2000 FISCAL YEAR

Publication 3385 (Rev. 3-01)

Catalog Number 27467P

INTERNAL REVENUE SERVICE

ANNUAL REPORT
Mission Statement

Provide America’s taxpayers top

quality service by helping them

understand and meet their tax

responsibilities and by applying

the tax law with integrity and

fairness to all.
Department of the Treasury

Internal Revenue Service

•

Annual Report

•

Fiscal Year 2000

CONTENTS

Stakeholder Messages ............................................................3

Management Discussion and Analysis ........................................8

Financial Statements and Notes.................................................44

Supplemental Information.........................................................68

Other Accompanying Information...............................................74

Auditor’s Report......................................................................78

Agency Information.................................................................120
Department of the Treasury

Internal Revenue Service

•

Annual Report

•

Fiscal Year 2000

LIST OF EXHIBITS

Exhibit 1 FY 2000 IRS Organization ...........................................12

Exhibit 2 FY 2001 IRS Organization ...........................................13

Exhibit 2a FY 2001 IRS National Headquarters Organization...............14

Exhibit 3 Key Performance Indicators..........................................15

Exhibit 4 Components of Unpaid Assessments................................38

Exhibit 5 Components of Write-off Balance...................................39

Exhibit 6 Components of Taxes Receivable.....................................40

Exhibit 7 Components of Unpaid Assessments; Unpaid Taxes,

Interest and Penalties....................................................41
Department of the Treasury

Internal Revenue Service

•

Stakeholder Messages

•

Fiscal Year 2000

MESSAGE FROM THE COMMISSIONER

The IRS can look back on the past year with pride as it successfully managed a number

of critical programs and projects intended to improve service to taxpayers and the

efficiency of the Nation’s tax administration system. And rather than being an end in

themselves, these initiatives help form the foundation for a modernized IRS and carry out

the spirit and letter of the IRS Restructuring and Reform Act of 1998 (RRA 98).

During its modernization, the IRS must continue to process tax returns, collect revenues

and provide and improve service to taxpayers. Last year’s filing season was very smooth

and almost error free. The Agency collected over $1.9 trillion in net revenues and

received and processed 212 million returns, including 128 million individual returns. It

also issued over 92 million individual refunds. And this past year, 35 million individual

taxpayers took advantage of filing their return electronically. Hits on the IRS’ web site

soared too, approaching the 1.3 billion mark at the end of the fiscal year.

Due to the combined efforts of the IRS and the General Accounting Office, I am also

pleased to report that the GAO has rendered an “unqualified” or clean opinion on the

IRS’ FY 2000 Financial Statements (both Revenue and Administrative accounts.) This

means that the IRS could properly account for $8.3 billion in appropriated funds; over $2

trillion in revenues collected; and over $190 billion in refunds. This success can be

greatly attributed to the hard work and dedication of the IRS staff; the significant

improvements made to IRS’ internal controls; and management focus placed on the

financial audits.

Congress has increasingly viewed the financial audit as an important evaluation of

agency performance. In last year’s appropriations hearings, the Chairman of the House

Subcommittee for Treasury, Postal Service, and General Government stressed the

importance of a clean financial audit for IRS. Planning is already underway to insure that

we maintain the same level of commitment for the FY 2001 and all future audits.

However, long-standing inadequacies in our financial reporting systems must still be

addressed through the broader efforts to modernize the IRS’ systems and organization as

mandated by RRA 98. The key to better financial management at the IRS is improved

technology.

The century date change was one of the great success stories of 2000. The IRS

experienced a smooth Y2K “roll-over weekend” between December 29 and January 3,

2000, with fewer glitches than experienced in a normal year. There were also no

problems associated with the leap year on February 29, 2000.

Our Y2K success was hard won and can be directly attributed to our comprehensive

planning and preparations over a three and one-half year period as well as the guidance,
2

assistance and support Congress provided the IRS. Without the significant investment in

resources to plan and prepare for Y2K, there was a tremendous potential for significant

disruptions to ongoing IRS operations. Indeed, the tax system would have ground to a

halt causing a massive disruption affecting almost every taxpayer. Fortunately, that

investment was made.

