In November 2005, 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, 2005 and 2004, and on the effectiveness of its internal controls as of September 30, 2005. 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 audit of IRS's financial statements as of, and for the fiscal year ending September 30, 2005, 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 2005 audit report, they all warrant management's consideration.

During our fiscal year 2005 audit, we identified a number of internal control issues that adversely affected safeguarding of tax receipts and information, and the reliability of expense, and property & equipment (P&E) records. These issues concern (1) taxpayer receipts and data transmittal documents, (2) physical security controls at taxpayer assistance centers, (3) the roles and responsibilities of security guards, (4) candling procedures, (5) timely processing of large remittances at lockbox banks, (6) access to tax return processing facilities, (7) juvenile hiring policy, (8) classification of procurement transactions as P&E or expense, and (9) recording P&E disposals.

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