Major Management Challenges and Program Risks: Department of the Treasury
(Letter Report, 01/01/99, GAO/OCG-99-14).

As part of its Performance and Accountability Series, GAO provided
information on the major management challenges and program risks facing
the Department of the Treasury.

GAO noted that: (1) the Internal Revenue Service (IRS) faces formidable
challenges as it attempts to fulfill its mission while addressing major
organizational, management, and performance issues; (2) these issues
include the need for: (a) restructuring IRS' organization and business
practices to better balance its efforts between taxpayer assistance and
enforcement; (b) correcting management and technical weaknesses in its
systems modernization efforts; (c) resolving financial management and
control weaknesses that affect its ability to adequately manage its
financial operations; (d) addressing problems relating to its ability to
collect federal tax receivables and other unpaid assessments; (e)
assessing the impact of various efforts it has under way to reduce
filing fraud; (f) improving security controls over information systems
to address weaknesses that place taxpayer data at risk to both internal
and external threats; and (g) modifying information systems to properly
function in the year 2000; (3) the Customs Service has made significant
improvements in its financial management; as a result, GAO has removed
it from its list of high-risk federal government programs; (4) however,
Customs still needs to address certain challenges related to controlling
access to sensitive data in its automated systems and maintaining
complete and reliable information in its core financial systems; (5) in
addition, GAO's recent work has shown that an incomplete systems
architecture has hindered Customs' management of major technology
investments, such as its Automated Commercial Environment System; (6)
Treasury's Financial Management Service (FMS) faces challenges in
addressing several financial management issues; (7) FMS' ability to
prepare reliable consolidated financial statements for the U.S.
government is primarily hindered by other federal agencies' weaknesses
in recordkeeping, documentation, and internal controls; (8) general
computer control weaknesses at FMS and its contractor data centers place
the data in its financial systems at significant risk of unauthorized
modification, disclosure, loss, or impairment; (9) FMS has experienced
some difficulties in effectively fulfilling Treasury's responsibilities
under the Debt Collection Improvement Act; (10) at the departmental
level, Treasury's financial management weaknesses hinder its ability to
maintain reliable financial records on the results of its operations;
and (11) the Department's financial management systems did not comply
with federal requirements.

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

 REPORTNUM:  OCG-99-14
     TITLE:  Major Management Challenges and Program Risks: Department 
             of the Treasury
      DATE:  01/01/99
   SUBJECT:  Accountability
             Information resources management
             Tax administration systems
             Management information systems
             Customs administration
             Financial management systems
             Computer security
             Systems conversions
             Internal controls
             Risk management
IDENTIFIER:  Performance and Accountability Series 1999
             Customs Service Automated Commercial Environment System
             Customs Service Seized Assets and Case Management Tracking 
             System
             IRS Electronic Fraud Detection System
             IRS Questionable Refund Program
             Earned Income Tax Credit
             EIC
             Y2K
             
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Cover
================================================================ COVER


Performance and Accountability Series

January 1999

MAJOR MANAGEMENT CHALLENGES AND
PROGRAM RISKS - DEPARTMENT OF THE
TREASURY

GAO/OCG-99-14

Treasury Challenges


Abbreviations
=============================================================== ABBREV

  ACE - Automated Commercial Environment
  CMP - compliance measurement program
  CFO - Chief Financial Officers Act
  CFS - consolidated financial statements
  CIO - Chief Information Officer
  DCIA - Debt Collection Improvement Act
  EIC - Earned Income Credit
  FFMIA - Federal Financial Management Improvement Act of 1996
  FMS - Financial Management Service
  IRS - Internal Revenue Service
  OIG - Office of Inspector General
  OMB - Office of Management and Budget
  SEACATS - Seized Assets and Case Management Tracking System
  SSN - Social Security number
  TOP - Treasury Offset Program

Letter
=============================================================== LETTER



January 1999

The President of the Senate
The Speaker of the House of Representatives

This report addresses the major performance and management challenges
affecting the ability of the Department of the Treasury to
effectively carry out its mission.  Specifically, this report
discusses the challenges facing three Treasury bureaus--the Internal
Revenue Service, Customs Service, and the Financial Management
Service--as well as departmentwide financial management challenges. 
It also discusses corrective actions that Treasury and its bureaus
have taken or initiated to address these challenges and further
actions that are needed.  For many years, we have reported
significant problems at Treasury.  These problems are the result of
serious deficiencies in (1) information and financial management
systems, (2) internal controls at the department level and in the
three bureaus, and (3) the organizational structure at IRS. 

Treasury has made progress in addressing its key management
challenges and continues to plan future improvements.  Progress has
been made, for example, in the financial management area, as
indicated by (1) the unqualified opinions both IRS and Customs
received on their financial statements and (2) the removal of
Customs' financial management from our high-risk list of federal
government programs.  The Commissioner of Internal Revenue and the
leadership team at IRS has given a top priority to addressing
deficiencies.  However, while the efforts of the Department and its
bureaus are encouraging, Treasury must do more.  Because of the
complexity of many of Treasury's challenges, long-term efforts are
still needed if effective solutions are to be developed and
implemented.  In particular, we continue to believe that several
areas within IRS and the asset forfeiture program at Customs remain
at high risk. 

This report is part of a special series entitled the Performance and
Accountability Series:  Major Management Challenges and Program
Risks.  The series contains separate reports on 20 agencies--1 on
each of the cabinet departments and on most major independent
agencies as well as the U.S.  Postal Service.  The series also
includes a governmentwide report that draws from the agency-specific
reports to identify the performance and management challenges
requiring attention across the federal government.  As a companion
volume to this series, GAO is issuing an update to those government
operations and programs that its work has identified as "high risk"
because of their greater vulnerabilities to waste, fraud, abuse, and
mismanagement.  High-risk government operations are also identified
and discussed in detail in the appropriate performance and
accountability series agency reports. 

The performance and accountability series was done at the request of
the Majority Leader of the House of Representatives, Dick Armey; the
Chairman of the House Government Reform Committee, Dan Burton; the
Chairman of the House Budget Committee, John Kasich; the Chairman of
the Senate Committee on Governmental Affairs, Fred Thompson; the
Chairman of the Senate Budget Committee, Pete Domenici; and Senator
Larry Craig.  The series was subsequently cosponsored by the Ranking
Minority Member of the House Government Reform Committee, Henry A. 
Waxman; the Ranking Minority Member, Subcommittee on Government
Management, Information and Technology, House Government Reform
Committee, Dennis J.  Kucinich; Senator Joseph I.  Lieberman; and
Senator Carl Levin. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of the Congress, the
Director of the Office of Management and Budget, the Secretary of the
Treasury, and the heads of other major departments and agencies. 

David M.  Walker
Comptroller General of
the United States


OVERVIEW
============================================================ Chapter 0

One of the primary responsibilities of the Department of the Treasury
is to manage the government's finances.  This includes collecting
over $1.7 trillion in federal tax revenues and making payments
totaling more than $1 trillion annually.  Treasury faces many
challenges in managing the government's finances and, like other
parts of the government, is experiencing demands to be more effective
and accountable in carrying out its mission.  Many of the issues
affecting Treasury's ability to effectively manage the government's
finances involve challenges relating to information systems.  Until
Treasury and its bureaus and offices are better able to address the
numerous performance and management challenges they are facing, their
ability to manage the government's finances will remain impaired. 


   THE CHALLENGES
---------------------------------------------------------- Chapter 0:1


      MANAGEMENT AND PERFORMANCE
      ISSUES AFFECTING THE
      INTERNAL REVENUE SERVICE
-------------------------------------------------------- Chapter 0:1.1

The Internal Revenue Service (IRS) faces formidable challenges as it
attempts to fulfill its mission while addressing major
organizational, management, and performance issues.  These issues
include the need for (1) restructuring IRS' organization and business
practices to better balance its efforts between taxpayer assistance
and enforcement, (2) correcting management and technical weaknesses
in its systems modernization efforts, (3) resolving financial
management and control weaknesses that affect its ability to
adequately manage its financial operations, (4) addressing problems
relating to its ability to collect federal tax receivables and other
unpaid assessments, (5) assessing the impact of various efforts it
has under way to reduce filing fraud, (6) improving security controls
over information systems to address weaknesses that place taxpayer
data at risk to both internal and external threats, and (7) modifying
information systems to properly function in the year 2000. 


      CUSTOMS' FINANCIAL
      MANAGEMENT REMOVED FROM
      HIGH-RISK LIST, BUT
      CHALLENGES REMAIN
-------------------------------------------------------- Chapter 0:1.2

The Customs Service has made significant improvements in its
financial management; as a result, we have removed it from our list
of high-risk federal government programs.  However, Customs still
needs to address certain challenges related to controlling access to
sensitive data in its automated systems and maintaining complete and
reliable information in its core financial systems.  In addition, our
recent work has shown that an incomplete systems architecture has
hindered Customs' management of major technology investments, such as
its Automated Commercial Environment system. 


      FINANCIAL MANAGEMENT
      CHALLENGES AFFECTING THE
      FINANCIAL MANAGEMENT SERVICE
-------------------------------------------------------- Chapter 0:1.3

Treasury's Financial Management Service (FMS) faces challenges in
addressing several financial management issues.  First, FMS' ability
to prepare reliable consolidated financial statements for the U.S. 
government is primarily hindered by other federal agencies'
weaknesses in recordkeeping, documentation, and internal controls. 
Second, general computer control weaknesses at FMS and its contractor
data centers place the data in its financial systems at significant
risk of unauthorized modification, disclosure, loss, or impairment. 
Third, FMS has experienced some difficulties in effectively
fulfilling Treasury's responsibilities under the Debt Collection
Improvement Act. 


      DEPARTMENTWIDE FINANCIAL
      MANAGEMENT WEAKNESSES
-------------------------------------------------------- Chapter 0:1.4

At the Departmental level, Treasury's financial management weaknesses
hinder its ability to maintain reliable financial records on the
results of its operations.  Specifically, weaknesses exist in the
Department's (1) accountability for and reporting on seized and
forfeited property; (2) computer security controls; (3) integration
of financial management systems; and (4) process that is used to
prepare Departmentwide financial statements.  In addition, the
Department's financial management systems did not comply with federal
requirements. 


   PROGRESS AND NEXT STEPS
---------------------------------------------------------- Chapter 0:2

Treasury has made progress in addressing its key managerial
challenges and continues to develop plans aimed toward making future
improvements.  Progress, for example, is signified by the (1)
unqualified opinions both IRS and Customs received on their financial
statements and (2) removal of Customs' financial management from our
list of high-risk federal government programs.  While Treasury
deserves to be recognized for the progress it has made in addressing
its key problems, more needs to be done.  Because of the complexity
of many of Treasury's challenges, long-term efforts may be required
to effectively plan and implement solutions. 

