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entitled 'Internal Revenue Service: Status of Recommendation from 
Financial Audits and Related Financial Management Reports' which was 
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Report to the Commissioner of Internal Revenue:

April 2004:

INTERNAL REVENUE SERVICE:

Status of Recommendations from Financial Audits and Related Financial 
Management Reports:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-523]: 

GAO Highlights:

Highlights of GAO-04-523, a report to the Commissioner of Internal 
Revenue 

Why GAO Did This Study:

In its role as the nations tax collector, the Internal Revenue Service 
(IRS) has a demanding responsibility in collecting taxes, processing 
tax returns, and enforcing the nations tax laws. Since GAOs first 
audit of IRSs financial statements in fiscal year 1992, a number of 
weaknesses in IRSs financial management operations have been 
identified. In related reports, GAO has recommended corrective action 
to address those weaknesses.

Each year as part of the annual audit of IRSs financial statements, 
GAO not only makes recommendations to address any new weaknesses 
identified but also follows up on the open weaknesses GAO identified in 
previous years audits. The purpose of this report is to assist IRS 
management in tracking the status of audit recommendations and actions 
needed to address them.

What GAO Found:

Although IRS has made improvements to address a number of financial 
management weaknesses, some of the open audit recommendations have been 
outstanding for an extended period of time. IRS has continued to 
experience delays in the implementation of the new systems intended to 
correct some of these long-standing deficiencies. Others, however, 
could be resolved with additional management attention. The continued 
existence of these financial management weaknesses exposes IRS to loss 
due to errors or theft and impairs the availability of current, 
accurate financial information that management needs to make decisions 
on a day-to-day basis.

Of 100 recommendations related to financial management (consisting of 
78 recommendations open as of May 2003, 7 recommendations included in 
GAOs July 2003 report on IRSs excise tax certification process, and 
15 new recommendations included in GAOs management report for fiscal 
year 2003), GAO is closing 24 because of actions IRS has taken to 
address the issues that gave rise to them. These actions were verified 
by GAO in the course of conducting the audit of IRSs fiscal year 2003 
financial statements.

Of the remaining 76 financial management recommendations GAO considers 
open as of the date of this report, 66 are short term (capable of being 
addressed within 2 years) and 10 are long term (expected to require 
more than 2 years to implement). IRS considers 37 (49 percent) of the 
76 recommendations to be closed. GAO considers 12 of these 37 still 
open because it has not yet had an opportunity to verify the actions 
taken by IRS. The actions cited by IRS for these 12 recommendations are 
recent and were taken after GAOs financial statement audit work for 
the year was completed. For 24 of the 37 recommendations that IRS 
considers closed, GAO found that action taken by IRS has not yet been 
fully effective in addressing the conditions that gave rise to the 
recommendations. IRS disagrees with the remaining recommendation.

IRS continues to exhibit a strong commitment to addressing its ongoing 
financial management problems and has made improvements in recent years 
that have resulted in the closing of many recommendations. At the same 
time, the continued existence of the serious financial management 
weaknesses that gave rise to the remaining open recommendations 
represents a serious obstacle that IRS needs to overcome to achieve 
effective financial management.

GAO will continue to monitor IRSs progress in implementing the 76 
recommendations that remain open during the fiscal year 2004 audit. IRS 
said it expects GAO to find in its fiscal year 2004 financial audit 
that IRS has taken corrective actions to allow closure of another 37 
recommendations. In addition, IRS stated that it is actively working to 
implement corrective actions to address all remaining open 
recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-523.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Steven J. Sebastian at 
(202) 512-3406 or sebastians@gao.gov.

[End of section]

Contents:

Letter: 

Status of Recommendations: 

Agency Comments: 

Objective, Scope, and Methodology: 

Appendixes:

Appendix I: Status of GAO Recommendations from Prior IRS Financial 
Audits and Related Management Reports: 

Appendix II: Details on Audit Methodology: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Acknowledgments: 

Letter April 28, 2004:

The Honorable Mark W. Everson: 
Commissioner of Internal Revenue:

Dear Mr. Everson:

This report provides the status of the Internal Revenue Service's (IRS) 
efforts to implement recommendations we have made based on our audits 
of IRS's financial statements and other efforts related to financial 
management. In updating the status of these recommendations, we have 
included the results of our audits of IRS's financial statements for 
fiscal years 2003 and 2002.[Footnote 1] This report is being provided 
to you to (1) assist IRS management in tracking the unresolved issues 
identified in our prior audits[Footnote 2] and (2) report on the 
current status of open audit recommendations detailed in our previous 
financial audit and financial management-related reports. In cases 
where IRS has taken action on open recommendations that did not result 
in our closing them, we explain why this occurred. No new 
recommendations are being made in this report.

Since our first audit of IRS's financial statements in fiscal year 
1992, our audits have identified a number of weaknesses in IRS's 
financial management operations. In related reports on IRS's internal 
controls, we have recommended corrective actions to address those 
weaknesses. Appendix I lists (1) recommendations we have made based on 
our financial audits and other financial management-related work that 
we have not previously reported as closed, (2) the status of each of 
these recommendations and corrective actions taken or planned as of 
February 2004 as reported to us by IRS and incorporated in appendix I, 
and (3) our analysis of whether the issues that gave rise to the 
recommendations have been effectively and fully addressed based on the 
work performed during our fiscal year 2003 financial audit. Effectively 
implementing recommendations is critical for IRS to resolve its 
financial management challenges.

Status of Recommendations:

In May 2003, we issued a report that provided (1) the status of IRS's 
efforts to implement prior recommendations as of our fiscal year 2002 
financial audit[Footnote 3] and (2) new recommendations based on the 
results of our fiscal year 2002 financial audit.[Footnote 4] In the May 
2003 report, we included 98 audit recommendations that we had not 
previously reported as being closed, 1 dating back as far as 1993. Of 
the 98 recommendations, 20 were closed at the time that report was 
issued, leaving 78 that were used as a starting point for appendix I of 
this report. For this year, we added 7 recommendations from our July 
2003 report on the excise tax certification process[Footnote 5] and 15 
new recommendations included in GAO's management report for fiscal year 
2003,[Footnote 6] for a total of 100 recommendations. Based on the 
results of our recently completed fiscal year 2003 financial audit, we 
are closing 24 recommendations made in prior audits due to verified 
actions IRS has taken to address the issues that gave rise to them. 
Therefore, as of the date of this report, 76 financial management 
recommendations remain open, 66 of which are short term and 10 of which 
are long term.[Footnote 7]

As indicated in appendix I, of the 76 recommendations we consider to be 
open, IRS considers 37 (49 percent) to be closed. We consider 12 of 
these recommendations to be open because IRS took corrective action to 
resolve these recommendations after we completed our testing for the 
fiscal year 2003 audit and, as a result, we have not yet had time to 
verify implementation of the corrective actions, which is a 
prerequisite to our closing a recommendation. We will verify the 
effectiveness of IRS's actions to address these recommendations during 
our fiscal year 2004 audit. For 24 of the 37 recommendations that IRS 
considers closed, we found that action taken by IRS has not been fully 
effective in addressing the conditions that gave rise to the 
recommendations. IRS disagrees with the remaining 
recommendation,[Footnote 8] though it had agreed with the 
recommendation at the time it was made.

Twenty-three of the 24 recommendations that IRS considers closed but 
that we consider open involved the issuance of formal written policies 
or directives aimed at addressing the internal control deficiencies 
that gave rise to the recommendations. However, we found that these 
policies or directives were not being adhered to or were not fully 
effective in correcting the deficiencies that led to the 
recommendations. We also found that the revised policies or directives 
intended to correct 6 of these 23 recommendations did not adequately 
address the underlying issues. We believe that all these 
recommendations could be resolved with additional management follow-up 
to ensure that the revised policies and directives specifically address 
the issues and to ensure that corrective actions as envisioned in 
policy and procedural changes are fully and effectively implemented. In 
the interim, the underlying weaknesses will likely continue to exist, 
impairing the quality and timeliness of IRS's financial information and 
increasing its exposure to losses.

A number of the 76 recommendations in appendix I that we consider to be 
open have been outstanding for an extended period of time. For example, 
24 (32 percent) of the recommendations were made over 2 years ago, 
including 15 recommendations from more than 3 years ago, 4 
recommendations from more than 5 years ago, and 1 recommendation that 
has remained open for over 10 years. The continued existence of the 
issues that gave rise to these recommendations exposes IRS to losses 
due to errors or theft, and impairs the availability of the current, 
accurate financial information management needs to make decisions.

The majority of the 76 recommendations we consider to be open address 
one of two broad issues:

* Forty-one (54 percent), all of which we consider to be short term, 
relate to weaknesses in (1) management controls over lockbox banks that 
process taxpayer receipts and (2) controls intended to safeguard 
taxpayer receipts and data at IRS sites. These continued weaknesses 
expose IRS to unnecessary risk of loss and increase taxpayer exposure 
to losses from financial crimes committed by individuals who 
inappropriately gain access to confidential personal information. IRS 
considers 28 of these recommendations closed. However, during our 
fiscal year 2003 financial audit, we found that IRS's corrective 
actions had not fully resolved the issues for 22 of these 28 
recommendations and, for the remaining 6 recommendations, IRS's actions 
occurred after we completed our testing for the fiscal year 2003 audit. 
For example, in November 1998, we recommended that IRS ensure that all 
returned refund checks be stamped "nonnegotiable" as soon as extracted. 
In May 2000, IRS updated its policies to add instructions and establish 
a policy for safeguarding returned refund checks. However, during our 
audits in fiscal years 2001 through 2003, we found that IRS employees 
at some sites we visited were not consistently adhering to the policy 
for handling returned refund checks.

* Fourteen (18 percent) relate to system deficiencies that will not be 
fully corrected until IRS implements new financial management systems. 
Prior GAO reviews have disclosed numerous modernization management 
control deficiencies that have contributed to reported cost overruns 
and delays in the implementation of the systems intended to resolve 
these issues.[Footnote 9] For example, IRS had planned to implement the 
first release of its new Integrated Financial System (IFS) in October 
2003, but announced shortly before the start of the new fiscal year 
that it was delaying implementation until at least the middle of fiscal 
year 2004. As of February 2004, implementation of IFS release 1, which 
is intended to provide core financial, budget formulation, and cost 
accounting systems, had been further delayed. In addition, according to 
IRS, implementation of subsequent releases, which provide property, 
procurement, and performance management functions, is being reevaluated 
because of release 1 delays and funding availability. IRS has also 
encountered delays in the implementation of the Customer Account Data 
Engine (CADE), the new system designed to modernize IRS's taxpayer 
files, and the Custodial Accounting Project (CAP), which is intended to 
provide management information related to tax operations needed for 
day-to-day decision making, performance management, and reporting. As a 
result of cost overruns and delays, IRS and a contractor undertook a 
comprehensive review of CADE and IRS's entire business systems 
modernization program. Based on the results of the review, IRS launched 
an action plan to remedy the problems plaguing its systems 
modernization program. However, the program continues to face 
significant challenges and risks, and IRS does not expect that its new 
financial management systems will be fully implemented until at least 
2007. Successful implementation of IFS, CAP, and CADE is essential to 
correcting IRS's long-standing financial management deficiencies and 
internal control weaknesses that prevent IRS from producing reliable 
and timely financial information needed for decision making on an 
ongoing basis.

Although IRS continues to experience delays in implementing the systems 
intended to address many underlying financial management and operations 
issues, it has made improvements in recent years that have resulted in 
the closing of many recommendations. For example, IRS made significant 
progress in addressing issues related to property and equipment (P&E), 
which resulted in closing 5 of the 11 P&E-related recommendations. 
However, delays in implementing IFS would inhibit significant 
additional progress in addressing P&E issues because IFS is intended to 
address 5 of the remaining 6 P&E-related recommendations. Delays in 
implementation of IFS and other systems would also inhibit IRS's 
ability to correct 14 deficiencies related to financial reporting, 
unpaid tax assessments, tax revenue, and refunds. Consequently, the 
continued existence of delays in the implementation of new systems and 
the other serious financial management weaknesses that gave rise to 
many of the remaining open recommendations represents a serious 
obstacle that IRS needs to overcome in order to achieve effective 
financial management and have available accurate, timely financial 
reporting and other information that is useful for day-to-day decision 
making. This was the overriding intent of the Federal Managers' 
Financial Integrity Act, the Chief Financial Officers Act of 1990, the 
Federal Financial Management Improvement Act of 1996, and other federal 
financial management reform legislation.

Agency Comments:

In commenting on a draft of this report, IRS said it believed that we 
would be able to confirm its implementation of an additional 37 
recommendations based on our fiscal year 2004 audit. IRS stated that it 
is actively working to implement corrective actions to address all 
remaining open recommendations. We will review the effectiveness of 
these corrective actions and the status of IRS's progress in addressing 
all open recommendations as part of our fiscal year 2004 financial 
audit.

Objective, Scope, and Methodology:

The objective of this report is to assist IRS management in tracking 
the status of financial audit and financial management-related 
recommendations and the actions needed to address them. To accomplish 
this objective, we evaluated the effectiveness of IRS's corrective 
actions implemented in response to open recommendations during fiscal 
year 2003 as part of our fiscal years 2003 and 2002 financial 
audits.[Footnote 10] Further details on the scope and methodology of 
our IRS financial audit work are included in appendix II. We obtained 
from IRS its assessment of the status of each recommendation and 
corrective action taken or planned as of February 2004, which we 
included in appendix I. We compared IRS's actions to our fiscal year 
2003 audit findings and noted any differences between IRS's and our 
conclusions regarding the status of each recommendation. We conducted 
our audit in accordance with U.S. generally accepted government 
auditing standards. We requested comments on a draft of this report 
from the Commissioner of Internal Revenue or his designee. We received 
written comments from IRS, which are reprinted in appendix III.

