Financial Audit: Actions Needed to Improve IRS Financial Management
(Testimony, 06/06/96, GAO/T-AIMD-96-96).

This testimony discusses GAO's financial audits of the Internal Revenue
Service (IRS). As part of a pilot program under the Chief Financial
Officers Act of 1990, IRS began preparing annual financial statements
explaining the results of its operations. GAO's audits span fiscal years
1992-95. Implementation of the act has (1) led IRS top managers to have
a greater understanding of IRS' serious and pervasive accounting and
reporting problems, (2) yielded information on the magnitude of IRS' tax
receivables collection problems, and (3) underscored the need for
stronger controls over such areas as payroll operations. The act has
also provided the impetus behind efforts to improve IRS operations and
address the major problems cited by GAO financial audits. However, GAO
has been unable to express an opinion on the reliability of IRS'
financial statements for any of the four fiscal years--from 1992 through
1995. This testimony describes in detail the fundamental, persistent
problems that remain uncorrected and will prevent GAO from expressing an
opinion on IRS' future financial statements.

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

 REPORTNUM:  T-AIMD-96-96
     TITLE:  Financial Audit: Actions Needed to Improve IRS Financial 
             Management
      DATE:  06/06/96
   SUBJECT:  Budget receipts
             Accounts receivable
             Tax administration systems
             Financial management systems
             Financial records
             Financial statement audits
             Federal agency accounting systems
             Accounting procedures
             Internal controls
             Appropriation accounts

             
Financial Audit: Actions Needed to Improve IRS Financial Management
(Testimony, 06/06/96, GAO/T-AIMD-96-96).

GAO discussed its financial audits of the Internal Revenue Service for
fiscal years 1992 through 1995. GAO noted that: (1) IRS relied on
alternative sources to obtain revenue totals by type of tax for its
financial statements; (2) IRS financial statements include various
discrepancies that cannot be explained because of weaknesses in IRS
information and collection systems; (3) the validity of IRS accounts
receivable and collectible accounts receivable can not be verified; (4)
many uncollected compliance assessments and financial receivables are
uncollectible; (5) IRS has been unable to accurately account and report
its total inventory of accounts receivable; (6) while IRS has made some
improvements in accounting and reporting on its operating costs,
significant problems remain; (7) IRS can not confirm when and if goods
and services were received; and (8) the accuracy of the IRS Fund Balance
with Treasury accounts cannot be verified.

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

 REPORTNUM:  T-AIMD-96-96
     TITLE:  Financial Audit: Actions Needed to Improve IRS Financial 
             Management
      DATE:  06/06/96
   SUBJECT:  Budget receipts
             Accounts receivable
             Tax administration systems
             Financial management systems
             Financial records
             Financial statement audits
             Federal agency accounting systems
             Accounting procedures
             Internal controls
             Appropriation accounts
IDENTIFIER:  IRS Financial Management System
             
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Cover
================================================================ COVER


Before the Committee on Governmental Affairs
U.S.  Senate

For Release on Delivery
Expected at
10:00 a.m.
Thursday,
June 6, 1996

FINANCIAL AUDIT - ACTIONS NEEDED
TO IMPROVE IRS FINANCIAL
MANAGEMENT

Statement of Gregory M.  Holloway
Director, Governmentwide Audits
Accounting and Information Management Division

GAO/T-AIMD-96-96

GAO/AIMD-96-96T


(901704)


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


============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss our financial audits of the
Internal Revenue Service (IRS).  As part of a pilot program under the
Chief Financial Officers (CFO) Act of 1990, IRS began preparing
annual financial statements showing the results of its operations
starting with those for fiscal year 1992.  Our audits have spanned
fiscal years 1992 through 1995. 

In fiscal year 1995, IRS' financial statements and our audit covered
a reported $1.4 trillion of tax revenue, or over 90 percent of
revenues used to help fund the federal government's operations.  Also
covered were $8 billion of operating costs for carrying out IRS
activities and programs involving processing tax returns and
providing taxpayer assistance, enforcing tax laws and collecting
revenues, maintaining and building information systems, and carrying
out various administrative and management activities. 

Prior to the CFO Act's requirements, IRS had not prepared financial
statements and had never undergone a financial audit.  CFO Act
implementation has (1) led to IRS top managers having a much better
understanding than ever before of IRS' serious and pervasive
accounting and reporting problems, (2) provided information on the
magnitude of IRS' tax receivables collection problems, and (3)
identified the need for stronger controls over such areas as payroll
operations. 