The IRS also gained some valuable residual benefits from the Y2K conversion project.

These include improved program and inventory management practices and the

replacement of obsolete hardware and systems software products. The lessons we

learned should be of particular value as we proceed to the even more challenging

business systems modernization program.

Following RRA 98’s directions, the IRS designed and has implemented a new

organizational structure. It resembles the private sector model of organizing around

customers with similar needs. The IRS created four customer-focused operating

divisions to best serve taxpayers: Wage and Investment, Small Business and SelfEmployed, Large and Mid-Size Business, and Tax Exempt and Government Entities.

There are also a number of functional units, including Appeals, the Taxpayer Advocate

Service, Criminal Investigation, and Communication and Liaison.

The modernized IRS organization was officially inaugurated, or “stood up,” on October

1, 2000 and a top management team is in place for each of the operating divisions and

business units. However, many challenges and much hard work remain as the different

parts of the new organization are staffed and trained. The final stages of implementation,

including the redistribution of workload, will require another two years through FY 2002.

In the short-term, the reorganization should be largely invisible to taxpayers and tax

practitioners. In the long-term, they will see the positive changes that modernization is

intended to produce. The new organization will place a greater emphasis on pre-filing

services and early resolution of complex issues. More resources will be devoted to prefiling activities, such as education and outreach to help taxpayers comply with the tax law

and get their tax returns right the first time. Post-filing activities will focus on problem

prevention with targeted enforcement activities for non-compliance.

To improve the entire way the IRS conducts business, the Agency recently embarked on

one of the largest and most sensitive business systems modernization programs ever

undertaken in the U.S. Simply put, the IRS must replace its obsolete computer systems.

Present systems do not allow the IRS to administer the nation’s tax system and provide

essential service to taxpayers at an acceptable level of efficiency, effectiveness, and risk.

In FY 1998, Congress established an Information Technology Investment Account

(ITIA) to fund modernization and, to date, has appropriated $506 million for this purpose.

In December 1998, the IRS selected a PRIME contractor to partner with the private

sector in managing what is now called the Business Systems Modernization Program.
3

During FY 2000, the program focused on establishing an effective management process,

defining the long-term vision of how the IRS will operate, and planning initial projects.

The program's first project, improving taxpayer access to customer service toll-free

telephone systems, is scheduled for delivery in FY 2001. The ultimate goal is to bring

improvements to all parts of the IRS, from the Agency's core data systems to processing

tax returns. This will take the better part of a decade to accomplish.

At the conclusion of 2000, the IRS also released Blueprint 2000, which is the first major

update of the original 1997 Modernization Blueprint. It provides the business and

technology framework that will be used to redesign business practices and build the

systems that will enable their use. The entire IRS senior leadership team and I are

committed to Blueprint 2000, and this is exactly the approach we need to move the IRS

into the next century.

On a much broader scale, a new strategic planning, budgeting, and performance

management process was introduced for the entire Agency. It provides a formal platform

upon which IRS strategies and resource allocations are established. The process

incorporates senior management involvement and guidance and ensures that the operating

units are responsible for operational plans and business practices. The new process will

also provide for greater integration between IRS' planning, budgeting, research, and

performance accountability mechanisms. The IRS is now able to put forth a strategic

planning framework that includes all of its major strategic-level programs and ties

directly to several years of operational-level programs and budget requests.

In conclusion, the IRS is making steady progress on the goals and mandates established

by the IRS Restructuring and Reform Act of 1998. While not without problems and

occasional setbacks, we are laying the foundation for the modernized IRS that will

produce tangible improvements in service, compliance and productivity. With continued

and assured support, I am convinced we can succeed.

Sincerely,
MESSAGE FROM THE ACTING CHIEF FINANCIAL OFFICER

I am pleased to report that the IRS received an "unqualified" (clean) audit opinion

from the General Accounting Office (GAO) on its financial statements (both

Revenue and Administrative accounts). Thus, GAO has attested that our

financial statements and accompanying notes present fairly, in all material

respects, in conformity with generally accepted accounting principles, IRS'

assets, liabilities, net position, net costs, changes in net position, budgetary

resources, reconciliation of net costs to budgetary obligations, and custodial

activity.

