This report presents the results of GAO's attempts to audit the Internal Revenue Service's (IRS) financial statements for fiscal years 1994 and 1993. This report also assesses IRS' 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 is committed to overcoming the problems that GAO reported. GAO is unable to express an opinion on the reliability of IRS' financial statements for fiscal year 1994. GAO discusses the scope and severity of IRS" financial management and control problems, the effect these problems have had on IRS' ability to carry out its mission, and remedy the problems. GAO also makes recommendations to help IRS resolve the long-standing problems and strengthen its financial management operations.

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