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

May 2003:

Internal Revenue Service:

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

GAO-03-665:

GAO Highlights: 

Highlights of GAO-03-665, 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:

Many of GAOs open audit recommendations to IRS were made during the 
past 6 months; others, however, have been outstanding for an extended 
period of time. The continued existence of these problems exposes IRS 
to loss due to errors or theft and impairs the reliability and 
availability of current, accurate financial information that 
management needs to make decisions on a day-to-day basis.

Of 998 recommendations related to financial management (consisting of 
62 recommendations open as of July 2002, 27 recommendations included 
in GAOs January 2003 report on management and oversight at lockbox 
banks, and 9 new recommendations included in GAOs management report 
for fiscal year 2002), GAO is closing 20 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 2002 financial statements.

Of the remaining 78 financial management recommendations GAO considers 
open as of the date of this report, 73 are short term (capable of 
being addressed within 2 years) and 5 are long term (expected to 
require more than 2 years to implement). IRS considers 34 (44 percent) 
of the 78 recommendations to be closed. For 26 of these 34, including 
15 related to GAOs recent report on lockbox banks, GAO considers them 
still open because it has not yet had an opportunity to verify the 
actions taken by IRS. The actions cited by IRS are recent and were 
taken after GAOs financial statement audit work for the year was 
completed. For 8 of the 34 recommendations that IRS considers closed, 
GAO found that action taken by IRS has not yet been fully effective in 
addressing the condition that gave rise to the recommendation. 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 78 
recommendations that remain open as of the date of this report. IRS 
expects GAO to find in its fiscal year 2003 financial audit that IRS 
has taken corrective actions to allow closure of another 34 
recommendations. In addition, IRS has stated that it is actively 
working to implement corrective actions to address all remaining open 
recommendations.

What GAO Recommends:

GAO did not make any new recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-03-665.

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

[End of section]

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:

Abbreviations:

ADP: automated data processing:

ATFRP: Automated Trust Fund Recovery Penalty:

CADE: Customer Account Data Engine:

CAP: Custodial Accounting Project:

CARE: Communication, Assistance, Research and Education:

CFO: Chief Financial Officer:

COIC: Centralized Offer in Compromise:

EDW: Enterprise Data Warehouse:

FAOP: Field Assistance Operating Procedures:

FBI: Federal Bureau of Investigation:

FFMIA: Federal Financial Management Improvement Act of 1996:

FMFIA: Federal Managers' Financial Integrity Act of 1982:

FMS: Financial Management Service:

IEI: Invitations for Expressions of Interest:

IFS: Integrated Financial System:

IRM: Internal Revenue Manual:

IRS: Internal Revenue Service:

IT: information technology:

IRACS: Interim Revenue Accounting Control System:

ITAMS: Information Technology Asset Management System:

LPG: Lockbox Processing Guidelines:

MOU: Memorandum of Understanding:

NFC: National Finance Center:

NTEU: National Treasury Employees Union:

OHRES: Office of Human Resources Enterprise Solutions:

OIC: Offer in Compromise:

P&E: property and equipment:

SETS: Security Entry and Tracking System:

SPIF: Single Point Inventory Function:

TAC: Taxpayer Assistance Center:

TFRP: Trust Fund Recovery Penalty:

W&I: Wage and Investment:

Letter May 29, 2003:

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 2002 and 2001.[Footnote 1] This report is being provided 
to you to (1) assist IRS management in tracking the unresolved issues 
identified in our prior financial 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.

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 and in management letters, 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) IRS's reported status of each of these recommendations 
and its corrective actions taken or planned as of April 2003, and (3) 
our analysis of whether the issue that gave rise to the recommendation 
has been effectively and fully addressed based on the work performed 
during our fiscal year 2002 financial audit. Effectively implementing 
recommendations is critical for IRS to resolve its financial management 
challenges.

Status of Recommendations:

In July 2002, we issued a report that provided (1) the status of IRS's 
efforts to implement prior recommendations as of our fiscal year 2001 
financial audit[Footnote 3] and (2) new recommendations based on the 
results of our fiscal year 2001 financial audit.[Footnote 4] In the 
July 2002 report, we included 89 audit recommendations that we had not 
previously reported as being closed, some dating back as far as 1993. 
Of the 89 recommendations, 27 were closed at the time that report was 
issued, leaving 62 that were used as a starting point for appendix I of 
this report. For this year, we added 27 new recommendations included in 
our January 2003 report on IRS's and Treasury's Financial Management 
Service's (FMS) management and oversight of lockbox banks[Footnote 5] 
and 9 new recommendations included in our fiscal year 2002 management 
report,[Footnote 6] for a total of 98 recommendations. Based on the 
results of our recently completed fiscal year 2002 financial audit, we 
are closing 20 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, 78 financial management 
recommendations remain open, 73 of which are short term and 5 of which 
are long term.[Footnote 7]

As indicated in appendix I, of the 78 recommendations we consider to be 
open, IRS considers 34 (44 percent) to be closed. We consider 26 of 
these recommendations (including 15 related to our recent report on 
lockbox banks) to be open because IRS has taken recent corrective 
action to resolve these recommendations, but we have not yet verified 
implementation of the corrective action, which is a prerequisite to 
closing the recommendation. The actions cited by IRS are recent and 
were taken after our fiscal year 2002 financial statement audit work 
was completed. For 8 of the 34 recommendations that IRS considers 
closed, we found that action taken by IRS has not been fully effective 
in addressing the condition that gave rise to the recommendation. IRS 
disagrees with the remaining 1 recommendation.

Regarding the 34 recommendations IRS considers closed, many involved 
issuance of formal written policies or directives. Because these 
policies or directives were only recently issued and their 
effectiveness is not yet known, or because we continue to find 
instances where the policy is not being adhered to, we continued to 
keep these recommendations open. Regarding the 8 for which we have 
assessed IRS action and determined it was not sufficient, we believe 
these could be resolved with additional management follow-up 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.

Many of the 78 recommendations in appendix I that we consider to be 
open were issued within the past year; others, however, have been 
outstanding for an extended period of time. For example, 36 (46 
percent) of the recommendations were made during the past 6 months, 
while 23 (29 percent) were made over 2 years ago, including 10 from 
more than 3 years ago and 1 that has remained open for over 9 years. 
Twenty of the 23 recommendations made over 2 years ago were considered 
to be short term at the time they were made. The continued existence of 
the issues that gave rise to these recommendations exposes IRS to loss 
due to errors or theft, and impairs the reliability and availability of 
the current, accurate financial information management needs to make 
decisions.

The majority of the 78 recommendations we consider to be open address 
one of two broad issues:

* Eleven (14 percent) relate to a material weakness in IRS's property 
and equipment (P&E) management. In its Federal Managers' Financial 
Integrity Act (FMFIA) annual assurance statement, IRS has reported a 
material weakness in P&E management every year since 1983. IRS 
continues to make significant progress in addressing issues related to 
P&E, but a number of these issues can only be fully resolved through 
implementation of an integrated property management system. IRS expects 
to fully implement such a system by March 2005.

* Forty-five (58 percent) relate to weaknesses in controls intended to 
safeguard taxpayer receipts and data. We consider all of these 
recommendations to be short term in nature. For example, lockbox banks 
with contracts to process taxpayer receipts continued to hire staff and 
allow them access to taxpayer receipts and data before the results of 
their fingerprint checks were received and approved, and IRS was unable 
to ensure that the taxpayer receipts and data it receives are properly 
accounted for and safeguarded. 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 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 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 FMFIA, 
the Chief Financial Officers Act of 1990, the Federal Financial 
Management Improvement Act of 1996 (FFMIA), 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 completion of an additional 34 
recommendations based on our fiscal year 2003 financial 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 2003 financial audit.

