GAO REPORTS ON THE IRS AUGUST 4, 1995
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-95-141
TITLE: Financial Audit: Examination of IRS' Fiscal Year 1994
Financial Statements
DATE: 08/04/95
SUBJECT: Financial statement audits
Internal controls
Reporting requirements
Accounts receivable
Administrative costs
Accounting procedures
Tax administration
Federal agency accounting systems
Financial management
Financial records
IDENTIFIER: IRS Revenue Accounting Control System
Earned Income Tax Credit
Federal Tax Deposit System
IRS Accounts Receivable Dollar Inventory System
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Cover
================================================================ COVER
Report to the Congress
August 1995
FINANCIAL AUDIT - EXAMINATION OF
IRS' FISCAL YEAR 1994 FINANCIAL
STATEMENTS
GAO/AIMD-95-141
IRS Financial Audit
(901662)
Abbreviations
=============================================================== ABBREV
ADP - automated data processing
AFS - Automated Financial System
ARDI - Accounts Receivable Dollar Inventory
BMF - Business Master File
CFO - Chief Financial Officer
CNC - currently not collectible
EARL - Electronic Audit Research Log
EFTPS - Electronic Federal Tax Payment System
FICA - Federal Insurance Contribution Act
FMFIA - Federal Managers' Financial Integrity Act
FMS - Federal Management Service
FTD - federal tax deposit
IDRS - integrated data retrieval system
IMF - Individual Master File
IRC - Internal Revenue Code
IRS - Internal Revenue Service
NMF - nonmaster file
OIC - offers in compromise
OMB - Office of Management and Budget
RACS - Revenue Accounting Control System
SSA - Social Security Administration
TFR - Trust Fund Recovery
TSM - Tax Systems Modernization
Letter
=============================================================== LETTER
B-259455
August 4, 1995
To the President of the Senate and the
Speaker of the House of Representatives
In accordance with the Chief Financial Officers Act of 1990, this
report presents the results of our efforts to audit the Principal
Financial Statements of the Internal Revenue Service (IRS) for fiscal
years 1994 and 1993 and an assessment of its internal controls and
compliance with laws and regulations. IRS continues to face major
challenges in developing meaningful and reliable financial management
information and in providing adequate internal controls that are
essential to effectively manage and report on its operations.
Overcoming these challenges is difficult because of the long-standing
nature and depth of IRS' financial management problems and the
antiquated state of its systems. IRS has expressed its commitment to
resolving the problems we reported.
We are unable to express an opinion on the reliability of IRS' fiscal
year 1994 Principal Financial Statements. Our report discusses the
scope and severity of IRS' financial management and control problems,
the adverse impact of these problems on IRS' ability to effectively
carry out its mission, and IRS' actions to remedy the problems. Our
report also contains recommendations to help IRS continue its efforts
to resolve these long-standing problems and strengthen its financial
management operations.
We are sending copies of this report to the Commissioner of Internal
Revenue, the Secretary of the Treasury, the Director of the Office of
Management and Budget, the Chairmen and Ranking Minority Members of
the Senate Committee on Governmental Affairs and the House Committee
on Government Reform and Oversight, and other interested
congressional committees. Copies will also be made available to
others upon request.
This report was prepared under the direction of Gregory M. Holloway,
Director, Civil Audits, with the support of IRS' Internal Audit staff
and staff from the Accounting and Information Management Division's
Civil Audits Group and Audit Support and Quality Assurance Group.
Mr. Holloway may be reached at (202) 512-9510.
Charles A. Bowsher
Comptroller General
of the United States
Letter
=============================================================== LETTER
B-259455
To the Commissioner of Internal Revenue
In accordance with the Chief Financial Officers (CFO) Act of 1990,
the Internal Revenue Service (IRS) prepared the accompanying
Principal Financial Statements for the fiscal years ended September
30, 1994 and 1993. We were unable to express an opinion on the
reliability of these statements for the following five primary
reasons.
One, the amount of total revenue of $1.3 trillion reported in the
financial statements could not be verified or reconciled to
accounting records maintained for individual taxpayers in the
aggregate.
Two, amounts reported for various types of taxes collected, for
example, social security, income, and excise taxes, could also
not be substantiated.
Three, we could not determine from our testing of IRS' gross and
net accounts receivable estimates of over $69 billion and $35
billion, respectively, which include delinquent taxes, whether
those estimates were reliable.
Four, IRS continued to be unable to reconcile its Fund Balance with
Treasury accounts.
Five, we could not substantiate a significant portion of IRS' $2.1
billion in nonpayroll expenses included in its total operating
expenses of $7.2 billion, primarily because of lack of
documentation. However, we could verify that IRS properly
accounted for and reported its $5.1 billion of payroll expenses.
Also, continuing material weaknesses in internal controls in fiscal
year 1994 resulted in ineffective controls for
safeguarding assets;
providing a reasonable basis for determining material compliance
with laws governing the use of budget authority and other
relevant laws and regulations; and
assuring that there were no material misstatements in its Principal
Financial Statements, including the Overview to the Financial
Statements as well as supplemental information.
In addition to these problems, as discussed in subsequent sections of
this report, we also identified other unsubstantiated and/or
misstated amounts, such as $6.5 billion in contingent liabilities
that were unsubstantiated. The differences we identified for
specific reported amounts in IRS' financial statements could in fact
be larger or smaller than the tens of billions of dollars discussed
in this report. IRS did not know, and we could not determine, the
reasons for most of the differences. Therefore, we could not
adequately estimate appropriate adjustments to make the statements
more reliable.
IRS has, however, made some progress in responding to the problems we
identified in our previous audits. For example, IRS has implemented
a new administrative accounting system to account for its day-to-day
operations. The new system should help IRS to correct some of its
past transaction processing problems that diminished the accuracy and
reliability of its cost information. In addition, IRS successfully
transferred its payroll processing to the Department of Agriculture's
National Finance Center and, as a result, properly accounted for and
reported its $5.1 billion of payroll expenses for fiscal year 1994.
These actions represent a good start in IRS' efforts to more fully
account for its operating expenses.
IRS has made more limited progress in improving accounting for
federal revenues. While IRS is in the process of implementing 12 of
the 14 recommendations we made concerning revenue collections from
our previous reports, it has completed only 2 of these 14
recommendations. Accordingly, IRS needs to intensify its efforts,
including developing a detailed plan with explicit, measurable goals
and a set timetable for action, to attain the level of financial
reporting and controls needed to effectively manage its massive
operations and to reliably measure its performance.
The following contents of this summary letter, as well as the
detailed sections in the back of this report, further elaborate on
(1) the problems we found both in the financial statements and in the
internal control environment that led us to our basis for our opinion
and (2) actions IRS needs to take to continue its improvement
efforts.
ISSUES WITH REVENUE
------------------------------------------------------------ Letter :1
IRS' financial statement amounts for revenue, in total and by type of
tax, were not derived from its revenue general ledger accounting
system (RACS) or its master files of detailed individual taxpayer
records. This is because RACS did 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 RACS. As a result, IRS relied on
alternative sources, such as Treasury schedules, to obtain the
summary total by type of tax needed for its financial statement
presentation.
IRS asserts that the Treasury amounts were derived from IRS records;
however, neither IRS nor Treasury's records maintained any detailed
information that we could test to verify the accuracy of these
figures. As a result, to substantiate the Treasury figures, we
attempted to reconcile IRS' master files--the only detailed records
available of tax revenue collected--with the Treasury records. We
found that IRS' reported total of $1.3 trillion for revenue
collections, which was 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. Some of the larger reported amounts 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
(FICA) 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.
IRS officials maintain that most of these differences were due to
in-process transactions that would post to the master files after
September 30, 1994, even though they were received and recorded in
its RACS general ledger on or before September 30, 1994 and items
in-process at the beginning of the year. In-process transactions
included cash receipts, tax returns, and refunds that were received
or paid near the end of the fiscal year, but, because of IRS' lengthy
processing time, the transactions were not recorded to the master
files until the next fiscal year.
IRS attempted to account for its in-process transactions, but could
not. This is because its computer program did not account for or
capture a detailed history of all in-process transactions as of
September 30, 1994. As a result, IRS could not determine the full
financial impact of in-process transactions on its financial
statements. This was also a problem in fiscal year 1993. For these
reasons, we could not adequately test IRS' in-process transactions
and, thus, we could not determine if IRS' explanation that the
differences was due to in-process transactions was correct.
The root cause of these problems is that RACS was not designed to
summarize revenue collections by type of tax. Ideally, RACS, as the
general ledger, 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.
However, RACS was not designed to total the various taxes IRS
collects by type of tax and only summarizes total receipts collected.
Further, RACS' design does not maintain a detailed transaction
history of the amounts that were added together to equal the
summarized amounts it contains.
Despite these problems, we were able to verify that IRS' reported
total revenue collections of $1.3 trillion agreed with tax collection
amounts deposited at the Department of the Treasury. However, we did
find $239 million of tax collections recorded in IRS' RACS general
ledger that were not included in reported tax collections derived
from Treasury data.
In addition to these problems, we could not determine from our
testing the reliability of IRS' projected estimate for accounts
receivable. As of September 30, 1994, IRS reported an estimate of
valid receivables of $69.2 billion,\1 of which $35 billion\2 was
deemed collectible. However, in our random statistical sample of
accounts receivable items IRS tested, we disagreed with IRS on the
validity of 19 percent\3 of the accounts receivable and the
collectibility of 17 percent\4 of them. Accordingly, we cannot
verify the reasonableness of the accuracy of the reported accounts
receivable.
--------------------
\1 The range of IRS' confidence interval, at a 95 percent confidence
level, is that the actual amount of valid accounts receivable as of
September 30, 1994, was between $66.1 billion and $72.3 billion.
\2 The range of IRS' confidence interval, at a 95 percent confidence
level, is that the actual amount of collectible accounts receivable
as of September 30, 1994, was between $34 billion and $36 billion.
\3 The range for our confidence interval, at a 95 percent confidence
level, is that the actual amount of the validity exceptions as of
September 30, 1994, was between 14.5 percent and 24.2 percent.
\4 The range for our confidence interval, at a 95 percent confidence
level, is that the actual amount of the collectibility exceptions as
of September 30, 1994, was between 13.1 percent and 22.5 percent.
ISSUES WITH ADMINISTRATIVE
OPERATIONS
------------------------------------------------------------ Letter :2
IRS' Fund Balance With Treasury accounts continued unreconciled, with
unexplained differences. With regard to IRS' $7.2 billion in
operating expenses, we could substantiate that IRS' $5.1 billion in
payroll was properly accounted for. However, the results of our
statistically projectable samples of the remaining $2.1 billion in
nonpayroll operating expenses showed that over $375 million,\5 or 18
percent of IRS' total nonpayroll operating expenses, could not be
substantiated because IRS could not provide support for the validity
of the expense.
IRS' reported financial statement amounts for its Fund Balance With
Treasury--its bank accounts--were not reconciled to Treasury
balances. We found the following.
At the end of fiscal year 1994, unreconciled cash differences
netted to $76 million. After we brought this difference to the
CFO's attention, an additional $89 million in adjustments were
made. These adjustments were attributed to accounting errors
dating back as far as 1987 on which no significant action had
been taken until our inquiry. IRS was researching the remaining
$13 million in net differences to determine the reasons for
them. These net differences, which span an 8-year period,
although a large portion date from 1994, consisted of $661
million of increases and $674 million of decreases. IRS did not
know and we could not determine the financial statement impact
or what other problems may become evident if these accounts were
properly reconciled.
To deal with its long-standing problems in reconciling its Fund
Balance with Treasury accounts, during fiscal year 1994, IRS made
over $1.5 billion in unsupported adjustments (it wrote off these
amounts) that increased cash by $784 million and decreased cash by
$754 million, netting to $30 million. In addition, $44 million of
unidentified cash transactions were cleared from cash suspense
accounts\6 and included in current year expense accounts because IRS
could not determine the cause of the cash differences. These
differences suggest that IRS did not have proper controls over cash
disbursements as well as cash receipts.
In addition to its reconciliation problems, we found numerous
unsubstantiated amounts and some errors in non-payroll related
transactions that IRS processed. These unsubstantiated amounts
occurred because IRS did not have support for when and if certain
goods or services were received and, in other instances, IRS had no
support at all for the reported expense amount. These
unsubstantiated amounts represented about 18 percent of IRS' $2.1
billion in total nonpayroll expenses and about 5 percent of IRS' $7.2
billion in total operating expenses.
Most of IRS' $2.1 billion in nonpayroll related expenses are derived
from interagency agreements with other federal agencies to provide
goods and services in support of IRS' operations. For example, IRS
purchases printing services from the Government Printing Office;
phone services, rental space, and motor vehicles from the General
Services Administration; and photocopying and records storage from
the National Archives and Records Administration.