To meet congressional demands to become more effective and
accountable, Treasury began moving toward a performance-based
approach to management before the Government Performance and Results
Act requirements became mandatory.\1 For example, for several years,
Treasury has included in its budget request performance goals that
are derived from its strategic plan.  In addition, Treasury's fiscal
year 1999 performance plan, which was prepared under the Results Act
requirements, was combined with its budget request and included
reports on performance goals for the preceding 2 fiscal years. 
However, Treasury's performance plan would be more useful to the
Congress and other stakeholders if it included performance goals to
specifically address all of the significant management challenges,
including the numerous high-risk areas that the Department faces. 
The performance plan briefly acknowledges some of these major
challenges, but it does not have performance goals that adequately
address all of them. 

We believe that Treasury must take action to develop comprehensive
implementation strategies so that its financial and information
systems are designed to meet the needs of the Department.  Continued
dialogue between the Congress, the Department, and other stakeholders
is also necessary to help guide Treasury in devising strategies to
more effectively address its major management challenges.  In
addition, Treasury must be able to show stakeholders evidence of the
extent that progress is being made.  One way to show commitment to
improvement is to promptly implement corrective actions to address
those challenges that lend themselves to short-term solutions. 
Treasury's annual performance plan under the Results Act could be
used to convey the status of such progress. 


--------------------
\1 The Government Performance and Results Act of 1993 is designed to
improve the efficiency and effectiveness of federal programs by
establishing a system to set goals for program performance and to
measure results.  The Act requires agencies to prepare multiyear
strategic plans, annual performance plans, and annual performance
reports. 


MAJOR PERFORMANCE AND MANAGEMENT
ISSUES
============================================================ Chapter 1

Treasury performs key governmental roles, including administering and
enforcing the nation's tax laws, collecting revenue, and managing the
government's finances.  Treasury also formulates and recommends
economic, financial, tax, and fiscal policies and manufactures coins
and currency.  To carry out its diverse responsibilities, Treasury is
divided into more than a dozen bureaus and offices.  For its fiscal
year 1999 budget, Treasury requested about $12.3 billion. 

Our work and that of others have identified Departmentwide management
problems at Treasury as well as significant problems in three
bureaus--IRS, Customs, and FMS.  Much of our work has focused on IRS
because of the crucial role it plays in collecting taxes and
administering the federal tax system.  IRS is Treasury's largest
bureau with about 102,000 staff years--two-thirds of the Department's
total staff years--and a fiscal year 1999 budget request of nearly
$8.3 billion--about two-thirds of the Department's total budget. 
Several key areas in IRS remain on our high-risk list of government
programs, and IRS continues to face new organizational challenges
that may affect its ability to effectively carry out its mission. 
For these reasons, this report highlights IRS' major performance and
management issues relating to restructuring, systems modernization,
financial management, accounting for and collecting taxes owed the
government, filing fraud, information systems security, and century
date conversion efforts.  This report also addresses important
management issues affecting Customs and FMS as well as Departmentwide
financial management problems.  These challenges hinder Treasury's
ability to manage the government's finances. 


   MANAGEMENT AND PERFORMANCE
   ISSUES AFFECTING IRS
---------------------------------------------------------- Chapter 1:1

The Congress, in passing the IRS Restructuring and Reform Act of
1998, reaffirmed its commitment to addressing the performance and
management issues confronting IRS.  In the same vein, the IRS
Commissioner has set goals for restructuring the nation's tax
collection agency to provide better customer service.  One key to
restructuring IRS' business operations to provide better service to
taxpayers is acquiring modernized systems.  Modernized systems are
also critical for IRS to address its weaknesses relating to financial
management, information systems security, accounting for and
collecting taxes, and filing fraud.  At the same time it is planning
business restructuring and systems modernization, IRS must also
manage its century date conversion efforts--which are crucial to its
continued operation. 


      THE NEED FOR RESTRUCTURING
      IRS' ORGANIZATION AND
      BUSINESS PRACTICES
-------------------------------------------------------- Chapter 1:1.1

The Congress had several reasons for passing the IRS Restructuring
and Reform Act of 1998, including concerns about IRS' treatment of
taxpayers.  To address these concerns and to institute his own
initiatives, the Commissioner of Internal Revenue announced a
multiyear business modernization plan for IRS that is aimed at
improving customer service.  The Commissioner has categorized his
proposed changes into several key areas, including (1) an
organization built around taxpayer needs, (2) balanced performance
measures, and (3) new technology. 

Managing the restructuring will be a challenge for IRS because (1)
the proposed changes in the way IRS does business are extensive, (2)
collecting taxes requires IRS to balance its efforts between taxpayer
assistance and enforcement, and (3) business restructuring must be
coordinated with systems modernization. 

The proposed restructuring would be the biggest reorganization of IRS
in decades.  Currently, IRS has about 100,000 employees who are
organized by tax administration function such as returns processing
and collection.  Under the proposed changes, IRS would be organized
into four units that would specialize in serving the needs of
different types of taxpayers.  The proposed units are (1) wage and
investment income; (2) small business, self-employment, and
supplemental income; (3) middle market and large corporate; and (4)
tax exempt. 

While the magnitude of the restructuring task is daunting, management
of restructuring is complicated by the need to balance IRS' tax
collection efforts and resources between providing service to
taxpayers and enforcing compliance with the tax laws.  To reinforce
the appropriate relationship between these objectives, a balanced set
of IRS performance measures is needed.  The Commissioner has also
emphasized the importance of measures of organizational performance
that balance customer satisfaction, business results, employee
satisfaction, and productivity.  The intent is to provide incentives
for service-oriented behavior toward taxpayers, while also
emphasizing the need for achieving efficiencies in collecting
revenue.  Although IRS is striving to improve its overall performance
measurement system, it faces particular challenges as it develops and
implements performance measures to gauge its efforts to reduce
taxpayer burden through improved customer service.  The key
challenges we identified are (1) developing a reliable measure of
taxpayer burden, including the portion that IRS can influence; (2)
developing measures that can be used to compare the effectiveness of
the various customer service programs; and (3) refining or developing
new measures that gauge the quality of the services provided. 
Additionally, as IRS refines its strategic goals and related
measures, it is important that IRS obtain stakeholder involvement to
balance its efforts between assisting taxpayers and enforcing
compliance with the tax laws. 

Reengineering business practices that focus on solving taxpayer
problems is a central element of the restructuring concept.  For
example, IRS is planning efforts to identify as promptly as possible
taxpayers who may present a risk of nonpayment and to work out a
payment plan that addresses the particular payment problems of those
taxpayers.  This early identification is intended to help the
taxpayer make the necessary payments and minimize the need for
subsequent enforcement actions. 

New technology is essential to addressing the problems that have
hampered IRS' ability to better serve taxpayers.  This is critical in
that IRS' existing computer systems do not provide ready access to
needed information and, consequently, do not adequately support
modern work processes or facilitate the attainment of the high level
of customer service that IRS hopes to achieve under restructuring. 
Modernized systems should help IRS collect taxes by providing its
collectors with on-line access to the information they need when they
need it.  These systems, along with the Commissioner's emphasis on
balanced performance measures, should help provide IRS with the
management information it needs to evaluate the effectiveness of its
programs. 

The Commissioner's restructuring plan acknowledges that deficiencies
exist in IRS' computer systems.  In that regard, the plan points out
that the new business practices and organizational structure provide
a basis for completing and implementing the modern systems outlined
in the technology modernization blueprint.  One challenge for IRS is
to ensure that the systems development plans under the modernization
blueprint and restructuring plan are aligned.  In addition, for the
Commissioner's restructuring plan to be successful, it is also
critical that the long-standing internal control and system
weaknesses related to financial management be fully addressed and
corrected. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.2

James R.  White, Director
Tax Policy and Administration Issues
General Government Division
(202) 512-9110
[email protected]


      THE NEED TO ADDRESS
      MANAGEMENT AND TECHNICAL
      WEAKNESSES IN SYSTEMS
      MODERNIZATION EFFORTS
-------------------------------------------------------- Chapter 1:1.3

For more than a decade, IRS has been attempting to modernize its
outdated, paper-intensive approach to tax return processing.  We
reviewed IRS' management of its systems modernization program and, in
1995, reported on serious management and technical weaknesses that
jeopardized the program's successful completion.  At that time, we
made recommendations to correct the weaknesses and designated the
modernization program as a high-risk information technology
investment.  Since then, we have reviewed IRS' actions to address our
recommendations and strengthen its systems modernization capability,
and we have made additional recommendations to aid in this endeavor. 

IRS has made progress in strengthening its modernization capability,
and according to IRS' Chief Information Officer (CIO), the Service
plans to (1) fully implement our recommendations before it begins
building modernized systems and (2) reexamine its modernization
blueprint in light of ongoing IRS organizational restructuring and
the IRS Restructuring and Reform Act of 1998.  However, until our
recommendations have been fully implemented, IRS lacks the ability to
effectively modernize its tax systems. 


         IRS' EFFORTS TO ADDRESS
         LONG-STANDING SYSTEMS
         MODERNIZATION MANAGEMENT
         AND TECHNICAL WEAKNESSES
------------------------------------------------------ Chapter 1:1.3.1

In July 1995, we reported that IRS (1) did not have a comprehensive
business strategy to reduce paper tax return filings in a
cost-effective manner and (2) had not fully developed and put in
place the requisite management, software development, and technical
infrastructure necessary to successfully implement its ambitious
systems modernization.  We also reported that IRS lacked an overall
systems architecture to guide the modernization's development and
evolution. 

At that time, we made over a dozen recommendations to address these
weaknesses, including calling for IRS to (1) implement processes for
investment management; (2) implement disciplined procedures for
software development; and (3) complete and enforce an integrated
systems architecture, including data and security subarchitectures. 
IRS agreed with our recommendations. 

In 1996, because IRS had made progress in implementing our
recommendations and to minimize the risk of IRS' investing in systems
before the recommendations were implemented, we suggested that the
Congress limit IRS' information technology spending to certain
cost-effective categories.  In the fiscal year 1997 Omnibus
Consolidated Appropriations Act, the Congress directed IRS to, among
other things, establish a schedule for implementing our
recommendations and submit an architecture for the modernization by
May 15, 1997. 

Since then, IRS has taken actions to address these challenges.  For
example, IRS hired a new CIO and created an investment review board
to select, control, and evaluate its information technology
investments.  Additionally, IRS provided the first two levels of a
four-level modernization blueprint to the Congress on May 15, 1997. 
Also, in March 1998, IRS released a request for proposals for a prime
systems integration services contractor.  This contractor, in
partnership with IRS, was to be responsible for defining key
components of the blueprint and for acquiring and implementing
modernized tax systems in accordance with the blueprint.  IRS awarded
the contract in December 1998. 