The CFO Act's requirements also have provided the impetus for efforts
to improve IRS operations and address the substantial problems
identified by our financial audits.  Since our first audit of IRS'
financial statements, IRS has implemented a new financial system to
improve accounting and reporting for its administrative operations,
has begun to use the payroll services provided by the Department of
Agriculture's National Finance Center, and has other improvement
efforts ongoing. 

However, we have been unable to express an opinion on the reliability
of IRS' financial statements for any of the 4 fiscal years from 1992
through 1995.  The following fundamental, persistent problems remain
uncorrected and, until they are resolved, will continue to prevent us
from expressing an opinion on IRS' financial statements in the
future. 

  -- The amounts of total revenue ($1.4 trillion) and tax refunds
     ($122 billion) cannot be verified or reconciled to accounting
     records maintained for individual taxpayers in the aggregate. 

  -- The amounts reported for various types of taxes collected (for
     example, social security, income, and excise taxes) cannot be
     substantiated. 

  -- The reliability of reported estimates of $113 billion for valid
     accounts receivable and $46 billion for collectible accounts
     receivable cannot be determined. 

  -- A significant portion of IRS' reported $3 billion in nonpayroll
     operating expenses cannot be verified. 

  -- The amounts IRS reported as appropriations available for
     expenditure for operations cannot be reconciled fully with
     Treasury's central accounting records showing these amounts, and
     hundreds of millions of dollars in differences have been
     identified. 

To help IRS resolve these issues, we have made 59 recommendations to
improve IRS' financial management systems and reporting.  IRS agreed
with these recommendations and has worked to implement them and
correct its financial management systems and information problems. 
However, many of the more significant recommendations have not yet
been fully implemented. 

Solving these problems is essential to provide reliable financial
information and ensure taxpayers that their tax dollars are properly
accounted for in accordance with federal accounting standards.  The
accuracy of IRS' financial statements is also key to both IRS and the
Congress for (1) ensuring adequate accountability for IRS programs,
(2) assessing the impact of tax policies, and (3) measuring IRS'
performance and cost effectiveness in carrying out its numerous tax
enforcement, customer service, and collection activities. 

Further, IRS' financial reporting problems affect the accuracy of
financial reports and effective operations of the other government
agencies for which IRS collects tax receipts, such as the Social
Security Administration for the Social Security Trust Fund and the
Department of Labor for the Unemployment Trust Fund.  Beginning in
fiscal year 1998, federal accounting standards will require IRS to
disclose the reasons for any continuing noncompliance with the laws
relating to the disposition of tax revenue to trust funds and the
amount of over- or underfunding, if reasonably estimable.  Unless
corrected, IRS' financial management problems will also affect the
reliability of the consolidated executive branch financial statements
the Department of the Treasury is required to prepare beginning in
fiscal year 1997. 

The remainder of this testimony addresses IRS' underlying, basic
financial management problems and what needs to be done to correct
them. 


   INFORMATION UNAVAILABLE TO
   SUBSTANTIATE REVENUE
---------------------------------------------------------- Chapter 0:1

Our financial audits have found that IRS' financial statement amounts
for revenue, in total and by type of tax, were not derived from its
revenue general ledger accounting system or its master files of
detailed individual taxpayer records.  The revenue accounting system
does not contain detailed information by type of tax, such as
individual income tax or corporate tax, and the master file cannot
summarize the taxpayer information needed to support the amounts
identified in the system.  As a result, IRS relied without much
success on alternative sources, such as Treasury schedules, to obtain
the summary total by type of tax needed for its financial statement
presentation. 

To substantiate the Treasury figures, our audits attempted to
reconcile IRS' master files--the only detailed records available of
tax revenue collected--with Treasury records.  For fiscal year 1994,
for example, we found that IRS' reported total of $1.3 trillion for
revenue collections taken from Treasury schedules was $10.4 billion
more than what was recorded in IRS' master files.  Because IRS was
unable to satisfactorily explain, and we could not determine the
reasons for this difference, the full magnitude of the discrepancy
remains uncertain. 

In addition to the difference in total revenues collected, we also
found large discrepancies between information in IRS' master files
and the Treasury data used for the various types of taxes reported in
IRS' financial statements.  For fiscal year 1994, for example, some
of the larger reported amounts in IRS' financial statement for which
IRS had insufficient support were $615 billion in individual taxes
collected--this amount was $10.8 billion more than what was recorded
in IRS' master files; $433 billion in social insurance taxes
collected--this amount was $5 billion less than what was recorded in
IRS' master files; and $148 billion in corporate income taxes--this
amount was $6.6 billion more than what was recorded in IRS' master
files.  Thus, IRS did not know and we could not determine if the
reported amounts were correct.  These discrepancies also further
reduce our confidence in the accuracy of the amount of total revenues
collected. 