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Appropriations; Senate 
Committee on Finance; Senate Committee on Governmental Affairs; Senate 
Committee on the Budget; Subcommittee on Transportation, Treasury, and 
General Government, Senate Committee on Appropriations; Subcommittee on 
Taxation and IRS Oversight, Senate Committee on Finance; Subcommittee 
on Oversight of Government Management, the Federal Workforce, and the 
District of Columbia, Senate Committee on Governmental Affairs; House 
Committee on Appropriations; House Committee on Ways and Means; House 
Committee on Government Reform; House Committee on the Budget; 
Subcommittee on Transportation, Treasury, and Independent Agencies, 
House Committee on Appropriations; Subcommittee on Government 
Efficiency and Financial Management, House Committee on Government 
Reform; and Subcommittee on Oversight, House Committee on Ways and 
Means. In addition, we are sending copies of this report to the 
Chairman and Vice Chairman of the Joint Committee on Taxation, the 
Secretary of the Treasury, the Director of the Office of Management and 
Budget, the Chairman of the IRS Oversight Board, and other interested 
parties. Copies will be made available to others upon request. In 
addition, the report will be available at no charge on GAO's Web site 
at [Hyperlink, http://www.gao.gov]. 

If you have any questions concerning this report, please contact me at 
(202) 512-3406 or [Hyperlink, sebastians@gao.gov]. Contributors to this 
report are listed in appendix IV.

Sincerely yours,

Signed by: 

Steven J. Sebastian: 
Director, 
Financial Management and Assurance:

[End of section]

Appendixes:

Appendix I: Status of GAO Recommendations from Prior IRS Financial 
Audits and Related Management Reports:

Count: 1;
No.: 94-2;
Recommendation: Monitor implementation of actions to reduce the errors 
in calculating and reporting manual interest on taxpayer accounts, and 
test the effectiveness of these actions. (short-term);
Source report: Financial Management: Important IRS Revenue Information 
Is Unavailable or Unreliable (GAO/AIMD-94-22, Dec. 21, 1993);
Status of recommendations: Per IRS: Open. IRS is addressing the issue 
by increasing automation of restricted interest calculations, 
developing a quality review process, educating the workforce and 
measuring accuracy. Specifically, IRS has completed the rollout of the 
new software, provided training, and implemented a national help desk 
to support the end users. Additionally, IRS plans to implement quality 
reviews of the new manual interest procedures during 2004;
Status of recommendations: Per GAO: Open. We will review the changes 
IRS has implemented and continue to test the accuracy of IRS's manual 
interest calculations during our fiscal year 2004 financial audit.


Count: 2;
No.: 99-1;
Recommendation: Manually review and eliminate duplicate or other 
assessments that have already been paid off to assure that all accounts 
related to a single assessment are appropriately credited for payments 
received. (short-term);
Source report: Internal Revenue Service: Immediate and Long-Term 
Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 
30, 1998);
Status of recommendations: Per IRS: Open. IRS is developing an 
automated system to manage Trust Fund Recovery Penalties (TFRP). Phase 
I, to automate calculation of the penalties and assessment process to 
ensure accuracy and assessment timeliness, was implemented in July 
2003, and various aspects of the implementation continue. IRS is 
conducting the pilot for Phase II, which automates the manual steps of 
the campus process to timely cross-reference payments. Phase II has 
been delayed until at least April 2004. Software necessary for Phase 
III, centralization of some TFRP functions, is scheduled for release in 
2004. IRS anticipates completing Phase III by March 31, 2005. IRS is 
developing an action plan to improve timely and accurate manual 
processing of TFRP transcripts. Additional reviews have been 
recommended for each campus on TFRP cases. Processing problems have 
been identified and recommendations for corrective actions have been 
made. Training was developed to provide clarification of IRM issues;
Status of recommendations: Per GAO: Open. This recommendation 
specifically calls for IRS to review and correct its existing taxpayer 
records. In fiscal year 2003 we found that 24 of the 59 cases with 
Trust Fund Recovery Penalties (TFRP) had payments that were not 
properly reflected in each responsible party's account. We recognize 
automation of the current TFRP program is much needed. Until 
implemented, TFRP cases will continue to depend on campus personnel 
manually inputting the cross-reference information needed to link these 
assessments, but these efforts to date have not been effective. For 17 
(71 percent) of the 24 cases with mis-posted payments noted above, all 
necessary manual cross-indexes had been posted. Even after the new 
system is implemented, it will require significant manual effort to 
correct existing taxpayer records and ensure that it functions as 
needed for future cases. We will continue to test TFRP cases for proper 
postings to all related accounts.


Count: 3;
No.: 99-3;
Recommendation: Ensure that IRS's modernization blueprint includes 
developing a subsidiary ledger to accurately and promptly identify, 
classify, track, and report all IRS unpaid assessments by amount and 
taxpayer. This subsidiary ledger must also have the capability to 
distinguish unpaid assessments by category in order to identify those 
assessments that represent taxes receivable versus compliance 
assessments and write-offs. In cases involving trust fund recovery 
penalties, the subsidiary ledger should ensure that (1) the trust fund 
recovery penalty assessment is appropriately tracked for all taxpayers 
liable but counted only once for reporting purposes and (2) all 
payments made are properly credited to the accounts of all individuals 
assessed for the liability. (short-term);
Source report: Internal Revenue Service: Immediate and Long-Term 
Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 
30, 1998);
Status of recommendations: Per IRS: Open. IRS's Custodial Accounting 
Project (CAP) includes development of a Taxpayer Account Sub Ledger, 
which is expected to provide the ability to identify duplicate trust 
fund recovery assessments, taxes receivable, compliance assessments, 
and write-offs for financial reporting purposes. CAP Release 1 is 
behind schedule, and a new strategy is being developed. Cost and 
schedules will not be known until the new strategy is validated. In 
addition, IRS is developing an automated system to manage cases with 
Trust Fund Recovery Penalties (TFRP), as discussed under recommendation 
99-1 above. When Phase II of the system is implemented, the Chief 
Financial Officer (CFO) can establish the links to more accurately 
report the single balance due from these assessments. Final phase of 
implementation is anticipated in 2005;
Status of recommendations: Per GAO: Open. IRS's plan to address our 
specific recommendation regarding TFRP cases is discussed in 
recommendation 99-1 above. We will continue to monitor IRS's 
development of a new strategy for CAP, as well as its implementation of 
the new TFRP system.


Count: 4;
No.: 99-17;
Recommendation: Ensure that all returned refund checks are stamped 
"nonnegotiable" as soon as they are extracted. (short-term);
Source report: Internal Revenue Service: Physical Security over 
Taxpayer Receipts and Data Needs Improvement (GAO/AIMD-99-15, Nov. 30, 
1998);
Status of recommendations: Per IRS: Closed. IRS updated Internal 
Revenue Manual (IRM) 3.10.72.6(1) to reflect the policy of stamping all 
returned refund checks "unless for credit to the U.S. Treasury, this 
instrument is non-negotiable" as soon as they are extracted. In May 
2000, IRS added instructions to the IRM that required extraction 
personnel to place returned refund checks in a designated bucket/bin 
for manager review to ensure compliance. This question is on the 
Submission Processing Checklist and the campuses are reviewed monthly 
against the checklist to ensure compliance. A memo will be issued to 
Compliance Field Functions reminding them to properly stamp returned 
checks as non-negotiable;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our fiscal year 2003 site visits, we found checks at 
a service center campus that had not been stamped. Additionally, in 
several units of IRS's Small Business/ Self Employed division that 
received payments at a field office, we found that staff were unaware 
of the procedures for handling returned refund checks. Furthermore, 
some of these units did not have "non-negotiable" stamps. Additionally, 
the Compliance unit in another field office did not stamp returned 
refund checks. Consequently, several employees handled the checks 
before they were eventually restrictively endorsed, thus increasing 
their risk of theft.


Count: 5;
No.: 99-19;
Recommendation: Ensure that walk-in payment receipts are recorded in a 
control log prior to depositing the receipts in the locked container 
and ensure that the control log information is reconciled to receipts 
prior to submission of the receipts to another unit for payment 
processing. To ensure proper segregation of duties, an employee not 
responsible for logging receipts in the control log should perform the 
reconciliation. (short-term);
Source report: Internal Revenue Service: Physical Security over 
Taxpayer Receipts and Data Needs Improvement (GAO/AIMD-99-15, Nov. 30, 
1998);
Status of recommendations: Per IRS: Open. IRS issued guidance to the 
field in August 1999 and updated the IRM in January 2000 to include 
instructions for a control log and reconciliation of receipts. IRS will 
write new IRM procedures relating specifically to the control and 
reconciliation of remittances maintained in locked containers/safes. 
The draft IRM will be completed by June 30, 2004. Operational review of 
the Taxpayer Assistance Center (TAC) will include steps to ensure 
adherence to IRM procedures;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, at both field office units that handle receipts, including TAC, 
the individual who posted receipts to the log also reconciled the log. 
We will review IRS's actions during our fiscal year 2004 audit.


Count: 6;
No.: 99-20;
Recommendation: Analyze and determine the factors causing delays in 
processing and posting TFRP assessments. Once these factors have been 
determined, IRS should develop procedures to reduce the impact of these 
factors and to ensure timely posting to all applicable accounts and 
proper offsetting of refunds against unpaid assessments before 
issuance. (short-term);
Source report: Internal Revenue Service: Custodial Financial Management 
Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999);
Status of recommendations: Per IRS: Open. Automated Trust Fund Recovery 
Penalty programming continues. Phase I, to automate calculation of the 
penalties and assessment process to ensure accuracy and assessment 
timeliness was implemented July 1, 2003. IRS is conducting the pilot 
for Phase II, which automates the manual steps of the campus process to 
timely cross-reference payments. Phase II Pilot solution identified and 
tested: the system works well in production and productivity doubled 
when the campus began using the system;
Status of recommendations: Per GAO: Open. When IRS implements its 
Automated Trust Fund Recovery Penalty Program, we will review its 
effectiveness in eliminating processing delays. In the meantime, we 
will continue to monitor Trust Fund Recovery Penalty processing 
timeliness.


Count: 7;
No.: 99-22;
Recommendation: Expand IRS's current review of campus deterrent 
controls to include similar analyses of controls at IRS field offices 
in areas such as courier security, safeguarding of receipts in locked 
containers, requirements for fingerprinting employees, and 
requirements for promptly overstamping checks made out to "IRS" with 
"Internal Revenue Service" or "United States Treasury." Based on the 
results, IRS should make appropriate changes to strengthen its physical 
security controls. (short-term);
Source report: Internal Revenue Service: Custodial Financial Management 
Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999);
Status of recommendations: Per IRS: Closed. Guidelines were included in 
the fiscal year 2003 Operating Procedures for Taxpayer Assistance 
Centers (TAC) for safeguarding receipts in locked containers and over-
stamping checks made payable to IRS. Operating procedures state, in 
part, that all remittances and related returns must be recorded on Form 
795, Daily Report of Collection Activity, and placed in a locked 
container until transmitted to the appropriate Submission Processing 
Center. Payments in the form of personal checks, cashier checks, and 
money orders should be made payable to "United States Treasury." Checks 
made out to IRS or U.S. Treasury must be over-stamped with the words 
"United States Treasury" immediately upon receipt. IRS is also 
including these issues in its operational reviews of the TACs. Managers 
in the TACs are also required to complete an annual review that 
includes these issues. In April 2003, IRM 5.1.2 was revised with new 
sub-sections, including: Timeliness of Remittances and Physical 
Security Controls over Remittances;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. We verified that IRS has included guidelines in the fiscal 
year 2003 Operating Procedures for Taxpayer Assistance Centers (TACs) 
for safeguarding receipts in locked containers and over-stamping checks 
made payable to IRS. IRS has also included these issues in its TAC 
reviews. In addition, IRS provided evidence that it performed reviews 
of Forms 809 used in field collections. However, similar to prior 
audits, we continued to find control weaknesses over the safeguarding 
and accounting for taxpayer receipts and data in TAC as well as in 
Small Business/Self Employed field office units that handle receipts. 
During our fiscal year 2003 audit, we did not find any issues with 
courier security and hiring practices in IRS field offices. We will 
continue to monitor IRS's efforts.


Count: 8;
No.: 99-25;
Recommendation: Ensure that additional staff are employed or existing 
staff appropriately cross-trained to be able to perform the master file 
extractions and other ad hoc procedures needed for IRS to continually 
develop reliable balances for financial reporting purposes. (short-
term);
Source report: Internal Revenue Service: Custodial Financial Management 
Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999);
Status of recommendations: Per IRS: Open. The need to build an 
appropriate depth of experience is both immediate and ongoing;
resources are examined to see if work can be realigned, and if existing 
employees can be retrained. Contractor support is used to provide the 
support and backup necessary for preparation of the compensating 
procedures, pending implementation of the Custodial Accounting Project 
(CAP) and the Customer Account Data Engine (CADE). IRS is committed to 
supporting the funding of contractor resources that are used for the 
Custodial Financial Statement Audit. This corrective action will be 
continually monitored and developed as new solutions to the problem are 
identified. This recommendation will remain open until the full 
implementation of CAP for the entire custodial financial audit (IMF, 
BMF, INMF, and IRAF) with an anticipated date of October 1, 2007, 
pending the CAP Release 1 replan and rescheduling of Release 2;
Status of recommendations: Per GAO: Open. In fiscal year 2003, IRS 
continued to utilize compensating procedures to enable it to generate 
reliable information for financial reporting purposes. Additional 
resources were not added in FY 2003 to perform current compensating 
procedures pending implementation of CAP/CADE. IRS has noted that the 
depth of IRS experience of staff is inadequate. IRS's current position 
is to support the financial statement audit process with available 
resources and contractors, without hiring until the full implementation 
of CAP. We will continue to assess IRS's actions during our fiscal year 
2004 audit.


Count: 9;
No.: 99-29;
Recommendation: Develop the data to support meaningful cost information 
categories and cost-based performance measures. (long-term);
Source report: Internal Revenue Service: Serious Weaknesses Impact 
Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 
1999);
Status of recommendations: Per IRS: Open. Integrated Financial System 
(IFS) Release 1 includes requirements for a cost module that is 
interfaced with program area management information systems. Once 
implemented, both direct and indirect resource cost data will be linked 
to the budget process and the strategic planning goals of all business 
units. This will help move the Service forward in transitioning to a 
Performance-Based Organization. Full cost accounting will not be 
realized until future releases such as Asset Management and Work 
Management are implemented. At present these releases are being 
evaluated based on IFS Release 1 delays and funding availability. All 
future releases have been delayed or placed on indefinite hold;
Status of recommendations: Per GAO: Open. We will follow up during 
future audits to assess the effectiveness of the implementation of 
IFS's cost accounting features.