IRS failed to follow its own receipt and acceptance procedures for
these transactions. Those procedures require written documentation
for verification of the quality, quantity, date, and acceptance of
goods and services purchased, including interagency transactions.
Not following its procedures made IRS vulnerable to receiving
inappropriate interagency charges and other misstatements of its
reported operating expenses, without detection. Not knowing if
and/or when these items were purchased seriously undermines any
effort to provide reliable, consistent cost or performance
information on IRS' operations. As a result of these unsubstantiated
amounts, IRS has no idea and we could not determine, when and, in
some instances, if the goods or services included in its reported
operating expenses were correct or received. We also found several
internal control weaknesses involving interagency agreements which
contributed to our inability to express an opinion. These weaknesses
are discussed in the following section.
--------------------
\5 The range for our confidence interval, at a 95 percent confidence
level, is that the actual amount of operating expenses that could not
be substantiated as of September 30, 1994, was between $299 million
and $452 million.
\6 Suspense accounts include those transactions awaiting posting to
the appropriate account or those transactions awaiting resolution of
unresolved questions.
INTERNAL CONTROL ENVIRONMENT
------------------------------------------------------------ Letter :3
Our reports dating back to 1988\7 discussed the lack of internal
controls in IRS systems and processes. These weaknesses continue to
be a major cause of the problems we found in our most recent audit.
Our February 1995 high-risk series,\8 for example, noted IRS'
continuing inability to accurately report its accounts receivable and
designated refund fraud as a new concern.
Inadequate internal controls, especially the lack of proper
documentation of transactions, resulted in IRS continuing to report
unsupported revenue information. In some cases, IRS did not maintain
documentation to support reported balances. In other cases, it did
not perform adequate analysis, such as reconciling taxpayer
transactions to the general ledger, to ensure that reported
information was reliable. Similarly, the lack of controls over
refunds and earned income credits resulted in errors and potential
fraud. In accounting for its $7.2 billion in appropriated funds, IRS
has been hampered by its failure to establish and carry out
rudimentary internal controls and accounting procedures, such as
reconciling cash accounts. Finally, errors in processing created
delays, which resulted in additional taxpayer burden and reduced
productivity.
We found several internal control problems that contributed to our
inability to express an opinion on IRS' financial statements.
Examples include the following:
We sampled 4,374 statistically projectable transactions posted to
taxpayer accounts. However, IRS was unable to provide adequate
documentation, such as a tax return, for 524 transactions, or 12
percent. Because the documentation was lost, physically
destroyed or, by IRS policy, not maintained, some of the
transactions supporting reported financial balances could not be
substantiated, impairing IRS' ability to research any
discrepancies that occur.
IRS was unable to provide adequate documentation for 111 items, or
68 percent, in our random sample of 163 transactions from IRS'
nonmaster file. The nonmaster file is a database of taxpayer
transactions that cannot be processed by the two main master
files or are in need of close scrutiny by IRS personnel. These
transactions relate to tax years dating as far back as the
1960s. During fiscal year 1994, approximately 438,000
transactions valued at $7.3 billion were processed through the
nonmaster file. Because of the age of many of these cases, the
documentation is believed to have been destroyed or lost.
IRS cannot provide documentation to support $6.5 billion in
contingent liabilities reported as of September 30, 1994.
Contingent liabilities represent taxpayer claims for refunds of
assessed taxes which IRS management considers probable to be
paid. These balances are generated from stand-alone systems,
other than the master file, that are located in two separate IRS
divisions. Because these divisions could not provide a listing
of transactions for appropriate analysis, IRS did not know, and
we could not determine, the reliability of these balances.
IRS is authorized to offset taxpayer refunds with certain debts due
to IRS and other government agencies. Before refunds are
generated, IRS policy requires that reviews be performed to
determine if the taxpayer has any outstanding debts to be
satisfied. For expedited refunds, IRS must manually review
various master files to identify outstanding debts. However,
out of 358 expedited refunds tested, we identified 10 expedited
refunds totaling $173 million where there were outstanding tax
debts of $10 million, but IRS did not offset the funds. Thus,
funds owed could have been collected but were not.
An area that we identified where the lack of controls could
increase the likelihood of loss of assets and possible fraud was
in the reversal of refunds. Refunds are reversed when a check
is undelivered to a taxpayer, an error is identified, or IRS
stops the refund for further review. In many cases, these
refunds are subsequently reissued. If the refund was not
actually stopped by Treasury, the taxpayer may receive two
refunds. In fiscal year 1994, IRS stopped 1.2 million refunds
totaling $3.2 billion. For 183 of 244, or 75 percent of our
sample of refund reversals, IRS was unable to provide support
for who canceled the refund, why it was canceled, and whether
Treasury stopped the refund check. Service center personnel
informed us that they could determine by a code whether the
refund was canceled by an internal IRS process or by the
taxpayer, but, as a policy, no authorization support was
required, nor did procedures exist requiring verification and
documentation that the related refund was not paid.
The earned income credit is a refundable tax credit available to
low-income working families. Using a statistically projectable
sample, we found that 10 percent of fiscal year 1994 earned
income credit claims contained data that were either
inconsistent with the taxpayer's prior year return, incomplete,
or inaccurate compared to supporting documents filed with the
return or compared with information in different places on the
return itself. These discrepancies projected to $1.1 billion\9
of the $11 billion balance for earned income credits. The cases
identified discrepancies relating to a dependent's identifying
information, such as name, social security number, or date of
birth, and inconsistencies relating to the eligibility of the
taxpayer, such as incorrect calculation of income or filing
status. According to an IRS official, while IRS is aware of
these cases, it believes it is not cost-effective to conduct the
enforcement procedures necessary to resolve them.
IRS' procedures to account for $140 million in accounts payable
were flawed and resulted in misstatements of IRS' cost of
operations. We examined a statistically projectable random
sample of 360 accounts payable transactions valued at $51
million and found 152 instances where the amount recorded was
incorrect or unsubstantiated. The estimated dollar error from
these sample transactions was $29 million,\10 or 21 percent, for
accounts payable.
These errors were caused by ambiguous internal control procedures
that were often performed inconsistently, for example, unclear
guidance which resulted in transactions being incorrectly recorded.
Because operating expenses are substantiated in part by the accounts
payable process, the error rate pertains to a much larger universe of
transactions than the amount of such transactions in accounts payable
at year-end. These levels of errors and unsubstantiated amounts
contributed to the unreliability of IRS' cost information.
IRS' year-end closing procedures for accounts payable were also
inadequate. Based on a statistically projectable random sample
of 189 vendor payments made in October 1994, after the end of
fiscal year 1994, we estimate that $25 million\11 (in addition
to the $140 million recorded) should have been in accounts
payable in fiscal year 1994, but was not included.
We estimate that IRS' $1.3 billion of undelivered orders\12 was
overstated by $271 million.\13 First, we found undelivered
orders that should have been deobligated. We found (1) 16 items
that were from 6 months to 3 years old and, although the goods
or services had been fully received, the balances remained
obligated and (2) 9 items that were 1 year to 3 years old, but
no charges had been made, nor did it appear likely that any
charges would ever be made against the obligation. These 25
items totaled $38.8 million and were part of our statistically
projectable random sample of 176 items amounting to $502
million. Second, another 16 items in our sample totaling $8.4
million should have been shown as accounts payable instead of
undelivered orders since IRS had received the goods or services
during fiscal year 1994.
IRS routinely processed its interagency purchases in a poor manner
because key staff consistently did not follow established
procedures. These practices adversely affected the reliability
of IRS' cost information.
We found the following.
IRS plan managers were often late in securing obligating documents,
resulting in payments being made for interagency agreements that did
not yet exist. We found 20 payments out of 76 in our random sample
of expense transactions for interagency agreements where payments
were made before agreements existed, although later ratified. These
20 payments were for 6 interagency agreements.
Payments were made from IRS' Fund Balance with Treasury accounts for
goods or services purportedly provided, and neither IRS staff who
purchased the items nor accounting staff had any record of when and,
in some instances, whether the goods or services were ever received.
We found 77 out of 463, or 17 percent in our statistically
projectable random sample of expenses where IRS paid for goods and
services and had no support to show whether the goods or services
were ever received. We found that 5 of the 77 payments were made to
commercial vendors.
--------------------
\7 Internal Revenue Service: Need to Improve the Revenue Accounting
Control System (GAO/IMTEC-88-41, June 17, 1988) and Managing IRS:
Actions Needed to Assure Quality Service in the Future (GAO/GGD-89-1,
October 14, 1988).
\8 High-Risk Series: Internal Revenue Service Receivables
(GAO/HR-95-6, February 1995) and An Overview (GAO/HR-95-1, February
1995).
\9 The range of our confidence interval, at a 95 percent confidence
level, is that the actual amount of overstatement of earned income
credits as of September 30, 1994, was between $643 million and $1.6
billion.
\10 The range of our confidence interval at a 95 percent confidence
level, is that the actual amount of overstatement of accounts payable
as of September 30, 1994, was between $22 million and $36 million.
\11 The range of our confidence interval, at a 95 percent confidence
level, is that the actual amount of unrecorded accounts payable as of
September 30, 1994, was between $19 million and $31 million.
\12 The term undelivered orders refers to the value of goods and
services ordered and obligated which have not been received. This
amount includes any orders for which advance payment has been made
but for which delivery or performance has not yet occurred.
\13 The range of our confidence interval, at a 95 percent confidence
level, is that the actual amount of overstatements of undelivered
orders as of September 30, 1994, was between $196 million and $346
million.
CONTROLS OVER PROCESSING
RETURNS
---------------------------------------------------------- Letter :3.1
During fiscal year 1994, IRS processed almost 1 billion information
documents and 200 million returns. In most cases, IRS processed
these returns correctly. However, we found instances where IRS'
mishandling of taxpayer information caused additional burden on the
taxpayer and decreased IRS' productivity.
In fiscal year 1994, IRS processed about 102 million adjustments to
taxpayer accounts valued at $131 billion that resulted in increases
or decreases of taxes, penalties, and interest, or the removal of
credit or balance due accounts from the master files after the
statute of limitations had expired.\14 These adjustments were caused
by a variety of reasons, including IRS
assessing additional taxes, penalties, and interest resulting not
from taxes reported by the taxpayer but from taxes identified by
IRS' matching program, as discussed below, or from IRS'
examination of returns;
correcting IRS or taxpayer errors, found by either IRS or the
taxpayer;
correcting errors IRS made during the processing of tax returns
and/or in making cash receipts/payments;
assessing taxes against taxpayers that did not voluntarily file
their tax returns;
making adjustments to taxpayers' accounts as a result of amended
returns or correspondence; and
writing off accounts due to the collection statute expiration date
or refund statute expiration date.
IRS does not have a formal process for analyzing the causes of these
transactions, estimating their frequency and magnitude, and
determining whether cost-effective controls can be implemented.
Based on our random sample of 986 adjustment transactions, we found
that 219 cases, or 22 percent, resulted in additional burden to the
taxpayer and reduced productivity. Generally, this occurred because
IRS and the taxpayer spent time resolving issues that should never
have occurred.
In many cases, the additional taxpayer burden resulted from IRS'
implementation of certain enforcement programs it uses to ensure
taxpayer compliance, one of which is the matching program. This
program's problems in timely processing cause additional burden when
taxpayers discover 15 months to almost 3 years after the fact that
they have misreported their income and must pay additional taxes plus
interest and penalties. For example, in our review of 45
judgmentally selected\15 underreporter cases--used to identify
individuals who have misreported or not reported income and
withholdings--we found that IRS took an average of 2.5 years to
record the additional tax from the date the return was due. In our
review of 77 judgmentally selected substitute for return cases--which
identify individual taxpayers who have income but did not file a
return--we found that IRS took about 3.3 years to record the
assessment (taxes) to the individual master file. In 55 of these
cases, or 71 percent, the taxpayer did not respond or disagreed with
the assessment. When we had completed our audit work, 56 of these
cases were still outstanding. These issues are discussed in greater
detail in the Tax Return Processing section of this report.
In a matter that affects almost all of IRS' processes, we found that
its computer security environment was inadequate to protect against
employees' making unauthorized transactions and activities without
detection. This problem and other computer security issues have been
reported before and remain unresolved. These issues are discussed in
greater detail in the Computer Security section of this report. In
addition, we will be reporting to IRS separately on these matters.