All of us at IRS are very proud of this significant achievement. We have worked

diligently for several years toward this goal and can attribute much of this

success to the monumental effort put forth by IRS' managers and staff. Through

staff efforts, and with the help of the GAO audit team, many improvements to the

audit process were achieved.

IRS also made significant improvements during FY 2000 to its internal controls in

the following areas: security of taxpayer receipts and data; courier processes;

management of property and equipment inventories; security of physical and

technology resources; reconciliation of the administrative fund balance; and its

monitoring program for administrative reconciliations.

There is still much hard work ahead of us in FY 2001. IRS reported a number of

items as material weaknesses/non-conformances through the Federal Managers'

Financial Integrity Act reporting process. These weaknesses and national control

deficiencies continue to be addressed by the Financial and Management

Controls Executive Steering Committee at IRS.

Our initial goal was to attain a clean opinion. We have succeeded. Our other

goals have been to make permanent changes to address the shortcomings

identified by IRS and GAO. We will continue to prioritize and address issues

through our newly established strategic planning and budgeting process. We are

also working on our long-term solution to have an integrated financial

management system.

Sincerely,
Department of the Treasury

Internal Revenue Service

•

Management Discussion and Analysis

•

Fiscal Year 2000

INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

Mission

Statement

Provide America’s taxpayers top quality service by helping them understand and meet

their tax responsibilities and by applying the tax law with integrity and fairness to all.

1. Modernizing The IRS - Goals, Principles, and Change

“All that we have accomplished over the past year is a beginning, not

an end. We have a great foundation upon which to build.”

- Charles Rossotti, Commissioner, Internal Revenue Service

Tax Executive Institute, October 24, 2000

Serving taxpayers better is the key concept behind everything the IRS is doing to

modernize. The importance of service is reflected in three goals:

ÿ Service to each taxpayer

ÿ Service to all taxpayers

ÿ Productivity through a quality work environment

Five guiding principles help show the way through modernization. These guiding

principles allow the IRS to manage both the organizational change and the operations

and maintenance that must continue during the rebuilding process. The guiding

principles are:

ÿ Understand and solve problems from taxpayer’s point of view

ÿ Expect managers to be accountable - knowledge, responsibility, authority, action

ÿ Align measures of performance to all organizational levels

ÿ Foster open, honest communication

ÿ Insist on total integrity

Finally, there are five equally important, critical areas of change:

ÿ Revamped business practices

ÿ Customer focused operating divisions

ÿ Management roles with clear responsibility

ÿ Balanced measurement of performance

ÿ New technology
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

2. ORGANIZATION AND MANAGEMENT

The organization structure is the vehicle through which decisions are made and actions

carried out. The IRS structure was built around districts and service centers (the basic

organizational units) that were established many years ago and evolved over decades.

There were 33 districts and ten service centers. Each of these 43 units was charged

with administering the entire tax law for every kind of taxpayer, large and small, in a

defined geographical area. Consequently, every taxpayer was serviced by both a

service center and a district, sometimes by more than one. Within each of these units,

work was actually carried out by functional disciplines, principally Examination, Appeals,

Collection, Criminal Investigation, Submission Processing, and Customer Service.

Service centers and districts each performed these functions for the same taxpayer, the

responsibility shifting depending on whether the work was done by phone, mail, or in

person. For example, in the collection area, there were three separate kinds of

organizations spread over all 43 operational units that used four separate computer

systems to collect taxes. Each of these three units and four systems collected from

every kind of taxpayer, from individuals to businesses.

Overseeing these operational units were four regions and a national office (Exhibit 1),

which also operated three large computing centers. There were eight intermediate

levels of staff and line management between a front-line employee and the Deputy

Commissioners, who were the only managers besides the Commissioner who had

responsibility over all aspects of service to any particular taxpayer.

This structure no longer enabled the IRS to achieve its strategic goals. The outdated

structure, matched by an inadequate technology base, represented the principal

obstacles to modernizing IRS business practices and strategies, and to delivering

improvements in service and productivity.