Count: 10;
No.: 99-30;
Recommendation: Develop and implement procedures and controls to ensure 
that detailed P&E records are accurately maintained. These procedures 
and controls would include ensuring that physical inventories at field 
locations are effectively performed, including prompt resolution of 
discrepancies found in the inventories and appropriate adjustment of 
detailed records. (short-term);
Source report: Internal Revenue Service: Serious Weaknesses Impact 
Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 
1999);
Status of recommendations: Per IRS: Closed. IRM 2.14.1, Information 
Technology Asset Management, was first published in June 2002. It was 
updated and republished in July 2003. Increased automation, including 
the expansion of the Electronic Packing Slip initiative, helped IRS 
establish accurate skeletal records in ITAMS. IRS's Asset Management 
office publishes exception reports for the field Single Point Inventory 
Function (SPIF) employees to reconcile on a biweekly basis. Errors and 
exceptions are tracked on these exception reports for SPIF employees to 
use in order to perfect incorrect P&E records. IRS also now has one 
authoritative IRM that consolidates all the procedures and policies for 
SPIF employees in one location;
Status of recommendations: Per GAO: Closed. During fiscal year 2003, 
IRS (1) developed and implemented procedures to use electronic data 
from vendors to create inventory records, which helped ensure that 
assets were promptly and accurately recorded upon receipt of the 
assets, (2) focused additional effort on ensuring that assets disposals 
were recorded timely, (3) expanded use of network monitoring software 
to track assets, and (4) enhanced monitoring and quality control over 
the annual inventory process. As a result, our testing during fiscal 
year 2003 indicated significant improvement in the accuracy and 
reliability of IRS's P&E inventory records.


Count: 11;
No.: 99-36;
Recommendation: Make enhancements to IRS financial systems to include 
recording P&E and capital leases as assets when purchased and to 
generate detailed records for P&E that reconcile to the financial 
records. (long-term);
Source report: Internal Revenue Service: Serious Weaknesses Impact 
Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 
1999);
Status of recommendations: Per IRS: Open. In IFS Release 1, P&E and 
leasehold improvements will be recorded as assets when purchased. 
However, amortization will remain a manual process. The ability to tie 
to the detailed physical asset information and a fully integrated 
system with subsidiary records will not be available until the Asset 
Management module is implemented during Release 2. All future releases 
are being evaluated based on IFS Release 1 delays and funding 
availability and have been delayed or placed on indefinite hold;
Status of recommendations: Per GAO: Open. We will evaluate IFS Release 
1 after it is implemented and we will continue to monitor IRS's 
progress with Release 2.


Count: 12;
No.: 01-01;
Recommendation: Better monitor IRS's procedures requiring that a freeze 
code be entered on all accounts of a taxpayer who IRS has determined is 
potentially liable for unpaid payroll taxes. This should be done on all 
such accounts to prevent the inadvertent release of refunds to the 
taxpayer until IRS determines the validity of the tax liability. 
(short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Closed. In September 2001 IRS 
issued a memorandum to the field emphasizing the timely input of the 
freeze code and revised Internal Revenue Manual (IRM) procedures to 
allow 30 days for the assessment of the trust fund penalty after input 
of the freeze code. IRS group managers are responsible for ensuring 
that the IRM procedures are followed and that adherence is tested when 
they review cases;
Status of recommendations: Per GAO: Closed. After IRS took action, our 
financial audit procedures in 2002 and 2003 have not identified the 
inadvertent release of refunds due to lack of freeze codes. Therefore, 
we are closing this specific recommendation regarding timely input of 
freeze codes to prevent erroneous refunds.


Count: 13;
No.: 01-02;
Recommendation: Revise policies and procedures governing the processing 
of abatement transactions to establish (1) appropriate time frames for 
processing abatements, (2) a methodology for monitoring the timeliness 
of abatement processing, and (3) procedures to identify the causes for 
delays and formulate corrective actions;
Also, examine abatement transactions arising from IRS errors to 
determine the causes for the errors and, based on this examination, 
formulate and implement appropriate procedures to reduce the level of 
errors made when entering data into taxpayer accounts. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Closed. IRS has not established 
specific time frames for processing abatements because large dollar 
claims often require additional documentation to verify a claim's 
validity. Often these cases go through examination, or have other 
taxpayer compliance issues. Allowing interest on refunds for these 
cases taking longer than 45 days to process is part of IRS's cost of 
doing business. The Office of Unpaid Assessments reviewed abatement 
cases identified for the 2002 audit and found that there were 
compliance activities in each case that required interest. In addition, 
IRS continues to enhance its policies and procedures to monitor the 
processing of abatement transactions;
Status of recommendations: Per GAO: Open. Although we agree that many 
cases may take longer than 45 days, we believe IRS should establish 
general targets for timeliness as well as a method for measuring and 
evaluating the processing times for abatements. In fiscal year 2003 we 
continued to find delays. Additionally, our recommendation calls for a 
review of abatements caused by IRS input errors to determine causes and 
corrections. We will continue to monitor timeliness of abatement 
processing and evaluate the effectiveness of IRS procedures for 
monitoring abatement transactions during our fiscal year 2004 financial 
audit.


Count: 14;
No.: 01-03;
Recommendation: Implement procedures to monitor the age of all pending 
offers and to require supervisors to follow up with staff to determine 
within 6 months whether to accept or reject the offer. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. IRS continues to make 
progress in the "closed within six months" measure. IRS is re-examining 
the six-month processing time goal. (IRS Should Evaluate the Changes to 
Its Offer in Compromise Program, GAO-02-311);
Status of recommendations: Per GAO: Open. IRS has improved its closure 
rate for offers in compromise, partly because it centralized processing 
at two campuses. In fiscal year 2003, the percentage of offers closed 
within six months increased to 56 percent, up from 38 percent the prior 
year. We will continue to monitor the timeliness of offer in compromise 
processing as part of our 2004 financial audit.


Count: 15;
No.: 01-04;
Recommendation: As an alternative to prematurely suspending active 
collection efforts, and using the best available information, develop 
reliable cost-benefit data relating to collection efforts for cases 
with some collection potential. These cost-benefit data would include 
the full cost associated with the increased collection activity (i.e., 
salaries, benefits, and administrative support), as well as the 
expected additional tax collections generated. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. IRS presented to the GAO a 
comprehensive action plan with short and long-term actions to address 
the material weakness on collection of unpaid taxes. In addition, the 
IRS is developing a cost accounting module. However, due to IFS Release 
1 delays and funding availability, all future releases have been 
delayed or placed on indefinite hold. Therefore, IRS will explore 
currently available information and determine the feasibility of 
developing a type of interim cost-benefit data or take other steps to 
enhance resource allocation decisions with regard to collection 
activities;
Status of recommendations: Per GAO: Open. We will continue to monitor 
IRS's development of new systems and its efforts to use currently 
available information to develop interim cost-benefit data.


Count: 16;
No.: 01-06;
Recommendation: Implement procedures to closely monitor the release of 
tax liens to ensure that they are released within 30 days of the date 
the related tax liability is fully satisfied. As part of these 
procedures, IRS should carefully analyze the causes of the delays in 
releasing tax liens identified by our work and prior work by IRS's 
former internal audit function and ensure that such procedures 
effectively address these issues. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. IRS has taken steps to 
improve the timeliness of lien releases involving settlement by Offer-
in-Compromise. Offer-in-Compromise tax examiners were given access to 
the lien system to initiate lien releases once an offer has been 
settled. IRS staff will review lien processing units during scheduled 
reviews during the second and third quarters of fiscal year 2004. They 
will visit Offer-in-Compromise sites during the fourth quarter of 
fiscal year 2004. Additionally, they have developed an action plan to 
address the root causes of untimely lien releases from the fiscal year 
2003 audit;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, we continued to find delays in release of liens. We found 12 
instances out of 59 cases tested in which IRS did not release the 
applicable federal tax lien within the 30-day statutory period. The 
time between the satisfaction of the liability and release of the lien 
ranged from 35 days to 249 days. We will review the impact of IRS's 
actions to date and will continue to review IRS's release of tax liens.


Count: 17;
No.: 01-12;
Recommendation: For (1) IRS's Automated Underreporter and Combined 
Annual Wage Reporting programs, (2) screening and examination of Earned 
Income Tax Credit claims, and (3) identifying and collecting previously 
disbursed improper refunds, use the best available information to 
develop reliable cost-benefit data to estimate the tax revenue 
collected by, and the amount of improper refunds returned to, IRS for 
each dollar spent pursuing these outstanding amounts. These data would 
include (1) an estimate of the full cost incurred by IRS in performing 
each of these efforts, including the salaries and benefits of all staff 
involved, as well as any related nonpersonnel costs, such as supplies 
and utilities, and (2) the actual amount (a) collected on tax amounts 
assessed and (b) recovered on improper refunds disbursed. (long-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. The key objective of IRS's 
efforts in developing cost data is to use data to make informed 
resource allocation decisions. IRS intends to consider cost data 
associated with its major programs, when developed, in all facets of 
the strategic planning process. Once implemented, the cost module of 
IFS, Release 1, will provide both direct and indirect resource cost 
data and will be linked to the budget process and the strategic 
planning goals of all business units. Full cost accounting will not be 
realized until future IFS releases, including Asset Management and Work 
Management, are implemented. At present these releases are being 
evaluated based on IFS Release 1 delays and funding availability. All 
future releases have currently been delayed or placed on indefinite 
hold;
Status of recommendations: Per GAO: Open. We will review the IFS plans 
to verify that it includes requirements that meet the objectives of the 
recommendation. We will continue to monitor IRS's development and use 
of cost data.


Count: 18;
No.: 01-15;
Recommendation: Ensure that all IRS units receiving collections have 
consistent policies and procedures to safeguard and account for cash 
receipts. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Closed. Completed September 1, 
2002. Multi-disciplinary teams composed of management from Security 
Services, Information Services, and Agency-Wide Shared Services will 
continue to work with local staff to ensure consistent, on-going 
implementation of policies and procedures. In April 2003, IRM 5.1.2 was 
revised with new sub-sections, including: Timeliness of Remittances and 
Physical Security Controls over Remittances;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our FY 2003 audit, we found that both field office 
TACs we visited accepted walk-in payments in an unsecured area. In 
addition, at one of the sites, receipts were not stored in locked 
containers.


Count: 19;
No.: 01-17;
Recommendation: Develop a subsidiary ledger for leasehold improvements 
and implement procedures to record leasehold improvement costs as they 
occur. (long-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. In IFS Release 1, property 
and equipment (P&E) and leasehold improvements will be recorded as 
assets when purchased. However, amortization will remain a manual 
process. The ability to tie to the detailed physical asset information 
and a fully integrated system with subsidiary records will not be 
available until the Asset Management module is implemented during 
Release 2. All future releases are being evaluated based on IFS Release 
1 delays and funding availability and have been delayed or placed on 
indefinite hold;
Status of recommendations: Per GAO: Open. We will evaluate IFS Release 
1 after it is implemented and we will continue to monitor IRS's 
progress with Release 2.


Count: 20;
No.: 01-18;
Recommendation: Implement procedures and controls to ensure that 
expenditures for P&E are charged to the correct accounting codes to 
provide reliable records for expenditures as a basis of extracting the 
costs for major systems and leasehold improvements. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. In IFS Release 1, P&E and 
leasehold improvements will be posted to the correct accounting string 
and Release 1 ties corresponding Federal Supply Classification codes to 
P&E material groups. The ability to tie to the detailed physical asset 
information and a fully integrated system with subsidiary records will 
not be available until the Asset Management module is implemented 
during Release 2. In the interim, IRS has implemented processes to 
identify, extract, and reclassify capitalized P&E transactions into the 
proper general ledger accounts;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, we found that IRS, with contractor assistance, implemented 
interim procedures to identify, extract, and reclassify P&E costs. 
However, IRS continued to lack current, reliable P&E information on an 
ongoing basis because P&E transactions were not properly recorded as 
transactions occurred. In addition, we continued to find that charges 
to accounting codes were not always correct. We will evaluate IFS 
Release 1 after it is implemented and we will continue to monitor IRS's 
progress with Release 2.


Count: 21;
No.: 01-21;
Recommendation: Consolidate and update the P&E policies and procedures 
currently documented in various handbooks and policy memorandums into a 
comprehensive document that personnel responsible for maintaining 
inventory records can use as a reference. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. IRS updated IRM 2.14.1, 
Information Technology Asset Management, to include all policies and 
procedures pertaining to information technology assets. IRS is in the 
process of revising IRM 1.14.2.49, Property Management Handbook, which 
will provide policies and procedures for non-information technology 
assets. Target date for the new consolidated handbook is April 2004. 
Once published, these revised IRMs will provide authoritative guidance 
for both information technology and non-information technology assets;
Status of recommendations: Per GAO: Open. We will continue to monitor 
IRS's progress in revising and updating its IRMs during our fiscal year 
2004 audit.


Count: 22;
No.: 01-27;
Recommendation: Perform sufficient supervisory reviews to help ensure 
that transactions recorded on P&E inventory records are accurately 
entered into subsidiary records and appropriately supported by 
documentation. (short-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Closed. IRS established an 
Electronic Packing Slip initiative, which helped establish accurate 
inventory records. IRS also implemented procedures to identify 
potential errors and discrepancies on inventory records and produce 
exception reports that are reviewed by SPIF personnel on a biweekly 
basis;
Status of recommendations: Per GAO: Closed. In fiscal year 2003, IRS 
developed procedures to obtain and use electronic data from vendors to 
create inventory records, which helped ensure that assets were promptly 
and accurately recorded upon receipt of the assets. In addition, IRS 
enhanced monitoring and quality control over the annual inventory 
process. As a result, our testing during fiscal year 2003 indicated 
significant improvement in the accuracy and reliability of IRS's P&E 
inventory records.


Count: 23;
No.: 01-33;
Recommendation: Establish policies and procedures to ensure that all 
administrative and, to the extent possible, custodial transactions are 
promptly recorded in the general ledger, preferably within 30 days of 
the transaction. (long-term);
Source report: Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management (GAO-01-42, Nov. 17, 2000);
Status of recommendations: Per IRS: Open. As of June 1, 2002, Revenue 
Systems/ Interim Revenue Accounting Control System (IRACS) is using a 
spreadsheet to ensure that all documents are received and recordable 
transactions are input into the Interim Revenue Accounting Control 
System prior to month-end activities. The capability for recording 
custodial transactions for taxes receivable and refunds payable at the 
detail level will not be available until full implementation of CAP 
with integration to IFS. Additionally, for administrative transactions, 
the IRS is in the midst of an initiative to identify all major non-
payroll expense transactions that can be accrued and/or recorded on an 
interim basis. During fiscal year 2003, IRS implemented interim 
accruals to monthly record material non-payroll administrative 
activities, such as rent, postage, and telephone expenses;
Status of recommendations: Per GAO: Open. We verified that during 
fiscal year 2003, IRS implemented interim accruals to more timely 
record material administrative activities, such as rent, postage and 
telephone expenses. This has significantly improved the reliability of 
related balances during the year. However, for taxes receivable and the 
related balances due to Treasury, the balances reported are not based 
on the routine recording of transactions. We will continue to monitor 
IRS's progress during our fiscal year 2004 financial audit.