These examples of internal control weaknesses demonstrate the
long-standing, pervasive nature of IRS' financial management
problems--weaknesses which contributed to our inability to audit IRS'
financial statements. The erroneous amounts discussed would not
likely have been identified if IRS' financial statements had not been
subject to audit. In part, IRS has concluded in its fiscal year 1994
Federal Managers' Financial Integrity Act (FMFIA) annual statement to
the Secretary of the Treasury, that it did not have reasonable
assurance that its accounting systems conformed to established
standards. However, IRS concluded that, except for the 11 material
weaknesses identified, it had reasonable assurance that the
objectives of internal control (section 2 of the FMFIA) had been
achieved. We disagree with this conclusion, given the severity of
the control weaknesses IRS reported and the additional weaknesses we
identified above.
Further, the errors and unsubstantiated amounts highlighted
throughout this report suggest that information IRS provides during
the year is vulnerable to errors and uncertainties as to its
completeness and that reported amounts may not be representative of
IRS' actual operations. The following section discusses IRS efforts
to date to correct these weaknesses and our suggestions for
additional actions needed to do so.
--------------------
\14 The collection statute of limitations generally provides IRS 10
years after the assessment to collect delinquent taxes. The refund
statute expiration date allows the taxpayer to file a claim for
credit or refund of an overpayment within 3 years from the time the
return was filed or 2 years from the time the taxes were paid,
whichever is later.
\15 We were unable to determine from the master files the population
of specific categories, such as underreporter and substitute for
return cases. Therefore, we judgmentally selected samples of these
categories.
FURTHER ACTIONS NEEDED
------------------------------------------------------------ Letter :4
IRS has made some progress in responding to the problems we have
identified in previous reports. With respect to accounting for
costs, IRS implemented a new administrative accounting system in
fiscal year 1993 to account for its day-to-day operations. The new
system should help IRS to correct some of its recurring transaction
processing problems. In addition, IRS successfully transferred its
payroll processing to the Department of Agriculture's National
Finance Center.
However, IRS has made very little progress in accounting for revenue.
For example, IRS has only fully implemented 2 of our 14
recommendations regarding revenue that resulted from our audits of
IRS' fiscal years 1992 and 1993 financial statements. While it has
begun to take action on many of our recommendations, it has
implemented only 13 of the total 59 recommendations we made, which
included recommendations relating to costs as well as revenues. The
13 implemented recommendations focused more on establishing needed
policies, not on specific problems that need to be remedied. The
status of each recommendation resulting from our prior financial
statement audits is discussed in appendix I.
As stated in our July 28, 1994, testimony\16 before the Senate
Committee on Governmental Affairs, IRS has not instituted procedures
to adequately ensure that
all revenues due to the federal government are identified so that
collection can be pursued;
errors in taxpayer information are detected and refunds of taxes
are appropriate;
appropriated funds are spent in accordance with applicable laws and
accurately accounted for; and
sensitive computerized information, such as taxpayer records, is
protected from unauthorized access, disclosure, or modification.
We have been concerned because IRS has not developed a detailed
strategic plan that would include both short-term and long-term
solutions to its financial management problems. Such concern
prompted us to send a September 12, 1994, letter\17 to the
Commissioner of Internal Revenue. In that letter, we enumerated the
problems that precluded IRS from preparing auditable financial
statements for fiscal year 1993 and the actions that were needed to
correct these problems. We stated that IRS' fundamental need is for
a clearly articulated plan detailing how it will prepare auditable
financial statements. This plan should have specific timetables and
individuals to be held accountable for completing, in a timely
manner, the corrective actions needed. As of May 1, 1995, no such
plan existed. Without a plan of this kind that addresses needed
short-term improvements, it is doubtful that IRS can complete
corrective actions expeditiously.
However, IRS needs to go beyond just planning for auditable financial
statements. The problems with IRS' revenue accounting system affect
its operations as well. IRS' revenue accounting problems are
especially impacted and complicated by out-of-date automated data
processing (ADP) systems that need extensive hardware and software
improvements and upgrades. We believe that the necessary actions are
multifaceted and encompass a variety of organizational, managerial,
technological, and procedural issues so that planning for auditable
financial statements needs to be integrated with a broader plan to
improve the revenue accounting system.
Revenue accounting issues are especially troubling because most of
these problems have been reported repeatedly for many years and yet
much remains to be done. Some key examples follow.
Over 7 years ago, we recommended that revenue accounting and all
feeder systems be put under the direction of the CFO and that
the CFO be given sufficient resources and authority to implement
the changes needed. We reiterated this position in our audit of
IRS' fiscal year 1992 financial statements. While the CFO has
been given some authority for making changes to these systems,
IRS has not committed sufficient resources to research the root
causes and identify solutions--work that should be done before
any changes are made.
Most solutions to revenue accounting problems are scheduled to be
undertaken or completed several years from now. No effective
interim plan exists to address these problems, which will likely
result in a continued inability to produce auditable financial
statements.
Weaknesses in accounts receivable continue to exist, although both
IRS and GAO have been reporting this information as unreliable
for years. IRS still does not have a credible subsidiary record
for accounts receivable. For fiscal year 1993, IRS began
reporting, as part of its audited financial statements, an
accounts receivable amount based on a statistical estimate.
However, this amount is only acceptable and useful for
periodically reporting an approximate financial statement amount
at a designated date. IRS is still unable to account for the
changes in accounts receivable from year to year and cannot
provide detailed information on the composition or aging of
accounts receivable.
Because of the limitations on its use in analysis, statistical
sampling is clearly limited and less precise than actual data for
assessing the effectiveness of collection efforts, analyzing
variances in the balance from year to year, and developing effective
collection strategies. IRS does not yet have an effective strategy
to create a detailed subsidiary record of accounts receivable, nor
does it have a short-term strategy to identify all those who
legitimately owe it money, despite our urging the development of such
strategies over several years.
While providing operating information for taxpayer assistance and
collection efforts continues to be an important consideration in the
structure of the master files and related feeder systems, the revenue
accounting information also needs to be provided. This will require
financial management expertise. Therefore, the key actions needed
immediately to begin to correct long-standing problems in IRS'
revenue accounting is to assign responsibility for revenue accounting
and all of the feeder systems directly to the CFO and to provide the
CFO with sufficient resources and authority to make needed
corrections. In addition, the CFO should be specifically charged to
do the following:
implement software, hardware, and procedural changes needed to
create reliable subsidiary accounts receivable and revenue
records that are fully integrated with the general ledger;
change the current federal tax deposit (FTD) coupon reporting
requirements to include detailed reporting for all excise taxes,
FICA taxes, and employee withheld income taxes; and
implement software changes that will allow the detailed taxes
reported to be separately maintained in the master file, other
related revenue accounting feeder systems, and the general
ledger.
IRS has attempted to address some of the problems we identified, but
it has not responded to the core problems identified in our prior
audit reports or our September 12, 1994, letter. For example, IRS is
developing its Accounts Receivable Dollar Inventory (ARDI) system to
provide various analyses of the amounts included in its inventory of
tax debts. However, the design and implementation of ARDI does not
correct the key flaw in IRS' accounting for accounts receivables--the
inability to differentiate between assessments made for enforcement
purposes that are not valid receivables and valid accounts
receivables. Therefore, while ARDI may provide an analysis of IRS'
inventory of tax debts, it will not provide better information on how
much is actually owed or information needed for any meaningful
analysis of the effectiveness of IRS' collection efforts.
Another example of IRS' problems in addressing its problems has been
in reconciling its Fund Balance with Treasury accounts. As a result
of our audits, IRS' problems in reconciling these accounts were
brought to light. Since our first financial statement audit of IRS
for fiscal year 1992, IRS has made several attempts to reconcile
these accounts. Over the last 3 years, hundreds of millions of
dollars have been written off when, after much research, the causes
of the unreconciled amounts could not be identified. We believe that
IRS should have had a plan to accomplish necessary write-offs for
fiscal year 1993 and put procedures in place to ensure that, in
subsequent years, reconciling items were promptly identified and
resolved. However, effective reconciling procedures have not been
put in place and, as of May 1, 1995, amounts continued to be
unreconciled and were not being promptly identified and resolved.
IRS has begun developing and upgrading the current RACS general
ledger system, which is expected to be operational by 1998.
Contracts for the computer hardware have recently been awarded and
the computers have been installed at two service centers. However,
the requirements and design for the new general ledger software have
not been completed. For the new general ledger to be effective, it
must provide an electronic interface between the general ledger and
the subsidiary systems so that detailed data are available to support
the financial statements. For example, the new general ledger system
must be able to provide data to support each type of tax collected,
which it is currently unable to do. In addition, its internal
control features should be standardized to ensure proper posting.
Until an effective RACS system is operational, IRS plans to rely on
its current systems and alternative sources for generating financial
information.
IRS needs to implement the 46 remaining recommendations from our
prior two financial audits as well as the corrective actions outlined
in our September 12, 1994, letter. There currently is no short-term
plan to do this effectively. IRS will not be able to accomplish the
needed corrective actions without a detailed plan with explicit
measurable goals and a set timetable for action. We believe the
detailed plan called for will be an essential ingredient to ensure
that IRS' efforts are focused and timely. Such a plan would also
provide IRS and the Congress a clear means for measuring IRS'
progress towards correcting the problems we have reported.
While correcting these problems is essential to IRS' efforts to
prepare auditable financial statements, it is perhaps more crucial
that IRS' senior management and the Congress have reliable
information on taxes collected and uncollected as well as the cost of
IRS' operations to properly oversee and evaluate IRS' performance.
It also is critical that IRS have effective controls to ensure that
the cash and other assets IRS is responsible for are protected from
loss and that IRS complies with the terms of its budget and the laws
governing the execution of its mission. Finally, certain budget
decisions the Congress is called upon to make, such as decisions
about IRS' enforcement budget, may be premised on the uncertain
information reported by IRS, further underscoring the urgency for
prompt and effective corrective actions. More forceful and directed
efforts will be required to attain the level of financial reporting
and controls that the Congress and the American taxpayer rightfully
expect of our nation's primary revenue collector.
--------------------
\16 Financial Audits: CFO Implementation at IRS and Customs
(GAO/T-AIMD-94-164, July 28, 1994).
\17 See "IRS Corrective Actions" (GAO/AIMD-94-184R) in appendix III.
This letter expanded on our previous findings and recommendations
transmitted to IRS in audit reports and correspondence or discussed
with IRS officials at meetings.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :5
In commenting on a draft of this report, IRS described the status of
actions it is taking or plans to take to correct deficiencies
discussed in this and prior reports. In addition, IRS reaffirmed its
commitment to the goals of the CFO Act to improve financial
management and to provide stakeholders and managers with accurate and
timely financial information. IRS' written comments are included in
appendix IV.
---------------------------------------------------------- Letter :5.1
The following sections of the report provide additional detail on our
findings regarding revenue collection, accounts receivable, tax
return processing, administrative operations, and computer security.
They also include our findings and conclusions on IRS' seized asset
program.
Charles A. Bowsher
Comptroller General of the
United States
May 1, 1995
REVENUE
=========================================================== Appendix 0
ADDITIONAL WEAKNESSES FURTHER
LIMIT IRS' ABILITY TO REPORT
RELIABLE INFORMATION
--------------------------------------------------------- Appendix 0:1
In addition to the issues discussed in our opinion letter and
Internal Control Environment, we identified areas where the design of
IRS' revenue accounting systems, IRS' absence of procedures for
reconciling its detailed master files records--taxpayer accounts--to
its reported amounts, and untimely analysis of suspense accounts\18
resulted in IRS reporting revenue information whose accuracy is
uncertain. We also assessed IRS' compliance with certain provisions
of the Internal Revenue Code (IRC) for certifying the proper
distribution of excise taxes and ensuring it notified the Joint
Committee on Taxation for certain refunds of $1 million or more.
These internal control weaknesses impair the Congress' ability to
provide effective oversight, obscure the financial impact of existing
tax policies, and weaken IRS' ability to manage its programs
effectively.
IRS' revenue accounting system was designed to record tax revenue
receipts and returns at a summary level, based on tax returns. IRS
has a fiduciary responsibility for collecting taxes on behalf of
other federal agencies and certifying to the Department of Treasury
the amounts to be distributed to the recipient agencies. Recording
revenue receipts and returns at a summary level, based on the tax
return, as opposed to in detail for the various taxes collected and
by recipient, minimizes IRS' ability to readily, if at all, determine
and report the correct amount of taxes to be distributed to other
agencies, as well as the financial impact of tax policy decisions.
IRS does not routinely verify that summary amounts reported on the
various taxes it collects equal amounts included in its detailed
taxpayer account records and, where it attempted to do so, IRS
identified differences it could not explain. As part of our audit,
we tried to reconcile taxpayer accounts to reported amounts for the
various taxes collected and found additional differences that IRS
could not explain. Some examples follow.
