In November 2004, we issued our report on the results
of our audit of the Internal Revenue Service's (IRS) financial
statements as of, and for the fiscal years ending, September 30, 2004
and 2003, and on the effectiveness of its internal controls as of
September 30, 2004. We also reported our conclusions on IRS's
compliance with significant provisions of selected laws and regulations
and on whether IRS's financial management systems substantially comply
with requirements of the Federal Financial Management Improvement Act
of 1996. A separate report on the implementation status of
recommendations from our prior IRS financial audits and related
financial management reports, including this one, will be issued
shortly. The purpose of this report is to discuss issues identified
during our fiscal year 2004 audit regarding internal controls that
could be improved for which we do not currently have any
recommendations outstanding. Although not all of these issues were
discussed in our fiscal year 2004 audit report, they all warrant
management's consideration.
During our fiscal year 2004 audit, we
identified a number of internal control issues that adversely affected
safeguarding of tax receipts and information, refunds to taxpayers, and
lien resolutions. These issues concern (1) enforcement of IRS
contractor background investigation policies, (2) omission of certain
provisions related to contingency plans and taxpayer privacy in lockbox
bank service contracts, (3) verification of lockbox bank deposits, (4)
procedures for handling taxpayer receipts and information by couriers,
(5) safeguarding sensitive systems and equipment in lockbox banks, (6)
candling procedures, (7) monitoring and verifying recording and
transmittal of taxpayer receipts and information, (8) controls over
automated refund disbursements, (9) controls over authorization of
manual refunds, and (10) resolution of liens with manually calculated
interest or penalties. These issues increase the risk that (1) taxpayer
receipts and information could be lost, stolen, misused, or destroyed;
(2) improper refunds to taxpayers could be disbursed; and (3) liens
could be released before taxpayers have paid the full amount of
interest or penalties due.
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