In early 1998, we reported that the blueprint was a good first step
that provided a solid foundation from which to define the level of
detail and precision needed to effectively and efficiently build a
modernized system of interrelated systems.  The Commissioner agreed
with our findings.  Subsequently, the Congress limited IRS' ability
to obligate information technology investment funds until certain
conditions were met.  These conditions included that IRS was to
submit to the Congress for approval an expenditure plan that (1)
implements the blueprint, (2) complies with requirements of the
Office of Management and Budget's (OMB) system investment guidelines,
(3) passes reviews and approvals by OMB and Treasury's IRS Management
Board, and (4) is reviewed by us. 


         IRS PLANS TO IMPLEMENT
         OUR RECOMMENDATIONS
------------------------------------------------------ Chapter 1:1.3.2

In January 1998, the Commissioner of Internal Revenue announced plans
for restructuring IRS' organization.  However, this restructuring
will affect the very business processes and requirements that the
blueprint is based on, thus raising questions about the blueprint's
validity and applicability.  Additionally, IRS has continued to
follow through with its plans to use contractors to modernize its
systems, rather than follow its past practice of developing the
systems itself.  However, as we reported in our 1997 high-risk report
on IRS, increasing the use of contractors will not automatically
increase the likelihood of successful modernization because IRS has
historically lacked the capability to effectively manage its
contractors.  For this strategy of acquiring modernized systems,
rather than developing them in-house, to be successful, IRS would
first have to strengthen and improve its ability to manage
contractors.  Further, Treasury's fiscal year 1999 annual performance
plan, submitted under the Results Act, only describes IRS'
modernization-related activities in general terms.  For example, the
plan states that IRS will conduct software maturity activities and
establish and maintain systems life cycle processes to manage the
prime systems modernization contractor.  These general statements do
not provide objective, quantifiable, and measurable performance goals
and do not specify measures for assessing progress toward the goals,
as required by the Results Act. 

In December 1998, IRS awarded its prime contract for systems
modernization.  According to IRS' CIO, the Service plans to partner
with the prime contractor to complete the modernization blueprint, as
we recommended, and to account for (1) changes in system requirements
and priorities caused by IRS' organizational restructuring and (2)
changes to accommodate new technology and to implement the IRS
Restructuring and Reform Act of 1998 requirements.  Additionally, the
CIO stated that IRS plans to establish disciplined life cycle
management processes and structures and mature software development
and acquisition capabilities before it begins building modernized
systems. 

Because of the importance and high cost of the modernization and the
fact that our key recommendations remain open, we plan to continue
evaluating IRS' ability and readiness to effectively modernize its
systems and will continue to categorize IRS' systems modernization
effort as a high-risk program. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.4

Jack L.  Brock, Jr., Director
Governmentwide and Defense Information
 Systems
Accounting and Information Management
 Division
(202) 512-6240
[email protected]


      THE NEED TO CONTINUE TO
      ADDRESS FINANCIAL MANAGEMENT
      WEAKNESSES
-------------------------------------------------------- Chapter 1:1.5

In fiscal year 1997, IRS received an unqualified opinion on its
custodial financial statements for the first time since we began
auditing them in fiscal year 1992.\1 This achievement was largely
attributable to IRS' efforts to improve significant internal controls
in critical areas, such as the reconciliation of tax receipts and
refunds between its systems and those of FMS.  However, IRS had to
use extensive ad hoc procedures to enable it to prepare auditable
financial statements.  This resulted from IRS' inability to rely on
its general ledger system to support its financial statements because
of its deficiencies.  A core purpose of a general ledger system is to
support the preparation of financial statements.  To compensate for
deficiencies, IRS uses specialized computer programs to extract
information from its master files--its only detailed database of
taxpayer information--to derive amounts to be reported in the
financial statements.  However, the amounts produced by this approach
needed material audit adjustments to produce reliable financial
statements.  In our audit report on IRS' fiscal year 1997 financial
statements, we cited long-standing material weaknesses in IRS'
financial management that prevented it from routinely generating
timely and reliable information as a tool for managing IRS operations
or as a basis for preparing financial statements.  These weaknesses
also affect IRS' ability to adequately manage its financial
operations, expose the federal government and taxpayers to financial
loss, and create undue burden to taxpayers. 

IRS' primary internal control weaknesses relate to tax receipts,
taxpayer data, and unpaid tax assessments.  IRS initiated corrective
actions designed to address some of the pervasive financial
management problems we have reported since 1992.  However, many of
IRS' initiatives--which include its systems modernization effort and
plans to improve its financial reporting capabilities--are long term
and, according to IRS' plans, may take 10 years or more of sustained
effort to fully implement.  Some other issues can be resolved in the
next few years by improving policies, procedures, and internal
controls.  These weaknesses in IRS' financial management systems and
internal controls reflect the extent to which IRS still has extensive
work ahead to fully address and resolve its financial management and
internal control deficiencies.  Therefore, IRS' financial management
continues to be designated as a high-risk area. 


--------------------
\1 The custodial financial statements did not report on activities
related to IRS' administrative costs that were funded by
appropriations and reimbursements from other agencies, state and
local governments, and the public.  These activities were reported
separately in IRS' administrative financial statements, which were
audited by the Treasury Office of Inspector General. 


         INTERNAL CONTROL
         WEAKNESSES REGARDING TAX
         RECEIPTS AND TAXPAYER
         DATA
------------------------------------------------------ Chapter 1:1.5.1

IRS' controls over tax receipts and taxpayer data do not adequately
reduce the vulnerability of the federal government and taxpayers to
loss from the theft and inappropriate disclosure of proprietary
taxpayer information.  For example, receipts were left in
unrestricted areas accessible to individuals not authorized to handle
receipts.  In addition, employees were hired and worked in positions
requiring the handling of cash, checks, or sensitive taxpayer
information before IRS received the results of their background or
fingerprint checks.  Of the 80 thefts that IRS investigated at
service centers from January 1995 to July 1997, 12 (15 percent) were
committed by individuals who had previous arrest records or
convictions that were not identified before their employment.  In
addition, single, unarmed couriers in ordinary civilian vehicles were
used to transport IRS deposits totaling hundreds of millions of
dollars to the depository institutions during the peak filing season. 
One courier left a deposit totaling more than $200 million unattended
in an open vehicle while he returned to the service center.  At one
district office, IRS relied on a bicycle messenger to deliver daily
deposits ranging from more than $1 million during the nonpeak season
to more than $100 million during the peak season. 

Although receipts and taxpayer information will always be vulnerable
to theft, IRS has a responsibility to protect the government and
taxpayers from such losses.  In November 1998, we made
recommendations to IRS that would address the internal control
weaknesses that our work identified, including prohibiting new
employees from being assigned to process receipts until fingerprint
checks are received and reviewed by management, enhancing physical
security over receipts and taxpayer data, and reviewing the level of
security provided receipts and taxpayer data in transit to depository
institutions.  IRS generally agreed with our recommendations and has
indicated that it plans to address most of the control deficiencies
relating to tax receipts and taxpayer data we identified. 


         INTERNAL CONTROL
         WEAKNESSES OVER UNPAID
         TAX ASSESSMENTS
------------------------------------------------------ Chapter 1:1.5.2

IRS does not have a detailed listing or subsidiary ledger that tracks
and accumulates unpaid tax assessments on an ongoing basis.  The lack
of a subsidiary ledger impairs IRS' ability to effectively manage its
unpaid assessments.  This weakness has resulted in IRS'
inappropriately directing collection efforts against taxpayers after
amounts owed had been paid.  In one case, three taxpayers had
multimillion dollar tax liabilities and liens placed against their
property, although the taxes had actually been paid and two of the
individuals were owed refunds.  In addition, IRS must rely on
computer programs to extract data from its master files to prepare
its financial statements, a process that necessitated tens of
billions of dollars in adjustments to correct misclassifications and
eliminate duplicate transactions in fiscal year 1997.  IRS also lacks
adequate documentation to support its unpaid assessments.  For
example, the estate case files we reviewed generally did not include
audited financial statements or an independent appraisal of the
estate's assets--information that would greatly assist in determining
potential collectibility and potential underreporting in these cases. 
These weaknesses hinder IRS' ability to effectively manage its unpaid
assessments by contributing to IRS' inability to focus its collection
efforts on those accounts exhibiting the greatest degree of
collection potential. 

During fiscal year 1998, we issued a report discussing these issues
in detail and providing recommendations to address them.  IRS has
agreed to consider studying ways of addressing these problems,
pending implementation of its long-term system enhancements. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.6

Gregory D.  Kutz, Associate Director
Governmentwide Accounting and Financial
 Management Issues
Accounting and Information Management
 Division
(202) 512-9505
[email protected]


      THE NEED TO ADDRESS PROBLEMS
      RELATING TO FEDERAL TAXES
      RECEIVABLE AND OTHER UNPAID
      ASSESSMENTS
-------------------------------------------------------- Chapter 1:1.7

Each year, IRS collects tax revenue to fund government operations. 
In fiscal year 1998, IRS collected over $1.7 trillion.  However, IRS
has not been able to collect a significant portion of the amount of
federal taxes it identifies as due the government.  This problem has
been compounded by serious financial management system deficiencies
and the lack of sound, reliable information, which impede IRS'
efforts to collect unpaid tax assessments. 

As of September 30, 1997, IRS had identified $214 billion in unpaid
tax assessments that were due to the federal government.  These
assessments, which have historically been referred to as IRS'
accounts receivable, consist of (1) $90 billion in taxes due from
taxpayers for which IRS can support the existence of a federal tax
receivable through taxpayer agreement or a favorable court ruling;\2
(2) $48 billion in compliance assessments for which neither a
taxpayer nor a court has affirmed that the amounts are owed; and (3)
$76 billion in write-offs, which represent unpaid assessments for
which IRS does not expect further collection because of such factors
as the taxpayer's death, bankruptcy, or insolvency.  Under federal
accounting standards, only the $90 billion in unpaid assessments that
IRS can support by taxpayer agreement or favorable court ruling
represent federal taxes receivable.  For the first time since we
began auditing IRS, the agency has reported a reasonable estimate of
the amount of federal taxes receivable it expects to ultimately
collect.  This amount, $28 billion as of September 30, 1997,
represents just 31 percent of the total federal taxes receivable and
just 13 percent of the total balance of unpaid assessments. 

Our work has shown that this low level of expected collectibility is
a reasonable estimate given the composition of IRS' unpaid
assessments.  The $76 billion in write-offs are amounts primarily due
from bankrupt and insolvent taxpayers, including billions in
delinquent taxes that are owed by failed financial institutions and
thus have virtually no hope of collection.  The $48 billion in
compliance assessments are primarily amounts that are owed by
individuals and businesses for income and payroll taxes.  However,
IRS' future prospects of collecting these amounts are low because (1)
these taxpayers have not acknowledged the debt and (2) in many
instances these amounts are derived through IRS' various compliance
and enforcement programs and may not ultimately represent the amounts
actually owed by the taxpayer. 