Objective, Scope, and Methodology:

The objective of this report is to assist IRS management in tracking 
the status of financial audit and related financial management 
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 2002 as part of our fiscal years 2002 and 2001 financial 
audits.[Footnote 8] Further details on the scope and methodology of our 
IRS financial audit work are included in appendix II. We also included 
recommendations from our recently issued report on IRS and FMS 
management and oversight of lockbox banks and from our recently issued 
management report covering new recommendations from our fiscal year 
2002 financial audit.[Footnote 9] We obtained from IRS its assessment 
of the status of each recommendation and corrective action taken or 
planned as of April 2003. We compared IRS's actions to our fiscal year 
2002 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 made available at no charge on GAO's Web 
site at http://www.gao.gov.

If you have any questions concerning this report, please contact me at 
(202) 512-3406. The GAO contact and staff acknowledgments 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.: 93-2; Recommendation: Determine what information related 
to automated data processing (ADP) resources, such as equipment 
condition and remaining useful life, would be most useful to IRS 
managers for financial management purposes and develop a means for 
accounting for these data. (long-term); Source report: Financial 
Management: IRS Lacks Accountability over Its ADP Resources (GAO/AIMD-
93-24, Aug. 5, 1993); Status of recommendations: Per IRS: Closed. IRS's 
new Integrated Financial System (IFS) will include information related 
to equipment resources and incorporate a means of accounting for such 
data. Scheduled completion date is March 1, 2005; Status of 
recommendations: Per GAO: Closed. IRS plans to implement an integrated 
property and equipment (P&E) inventory system in March 2005, which is 
expected to include information related to ADP resources and 
incorporate a means of accounting for such data. As a result, we are 
closing this recommendation and monitoring IRS's efforts in 
implementing IFS under a related recommendation (99-36).

Count: 2; 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. As of January 1, 2003, 
the rollout of the new software was completed. It is available to 
anyone in the field. Training was provided. IRS reported that during 
the rollout they implemented a national help desk to support the end 
user. Additionally, IRS plans for post rollout review to ensure the 
field is using the tool and using it properly. These reviews will also 
include an analysis of the accuracy of the interest calculations. 
Further, IRS will implement the final phase of the program, which 
allows the software to interface with the Integrated Data Retrieval 
System (IDRS)/Master File and in turn will greatly reduce human errors 
associated with the manual input of data; Status of recommendations: 
Per GAO: Open. We will review the effectiveness of IRS's use of 
software to reduce the miscalculation of manual interest.

Count: 3; 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. Automated Trust Fund Recovery 
Penalty (ATFRP) programming continues and first phase to automate 
calculation of the penalties and assessment process to ensure accuracy 
and assessment timeliness is to be rolled out to all centers July 1, 
2003. The second phase to automate the manual steps of the service 
center process to timely cross-reference payments should be completed 
by October 31, 2003. IRS is formulating plans to correct current 
records for which payments have not been posted properly; Status of 
recommendations: Per GAO: Open. Until new systems are in place and 
fully functional, IRS's ability to track and link multiple Trust Fund 
Recovery Penalty (TFRP) assessments will depend on service center 
personnel manually inputting the cross-reference information needed to 
link these assessments.

Count: 4; 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. To ensure TFRP assessments are tracked 
and payments are properly credited, IRS is developing the ATFRP 
program. The first phase to automate the calculation of the penalties 
and assessment process to ensure accuracy and timeliness of assessments 
is to be rolled out to centers July 1, 2003. Phase 2, to automate 
manual steps of service center process to timely cross-reference 
payments is to be completed by October 31, 2003. This will allow the 
Chief Financial Officer (CFO) to establish the links to more accurately 
report the one balance due from these assessments. In addition, 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. Scheduled 
for completion November 3, 2003; Status of recommendations: Per GAO: 
Open. Until new systems are in place and fully functional, IRS's 
ability to track and link multiple TFRP assessments will depend on 
service center personnel manually inputting the cross-reference 
information needed to link these assessments. This process is labor-
intensive and not always effective. In fiscal year 2002, we found that 
in 21 out of 23 unpaid payroll cases in which payments were not 
properly recorded to all related accounts, cross-references were 
present. Even after the subsidiary ledger is implemented, it may 
require significant manual effort to correct taxpayer records and 
ensure that it functions as needed.

Count: 5; No.: 99-12; Recommendation: Until the problems with delays in 
fingerprint checks are resolved, develop and implement a policy 
prohibiting new employees from being assigned to process receipts until 
the results of fingerprint checks are received and reviewed by 
management. (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. In April 2000, IRS issued a policy memo requiring that 
fingerprint checks be received and results evaluated before an employee 
in any IRS office can begin working, and it issued a further clarifying 
memo in August 2000. Completed August 2000. IRS states that compliance 
with this policy is monitored on a monthly basis in a report provided 
to the Personnel Security Officer; Status of recommendations: Per GAO: 
Closed. While IRS and Office of Personnel Management hiring data showed 
that IRS continued to hire employees who had access to taxpayer 
receipts and data in fiscal year 2002 before it received the results of 
their fingerprint checks, we noted significant improvement over fiscal 
year 2001 in implementing the April 2000 policy. We will continue to 
evaluate the effectiveness of IRS's efforts in our fiscal year 2003 
financial audit.

Count: 6; No.: 99-16; Recommendation: Provide secure containers for 
service center employees to store "discovered remittances" prior to 
inventory and submission to the Receipt and Control Branch. Immediately 
upon discovery, the receipts should be recorded into a control log, the 
receipts secured in a locked container, and the discovered receipts 
reconciled to the control log prior to submission for processing. 
(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. Each 
service center campus currently has locked containers to store the 
discovered remittances. In addition, IRS reported that it issued 
instructions to the service centers on February 17, 1999, to emphasize 
the handling and recording of these remittances to ensure 
reconciliation. Completed February 17, 1999. This question is on the 
Submission Processing Checklist. At least three areas of the service 
centers are reviewed monthly against the checklist to ensure 
compliance; Status of recommendations: Per GAO: Closed. During our 
fiscal year 2002 audit we verified that the two service centers we 
visited were using locked containers to store discovered remittances. 
These remittances were immediately recorded on a control log and the 
log was reconciled.

Count: 7; 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. Completed May 2000. 
This question is on the Submission Processing Checklist. The service 
centers are reviewed monthly against the checklist to ensure 
compliance; Status of recommendations: Per GAO: Open. IRS has taken 
action to revise its IRM. However, IRS's action of establishing a 
policy does not provide assurance that this policy is consistently 
adhered to. Although this policy was implemented on October 15, 2001, 
during our fiscal year 2002 site visits, we found that not all sites 
were locking or immediately stamping the returned refund checks. 
Consequently, several employees handled the checks before they were 
restrictively endorsed, thus increasing their risk of theft. We will 
continue to evaluate IRS's efforts in our fiscal year 2003 audit. IRS's 
response only addresses IRS service center campuses. See status of 
recommendation 03-17 for lockbox response.

Count: 8; 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: Closed. 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. Completed January 
2000; Status of recommendations: Per GAO: Open. IRS has taken action 
to issue guidance. However, IRS's action of establishing a policy does 
not provide assurance that this policy is consistently adhered to. 
During our fiscal year 2002 audit, at one of two field offices visited, 
the individual reconciling the control log also posted receipts to the 
log. We will continue to evaluate IRS's efforts in our fiscal year 2003 
financial audit.

Count: 9; 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. The 
ATFRP programming is continuing, and the first phase to automate the 
calculation of the penalties and assessment process to ensure accuracy 
and timeliness of the assessments should be rolled out to all centers 
July 1, 2003. The second phase to automate the manual steps of the 
service center process to timely cross-reference payments should be 
completed by October 31, 2003; Status of recommendations: Per GAO: 
Open. We will continue to monitor the timeliness and completeness of 
IRS's processing of these transactions.

