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					 

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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                                   

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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.      

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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.   

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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.     

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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).        

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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.

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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.      

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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.

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