This leaves $90 billion in unpaid assessments that represent federal
taxes receivable.  Yet, our work has shown that $62 billion (68
percent) of this balance is also not likely to be collectible.  This
$62 billion is owed primarily by taxpayers who are (1) experiencing
financial hardships, (2) undergoing bankruptcy, or (3) unwilling to
pay some or all of the amounts they owe.  Only $28 billion of the $90
billion of federal taxes receivable represent amounts where
collection is likely based on the financial status and willingness of
the taxpayers to pay some or all of the amounts they owe.  However,
despite these problems, IRS' goal is to pursue collection of all
federal taxes due. 

Striving to close the gap between the amount of tax revenue owed the
government and the amount likely to be collected is a major challenge
for IRS.  However, IRS' long-standing systems deficiencies make this
challenge even more difficult.  IRS has continually tried to manage
its federal taxes receivable and other unpaid assessments with
systems that are unable to provide timely, useful, and reliable
information on the status of taxpayers' accounts.  Consequently, IRS
does not have the complete and reliable information it needs to
effectively focus collection efforts on accounts with the greatest
collection potential.  This is critical given that 87 percent of IRS'
estimated unpaid assessments, including the $62 billion in federal
taxes receivable, have little or no potential for collection. 
Additionally, because IRS' systems are not integrated with one
another, they create high rates of error in taxpayers' accounts and,
in some cases, create unnecessary taxpayer burden.  These burdens
result in costs to both the taxpayer and IRS in resolving the errors
caused by these system deficiencies.  System weaknesses and the lack
of adequate data also have an impact on IRS' ability to identify
delinquencies so that it can target its compliance and enforcement
initiatives.  These deficiencies impede IRS' efforts to detect
noncompliant taxpayers earlier, thereby increasing the likelihood
that such amounts, if and when detected, will yield little
collection. 

We have provided IRS with a series of long- and short-term
recommendations to assist it in addressing the serious financial
management issues that are associated with federal taxes receivable
and other unpaid assessments.  However, these issues and their
implications continue to expose the government to significant loss of
tax revenue.  Consequently, we believe federal taxes receivable
should continue to be designated as a high-risk area for the
government. 


--------------------
\2 When Statement of Federal Financial Accounting Standards No.  7
became effective for fiscal year 1998, these transactions were
redefined and are now appropriately referred to as federal taxes
receivable. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:1.8

Gregory D.  Kutz, Associate Director
Governmentwide Accounting and Financial
 Management Issues
Accounting and Information Management
 Division
(202) 512-9505
[email protected]


      THE NEED TO ASSESS THE
      IMPACT OF EFFORTS TO REDUCE
      FILING FRAUD
-------------------------------------------------------- Chapter 1:1.9

Since we first identified filing fraud as a high-risk area in
February 1995, IRS has taken several steps in an attempt to reduce
its exposure to filing fraud.  For example, IRS (1) expanded the
number of up-front filters in the electronic filing system that is
designed to screen electronic submissions for problems, such as
missing or incorrect Social Security numbers (SSN), to prevent
returns with those problems from being filed electronically; (2)
strengthened the process for checking the suitability of persons
applying to participate in the electronic filing program as return
preparers or transmitters by requiring fingerprint and credit checks;
(3) revised the computerized formulas used to score all tax returns
to determine their fraud potential; (4) upgraded the Electronic Fraud
Detection System to give staff in the Questionable Refund Program
better research capabilities; and (5) placed an increased emphasis on
validating SSNs on filed paper returns. 

A significant change in IRS' return processing procedures in 1997
enhanced its ability to` deal with paper returns involving missing or
incorrect SSNs.  That year, as legislatively authorized, IRS began
treating missing or incorrect SSNs as math errors, which was similar
to the way it had historically handled computational errors.  That
meant that IRS could adjust refunds claimed by persons filing paper
returns if the required SSNs were missing or incorrect.  Before 1997,
IRS could not make adjustments to a refund involving a missing or
incorrect SSN until it had gone through more time-consuming and
labor-intensive examination procedures.  As we reported in 1996,
those procedures limited the number of cases IRS could work and
resulted in millions of questionable refunds being issued. 

Most of the fraudulent refund claims identified by IRS involved the
Earned Income Credit (EIC), which is a refundable tax credit that is
available to low-income, working taxpayers.  In April 1997, IRS
released the results of its study of EIC noncompliance on tax returns
filed in 1995 (i.e., tax year 1994 returns).  The study showed that
of the $17.2 billion in EIC claims on tax year 1994 returns, about
$4.4 billion (25.8 percent) was estimated to be overclaims.  How much
of this $4.4 billion involved fraud, as opposed to less serious
noncompliance, is unknown.  The returns included in IRS' study were
filed before IRS was given increased authority to deal with missing
or invalid SSNs.  However, even after adjusting for the potential
effect of that increased authority, IRS determined that the rate of
EIC noncompliance would still be over 20 percent. 

Our work relating to the audit of IRS' financial statements also
showed that IRS' internal controls are not adequate to ensure that
only valid tax refunds are disbursed.  As a result, IRS has sometimes
issued refunds that were duplicated, based on erroneous or fraudulent
tax returns, or payable to IRS employees who had manipulated IRS'
records to generate invalid refunds payable to themselves. 

In response to IRS' findings, the Congress passed legislation that
gave IRS (1) new enforcement tools and (2) additional funding that
was specifically designated for EIC-related activities.  With those
new tools and funds, IRS, in 1998, began implementing a 5-year EIC
compliance initiative that involved several components directed at
issues that were identified by IRS' study as major sources of EIC
noncompliance.  For example, IRS initiated enforcement efforts that
focused on (1) cases where an EIC-qualifying child's SSN was used on
more than one tax return for the same tax year and (2) returns filed
by certain EIC claimants who claimed the head-of-household filing
status.  IRS also began a study of noncompliance among EIC claimants
who report income from self-employment, increased staffing in the
Questionable Refund Program, and issued procedures requiring tax
return preparers to exercise due diligence in preparing returns
involving EIC claims. 

As we reported in July 1998, most of IRS' efforts under the EIC
compliance initiative had not progressed far enough at the time we
completed our audit work for us to judge their effectiveness.  To
help assess the overall effectiveness of its efforts, IRS plans to do
annual studies of EIC compliance starting with a baseline study of
returns filed in 1998 (i.e., tax year 1997 returns), which is
currently under way.  Using the results of that baseline study and
subsequent years' studies, IRS plans to measure the rate of
compliance and improvement in that rate over time.  Those annual
studies should eventually provide the necessary data to assess the
impact of IRS' efforts on reducing the incidence of noncompliance
associated with the EIC.  Until sufficient data on the results and
impact of IRS' efforts are available through these studies and better
controls are instituted through systems modernization, which is still
in the planning stages, filing fraud should remain a high-risk area. 


      KEY CONTACTS
------------------------------------------------------- Chapter 1:1.10

James R.  White, Director
Tax Policy and Administration Issues
General Government Division
(202) 512-9110
[email protected]

Gregory D.  Kutz, Associate Director
Governmentwide Accounting and Financial
 Management Issues
Accounting and Information Management
 Division
(202) 512-9505
[email protected]


      THE NEED TO IMPROVE SECURITY
      CONTROLS OVER INFORMATION
      SYSTEMS
------------------------------------------------------- Chapter 1:1.11

For the past 5 years, we have reported significant and long-standing
weaknesses with controls over IRS' information systems.  Although IRS
has made progress in improving computer security, weaknesses in IRS'
computer security controls continue to place IRS' automated systems
and taxpayer data at serious risk to both internal and external
threats.  Such weaknesses could result in the denial of computer
services or in the unauthorized disclosure, modification, or
destruction of taxpayer data.  These weaknesses affect IRS' ability
to control physical access to its facilities and sensitive computing
areas, control electronic access to sensitive taxpayer data and
computer programs, prevent and detect unauthorized changes to
taxpayer data or computer software, and restore essential IRS
operations following an emergency or natural disaster. 

Similar to receipts and hard-copy taxpayer data, the need is clear
for IRS to implement strong and effective security over taxpayer data
contained in its information systems.  IRS relies on its information
systems to annually process more than 200 million taxpayer returns,
account for over $1.7 trillion collected in tax revenues, and issue
over $150 billion in tax refunds.  In addition, IRS systems contain
sensitive taxpayer information, such as name, address, SSN, and
details of taxpayers' financial holdings.  As we have previously
reported, similar information has been used to commit financial
crimes and identify fraud nationwide.  Commonly reported financial
crimes include using someone's personal information to fraudulently
establish credit, run up debt, and take over and deplete taxpayers'
financial accounts. 

We previously recommended that IRS complete implementation of an
effective servicewide computer security management program and
establish the appropriate safeguards and control measures to
adequately protect IRS' tax processing operations and taxpayer data. 
IRS agreed with our recommendations and stated that our conclusions
and recommendations were consistent with its ongoing actions to
improve systems security.  Until stronger security controls are in
place over its information systems, IRS' tax processing operations
remain vulnerable to disruption.  Furthermore, the sensitive taxpayer
data maintained by IRS could be disclosed to unauthorized
individuals, modified and improperly used, or destroyed, thereby
exposing taxpayers to financial crimes such as identity fraud. 


      KEY CONTACT
------------------------------------------------------- Chapter 1:1.12

Robert F.  Dacey, Director
Consolidated Audit and Computer
 Security Issues
Accounting and Information Management
 Division
(202) 512-3317
[email protected]


      THE NEED TO CONFRONT THE
      CHALLENGES PRESENTED BY THE
      YEAR 2000 COMPUTER PROBLEM
------------------------------------------------------- Chapter 1:1.13

IRS, like other Treasury offices and bureaus, is highly dependent on
information technology to carry out its mission.  Most of Treasury's
information systems were not designed to read dates beyond December
31, 1999.  As a result, IRS and the other Treasury offices and
bureaus are in the midst of a massive effort to make their
information systems Year 2000 compliant to avoid significant
disruptions to their operations. 

IRS accounts for the bulk of Treasury's Year 2000 undertaking.  Of
the estimated $1.9 billion earmarked for Treasury's Year 2000
program, $1.4 billion has been designated for IRS.  These cost
estimates include work needed for IRS' mission-critical information
systems, telecommunications networks, and buildings.  IRS' program
also represents one of the largest civilian Year 2000 efforts.  At
the outset, IRS faced significant challenges in making its systems
Year 2000 compliant.  In addition to the size of its effort, IRS
lacked a comprehensive inventory of information system assets,
particularly of its information systems infrastructure (i.e., systems
software, hardware, and telecommunications networks), and IRS' CIO
did not control all mission-critical assets. 

In a June 1998 report, we said that IRS had made more progress in
fixing its applications than its infrastructure.  Also, we said that
two major Year 2000 system replacement efforts were experiencing
schedule slippages.  In addition, we identified two risk areas for
IRS' Year 2000 effort--that is, the absence of an integrated master
schedule showing the interdependencies among the many Year 2000
efforts and a limited approach to contingency planning. 