Count: 24;
No.: 01-39;
Recommendation: Develop a mechanism to track and report the actual 
costs associated with reimbursable activities. (long-term);
Source report: Management Letter: Improvements Needed in IRS' 
Accounting Procedures and Internal Controls (GAO-01-880R, July 30, 
2001);
Status of recommendations: Per IRS: Open. IRS has developed guidance 
for costing reimbursable agreements. This guidance includes 
instructions on tracking labor and was completed February 1, 2002. IFS 
Release 1 includes requirements for a cost module that is interfaced 
with program area management information systems. Once implemented, 
both direct and indirect resource cost data will be linked to the 
budget process and the strategic planning goals of all business units. 
This will help move the Service forward in transitioning to a 
Performance-Based Organization. Full cost accounting will not be 
realized until future releases, such as Asset Management and Work 
Management, are implemented. At present these releases are being 
evaluated based on IFS Release 1 delays and funding availability. All 
future releases have been delayed or placed on indefinite hold;
Status of recommendations: Per GAO: Open. We confirmed that IRS 
completed procedures for costing reimbursable agreements that provides 
the basic framework for the accumulation of both direct and indirect 
costs at the necessary level of detail. IRS plans to implement these 
procedures over several years as it phases in various program area 
management information systems that will provide critical information 
to its new cost accounting system. However, as indicated by IRS, these 
systems have been placed on indefinite hold. We will continue to 
monitor IRS's efforts to fully implement its cost accounting system 
and, once it has been fully implemented, evaluate the effectiveness of 
IRS procedures for developing cost information for its reimbursable 
agreements.


Count: 25;
No.: 02-01;
Recommendation: Implement policies and procedures to record 
capitalizable acquisition costs for P&E, capital leases, leasehold 
improvements, and major systems in the appropriate P&E general ledger 
accounts as transactions occur. (long-term);
Source report: Internal Revenue Service: Progress Made, but Further 
Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 
2001);
Status of recommendations: Per IRS: Open. IRS P&E capitalization 
policies and procedures provide for use of the pooling concept to 
capitalize costs associated with ADP equipment with a useful life of 
greater than 1 year. The pooling method is used, as opposed to the 
preferred process of capturing costs on a transactional basis, due to 
system limitations. In IFS Release 1, P&E and leasehold improvements 
will be recorded as assets when purchased. P&E will also be posted to 
the correct accounting string and Release 1 ties corresponding Federal 
Supply Classification codes to P&E material groups. However, a fully 
integrated system with subsidiary records will not be available until 
the Asset Management module is implemented during Release 2. All future 
releases are being evaluated based on IFS Release 1 delays and funding 
availability and have been delayed or placed on indefinite hold;
Status of recommendations: Per GAO: Open. We will continue to evaluate 
the effectiveness of IRS's interim procedures for capitalizing P&E 
costs under the pooling concept during our fiscal year 2004 financial 
audit. We will evaluate IFS Release 1 after it is implemented and we 
will continue to monitor IRS's progress with Release 2.


Count: 26;
No.: 02-03;
Recommendation: Perform periodic reviews to monitor and ensure that 
obligations are promptly established in the accounting system. Such 
reviews would assist IRS in maintaining accurate and complete records 
of its obligations and in reducing the risk of obligations exceeding 
available funding. (short-term);
Source report: Internal Revenue Service: Progress Made, but Further 
Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 
2001);
Status of recommendations: Per IRS: Closed. IRS issued guidance to all 
business units requesting a complete review of obligations to be 
completed monthly and certified quarterly and a complete review of 
commitments to be certified quarterly. Obligation guidance was 
completed June 26, 2001. Commitment guidance was completed December 31, 
2002;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
audit work, we verified that IRS implemented its commitment guidance, 
which requires business units to certify that unliquidated commitments 
were reviewed to determine whether the commitments should be converted 
into obligations. In addition, we found that IRS promptly established 
obligations in its accounting system.


Count: 27;
No.: 02-05;
Recommendation: Develop, document, and implement policies and 
procedures to require that reconciliations between proprietary and 
budgetary accounts be performed monthly so that differences can be 
identified in a timely manner, and, if necessary, adjusted. (short-
term);
Source report: Internal Revenue Service: Progress Made, but Further 
Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 
2001);
Status of recommendations: Per IRS: Closed. Policies and procedures 
addressing monthly reconciliations were documented on June 1, 2002. 
Monthly reconciliations are currently being prepared between 
proprietary and budgetary accounts and differences are adjusted when 
identified. During fiscal year 2003, IRS implemented interim accruals 
to monthly record material administrative activities, such as rent, 
postage, and telephone expenses. These accruals have resulted in 
significantly reduced suspense amounts at all reporting periods;
Status of recommendations: Per GAO: Closed. We confirmed that quarterly 
reconciliations between budgetary and proprietary accounts are 
performed and documented. Informal reconciliations are prepared 
monthly. During fiscal year 2003, IRS implemented interim accruals to 
monthly record material administrative activities, such as rent, 
postage, and telephone expenses. In addition, IRS implemented 
procedures to accrue user fees on a quarterly basis. This has 
significantly improved the reliability of the related balance during 
the year and has reduced the balance of the suspense account at June 
30, 2003, to $22 million and as of year-end $6 million.


Count: 28;
No.: 02-08;
Recommendation: Implement policies and procedures to require that all 
employees itemize on their time cards the time spent on specific 
projects. (long-term);
Source report: Internal Revenue Service: Progress Made, but Further 
Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 
2001);
Status of recommendations: Per IRS: Open. IRS agreed with the objective 
of this recommendation, which is to allow it to collect and report the 
full payroll costs associated with its activities. While IRS indicated 
that most of its employees already itemize their time charges in 
functional tracking systems, it has acknowledged that full 
implementation of the IFS cost accounting module is required to close 
this recommendation. IFS Release 1 includes requirements for a cost 
module that is interfaced with program area management information 
systems. Once implemented, both direct and indirect resource cost data 
can be linked to the budget process and the strategic planning goals of 
all business units. This will help move the Service forward in 
transitioning to a Performance-Based Organization. Full cost accounting 
will not be realized until future releases, such as Asset Management 
and Work Management, are implemented. At present these releases are 
being evaluated based on IFS Release 1 delays and funding availability. 
All future releases have been delayed or placed on indefinite hold;
Status of recommendations: Per GAO: Open. We confirmed that IRS 
employees use functional tracking (workload management) systems to 
itemize and track their time charges. However, this recommendation 
remains open because its objective is to allow IRS to collect and 
report the full payroll costs associated with its activities. During 
our fiscal year 2003 audit, we continued to find that the functional 
tracking systems are insufficient for this purpose because they do not 
interface with each other or the general ledger to allow management to 
use them to readily accumulate the time charged to specific projects. 
The new cost accounting module of IFS is expected to track IRS's costs 
at the activity level and, thus, may address the recommendation. 
However, IRS plans to fully implement cost accounting, which are 
expected to require several years to execute, are currently on hold. We 
will continue to monitor IRS's progress in implementing the IFS cost 
accounting module.


Count: 29;
No.: 02-09;
Recommendation: Implement policies and procedures to allocate 
nonpersonnel costs to programs and activities on a routine basis 
throughout the year. (long-term);
Source report: Internal Revenue Service: Progress Made, but Further 
Actions Needed to Improve Financial Management (GAO-02-35, Oct. 19, 
2001);
Status of recommendations: Per IRS: Open. IRS agreed with this 
recommendation and indicated plans to address this issue with the cost 
accounting module that will be part of IFS. IFS Release 1 includes 
requirements for a cost module that is interfaced with program area 
management information systems. Once implemented, both direct and 
indirect resource cost data can be linked to the budget process and the 
strategic planning goals of all business units. This will help move IRS 
forward in transitioning to a performance-based organization. Full cost 
accounting will not be realized until future releases, such as Asset 
Management and Work Management, are implemented. At present, these 
releases are being evaluated based on IFS Release 1 delays and funding 
availability. All future releases have been delayed or placed on 
indefinite hold;
Status of recommendations: Per GAO: Open. We confirmed that the IFS 
plans include requirements that meet the objectives of this 
recommendation;
however, in fiscal year 2003 IRS delayed, or placed on hold, the 
implementation of these requirements for an indefinite period. IRS 
plans to implement these requirements are expected to be executed over 
several years as IRS phases in various program area management 
information systems that will provide critical information to the cost 
accounting system. We will continue to monitor IRS's efforts and, once 
IFS is completed, follow up on IRS's implementation of these plans.


Count: 30;
No.: 02-11;
Recommendation: Develop policies and procedures to require that field 
office employees provide taxpayers receipts for all walk-in payments. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS issued the Field 
Assistance (FA) IRM in June 2003, which instructs TAC employees to 
issue Form 809, Receipt for Payment of Taxes, when taxpayers request a 
receipt as proof of payment even if cash was not received. (IRM 
21.3.4.7.1.1(4). The IRM also states Document 10161-Payments May Be 
Made By-will be posted in all TACs. IRS monitored adherence to these 
requirements during operational reviews conducted in the TACs during 
fiscal year 2003;
Status of recommendations: Per GAO: Closed. We verified that IRS has 
incorporated guidelines in its FY 2002 & 2003 Field Assistance 
Operations Procedures (FAOP) to instruct employees to issue receipts to 
taxpayers upon request.


Count: 31;
No.: 02-12;
Recommendation: Develop policies and procedures to require that field 
offices post signs in the most visible locations to remind taxpayers to 
obtain receipts for payments. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS issued the FA IRM in 
June 2003, which lists the required signs for each TAC. Sign #10161 is 
the Payment Upon Request sign and each TAC is required to display the 
sign where it can be seen (IRM 21.3.4.3(4). IRS monitored adherence to 
these procedures during operational reviews of the TACs conducted in 
fiscal year 2003. Signs were posted in TACs as required and additional 
employees have been assigned 809 books in various TACs. Periodic 
reviews and verification of the requirement are required at a minimum 
during the annual filling season readiness operational review;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. We verified that IRS included instructions in its FY 2003 
FAOP but the instructions did not specify that the signs be posted in 
the most visible location. During our FY 2003 audit we found that no 
signs were posted in one of the two field offices we visited.


Count: 32;
No.: 02-14;
Recommendation: Develop policies and procedures to require that IRS and 
lockbox employees performing final candling record receipts in a 
control log at the time of discovery, recording at a minimum the total 
number of payments found, the amount of each payment, and the taxpayer 
who submitted the payment. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. The 2003 Lockbox Processing 
Guidelines (LPG), 3.2.8.1(1), directs "Lockbox employees to complete 
Form 9535, Record of Lockbox Discovered Remittance and Correspondence" 
when receipts are discovered during candling. The employee must record 
the type of document and remittance found, dollar amount, taxpayer's 
name and address, Social Security Number/Taxpayer Identification 
Number, and discoverer's name on Form 9535. Each remittance must be 
listed as a separate entry. The 2003 Extracting, Sorting & Numbering 
IRM, 3.10.72.6.2, requires "management to maintain a log identifying 
the employees responsible for overlooking the items and items 
discovered." The 2003 LPG was updated January 31, 2003;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our FY 2003 audit we verified that IRS revised the 
LPG to direct employees to complete Form 9535, Record of Lockbox 
Discovered Remittance and Correspondence when receipts are discovered 
during candling and specified information to be recorded. We also 
verified that the IRM, updated May 28, 2003, requires management to 
maintain a log identifying the employees responsible for overlooking 
the items and information on the items discovered (check amount/form 
number). However, at 2 service centers and at one lockbox bank we found 
that staff did not immediately record items found during final candling 
in a control log. Furthermore, 1 service center's candling log did not 
capture the minimum information in this recommendation. Since IRS's 
action relating to the IRM occurred after our site visits, we will 
continue to monitor IRS's efforts.


Count: 33;
No.: 02-15;
Recommendation: Develop policies and procedures to require that IRS and 
lockbox managers or designated officials reconcile logs of payments 
found during final candling to the related receipts and documents. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. The 2003 LPG, 3.2.8.1(1), 
directs the responsible manager to validate that the information was 
correctly entered on Form 9535 for every shift worked. The 2003 
Extracting, Sorting & Numbering IRM, 3.1072.6.2(1)e, states, 
"management shall immediately reconcile the discovered remittances with 
the final candling log." The 2003 LPG was updated January 31, 2003;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. We verified that the LPG directs lockbox managers to daily 
validate Form 9535 and the IRM, which was updated on May 28, 2003, to 
coordinate with the LPG, requires that management initial the log to 
validate that all available information is correctly entered and ensure 
that all remittances listed in the log are brought to the deposit 
function on a daily basis. However, at 1 service center we found that 
items discovered during candling were not reconciled.


Count: 34;
No.: 02-16;
Recommendation: Ensure that field office management complies with 
existing receipt control policies that require a segregation of duties 
between employees who prepare control logs for walk-in payments and 
employees who reconcile the control logs to the actual payments. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS had issued guidance to 
TAC managers requiring the separation of duties. Further, this item is 
included in the self-assessment, which is to be conducted periodically. 
IRS monitored adherence to the existing procedures during operational 
reviews of the TACs conducted in fiscal year 2003;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. In addition, the applicable IRM no longer requires 
segregation of duties. During our fiscal year 2003 audit, at both field 
office units that handle receipts, including TAC, the individual who 
posted receipts to the log also reconciled the log.