Count: 10; No.: 99-22; Recommendation: Expand IRS's current review of 
service center 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; 
Status of recommendations: Per GAO: Open. IRS reported that it included 
guidelines in its fiscal year 2003 Operating Procedures for TACs. 
During our fiscal year 2002 audit, we noted that IRS has primarily 
focused its review of field offices on the TACs. We are concerned about 
the limited scope of this review since past audits, as well as our 
fiscal year 2002 audit, have found control weaknesses over the 
safeguarding of and accounting for taxpayer receipts and data not only 
in TAC units but other field office units, such as Small Business/Self 
Employed. Because IRS's action only addresses TACs and it occurred 
after the completion of our fiscal year 2002 audit, we will assess the 
adequacy of IRS's actions during our fiscal year 2003 financial audit.

Count: 11; 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: Closed. IRS hired 
three additional contractor staff to work on financial reporting and 
they have been appropriately cross-trained. This additional contractor 
support provides the support and backup necessary for preparation of 
the compensating procedures pending the implementation of CAP/ Customer 
Account Data Engine (CADE). However, we are concerned that a large 
number of additional staff are still needed (20 contractors) to fully 
transition to CAP release 1. The additional staff are scheduled to be 
hired by October 2003 for CAP Transition Support. The anticipated date 
for using CAP release 1 (IMF) for the financial audit is October 1, 
2004. The anticipated date for using CAP for the entire custodial 
financial audit (IMF, BMF, NMF, and IRAF) is October 1, 2006; Status 
of recommendations: Per GAO: Open. In fiscal year 2002, IRS continued 
to utilize compensating procedures to enable it to generate reliable 
information for financial reporting purposes. It is unclear if staff 
resources available to perform current compensating procedures pending 
implementation of CAP/CADE have been sufficiently enhanced. We will 
assess the adequacy of IRS's actions during our fiscal year 2003 
audit.

Count: 12; 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. IRS 
will implement cost accounting as part of release 1 of IFS. Scheduled 
for completion October 1, 2003; 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: 13; 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 was signed and put into 
effect June 22, 2002. IRS has addressed the reconciliation of 
discrepancies in the IRM, in the Inventory Certification Plan, and 
through Asset Management Policy directives posted on IRS's Asset 
Management Web site. During IRS's inventory cycle, it distributes 
exception reports showing those discrepancies on a biweekly basis to 
all Single Point Inventory Functions (SPIF). IRS tracks its progress 
for working those exception reports using spreadsheets and graphs and 
shares that information with the Area Directors and SPIFs; Status of 
recommendations: Per GAO: Open. During fiscal year 2002, we noted 
improvement in the reliability of IRS's P&E inventory records. However, 
serious weaknesses continued to affect IRS's ability to maintain 
accountability over its P&E. IRS's procedures for recording P&E 
acquisitions and disposals did not ensure that transactions were 
promptly and accurately recorded. For example, of 220 P&E items we 
selected from inventory records at 22 sites, 22 could not be located at 
the time of our review. We will evaluate IRS's continuing efforts to 
achieve accountability over its P&E during our fiscal year 2003 
financial audit.

Count: 14; No.: 99-34; Recommendation: Revise the current 
capitalization policy to ensure that material P&E acquisitions are not 
expensed. (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. IRS P&E capitalization policies and procedures have been 
documented and include a capitalization threshold for the projected 
design and development costs of internal use software systems, in 
accordance with Statement of Federal Financial Accounting Standards No. 
10; Status of recommendations: Per GAO: Closed. We confirmed that IRS 
established a capitalization threshold for accumulating and 
capitalizing P&E hardware costs consistent with the pooling concept 
currently in use. We will continue to evaluate IRS's efforts to 
implement a policy for capitalizing costs on a transactional basis as 
part of recommendation number 99-36.

Count: 15; 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. IRS's new IFS, currently targeted for March 2005, will 
allow recording P&E and capital leases as assets when purchased and 
will generate detailed records for P&E that will reconcile to the 
financial records. Scheduled completion is March 1, 2005; Status of 
recommendations: Per GAO: Open. We will continue to evaluate IRS's 
progress in addressing these issues in its new system.

Count: 16; No.: 99-38; Recommendation: Establish procedures for the 
financial statements to undergo review at the appropriate levels within 
the CFO's office, with documented evidence of the reviews. (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. IRS has 
developed procedures that require two levels of review of the financial 
statements. Completed August 31, 1999; Status of recommendations: Per 
GAO: Closed. In fiscal year 2002, IRS implemented procedures for 
reviewing its financial statements. Two levels of review were 
performed, and the reviews were documented in IRS's financial statement 
workpapers. As a result of this review process, our review of IRS's 
year-end financial statements did not identify any material 
presentation issues.

Count: 17; 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 the IRM 
5.19.7.9.11(3)(i) 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: Open. We will continue to monitor IRS's use 
of freeze codes to assure they are used to prevent refunds from being 
released to taxpayers who are potentially liable for unpaid payroll 
taxes.

Count: 18; 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: Open. IRM 21 provides servicewide guidance 
on account-related and adjustment workload. Timeliness standards are 
addressed in IRM 21 and supplemented by an annual program guidance 
provided by each Business Operating Division. IRS reports provide 
detailed program-by-program comparisons of current inventory and trends 
that are used by management and the policy/program analyst to monitor 
program delivery and status. The quality review process also addresses 
timeliness of the workload. To address specific causes of delays, IRS 
will review abatement problems identified during the past year's audit 
to determine the source of these abatements and the owner of the 
process to determine if additional corrective actions are needed; 
Status of recommendations: Per GAO: Open. In fiscal year 2002, we 
continued to find delays in the processing of abatements. We will 
continue to monitor the effectiveness of IRS's actions during our 
fiscal year 2003 financial audit.

Count: 19; 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: Closed. The 
Centralized Offer in Compromise (COIC) operation began in August 2001. 
Throughout the first year, excess field staff continued to work to 
eliminate the backlog of cases that had accumulated in the field. 
Several process improvements were also implemented in COIC. By October 
2002, the field inventory was reduced by 20,000 cases, allowing IRS to 
reduce field staff by about 500 revenue officers. Performance on the 
"closed in six months" measure is improving significantly in the first 
quarter of fiscal year 2003; Status of recommendations: Per GAO: Open. 
Based upon IRS's reported improvements in the timeliness of Offers in 
Compromise (OIC) processing, we will evaluate the timeliness of IRS's 
processing of OICs as part of our 2003 audit.

Count: 20; 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 implemented 
computer models to identify the collectibility potential of cases based 
on specific case characteristics. IRS currently has an open research 
project that will validate the accuracy of the collectibility indicator 
used in the risk-based models. The research project will include a 
validation of the criteria used to determine collection efforts, based 
on a cost-benefit analysis. Additionally, the cost accounting module of 
IFS is currently scheduled for full implementation by October 1, 2006; 
Status of recommendations: Per GAO: Open. The key objective of IRS's 
efforts in developing cost data is to use data to make informed 
resource allocation decisions. We will continue to monitor IRS's 
development and use of cost data.

Count: 21; No.: 01-05; Recommendation: Incorporate into its systems 
modernization blueprint and strategic planning process the capability 
to routinely and reliably measure the cost-benefit of its collection 
activities and make informed resource allocation decisions. (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. The capability to 
measure the cost-benefit of collection activities and to make informed 
resource allocation decisions has been incorporated into IRS's systems 
modernization blueprint and strategic planning process; Status of 
recommendations: Per GAO: Closed. IRS incorporated into its systems 
modernization blueprint the ability to use cost information for cost-
benefit analysis.