IRS has begun taking action to address our concerns about a master
schedule.  We made no recommendations on that risk area in our June
1998 report.  Concerning the second risk area, we recommended that
the Commissioner take steps to broaden the contingency planning
effort to help ensure that IRS had adequately assessed the
vulnerabilities of its core business processes to potential Year 2000
system failures.  Specifically, we recommended that the Commissioner
(1) solicit input from the business functional areas to identify core
business processes and identify those processes that must continue in
the event of a Year 2000 failure, (2) map IRS' mission-critical
systems to those core business processes, (3) determine the impact of
information system failures on each core business process, (4) assess
existing contingency plans for their applicability to potential Year
2000 failures, and (5) develop and test contingency plans for core
business processes if existing plans are not appropriate. 

Since we issued our report, IRS has been taking actions to address
our recommendations.  IRS had originally planned to have its first
set of contingency plans by December 15, 1998; however, according to
its officials, IRS did not meet that milestone.  We plan to continue
monitoring IRS' progress in developing contingency plans.  If IRS is
unable to make its mission-critical systems Year 2000 compliant, IRS
could be rendered unable to properly and timely process tax returns,
issue refunds, correctly calculate interest and penalties,
effectively collect taxes, or prepare accurate financial statements
and other financial reports. 


      KEY CONTACT
------------------------------------------------------- Chapter 1:1.14

James R.  White, Director
Tax Policy and Administration Issues
General Government Division
(202) 512-9110
[email protected]


   CUSTOMS' FINANCIAL MANAGEMENT
   REMOVED FROM THE HIGH-RISK
   LIST, BUT CHALLENGES REMAIN
---------------------------------------------------------- Chapter 1:2

Since Customs was originally added to the high-risk list, it has
developed and implemented actions to address the problems that
contributed to its designation as a high-risk area.  Because Customs'
management has made progress in addressing its financial management
weaknesses, especially those related to assessing and collecting
revenues, we are removing Customs financial management from the
high-risk list.  However, similar to many other federal agencies,
Customs still faces certain challenges that are primarily related to
controlling access to sensitive data that are maintained in its
automated systems and maintaining complete and reliable information
in its core financial systems. 


      SIGNIFICANT IMPROVEMENTS AT
      CUSTOMS RESULTS IN REMOVAL
      FROM THE HIGH-RISK LIST
-------------------------------------------------------- Chapter 1:2.1

In 1991, we added Customs as a high-risk area because it had major
weaknesses in its management and organizational structure that
diminished its ability to detect trade violations on imported cargo;
collect applicable duties, taxes, fees, and penalties; control
financial resources; and report on financial operations.  In February
1995, we reported that Customs had taken several actions in an effort
to reduce risks in the general management area.  For instance,
Customs revised its 1993 5-year plan to clarify and set priorities
for its trade enforcement objectives; improved controls over the
identification and collection of duties, taxes, fees, and penalties;
and embarked on a reorganization plan to correct institutional
problems that were related to cooperation and coordination among its
programmatic units and to ensure consistency in policy
implementation. 

We have made several recommendations to Customs to help promote
better financial management and strengthen its controls over
assessing and collecting revenues.  We made these recommendations
realizing that most of these problems would require long-term efforts
to effectively plan and implement solutions to address the
long-standing root causes.  Over the past several years, Customs has
continually shown a commitment to improving its financial management
by implementing significant corrective actions to address our
recommendations.  Actions that have been implemented include
statistically sampling compliance of commercial importations through
ports of entry to better focus enforcement efforts; implementing a
compliance measurement program (CMP) for bonded warehouses;\3
programming the Automated Commercial System in fiscal year 1995 to
detect any drawback claims\4 that exceeded the total amount of duty
and tax paid on related import entries; and aggressively pursuing the
collection of delinquent receivables.  Another indicator of Customs'
progress in the financial management area is its ability to receive
unqualified audit opinions on its fiscal years 1996 and 1997
financial statements. 

In addition to these actions, according to Customs officials, Customs
has several initiatives under way to improve its controls over
assessing and collecting revenues.  For example, in September 1998,
Customs began implementing a nationwide in-bond shipments CMP that is
intended to provide some assurance over compliance of in-bond
shipments through random examinations of such items.\5 The program
involved system changes for in-bond shipments as well as the addition
of compliance measurement inspections for randomly selected in-bond
shipments.  Additionally, Customs plans to implement a CMP for
foreign trade zones\6 and is reviewing drawbacks and drawback claims
for quality assurance. 

Given the significant improvement efforts, including those related to
assessing and collecting revenues, undertaken by Customs since it was
first added to the high-risk list, we are removing our high-risk
designation. 


--------------------
\3 Foreign merchandise can be placed into bonded warehouses without
the assessment of duties, taxes, and fees on the goods until the
goods are released into the commerce of the United States. 

\4 Drawback claims are refunds of duties and taxes paid on imported
goods that are subsequently exported or destroyed.



\5 In-bond shipment refers to goods that are authorized, by law, to
be moved within the United States before release or export without
appraisement or classification. 

\6 Foreign trade zones are geographic areas, designated in accordance
with the Foreign Trade Zone Act of 1934, where merchants may bring
domestic or foreign merchandise for storage, exhibition,
manipulation, manufacturing, assembly, or other processing without
subjecting them to formal Customs entry procedures and payment of
duties.  Foreign goods held in foreign trade zones are not assessed
duties, taxes, or fees until the goods are released into the commerce
of the United States. 


      WEAKNESSES RELATING TO
      INTERNAL CONTROLS OVER DATA
      IN AUTOMATED SYSTEMS
-------------------------------------------------------- Chapter 1:2.2

Similar to many other federal agencies, Customs still faces certain
challenges that are primarily related to controlling access to
sensitive data that are maintained in its automated systems and
maintaining complete and reliable information in its core financial
systems.  In its March 1998 audit report on Customs' fiscal year 1997
financial statements, the Treasury Office of Inspector General (OIG)
reported the following material weaknesses in internal controls:\7
(1) core financial management systems need to be improved and
integrated and (2) adherence to systems development standards for
certain financial management systems was lacking.  The Treasury OIG
also identified reportable conditions, including (1) computer access
vulnerabilities that could allow for unauthorized modification and
deletion of production programs, systems software, and data in
Customs' systems and (2) disaster recovery capabilities that were in
need of improvement.\8

We and others have made several recommendations to Customs that are
related to the access of its computer systems and to the improvement
and integration of its core financial management systems.  According
to its officials, Customs has the following initiatives under way to
address these recommendations:  (1) implementing system enhancements
to its Seized Assets and Case Management Tracking System (SEACATS);
(2) continuing its efforts to replace all existing nonrevenue-related
financial management systems with a single integrated system; (3)
taking additional corrective actions on computer security control
weaknesses, such as completing periodic reviews of user access
capabilities and limiting users' access to operating system
capabilities; (4) developing plans to conduct a business impact and
recovery requirements analysis to identify critical systems and
applications in the event of a systems disaster; and (5) pending the
receipt of funding, establishing a disaster recovery site in the year
2000. 

We believe that Customs' improvement efforts are appropriately
focused, but its management must provide the continuing support
needed to ensure that these important actions are properly
implemented and that related problems do not recur.  As part of its
annual audit of Customs' financial statements, the Treasury OIG plans
to update the status of Customs' internal control weaknesses.  Also,
we will continue to monitor Customs' progress in addressing these
areas. 


--------------------
\7 A material weakness is a condition in which the design or
operation of one or more of the internal control components does not
reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material to the financial
statements may occur and not be detected promptly by employees in the
normal course of performing their duties. 

\8 Reportable conditions involve matters coming to the auditor's
attention relating to significant deficiencies in the design or
operation of internal controls that, in the auditor's judgment, could
adversely affect an entity's ability to (1) safeguard assets against
loss from unauthorized acquisition, use, or disposition; (2) ensure
the execution of transactions in accordance with management's
authority and in accordance with laws and regulations; or (3)
properly record, process, and summarize transactions to permit the
preparation of the financial statements or to maintain accountability
for assets. 


      WEAKNESSES RELATING TO THE
      DEVELOPMENT OF CUSTOMS'
      AUTOMATED COMMERCIAL
      ENVIRONMENT SYSTEM
-------------------------------------------------------- Chapter 1:2.3

Our recent work shows that an incomplete systems architecture has
hindered Customs' ability to manage information technology
investments, particularly large, mission-critical systems such as its
Automated Commercial Environment (ACE) system.  Pending funding,
Customs plans to use ACE to replace the current system used for
collecting, disseminating, and analyzing import-related data and
ensuring the proper collection and allocation of revenues totaling
about $19 billion annually.  Customs initiated ACE in 1994.  In
January 1998, Customs estimated that it would cost $1.15 billion to
develop, operate, and maintain ACE over the 15-year period between
fiscal years 1994 and 2008.  As of the end of fiscal year 1998,
Customs reported that it had spent $62.1 million on ACE. 

In May 1998, we reported that Customs' incomplete enterprise
information systems architecture and limitations in its plans for
enforcing compliance with an architecture, once one is completed,
impair the agency's ability to effectively and efficiently develop or
acquire operational systems, such as ACE, and to maintain existing
systems.  Furthermore, because Customs' incomplete architecture is
not based on a thorough understanding of its enterprisewide
functional and information needs, Customs did not have adequate
assurance that its information systems, such as ACE, would optimally
support its ability to (1) fully collect and accurately account for
billions of dollars in annual federal revenue and (2) allow for the
expeditious movement of legal goods and passengers across our
nation's borders while preventing and detecting the movement of
illegal goods and passengers.  We recommended that Customs follow
through on plans to complete its enterprise information systems
architecture and require that information systems comply with the
architecture, unless a thorough analysis supports a waiver.  Customs
agreed with our recommendations and is in the process of completing
its enterprise systems architecture and instituting a requirement
that systems comply with the architecture. 


      KEY CONTACTS
-------------------------------------------------------- Chapter 1:2.4

Gary T.  Engel, Associate Director
Governmentwide Accounting and Financial
 Management Issues
Accounting and Information Management
 Division
(202) 512-3406
[email protected]

Jack L.  Brock, Jr., Director
Governmentwide and Defense Information
 Systems
Accounting and Information Management
 Division
(202) 512-6240
[email protected]


   FINANCIAL MANAGEMENT CHALLENGES
   AFFECTING FMS
---------------------------------------------------------- Chapter 1:3

FMS is the government's financial manager, central disburser, and
collections agency as well as its accountant and reporter of
financial information.  FMS faces challenges in addressing financial
management issues related to preparation of the government's
consolidated financial statements (CFS), computer system security,
and FMS' implementation of its requirements under the Debt Collection
Improvement Act of 1996 (DCIA).  We will continue to monitor FMS'
efforts to implement its requirements under DCIA.  In addition, we
are evaluating FMS' efforts to address the other matters during our
ongoing audit of the government's fiscal year 1998 CFS. 