Count: 35;
No.: 02-17;
Recommendation: Clarify that the intent of the requirement for 
background investigations is meant to apply to personnel being 
entrusted with taxpayer receipts and information rather than just 
personnel being granted access to an IRS facility. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. On October 3, 2002, IRS 
issued a memorandum, "Clarification of Background Investigation 
Requirements for Contractors" to clarify that the intent of the 
requirement for background investigations is meant to apply to 
personnel being entrusted with taxpayer receipts and information rather 
than just personnel being granted access to an IRS facility. 
Additionally, banks have been required to ensure that courier services 
employees working with the lockbox facility are getting Federal Bureau 
of Investigation fingerprint checks (LPG, January 2003);
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
audit we verified that the October 3, 2002, memorandum reiterated the 
IRS requirement that all contractor employees who have access to 
taxpayer receipts and information must have an approved background 
investigation conducted by the IRS National Background Investigations 
Center (NBIC). In addition, we found that IRS was pursuing courier 
background investigations at all ten of its campuses.


Count: 36;
No.: 02-18;
Recommendation: Work with the National Finance Center (NFC) to resolve 
the technical limitations that exist within the Security Entry and 
Tracking System (SETS) database and continue to periodically review 
SETS data to detect and correct errors. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Open. NFC is in the process of 
upgrading the SETS application to a web version, which they anticipate 
deploying in six to nine months. Treasury has requested that NFC 
include IRS as a participant in the design and development sessions. In 
the interim, NFC will continue to address any problems reported by IRS;
Status of recommendations: Per GAO: Open. We will continue to monitor 
IRS's actions.


Count: 37;
No.: 02-20;
Recommendation: Establish procedures to track the release of liens up 
to the point of delivery to the local jurisdiction to ensure liens are 
released timely to avoid unduly burdening taxpayers once they have 
satisfied their tax liability. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS issued a memorandum 
dated January 28, 2003, with instructions for tracking when the 
certificates of lien release leave our immediate control. Certificates 
must be generated at least weekly. Based on the results of the 2003 
audit, IRS has drafted a detailed action plan for lien release issues, 
which includes operational reviews. The new procedures are for 
Automated Lien System Units to date stamp a duplicate copy of the line 
release-billing voucher so that the Service has actual knowledge of 
when line releases are no longer under our direct control. This was 
issued in the Internal Revenue Manual on October 1, 2003. Certificates 
must be generated weekly. A memo was issued January 28, 2003, on 
Payment Compliance, which was reinforced via email on April 1, 2004, to 
Territory Managers in Case Processing, emphasizing that the 
requirements and the procedures have been incorporated into IRM 
5.12.6.4.1. Reviews will be conducted at all management levels to 
ensure that these procedures are being followed;
Status of recommendations: Per GAO: Open. Although IRS established 
procedures for tracking liens, none of the 7 lien units that we visited 
in 2003 had properly implemented the date-stamping procedures. We will 
continue to review the implementation of IRS's corrective actions 
during our 2004 financial audit.


Count: 38;
No.: 02-21;
Recommendation: Ensure that complete skeletal records are created and 
available for the SPIF units to update upon receipt of P&E. (short-
term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS successfully 
implemented an Electronic Packing Slip initiative with its primary 
hardware vendor. Using an automated transfer method, the vendor 
provides an electronic feed of all equipment that was shipped. IRS 
updates the Information Technology Asset Management System with that 
information and has skeletal records established before the equipment 
reaches a Single Point Inventory Function's loading dock;
Status of recommendations: Per GAO: Closed. IRS implemented a process 
for suppliers to provide "electronic packing slip" information when 
equipment is purchased and shipped. This information is used to 
establish skeletal records on ITAMS before property is received at the 
loading dock. During our fiscal year 2003 audit, we found that skeletal 
records were almost always available for Single Point Inventory 
Function units to update upon receipt of P&E.


Count: 39;
No.: 02-23;
Recommendation: Develop and implement procedures to ensure that 
procurement award and requisition numbers recorded on property records 
are complete, accurate, and linked to the accounting records. (long-
term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Open. IRS's Information Technology 
Services is working with Procurement and vendors to establish a 
reliable vehicle for transmitting packing slip information. IRS will 
continue to work with Procurement to see that these fields are made a 
part of every procurement and that the necessary procurement award and 
requisition numbers are established on ITAMS at the time of purchase 
via an electronic feed from Procurement and matched via the electronic 
packing slip IRS will receive from vendors. A fully integrated system 
that provides the ability to tie to the detailed physical asset 
information will not be available until the Asset Management module is 
implemented during IFS Release 2. All future releases are being 
evaluated based on IFS Release 1 delays and funding availability and 
have been delayed or placed on indefinite hold;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, we continued to find that accounting transactions could not 
always be linked to P&E inventory records. We will continue to review 
IRS's corrective actions during our fiscal year 2004 financial audit.


Count: 40;
No.: 02-24;
Recommendation: Record software licenses in IRS's property management 
system. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. All software valued at more 
than $25,000 was recorded into ITAMS by June 2003. IRS also developed 
and implemented procedures to update software information on an on-
going basis;
Status of recommendations: Per GAO: Closed. In fiscal year 2003, IRS 
developed and implemented policy and procedures to identify and record 
software licenses.


Count: 41;
No.: 02-25;
Recommendation: Develop an approach to assess IRS's compliance with the 
terms of these software licenses. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS developed and 
implemented procedures to reconcile the number of software users with 
the number of licenses purchased. This allows IRS to determine 
compliance with the terms of software licenses and to know when to 
purchase more or less software based on usage;
Status of recommendations: Per GAO: Closed. In fiscal year 2003, IRS 
implemented a process to inventory software licenses and assess 
compliance with the terms of the licenses.


Count: 42;
No.: 02-26;
Recommendation: Ensure that, in the absence of an integrated general 
ledger system for IRS's custodial and administrative activities, IRS 
strengthens monitoring and analysis of receivables to ensure that 
receivables are not being erroneously recorded as a result of the lack 
of integration between these two activities. (short-term);
Source report: Management Report: Improvements Needed in IRS's 
Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 
2002);
Status of recommendations: Per IRS: Closed. IRS agrees with this 
recommendation and has taken steps to better manage reimbursable 
activity. IRS is now reconciling all reimbursable receivable accounts 
with the appropriate general ledger accounts monthly and is monitoring 
activities between custodial and administrative accounts as part of 
this process. Additionally, IRS has implemented a process to routinely 
review open receivables and take action to write off amounts, as 
appropriate;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
audit, we verified that IRS initiated corrective actions, that involved 
monitoring and detailed analysis of its reimbursable receivables that 
effectively addressed this recommendation. We found that, at fiscal 
yearend, IRS had identified and written off most of its old 
reimbursable receivable accounts and maintained no receivable balances 
that were due from its custodial activities.


Count: 43;
No.: 03-01;
Recommendation: Document IRS's oversight roles and responsibilities in 
agency policy and procedure manuals and determine appropriate level of 
IRS oversight of lockbox sites throughout the year, particularly during 
peak processing periods. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The MOU between FMS and 
IRS, detailing the roles and responsibilities of each organization in 
administering the IRS Lockbox Program, was signed April 30, 2003. In 
addition, IRM 3.0.230, Lockbox Processing Procedures, and the Lockbox 
Processing Guidelines (2003) and (2004) outline the duties and 
responsibilities of FMS and IRS;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, we reviewed the MOU in draft form and have since confirmed its 
ratification. We will evaluate IRS's documentation of its oversight 
roles and responsibilities in agency policy and procedure manuals as 
part of our fiscal year 2004 financial audit.


Count: 44;
No.: 03-02;
Recommendation: Establish and document guidelines and procedures in 
policy and procedure manuals for implementing the new penalty provision 
for lockbox banks to reimburse the government for direct costs incurred 
in correcting errors made by lockbox banks. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Open. Rescheduled to November 15, 
2004. IRS/ FMS has drafted a high-level reimbursement process. The plan 
includes the use of a special Lockbox Program code to delineate IRS 
rework costs as a result of errors made by the lock box sites. 
Currently the IRS/FMS is working on further detailing the plan for 
approval by FMS/IRS management. Once the plan is approved, IRS will 
incorporate the procedures in both the Lockbox Processing Guidelines 
and the Lockbox Processing IRM;
Status of recommendations: Per GAO: Open. We will evaluate IRS's 
corrective actions in future financial audits.


Count: 45;
No.: 03-03;
Recommendation: Finalize and document the recently developed waiver 
process in IRS policy and procedure manuals and ensure that decisions 
on requests for waivers are formally and promptly communicated to 
lockbox management. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. Both the new waiver 
process, which is described in section 2.1.3.1 of the 2003 and 2004 
Lockbox Processing Guidelines (LPG), revised April 8, 2003, and issued 
December 1, 2003, respectively, and the Security Memorandum of 
Understanding (MOU), which was used to document the internal process 
between the IRS and the FMS, and completed on April 1, 2003, address 
this recommendation;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
IRS financial audit, we verified that the new waiver process is 
described in the LPG and that the internal process between IRS and FMS 
is documented in the MOU.


Count: 46;
No.: 03-04;
Recommendation: Establish and document a process in IRS policy and 
procedure manuals to ensure that lockbox bank management formally 
responds to IRS oversight findings and recommendations promptly and 
that corrective actions taken by lockbox bank management are 
appropriate. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The Security MOU, completed 
on 04/01/03, documents the roles and responsibilities of the Security 
Review Team, which is comprised of FMS and IRS security experts. IRS 
documents our findings, which are sent to FMS to be included in a final 
report to the banks. This report covers findings, recommendations, and 
due dates for all corrective actions. IRS receives a copy of the final 
report;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
IRS financial audit, we verified that a process to ensure that lockbox 
bank management formally responds to IRS and FMS was documented in the 
Security MOU. The MOU does not however document IRS's oversight roles 
and responsibilities in IRS policy and procedure manuals.


Count: 47;
No.: 03-05;
Recommendation: Establish and document a process in IRS policy and 
procedure manuals to ensure that IRS officials with the appropriate 
levels of expertise continue to participate in announced and 
unannounced security reviews of lockbox banks. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The Security MOU, which was 
completed on April 1, 2003, documents the roles and responsibilities of 
the Security Review Team, which is comprised of FMS and IRS security 
experts;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
IRS financial audit, we verified that the roles and responsibilities of 
the security review team were documented in the Security MOU.


Count: 48;
No.: 03-06;
Recommendation: Ensure that the results of on-site compliance reviews 
are completed and promptly submitted to IRS's National Office. (short-
term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. Lockbox banks underwent 
security reviews in 2003. The banks were required to respond officially 
to the items identified in the security report. Security reviews were 
based on the lockbox sites' compliance with the LPG. IRS is represented 
on the security review team, provides input related to the review to 
FMS, and then receives a copy of the final response sent by FMS to the 
lockbox bank;
Status of recommendations: Per GAO: Open. Based on our review during 
our fiscal year 2003 IRS financial audit, the lockbox coordinators 
completed a compliance review checklist during January and April 2003 
peak for the 4 lockbox banks we visited. However, we noted that in some 
instances the coordinator did not complete all the steps noted on the 
checklist. We were unable to determine whether or not the reviews were 
submitted promptly to IRS's National Office. We will continue to 
monitor IRS's efforts in our fiscal year 2004 financial audit.


Count: 49;
No.: 03-07;
Recommendation: Revise the guidance used for compliance reviews so it 
requires reviewers to (1) determine whether lockbox contractors, such 
as couriers, have completed and obtained favorable results on IRS 
fingerprint checks and (2) obtain and review all relevant logs for cash 
payments and candled items to ensure that all payments are accounted 
for. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. IRS updated the security 
checksheet to instruct reviewers to determine whether contractors have 
completed and obtained favorable fingerprint results and to review all 
relevant logs for cash payments and candling logs. In addition, IRS and 
FMS personnel review all contractor (including courier) documentation 
during peak. Lockbox Coordinators are responsible for reviewing the 
candling log and cash log;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
financial audit, we verified that IRS updated FMS's check sheet and 
found it contained all of the recommended requirements. In addition, we 
verified that the LPG was updated to revise guidance for candling. 
However, we also reviewed the lockbox coordinators' on-site review 
checksheet and found that it did not contain the courier or the 
candling log requirements. We will continue to monitor IRS's efforts in 
our fiscal year 2004 financial audit.


Count: 50;
No.: 03-08;
Recommendation: Assign individuals, other than the lockbox 
coordinators, responsibility for completing on-site performance 
reviews. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. IRS disagrees with this 
recommendation. The Lockbox Coordinators were specifically hired to 
conduct the performance reviews and to represent the IRS interests at 
the banks during peak processing. IRS has increased the monitoring of 
the Lockbox Coordinator's performance by establishing direct report of 
these positions to a newly established organization in the Revenue and 
Deposit Branch. Reports prepared by the Lockbox Coordinators are 
analyzed and reviewed by the manager of the Lockbox Coordinators, also 
the Lockbox Policy and Procedure Section and FMS. This review will 
identify any inconsistencies with other on-site observations and 
findings by other staff. In addition, each Submission Processing Center 
conducts a review of the documents and remittances returned by the 
Lockbox Bank. The role of the Lockbox Coordinators is not only to 
ensure the proper reviews are completed for each site but also to be 
the Liaison for the Bank and related Submission Processing Center. They 
will respond to questions and provide direction based on established 
guidelines in the Lockbox Processing Guidelines. To ensure Lockbox 
Coordinators are able to perform all of the prescribed reviews the 
Revenue and Deposit Branch will ensure additional staff is available as 
needed. GAO's concern regarding the objectivity and integrity of each 
individual Lockbox Coordinator becoming questionable will be addressed 
through monitoring of individual performance by the newly assigned 
manager. IRS is also working towards standardization of the review 
process that should decrease this concern as well;
Status of recommendations: Per GAO: Open. We continue to believe the 
current lockbox coordinator structure, where lockbox coordinators are 
responsible for performing performance reviews as well as assisting 
lockbox banks with processing issues, does not alleviate the potential 
conflict of competing responsibilities in completing on-site 
performance reviews. However, we will review IRS's actions during our 
fiscal year 2004 audit to determine their effect on this issue. IRS 
previously agreed with this recommendation in its comments on the 
lockbox report dated December 20, 2002.


Count: 51;
No.: 03-09;
Recommendation: Require lockbox management to ensure that perimeter 
doors are locked and alarms on perimeter doors are functioning and that 
IRS take steps to monitor adherence to this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. Security reviews have been 
completed to address this requirement;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
IRS financial audit, we verified that IRS had taken steps to monitor 
compliance with this requirement. Additionally, this item is included 
in FMS's monitoring/oversight checklist used to monitor compliance with 
this requirement.