Count: 22; 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. On August 26, 2002, the Letter of 
Understanding with the National Treasury Employees Union (NTEU) was 
signed. It outlines procedures for the Streamlined Release of Federal 
Tax Liens Pilot, which is applicable only for the Offer in Compromise 
unit employees in the compliance centers. Selection and training of the 
volunteers was completed and the pilot began on January 6, 2003. The 
decision was made to expand the pilot to include additional lien 
releases to provide more case data. The completion date was extended to 
July 1, 2003, to allow time to share the pilot results with NTEU and 
address any issues identified during the pilot; Status of 
recommendations: Per GAO: Open. In fiscal year 2002 we found 20 
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 39 days to 1,263 days. We will continue to monitor IRS's 
release of tax liens and evaluate any new IRS procedures during our 
fiscal year 2003 financial audit.

Count: 23; 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. (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. 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. The cost accounting module of IFS is currently 
scheduled for full implementation by October 1, 2006; 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: 24; No.: 01-13; Recommendation: Incorporate in IRS's systems 
modernization blueprint and strategic planning process capabilities for 
routinely and reliably measuring cost-benefit information to make 
informed resource allocation decisions. (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: Closed. Under IFS, IRS is building a cost 
accounting module and strategic enterprise module that aligns the 
Treasury Integrated Management Information System structure to the Cost 
Centers, Product and Services, Balance Measures, Production, and 
eventually to Labor. This is part of the October 1, 2003, deliverable 
and provides traceability to the systems modernization blueprint. The 
Deputy Commissioner for Modernization & Chief Information Officer has 
committed to provide subject matter experts to IFS to help tie the 
costs associated with its activities and programs at the project areas 
(tiers A, B, C) and sub project areas; Status of recommendations: Per 
GAO: Closed. IRS incorporated into its systems modernization blueprint 
the ability to routinely and reliably measure and analyze cost-benefit 
information.

Count: 25; No.: 01-14; Recommendation: Work with Treasury's Financial 
Management Service (FMS) to revise the current lockbox contracts to 
emphasize security requirements and to specifically require that (1) 
fingerprint checks be completed before employees begin working, (2) 
temporary employees be subjected to background checks that are 
consistent with those required for IRS employees, and (3) at a minimum, 
lockbox bank courier services meet the service center requirements 
contained in IRS's November 16, 1999, policy. (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 developed lockbox bank security 
standards included in the calendar year 2002 contract. The standards 
include physical security, courier, and background investigation 
standards consistent with IRS campus requirements. IRS worked with FMS 
and included the standards in the Invitations for Expressions of 
Interest (IEI) for the new lockbox contract. IRS reported that 
corrective action was completed on January 29, 2001, with the issuance 
of the IEI; Status of recommendations: Per GAO: Closed. IRS revised 
the calendar year 2002 lockbox agreements. However, during fiscal year 
2002, we continued to find that lockbox bank employees were given 
access to taxpayer data and receipts before fingerprint results were 
received and lockbox bank courier services requirements were not 
consistent with service center requirements. We will monitor IRS's 
progress in addressing these areas under recommendations 03-19, 03-20, 
and 03-22.

Count: 26; 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: Open. Further review and identification of 
the policies and procedures requiring consistency at field offices is 
still underway. Completion date has been revised to August 29, 2003; 
Status of recommendations: Per GAO: Open. During our fiscal year 2002 
site visits, we found that not all collection units within the sites 
stored receipts and unopened mail containing potential taxpayer 
receipts and data in locked containers during operating hours. During 
our fiscal year 2003 financial audit, we will continue to monitor IRS's 
progress in developing and implementing policies that are consistent 
throughout IRS to safeguard and account for cash.

Count: 27; 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. The new IFS will incorporate a subsidiary ledger for 
leasehold improvements. Scheduled completion is March 1, 2005; Status 
of recommendations: Per GAO: Open. We will continue to evaluate the 
effectiveness of IRS's efforts in this area.

Count: 28; 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. A 
module of IRS's new IFS, scheduled for implementation in October 2003, 
will incorporate procedures that will help ensure correct and direct 
posting of all P&E to the proper accounting codes as transactions 
occur. Routine and timely reporting of leasehold improvements will be 
addressed in a subsequent release of IFS scheduled for implementation 
in fiscal year 2005. 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 2002 audit, we found that IRS, with 
contractor assistance, implemented interim procedures to identify, 
extract, and reclassify P&E costs, which improved the timeliness of 
recording P&E transactions in accounting records. Nonetheless, 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 found that charges to leasehold improvement 
accounting codes were not always correct. We will continue to monitor 
IRS's progress in implementing IFS during our fiscal year 2003 audit.

Count: 29; 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. IRM 2.14.1, which 
established policies and procedures for information technology (IT) 
assets, was signed and put into effect on June 22, 2002. IRS is in the 
process of incorporating policies and procedures for non-IT assets into 
the IRM; Status of recommendations: Per GAO: Open. We verified that 
IRS issued a revised IRM to establish accountability in the receipt, 
distribution, excess, and/or disposal of IT hardware, software, and 
telecommunication equipment. During our fiscal year 2003 audit, we will 
monitor IRS's progress in developing a comprehensive document that 
provides policies and procedures for all P&E.

Count: 30; No.: 01-26; Recommendation: Review, and correct as 
necessary, data in inventory records, such as serial or model numbers 
and manufacturer names, during periodic inventories of P&E. (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. IRM 2.14.1, 
Information Technology Asset Management, was signed and put into effect 
on June 22, 2002. IRM 2.14.1 addresses the review and correction of 
data in the inventory records. IRM 2.14.1.1.7 contains the Quality 
Assurance Plan and guidelines for SPIF function employees to follow to 
verify the adequacy and accuracy of IRS property management systems. 
The Quality Assurance Plan specified in IRM 2.14.1 supports the 
accuracy of IRS property records and facilitates the continuous process 
improvement in the receipt, distribution, excess, and disposal of 
property, ADP hardware, software, and telecommunications equipment 
throughout IRS; Status of recommendations: Per GAO: Closed. We 
verified that IRS's revised IRM 2.14.1 contains procedures for 
validating data in inventory records. We also found improvement in the 
accuracy of data, such as serial and model numbers and manufacturer 
names recorded on IRS's inventory records, during our fiscal year 2002 
audit.

Count: 31; 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: Open. IRS does not plan to implement the IFS 
Property Module until March 2005 and until that time will not have a 
fully integrated system with subsidiary records. Work continues on 
implementing the Electronic Packing Slip project, which will help 
eliminate errors and ensure that P&E inventory records are accurately 
accounted for in the system; Status of recommendations: Per GAO: Open. 
We continued to find that P&E transactions were not always promptly and 
accurately recorded. We will evaluate the effectiveness of IRS's 
actions during our fiscal year 2003 financial audit.

Count: 32; 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. (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. For custodial transactions, 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 IRACS 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. Procedures are being developed for the reporting of 
accruals for taxes receivable and refunds payable on the quarterly 
financial statements beginning fiscal year 2004. Additionally, for 
administrative transactions, the IRS is in the midst of an initiative 
to identify all major nonpayroll expense transactions that can be 
accrued and/or recorded on an interim basis. The plan to record 
additional interim accruals, without giving consideration to any 
potential problems attributable to the IFS implementation, is scheduled 
to be completed prior to the fourth quarter of fiscal year 2003; 
Status of recommendations: Per GAO: Open. IRS's response recognizes the 
continued existence of this condition and cites a plan of action to 
resolve it. We will continue to monitor IRS's progress in this area 
during our fiscal year 2003 audit.

