New hires for this group will also receive this training. Open. This is a new recommendation. IRS's actions occurred subsequent to the completion of our fiscal year 2004 audit. We will review IRS's corrective actions during our fiscal year 2005 audit. 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 assessments, revenue, refunds, 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 31 U.S.C. S: 3512(c), (d), commonly referred to as the Federal Managers' Financial Integrity Act of 1982. * 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 (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); Fair Labor Standards Act of 1938, as amended (29 U.S.C. S: 206); Civil Service Retirement Act of 1930, as amended (5 U.S.C. S:S: 5332 and 5343); 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: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 Act, 2004, Pub. L. No. 108-199, 118 Stat. 3 (Jan. 23, 2004). o Tested whether IRS's financial management systems substantially comply with the three requirements of the Federal Financial Management Improvement Act of 1996 (Pub. L. No. 104-208, div. A, S: 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996) (codified at 31 U.S.C. S: 3512 note). Appendix III Comments from the Internal Revenue Service Appendix IV GAO Contact and Staff Acknowledgments Steven Sebastian, (202) 512-3406 GAO Contacts Paul Foderaro, (202) 512-2535 In addition to the persons named above, Chuck Fox, William Cordrey, Acknowledgments Charles Payton, Patricia Blumenthal, Gloria Cano, Nina Crocker, John Davis, Alain Dubois, David Elder, Valerie Freeman, John Gates, and Angel Sharma made key contributions to this report. GAO's Mission The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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