The IRS’ new modernized structure, effective in FY 2001, is similar to one widely used

in the private sector; the work is organized around customer’s needs, in this case

taxpayers. Just as many financial institutions have different divisions that serve retail

customers, small to medium businesses and large multinational businesses, the

taxpayer base falls into similar groups. The structure of the new FY 2001 organization

is shown in Exhibits 2 and 2a.

The key operational units are four operating divisions, each charged with full end-to-end

responsibility for serving a set of taxpayers with similar needs. These operating

divisions are supported by two service organizations: Agency Wide Information Systems

Services and Agency Wide Shared Services (providing common services such as

facilities and procurement).
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

ORGANIZATION AND MANAGEMENT (continued)

Appeals and the Taxpayer Advocate Service are nationwide organizations that provide

separate specialized independent channels for taxpayers. Criminal Investigation has

sole responsibility for investigation of criminal violations of the tax law and, for the first

time, in FY 2001, will operate as a line unit within the IRS. Chief Counsel provides tax

advice, guidance, and legislative services to all components of the IRS. A smaller

national office will assume an overall role of setting broad policy, reviewing plans and

goals of the operating units, and developing major improvement initiatives. The Office of

the Chief Inspector has been renamed the Treasury Inspector General for Tax

Administration (TIGTA) and has been removed from the IRS. It is now a separate

Inspector General (IG) organization that reports to the Secretary of the Treasury, in

accordance with the Restructuring and Reform Act of 1998 (RRA 98).
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

Exhibit 1

FY 2000 IRS Organization*

National Director, EEO & Diversity

National Director, Taxpayer Treatment

& Service Improvements

National Director of Quality

Commissioner

Deputy

Commissioner

Operations

Deputy

Commissioner

Modernization

Modernization Teams

Chief Operations

Officer

Assistant

Commissioner

(Customer Service)

Assistant

Commissioner

(Examination)

Assistant

Commissioner

(Collection)

Assistant

Commissioner

(Criminal Investigation)

Assistant

Commissioner

(EP/EO) 

2

Assistant

Commissioner

(International)

Assistant Commissioner

(Electronic Tax

Administration)

Assistant Commissioner

(Research & Statistics

of Income)

Assistant Commissioner

(Forms & Submission

Processing)

Executive Officer for

Service Center

 Operations

Chief

Management &

Finance

Chief Financial Officer

Assistant

Commissioner

(Procurement)

Assistant

Commissioner

(Support Services)

Assistant

Commissioner

(Program Analysis)

National Director

Strategic Planing

Division

National Director

Analysis & Studies

Division

Chief, Headquarters

Operations

National Director

Of Appeals

Regional Directors

Of Appeals (4)

Director of Practice

Regional

Commissioners (4)

Chief Counsel 

1

Chief

Communication

& Liaison

N

Ta

A

1. Chief Counsel reports directly to the Commissioner except in circumstances specifie

by The IRS Restructuring and Reform Act of 1998.

2. Abbreviation for Employee Plans and Exempt Organization.

* In FY 2000, IRS began its transition to the new organizational structure.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

Exhibit 2

FY 2001 IRS Organization

 --------------- -

 ---------------

Chief

Counsel

Commissioner

Deputy Commissioner

National Headquarters

(See Attached Chart)

Agency Wide

Shared Services

Agency Wide

IS Services Appeals

Taxpayer

Advocate

Service

Criminal

Investigation

Wage

&

Investment

Small Business &

Self Employed

Large and (2)

Mid-Size

Business

Tax Exempt & (1)

Government

Entities

Communications

& Liaison

Footnote

1. Operational effective date 3/1/00

2. Operational effective date 6/4/00

Remaining organization effective 10/1/00

Treasury Inspector General

 For Tax Administration
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

Exhibit 2a

FY 2001 IRS National Headquarters Organization

Commissioner

Deputy

Commissioner

Equal Employment

Opportunity and Diversity

Modernization

Teams

Strategic

Planning and

Budgeting

Office of Tax

Administration

Coordination

Finance

Assistant Deputy

Commissioner

Modernization

Chief Financial

Officer

Commissioner's

Complaint

Processing and

Analysis Group

Assistant Deputy

Commissioner

Operations

Research,

Analysis, and

Statistics of

Income

Senior Counselor Director

of Practice

Strategic

Human

Resources
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

3. KEY PERFORMANCE INDICATORS

The key performance indicators (as shown in Exhibit 3) were selected as

measurements of performance that deliver the overall mission for the organization as a

whole or for organizational components that are responsible for providing a full range of

services to large sets of taxpayers. In the FY 2001 organization, a new set of strategic

measures will be applicable to the IRS overall and to each of the four major operating

divisions.