Count: 52;
No.: 03-10;
Recommendation: Require lockbox management to ensure that guards are 
responsive to alarms and that IRS takes steps to monitor adherence to 
this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement to ensure 
that door alarms are responded to by the guards was previously 
established in the 2002 LPG issued January 1, 2002. During on-site 
reviews, IRS and FMS security teams observe the guards responding to 
door alarms, etc., by performing tests during on-site security review. 
Documented in Section 2.4 of 2003 (revised April 8, 2003) and 2004 LPG 
(issued December 1, 2003);
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
IRS financial audit, we noted that IRS had taken steps to monitor 
compliance with this requirement. Additionally, this item is included 
in FMS's monitoring/oversight checklist used to monitor compliance with 
this requirement. However, in our fiscal year 2003 audit, we observed 
that guards did not respond to alarms at one of the four lockbox banks 
we visited.


Count: 53;
No.: 03-11;
Recommendation: Require lockbox management to ensure that employees' 
identity and employment status are verified prior to granting access to 
the processing floor and that IRS take steps to monitor adherence to 
this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement to ensure 
that employee identity and employment status are verified prior to 
granting access to the processing floor was previously listed in the 
2002 LPG issued January 1, 2002. During the on-site security reviews, 
the security review teams ensure the banks meet this requirement by 
reviewing personnel folders for temporary employees, bank officials, 
couriers, and guards. Documented in Section 2.5 of the 2003 (revised 
April 8, 2003) and 2004 LPG (issued December 1, 2003);
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
IRS financial audit, we noted that IRS had taken steps to monitor 
compliance with this requirement. Additionally, this item is included 
in FMS's monitoring/oversight checklist used to monitor compliance with 
this requirement as well as in the LPG. Furthermore, we noted no 
exceptions during our observations.


Count: 54;
No.: 03-12;
Recommendation: Require lockbox management to ensure that visitor 
access to and activity in the processing area are adequately controlled 
and that IRS take steps to monitor adherence to this requirement. 
(short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement to control 
visitor access was previously listed in the 2002 LPG issued January 1, 
2002. During the on-site security reviews, IRS/FMS security teams 
observe the sites' handling of visitors to ensure that the banks meet 
this requirement. Additionally, during peak visits a lockbox 
coordinator observes adherence to this requirement. Documented in 
Section 2.6.2 of the 2003 (revised April 8, 2003) and 2004 LPG (issued 
December 1, 2003);
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
IRS financial audit, we verified that IRS had taken steps to monitor 
compliance with this requirement. Additionally, this item is included 
in FMS's monitoring/oversight checklist used to monitor compliance with 
this requirement.


Count: 55;
No.: 03-13;
Recommendation: Require lockbox management to ensure that employee 
access and items brought into and out of the processing area are 
closely monitored by guards and that IRS take steps to monitor 
adherence to this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement to ensure 
that employee access and items brought into and out of the processing 
area are closely monitored by guards was previously listed in the 2002 
LPG issued January 1, 2002. Additionally, Post Orders are required to 
be developed and reviewed with security guards prior to each peak to 
reinforce this requirement. On-site security review, as well as Lockbox 
Coordinator visits, monitors the adherence to this requirement. During 
the on-site security reviews, IRS and FMS security teams observe the 
sites handling of visitors to ensure the banks meet this requirement. 
Documented in Section 2.7 of the 2003 (revised April 8, 2003) and 2004 
LPG (issued December 1, 2003);
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
IRS financial audit, we verified that IRS had taken steps to monitor 
compliance with this requirement. Additionally, this item is included 
in FMS's monitoring/oversight checklist used to monitor compliance with 
this requirement as well as in the LPG. Furthermore, we noted no 
exceptions during our observations.


Count: 56;
No.: 03-14;
Recommendation: Require lockbox management to ensure that surveillance 
cameras and monitors are installed in ways that allow for effective, 
real-time monitoring of lockbox operations and that IRS take steps to 
monitor adherence to this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. Surveillance cameras have 
been installed at all lockbox sites. Security review teams continually 
monitor compliance. These procedures were updated in Section 2.4.1 of 
the 2003 (revised April 8, 2003) and the 2004 LPG, issued December 1, 
2003;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our fiscal year 2003 financial audit we found that 
at one of four lockbox banks we visited, guards did not use the cameras 
to monitor external activity when the door alarm was activated. At 
another site, we found that guards did little to no monitoring of the 
cameras while at the guard console.


Count: 57;
No.: 03-15;
Recommendation: Require lockbox management to ensure that envelopes are 
properly candled and that IRS take steps to monitor adherence to this 
requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. These procedures were 
updated in Section 3.5.1.1 of the 2003 (revised April 8, 2003) and the 
2004 LPG, issued December 1, 2003. Candling procedures are clarified to 
ensure envelopes are properly candled. Adherence to the requirements 
was added to the Lockbox Security Check Sheet. Adherence will be 
monitored by the lockbox FMS and IRS security team announced and 
unannounced visits;
Status of recommendations: Per GAO: Open. IRS needs to ensure that all 
requirements are consistently and routinely adhered to by lockbox 
management at all of the lockbox sites. During our review of lockbox 
banks in 2003, we found one lockbox bank where envelopes that were not 
opened on 3 sides were not candled twice and at another bank employees 
were unable to determine whether 2 candlings had been performed.


Count: 58;
No.: 03-16;
Recommendation: Require lockbox management to perform and adequately 
document candling reviews and that IRS take steps to monitor adherence 
to this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement to perform 
and adequately document candling reviews was added in Section 3.5.1.1 
of the 2003 (revised 04/08/03) and 2004 LPG, issued 12/ 01/03. 
Adherence to the requirements was added to the Lockbox Security Check 
Sheet. Adherence will be monitored by the lockbox FMS and IRS security 
team during announced and unannounced visits. Additionally Lockbox 
Coordinators review candling as part of their quality review checks 
during each peak;
Status of recommendations: Per GAO: Open. While IRS has added candling 
reviews requirement to LPG 3.5.1.1 and has taken steps to monitor 
adherence to this requirement by including this requirement in FMS's 
oversight/monitoring checklist, its actions have not been sufficient to 
ensure compliance. During our fiscal year 2003 IRS financial audit, we 
found that at three of the four sites we visited, reviews of final 
candled envelopes were not performed as required and/or was not 
documented.


Count: 59;
No.: 03-17;
Recommendation: Require that returned refund checks are restrictively 
endorsed immediately upon extraction and that IRS take steps to monitor 
adherence to this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement to ensure 
that returned refund checks are restrictively endorsed immediately upon 
extraction was previously listed in Section 3.2.1 of the 2002 LPG 
issued January 1, 2002, as well as the 2003 (revised April 8, 2003) and 
2004 LPG, issued December 1, 2003. During the on-site security reviews, 
IRS and FMS security teams review adherence to this requirement. 
Additionally, adherence to this requirement is evaluated during the 
daily SPC[A] quality reviews;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
IRS financial audit, we verified that IRS had taken steps to monitor 
compliance with this requirement. Additionally, this item is included 
in FMS's monitoring/oversight checklist used to monitor compliance with 
this requirement. However, we found that at three of the four sites we 
visited, returned refund checks were not consistently restrictively 
endorsed immediately upon extraction.


Count: 60;
No.: 03-18;
Recommendation: Require that lockbox couriers are properly identified 
prior to granting them access to taxpayer data and receipts and that 
IRS take steps to monitor adherence to this requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The 2003 LPG, Section 
2.8.7, effective January 1, 2003, specifies that guards identify 
couriers before granting access. Adherence to the requirements was 
added to the Lockbox Security Check Sheet. Adherence is monitored by 
the Lockbox FMS and IRS security team during their announced and 
unannounced security visits;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
audit, we verified that IRS had taken steps to monitor compliance with 
this requirement.


Count: 61;
No.: 03-19;
Recommendation: Require that employees have received favorable results 
on fingerprint checks before they are granted access to taxpayer data 
and receipts and that IRS take steps to monitor adherence to this 
requirement. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The requirement for lockbox 
sites to obtain favorable results on employees' fingerprint checks 
before allowing them access to the processing floor was previously 
listed in the 2002 LPG. The 2003 LPG, Section 2.6.1, effective January 
1, 2003, was updated to reflect the new requirements. The FMS and IRS 
security team review personnel files to ensure employees currently 
working with taxpayer remittances have fingerprint clearance;
Status of recommendations: Per GAO: Closed. In our fiscal year 2003 
financial audit, we found that IRS had made significant improvements in 
ensuring that lockbox bank employees received favorable fingerprint 
checks before being granted access to taxpayer data and receipts and no 
exceptions were noted in this area.


Count: 62;
No.: 03-20;
Recommendation: Revise the LPG to require that before lockbox bank 
couriers receive access to taxpayer data and receipts they undergo and 
receive favorable results on background investigations that are deemed 
appropriate by IRS and are consistent across lockbox banks. (short-
term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. On September 23, 2003, at 
the annual Lockbox Conference, NBIC[B] presented the new background 
investigation requirements for permanent Lockbox bank employees, 
couriers and guards. The new procedures require a moderate risk 
National Agency Check with Law and Credit investigation on all 
permanent bank employees, couriers and guards. The banks were given an 
implementation schedule beginning October 1, 2003 with full 
implementation by April 1, 2004. On December 15, 2003, the Lockbox 
Project Office sent out a Lockbox Electronic Bulletin with the 2004 
Lockbox Processing Guidelines (LPG) containing the revised background 
investigation requirements under L.P.G.4.2, Personnel Security and 
L.P.G.5.1.2(5);
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
financial audit, we continued to find that lockbox couriers were not 
undergoing background investigations. In our fiscal year 2004 financial 
audit, we will evaluate the recent actions taken by IRS.


Count: 63;
No.: 03-21;
Recommendation: Revise the LPG to require that before permanent lockbox 
bank employees receive access to taxpayer data and receipts they 
undergo and receive favorable results on background investigations that 
are deemed appropriate by IRS and are consistent across lockbox banks. 
(short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. On September 23, 2003, at 
the annual Lockbox Conference, NBIC presented the new background 
investigation requirements for permanent Lockbox bank employees, 
couriers and guards. The new procedures require a moderate risk 
National Agency Check with Law and Credit investigation on all 
permanent bank employees, couriers and guards. The banks were given an 
implementation schedule beginning October 1, 2003 with full 
implementation by April 1, 2004. On December 15, 2003, the Lockbox 
Project Office sent out a Lockbox Electronic Bulletin with the 2004 
Lockbox Processing Guidelines (LPG) containing the revised background 
investigation requirements under L.P.G.4.2, Personnel Security and 
L.P.G.5.1.2(5);
Status of recommendations: Per GAO: Open. In our fiscal year 2004 
financial audit, we will evaluate the recent actions taken by IRS.


Count: 64;
No.: 03-22;
Recommendation: Revise the LPG to require that guards inspect courier 
vehicles for unauthorized passengers and unlocked doors. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The 2003 LPG, Section 
2.7.4, which was effective January 1, 2003, was updated to include this 
requirement;
Status of recommendations: Per GAO: Closed. During fiscal year 2003 we 
reviewed a Lockbox Electronic Bulletin (LEB) alert that revised the LPG 
to require that guards inspect courier vehicles for unauthorized 
passengers and unlocked doors. During our audit, we did not identify 
any instances where guards did not inspect courier vehicles for 
unauthorized passengers and unlocked doors.


Count: 65;
No.: 03-23;
Recommendation: Revise the LPG to require that candling procedures for 
the various types of extraction methods be clarified. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. In the 2003 LPG, Section 
3.2.8, effective January 1, 2003, candling procedures for the various 
types of extraction methods were clarified. Splitting the envelope on 
three sides and flattening the envelope is sufficient to meet candling 
requirements. This process is sufficient to meet the candling 
requirements without further light source viewing. All other methods of 
extraction require viewing the envelope twice, through a light source, 
to meet the candling requirement;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
financial audit, we verified that the LPG revision clarified the 
candling procedures for the various types of extraction methods.


Count: 66;
No.: 03-24;
Recommendation: Revise the LPG to require that during candling, lockbox 
bank employees record which machines and which extraction clerks missed 
items. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. On April 2, 2003, IRS 
instructed the banks to change the quality review process for candling. 
The new procedures require that banks track which machines and which 
employees missed items. The procedures were effective April 14, 2003 
and included in the 2004 LPG, issued December 1, 2003;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our fiscal year 2003 audit, we verified that IRS 
included this requirement in the April 2003 LPG. However, we found at 
two of the four sites we visited that neither the machines nor the 
clerks responsible for overlooking discovered items were recorded on 
the candling logs.


Count: 67;
No.: 03-25;
Recommendation: Revise the LPG to require that lockbox bank management 
reconcile items found during candling to the candling records. (short-
term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. Instructions for candling 
have been revised to require management to reconcile items to the Form 
9535. The 2003 LPG was updated on January 31, 2003, via Lockbox 
Electronic Bulletin alert, to include this requirement in the LPG. LPG 
reference 3.2.8.2;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our fiscal year 2003 IRS financial audit we verified 
that the LPG had been revised to incorporate this requirement. However, 
we found at one of four sites we visited that management did not 
initial the candling log for each shift, whether or not items were 
found to validate that information was entered correctly and items 
found had been reconciled to the Form 9535.


Count: 68;
No.: 03-26;
Recommendation: Revise the LPG to require that lockbox bank management 
reconcile cash payments to internal cash logs and the cash logs they 
provide to IRS. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. All cash receipts are 
documented on Form 9535. LPG 2003 was updated on January 31, 2003, via 
Lockbox Electronic Bulletin, to include the requirement to document 
immediately and for management to reconcile payments. LPG reference 
3.3.2.14;
Status of recommendations: Per GAO: Open. IRS's action of establishing 
a policy does not provide assurance that this policy is consistently 
adhered to. During our fiscal year 2003 financial audit, we verified 
that the LPG had been revised to incorporate this requirement. However, 
we found that at one of four sites we visited cash was not always 
recorded immediately upon discovery. In addition, there was no 
documentation that management had reconciled the log.


Count: 69;
No.: 03-27;
Recommendation: Revise the LPG to require that lockbox employees 
immediately seek processing guidance from the lockbox coordinator if 
envelopes with timely postmark dates are received after the postmark 
review period has ended. (short-term);
Source report: IRS Lockbox Banks: More Effective Oversight, Stronger 
Controls, and Further Study of Costs and Benefits Are Needed (GAO-03-
299, Jan. 15, 2003);
Status of recommendations: Per IRS: Closed. The January 1, 2003, LPG 
included a requirement for a lockbox site to notify the SPC Lockbox 
Coordinator if it receives timely postmarked mail after the grace 
period. The Lockbox Coordinator will provide instructions for 
processing and assess the need for further postmark review. See LPG 
reference 3.2.2.1(2);
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
financial audit, we verified that the LPG had been revised to 
incorporate this requirement.