IRS cannot provide detailed information on collected taxes because
neither the documentation accompanying tax payments by
businesses nor the related tax returns provide the needed level
of detail. For example, IRS captures excise tax receipt
information from coupons accompanying Federal Tax Deposits
(FTDs).\19 However, IRS cannot provide detailed information on
the amount of excise taxes because all 50 specific excise taxes
are reported under 1 of 11 categories of tax included on the
coupon with no differentiation on how the amount paid is to be
distributed to each recipient of taxes collected. During fiscal
year 1994, IRS analyzed excise taxes by specific trust fund\20
to determine if there were significant differences between taxes
paid and amounts reported as owed on the return. IRS determined
that the differences between cash receipts and liabilities were
between $1 million and $64 million for the almost $98 billion in
excise taxes reported. This analysis compared only taxes
collected to taxes owed where IRS' detailed taxpayer accounts
showed that the full amount had not been paid. Because IRS
completed the analysis in fiscal year 1994 after our audit work
was substantially completed, we were unable to determine the
reliability of the analysis this year. However, in performing
preliminary audit procedures on the analysis, we found that the
$118 million balance that IRS' analysis identified as unpaid
excise taxes could be understated by as much as $43 million. We
will test its reliability further in our fiscal year 1995 audit
of IRS.
Similar to specific data on excise taxes, the FTD coupon combines
social security taxes with income taxes withheld from employees.
Thus, IRS also cannot determine the actual amount of social
security receipts collected. While by law, IRS is required to
transfer these receipts to the Social Security Administration
based on assessments, it should also determine the actual amount
that is collected in order to accurately report amounts
collected to the Congress and others.
Because IRS' accounting systems do not reconcile detailed excise
tax information to amounts reported to Treasury for distribution
to the trust funds in a timely way, IRS' Supplemental Financial
Information to the financial statements contained balances on
distribution of taxes that were (1) inconsistent with
information presented on the face of the statements and (2)
unsupported.
First, IRS performs reviews of quarterly excise tax returns to
calculate the proper amounts that should be distributed to the
various trust funds. However, as of April 1, 1995, IRS had only
completed its review of the quarter ending June 30, 1994. After we
brought these problems to IRS' attention, IRS updated the
Supplemental Financial Information to include the quarter ending
September 30, 1994. We were unable to review this data because it
only became available after our audit procedures were completed.
Second, IRS was unable to support $1.9 billion, or 5 percent, of
$41.3 billion of excise tax receipts identified as unclassified
excise taxes. According to IRS personnel, the discrepancy is partly
due to timing differences and transactions included in the total that
do not represent excise tax transactions. However, no documentation
was available to support this assertion.
In addition, the compliance matters regarding the legal requirement
that IRS certify distribution of excise taxes based on collections
rather than the amount reported on the tax return--IRS certifies
based on the return amount--correct receipt information is otherwise
needed. Without this information, IRS cannot determine and the
Congress will never reliably know the financial impact of any
resulting subsidies--including those allowed by law, such as social
security funds. In the analysis of social security funds, IRS
determined that the difference between cash receipts and the tax
liabilities used in distributing funds was approximately $3.6 billion
over 4 years. Because IRS' methodology did not take into account the
effect of invalid transactions such as invalid accounts receivable,
these amounts may be misstated.
As part of Tax Systems Modernization (TSM), IRS has designed the
Electronic Federal Tax Payment System (EFTPS), to electronically
receive deposits from businesses. EFTPS is planned to be operational
by early 1996. If implemented as designed, EFTPS will have the
capability of collecting actual receipt information for excise and
social security taxes. However, based on current regulations, not
all employers will be required to use EFTPS to make their FTD
payments. According to IRS officials, approximately 20 percent of
the employers that make FTD payments will have the option of
remaining with the current system, which provides limited
information. Therefore, even if employers that use EFTPS are
required to provide additional information on social security and
excise taxes, to the extent that some businesses will still make
deposits using the current system, IRS will not have the complete
information it needs to determine collections from excise and social
security taxes.
In addition to capturing insufficient detailed information for tax
receipts, IRS does not resolve amounts initially recorded in suspense
accounts in its general ledger (RACS) in a timely manner. Some
examples follow.
IRS does not ensure that all revenue transactions in process were
recorded in the proper fiscal year because IRS could not
identify detailed support for these balances so that proper
analysis could be performed timely. As of September 30, 1994,
transactions in process, related to tax receipts, tax returns,
adjustments, and other items, were a net $101 billion. During
fiscal year 1994, IRS developed computer programs and procedures
to attempt to determine the proper posting of these
transactions. By using these procedures, IRS identified
approximately $90 billion in transactions that had not been
posted to taxpayers' accounts on the master files until the next
fiscal year due to the length of IRS' processing cycle. Because
IRS did not complete the analysis until after our audit work was
substantially completed, we were unable to assess the
reliability of the analysis this year.
In addition, IRS could not identify the transactions that made up the
remaining $11 billion because no analysis had been performed. IRS
stated that these amounts probably relate to transactions which may
not post to taxpayers' accounts without IRS or taxpayer intervention.
For example, instances where the taxpayer's identifying information
was inconsistent with taxpayer information on the master files could
result in incorrect taxpayer balances and require contact with the
taxpayer to resolve the discrepancy.
IRS does not promptly analyze and resolve frozen credits, hindering
its ability to properly report these amounts in its financial
statements. Accounts with frozen credits consist of payments
that exceed assessments and may be potential refunds. IRS may
freeze an account for a number of reasons--for example to
investigate potential fraudulent refund schemes, undeliverable
refunds, IRS litigation against the taxpayer, or a return not
being recorded. As of September 30, 1994 and 1993, there were
$44 billion and $39 billion, respectively, of frozen credits.
IRS attempted to resolve this problem by performing summary
analyses of these accounts without reviewing related taxpayer
transactions. As a result, we were unable to determine whether
frozen credits were accurate or properly reported in the
financial statements.
Based on our analysis of the data, 628,000 taxpayer modules, or about
35 percent of the credit balances, were over a year old, with a total
dollar value of $9.6 billion. Of the 628,000 modules, 70 percent
were for amounts of $1,000 or less. In our random sample of 107
frozen credits, we found 48 frozen credits that had been created by
IRS errors, resulting in additional taxpayer burden and reduced
productivity. For example, one taxpayer filed a 1992 tax return that
IRS recorded for tax year 1962 in its IMF. As a result of this
error, the taxpayer received a notice from IRS requesting payment of
interest and penalties. Because the taxpayer had paid the tax
reported on the tax return, the taxpayer identified and notified IRS
of the error. IRS did not correct the taxpayer's account to reflect
the current tax year but did abate the interest, the penalties, and
the tax amount. By abating the tax amount, IRS created a credit
balance in the taxpayer's account. To resolve the credit amount, IRS
needs to reverse the abatement transaction relating to the taxes.
The processing of certain expedited refunds resulted in invalid\21
accounts receivable balances. IRS expedites refunds in certain
situations--for example, when refunds are greater than $1
million (to reduce interest costs), in cases of financial
hardship, or when refund checks have been lost. Expedited
refunds are processed manually, outside the normal process. For
this reason, they are sometimes recorded to the taxpayer's
account before the tax return or related tax adjustment. When
this occurs, IRS appears to have advanced funds to the taxpayer.
Although this serves as a control to ensure that the adjustment
is recorded to the taxpayer's account and interest costs are
limited, it also creates a receivable in IRS' accounting
records. For example, in July 1994, as the result of a court
decision, IRS issued 22 expedited refunds amounting to over $333
million. These amounts were included in the September 30, 1994,
inventory of tax debts\22 included in the RACS general ledger,
even though the taxpayers did not owe any taxes. The
receivables were eliminated when adjustments to reduce tax
liabilities for the various taxpayer accounts were recorded in
April 1995.
In a related issue, IRS is generally required by law (26 U.S.C.
6405) to notify the Joint Committee on Taxation of certain refunds
and credits in excess of $1 million 30 days before issuing such
refunds or credits. For fiscal year 1993, we reported that 113 out
of 118 refunds and credits in excess of $1 million were authorized
without proper notification to the Joint Committee. After we issued
our opinion on IRS' fiscal year 1993 financial statements, staff of
the Joint Committee advised us that IRS and the Committee have had a
long-standing agreement that, under section 6405, IRS would submit to
the Committee only refund claim cases resulting from an IRS
examination, not cases where the refund is claimed on the return. We
were not aware of this arrangement at the time of our prior report,
and IRS did not inform us of it in its comments on our draft report.
From our fiscal year 1994 testing of 176 refunds greater than $1
million, we found that 126 cases did not require Joint Committee
notification, under the Committee agreement with IRS, because the
refunds were claimed on the return. Of the remaining 50 cases which
resulted from examinations and thus should have been brought to the
Joint Committee's attention, we determined that IRS (1) properly
notified the Joint Committee for 32 cases, and (2) was unable to
provide adequate documentation to determine whether the Joint
Committee had been properly notified for 16 cases. For the remaining
2 cases, IRS notified the Joint Committee but only after it had
already issued the refund. For example, we identified one
examination case where a refund was issued to the taxpayer in
February 1994, but IRS did not notify the Joint Committee until
September 1994.
--------------------
\18 Suspense accounts include those transactions awaiting posting to
the appropriate taxpayer account or those transactions awaiting
resolution of unresolved questions. Those accounts would include,
but not be limited to, frozen credits and in-process transactions,
which are discussed later in this section.
\19 FTDs are payments made through the Department of Treasury's
deposit system by business taxpayers on a weekly to quarterly basis,
depending on the type and amount of tax owed. Businesses pay 11
types of taxes, including employment taxes, withholding, corporate
income taxes, and excise taxes. Currently, business taxpayers
manually prepare FTD coupons by writing in the dollar amount, tax
quarter, and type of tax paid. Under the Electronic Federal Tax
Payment System (EFTPS), discussed later in this section, FTD deposits
will be sent electronically.
\20 IRS collects funds for 11 excise trust funds including Highway,
Airport and Airways, Mass Transit, Superfund, Black Lung, Oil Spill,
Leaking Underground Storage Tanks, Vaccine Injury Compensation,
Aquatic Resources, Earmarked, and Inland Waterways.
\21 Throughout this report, we refer to invalid receivables as those
assessments which should not be included for financial reporting
purposes. However, we recognize that IRS needs to account for those
assessments for enforcement and compliance purposes.
\22 The inventory of tax debts includes all outstanding debts owed by
taxpayers that are in IRS' detailed accounting records, even though
many are invalid for financial reporting purposes. Valid accounts
receivable are included in IRS' inventory of tax debts and represent
those items where IRS has established a claim to cash or other assets
of the taxpayer.
ACCOUNTS RECEIVABLE
=========================================================== Appendix 1
ACCOUNTS RECEIVABLE ARE
INACCURATE AND REMAIN A HIGH
RISK
--------------------------------------------------------- Appendix 1:1
GAO and OMB have identified accounts receivable as a high-risk area
for several years. As stated in our February 1995 high-risk series
of reports, IRS efforts to collect delinquent taxes have been
inefficient.
To develop its accounts receivable, IRS extracts its inventory of tax
debts from its individual master file (IMF), business master file
(BMF), and nonmaster file (NMF). As of September 30, 1994, the IMF
and BMF inventory of tax debts was $166 billion,\23 many of which
were 5-years old or older. Table 1 illustrates the dollar value of
the IMF and BMF inventory of tax debts by type of return and age.
Table 1
IMF and BMF Inventory of Tax Debts by
Type of Return and Age
(Dollars in millions)
Less 1 to 3 to
than 3 5 5 yrs.
Type of tax return 1 yr. yrs. yrs. or older Total
-------------------------- -------- ------ ------ -------- ------
1040 -U.S. Individual $17,657 $20,72 $14,34 $22,663 $75,38
4 0 4
941 -Employer's Quarterly 5,766 7,430 7,849 19,669 40,714
1120 -U.S. Corporation 5,630 7,726 2,554 5,470 21,380
Other IMF Returns 1,416 2,933 3,146 7,252 14,747
940 -Employer's Annual 425 731 1,002 2,313 4,471
Federal Unemployment
706 -U.S. Estate 3,296 212 114 165 3,787
Other BMF Returns 966 808 845 1,168 3,787
720 -Quarterly Federal 295 315 233 722 1,565
Excise
======================================================================
Total $35,451 $40,87 $30,08 $59,422 $165,8
9 3 35
Percentage 21.4 24.7 18.1 35.8 100
----------------------------------------------------------------------
Table 1 includes valid and invalid amounts. IRS cannot separately
identify its valid accounts receivable from invalid accounts
receivable. For example, when IRS' information return matching
process identifies that a taxpayer received a W-2 but did not file a
tax return, IRS creates a return for the taxpayer. For the most
part, this is done using the standard deduction and single filing
status. This profile often results in the taxpayer owing taxes. IRS
sends a notice to the taxpayer to encourage the taxpayer to file a
return so that the right amount of tax can be determined. If the
taxpayer does not respond, IRS records this as an assessment of tax
in its master files without any differentiation from other master
file entries that are valid accounts receivable. This assessment
would not be a valid account receivable for financial reporting
purposes because the taxpayer has an opportunity to, and often does,
refute the amount. IRS cannot readily identify how much of its
inventory of tax debts represents these types of items.