The IRS began identifying key performance indicators in FY 2000 and will refine and

finalize these measures in FY 2001. Experience has shown that the development of

good performance measures is an evolving process that improves with time. As such, it

is anticipated and expected that there may be changes to the specific measures. The

strategic intent behind these measures, however, is expected to remain firm.

Exhibit 3

Key Performance Indicators FY 99 Actual FY 00 Plan FY 00 Actual

Service To Each Taxpayer

1. Customer Satisfaction—Toll-Free

2. Customer Satisfaction—Walk-In

3. Customer Satisfaction—Field & Office Exam.

4. Customer Satisfaction—Field Collection

Service To All Taxpayers

1. Toll-Free Level of Service

2. No. of Calls Answered— Includes Automated

—workload projections only (millions)

3. Tax Law Accuracy Rate for Taxpayer

Inquiries (Toll-Free)

4. No. of Taxpayers Served—Walk-In —

workload projection only (millions)

5. Field Collection Quality

6. Field Examination Quality

7. Office Examination Quality

8. Total Net Revenue Collected—

workload projection only (trillions)

9. Total Enforcement Revenue Collected—

workload projection only (billions)

10. Total Enforcement Revenue Protected

—workload projection only (billions)

Productivity Through A Quality Work

Environment

1. Employee Satisfaction (Servicewide)

3.5(1)

6.4(2)

4.1(2)

3.9(2)

53.3%

110.3

74.1%

10.0

86.0%

58.0%

58.0%

$1.718

$32.9

$5.5

55.0%

3.6(3)

6.5

4.4

3.9

58.5%

118.0

80.0%

10.0

86.0%

68.0%

72.0%

$1.847

$32.2(4)

$5.5

55.0%

3.5(1)

6.5(2)

4.4(2)

4.6(2)

60.6%

93.2

72.6%

9.7

83.4%

57.0%

58.0%

$1.902

$33.8

$4.6(5)

59.0%

Footnotes

1. Beginning in FY 2000 the IRS switched to an automated survey system. Testing revealed that a 4-point scale works better with an automated survey.

2. Measures # 2,3,4 were rated on a 7 point scale.

3. FY 2000 goal was re-calculated by Pacific Consulting Inc. on 1/3/00 at IRS request.

4. Revised projections – Summer 2000

5. This number represents results from two of the three components of the measures. Refund fraud data is not available at this time.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

KEY PERFORMANCE INDICATOR EXPLANATIONS

Service To Each Taxpayer

During the fiscal year, TIGTA conducted nine audits on the IRS Customer Satisfaction

Transaction Surveys. The chief concern of the audits focused on survey administration,

such as the taxpayer response rates to the surveys, the size and selection of sample

populations, and establishing management controls over completed surveys. IRS took

both programmatic and organizational actions to address the concerns stated in the

TIGTA reports. The IRS recently awarded a new five-year Blanket Purchase Agreement

(BPA) for development of a strategy to identify the best way to secure accurate and

valid customer satisfaction data. As part of the process, IRS will ensure the data

gathered from the Customer Satisfaction Surveys meets both internal operational needs

as well as the Government Performance and Results Act (GPRA) requirements.

1. Customer Satisfaction – Toll-Free – This measure represents the customers’ overall

level of satisfaction with the services provided by the IRS Toll-Free program. Survey

recipients are asked to rate IRS performance on a four-point scale, where 1 indicates

Very Dissatisfied and 4 indicates Very Satisfied.