Count: 70;
No.: 03-28;
Recommendation: Enforce 180-day expiration period for fingerprint check 
results required when an individual enters on duty. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. IRS re-emphasized this 
policy by e-mail to Background Investigations Coordinators and 
Personnel Officers on September 30, 2002, and during a conference call 
on October 9, 2002. In addition, the Personnel Security and 
Investigations staff created and distributed an Excel file that 
calculates the date when fingerprint results expire. IRS staffs have 
received instructions on how to use the spreadsheet and to annotate 
Case Closing documentation. As a result, Personnel Offices are 
enforcing the 180-day policy for fingerprint results;
Status of recommendations: Per GAO: Closed. During our fiscal year 2003 
financial audit we noted only 5 instances in over 12,000 hires where 
individuals were hired with fingerprint results over 180 days old.


Count: 71;
No.: 03-29;
Recommendation: Confirm with FMS that IRS's requirements for background 
and fingerprint checks for courier services are met regardless of 
whether IRS or FMS negotiates the service agreement. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. On October 7, 2002, FMS 
issued an amendment to the Courier MOU, which included the requirement 
that all courier employees satisfy the basic investigation including an 
Federal Bureau of Investigation fingerprint and name check. All 10 IRS 
campuses now have a contact responsible for submitting paperwork to the 
National Background Investigation Center (NBIC) and ensuring courier 
employees are granted clearance. On April 10, 2003, IRS requested that 
NBIC provide a monthly status report of the campus compliance to the 
Wage and Investment (W&I) Division. The 2004 LPG (issued December 1, 
2003) includes Guidelines for Background Investigations under Personnel 
Security in Section 4.2;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, we found that the five service centers with Financial Management 
Service (FMS) negotiated service agreements were not compliant with the 
revised courier standards requiring couriers to undergo NBIC background 
investigations.


Count: 72;
No.: 03-30;
Recommendation: Establish procedures to verify that courier services 
are adhering to the standards established for them by IRS, including 
the requirement that the courier service have insurance coverage. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. The Security Review Team of 
Receipt and Control reviews monthly compliance with the courier 
requirements. For the five campuses where IRS holds the courier 
contract, the Security Review Team was required to verify the campus 
has a valid insurance certificate valued at $1 million. For the five 
campuses with FMS negotiated agreements, FMS drafted a memorandum to 
the financial institutes advising them to regularly provide a copy of 
the insurance certificates to IRS. The 2003 LPG included this procedure 
in Section 2.8.4.1;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
audit, we reviewed the Campus Security Checklist and found it included 
a question on whether the Contracting Officer Technical Representative 
for campuses with IRS-negotiated courier agreements had a copy of the 
bonding/insurance certificate valued at $1 million. However, it did not 
request this information for campuses with FMS-negotiated courier 
agreements. For four of the five campuses with FMS-negotiated courier 
agreements, we reviewed an amendment to the agreements and found that 
three amendments required that the courier service provide its bonding 
or insurance certification on an annual basis to FMS and one required 
the service to provide insurance certification to the IRS campus. 
However, we found during our audit that the IRS campuses had not 
received the insurance statement as required by the agreement.


Count: 73;
No.: 03-31;
Recommendation: Enforce consistent implementation of policy limiting 
personal belongings in receipt processing areas at service center 
campuses. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. On February 6, 2004, IRS 
issued information alert W&I-IA-2002-63-2004 specifying the items that 
are prohibited from the secure receipt processing areas and requiring 
that employees use clear plastic bags to transport small items not 
carried on their person in and out of the secure areas. First line 
managers or a designated representative conduct, at minimum, monthly 
random reviews of employee compliance with all security policies as 
they relate to personal belongings in the secure receipt processing 
areas. In addition, Campus Security Review Teams conduct monthly 
reviews to ensure compliance with these procedures. These procedures 
were added via Information Alerts to IRMs pertaining to the secure 
receipt processing areas;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
financial audit, we found that one of four campuses we visited allowed 
prohibited items such as newspapers, books, and purses into receipt 
processing areas. Additionally, at the same campus, items transported 
in and out of the processing area in clear plastic bags were not 
clearly visible and not all temporary employees had lockers to store 
personal belonging. Since IRS's actions occurred after our site visits, 
we will continue to evaluate IRS's corrective actions.


Count: 74;
No.: 03-32;
Recommendation: Prohibit the storage of employees' personal belongings 
with cash payments and receipts at IRS's TACs. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. On June 3, 2003, FA[C] 
included a requirement in IRM 21.3.4.7.3.1(2), which states that cash 
payments and Form 809 (Receipt for Payment of Taxes) must be stored 
separately from personal belongings. This issue was also included in 
operational reviews of the TACs conducted during fiscal year 2003;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
financial audit, we verified that IRS included this requirement in the 
IRM guidelines dated June 27, 2003. However, this IRM was completed at 
the end of our site visits. We found that at one of the two field 
offices we visited, personal belongings such as purses and briefcases 
were allowed in areas where taxpayer receipts were received. Since 
IRS's action occurred near the end of our audit, we will continue to 
evaluate the effectiveness of IRS's corrective actions during our 
fiscal year 2004 financial audit.


Count: 75;
No.: 03-33;
Recommendation: Revise candling procedures to specify the precise 
candling methods to be used based on the dimensions of the mail 
processed and the extraction method used for both the first and the 
final candling. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. On May 28, 2003, the IRM 
candling procedures were updated with an Information Alert (W&I-IA-
2002-730) to specify precise first and final candling methods based on 
dimensions of the mail and first and final candling;
Status of recommendations: Per GAO: Open. We verified that IRS included 
this requirement in the IRM guidelines. However, during our fiscal year 
2003 financial audit, we found that at two of four campuses we visited, 
not all envelopes were illuminated at least once. Since IRS's action 
occurred after our site visits, we will continue to evaluate IRS's 
corrective actions during our fiscal year 2004 financial audit.


Count: 76;
No.: 03-34;
Recommendation: Establish and implement procedures prohibiting a single 
employee from performing the final candling in a remote location. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. On May 28, 2003, the IRM 
candling procedures were updated with an Information Alert (W&I-IA-
2002-730) implementing procedures prohibiting a single employee from 
performing the final candling in a remote location. This requirement 
was also added to the 2004 revision of IRM 3.10.72;
Status of recommendations: Per GAO: Open. During our fiscal year 2003 
IRS financial audit we verified that IRS included this requirement in 
the IRM guidelines. However, we found at one campus that while two 
employees performed candling in a separate room together, there were so 
many crates and boxes in the area that the two employees could not see 
one another. Since IRS's action occurred after our site visits, we will 
continue to evaluate IRS's corrective actions during our fiscal year 
2004 financial audit.


Count: 77;
No.: 03-35;
Recommendation: Determine which TACs do not presently accept payment of 
taxes in cash and issue a memorandum reminding them of the requirement 
that cash be accepted. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. Completed June 5, 2003. IRS 
included guidelines in its Fiscal Year 2003 Field Assistance Operating 
Procedures (FAOP) stating that all TACs will accept all standard forms 
of payments from customers, including checks, money orders, and cash;
Status of recommendations: Per GAO: Closed. We verified that IRS 
incorporated guidelines in its fiscal year 2003 FAOP stating that all 
TACs will accept all standard forms of payments from customers 
including checks, money orders, and cash.


Count: 78;
No.: 03-36;
Recommendation: Establish a mechanism to periodically review adherence 
to IRS's policy that payment of taxes in cash be accepted. (short-
term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls (GAO-03-562R, May 20, 2003);
Status of recommendations: Per IRS: Closed. IRS monitored adherence to 
these guidelines during operational reviews of the TACs conducted in 
fiscal year 2003. The FA IRM, issued in June 2003, states "There will 
be at least one employee in each TAC that is issued a Form 809 Receipt 
Book". This gives each TAC the ability to issue the official receipt to 
taxpayers when paying by cash or when a receipt is requested. (IRM 
21.3.4.7.3(3). Managers in the TACs are also required to complete an 
annual review to address this issue;
Status of recommendations: Per GAO: Open. Actions taken thus far have 
not been effective. During our fiscal year 2003 financial audit, we 
found at one field office TAC that taxpayers wishing to pay in cash 
were encouraged to obtain a money order from a nearby bank. At the 
other TAC in that same field office we found that the Compliance unit 
manager was unaware of the procedures for receiving cash payments.


Count: 79;
No.: 03-37;
Recommendation: Develop and implement post-input review procedures to 
verify the accuracy of excise tax credit information in the master 
file. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Closed. In July 2003, the 
Cincinnati Compliance Campus implemented Program Analysis System 
reviews on Gasoline Wholesale Distributor/End User/Diesel claims 
submitted on Forms 8849. In August 2003 they implemented and increased 
the responsibility for managers to review all work including fuel 
claims as part of their performance review for employees. In December 
2003, Excise is included in the Embedded Quality Review System 
expansion rollout and fuel claims are also included in this review. The 
Embedded Quality Review System is performed by the employer's manager 
and is part of the employee's performance rating;
Status of recommendations: Per GAO: Open. IRS's corrective actions were 
completed after the cut-off period of transactions included in our 
fiscal year 2003 testing. We will review the effectiveness of these 
actions during our fiscal year 2004 audit.


Count: 80;
No.: 03-38;
Recommendation: Investigate why certification errors continue to go 
undetected through IRS's review procedures. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Closed. In October 2003, IRS 
reiterated to management the importance of reviewing and understanding 
the Certification process;
Status of recommendations: Per GAO: Open. IRS's corrective action was 
completed after we reviewed its final excise tax receipt certification 
affecting fiscal year 2003 distributions. We will review the 
effectiveness of this action during our fiscal year 2004 audit.


Count: 81;
No.: 03-39;
Recommendation: Develop and implement an action plan to improve the 
certification review process. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Closed. In October 2003, IRS 
reiterated to management the importance of reviewing and understanding 
the Certification process;
Status of recommendations: Per GAO: Open. IRS's corrective action was 
completed after we reviewed its final excise tax receipt certification 
affecting fiscal year 2003 distributions. We will review the 
effectiveness of this action during our fiscal year 2004 audit.


Count: 82;
No.: 03-40;
Recommendation: Communicate in writing any potential changes in IRS's 
certification process to other Treasury entities that use the 
certification information, and obtain concurrence from these entities 
prior to implementing such changes. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Open. IRS has implemented the 
taking of minutes at all Treasury Excise Tax Working meetings, and will 
also have a Memorandum of Understanding (MOU) signed by the Treasury 
Excise Tax Working Group;
Status of recommendations: Per GAO: Open. We will review the status of 
IRS's corrective actions during our fiscal year 2004 financial audit.


Count: 83;
No.: 03-41;
Recommendation: Implement procedures to annually identify excise 
taxpayers with the largest excise tax liabilities affecting the Highway 
Trust Fund and the Airport and Airway Trust Fund. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Closed. IRS has identified Employer 
Identification Numbers of the largest excise tax liabilities beginning 
with tax period 200209. IRS identified the largest excise tax filers to 
both Cincinnati Submission Processing and Compliance Campuses in August 
2003. The Employer Identification Numbers will be updated annually 
using the September tax periods;
Status of recommendations: Per GAO: Open. We verified that IRS had 
identified the excise taxpayers with the largest excise tax liabilities 
when we reviewed its pre-certification of excise tax receipts for the 
quarter ended June 30, 2003. We will continue to monitor IRS's actions 
during our 2004 audit to verify that IRS has implemented this as a 
recurring annual procedure.


Count: 84;
No.: 03-42;
Recommendation: Implement procedures to track the status of tax return 
filings for the largest payers of excise taxes and contact these 
taxpayers if the submission processing campus has not received their 
tax returns by 2 weeks after the due date. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Open. IRS is conducting a pilot to 
analyze the receipt pattern of the largest excise taxpayers. The 
Cincinnati Submission Processing and Compliance Campuses have entered 
into a Service Level Agreement (SLA) to jointly monitor receipts and 
processing of excise tax returns. IRS implemented a 6-day cycle for 
expedited processing of all Form 720s. This pilot is on schedule to be 
completed by November 2004. The SLA was signed in October 2003 and 
revised in November 2003;
Status of recommendations: Per GAO: Open. We will review the progress 
of IRS's pilot during our fiscal year 2004 audit.


Count: 85;
No.: 03-43;
Recommendation: Implement procedures to monitor the receipt and 
processing status of large excise tax returns to ensure that they are 
promptly recorded in IRS's master file prior to certifying excise tax 
distributions. (short-term);
Source report: Management Report: Improvements Needed in Controls over 
IRS's Excise Tax Certification Process (GAO-03-687R, July 23, 2003);
Status of recommendations: Per IRS: Closed. The Campus' Program Analyst 
staff and Reports Excise Analysts are monitoring to ensure timely 
posting of the largest taxpayers. The SLA between the Cincinnati 
Submission Processing and Compliance Campuses ensures monitoring and 
processing of all Form 720 returns on a 6-day cycle. Compliance has 
verified that Form 720 returns are being processed on a six-day cycle, 
procedures are in place, and IRS is monitoring to ensure timely posting 
of the largest taxpayers;
Status of recommendations: Per GAO: Open. IRS's corrective action was 
completed after we reviewed its final excise tax receipt certification 
affecting fiscal year 2003 distributions. We will review the 
effectiveness of this action during our fiscal year 2004 audit.


Count: 86;
No.: 04-01;
Recommendation: We recommend that IRS require lockbox bank managers to 
maintain appropriate documentation on-site demonstrating that 
satisfactory fingerprint results have been received before contractors 
are granted access to taxpayer receipts and data. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The current LPG requires 
appropriate documentation for couriers and guards before contractors 
are granted access to taxpayer receipts. To ensure compliance with the 
LPG, IRS and FMS include this as a review item when performing security 
and administrative reviews;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective action during our fiscal year 2004 
audit.