For its financial statements, IRS estimates valid and collectible
accounts receivable using a statistical sampling methodology. As of
September 30, 1994, IRS reported an estimate of valid receivables of
$69.2 billion,\24 of which $35 billion\25 was deemed collectible.
Based on our random sample of 195 receivables from the 3,220
receivable cases used by IRS, we disagreed with IRS in 37 out of 195
cases, or 19 percent, on the validity of the receivable, and in 34
out of 195 cases, or 17 percent, on the collectibility of the
receivable.
The validity estimate may be misstated, in part, because IRS excludes
receivables classified in its currently not collectible (CNC)
category as invalid. This category represents receivables where IRS
concluded it was not cost-effective to pursue collection. Taxpayers
included in this category are those IRS cannot locate or whom IRS has
concluded cannot currently pay.
For the purposes of its statistical sampling methodology, CNCs are
included in IRS' sample selection population to estimate collections
from these cases, and the collectible amounts are added back to their
accounts receivable estimate. This misstates accounts receivable
because only the collectible portion, and not the full amount owed,
is added back. Some of the accounts receivable in this category
should be removed, for financial reporting purposes, from IRS'
reported receivables, such as those for deceased taxpayers with no
estate, defunct corporations, or corporations without assets. For
example, we found that 16 of the 57 CNC cases, or 28 percent, in our
random sample of 195 items, were valid, even though in some instances
they may not have been fully collectible, while IRS' methodology
considers them invalid.
While estimating accounts receivable provides a clearer picture of
the amount of tax revenue that could be realized, statistical
sampling has its limitations for the purpose of managing accounts
receivable and assessing the outcome of IRS' enforcement programs to
improve collections of accounts receivable. For example, IRS cannot
explain why its estimate of the collectible receivables increased by
$5.7 billion from September 30, 1993, to September 30, 1994. IRS may
have a general idea of the increase, but it cannot readily provide
specifics by taxpayer or what impact its collection tools, such as
offers in compromise, had on the increase.
In an effort to address its multiple problems in accounting for and
reporting its revenue collection activities, including accounts
receivable, IRS is in the process of redesigning its RACS general
ledger system. However, this redesign effort does not include plans
for distinguishing between valid and invalid receivables in IRS'
master files. IRS' master files provide the detail for the
summarized amounts for IRS' inventory of tax debts included in RACS
and thus errors will still persist if the redesign effort does not
correct this problem. IRS' general ledger should provide the summary
data, while the subsidiary systems should provide the detailed data.
The detailed data should be able to tell IRS management and the
Congress why the receivables went up by taxpayer account and the
reason valid and invalid receivables created for enforcement purposes
varied from one year to the next.
Not having complete and accurate data on accounts receivable hinders
IRS' ability to develop the best collection strategies, determine
staffing levels, put resources to their best use, and measure
performance. For example, IRS does not capture account related
information to evaluate the impact of specific types of levies, such
as garnishing wages or levying bank accounts.
High error rates and inefficient systems also create additional work
for both IRS and taxpayers. With the proper information, IRS could
develop an overall strategy to better ensure that it is recovering
the most revenue at the lowest cost and to evaluate the effectiveness
of numerous collection tools and programs. Such evaluations would
help IRS improve the efficiency and productivity of the collection
process.
In addition, because IRS lacks reliable data on accounts receivable,
the presentation and disclosure of accounts receivable information
reported in its financial statements to the Congress and to Treasury
are not as useful or meaningful as they should be. The presentation
and disclosure of accounts receivable in IRS' fiscal year 1994
financial statements only show the valid and collectible amount based
on IRS' statistical sample and general information on the types of
receivables that were excluded from the balance. They do not provide
detailed information about the tax receivable activity during the
year. For instance, IRS does not disclose the number and dollar
value of new receivables established during the year; the amount
collected from receivables during the year; or any detail on the
composition of receivables by source, age, and tax class.
--------------------
\23 In its February 1, 1995, statement before the Subcommittee on
Treasury, Postal Service, and General Government, House Committee on
Appropriations, IRS reported that its inventory of tax debts was $156
billion. This amount excludes duplicate trust fund recovery
penalties and Resolution Trust Corporation assessments of $15
billion. The $166 billion does not include receivables from the
nonmaster file, which represent $5 billion, or 3 percent of the
inventory of tax debts.
\24 The range of IRS' confidence interval, at a 95 percent confidence
level, is that the actual amount of valid accounts receivable as of
September 30, 1994, was between $66.1 billion and $72.3 billion.
\25 The range of IRS' confidence interval, at a 95 percent confidence
level, is that the actual amount of collectible accounts receivable
as of September 30, 1994, was between $34 billion and $36 billion.
TAX RETURN PROCESSING
=========================================================== Appendix 2
INEFFICIENT PROCESSING COSTS
TAXPAYERS AND THE GOVERNMENT
--------------------------------------------------------- Appendix 2:1
America's income tax system depends on taxpayers' voluntarily filing
returns and paying taxes and IRS' effective processing of millions of
tax returns. In many cases, we found that IRS processes tax returns
and payments correctly. However, we found several instances where
additional burden was caused by IRS' mishandling of taxpayer
information. This was evidenced by (1) unnecessary contacts with
taxpayers, (2) IRS' lateness in contacting the taxpayer, resulting in
refunds being delayed, and (3) inefficiencies in IRS systems and
manual processes that result in revenue losses and additional burden
that could have been avoided.
In fiscal year 1994, IRS processed about 102 million adjustments to
taxpayer accounts valued at $131 billion that resulted in increases
or decreases of taxes, penalties, and interest, or the removal of
credit or balance due accounts from the master files after the
statute had expired. As discussed in the Internal Control
Environment section of this report, these adjustments were caused by
a variety of reasons.
UNNECESSARY CONTACTS RESULT
IN ADDITIONAL BURDEN
------------------------------------------------------- Appendix 2:1.1
Additional burden on taxpayers occur when unnecessary contacts are
made by IRS to the taxpayer, or the taxpayer to IRS. The taxpayer
may have to contact IRS when (1) IRS does not make needed changes to
the master files, which generates erroneous notices to the taxpayers
or delays refunds, and (2) IRS takes too long to respond to
correspondence or to process amended returns.
Based on our random sample of 986 adjustment transactions, we found
that 219, or 22 percent, resulted in additional taxpayer burden and
reduced productivity. An example of what we found was one case where
IRS could not find the taxpayer's form 2553--election for S
corporation status\26 --that the taxpayer stated was filed on March
2, 1987. When the IRS did not respond to the filing, the taxpayer
corresponded with IRS at least one time regarding this election to
ascertain the status of the filing. The taxpayer heard nothing from
IRS. On the assumption that IRS had accepted the election, the
taxpayer filed the 1987 and 1988 returns based on the S corporation
election. The 1987 return was accepted by IRS as an S corporation,
and a refund was issued. However, in 1990, IRS sent a notice to the
taxpayer stating that no form 2553 had been filed and that the
taxpayer had to file as a corporation for tax year 1988. The
taxpayer had a copy of the form, but IRS, as is its policy, would not
accept the form, because it did not have IRS' date of receipt stamp
on it. Nevertheless, one IRS office, pointing to the taxpayer's
correspondence, stated that there was no reason to believe that the
form 2553 was not filed on time. But another office rejected this
claim and assessed the taxpayer as a corporation--
which meant additional taxes due. The taxpayer petitioned the
assessment to the Appeals Branch, which reduced the assessment by
half. In 1994, the taxpayer paid the amount, even though the
taxpayer argued that he owed nothing and that IRS merely lost the
filed form. The taxpayer's inquiry as to the status of the filing
should have put IRS on notice that its master file may have been
incomplete. Had IRS addressed this matter promptly, both IRS and the
taxpayer might have avoided action by the Appeals Branch and its
resulting burdens.
In another example, we found that IRS failed to adjust a BMF account
in a timely manner. The taxpayer, who owned the business, inquired
about a notice assessing additional penalties against the business on
October 30, 1989. Based on documentation, IRS agreed to abate the
penalties for reasonable cause on December 6, 1989. However, the
transaction was not posted to the BMF until 1993, when the taxpayer's
accountant inquired as to whether the penalties were abated. During
this time, the taxpayer received notices for the penalties. IRS took
money from the taxpayer's individual account on the IMF, and the
taxpayer also paid the penalties based on the notices. After IRS
determined that the original abatement was not made, it corrected the
taxpayer's account--abated the penalties--and issued the taxpayer a
refund.
In another example, a taxpayer filed an amended return on November 8,
1993. IRS made the adjustment to the IMF on December 30, 1993.
However, the account had an erroneous freeze code that restricted the
issuance of the refund. Eventually, the taxpayer filed another
amended return on September 14, 1994, and IRS found the error and
made the correction--eliminated the freeze code--and issued a refund
to the taxpayer.
--------------------
\26 S corporations are small corporations that operate like
partnerships and thus are not taxed as a separate entity.
UNTIMELY PROCESSING CAUSES
DELAYED CONTACT WITH THE
TAXPAYER
------------------------------------------------------- Appendix 2:1.2
In many cases, additional taxpayer burden resulted from IRS'
implementation of certain enforcement programs it uses to ensure
taxpayer compliance. One such program is the matching program. IRS
uses data obtained from the Social Security Administration (SSA) and
third parties, such as banks and other financial institutions, to
compare or "match" to information filed by taxpayers on their tax
returns. The lateness of the matching program results in additional
taxpayer burden when taxpayers are unaware that they have misreported
their income when they file a tax return and, discover, 15 months to
almost 3 years later, that they must pay additional taxes plus
interest and penalties. The program's untimeliness also reduces
productivity. For example, if a taxpayer moves and leaves no
forwarding address, IRS must expend resources to try to locate the
taxpayer.
IRS' matching programs are an effective tool for uncovering taxpayer
noncompliance and underreporting. While these programs may create
some additional burden, they also are an effective means for IRS to
retrieve revenues that might otherwise be lost. However, in order
for these programs to be as effective as possible, they must be more
timely.
The information used in IRS' matching efforts are 1040 individual
income tax returns, W-2 information provided by SSA, and other
information returns--form 1099, form 1098, form 5498, and form K-1.
Form 1099 information returns are required to be sent to IRS by the
person or entity who paid or distributed various types of income,
such as interest income and dividends. Form 1098 information returns
are required to be sent to IRS from entities receiving mortgage
interest payments. The form 5498 is used to report individual
retirement arrangement information, and the form K-1 is used by
entities to report shares of income, credits, and deductions to
beneficiaries, partners, and shareholders.
IRS performs this match only once each tax year, because this program
is a significant drain on IRS' normal operations due to serious
limitations in its current computing capacity. For example, IRS
officials stated that the actual match for 1993 data required
approximately 140 hours of computer time, or about 1 week of
24-hour-a-day processing.
To identify underreported income and nonfilers, IRS only performs the
match from the information returns it receives from SSA and third
parties, such as banks, to the information recorded on IRS' IMF from
the taxpayer's return. IRS does not match the income and related
withholding reported on the taxpayer's return, which is recorded on
the IMF, to related information returns to detect false income and
withholding fraudulently reported, which could result in a taxpayer
receiving a refund. According to IRS officials, the reason this
match is not done is because IRS' current systems do not have
sufficient capacity nor processing time available to do so.
Figure 1 shows the matching process for tax year 1993, the most
recent matching data available.
Figure 1: Matching Process for
Tax Year 1993
(See figure in printed
edition.)
\a Estimated time for action.
\b Estimated time is based on GAO's review. IRS is currently
exploring alternatives to minimize this delay. For example, IRS
intends to reduce the number of TY 1993 cases to be worked to
expedite their completion.
Source: GAO analysis of IRS'
data.
(See figure in printed
edition.)
The majority of information returns, such as those mentioned above,
are sent directly to IRS' revenue computing center via magnetic tape
or disk. Other information and tax returns are filed at the service
centers on paper. The data on these documents are then entered onto
an electronic medium and sent to IRS' revenue computing center. As
shown in figure 1, IRS receives tax returns and information returns
at various times during the year.
By May 31, or about 1 month after the April 15 filing deadline, IRS
usually has received almost all of the information it uses for
matching. Though these returns and information are due and typically
received by May 31, IRS continues to receive corrected and late
information returns throughout the year. For tax year 1993, IRS
received approximately 95 percent of the information for the match
approximately 5 months after the April 15 filing deadline. However,
IRS did not conduct the match until early February 1995.