      THE NEED TO ADDRESS ISSUES
      RELATED TO PREPARING
      RELIABLE CONSOLIDATED
      FINANCIAL STATEMENTS FOR THE
      GOVERNMENT
-------------------------------------------------------- Chapter 1:3.1

In our March 1998 audit report on the government's fiscal year 1997
CFS, we reported that problems with fundamental recordkeeping,
incomplete documentation, and weak internal controls prevent the
government from accurately reporting a large portion of assets,
liabilities, and costs.  These deficiencies, as described in the
following paragraphs, affect the reliability of the CFS and much of
the underlying information.  As preparer of the CFS, FMS has a key
responsibility to work with agencies to address some of these
problems, including the government's inability to (1) properly
account for billions of dollars of basic transactions, especially
those between governmental entities; (2) ensure that the information
in the CFS is consistent with agencies' financial statements; and (3)
ensure that all disbursements are properly recorded. 

To make the CFS balance, FMS recorded a net $12 billion item on the
Statement of Changes in Net Position, which it labeled unreconciled
transactions.  FMS attributed this out-of-balance condition, which is
the net of more than $100 billion in unreconciled transactions, to
the government's inability to properly identify and eliminate
transactions between federal government entities and to agency
adjustments that affected net position.  Agencies' accounts can be
out of balance with each other, for example, when one or the other of
the affected agencies does not properly record transactions with
another agency or the agencies record the transactions in different
time periods.  These out-of-balance conditions can be detected and
corrected by instituting procedures for reconciling transactions
between agencies.  Generally, such reconciliations are not performed. 
These unreconciled transactions result in material misstatements of
assets, liabilities, revenues, and/or costs.  Until effectively
corrected, this problem could continue to prevent us from being able
to form an opinion on the reliability of the CFS. 

The government cannot ensure that the information in the CFS is
consistent with agency financial statements.  FMS relies on agencies
to submit data needed to prepare the CFS; however, (1) several
agencies were unable to provide assurance that amounts submitted to
FMS agreed with their agency financial statements; (2) many agencies
needed to make significant subsequent adjustments to their
submissions in an effort to properly classify amounts in the CFS; and
(3) we found misstatements, which FMS corrected, that totaled several
hundred billion dollars in agency-submitted information and were
primarily due to mistakes in coding, incorrect use of general ledger
accounts, and misallocations among the net cost categories. 

In our March report, we noted that several major agencies were not
effectively reconciling their records with FMS' records of cash
disbursements, resulting in the government's being unable to ensure
that all disbursements are properly recorded.  In our related report
issued in October 1998, we indicated that auditors depend on FMS for
support in fulfilling their reconciliation responsibilities.  Several
agencies reported problems with FMS' reconciliation processes and the
assistance it provides agencies in carrying out these processes.  We
found that FMS had taken some steps that attempt to improve the
reconciliation process and was considering other actions to improve
its assistance to agencies.  We recommended that FMS work with
agencies and provide sufficient resources to ensure that the
reconciliation problems are fully addressed. 

FMS has developed action plans and is working with us, OMB, and key
agencies to address the noted problems.  However, fixing these
problems represents a significant challenge because of the size and
complexity of the government and the discipline needed to comply with
new accounting and reporting requirements.  Meeting these challenges
will require a significant commitment of agencies' and FMS'
management as well as adequately trained staff and effective
automated financial systems. 


      THE NEED TO IMPROVE COMPUTER
      SECURITY CONTROLS
-------------------------------------------------------- Chapter 1:3.2

FMS faces considerable challenges in overseeing the development,
implementation, and operation of its entitywide information systems,
including the establishment of appropriate computer controls.  FMS
maintains a wide array of financial and information systems to help
it process and reconcile money disbursed and collected by the various
government agencies.  Multiple banking, collection, and disbursement
systems are also used to process agency transactions, capture
relevant data, transfer funds to and from Treasury accounts, and
facilitate the reconciliation of these transactions.  In addition to
operating six regional financial centers, FMS relies on a network of
contractors and the Federal Reserve Banks to help carry out its
financial management responsibilities. 

In October 1998, we reported that general computer control weaknesses
at FMS and its contractor data centers place the data maintained in
FMS' financial systems at significant risk of unauthorized
modification, disclosure, loss, or impairment.\9 The weaknesses we
found included (1) inappropriate access to computer programs, data,
and equipment; (2) inadequate segregation of duties; (3) improper
application software development and change control procedures; and
(4) incomplete or untested service continuity and contingency plans. 

Weak controls over FMS' computer systems place billions of dollars of
payments and collections at risk of fraud.  These weaknesses existed
primarily because FMS does not have an effective entitywide computer
security planning and management program to ensure that (1) computer
controls are working and are reliable, (2) established policies and
procedures are followed, (3) errors or fraudulent transactions are
detected in a timely manner, and (4) identified deficiencies are
promptly corrected. 

Because of the large volume of transactions, the significance of the
related amounts involved, and the number of weaknesses identified at
the FMS data centers visited, we consider FMS' general computer
control problems a material weakness.  According to Treasury
officials, FMS has planned or already taken actions to correct many
of the individual weaknesses that we identified and communicated to
FMS management during our testing.  Although FMS is continuing to
correct weaknesses we identified, FMS cannot ensure on an ongoing
basis that weaknesses will be promptly detected and corrected until
it has an effective entitywide security management program.  Such a
program, if implemented effectively across the organization, would go
a long way toward helping FMS identify and promptly address its
computer control weaknesses. 


--------------------
\9 On July 31, 1998, we issued a "Limited Official Use" report to the
Secretary of the Treasury detailing weaknesses in FMS' general
controls.  The October 1998 version of the excerpted report for
public release, Financial Management Service:  Areas for Improvement
in Computer Controls (GAO/AIMD-99-10, Oct.  20, 1998), provided a
general summary of the weaknesses we identified and the
recommendations we made. 


      THE NEED TO EFFECTIVELY
      IMPLEMENT THE DEBT
      COLLECTION IMPROVEMENT ACT
-------------------------------------------------------- Chapter 1:3.3

DCIA provided significant opportunities for improving the
government's ability to collect nontax delinquent debt.  According to
Treasury, the 24 executive branch agencies that are to comply with
the Chief Financial Officers Act (CFO) of 1990 accounted for 99
percent of federal expenditures and held more than 90 percent ($43.1
billion) of federal nontax debt that was more than 180 days
delinquent as of April 1998.  Many of DCIA's provisions grant federal
agencies additional authority to enhance their debt collection
practices, and several key provisions affect Treasury.\10
Specifically, DCIA requires that agencies transfer most of their
nontax debt that has been delinquent for more than 180 days to
Treasury for collection through its offset or cross-servicing
programs.  Under the offset program, Treasury uses amounts that the
federal government owes delinquent federal debtors to satisfy any of
the debtors' delinquent debt owed to a federal agency.  For example,
an income tax refund payment made by IRS may be offset to pay a
taxpayer's delinquent student loan debt.  Cross-servicing involves
the collection of debts through centralized debt collection centers
established by Treasury or private collection agencies.  DCIA also
requires the agencies to report information to Treasury annually on
the debts owed to them and their efforts to collect them.  In turn,
Treasury is required to report this information to the Congress
annually.  By April 1999, Treasury is to provide a one-time report to
the Congress on the collection services provided by the Department
and other entities to collect federal debts. 

The Congress has raised concerns about the slow pace at which DCIA
has been implemented by Treasury and the other agencies with related
responsibilities and the modest amounts actually collected since
DCIA's enactment.  As we testified in June 1998, our work at FMS has
shown that because of systems development problems, FMS does not have
a system capable of matching all federal payments against nontax
delinquent debts owed the government.  In addition, FMS' system
development problems have caused delays in consolidating the
administrative, tax refund, and federal salary offset programs, and
thus any debt collection efficiencies envisioned by such a
consolidation have not been realized.  Our work has also identified
areas in which actions by FMS are needed to reduce the risk of costly
system modifications and further delays in the Treasury Offset
Program (TOP).  FMS has informed us that it has taken actions to
address these areas.  According to FMS officials, enhancements to the
TOP system to incorporate additional payment types (e.g., Social
Security benefit payments) are planned or ongoing, and the system has
been modified to accommodate the tax refund offset program.  However,
FMS still faces challenges in effectively fulfilling its
responsibilities under DCIA, including further modifying the TOP
system.  A sustained commitment by FMS' management will be needed to
ensure that these challenges are successfully met. 


--------------------
\10 The Secretary of the Treasury assigned FMS primary responsibility
to fulfill Treasury's responsibilities under DCIA. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:3.4

Gary T.  Engel, Associate Director
Governmentwide Accounting and Financial
 Management Issues
Accounting and Information Management
 Division
(202) 512-3406
[email protected]


   DEPARTMENTWIDE FINANCIAL
   MANAGEMENT WEAKNESSES
---------------------------------------------------------- Chapter 1:4

A key to Treasury's ability to effectively carry out its mission is
sound financial management, including information about the
government's finances that is routinely available, accurate, and
reliable.  Without accurate and reliable financial systems and
information, Treasury cannot be sure that the information it has is
sufficient to manage its day-to-day operations, measure results of
operations, account for resources, collect taxes and other debts owed
the government, or safeguard assets.  The requirements of the CFO Act
and other legislation and recommendations that we and others made
have provided the impetus for ongoing efforts to improve Treasury's
financial management.  Although progress has been made, some
solutions to Treasury's financial management weaknesses require
longer term actions and technological changes to information systems. 
The Treasury OIG is evaluating Treasury's efforts to address these
financial management weaknesses during its ongoing audit of the
Department's fiscal year 1998 Departmentwide financial statements. 
We will continue to monitor Treasury's actions in these areas. 


      WEAKNESSES EXIST IN
      TREASURY'S ASSET FORFEITURE
      PROGRAM
-------------------------------------------------------- Chapter 1:4.1

Treasury's asset forfeiture program was on our original high-risk
list in 1990 because the program did not adequately focus on managing
the items seized.\11 We identified and reported, in December 1992,
major operational problems related to the management and disposition
of seized and forfeited property.\12 We also reported that Customs
had initiated corrective actions to address these problems.  In our
February 1995 high-risk report, we reported that although some
management and systems changes had improved program operations,
significant problems with seized property management remained. 

Since our 1995 report, Customs has undertaken actions to address
these problems, including continuing to upgrade existing storage
facilities and implementing a new seized property inventory system,
but some challenges remain.  In addition to these challenges,
improvements are needed in Treasury's accountability and reporting
over seized and forfeited property.  Furthermore, we have reported
that the Department of Justice and Treasury need to consolidate their
separate, but similar, seized asset management and disposition
functions.  As a result of the remaining weaknesses, the sensitive
nature of the asset forfeiture program, and the high visibility that
the program has experienced, Treasury's asset forfeiture program
continues to be designated as a high-risk area. 