Contributing to these discrepancies is a fundamental problem in the
way tax payments are reported to IRS.  IRS' tax receipt, return, and
refund processes are highlighted in figure 1. 

   Figure 1:  Federal Tax Deposit
   and Filing Processes

   (See figure in printed
   edition.)

About 80 percent, or about $1.1 trillion, of total tax payments are
made by businesses and typically include (1) taxes withheld from
employees' checks for income taxes, (2) Federal Insurance
Compensation Act (FICA) collections, and (3) the employer's matching
share of FICA.  IRS requires business taxpayers to make tax payments
using federal tax deposit coupons, shown in figure 2. 

   Figure 2:  Sample Federal Tax
   Deposit Coupon

   (See figure in printed
   edition.)

The payment coupons identify the type of tax return to which they
relate, such as a Form 941, Quarterly Wage and Tax Return, but do not
specifically identify either the type of taxes being paid or the
individuals whose tax withholdings are being paid.  For example, the
payment coupon in figure 2 reports that the deposit relates to a Form
941 return, which can cover payments for employees' tax withholding,
FICA taxes, and employers' FICA taxes.  Since only the total dollars
being deposited are indicated on the form, IRS knows that the entire
amount relates to a Form 941 return but does not know how much of the
deposit relates to the different kinds of taxes covered by that type
of return. 

Consequently, at the time tax payments are made, IRS is not provided
information on the ultimate recipient of the taxes collected. 
Furthermore, the type of tax being collected is not distinguished
early in the collection stream.  This creates a massive
reconciliation process involving billions of transactions and
subsequent tax return filings. 

For example, when an individual files a tax return, IRS initially
accepts amounts reported as a legitimate record of a taxpayer's
income and taxes withheld.  For IRS' purposes, these amounts
represent taxes paid because they cannot be readily verified to the
taxes reported by an individual's employer as having been paid.  At
the end of each year, IRS receives information on individual
taxpayers' earnings from the Social Security Administration.  IRS
compares the information from the Social Security Administration to
the amounts reported by taxpayers with their tax returns.  However,
this matching process can take 2 and a half years or more to
complete, making IRS' efforts to identify noncompliant taxpayers
extremely slow and significantly hindering IRS' ability to collect
amounts subsequently identified as owed from false or incorrectly
reported amounts. 

Consistent with this process, IRS' system is designed to identify
only total receipts by type of return and not the entity which is to
receive the funds collected, such as the General Fund at Treasury for
employee income tax withholdings or the Social Security Trust Fund
for FICA.  Ideally, the system should contain summarized information
on detailed taxpayer accounts, and such amounts should be readily and
routinely reconciled to the detailed taxpayer records in IRS' master
files. 

Also, IRS has not yet established an adequate procedure to reconcile
the revenue data that the system does capture with data recorded and
reported by Treasury.  Further, documentation describing what IRS'
financial management system is programmed to do is neither
comprehensive nor up-to-date, which means that IRS does not have a
complete picture of the financial system's operations--a prerequisite
to fixing the problems. 

Beginning with our audit of IRS' fiscal year 1992 financial
statements, we have made recommendations to correct weaknesses
involving IRS' revenue accounting system and processes.  They include

  -- addressing limitations in the information submitted to IRS with
     tax payments by requiring that payments identify the type of
     taxes being collected;

  -- implementing procedures to complete reconciliations of revenue
     and refund amounts with amounts reported by the Treasury; and

  -- documenting IRS' financial management system to identify and
     correct the limitations and weaknesses that hamper its ability
     to substantiate the revenue and refund amounts reported on its
     financial statements.  With a contractor's assistance, an IRS
     task force attempted to document IRS' financial management
     system transaction flows.  Because the contractor is not
     expected to complete this work until July 1996, it was not done
     in time to be useful in our fiscal year 1995 audit. 

Federal accounting standards provide new criteria for determining
revenue, effective for fiscal year 1998.  This will require IRS to
account for the source and disposition of all taxes in a manner that
enables accurate reporting of cash collections and accounts
receivable and appropriate transfers of revenue to the various trust
funds and the general fund.  To achieve this, IRS' accounting system
will need to capture the flow of all revenue-related transactions
from assessment to ultimate collection and disposition. 