This delay was partly caused for 1993 returns because IRS revised the
computer program used for the match due to legislative changes and
design improvements. As shown in figure 1, IRS took from January 1,
1994, until December 1994 to design, test, and validate these
revisions. Among the reasons for the delays in completing these
changes are IRS' antiquated computer system which still uses assembly
language--an outdated and difficult to program computer language--and
its limited number of programmers who are able to make these program
changes and who have many competing demands for their time.
After the match was completed at IRS' revenue computing center, the
mismatches were computer analyzed and sorted. This processing took
more than a month. The cases were then made available for service
center selection. The 6 service centers, who are responsible for
resolving these cases, received the mismatch cases in March 1995 and
then generated automated requests for the tax return files from the
various facilities where the returns were stored. By May 1995, the
service centers plan to begin selecting cases to resolve identified
mismatches--13 months after the April 15 deadline.
High-dollar discrepancy cases are given priority for review by the
service centers. Before a notice is sent to the taxpayer, however,
IRS verifies the information identified from the match to the
information recorded on the tax return to ensure that the taxpayer
did not record data in the incorrect place on the tax return.
As a result of one of its matching programs, IRS can identify
individual taxpayers who have misreported or not reported income and
withholdings--the underreporter program. In our review of 45
judgmentally selected underreporter cases, as of September 30, 1994,
we found that it takes IRS approximately 2.5 years to record the
additional taxes related to the unreported income from the date the
tax return was due. We found it took IRS an average of 21 months,
ranging from 6 to 27 months, to initially issue a notice informing
the taxpayer of the discrepancy in their return after the tax return
was due. We found that IRS' lateness in contacting the taxpayers,
contributed to 22 of the 45 cases, or 49 percent, of the
underreporter cases in our sample that still had an outstanding
balance of unpaid taxes.
Further, the matching program also identifies individual taxpayers
that have income but have not filed their tax returns--the nonfiler
program, specifically the substitute for return program. If the
taxpayer does not respond to inquiry notices generated from this
program, IRS independently prepares a tax return and related
assessments. These assessments are generally based on very limited
information, such as that gathered from forms W-2 and 1099. For
these cases, IRS assesses the maximum potential tax owed. Before IRS
assesses the taxes, it will issue two notices apprising the taxpayer
of his/her right to file a return or to file an appeal.
In our review of 77 judgmentally selected cases where IRS created a
"dummy" return for the taxpayer, as of September 30, 1994, we found
that IRS took approximately 3.3 years to record the assessment
(taxes) to the IMF. In 11 cases, IRS took over 4.5 years to make the
assessment. Due to the length of time IRS takes to assess the taxes,
taxpayers may not respond and collectibility is reduced. In 55 of
the 77 cases, or 71 percent, the taxpayer did not respond or
disagreed with the assessment. Of the 77 cases, 56 cases, or 73
percent, were still outstanding.
Once the assessment is made, IRS' collection process will begin. IRS
will issue up to 5 notices requesting payment. However, if the
taxpayer has not responded to the first 2 notices prior to
assessment, it is highly unlikely they will respond to these. As
reported in our high-risk report on accounts receivable,\27 the
collection process is outdated, costly, and inefficient. Clearly in
these cases, IRS could attempt earlier telephone contact with the
taxpayer versus issuing notices that are undeliverable or that result
in no taxpayer response. But, most important, IRS must develop a
means to expedite identification of taxpayers who owe.
In addition, IRS' experience has shown that the later enforcement
activities begin, the less likely IRS will be able to collect the
full amount due from the taxpayer. For this reason, it is imperative
that IRS (1) identify and notify noncompliant taxpayers and (2)
commence collection activities against delinquent taxpayers in a more
timely manner. Under current IRS systems, little can be done to
significantly reduce these time lags. A redesigned system that
allows real time comparisons of data would enable IRS to perform more
immediate matching.
--------------------
\27 Internal Revenue Service Receivables, (GAO/HR-95-6, February
1995).
INEFFICIENCIES IN IRS'
OPERATIONS
------------------------------------------------------- Appendix 2:1.3
Additional burden on taxpayers and reduced productivity also result
from inefficiencies in IRS' operations. For example, IRS' Trust Fund
Recovery (TFR) Penalty program--one of its enforcement tools designed
to collect unpaid social security and federal income taxes--relies on
manual processing of thousands of transactions because its computer
systems are unable to make systematic adjustments to accounts. This
manual process creates additional taxpayer burden and causes
misstatements in accounts receivable.
Business taxpayers who have employees and pay wages must file a
quarterly employment tax return (form 941). This return reports the
amount of trust fund taxes and non-trust fund taxes the employer must
pay to the government. Trust fund taxes are social security and
federal income taxes employers withhold from employees' paychecks.
Non-trust fund taxes are the employers' portion of taxes not withheld
from employees.
When a business fails to pay its trust fund taxes, IRS can impose a
TFR penalty on any officers of the business found to be "willful and
responsible" for not paying the taxes. The penalty amount is the
same amount of the withheld portion of employment taxes not paid.
Although called a penalty, it is essentially a means for transferring
the unpaid trust fund taxes to the individuals who were responsible
for paying the tax on behalf of the business. Although IRS can
assess the penalty on multiple officers, IRS' policy states that it
will collect the amount once.
Revenue officers in IRS district offices conduct an investigation to
determine the corporate officer(s) responsible for paying the trust
fund taxes. The revenue officer will propose a TFR penalty on any
officer found to be responsible for not paying the taxes. The
officer may appeal the TFR penalty recommendation, which could cause
an extended delay between the recommendation and the actual
assessment. During this time, the business taxpayer may make
payments on their account.
The business assessment is recorded on the BMF and the TFR penalty
assessment is recorded on the IMF. There is no systemic link between
the BMF and IMF, and transactions affecting one account are not
automatically recorded to other related accounts.
Our review of 80 randomly\28 selected TFR penalty cases found the
following.
IRS computer systems do not link taxpayer accounts related to TFR
assessments, which results in inefficient and time-consuming
manual processing. Payments or credits were made to reduce an
account in 41 of the 80 cases we reviewed. IRS took an average
of 316 days to reduce the related taxpayer accounts. In 17 of
the cases, IRS took more than 90 days to reduce the account; in
9 cases, it took more than a year; and in 1 case, it took almost
7 years to reduce the account.
Almost one-half of the TFR penalty accounts we reviewed had
misstated account balances. These accounts were overstated by
$2.3 million, or 9 percent of the reported accounts receivable
included in the TFR cases we tested. Overstatement of these
accounts could result in IRS collecting incorrect amounts from
taxpayers and increases the chance of collecting more than the
taxpayer owed. We identified 9 accounts in which IRS collected
a total of $158,000 more than the taxpayers owed.
IRS erroneously assessed TFR penalties on trust fund taxes not owed
because there were no controls to ensure that the business
liability still existed before IRS made the TFR assessment. We
identified 15 cases in our 80 case sample in which the business
taxpayers paid $195,000 between the time the revenue officer
determined the penalties and the time IRS assessed the
penalties. For these 15 cases, IRS assessed a total of $1
million; however, we found that for 12 of these cases, IRS
should have reduced the penalties by $117,000 because of
payments or credits made.
The identification and resolution of these problems need to be
efficiently and timely performed in order to reduce additional burden
and increase productivity.
--------------------
\28 Because the IMF and BMF are not linked, we were unable to
determine a population of all businesses and the related individuals
who were assessed a TFR penalty. Thus, although these 80 cases were
randomly selected, they are not projectable to the universe of TFR
penalty cases.
ADMINISTRATIVE OPERATIONS
=========================================================== Appendix 3
ACCOUNTING FOR APPROPRIATED
FUNDS HAS IMPROVED BUT MORE IS
NEEDED
--------------------------------------------------------- Appendix 3:1
IRS successfully implemented its new administrative accounting system
in fiscal year 1993. This new system better positions IRS to correct
some of its administrative accounting problems and provides a good
foundation for building accurate and reliable cost data that can be
used to determine the costs of IRS' operations. However, some of the
potential improvements that could be realized from this new system
have been undermined by IRS' failure to establish and carry out
rudimentary internal controls.
As discussed in our opinion letter, IRS continues to have problems
reconciling its fund balance with Treasury accounts, and it has not
been able to provide support to show that goods and services were
received for purchases made from other government agencies. Further,
IRS' accounting records continue to have significant amounts of
adjusting and correcting accounting entries, several of which we
found to be incorrect. These problems make the accuracy of any
underlying cost information IRS uses to compute performance measures
or to report the costs of its operations to the Congress or others
uncertain. Also, IRS continues to have problems achieving the goals
of the Prompt Payment Act. IRS continues to regularly make late
vendor payments.
IMPLEMENTATION OF GENERAL
LEDGER SYSTEM PROVIDES A
SOLID CORE FOR IRS'
FINANCIAL MANAGEMENT
IMPROVEMENT EFFORTS
------------------------------------------------------- Appendix 3:1.1
Information in IRS' core general ledger system and its related
subsidiary records should be the foundation for any cost accounting
system, cost information used for performance measures, and financial
reporting done by IRS. The most crucial aspect of any financial
management system is a core general ledger system that accurately
describes and records all revenues, receipts, expenses,
disbursements, and accruals of an agency in a timely manner. In our
first-ever financial statement audit of IRS for fiscal year 1992, we
found that IRS did not have an effective core general ledger system
and could not provide reliable detailed information for over 64
percent of its appropriated monies. However, for fiscal years 1993
and 1994, after its new general ledger system was implemented, IRS
could provide such detail.
Under its old general ledger system, IRS could not reliably identify
the detailed expenditures that occurred and thus was unable to
accurately report the costs of its operations. For example, as
stated earlier, for fiscal year 1992, IRS could not identify all
expenditures that were made for over 64 percent of its 1992
appropriated funds. IRS' situation in 1992 would be analogous to
someone entering checks into their checkbook for the year and keeping
a cumulative total of the balance and at the end of the year adding
up the checks and getting a balance that is quite different than the
cumulative balance in the checkbook, and being unable to determine
why the difference exists. The inability to determine why the
difference exists could be due to a variety of reasons that range
from innocent errors that went undetected to someone fraudulently
taking funds and not reporting it. In IRS' case, IRS did not know
why the differences were occurring.
IRS' new general ledger system arrays IRS' expenditures by
appropriation and management activity code--codes used to describe
the nature of the expenditure and which part of IRS' operation the
cost is associated with. The system also identifies all transactions
that were made whether the transactions were done correctly or not.
Thus, when problems are identified, IRS now has the ability to
research what occurred and determine the correct solution.
RUDIMENTARY PROBLEMS
PERSIST--MORE SUPERVISION
AND TRAINING ARE NEEDED
------------------------------------------------------- Appendix 3:1.2
In spite of IRS' successful efforts in implementing its new general
ledger system, the accuracy of information included therein continues
to be uncertain because IRS did not adhere to fundamental internal
controls that ensure the accuracy of data entered into its general
ledger. In some instances, internal controls were properly
prescribed but not followed, while in other instances effective
internal control procedures were not in place. The deficiencies we
found resulted from a lack of competence or resources to perform the
necessary job responsibilities or a willful intent not to comply with
prescribed internal controls. Any of these causes dictates the need
for closer supervision and better training of staff to ensure that
data entered into the general ledger are accurate and complete. In
addition to the issues discussed in our opinion, we found the
following deficiencies:
IRS routinely processed its interagency purchases in a poor manner
because key staff knowingly and consistently did not follow
established procedures. Payments to other government agencies
regularly occurred without being recorded for months and, in
some instances, were still not recorded and were a major cause
of IRS' inability to reconcile its Fund Balance with Treasury
accounts. This happened because IRS accounting staff did not
record these payments in the accounting records until a document
confirming receipt and acceptance was received from IRS
personnel who purchased the item, even though the money had
already been taken from IRS' accounts. While this is a good
policy, it is poorly implemented.
Interagency charges to IRS' Fund Balance with Treasury accounts that
occur where receipt of goods or services received has not been
verified are not researched and resolved in a timely manner. We
found several interagency payments in our sample of accounts payable
where payments charged to IRS' Fund Balance with Treasury accounts
maintained by Treasury were not recorded in IRS' records.
We found correcting and adjusting journal entries affecting expense
accounts that were arbitrarily done and others that were
incorrect. For example, we found that IRS arbitrarily decreased
its reported future funding requirements and appropriations used
by $126 million and wrote off $14 million from its invested
capital account without any supportable basis for doing so.
Also, we found that IRS failed to record an accrual for $340
million in workman's compensation expense in 1993. Thus, IRS'
cost of operations were understated by $340 million in 1993.