--------------------
\11 The Congress established the Department of the Treasury
Forfeiture Fund in October 1992 to supersede the Customs Fund. 
Customs is responsible for managing property seized by Treasury law
enforcement agencies. 

\12 Seized property includes, among other things, illegal drugs that
have no resale value to the government.  These items are subject to
forfeiture and are typically held by the seizing agency until they
are approved for destruction. 


      IMPROVEMENTS MADE IN
      CUSTOMS' ACCOUNTABILITY OVER
      SEIZED AND FORFEITED
      PROPERTY, BUT CHALLENGES
      REMAIN
-------------------------------------------------------- Chapter 1:4.2

We have made several recommendations relating to improving Customs'
accountability and stewardship over property seized.  Specifically,
we have recommended that Customs improve the (1) physical security at
its locations that are used to store seized property, (2) reliability
of the information maintained in its seized property tracking system,
and (3) controls over access to critical and sensitive data and
computer programs maintained in its systems that account for seized
property and law enforcement operations. 

Customs has made significant enhancements and is in the process of
making other enhancements to improve security over seized assets and
the reliability of information maintained in the information systems
that it uses to track the seized assets.  However, Customs still
needs to (1) obtain the remaining funding for improvements to storage
facilities, (2) complete enhancements to SEACATS, and (3) fully
correct identified weaknesses in its computer controls over the
system for law enforcement activities. 

In May 1997, we reported that Customs had recently built 6 new
storage facilities in locations it determined to be the most
vulnerable and had improved security at 28 other locations by
installing various security devices, such as motion sensors and
surveillance cameras.  Also, Customs told us that four storage
facilities, which are to be located in remote areas where significant
amounts of illegal drugs are routinely seized, were in the
preconstruction phase, but funding for construction had not been
provided.  We also reported in May 1997 that security devices that
had been procured to upgrade numerous locations had not been placed
in operation because the funding necessary to install them had not
been received. 

More recently, Customs said that the General Services Administration
has built one of the planned storage facilities and that Customs now
leases it.  However, Customs is awaiting the final approval of
funding for the remaining three storage facilities.  Also, according
to Customs officials, Customs has now received partial funding for
the installation of security devices, has installed them at several
locations, and is awaiting the final approval for the remaining
funds. 

Regarding the reliability of information maintained in the
information systems used to track seized assets, Customs has
undertaken several improvement efforts.  For example, Customs has
conducted annual nationwide physical inventories of its seized
property and implemented additional policies and procedures.  In
addition, Customs has developed and implemented a new system called
SEACATS.  However, in its fiscal year 1997 audit report, the Treasury
OIG reported that SEACATS experienced numerous data conversion
problems.  As a result, SEACATS did not contain accurate and
sufficient data that could be relied upon to prepare the required
analysis of changes in forfeited and seized currency and property
disclosures reported by Customs.  To address the problems, Customs
had to develop postconversion programs to process and correct
erroneous data, conduct exhaustive case file reviews, and perform a
complete physical inventory.  On the basis of the preliminary results
of work performed by the Treasury OIG for its audit of Customs'
fiscal year 1998 financial statements, Customs appears to have
corrected many of the early implementation problems it experienced
with the property information in SEACATS.  However, Customs officials
acknowledged that additional enhancements to SEACATS are necessary
for the system to perform as originally envisioned.  For example,
Customs must still obtain currency information from outside the
system to compile financial statement disclosures. 

In addition, the Treasury OIG reported that although improvements to
computer controls have been made during fiscal year 1997, controls
for the computer application system for law enforcement activities
showed that this system continued to be vulnerable to unauthorized
access.  Since the law enforcement system is a source of key data to
seizure activity recorded in SEACATS, this vulnerability could affect
the reliability of information in SEACATS.  Customs recently
contracted for a review of electronic data processing controls for
SEACATS, which upon completion will be reviewed by the Treasury OIG. 


      WEAKNESSES IN TREASURY'S
      ACCOUNTABILITY AND REPORTING
      OVER SEIZED AND FORFEITED
      PROPERTY
-------------------------------------------------------- Chapter 1:4.3

Treasury and its OIG have reported weaknesses in the Department's
accountability and reporting over seized and forfeited property. 
Specifically, Treasury reported material weaknesses related to seized
property in the Federal Managers' Financial Integrity Act section of
its fiscal year 1997 Accountability Report.\13 In addition, although
the Treasury Forfeiture Fund received an unqualified audit opinion on
its fiscal year 1997 financial statements, the Fund's auditor cited
three material weaknesses in its report on internal controls:  (1)
the Fund's accounting records were primarily maintained on the cash
basis of accounting; (2) the Fund's general ledger did not record all
balances and transactions that were reflected in the financial
statements; and (3) as previously noted, SEACATS did not contain
accurate and sufficient data that could be relied on to prepare the
analysis of changes in forfeited and seized currency and property
without substantial manual manipulation and reconciliation. 

Furthermore, in its March 1998 report on Treasury's fiscal year 1997
financial statements, the Treasury OIG reported as a Departmentwide
reportable condition the need for Treasury to improve accountability
and reporting over its seizure and forfeiture activities. 
Specifically, in addition to the Treasury Forfeiture Fund internal
control problems, the Treasury OIG reported that the Department's law
enforcement bureaus used different inventory tracking systems that
collected and accounted for seized property and forfeited assets
differently and used slightly different data definitions.  In
addition, Treasury could not provide all of the required disclosure
information for certain IRS and Secret Service seizure and forfeiture
activity that was outside the Executive Office for Asset Forfeiture's
responsibility. 

According to a Treasury official, Treasury is developing a plan that
includes actions designed to address the weaknesses previously noted. 
The action plan is to (1) include a description of the problems
identified, prioritize the problems, and propose solutions and (2)
discuss plans to develop an integrated tracking system that will
provide required financial reporting disclosures and will be used by
the Treasury bureaus and integrated with SEACATS.  As part of its
audit of Treasury's fiscal year 1998 Departmentwide financial
statements, the Treasury OIG plans to update the status of the asset
forfeiture program weaknesses.  We will also continue to monitor
Treasury's progress in addressing these areas. 


--------------------
\13 This text refers to the Department's third annual Accountability
Report for fiscal year 1997, which describes Treasury's missions and
goals and demonstrates how its financial performance is tied to the
Department's broader objectives. 


      CONSOLIDATION OF TREASURY'S
      AND JUSTICE'S SEIZED ASSET
      MANAGEMENT AND DISPOSITION
      FUNCTIONS NEEDED
-------------------------------------------------------- Chapter 1:4.4

Justice and Treasury continue to operate two similar but separate
seized asset management and disposal programs without plans for
consolidation, despite legislation requiring them to develop and
maintain a joint plan to consolidate postseizure administration of
certain properties.  In June 1991, we recommended consolidating the
management and disposition of all noncash seized property and
designating Justice's Marshals Service as the custodian.  We
estimated that program administration costs could be reduced if
Justice and Customs consolidated the postseizure management and
disposition of such items.  We also reported that consolidation would
likely result in lower contractor costs due to economies of scale. 
We still believe that consolidation of asset management and
disposition functions makes sense.  We encourage Treasury and Justice
to continue to identify areas of duplication and pursue options for
consolidation. 


      WEAKNESSES EXIST IN COMPUTER
      SYSTEMS SECURITY
-------------------------------------------------------- Chapter 1:4.5

In its auditors' report on Treasury's fiscal year 1997 Departmentwide
financial statements, the Treasury OIG reported as a material
weakness that computer security controls, which are designed to
safeguard data, protect computer application programs, prevent system
software from unauthorized access, and ensure continued computer
operations, need to be strengthened.  Although some improvements have
been made, computer control weaknesses in financial systems access
and physical security controls at certain bureaus reported by the
Treasury OIG in previous years continued to exist during fiscal year
1997 and additional weaknesses were identified.  These weaknesses
primarily involve IRS, Customs, and FMS and are discussed in each
bureau's separate section of this report. 


      WEAKNESSES RELATING TO
      INTEGRATED FINANCIAL
      MANAGEMENT SYSTEMS
-------------------------------------------------------- Chapter 1:4.6

In its auditors' report on Treasury's fiscal year 1996 Departmentwide
financial statements, the Treasury OIG reported that Treasury's lack
of integrated financial management systems was a material weakness. 
An integrated system would perform basic accounting functions and
provide integrated budget, financial, and performance information
that managers could reliably use to make decisions.  The auditors
reported that several component entities maintained separate systems
to support program and financial management and that these
nonintegrated systems could not be relied on to provide complete and
accurate information without extensive manual procedures, analyses,
and reconciliations.  The Treasury OIG had recommended that the
Treasury Chief Financial Officers Council develop a strategy for
improving the level of financial systems integration within and among
the Department's bureaus.\14

The Treasury OIG reported in its most recent audit report, which
covers fiscal year 1997, that the Treasury CFO Council had initiated
a project to define core financial data requirements, evaluate
current systems capabilities, and develop recommendations for
implementation of a Departmentwide data stewardship process. 
However, the Treasury OIG also reported that financial system
integration issues continued to exist. 


--------------------
\14 The Treasury CFO Council was established in July 1994 to help
ensure that all Treasury financial management systems provide timely,
useful, and auditable information that incorporates financial and
program performance measurements into the planning, budgeting, and
reporting process.  The Council comprises CFOs and deputy CFOs from
all Treasury offices and bureaus. 


      WEAKNESSES RELATING TO THE
      PROCESS USED TO PREPARE
      DEPARTMENTWIDE FINANCIAL
      STATEMENTS
-------------------------------------------------------- Chapter 1:4.7

In its auditors' report on Treasury's fiscal year 1996 Departmentwide
financial statements, the Treasury OIG reported a material weakness
related to deficiencies in the Department's financial statement
preparation process.  In its report on the fiscal year 1997
Departmentwide financial statements, the Treasury OIG reported that
progress had been made in some areas, but a material weakness
continued to exist related to the oversight and review of the
Department's process to prepare the Departmentwide financial
statements.  For example, the bureaus submitted financial data that
did not conform to the format requested by the Deputy CFO and
contained inconsistencies, incorrect classifications, and inaccurate
reporting of certain transactions.  In addition, intradepartmental
account balances and transactions reported by the bureaus that need
to be eliminated during the financial statement preparation process
were out of balance in excess of $100 million.  Furthermore, the
draft fiscal year 1997 Accountability Report provided to the Treasury
OIG contained material discrepancies and omissions that should have
been detected and addressed in the supervisory review process.  The
Treasury OIG reported that, if not mitigated by actions that required
a significant amount of the Department's and Treasury OIG's
resources, these weaknesses may have caused material misstatements in
the Departmentwide financial statements.  According to Treasury
officials, Treasury is taking actions to address these problems.  For
example, Treasury is making enhancements to its system used in the
financial statement preparation process that it believes will improve
the system's consolidating, reporting, and analyzing functions. 