Count: 33; No.: 01-34; Recommendation: Incorporate into its systems 
modernization plan requirements and specifications for a general ledger 
system that (1) accumulates and summarizes IRS's custodial and 
administrative transactions for financial reporting purposes, (2) is 
integrated with its supporting subsidiary records, and (3) is fully 
compliant with the U.S. Standard General Ledger at the transaction 
level. (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 
will implement IFS, which will be fully compliant with the U.S. 
Standard General Ledger at the transaction level. Scheduled completion 
is October 1, 2003. It will be populated with multiple releases of 
CAP; Status of recommendations: Per GAO: Closed. We have reviewed the 
role that Enterprise Data Warehouse (EDW)/CAP will play in resolving 
custodial financial management issues. EDW/CAP, when implemented, is 
designed to feed the IFS general ledger daily summarized custodial 
financial information. It is expected to provide (1) the ability to 
generate timely and reliable custodial financial information with full 
traceability between the detail and the custodial financial statement, 
and (2) full traceability between the detail taxpayer transactions to 
the U.S. Standard General Ledger in IFS. We will assess the 
implementation of these projects in future audits.

Count: 34; No.: 01-39; Recommendation: Develop a mechanism to track and 
report the actual costs associated with reimbursable activities. 
(short-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. 
Additionally, IFS will also provide the systemic mechanism to track and 
report the actual costs associated with reimbursable activities. The 
target implementation date is October 1, 2003; 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 these costs. We will follow up during 
our fiscal year 2003 audit to determine if IRS has procedures in place 
to ensure the framework is used to develop costing information for 
reimbursable agreements.

Count: 35; No.: 01-40; Recommendation: Establish procedures to 
periodically reconcile the subsidiary records to the control account 
for reimbursable receivables to ensure that the balance is adequately 
supported. (short-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: 
Closed. Since March 2002, and each month thereafter, IRS reported that 
it has reconciled the reimbursable receivable accounts to the control 
accounts. The reconciliation consists of comparison of the Automated 
Financial System Control Totals to the general ledger data received 
from the vendor. These totals are reconciled to correct improper 
postings, mapping issues, timing differences, and posting errors; 
Status of recommendations: Per GAO: Closed. IRS addressed this 
recommendation by implementing procedures in fiscal year 2002 to 
monthly reconcile its subsidiary records to the control account for 
reimbursable receivables.

Count: 36; No.: 01-41; Recommendation: Routinely age and review 
currently open reimbursable receivable accounts to identify accounts 
that are no longer valid or collectible. (short-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: Closed. IRS is currently aging and reviewing 
open reimbursable receivable accounts. Completed July 31, 2001; Status 
of recommendations: Per GAO: Closed. IRS addressed this recommendation 
by initiating action in fiscal year 2001 to regularly age and review 
its reimbursable receivable accounts.

Count: 37; No.: 01-43; Recommendation: Ensure that IRS personnel 
maintain effective oversight of the completeness and accuracy of 
contractor-generated information. (short-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: Closed. There is currently considerable 
review and supervision of contractor-generated information; Status of 
recommendations: Per GAO: Closed. During our fiscal year 2002 audit, we 
found that the information generated by the contractor had been 
effectively reviewed by IRS personnel.

Count: 38; No.: 01-44; Recommendation: Ensure compliance with Treasury 
regulations requiring that all transfers of funds between 
appropriations be properly approved and documented prior to being 
recorded in the financial records. (short-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: Closed. The Budget Execution Procedures book 
includes instructions for processing the SF1151 and Warrants. It states 
that funds can only be transferred after IRS has received approval from 
Treasury. This procedure was issued on May 25, 2001; Status of 
recommendations: Per GAO: Closed. Based on audit work for fiscal years 
2001 and 2002, all transfers of funds between appropriations have been 
properly approved and documented prior to being recorded in the 
financial records.

Count: 39; 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. (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: 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. IRS will implement capitalization of costs as 
transactions occur when the new IFS Integrated Asset Management module 
is implemented in March 2005; Status of recommendations: Per GAO: 
Open. We will continue to monitor IRS's progress in this area during 
future audits.

Count: 40; 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: Open. During fiscal year 
2002, IRS developed a listing of unliquidated commitments to use as a 
tool for ensuring the related obligations are promptly recorded in its 
accounting system. However, we continued to find instances where IRS 
did not promptly record obligations in its accounting system. We will 
continue to monitor the effectiveness of IRS's corrective actions 
during our fiscal year 2003 financial audit.

Count: 41; 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: Open. 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 
is instituting new accrual procedures that should reduce the amount in 
suspense at interim reporting periods. IRS will monitor this new 
process during the year and evaluate its effectiveness; Status of 
recommendations: Per GAO: Open. Quarterly reconciliations between 
budgetary and proprietary accounts are performed and documented. 
Informal reconciliations are prepared monthly. However, not all 
identified adjustments were recorded at interim periods during fiscal 
year 2002. For example, certain adjustments identified at interim 
periods, such as receipts into the general fund and user fees, as well 
as amounts in suspense, were not posted until year-end. We will 
continue to monitor IRS's progress in this area during our fiscal year 
2003 audit.

Count: 42; No.: 02-06; Recommendation: Develop, document, and implement 
policies and procedures to require that routine reviews and analyses of 
general ledger account balances be conducted to promptly identify 
errors and omissions. (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. Quarterly reviews of general ledger account balances and 
certification of those balances are being completed routinely. Policies 
and procedures addressing quarterly reviews were documented on June 1, 
2002; Status of recommendations: Per GAO: Closed. In fiscal year 2002, 
IRS issued a policy memorandum requiring quarterly reviews of the 
general ledger account balances and requiring that workpapers be 
established to document the reviews. This significantly reduced the 
amount of adjustments required at year-end and improved the quality of 
interim data.

Count: 43; No.: 02-07; Recommendation: Develop, document, and implement 
policies and procedures to require that corrections and adjusting 
entries be recorded throughout the year to reduce the magnitude of 
year-end adjustments and improve the reliability of interim financial 
data. (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. 
Adjustments and corrections are now being entered into the financial 
system routinely on a quarterly basis. Policies and procedures 
addressing recording of corrections and adjusting entries were 
documented on June 1, 2002; Status of recommendations: Per GAO: 
Closed. In fiscal year 2002, other than adjustments arising from 
reconciliations between the proprietary and budgetary accounts, IRS 
began recording corrections and adjusting entries when they were 
identified rather than at year end, thus reducing the magnitude of 
year-end adjustments.

Count: 44; 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. 
The cost accounting module is currently scheduled for full 
implementation by October 1, 2006; 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. We found 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. We will 
monitor IRS's progress in implementing the IFS cost accounting module.

Count: 45; No.: 02-09; Recommendation: Implement policies and 
procedures to allocate nonpersonnel costs to programs and activities on 
a routine basis throughout the year. (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: Open. IRS agreed with this recommendation and 
indicated plans to address this issue with the cost accounting module 
that will be part of IFS. Scheduled completion is October 1, 2003; 
Status of recommendations: Per GAO: Open. We will verify that the IFS 
plans include requirements that meet the objectives of this 
recommendation, and we will follow up on its implementation once IFS is 
completed.

Count: 46; No.: 02-10; Recommendation: Document reviews performed to 
validate that performance data are complete, accurate, and reliable. 
(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. A 
memorandum was issued by the CFO on March 8, 2002, requiring 
certification by designated officials that performance data reported on 
a monthly basis has been validated and verified. In addition, on 
September 30, 2002, we completed work on the expanded data dictionary 
that includes information concerning management controls that are in 
place to ensure that the data submitted monthly and for all external 
reporting purposes are valid and verified; Status of recommendations: 
Per GAO: Closed. In fiscal year 2002, IRS completed documenting its key 
controls for each of its key performance measures. As a result, by the 
end of fiscal year 2002, IRS had documented key controls in place to 
validate that performance data reported in its Management Discussion 
and Analysis are complete, accurate, and reliable.