2. Customer Satisfaction – Walk-In – This measure represents the customers’ overall

level of satisfaction with the services provided by the IRS Walk-In program. Scores

represent the average overall level of customer satisfaction from the Customer

Satisfaction Transactional Surveys. Survey recipients are asked to rate IRS

performance on a seven-point scale, where 1 indicates Very Dissatisfied and 7

indicates Very Satisfied.

3. Customer Satisfaction – Field and Office Examination – This measure represents

the level of satisfaction customers receive from interactions with IRS Field and Office

Examination. Scores represent the average overall level of customer satisfaction

from the Customer Satisfaction Transactional Surveys. Survey recipients are asked to

rate IRS performance on a seven-point scale, where 1 indicates Very Dissatisfied and

7 indicates Very Satisfied

4. Customer Satisfaction– Field Collection – This measure represents the customers’

overall level of satisfaction with the way their case was handled by the IRS Field

Collection program. Scores represent the average overall level of customer

satisfaction from the Customer Satisfaction Transactional Surveys. Survey recipients

are asked to rate IRS performance on a seven-point scale, where 1 indicates Very

Dissatisfied and 7 indicates Very Satisfied.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

KEY PERFORMANCE INDICATOR EXPLANATIONS

Service To All Taxpayers

1. Toll-Free Level of Service – This measure represents the relative success rate of

taxpayers that are calling for our toll-free services including tax law, account and

refund inquiries, informant calls, and calls to the Taxpayer Advocate. Level of

service is expressed as “calls answered” divided by the “total call attempts.”

2. Number of Calls Answered – Includes Automated (workload projection used to

project expected levels of program activity and justification of resource

requests) (millions) – This measure represents a count of all calls answered at

Customer Service Sites by assistors and automated systems. Calculation of this

measure excludes calls made directly to the TeleTax phone number.

3. Tax Law Accuracy Rate for Taxpayer Inquiries (Toll-Free) – This measure

represents the accuracy of tax law information provided to taxpayers through the

toll-free telephone assistance program. Results are calculated using the site quality

rate and weighing it using total site volume and number reviewed. That number is

then rolled up and becomes part of the national number. Results are expressed as

the percentage of reviewed calls.

4. Number of Taxpayers Served – Walk-In (workload projection used to project

expected levels of program activity and justification of resource requests)

(millions) – This measure represents the total number of taxpayers who come into

an IRS office to receive tax assistance or to request tax forms.

5. Field Collection Quality 1– This measure represents the score awarded to a

reviewed Collection case by the Collection Quality Measurement System (CQMS)

reviewer.

6. Field Examination Quality 1

– This measure represents the score awarded to a

reviewed Field Examination case by the Examination Quality Measurement System

(EQMS) third party reviewer.

7. Office Examination Quality 1– This measure represents the score awarded to a

reviewed Office Examination case by the EQMS reviewer.

 

1

 IRS Quality Review Systems (CQMS and EQMS) are designed to monitor, through a sample of completed cases, and crucial

aspects of job performance (for Collection: fair and courteous treatment, taxpayers’ right to notification, tax accuracy verification,

appeals rights - for Examination: timely exam start or reassignment, income-deduction-credit items considered, taxpayers’ rights and

innocent spouse provisions). The quality of completed case work is an important business result providing a balanced system of

measures when combined with specific quantitative performance measures. Cases are reviewed to measure performance in key

quality categories. 
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

KEY PERFORMANCE INDICATOR EXPLANATIONS

Service To All Taxpayers (continued)

8. Total Net Revenue Collected – (workload projection used to project expected

levels of program activity and justification of resource requests) – (trillions)

This measure represents all revenue collected (actuals and planned are from the

Department of the Treasury and the Office of Tax Analysis) by the IRS, including

enforcement collections, but excluding refunds.

9. Total Enforcement Revenue Collected – (workload projection used to project

expected levels of program activity and justification of resources requests) –

(billions) - This measure represents all revenue collected through enforcement

actions by Collection (includes collections on notices by Service Center Collection

Branch but excludes collections on Examination assessments), Automated

Collection System (ACS), and estimates of collections generated by Examination

recommendations.