Count: 87;
No.: 04-02;
Recommendation: We recommend that IRS revise its policy on two-person 
courier teams to prohibit the use of courier teams consisting of 
closely related individuals to further minimize the risk of collusion 
in the theft of taxpayer receipts and data. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. Additional background 
investigation requirements for all couriers have been implemented. 
However, Wage and Investment will confer with Mission Assurance to 
assess their current guidelines;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 88;
No.: 04-03;
Recommendation: We recommend that IRS develop procedures to require 
lockbox managers to provide satisfactory evidence that managerial 
reviews are performed in accordance with established guidelines. At a 
minimum, reviewers should sign and date the reviewed documents and 
provide any comments that may be appropriate in the event that their 
reviews identified problems or raised questions. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The LPG instructs the banks 
to perform numerous managerial reviews. IRS will consider the risk 
level of each of the documented logs, and assess each one to determine 
the appropriate level of review and if more guidelines are necessary;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will continue to review IRS's efforts during our fiscal year 2004 
audit.


Count: 89;
No.: 04-04;
Recommendation: We recommend that IRS revise its candling procedures at 
lockbox banks to require testing of automated candling machines at 
appropriate intervals, taking into account such factors as use time, 
volume processed, machine requirements, and shift cycles. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. IRS requires an additional 
candling of all envelopes processed by extractors using machines that 
have automated candling equipment. This requirement mitigates the risk 
identified by GAO. However, IRS agrees to assess their current 
guidelines for possible inclusion of testing standards for equipment 
with automated candling equipment;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will monitor IRS's actions during our fiscal year 2004 audit.


Count: 90;
No.: 04-05;
Recommendation: We recommend that IRS require lockbox managers to 
maintain logs of these tests and to periodically review their logs. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. IRS will include this 
recommendation as part of the assessment of testing standards for 
machines (04-04) with automated candling equipment;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will monitor IRS's actions during our fiscal year 2004 audit.


Count: 91;
No.: 04-06;
Recommendation: We recommend that IRS discontinue its practice of 
storing taxpayer receipts and data outside TAC secured areas without 
storing the receipts in a secured locked container. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. Written procedures have been 
provided to TAC employees for safeguarding taxpayer receipts when 
received. IRM 21.3.4.7(6), issued in June 2003, provides guidance 
stating that payments received from taxpayers will be immediately 
placed in a locked container. The receipts are also stored away from 
employees' personal belongings. IRS will continue to conduct 
operational reviews at TAC offices to ensure IRM procedures are being 
followed. The TAC location that was noted for securing payments from 
taxpayers outside the secure area of the TAC was contacted and the 
location of the desk has been moved inside the secured area of the TAC. 
The TAC manager was informed to ensure all TAC operations are conducted 
inside the secured area of the TAC;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 92;
No.: 04-07;
Recommendation: We recommend that IRS develop procedures to enhance 
adherence to existing instructions on safeguarding discovered 
remittances at service center campuses. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. In 2003, IRM 3.8.46 was 
produced and distributed to all campuses. Form 4287 (Record of 
Discovered Remittances) has been revised to include a box for managers 
to indicate that reconciliation has been performed. Also, IRS added to 
the monthly security checklist to review the discovered remittance 
procedures;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 93;
No.: 04-08;
Recommendation: We recommend that IRS enforce its policies and 
procedures to ensure that service center campus security guards respond 
to alarms. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The IRS Physical Security 
Programs within Mission Assurance will modify IRM 16.12, Facility and 
Property Protection, to require the following: development of self 
assessments, which may be used to test the response capabilities for 
guards, as these relate to alarms;
integrate self assessments into IRM 1.16;
conduct initial and then periodic security exercises, which are 
realistic, to ensure security guards respond to alarms, required by 
Operational Assurance personnel;
Operational Assurance will provide written reports to the Physical 
Security Program Office to support the conducting of security 
exercises;
review self assessment reports for alarm response and coordinate 
corrective action of outstanding issues;
and, conduct annual security exercise at each of their assigned 
facilities to test alarm responses by October 31, 2005;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 94;
No.: 04-09;
Recommendation: We recommend that IRS establish compensating controls 
in the event that automated security systems malfunction, such as 
notifying guards and managers of the malfunction, and immediately 
deploying guards to better protect the processing center's perimeter. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The IRS Physical Security 
Programs within Mission Assurance will develop procedures by August 30, 
2004, to be used in conjunction with the policies developed in 
Recommendation 04-08 to ensure that local management is notified 
whenever there is a malfunction of alarms and that guards are deployed 
or doors are secured, as necessary, either during tests or when 
otherwise identified. Procedures will include management notification 
of alarm failure when reported to the Situational Awareness Management 
Center/ Computer Security Incident Response Center (SAMC/CSIRC);
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will continue to review IRS's corrective actions.


Count: 95;
No.: 04-10;
Recommendation: We recommend that IRS modify AUO reports to ensure that 
they report the last activity date for each outstanding obligation line 
amount. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Closed. The Beckley Finance Center 
has revised the Aging Unliquidated Obligations report to accurately 
capture the last activity date for each obligation line amount;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 96;
No.: 04-11;
Recommendation: We recommend that IRS require procurement office staff 
to review and sign off on whether obligations are valid or require 
deobligation before business units complete their quarterly 
certifications. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. IRS is evaluating its current 
approach toward reviewing open obligations and approving those that 
require deobligation. This includes studying the relative 
responsibilities of the procurement office, business units, and the 
Beckley Finance Center with respect to validating and certifying 
deobligations. New guidelines will be issued at the conclusion of this 
internal review;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 97;
No.: 04-12;
Recommendation: We recommend that IRS enhance its compensating internal 
controls by including tests or recalculations of payroll computations 
performed by NFC for the IRS employees selected for review each pay 
period. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The IRS Transactional 
Processing Operations division will expand its current random sample 
payroll review/validation process to include the recalculation of 
agency Thrift Saving Plan contributions. A detailed Standard Operating 
Procedure outlining the complete review process is being developed, 
with implementation expected by June 2004;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will monitor IRS's corrective actions during our fiscal year 2004 
audit.


Count: 98;
No.: 04-13;
Recommendation: We recommend that IRS timely investigate and resolve 
any identified errors. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The IRS Transactional 
Processing Operations division is responsible for following up 
immediately on any discrepancies with NFC and ensuring that NFC takes 
corrective action within a timely basis;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's actions during our fiscal year 2004 audit.


Count: 99;
No.: 04-14;
Recommendation: We recommend that IRS establish review procedures for 
amounts being reported in Supplemental Information to the financial 
statements for Other Claims for Refund. (short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. The IRS's Appeals and Chief 
Counsel provide estimated amounts on Other Claims for Refund to the 
Office of Revenue Reports. For information received from Appeals, IRS 
management will perform a second level of review to ensure the accuracy 
of the amounts to be included in the financial statements. In addition, 
IRS management will work closely with Chief Counsel to find ways to 
accelerate getting information on claims pending review by federal 
courts;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.


Count: 100;
No.: 04-15;
Recommendation: Until BPMS is fully operational, we recommend that IRS 
implement procedures to ensure that all performance data reported in 
the MPS report are subject to effective, documented reviews to provide 
reasonable assurance that the data are current at interim periods. 
(short-term);
Source report: Management Report: Improvements Needed in IRS's Internal 
Controls and Accounting Procedures (GAO-04-553R, April 26, 2004);
Status of recommendations: Per IRS: Open. IRS has taken steps to ensure 
that the performance measures data reported in the monthly report is 
properly reviewed before being published. IRS is increasing the control 
over data by increasing the number of measures reported through the 
automated Business Performance Management Systems, requiring the 
submitting divisions to certify that their data is accurate, and 
reducing the number of measures manually reported in the monthly 
report. In addition, Corporate Planning and Performance Unit staff 
continues to complete the manual review process as described by GAO, 
which requires the staff to review the draft document, to compare it to 
the data provided to the divisions, and to compare it to the previous 
month's report for consistency, thereby validating the accuracy of the 
manual input of data to the report;
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2004 
audit.

Source: GAO.

[A] In reporting on the status of this recommendation, IRS refers to 
SPC, which is an acronym for Submission Processing Center.

[B] In reporting on the status of this recommendation, IRS refers to 
NBIC, which is an acronym for National Background Investigation Center.

[C] In reporting on the status of this recommendation, IRS refers to 
FA, which is an acronym for Field Assistance.

[End of table]

[End of section]

Appendix II: Details on Audit Methodology:

To fulfill our responsibilities as the auditor of the Internal Revenue 
Service's (IRS) financial statements, we did the following:

* Examined, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements. This included testing selected 
statistical samples of unpaid assessment, revenue, refund, accrued 
expenses, payroll, nonpayroll, property and equipment, and undelivered 
order transactions. These statistical samples were selected primarily 
to substantiate balances and activities reported in IRS's financial 
statements. Consequently, dollar errors or amounts can and have been 
statistically projected to the population of transactions from which 
they were selected. In testing these samples, certain attributes were 
identified that indicated either significant deficiencies in the design 
or operation of internal control or compliance with provisions of laws 
and regulations. These attributes, where applicable, can be and have 
been statistically projected to the appropriate populations.

* Assessed the accounting principles used and significant estimates 
made by management.

* Evaluated the overall presentation of the financial statements.

* Obtained an understanding of internal controls related to financial 
reporting (including safeguarding assets), compliance with laws and 
regulations (including the execution of transactions in accordance with 
budget authority), and performance measures reported in the 
Management's Discussion and Analysis.

* Tested relevant internal controls over financial reporting (including 
safeguarding assets) and compliance, and evaluated the design and 
operating effectiveness of internal controls.

* Considered the process for evaluating and reporting on internal 
controls and financial management systems under the Federal Managers' 
Financial Integrity Act.

* Tested compliance with selected provisions of the following laws and 
regulations: Anti-Deficiency Act, as amended (31 U.S.C.  1341(a)(1) 
and 31 U.S.C.  1517(a)); agreements for payment of tax liability in 
installments (26 U.S.C.  6159); Purpose Statute (31 U.S.C.  1301); 
release of lien or discharge of property (26 U.S.C.  6325); interest 
on underpayment, nonpayment, or extensions of time for payment of tax 
(26 U.S.C.  6601); interest on overpayments (26 U.S.C.  6611); 
determination of rate of interest (26 U.S.C.  6621); failure to file 
tax return or to pay tax (26 U.S.C.  6651); failure by individual to 
pay estimated income tax (26 U.S.C.  6654); failure by corporation to 
pay estimated income tax (26 U.S.C.  6655); Prompt Payment Act (31 
U.S.C.  3902 (a), (b), and (f), and 31 U.S.C.  3904); Pay and 
Allowance System for Civilian Employees (5 U.S.C.  5332 and 5343, and 
29 U.S.C.  206); Federal Employees' Retirement System Act of 1986, as 
amended (5 U.S.C.  8422, 8423 and 8432); Social Security Act, as 
amended (26 U.S.C.  3101 and 3121, and 42 U.S.C.  430); Federal 
Employees Health Benefits Act of 1959, as amended (5 U.S.C.  8905, 
8906, and 8909); and Consolidated Appropriations Resolution, 2003 (Pub. 
L. No. 108-7).

* Tested whether IRS's financial management systems substantially 
comply with the three requirements of the Federal Financial Management 
Improvement Act of 1996.

[End of section]

Appendix III: Comments from the Internal Revenue Service:

DEPARTMENT OF THE TREASURY 
INTERNAL REVENUE SERVICE 
WASHINGTON, D.C. 20224:

COMMISSIONER:

April 16, 2004:

Mr. Steven J. Sebastian 
Director:

Financial Management and Assurance 
U. S. General Accounting Office:

441 G Street, N.W. 
Washington, D.C. 20548:

Dear Mr. Sebastian:

I am responding to your draft report titled, Internal Revenue Service: 
Status of Recommendations from Financial Audits and Related Financial 
Management Reports. We recently provided you with an update on the 
current status of the recommendations, and you accurately incorporated 
this information into Appendix I of the draft report.

Of the 100 recommendations cited in your report, we are pleased that 
GAO agrees that 24 are now closed. In addition, we believe an 
additional 37 recommendations will be closed based on your fiscal year 
2004 financial audit. As stated in your report, some of your 
recommendations, such as those related to our modernization efforts, 
will require a longer period of time to resolve and will require our 
sustained commitment. We are actively working to implement corrective 
actions to effectively address all remaining open recommendations.

I appreciate the GAO's acknowledgment of our continued strong 
commitment to addressing financial management issues. I also recognize 
we must remain committed to achieving effective financial management.

Sincerely,

Signed by: 

Mark W. Everson:

[End of section]

Appendix IV: GAO Contact and Staff Acknowledgments:

GAO Contact:

Steven Sebastian, (202) 512-3406:

Acknowledgments:

In addition to the person named above, Paul Foderaro, Chuck Fox, Larry 
Malenich, Charles Payton, Ted Hu, Yola Lewis, John Davis, William 
Cordrey, Valerie Freeman, Alain Dubois, George Jones, Gloria Cano, and 
Nina Crocker made key contributions to this report.

(196012):

FOOTNOTES

[1] U.S. General Accounting Office, Financial Audit: IRS's Fiscal Years 
2003 and 2002 Financial Statements, GAO-04-126 (Washington, D.C.: Nov. 
13, 2003).

[2] U.S. General Accounting Office, Internal Revenue Service: Status of 
Recommendations from Financial Audits and Related Financial Management 
Reports, GAO-03-665 (Washington, D.C.: May 29, 2003). 

[3] U.S. General Accounting Office, Financial Audit: IRS's Fiscal Year 
2002 and 2001 Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 
15, 2002).

[4] GAO-03-665.

[5] U.S. General Accounting Office, Management Report: Improvements 
Needed in Controls over IRS's Excise Tax Certification Process, GAO-03-
687R (Washington, D.C.: July 23, 2003).

[6] U.S. General Accounting Office, Management Report: Improvements 
Needed in IRS's Internal Controls and Accounting Procedures, GAO-04-
553R (Washington, D.C.: Apr. 26, 2004).

[7] Short-term recommendations are defined as those that could be 
addressed within 2 years. Long-term recommendations are defined as 
those expected to require 2 years or more to implement.

[8] Recommendation 03-08 in appendix I was issued to correct a 
potential conflict in the responsibilities of lockbox coordinators, who 
assist lockbox banks with processing issues and who also perform the 
on-site performance review of those banks. 

[9] U.S. General Accounting Office, Business Systems Modernization: 
Internal Revenue Service Needs to Further Strengthen Program 
Management, GAO-04-438T (Washington, D.C.: Feb. 12, 2004).

[10] GAO-04-126.

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