Count: 47; 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. In February 2002, Wage and Investment (W&I) Communication, 
Assistance, Research and Education (CARE) issued a directive to field 
office area directors to instruct employees to issue receipts to 
taxpayers upon request. The same directive instructed area directors to 
install signs to advise taxpayers that receipts would be provided upon 
request; Status of recommendations: Per GAO: Open. Once we receive and 
verify the content of the February 2002 directive, we will close this 
recommendation. During our fiscal year 2002 audit, we did not identify 
any problems with the field office employees providing taxpayers 
receipts for all walk-in payments.

Count: 48; 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. In February 2002, 
W&I CARE issued a directive to field office area directors to advise 
them to install Document 10161 in field offices. Document 10161 states, 
"Let us know if you need a receipt; one is available upon request."; 
Status of recommendations: Per GAO: Open. IRS reported that it has 
issued guidance, but this action does not by itself provide assurance 
that the policy is consistently adhered to. During our site visits, at 
one of two sites no signs were posted in the TAC to notify taxpayers 
that they can request a receipt. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 49; No.: 02-13; Recommendation: Develop policies and procedures 
to require that two employees be present when payments from drop boxes 
are collected and logged. (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. This recommendation is no longer relevant because in July 
2002, IRS issued an IRM procedural update removing drop boxes from all 
TACs; Status of recommendations: Per GAO: Closed. This recommendation 
is no longer relevant because in July 2002, IRS issued an IRM 
procedural update removing drop boxes from all TACs.

Count: 50; 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. During our fiscal year 2002 
audit we found that staff at the two service center campuses and 
several lockbox banks we visited did not immediately log items found 
during final candling. Because IRS's action occurred after the 
completion of our fiscal year 2002 audit, we will assess the adequacy 
of IRS's actions during our fiscal year 2003 audit.

Count: 51; 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 daily validate Form 9535. The 2003 Extracting, Sorting & Numbering 
IRM, 3.10.72.6.2(1)e., states, "management shall immediately reconcile 
the discovered remittances with the final candling log." The 2003 LPG 
was updated January 3, 2003; Status of recommendations: Per GAO: Open. 
During our fiscal year 2002 audit at both service center campuses we 
visited and at several lockbox banks, items found during final candling 
were not reconciled. Because IRS's action occurred after the completion 
of our fiscal year 2002 audit, we will assess the adequacy of IRS's 
actions during our fiscal year 2003 financial audit.

Count: 52; 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. W&I CARE has issued guidance to TAC managers requiring the 
separation of duties. Further, this item is included in W&I CARE self-
assessment that is to be conducted periodically; Status of 
recommendations: Per GAO: Open. IRS reported it has issued guidance. 
However, this action does not by itself provide assurance that this 
policy is consistently adhered to. During our fiscal year 2002 audit, 
at one of two sites we visited, the individual who reconciled the log 
also posted receipts to the log. We will continue to evaluate IRS's 
efforts in our fiscal year 2003 financial audit.

Count: 53; 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: Open. On October 3, 2002, 
the Deputy Commissioner 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 (FBI) fingerprint checks (LPG, January 
2003). The issue of background investigations is pending OSC committee 
decision; Status of recommendations: Per GAO: Open. During our fiscal 
year 2002 audit we found that couriers at one of two sites had not 
received a background investigation, or at a minimum, a fingerprint 
check. IRS issued a memorandum on October 3, 2002, clarifying the 
intent of the background investigation requirement. Because IRS's 
action occurred after the completion of our fiscal year 2002 audit, we 
will assess the adequacy of IRS's actions during our fiscal year 2003 
audit.

Count: 54; 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. On July 9, 2002, a 
memorandum was sent to the Director, Office of Human Resources 
Enterprise Solutions (OHRES), regarding the need to work with NFC to 
correct SETS. On September 3, 2002, we received a response from OHRES, 
committing to work with NFC to resolve issues. Additionally, OHRES 
committed to develop a security module within HR Connect that will 
replace SETS. A task group met in November to identify system 
requirements; Status of recommendations: Per GAO: Open. We will review 
IRS's corrective actions during our fiscal year 2003 financial audit.

Count: 55; No.: 02-19; Recommendation: Issue a formal reminder of 
existing IRS manual refund procedures to supervisors and staff. (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 an 
information alert reminding staff to monitor manual refunds to prevent 
issuance of duplicate refunds and to monitor their reviews. Completed 
December 6, 2001; Status of recommendations: Per GAO: Closed. We 
reviewed a copy of the formal reminder. We also found that most IRS 
employees we interviewed at two service centers were aware of the 
issuance of the alert.

Count: 56; 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. Documents must be 
carried to the mailing destination, i.e., U.S. Post Office or IRS 
mailroom. IRS must secure a date stamp on the second copy of the 
billing voucher which it will retain for at least 1 year after the 
processing year; Status of recommendations: Per GAO: Open. IRS's 
instructions were issued after the end of our 2002 audit. We will 
review the implementation of IRS's corrective actions during our fiscal 
year 2003 financial audit.

Count: 57; 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: Open. Currently, suppliers provide IRS with Excel spreadsheets 
that are reviewed, adjusted as necessary, then placed in a format to 
"batch add" into the Information Technology Asset Management System 
(ITAMS) database. The "batch add" process goes a long way to 
establishing the skeletal records. IRS has developed a record layout 
for suppliers to provide "electronic packing slip" information when 
equipment is purchased and shipped. The procured asset record will be 
established on ITAMS before it is received at the loading dock. The 
establishment of the skeletal records on ITAMS via an electronic 
packing slip feed from our suppliers is key for cradle-to-grave asset 
stewardship and a high priority. Additionally, the automated interfaces 
that "reach out and touch" IRS's network asset is also a high priority. 
IRS is working to ensure that information from automated interfaces to 
network systems are properly captured and used to update the existence 
of assets recorded in ITAMS. Scheduled completion for implementation of 
automated updates to ITAMS is June 1, 2003; Status of recommendations: 
Per GAO: Open. During our fiscal year 2002 audit, we found that 
skeletal records were not always available for SPIF units to update 
upon receipt of P&E. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 58; No.: 02-22; Recommendation: Develop procedures and edit 
checks to reduce the likelihood of invalid property records. (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 has developed 
procedures to reduce the possibility of invalid property records. IRS 
has published those procedures in IRM 2.14.1, the inventory 
certification plan, and Asset Management Policy Directives. During its 
inventory cycle, IRS distributes exception reports showing 
discrepancies to our SPIF functions. IRS tracks its progress on those 
exception reports using spreadsheets and graphs and provides that 
information to the area directors and SPIFs; Status of 
recommendations: Per GAO: Closed. IRS issued a revised IRM that 
includes procedures for conducting an inventory and performing quality 
assurance reviews that reduce the likelihood of invalid property 
records. During our fiscal year 2002 audit, we did not find significant 
numbers of invalid property records.

Count: 59; 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. (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. 
Information Technology Services is working with Procurement and 
existing vendors to establish a reliable vehicle for transmitting 
packing slip information. IRS reported that it 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 the ADP equipment provider; Status of 
recommendations: Per GAO: Open. During our fiscal year 2002 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 2003 financial audit.

Count: 60; 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: Open. IRS is executing an action plan that 
will allow it to identify, record, and account for software; Status of 
recommendations: Per GAO: Open. In fiscal year 2002, IRS initiated a 
process to identify and record software licenses. We will review IRS's 
corrective actions during our fiscal year 2003 financial audit.

Count: 61; 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: Open. IRS is developing 
policies and procedures for tracking compliance with the terms of 
software licenses; Status of recommendations: Per GAO: Open. In fiscal 
year 2002, IRS initiated a process to inventory software licenses and 
assess compliance with the terms of the licenses. We will review IRS's 
corrective actions during our fiscal year 2003 financial audit.