      WEAKNESSES RELATING TO THE
      COMPLIANCE OF FINANCIAL
      MANAGEMENT SYSTEMS WITH
      FEDERAL REQUIREMENTS
-------------------------------------------------------- Chapter 1:4.8

The Federal Financial Management Improvement Act of 1996 (FFMIA)
requires auditors performing financial audits to report whether
agencies' financial management systems substantially comply with
federal accounting standards, financial systems requirements, and the
government's standard general ledger at the transaction level.  In
its fiscal year 1997 auditors' report on compliance with laws and
regulations, the Treasury OIG identified instances where the
Department's financial management systems did not substantially
comply with the requirements detailed in FFMIA.  Treasury reported
that it had various actions planned to correct the problems.  For
example, according to a Treasury official, one of its bureaus
recently implemented a new system that complies with FFMIA
requirements. 


      KEY CONTACT
-------------------------------------------------------- Chapter 1:4.9

Gary T.  Engel, Associate Director
Governmentwide Accounting and Financial
 Management Issues
Accounting and Information Management
 Division
(202) 512-3406
[email protected]


   FURTHER ACTION NEEDED
---------------------------------------------------------- Chapter 1:5

The Department of the Treasury has embraced efforts by the Congress,
us, and other stakeholders to present better information on the
results of the Department's programs and activities.  In doing so,
Treasury has sought to link its Departmentwide strategic goals to the
goals and missions of its bureaus and offices.  Along the same lines,
Treasury has taken steps to devise strategies for achieving its goals
and on how it can best measure performance.  This is not necessarily
an easy task because data on program results are typically more
difficult and resource intensive to obtain than data on program
activities.  In some instances, Treasury lacks information systems
that are necessary to obtain such data.  However, it is of vital
importance for the Department to be accountable to its stakeholders
at times when resources are limited and public demands are high. 
Like other parts of the federal government, Treasury needs to improve
its ability to apply the provisions of certain statutes, such as the
(1) Results Act; (2) CFO Act, as expanded by the Government
Management Reform Act; and (3) Clinger-Cohen Act.  Collectively,
these statutes hold substantial promise for making Treasury a more
accountable and effective part of the federal government. 


RELATED GAO PRODUCTS
============================================================ Chapter 2


   IRS
---------------------------------------------------------- Chapter 2:1


      SYSTEMS MODERNIZATION
-------------------------------------------------------- Chapter 2:1.1

Tax Systems Modernization:  Blueprint Is a Good Start But Not Yet
Sufficiently Complete to Build or Acquire Systems
(GAO/AIMD/GGD-98-54, Feb.  24, 1998). 

High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, Feb.  1997). 

IRS Operations:  Critical Need to Continue Improving Core Business
Practices (GAO/T-AIMD-96-188, Sept.  10, 1996). 

Tax Systems Modernization:  Actions Underway But Management and
Technical Weaknesses Not Yet Corrected (GAO/T-AIMD-96-165, Sept.  10,
1996). 

Internal Revenue Service:  Business Operations Need Continued
Improvement (GAO/AIMD-96-152, Sept.  9, 1996). 

Tax Systems Modernization:  Cyberfile Project Was Poorly Planned and
Managed (GAO/AIMD-96-140, Aug.  29, 1996). 

Tax Systems Modernization:  Actions Underway but IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June
7, 1996). 

Security Weaknesses at IRS' Cyberfile Data Center (GAO/AIMD-96-85R,
May 9, 1996). 

Tax Systems Modernization:  Management and Technical Weaknesses Must
Be Overcome to Achieve Success (GAO/T-AIMD-96-75, Mar.  26, 1996). 

Tax Systems Modernization:  Management and Technical Weaknesses Must
Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July
26, 1995). 


      IRS FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 2:1.2

Internal Revenue Service:  Physical Security Over Taxpayer Receipts
and Data Needs Improvement (GAO/AIMD-99-15, Nov.  30, 1998). 

Excise Taxes:  Internal Control Weaknesses Affect Accuracy of
Distributions to the Trust Funds (GAO/AIMD-99-17, Nov.  9, 1998). 

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

Internal Revenue Service:  Composition and Collectibility of Unpaid
Assessments (GAO/AIMD-99-12, Oct.  29, 1998). 

Management Letter:  IRS' Accounting Procedures and Internal Controls
(GAO/AIMD-98-211R, Sept.  2, 1998). 

Internal Revenue Service:  Remaining Challenges to Achieve Lasting
Financial Management Improvements (GAO/T-AIMD/GGD-98-138, Apr.  15,
1998). 

Financial Audit:  Examination of IRS' Fiscal Year 1997 Custodial
Financial Statements (GAO/AIMD-98-77, Feb.  26, 1998). 

IRS Management:  Improvement Needed in High-Risk Areas
(GAO/T-GGD-97-79, Apr.  14, 1997). 

IRS High-Risk Issues:  Modernization of Processes and Systems
Necessary to Resolve Problems (GAO/T-GGD-97-52, Mar.  4, 1997). 


      FEDERAL TAXES RECEIVABLE AND
      OTHER UNPAID ASSESSMENTS
-------------------------------------------------------- Chapter 2:1.3

Tax Administration:  IRS' Use of Enforcement Authorities to Collect
Delinquent Taxes (GAO/T-GGD-97-155, Sept.  23, 1997). 

Issues Affecting IRS' Collection Pilot (GAO/GGD-97-129R, July 18,
1997). 


      FILING FRAUD
-------------------------------------------------------- Chapter 2:1.4

Earned Income Credit:  IRS' Tax Year 1994 Compliance Study and Recent
Efforts to Reduce Non-Compliance (GAO/GGD-98-150, July 28, 1998). 

Earned Income Credit:  IRS' 1995 Controls Stopped Some Noncompliance,
But Not Without Problems (GAO/GGD-96-172, Sept.  18, 1996). 

Tax Administration:  Electronic Filing Fraud (GAO/T-GGD-94-89, Feb. 
10, 1994). 

Tax Administration:  IRS Can Improve Controls Over Electronic Filing
Fraud (GAO/GGD-93-27, Dec.  30, 1992). 


      INFORMATION SYSTEMS SECURITY
-------------------------------------------------------- Chapter 2:1.5

IRS Systems Security:  Although Significant Improvements Made,Tax
Processing Operations and Data Still at Serious Risk (GAO/AIMD-99-38,
Dec.  14, 1998). 

IRS Systems Security:  Tax Processing Operations and Data Still at
Risk Due to Serious Weaknesses (GAO/AIMD-97-49, Apr.  8, 1997). 


      YEAR 2000
-------------------------------------------------------- Chapter 2:1.6

Internal Revenue Service:  Impact of the IRS Restructuring and Reform
Act on Year 2000 Efforts (GAO/GGD-98-158R, Aug.  4, 1998). 

IRS' Year 2000 Efforts:  Business Continuity Planning Needed for
Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). 

IRS' Year 2000 Efforts:  Status and Risks (GAO/T-GGD-98-123, May 7,
1998). 


   CUSTOMS
---------------------------------------------------------- Chapter 2:2


      CUSTOMS FINANCIAL MANAGEMENT
-------------------------------------------------------- Chapter 2:2.1

Customs Service Modernization:  Architecture Must Be Complete and
Enforced to Effectively Build and Maintain Systems (GAO/AIMD-98-70,
May 5, 1998). 


   FMS
---------------------------------------------------------- Chapter 2:3

Financial Management Service:  Areas for Improvement in Computer
Controls (GAO/AIMD-99-10, Oct.  20, 1998). 

Financial Audit:  Issues Regarding Reconciliations of Fund Balances
With Treasury Accounts (GAO/AIMD-99-3, Oct.  14, 1998). 

Debt Collection Improvement Act:  Significant Challenges Remain to
Effectively Implement Treasury's Administrative Offset Program
(GAO/T-AIMD-98-195, June 5, 1998). 

Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, Mar.  31, 1998). 

Debt Collection:  Improved Reporting Needed on Billions of Dollars in
Delinquent Debt and Agency Collection Performance (GAO/AIMD-97-48,
June 2, 1997). 


   DEPARTMENTWIDE FINANCIAL
   MANAGEMENT
---------------------------------------------------------- Chapter 2:4

High-Risk Program:  Information on Selected High-Risk Areas
(GAO/HR-97-30, May 1997). 


PERFORMANCE AND ACCOUNTABILITY
SERIES
============================================================ Chapter 3

Major Management Challenges and Program Risks:  A Governmentwide
Perspective (GAO/OCG-99-1)

Major Management Challenges and Program Risks:  Department of
Agriculture (GAO/OCG-99-2)

Major Management Challenges and Program Risks:  Department of
Commerce (GAO/OCG-99-3)

Major Management Challenges and Program Risks:  Department of Defense
(GAO/OCG-99-4)

Major Management Challenges and Program Risks:  Department of
Education (GAO/OCG-99-5)

Major Management Challenges and Program Risks:  Department of Energy
(GAO/OCG-99-6)

Major Management Challenges and Program Risks:  Department of Health
and Human Services (GAO/OCG-99-7)

Major Management Challenges and Program Risks:  Department of Housing
and Urban Development (GAO/OCG-99-8)

Major Management Challenges and Program Risks:  Department of the
Interior (GAO/OCG-99-9)

Major Management Challenges and Program Risks:  Department of Justice
(GAO/OCG-99-10)

Major Management Challenges and Program Risks:  Department of Labor
(GAO/OCG-99-11)

Major Management Challenges and Program Risks:  Department of State
(GAO/OCG-99-12)

Major Management Challenges and Program Risks:  Department of
Transportation (GAO/OCG-99-13)

Major Management Challenges and Program Risks:  Department of the
Treasury (GAO/OCG-99-14)

Major Management Challenges and Program Risks:  Department of
Veterans Affairs (GAO/OCG-99-15)

Major Management Challenges and Program Risks:  Agency for
International Development (GAO/OCG-99-16)

Major Management Challenges and Program Risks:  Environmental
Protection Agency (GAO/OCG-99-17)

Major Management Challenges and Program Risks:  National Aeronautics
and Space Administration (GAO/OCG-99-18)

Major Management Challenges and Program Risks:  Nuclear Regulatory
Commission (GAO/OCG-99-19)

Major Management Challenges and Program Risks:  Social Security
Administration (GAO/OCG-99-20)

Major Management Challenges and Program Risks:  U.S.  Postal Service
(GAO/OCG-99-21)

High-Risk Series:  An Update (GAO/HR-99-1)




The entire series of 21 performance and accountability reports and
the high-risk series update can be ordered by using the order number
GAO/OCG-99-22SET. 


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