Pursuant to a legislative requirement, GAO examined the Internal Revenue Service's (IRS) financial statements for the fiscal year (FY) ending September 30, 1998.

GAO noted that: (1) pervasive weaknesses in the design and operation of IRS' financial management systems, accounting procedures, documentation, recordkeeping, and internal controls, including computer security controls, prevented IRS from reliably reporting on the results of its administrative activities; (2) IRS was able to reliably report on the results of its custodial activities for Fy 1998, including tax revenue received, tax refunds disbursed, and taxes receivable due from the public; (3) however, this achievement required extensive, costly, and time-consuming ad hoc procedures to overcome pervasive and long-standing internal control and systems weaknesses; (4) IRS' major accounting, reporting, and internal control deficiencies include: (a) an inadequate financial reporting process that resulted in IRS' inability to reliably prepare several of the required principal financial statements; (b) the lack of a subsidiary ledger to properly manage unpaid assessments, which has resulted in both taxpayer burden and lost revenue to the government; (c) deficiencies in preventive controls over tax refunds that have permitted the disbursement of millions of dollars of fraudulent refunds; (d) a failure to reconcile its fund balance to Treasury records during Fy 1998; (e) the inability to properly safeguard or reliably report its property and equipment; (f) vulnerabilities in computer security that may allow unauthorized individuals to access, alter, or abuse proprietary IRS programs and data, and taxpayer information; (g) vulnerabilities in controls over tax receipts and taxpayer data that increase the government's and the taxpayers' risk of loss or inappropriate disclosure of sensitive taxpayer data; and (h) an inability to provide assurance that its budgetary resources are being properly accounted for, reported, and controlled; (5) these weaknesses, as they relate to IRS' administrative activities, prevented GAO from rendering an unqualified opinion on five of IRS' six principal financial statements; and (6) with respect to IRS' custodial activities, GAO was able to verify that the reported balances were reliable.

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