Count: 62; 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: Open. IRS's corrective actions to address 
this issue did not become effective until the fourth quarter of fiscal 
year 2002, which was after we had completed our internal control work 
related to reimbursable activity. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 63; 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: Open. IRS is taking this recommendation under advisement and will 
respond formally to this issue upon approval and implementation of the 
IRS lockbox reorganization; Status of recommendations: Per GAO: Open. 
This is a new recommendation. We will review IRS's corrective actions 
during our fiscal year 2003 financial audit.

Count: 64; 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. IRS is taking this recommendation under 
advisement and will work with FMS to establish an effective 
reimbursement process. IRS will respond formally to this issue upon 
approval and implementation of the IRS lockbox reorganization; Status 
of recommendations: Per GAO: Open. This is a new recommendation. We 
will review IRS's corrective actions during our fiscal year 2003 
financial audit.

Count: 65; 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: Open. The new waiver 
process is described in section 2.1.3.1 of the January 2003 LPG 
document. The internal process between IRS and FMS is being documented 
by the Office of Program Evaluation and Risk Analysis in the Security 
Memorandum of Understanding (MOU). Expected completion date is April 1, 
2003; Status of recommendations: Per GAO: Open. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 66; 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: Open. The banks are required to 
officially respond to any deficiencies identified by the IRS and FMS 
security team. Since FMS holds the agreement with the banks, FMS will 
take the lead on formally establishing a database to keep track of the 
findings and require corrective actions to be taken by the bank. A copy 
of the report and response will be forwarded to IRS. The internal 
process between IRS and FMS will be documented in the Security MOU. 
Expected completion date of the Security MOU is April 1, 2003; Status 
of recommendations: Per GAO: Open. This is a new recommendation. We 
will review IRS's corrective actions during our fiscal year 2003 
financial audit.

Count: 67; 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: Open. 
The Security MOU is in draft format. This MOU will document the roles 
and responsibilities of the Security Review team. The Security Review 
team consists of FMS and IRS security experts. Expected completion date 
is April 1, 2003; Status of recommendations: Per GAO: Open. This is a 
new recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 68; 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: Open. Lockbox banks are undergoing security 
reviews in 2003. The banks will be required to officially respond to 
the items identified in the security report. Security reviews are based 
on the lockbox sites' compliance with the LPG. Since FMS holds the 
agreement with the banks, FMS will take the lead on formally 
establishing a database to keep track of the findings and require 
corrective actions to be taken by the lockbox bank management. The 
internal process between IRS and FMS is documented in the draft 
Security MOU. 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. Expected completion is 
April 1, 2003; Status of recommendations: Per GAO: Open. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 69; 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: Open. IRS updated the security 
checksheet to instruct reviewers to determine whether lockbox 
contractors, such as couriers, have completed and obtained favorable 
results on IRS fingerprint checks and obtain and review all relevant 
logs for cash payments and candled items. IRS also plans to update the 
Lockbox Coordinator on-site reviews to include specific review of 
courier documentation and the candling log. Review of the cash log is 
currently required; Status of recommendations: Per GAO: Open. This is 
a new recommendation. During our fiscal year 2003 financial audit, we 
will review IRS's security checksheet used by the review teams during 
their security visits. We will also review the lockbox coordinators' 
on-site reviews.

Count: 70; 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: IRS disagrees with this recommendation. The 
on-site performance reviews will continue to be conducted by the IRS 
Coordinator Staff. The Lockbox Coordinators are IRS's official 
representatives on site during the peak processing periods. The 
coordinators are qualified and trained to complete the banks 
performance review using the Data Collection Instrument. The 
coordinators know and understand how the taxpayer remittance should be 
processed and handled for IRS requirements; Status of recommendations: 
Per GAO: Open. This is a new recommendation. IRS agreed with this 
recommendation in its comments on the lockbox report, dated December 
20, 2002. We agree that the coordinators are qualified and trained to 
complete the banks' performance reviews and that they understand how 
taxpayer remittances should be processed and handled for IRS 
requirements. However, we believe the current lockbox coordinator 
structure does not alleviate the potential conflict of competing 
responsibilities.

Count: 71; 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 teams consisting of 
individuals from FMS, Agencywide Shared Services, and IRS are 
responsible for on-site security reviews. Lockbox sites are receiving 
announced and unannounced security reviews as of November 2002. These 
reviews will monitor management's compliance with this requirement; 
Status of recommendations: Per GAO: Open. This is a new recommendation. 
IRS needs to ensure that previously existing requirements are 
consistently and routinely adhered to by lockbox management at all of 
the lockbox sites. During our review of lockbox banks in 2002, we found 
sites that were not adhering to this requirement. We will review IRS's 
corrective actions during our fiscal year 2003 financial audit.

Count: 72; 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 LPG issued January 31, 2003; Status of 
recommendations: Per GAO: Open. This is a new recommendation. IRS needs 
to ensure that this previously existing requirement is consistently and 
routinely adhered to by lockbox management at all of the lockbox sites. 
During our review of lockbox banks in 2002, we found sites that were 
not adhering to this requirement. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 73; 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 LPG issued January 31, 2003; Status of recommendations: Per GAO: 
Open. This is a new recommendation. IRS needs to ensure that this 
previously existing requirement is consistently and routinely adhered 
to by lockbox management at all of the lockbox sites. During our review 
of lockbox banks in 2002, we found sites that were not adhering to this 
requirement. We will review IRS's corrective actions during our fiscal 
year 2003 financial audit.

Count: 74; 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 LPG issued January 31, 2003; Status of recommendations: Per 
GAO: Open. This is a new recommendation. IRS needs to ensure that this 
previously existing requirement is consistently and routinely adhered 
to by lockbox management at all of the lockbox sites. During our review 
of lockbox banks in 2002, we found sites that were not adhering to this 
requirement. We will review IRS's corrective actions during our fiscal 
year 2003 financial audit.

Count: 75; 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 LPG issued 
January 31, 2003; Status of recommendations: Per GAO: Open. This is a 
new recommendation. IRS needs to ensure that this previously existing 
requirement is consistently and routinely adhered to by lockbox 
management at all of the lockbox sites. During our review of lockbox 
banks in 2002, we found sites that were not adhering to this 
requirement. We will review IRS's corrective actions during our fiscal 
year 2003 financial audit.

Count: 76; 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: Open. The requirement to ensure that surveillance cameras and 
monitors are installed to permit observation of critical areas 
(internal/external) such as loading docks, secure storage areas, mail 
rooms extraction areas, etc. was established in the 2002 LPG issued 
January 1, 2002. In April 2002, we added a requirement for the guards 
to monitor CCTV activity on an ongoing basis whenever guards are not 
engaged in performing other security duties. We will review the 
existing requirements to determine its sufficiency. FMS and IRS 
security teams review tape inventories and inspect the camera coverage 
and quality during on-site security visits. Documented in Section 2.7.5 
of the 2003 LPG issued January 31, 2003; Status of recommendations: 
Per GAO: Open. This is a new recommendation. We will review IRS's 
corrective actions during our fiscal year 2003 financial audit.

Count: 77; 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 the 2003 LPG, Section 3.5.1.1, effective January 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. This is a new recommendation. IRS needs 
to ensure that previously existing requirements, updated for any 
clarifications, are consistently and routinely adhered to by lockbox 
management at all of the lockbox sites. During our review of lockbox 
banks in 2002, we found sites that were not adhering to candling 
requirements. We will review IRS's corrective actions during our fiscal 
year 2003 financial audit.

Count: 78; 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 the 
2003 LPG, Section 3.2.8, effective January 1, 2003. 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. This is a new 
recommendation. IRS needs to ensure that previously existing 
requirements, and any updates to these requirements, are consistently 
and routinely adhered to by lockbox management at all of the lockbox 
sites. During our review of lockbox banks in 2002, we found sites that 
were not adhering to these requirements. We will review IRS's 
corrective actions during our fiscal year 2003 financial audit.