In addition to these fundamental internal control problems, IRS
continues to make late payments to vendors for goods and services
purchased. Generally, the Prompt Payment Act was passed to encourage
federal agencies to pay their debts on time and, where they paid
late, to pay interest on the amount owed. While IRS was generally in
compliance with these requirements, IRS internal reports showed that
IRS was late on 39,248 payments, totaling $108 million, out of
234,743 payments, totaling $740 million, that were subject to Prompt
Payment requirements. IRS internal reports showed that IRS paid
$506,529 in interest related to these late payments.
These problems point to the need for IRS to more effectively
supervise and train its staff to perform established procedures, to
develop or clarify procedures where necessary, and to ensure that it
has the proper skill mix of staff to competently perform the work
required. This focus would allow IRS to effectively use its new
administrative accounting system.
SEIZED ASSETS
=========================================================== Appendix 4
MORE COMPLETE AND RELIABLE
INFORMATION IS NEEDED TO
MEASURE THE EFFECTIVENESS OF
THE SEIZED ASSET PROGRAM
--------------------------------------------------------- Appendix 4:1
In order to compel payment of delinquent taxes and encourage
voluntary compliance with the Internal Revenue Code (IRC), IRS is
authorized to seize and sell the assets of delinquent taxpayers and
those who violate internal revenue laws and certain other statutes
involving financial crimes. However, IRS lacked adequate systems to
provide information to evaluate the effectiveness of its seizure
programs and provide an analysis of its seizure activities.
For example, for fiscal year 1994, IRS systems could not provide
reliable information on (1) the expenses incurred from its seizure
activity, (2) revenue realized from the sale of seized assets, or (3)
the potential revenue that could be realized from the sale of seized
assets reported in its ending balance. IRS' systems were unable to
provide such information because IRS has no tracking or inventory
system to monitor the progression of seized assets from seizure to
final disposition. Without this information, IRS management could
not effectively manage program expenses, make cost-benefit decisions
regarding its seizure activity, or evaluate the success of its
seizure programs.
Furthermore, IRS systems could not provide an analysis of its seizure
activity in compliance with the disclosure requirements of the
federal accounting standard on inventory and related property, dated
October 27, 1993.\29 IRS used manual reconciliations between its
general ledger and records maintained at the district level to
support its analysis of seizure activity. IRS also used these
reconciliations to support its balance of $782 million for seized,
acquired, and collateral properties reported in the financial
statements for fiscal year 1994.\30
The extent of errors noted during our preliminary review of the
reconciliations precluded us from auditing the seized asset balance.
Out of a judgmental sample of 143 assets,\31 we found that 57 assets
should not have been included in the ending balance because of double
counting errors, the assets had been disposed of, or IRS did not have
actual or constructive control over the assets because of litigation.
An additional 6 assets were found to be seized as of year-end but not
included in IRS' detailed records. Out of a sample of 100 assets
reported as fiscal year 1994 dispositions, we found that 15 assets
had been disposed of in prior fiscal years.
Further, IRS financial statements do not include $6.5 million in
criminal investigation seizures classified as nonmonetary assets.
This amount includes $676,246 in foreign currency, bonds, and other
monetary instruments that were misclassified as nonmonetary assets.
After we discussed this issue with IRS officials, they agreed to
reclassify the $676,246 and disclose it in the financial statements.
In addition, IRS does not disclose the amount for collateral as a
footnote to accounts receivable in the financial statements. Such
disclosure could indicate the portion of outstanding taxes that are
secured by other assets.
Because of these problems, in testimony before the House Subcommittee
on Oversight, Committee on Ways and Means,\32 we stated that IRS
should seek another agency or contractor to handle the property
management functions that it now carries out in disposing of seized
property. Notwithstanding that we believe that the management
function should be handled outside of IRS, IRS officials stated that
a new system was implemented in fiscal year 1995 that it believes
will track its seized assets related to the collection of delinquent
taxpayer accounts.
--------------------
\29 An analysis of seizure activity should include the value and
number of assets on hand at the start of the year, seized during the
year, disposed of during the year, and on hand at year-end, as well
as known encumbrances against the property.
\30 Acquired property represents assets purchased by IRS for future
sales. Collateral property represents assets pledged as security for
outstanding or potential tax liabilities.
\31 The judgmental sample of 143 assets consisted of 120 assets
listed in the year-end balance and 23 assets listed in the seizure
logbooks maintained at the district offices.
\32 Tax Administration: IRS' Management of Seized Assets,
(GAO/T-GGD-92-65, September 24, 1992).
COMPUTER SECURITY
=========================================================== Appendix 5
SOME IMPROVEMENTS MADE BUT
OVERALL COMPUTER SYSTEMS
SECURITY REMAINS WEAK
--------------------------------------------------------- Appendix 5:1
In our prior year reports,\33 we stated that IRS' computer security
environment was inadequate. Our fiscal year 1994 audit found that
IRS has made some progress in addressing and initiating actions to
resolve prior years' computer security issues; however, some of the
fundamental security weaknesses we previously identified continued to
exist in this fiscal year.
These weaknesses were primarily IRS employees' capacity to make
unauthorized transactions and activities without detection. IRS has
taken some actions to restrict account access, review and monitor
user profiles, provide an automated tool to analyze computer usage,
and install security resources. However, we found that IRS still
lacks sufficient safeguards to prevent or detect unauthorized
browsing of taxpayer information and to prevent staff from changing
certain computer programs to make unauthorized transactions without
detection.
While not specifically designed to do so, our limited review did not
identify any instances where someone outside of IRS could enter its
computing environment and perform unauthorized transactions. We
reviewed general computer security controls at two IRS computing
centers and 3 of its 10 service centers. Some of the more compelling
problems we found were as follows:
controls did not adequately prevent users from unauthorized access
to sensitive programs and data files,
numerous users had been given authorized access to powerful system
privileges which could allow circumvention of existing security
controls,
a system that houses a variety of other applications also housed
taxpayer data, which increased the risk that this data could be
made accessible to large numbers of users,
input and approval duties for processing disbursements on a key
administrative application during fiscal year 1994 were not
always appropriately separated, thus allowing users to input
unauthorized transactions and process them through to completion
without detection, and
security reports prepared to monitor and identify unauthorized
access to the system continue to be cumbersome and virtually
useless to managers responsible for ensuring computer security.
We also found that IRS' current disaster recovery plan at the Service
Centers does not adequately address what should occur for IRS to
fully recover from a disaster at the Service Centers. In addition,
further efforts are required in better defining disaster recovery
procedures at the Martinsburg and Detroit Computing Centers.
We were told that better defining the disaster recovery plan was not
given a high priority because of resource constraints. However, such
detailed plans are critical for IRS to ensure that its primary
operations will not be interrupted for an unnecessary period of time
in the event of a disaster. During our fiscal year 1994 review, we
noted that IRS had established Disaster Recovery Analysts at each of
its 10 service centers to expedite its disaster recovery planning
efforts. Also, IRS awarded a contract for recovery services and
completed recovery testing for some Martinsburg and Detroit Computing
Center applications.
As we reported last year, these long-standing weaknesses are
symptomatic of broader computer security management issues. The
overriding problem we found is that IRS still does not have a
proactive, independent information security group that is
systematically deployed to review the adequacy and consistency of
security over IRS' computer operations. Instead, information
security issues are addressed on a reactive basis. Such a function
could proactively identify problems that need to be corrected and
regularly report to the Commissioner any problems identified that
were not resolved in a timely manner. The lack of such a group and
information security focus has resulted in inconsistencies among
centers and instances of noncompliance with procedures identified in
the Internal Revenue Manual.
The need for such a function is further heightened because of the
time it takes IRS to implement corrective actions once a problem is
identified. For example, the Electronic Audit Research Log (EARL)
initiative was intended to deter unauthorized browsing and other
activities by identifying potential unauthorized accesses based on
certain criteria designed to highlight the activity. However, this
initiative, which was started 3 or 4 years ago, is still not fully
implemented. In addition, an independent information security group
would ensure that TSM implementation efforts have proper security
controls put in place as the systems are developed.
A second fundamental weakness in IRS' computer security management is
that it has not completed formal risk assessments of its systems to
determine system sensitivity and vulnerability as required by OMB
Circular A-130. Information security needs vary by system based on
the nature and sensitivity of the data being processed by each system
and the number of users. To properly identify, prioritize, and then
implement appropriate controls, an overall risk assessment of each
system should be performed to identify critical systems and their
vulnerabilities. IRS must also evaluate the overall security of the
computing environment by taking into account connections among the
various systems. Such assessments have not been effectively
performed.
As a result of these weaknesses, IRS did not have reasonable
assurance that the confidentiality and accuracy of taxpayer data were
protected and that the data were not manipulated for purposes of
personal gain. Such weaknesses also diminish the reliability of IRS'
financial management information. Although IRS has taken or plans to
take steps to resolve some of these weaknesses, such as segregating
duties, improving security reports, and expediting disaster recovery
efforts, more effort to continuously identify weaknesses and
implement corrective actions is needed.
--------------------
\33 Financial Audit: Examination of IRS' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-2, June 30, 1993); IRS Information Systems:
Weaknesses Increase Risk of Fraud and Impair Reliability of
Management Information (GAO/AIMD-93-34, September 22, 1993); and
Financial Audit: Examination of IRS' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-120, June 15, 1994).
FINANCIAL STATEMENTS
=========================================================== Appendix 6
(See figure in printed
edition.)
Selected Financial and
Operating Data
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edition.)
Overview to the Financial
Statements
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
Statements of Financial
Position (Administrative)
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edition.)
Statements of Operations
(Administrative)
(See figure in printed
edition.)
Statements of Cash Flows for
Appropriated Funds
(Administrative)
(See figure in printed
edition.)
Statements of Budget and Actual
Expenses (Administrative)
(See figure in printed
edition.)
Notes to Financial Statements
(Administrative)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
Statements of Financial
Position (Custodial)
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edition.)
Statements of Collections
(Custodial)
(See figure in printed
edition.)
Notes to Financial Statements
(Custodial)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
Supplemental Financial
Information (Custodial)
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edition.)
Supplemental Financial
Information (Custodial)
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edition.)
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edition.)
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edition.)
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edition.)
Supplemental Management
Information
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
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edition.)
REPORTS ISSUED AS A RESULT OF
GAO'S AUDIT OF IRS' FISCAL YEARS
1992 AND 1993 FINANCIAL STATEMENTS
AND STATUS OF RECOMMENDATIONS
=========================================================== Appendix I
The results of our efforts to audit IRS' fiscal year 1992 and 1993
Principal Financial Statements were presented in our reports entitled
Financial Audit: Examination of IRS' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-2, June 30, 1993) and Financial Audit:
Examination of IRS' Fiscal Year 1993 Financial Statements
(GAO/AIMD-94-120, June 15, 1994). The system and internal control
weaknesses identified in the 1992 report and recommendations to
correct them were discussed in more detail in six reports. In fiscal
year 1993, we issued one report that included the system and internal
control weaknesses and recommendations. These are discussed in the
appendix by section.
We determined the status of the following recommendations based on
our audit work at IRS during fiscal year 1994 and on our discussions
with IRS officials. Our assessments of IRS' actions for the most
significant recommendations are discussed in the report. However, we
have not fully assessed the appropriateness or effectiveness of all
of the responses identified in the following table. We plan to
update our assessment of IRS' responses as part of our fiscal year
1995 audit.
Action
in
planni No
ng or specif
Action planni ic
Action in ng action
comple progre comple planne
Report/recommendations te ss te d
-------------------------------------- ------ ------ ------ ------
Financial Audit: IRS Significantly
Overstated Its Accounts Receivable
(GAO/AFMD-93-42, May 6, 1993)
Provide the IRS Chief Financial X
Officer authority to ensure that IRS
accounting system development efforts
meet its financial reporting needs. At
a minimum, the Chief Financial
Officer's approval of related system
designs should be required.
Take steps to ensure the accuracy of X
the balances reported in IRS financial
statements. In the long term, this
will require modifying IRS systems so
that they are capable of (1)
identifying which assessments
currently recorded in the Master File
System represent valid receivables and
(2) designating new assessments that
should be included in the receivables
balance as they are recorded. Until
these capabilities are implemented,
IRS should rely on statistical
sampling to determine what portion of
its assessments represent valid
receivables
Clearly designate the Chief Financial X
Officer as the official responsible
for coordinating the development of
performance measures related to
receivables and for ensuring that IRS
financial reports conform with
applicable accounting standards.
Modify the IRS methodology for X
assessing the collectibility of its
receivables by
--including only valid accounts
receivable in the analysis;
--eliminating, from the gross
receivables balance, assessments
determined to have no chance of being
collected;
--including an analysis of individual
taxpayer accounts to assess their
ability to pay;
--basing group analyses on categories
of assessments with similar collection
risk characteristics; and
--considering current and forecast
economic conditions, as well as
historical collection data, in
analyses of groups of assessments.