10.Total Enforcement Revenue Protected – (workload projection used to project

expected levels of program activity and justification of resource requests) –

(billions) – This measure represents dollars prevented from being released from

the Treasury through actions taken by the IRS in response to electronic and paper

filing fraud (deleted refunds), disallowed claims in response to a taxpayer’s effort to

recoup all or part of previously assessed and paid tax and penalty, refundable

earned income tax credit, and dependency issues worked in the service centers.

Productivity Through A Quality Work Environment

1. Employee Satisfaction (Servicewide) – This measure represents an employee’s

perception of the work environment, management practices, and organizational

barriers that affect an employee’s willingness and ability to do a good job. An

employee is asked to rate the IRS performance on a five-point scale. The

servicewide average is based on favorable ratings (determined as a 4 or 5).

ANALYSIS OF KEY PERFORMANCE INDICATORS

A variance analysis was conducted for all measures that fell short of the FY 2000

targeted performance. Measures reflecting a variance of less than +/-5% were not

reported. In addition, in the case of Field Collection Quality, analysis was conducted

due to the significant increase in FY 2000 performance when compared to the goal.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

ANALYSIS OF KEY PERFORMANCE INDICATORS

Service To Each Taxpayer

Customer Satisfaction – Field Collection – A multitude of internal and external forces

may have contributed directly and indirectly to the substantial rise in customer

satisfaction barometers. Chief among these are the rehabilitation of the agency’s image,

restoration of public trust and confidence, the numerous and sweeping changes

mandated and inspired by RRA 98 legislation, and the ensuing transformation in

corporate philosophy and orientation. The many new taxpayer rights and protections

and their attendant provisions including Section1203 (b), combined with redirection of

program priorities and resources, extensive re-training emphasizing negotiated case

resolutions and a customer service focus, plus expanded Offer in Compromise (OIC)

access, led to a dramatic reduction in the use of enforcement actions and a

fundamental change in customer relations. Other contributing internal factors could

include: adoption of the balanced measures program and approach; implementation of

new outreach programs; roll-out of several new installment agreement products;

institution of administrative reviewers; reduction in time applied to traditional programs;

Problem Solving Days; extended hours; reduced wait times in the walk-in area;

expanded taxpayer accessibility to services and products; and greater institutional

sensitivity and responsiveness to customer needs, concerns and expectations.

Changes in case mix may also have played a role.

Service To All Taxpayers

Number of Calls Answered – Includes Automated (workload projection only)

(millions) – The number of calls answered declined during FY 2000 while the total

attempts made by customers declined at a much higher rate. The decline in the calls

answered can be attributed to a decrease in efficiency of assistors in all product lines

(increased call handle time) and significant changes to the mix of calls. The decrease in

attempts made by customers are a result of improvement in key areas such as: (1)

notice issuance declined, (2) better call routing, and (3) changes to technology including

network prompting.

Tax Law Accuracy Rate for Taxpayer Inquiries (Toll-Free) – The slight decline in this

measure can be attributed to the changing mix and complexity of calls as evidenced by

results in all of the customer service product lines. Web-based applications for tax law

have had an impact on reducing telephone demand, leaving the more complex

questions to be answered by assistors. In an attempt to more accurately pinpoint

declines in all quality scores, a new measure (replacing this measure) was developed in

FY 2000 called the Correct Response Rate. This new measure is designed to eliminate
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

ANALYSIS OF KEY PERFORMANCE INDICATORS

Service To All Taxpayers (continued)

internal errors not impacting the outcome of the call to the customer, providing a better

indicator of quality IRS provides to its customers. Reporting against this measure will

begin in FY 2001.

Number of Taxpayers Served – Walk-In (millions) – The volume of contacts has

decreased by 5% from the prior year. This decrease can be attributed to a reduction of

approximately 500,000 forms distributed at the walk-in sites. The goal for FY 2000 of

10.0 million customers was a projection of total traffic based on historical information

rather than specific initiatives to increase contacts. A review of the decrease in Forms

Distribution in both the walk-in sites and telephone lines designated for forms requests

provides some indication that customers are securing their forms through some other

avenue, possibly the IRS internet website, “The Digital Daily.” This website continues to

be extremely popular and shows an increase in information accesses (968 million in

FY 2000 compared to 767 million in FY 1999) during the period January through April.