Count: 79; 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 the 2002 
LPG issued January 1, 2002. 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 quality reviews; Status of recommendations: Per GAO: Open. 
This is a new recommendation. IRS needs to ensure that previously 
existing requirements are consistently and routinely adhered to by 
lockbox management at all of the lockbox sites. During our review of 
lockbox banks in 2002, we found sites that were not adhering to this 
requirement. We will review IRS's corrective actions during our fiscal 
year 2003 financial audit.

Count: 80; 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 2.7.4, 
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: Open. This is a new 
recommendation. IRS needs to ensure that previously existing 
requirements, and any updates to them, are consistently and routinely 
adhered to by lockbox management at all of the lockbox sites. During 
our review of lockbox banks in 2002, we found sites that were not 
adhering to this requirement. We will review IRS's corrective actions 
during our fiscal year 2003 financial audit.

Count: 81; 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: Open. This is a new recommendation. IRS 
needs to ensure that previously existing requirements are consistently 
and routinely adhered to by lockbox management at all of the lockbox 
sites. During our review of lockbox banks in 2002, we found sites that 
were not adhering to this requirement. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 82; 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: Open. IRS reported that it is taking this 
recommendation under advisement; Status of recommendations: Per GAO: 
Open. This is a new recommendation. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 83; 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: Open. IRS reported that it is taking this 
recommendation under advisement; Status of recommendations: Per GAO: 
Open. This is a new recommendation. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 84; 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: Open. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 85; 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: 
Open. This is a new recommendation. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 86; 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: Open. Many new requirements for 
candling have been established. However, we are still in the process of 
analyzing the effectiveness of this as a requirement. Expected due date 
April 1, 2003; Status of recommendations: Per GAO: Open. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 87; 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; Status of recommendations: Per GAO: Open. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 88; 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. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 89; 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: Open. This 
is a new recommendation. We will review IRS's corrective actions during 
our fiscal year 2003 financial audit.

Count: 90; 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; Status of recommendations: Per GAO: Open. This is a 
new recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 91; 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 FBI fingerprint and name check; Status of 
recommendations: Per GAO: Open. This is a new recommendation. We will 
review IRS's corrective actions during our fiscal year 2003 financial 
audit.

Count: 92; 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: Open. IRS's Security Review 
Team of Receipt and Control reviews compliance with the courier 
requirements monthly, using the Campus Security Checklist. On April 17, 
2003, IRS requested that FMS direct banks to issue a copy of the 
insurance certificate to their aligned campus. In addition, FMS agreed 
to draft a memorandum to the financial institutions advising them to 
regularly provide a copy of the insurance certificates to IRS 
Headquarters; Status of recommendations: Per GAO: Open. This is a new 
recommendation. We will review IRS's corrective actions during our 
fiscal year 2003 financial audit.

Count: 93; 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: Open. IRS will issue a memorandum to all Submission Processing 
Field Directors by May 15, 2003, requiring managers in receipt 
processing areas to ensure employees are adhering to established 
security procedures. This memorandum will require unit managers in 
receipt processing areas to conduct random reviews of employee 
compliance with all security policies. Beginning by June 30, 2003, IRS 
will verify managerial adherence to this direction during the monthly 
Campus Security Reviews. The IRS Headquarters Security Review Team will 
also conduct unannounced Campus Security Reviews at the campuses; 
Status of recommendations: Per GAO: Open. This is a new recommendation. 
We will review IRS's corrective actions during our fiscal year 2003 
financial audit.

Count: 94; 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: Open. IRS will include a requirement in 
the IRM guidelines to be issued June 30, 2003, stating that cash 
payments and Form 809 - Receipt for Payment of Taxes must be stored 
separately from personal belongings; Status of recommendations: Per 
GAO: Open. This is a new recommendation. We will review IRS's 
corrective actions during our fiscal year 2003 financial audit.

Count: 95; 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: Open. IRS is revising its 
IRM candling procedures to specify precise first and final candling 
methods. Scheduled completion date is May 30, 2003; Status of 
recommendations: Per GAO: Open. This is a new recommendation. We will 
review IRS's corrective actions during our fiscal year 2003 financial 
audit.

Count: 96; 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: Open. IRS will 
incorporate new requirements in the IRM prohibiting a single employee 
from performing the final candling in a remote location. Scheduled 
completion date is May 30, 2003; Status of recommendations: Per GAO: 
Open. This is a new recommendation. We will review IRS's corrective 
actions during our fiscal year 2003 financial audit.

Count: 97; 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. 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: Open. This 
is a new recommendation. We will review IRS's corrective actions during 
our fiscal year 2003 financial audit.

Count: 98; 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 will include 
procedures in its operational reviews of TACs to ensure compliance with 
the FAOP guidelines. Also, managers in the TACs are also required to 
complete an annual review to address this issue; Status of 
recommendations: Per GAO: Open. This is a new recommendation. We will 
review IRS's corrective actions during our fiscal year 2003 financial 
audit.

[End of table]

Source: GAO and IRS.

[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:

* We 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, accounts 
payable, 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.

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

* We evaluated the overall presentation of the financial statements.

* We 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.

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

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

* We 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); Fair Labor 
Standards Act of 1938, as amended (29 U.S.C. 206); Civil Service 
Retirement Act of 1930, as amended (5 U.S.C. 5332, 5343); Federal 
Employees' Retirement System Act of 1986, as amended (5 U.S.C. 8422 
and 8423); Social Security Act, as amended (26 U.S.C. 3101 and 3121, 
and 42 U.S.C. 430); and Federal Employees Health Benefits Act of 1959, 
as amended (5 U.S.C. 8905, 8906, and 8909).

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

[End of section]

Appendix III: Comments from the Internal Revenue Service:

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

DEPUTY COMMISSIONER:

May 16, 2003:

Mr. Steven J. Sebastian Director:

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

441 G Street, NW Washington, DC 20548:

Dear Mr. Sebastian:

I am responding to your draft report titled, 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 98 recommendations cited in your report we are pleased that GAO 
agrees that 20 are now closed. In addition, we believe an additional 34 
will be closed based on your fiscal year 2003 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. We are actively working to implement corrective 
actions to address all remaining open recommendations.

I appreciate the GAO's acknowledgement of our continued strong 
commitment to improving financial management. I also recognize we must 
stay committed to resolving any remaining financial management issues.

Sincerely,


Bob Wenzel:

Signed by Bob Wenzel:


[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, Casey Keplinger, Larry Malenich, 
Paul Foderaro, Chuck Fox, Yola Lewis, John Davis, William Cordrey, 
Valerie Freeman, Alain Dubois, George Jones, Leonard Zapata, and Gloria 
Cano made key contributions to this report.

(196002):

FOOTNOTES

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

[2] U.S. General Accounting Office, Internal Revenue Service: Status of 
Recommendations from Financial Audits and Related Financial Management 
Reports, GAO-02-848 (Washington, D.C.: July 30, 2002). 

[3] U.S. General Accounting Office, Financial Audit: IRS's Fiscal Year 
2001 and 2000 Financial Statements, GAO-02-414 (Washington, D.C.: Feb. 
27, 2002).

[4] GAO-02-848.

[5] U.S. General Accounting Office, IRS Lockbox Banks: More Effective 
Oversight, Stronger Controls, and Further Study of Costs and Benefits 
Are Needed, GAO-03-299 (Washington, D.C.: Jan. 15, 2003).

[6] U.S. General Accounting Office, Management Report: Improvements 
Needed in IRS's Internal Controls, GAO-03-562R (Washington, D.C.: May 
20, 2003).

[7] Short-term recommendations are defined as those that could be 
addressed within 2 years. Long-term recommendations are defined as 
those recommendations expected to require 2 years or more to implement. 
These designations were assigned at the time the recommendation was 
first issued.

[8] GAO-03-243.

[9] GAO-03-299 and GAO-03-562R.

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