<h1by> Once the appropriate data are
accumulated, IRS may use modeling to
analyze collectibility of accounts on
a group basis, in addition to
separately analyzing individual
accounts. Such modeling should
consider factors that are essential
for estimating the level of losses,
such as historical loss experience,
recent economic events, and current
and forecast economic conditions. In
the meantime, statistical sampling
should be used as the basis for both
individual and group analyses.
IRS Information Systems: Weaknesses
Increase Risk of Fraud and Impair
Reliability of Management Information
(GAO/AIMD-93-34, September 22, 1993)
Limit access authorizations for X
individual employees to only those
computer programs and data needed to
perform their duties and periodically
review these authorizations to ensure
that they remain appropriate.
Monitor efforts to develop a X
computerized capability for reviewing
user access activity to ensure that it
is effectively implemented.
Establish procedures for reviewing the X
access activity of unit security
representatives.
Use the security features available in X
IRS' operating systems software to
enhance system and data integrity.
Require that programs developed and X
modified at IRS headquarters be
controlled by a program librarian
responsible for (1) protecting such
programs from unauthorized changes
including recording the time, date,
and programmer for all software
changes, and (2) archiving previous
versions of programs.
Establish procedures requiring that X
all computer program modifications be
considered for independent quality
assurance review.
Formally analyze Martinsburg Computing X
Center's computer applications to
ensure that critical applications have
been properly identified for purposes
of disaster recovery.
Test the disaster recovery plan. X
Monitor service center practices X
regarding the development,
documentation, and modification of
locally developed software to ensure
that such software use is adequately
controlled.
Review the current card key access X
system in the Philadelphia Service
Center to ensure that only users who
need access to the facilities
protected by the system have access
and that authorized users each have
only one unique card key.
Establish physical controls in the X
Philadelphia Service Center to protect
computers with access to sensitive
data that are not protected by
software access controls.
Financial Management: IRS' Self-
Assessment of Its Internal Control and
Accounting Systems Is Inadequate (GAO/
AIMD-94-2, October 13, 1993)
The Senior Management Council should X
coordinate, monitor, or oversee
activities to (1) establish and
implement proper written procedures
that provide for the identification,
documentation, and correction of
material weaknesses, (2) provide
classroom training and guidance
materials to all review staff, (3)
develop effective corrective action
plans that address the fundamental
causes of the weaknesses, and (4)
verify the effectiveness of corrective
actions before removing reported
weaknesses from IRS' records.
Financial Management: Important IRS
Revenue Information Is Unavailable or
Unreliable (GAO/AIMD-94-22,
December 21, 1993)
Develop a method to determine specific X
taxes collected by trust fund so that
the difference between amounts
assessed and amounts collected is
readily determinable and excise tax
receipts can be distributed as
required by law. This could be done by
obtaining specific payment detail from
the taxpayer, consistent with our
April 1993 FTD report. Alternatively,
IRS might consider whether allocating
payments to specific taxes based on
the related taxpayer returns is a
preferable method.
Determine the trust fund revenue X
information needs of other agencies
and provide such information, as
appropriate. If IRS is precluded by
law from providing needed information,
IRS should consider proposing
legislative changes.
Identify reporting information needs, X
develop related sources of reliable
information, and establish and
implement policies and procedures for
compiling this information. These
procedures should describe any (1)
adjustments that may be needed to
available information and (2) analyses
that must be performed to determine
the ultimate disposition and
classification of amounts associated
with in-process transactions and
amounts pending investigation and
resolution.
Establish detailed procedures for (1) X
reviewing manual entries to the
general ledger to ensure that they
have been entered accurately and (2)
subjecting adjusting entries to
supervisory review to ensure that they
are appropriate and authorized.
Monitor implementation of actions to X
reduce the errors in calculating and
reporting manual interest, and test
the effectiveness of these actions.
Give a priority to the IRS efforts X
that will allow for earlier matching
of income and withholding information
submitted by individuals and third
parties.
Financial Management: IRS Does Not
Adequately Manage Its Operating Funds
(GAO/AIMD-94-33, February 9, 1994)
Monitor whether IRS' new X
administrative accounting system
effectively provides managers up-to-
date information on available budget
authority.
Promptly resolve differences between X
IRS and Treasury records of IRS' cash
balances and adjust accounts
accordingly.
Promptly investigate and record X
suspense account items to appropriate
appropriation accounts.
Perform periodic reviews of X
obligations, adjusting the records for
obligations to amounts expected to be
paid, and removing expired
appropriation balances from IRS
records as stipulated by the National
Defense Authorization Act for Fiscal
Year 1991.
Monitor compliance with IRS policies X
requiring approval of journal vouchers
and enforcing controls intended to
preclude data entry errors.
Review procurement transactions to X
ensure that accounting information
assigned to these transactions
accurately reflects the appropriate
fiscal year, appropriation, activity,
and sub-object class.
Provide (1) detailed written guidance X
for all payment transactions,
including unusual items such as vendor
credits, and (2) training to all
personnel responsible for processing
and approving payments.
Revise procedures to require that X
vendor invoices, procurement orders,
and receipt and acceptance
documentation be matched prior to
payment and that these documents be
retained for 2 years.
Revise procedures to incorporate the X
requirements that accurate receipt and
acceptance data on invoiced items be
obtained prior to payment and that
supervisors ensure that these
procedures are carried out.
Revise document control procedures to X
require IRS units that actually
receive goods or services to promptly
forward receiving reports to payment
offices so that payments can be
promptly processed.
Monitor manually computed interest on X
late payments to determine whether
interest is accurately computed and
paid.
Enforce existing requirements that X
early payments be approved in
accordance with OMB Circular A-125.
Require payment and procurement X
personnel, until the integration of
AFS and the procurement system is
completed as planned, to periodically
(monthly or quarterly) reconcile
payment information maintained in AFS
to amounts in the procurement records
and promptly resolve noted
discrepancies.
Require the description and period of X
service for all invoiced items to be
input in AFS by personnel responsible
for processing payments, and enhance
the edit and validity checks in AFS to
help prevent and detect improper
payments.
Establish procedures, based on budget X
categories approved by OMB, to develop
reliable data on budget and actual
costs.
Use AFS' enhanced cost accumulation X
capabilities to monitor and report
costs by project in all
appropriations.
Financial Management: IRS Lacks
Accountability Over Its ADP Resources
(GAO/AIMD-93-24, August 5, 1993)
Provide the agency's CFO with the X
authority to ensure that data
maintained by IRS' ADP inventory
system meet its management and
reporting needs.
Provide that any software purchases, X
development, or modifications related
to this system are subject to the
CFO's review and approval.
Develop and implement standard X
operating procedures that incorporate
controls to ensure that inventory
records are accurately maintained.
Such controls should include
--establishing specific procedures to
ensure the prompt and accurate
recording of acquisitions and
disposals in IRS' ADP fixed asset
system, including guidance addressing
the valuation of previously leased
assets;
--reconciling accounting and inventory
records monthly as an interim measure
until the successful integration of
inventory and accounting systems is
completed as planned; and
--implementing mechanisms for ensuring
that annual physical inventories at
field locations are effectively
performed, that discrepancies are
properly resolved, and that inventory
records are appropriately adjusted.
Oversee IRS efforts for ensuring that X
property and equipment inventory data,
including telecommunications and
electronic filing equipment, is
complete and accurate.
Determine what information related to X
ADP resources, such as equipment
condition and remaining useful life,
would be most useful to IRS managers
for financial management purposes and
develop a means for accounting for
these data.
Develop an interim means to capture X
relevant costs related to in-house
software development.
Financial Audit: Examination of IRS'
Fiscal Year 1993 Financial Statements
(GAO/AIMD-94-120, June 15, 1994)
Tax Collection Activities
Ensure that system development efforts X
provide reliable, complete, timely,
and comprehensive information with
which to evaluate the effectiveness of
its enforcement and collection
programs;
Establish and implement procedures to X
analyze the impact of abatements on
the effectiveness of assessments from
IRS' various collection programs; and
Reconcile detailed revenue X
transactions for individual taxpayers
to the master file and general ledger.
Establish and implement procedures to X
proactively identify errors that occur
during processing of data, and design
and implement improved systems and
controls to prevent or detect such
errors in the future.
Management of Operating Funds
Monitor its systems and controls to X
regularly identify problems as they
occur by establishing clear lines of
responsibility and communication from
top management to the lowest staff
levels,
Develop action plans that are agreed X
upon by all affected groups and
individuals to correct problems
identified, and
Continuously monitor corrective X
actions to ensure that progress is
achieved.
Periodically compare information in X
payroll records to supporting
personnel information,
Use current information to X
periodically update estimated future
TSM costs, and
Develop reliable detailed information X
supporting its reported accounts
payable balances.
Seized Assets
Develop and implement systems and X
standard operating procedures that
incorporate controls to ensure that
seized asset inventory records are
accurately maintained, which include
Establishing specific procedures to X
ensure the prompt and accurate
recording of seizures and disposals,
including guidance addressing the
valuation of seized assets;
Reconciling accounting and inventory X
records monthly as an interim measure
until the successful integration of
inventory and accounting systems is
completed; and
Implementing mechanisms for ensuring X
that annual physical inventories at
field locations are effectively
performed, that discrepancies are
properly resolved, and that inventory
records are appropriately adjusted.
Determine what information related to X
seized assets, such as proceeds and
liens and other encumbrances, would be
most useful to IRS managers for
financial management purposes and
develop a means for accounting for
these data.
----------------------------------------------------------------------
OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix II
Management has the responsibility for
preparing the Principal Financial Statements in conformity with
applicable accounting principles,
establishing and maintaining internal controls and systems to
provide reasonable assurance that the broad control objectives
of the Federal Managers' Financial Integrity Act (FMFIA) are
met, and
complying with applicable laws and regulations.
In undertaking our audit of IRS, we planned to conduct an audit of
its Principal Financial Statements and of internal controls over
safeguarding of assets, assuring material compliance with budget
authority and with laws and regulations we considered relevant, and
assuring that there were no material misstatements in the Principal
Financial Statements. We also planned to test IRS' compliance with
laws and regulations we considered relevant. But we did not plan to
evaluate all internal controls relevant to operating objectives as
broadly defined in FMFIA.
We were unable to obtain reasonable assurance about whether the
Principal Financial Statements are reliable (free of material
misstatement and presented fairly in conformity with applicable
accounting principles). We were able to evaluate internal controls
in the following areas:
revenue transactions (including cash receipts and refund payments),
tax accounts receivable,
seized assets,
Treasury funds,
property and equipment,
expenditures, and
general computer controls.
We also obtained an understanding of internal controls over the
reliability of performance measures reported in the Overview and
Supplemental sections of IRS' report and assessed whether information
in the Overview and Supplemental sections was materially consistent
with the information in the Principal Financial Statements.
We tested compliance with selected provisions of the following laws
and regulations:
Chief Financial Officers Act of 1990 (Public Law 101-576);
Federal Managers' Financial Integrity Act of 1982 (Public Law
97-255);
National Defense Authorization Act for Fiscal Year 1991 (Public Law
101-510);
Antideficiency Act;
Prompt Payment Act (Public Law 97-177);
Civil Service Reform Act of 1978 (Public Law 95-454);
Federal Employees' Health Benefits Act of 1959 (Public Law 86-382);
and
certain laws relating to distributing excise taxes (26 U.S.C.
9501-9510) and to notifying the Joint Committee on Taxation of
refunds and credits of $1 million or more (26 U.S.C. 6405).
Except for the limitations on the scope of our work described in this
report, our work was performed from June 1994 through May 1995 in
accordance with generally accepted government auditing standards and
OMB Bulletin 93-06, "Audit Requirements for Federal Financial
Statements." Our work also included an opinion on IRS' internal
controls and considered the impact of noted problems on IRS'
operations and ability to achieve its mission.
We requested written comments on a draft of this report from the
Commissioner of Internal Revenue or her designee. The Commissioner
provided us with written comments, which are discussed in the Agency
Comments and Our Evaluation section and are reprinted in appendix IV.
(See figure in printed edition.)Appendix III
IRS COMMISSIONER LETTER
========================================================== Appendix II
(See figure in printed edition.)
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(See figure in printed edition.)Appendix IV
COMMENTS FROM THE INTERNAL REVENUE
SERVICE
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)
The following is GAO's comment on the Internal Revenue Service's
letter dated July 25, 1995.
GAO COMMENT
1. As discussed in our opinion, our concern about the types of taxes
collected was that IRS' systems do not maintain detailed information
by type of tax. This includes social security and income taxes as
well as excise taxes. However, with regard to excise taxes, our
point is that IRS should report accurate receipt information to the
Congress and others.
*** End of document. ***
