Pursuant to a legislative requirement, GAO provided information on the internal control and compliance issues related to the Internal Revenue Service's (IRS) custodial activities, focusing on: (1) previously reported internal control and compliance issues and related recommendations; (2) new issues identified during GAO's fiscal year (FY) 1998 financial audit, along with new recommendations to address those issues; and (3) additional issues identified from GAO's ongoing FY 1999 financial audit.

GAO noted that: (1) IRS continues to have a broad range of serious internal control weaknesses that have resulted in disbursements of fraudulent and other questionable tax refunds, unnecessary burden to taxpayers resulting from taxpayer receipts stolen by IRS employees, and errors or delays in posting payments to taxpayer accounts; (2) these control weaknesses fall into five major areas: (a) unpaid assessments; (b) security over receipts and taxpayer information; (c) refunds and earned income tax credits; (d) revenue reporting and distribution; and (e) financial reporting; (3) some weaknesses are long-standing, having been reported since GAO's first audit of IRS' financial statements in FY 1992; (4) in addition, GAO has found that some weaknesses are more pervasive than GAO previously reported; (5) until IRS corrects these weaknesses, these conditions will adversely impact IRS' ability to provide quality customer service; (6) IRS has acknowledged the seriousness of its financial management problems and the Commissioner has committed to making necessary improvements; (7) although some needed improvements can be achieved in the short term, GAO recognizes that for many weaknesses, systems modernization will need to be part of a long-term solution; (8) IRS has begun--and in some cases, completed--actions to address some of these problems; (9) for example, in the short term, IRS is developing and implementing various security procedures to better safeguard cash, checks, and taxpayer data; (10) these procedures include purchasing and installing equipment that, if properly linked with the Federal Bureau of Investigation, will provide fingerprint check results before new employees report to duty; (11) however, GAO recognizes that addressing other critical recommendations, such as the system deficiencies affecting IRS' ability to effectively manage and report on its unpaid assessments, will require system modifications that could take years to fully implement; (12) such long-term efforts will require sustained senior management commitment in order for IRS to have sound financial management; (13) IRS acknowledged the magnitude of its system deficiencies and internal control weaknesses in comments on this report; and (14) it noted that it was working on many of the matters that can be addressed in the short term, but recognized the long-term challenges posed by many of these issues and the need to factor them into its system modernization plans.

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