   ACCOUNTS RECEIVABLE COULD NOT
   BE VERIFIED
---------------------------------------------------------- Chapter 0:2

We could not verify the validity of either the $113 billion of
accounts receivable or the $46 billion of collectible accounts
receivables that IRS reported on its fiscal year 1995 financial
statements.  Consequently, these financial statements cannot be
relied on to accurately disclose the amount of taxes owed to the
government or the portion of that amount which is collectible.  This
is not a new problem, as we first identified IRS' accounts receivable
accounting and reporting problems in fiscal year 1992 and again in
each subsequent fiscal year's financial audit. 

In our audit of IRS' fiscal year 1992 financial statements, after
performing a detailed analysis of IRS' receivables as of June 30,
1991, we estimated that only $65 billion of about $105 billion in
gross reported receivables that we reviewed was valid and that only
$19 billion of the valid receivables was collectible.  At the time,
IRS had reported that $66 billion of the $105 billion was
collectible. 

Subsequently, we helped IRS develop a statistical sampling method
that, if properly applied, would allow it to reliably estimate and
report valid and collectible accounts receivable on its financial
statements.  We evaluated and tested IRS' use of the method as part
of our succeeding financial audits and found that IRS made errors in
carrying out the statistical sampling procedures, which rendered the
sampling results unreliable.  This year, for the first time, IRS
tried, also without success, to specifically identify its accounts
receivable. 

Reliable financial information on these amounts is important to IRS
and the Congress for

  -- assessing the results of enforcement and collection efforts,
     measuring performance in meeting IRS' mission and objectives,
     and allocating resources and staffing;

  -- reviewing the collectibility of accounts, determining trends in
     accounts receivable balances, and deliberating on the potential
     for increased collections and related budgetary needs; and

  -- assessing the effect of potential collections of accounts
     receivables in reducing the deficit. 

The importance of having credible financial information for these
purposes is underscored by the magnitude of IRS' inventory of
uncollected assessments and by IRS' problems in collecting tax
receivables, which we have monitored since 1990 as part of our
high-risk program.\1


--------------------
\1 Internal Revenue Service Receivables (GAO/HR-95-6, February 1995). 


      MUCH OF IRS' UNCOLLECTED
      ASSESSMENTS IS UNCOLLECTIBLE
-------------------------------------------------------- Chapter 0:2.1

IRS' reported inventory of uncollected assessments, which at
September 30, 1995, was $200 billion, is composed of both compliance
assessments, which are not yet but may become accounts receivable,
and financial receivables, which are valid accounts receivable. 

In the case of compliance assessments, IRS records an assessment to a
taxpayer's account, but neither the taxpayer nor a court has agreed
that the assessment is appropriate.  Normally, IRS makes these
assessments to encourage compliance with the tax laws.  For example,
when a taxpayer is identified by an IRS matching program as being
delinquent in filing a return, IRS creates an assessment using the
single filing status and standard deduction.  This action is to
encourage the taxpayer to file a tax return in the right amount.  The
taxpayer has an opportunity to refute an estimated assessment, and
often does, because the amount may be overstated or may not apply. 

On the other hand, financial receivables arise when taxpayers agree
to assessments or a court determines that an amount is owed.  These
receivables may also include cases in which IRS and a taxpayer agree,
or a court determines, that the amount of a compliance assessment is
due.  Financial receivables can include other situations as well,
such as when taxpayers file returns but do not pay the full amounts
due or they are making payments against amounts due. 

Figure 3 shows IRS' reported inventory of uncollected assessments for
June 30, 1991, and each fiscal year from 1992 through 1995. 

   Figure 3:  IRS' Inventory of
   Uncollected Assessments

   (See figure in printed
   edition.)

Note:  In fiscal year 1992, IRS did not identify the amount of
financial receivables. 

Source:  IRS analysis of its inventory of uncollected assessments for
fiscal years ending September 30, 1992 through September 30, 1995. 
For June 30, 1991, amounts are based on GAO's analysis of IRS'
inventory of uncollected assessments. 

According to IRS records, $96 billion, or 48 percent, of its
inventory of uncollected assessments as of September 30, 1995, is
uncollectible.  Figure 4 shows this and the amounts IRS reports as
related to the collection actions being taken on other uncollected
assessments. 

   Figure 4:  Status of IRS'
   Inventory of Uncollected
   Assessments as of September 30,
   1995 (Dollar amount in
   billions)

   (See figure in printed
   edition.)

Source:  IRS inventory of uncollected assessments as of September 30,
1995. 

Also, IRS records show that about $116.4 billion, or more than 59
percent, of its inventory of uncollected assessments as of September
30, 1995, is more than 6 tax years old.  Figure 5 shows the age of
IRS' inventory of uncollected assessments. 

   Figure 5:  IRS' Inventory of
   Uncollected Assessments by Tax
   Year as of September 30, 1995

   (See figure in printed
   edition.)

Note:  The total of this chart is $196 billion.  The difference
between this amount and the total uncollected assessments of $200
billion represents estate tax accounts and other tax accounts that
are not tracked by tax periods. 

Source:  IRS inventory of uncollected assessments as of September 30,
1995. 

In addition, IRS cites several reasons, or categories, such as the
inability of taxpayers to pay amounts owed, for uncollected
assessments being in an inactive status, which means that IRS is not
currently working to collect them.  Figure 6 shows the amounts IRS
reports in each of these categories as of September 30, 1995. 

   Figure 6:  IRS' Inventory of
   Inactive Uncollected
   Assessments as of September 30,
   1995 (Dollar amount in
   billions)

   (See figure in printed
   edition.)

Note:  Of IRS' $200 billion inventory of uncollected assessments, a
total of $110 billion was inactive at September 30, 1995. 

Source:  IRS inventory of uncollected assessments as of September 30,
1995. 


      ACCOUNTS RECEIVABLE
      ACCOUNTING PROBLEMS AND
      SOLUTIONS
-------------------------------------------------------- Chapter 0:2.2

IRS' accounting and reporting for accounts receivable is hampered by
the limitations of its financial management system.  IRS' system is
not designed to specifically identify and separately track from
detailed taxpayer records those owing taxes reportable as accounts
receivable. 

This year, to mitigate this system's limitation, IRS reported
accounts receivable by using the uncollected assessment information
from its computer system's master files, which were automatically
sorted into either compliance assessments or financial receivables. 
In this way, IRS planned to identify the amount specifically related
to financial receivables and report it as valid accounts receivable
as of September 30, 1995. 

However, when we tested a sample of the automated sorting results, we
found cases in which the financial management system's data were
incorrect, and thus, did not properly segregate compliance
assessments from financial receivables.  We identified instances in
which compliance assessments were classified as financial
receivables, and thus, incorrectly included as accounts receivable;
and other cases in which financial receivables were classified as
compliance assessments, and thus, improperly excluded from accounts
receivable.  Based on the testing results, we concluded that the
process IRS used in 1995 was unreliable for projecting the total
inventory of outstanding assessments.  Consequently, the accounts
receivable reported on the fiscal year 1995 financial statements
could not be relied on. 

Improving IRS' accounts receivable reporting in the short term would
require IRS to

  -- analyze its inventory of uncollected assessments to determine
     ways to resolve issues concerning the financial management
     system's underlying data limitations;

  -- reliably determine the estimated amount of accounts receivable
     that is collectible; and

  -- review and update current policies and procedures for
     maintaining documentation supporting accounts receivable, and
     where necessary, train employees to properly record detailed
     taxpayer transactions. 

By fiscal year 1998, federal accounting standards will require IRS to
design its financial management system to analyze all outstanding
amounts to properly identify and report valid accounts receivable and
the amount expected to be collected.  As required by federal
accounting standards, the system should track all activity affecting
IRS' accounts receivable balance, including collections as a result
of enforcement efforts, tax abatements, and aging of receivables. 
Federal accounting standards also require IRS to provide dollar
information about its compliance assessments and encourage IRS to
record as revenue an estimate of the recoverable amount of such
assessments. 


   ACCOUNTING FOR ADMINISTRATIVE
   OPERATIONS HAS IMPROVED BUT
   PROBLEMS REMAIN
---------------------------------------------------------- Chapter 0:3

Each year, IRS incurs billions of dollars in operating expenses to
(1) process tax returns and provide taxpayer assistance, (2) enforce
tax laws, (3) develop and maintain information systems, and (4)
provide administration and management.  IRS' reported operating costs
for each fiscal year from 1992 through 1995 are shown in figure 7. 

   Figure 7:  IRS' Reported
   Operating Costs for Fiscal
   Years 1992 Through 1995
   (Dollars in billions)

   (See figure in printed
   edition.)

For fiscal year 1995, IRS reported $8.1 billion in operating costs,
including $5.3 billion for payroll and other personnel costs and $2.8
billion for the cost of goods and services, such as rent, printing,
and acquiring and maintaining automatic data processing equipment. 
Figure 8 shows the percentages of IRS' total fiscal year 1995
operating costs that were reported to be incurred for payroll and
nonpayroll costs. 

   Figure 8:  IRS' Reported
   Payroll and Nonpayroll Costs
   for Fiscal Year 1995

   (See figure in printed
   edition.)

Our first financial audit identified serious problems in accounting
for and reporting on IRS administrative operations, which resulted in
IRS making improvements in these areas.  In fiscal year 1993, IRS
implemented a new system to account for its administrative
operations, which should correct some of the problems in accounting
for administrative operations our financial audits have identified
and reported.  In addition, IRS now uses the payroll services
provided by the Department of Agriculture's National Finance Center. 
However, IRS continues to have significant problems accounting for
certain administrative operations and these problems must be resolved
before we will be able to render an opinion on IRS' annual financial
statements. 


      RECEIPT OF GOODS AND
      SERVICES
-------------------------------------------------------- Chapter 0:3.1

IRS did not have support for when and if certain goods or services
were received and, in other instances, did not have support for
reported expense amounts.  For example, IRS accepts Government
Printing Office bills as being accurate and records an expense in its
financial records without first verifying that the printing goods and
services being billed were actually delivered and accepted. 

Also, in instances where IRS could provide information showing proper
receipt and acceptance of goods and services, expenses were often
recorded in the wrong fiscal year.  This problem occurs because (1)
IRS offices that receive and accept goods and services do not always
forward to IRS accounting offices evidence supporting these actions
and (2) IRS accounting offices used inconsistent, and in some cases
incorrect, policies and procedures for recording expenses. 

These problems

  -- leave IRS vulnerable to making inappropriate payments without
     detection,

  -- undermine the reliability of the administrative costs IRS
     reports on its annual financial statements,

  -- impede IRS' ability to provide useful and consistent cost and
     performance information to manage its operations, and

  -- diminish assurance that budgetary resources are effectively used
     as intended by IRS management and the Congress. 


      FUND BALANCE RECONCILIATION
      ISSUES
-------------------------------------------------------- Chapter 0:3.2

Also, we could not verify the accuracy of IRS' Fund Balance with
Treasury accounts that are related to IRS' administrative
appropriations.  The Fund Balance accounts are used to record cash
receipts and cash disbursements for these appropriations.  These
accounts are much like checking accounts with a bank, and their
balances represent the amount of administrative appropriations
available to IRS for expenditure.  Accordingly, like bank checking
accounts, each month, these accounts must be reconciled with the
bank's records, and any differences reported to the bank.  In this
case, the banker is Treasury and the differences are great. 

These accounts have been unreconciled in each of the years we have
audited IRS' financial statements.  The net reconciling differences
are in the millions of dollars and made up of gross differences in
the hundreds of millions of dollars.  For example, we reported last
year that IRS was researching $13 million in net differences that
consisted of $661 million of increases and $674 million of decreases. 
These figures do not represent all of the differences that existed at
that time. 

Until a reconciliation is completed, IRS does not know, and we could
not determine,

  -- that the Fund Balance accounts for administrative operations
     reported on IRS' financial statements are accurate and reliable,

  -- whether improper payments may have occurred, and

  -- the financial statement impact or what other problems may become
     evident if these accounts were properly reconciled. 

In fiscal year 1995, IRS hired a contractor to provide information on
the differences between IRS and Treasury records through fiscal year
1995 and established a task force to resolve the differences the
contractor identified.  IRS found that documentation was no longer
available to resolve prefiscal year 1993 differences, which resulted
in $10 million of net positive cash reconciling differences being
written off.  IRS has not yet completed the research necessary to
resolve fiscal year 1993, 1994, and 1995 differences. 

In addition to completing this research, IRS must ensure that
effective processes and procedures are in place to routinely
reconcile its Fund Balance with Treasury accounts.  In this regard,
IRS has created a unit to manage the reconciliation of these accounts
on an ongoing basis. 


-------------------------------------------------------- Chapter 0:3.3

More so than most federal entities, IRS directly and regularly
interfaces with the American people and significantly contributes to
their perception of the federal government.  Thus, it is crucial that
IRS' records be maintained with the highest level of integrity in
accounting for the monies provided by the American people to help
fund the operations of their national government.  We are committed
to continuing to provide advice to IRS to advance these goals. 

Mr.  Chairman, this concludes my statement.  I will be glad to answer
any questions that you or the other Members of the Committee may have
at this time. 

*** End of document. ***