Field Collection Quality – Collection’s declining performance in the CQMS measure

can be attributable to outside factors. Aggregate detail out time (time spent working in

areas other than Field Collection such as a Customer Service walk-in office) has

increased by 9.3% in FY 2000 as compared with the prior year’s experience. One of the

CQMS key quality categories is a “Timeliness of Work Category”. Failure to meet any of

the standards in this category will result in a lower overall composite score. Analysis of

the category revealed that a frequently used reason code for errors in the category was

“Lapse Prior to Assignment to Revenue Officer (RO) Assignment” due to managers not

having employees available to assign the work.

Field and Office Examination Quality – Quality results in both areas declined and did

not meet the goals established for FY 2000. Improvement opportunities were not

realized due in part to standards related to RRA 98 procedures not being met resulting

in a lower overall composite score. Also, concerns regarding the sampling were

addressed to ensure valid samples of cases were reviewed. Analysis of the data

reflects improvements in 3 standards: Audit Scope, Audit Planning, and Workpapers.

These improvements over the long run could substantially impact performance.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

4. PROGRAMMATIC HIGHLIGHTS

Business Systems Modernization Program

The U.S. tax administration system, which collects approximately $2 trillion in revenues

each year, is critically dependent on a collection of obsolete computer systems

developed by the IRS over the last 35 years. These systems do not allow the IRS to

administer the nation’s tax system and provide essential service to taxpayers at an

acceptable level of efficiency, effectiveness, and risk. The fact that the IRS has

struggled to modernize its technology, with only limited success, points to the difficulties

and inherent risks of this enormous task.

IRS has embarked on one of the largest and most sensitive business systems

modernization programs ever undertaken in the U.S. to solve this critical national

problem. In FY 1998, Congress established an Information Technology Investment

Account (ITIA) to fund modernization, and, to date, has appropriated $506 million. In

December 1998, the IRS selected a PRIME contractor to partner with the private sector

in managing the program.

In the 14 months since the first release of ITIA funding in June 1999, the program has

made substantial progress in the three key areas needed for long-term success. These

are: (1) establishing a rigorous and effective management process that will continue to

mature over time; (2) producing tangible deliverables for a set of initial projects that will

begin to produce business results in FY 2001; and (3) updating the business vision and

architecture to reflect recent experience to guide the program over the longer term.

Status of Plans

Management – The program planning phase, continued from FY 1999, formed an

effective management process during FY 2000. The culmination of this phase was the

official “stand-up” of the Business Systems Modernization Office organization in July

2000. This entailed defining clear roles and responsibilities, hiring qualified staff,

delivering a proven methodology, the Enterprise Life Cycle (ELC), training IRS and

contractor staff on the methodology and also on performance based contracting

principles, establishing a regular series of intensive program management reviews, and

developing and maintaining an integrated master schedule for each business systems

modernization project.

Projects – In a first round of planning in FY 1999, a limited set of initial projects was

defined on which work could proceed at an acceptable risk level. This decision was

based on the pre-existing Modernization Blueprint. These initial projects will deliver

substantial benefits beginning in FY 2001 and FY 2002. They will also provide a

practical means of developing and testing our management process and architecture

and lay down an essential foundation for subsequent projects.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

 PROGRAMMATIC HIGHLIGHTS

 Status of Plans (continued)

The projects selected for initial work were evaluated and selected on a comparative

basis from a larger portfolio of possible projects. The projects evaluated opportunities

for business process improvements based on customer needs, best practices, and the

mission, goals, and strategy of the IRS. A prioritization process was used to select and

refine a set of modernization projects. The projects selected ranked highest on a

combination of criteria which included benefits (to taxpayers, the IRS operations, and to

employees), risks, and readiness to proceed based on prior work.

All of the projects are being managed according to the agreed methodology of the ELC

which defines certain key milestones at which defined deliverables must be produced

and accepted to proceed to the next milestone. One such deliverable is the business

case, which summarizes the scope, benefit, cost, and risk of the project. A preliminary

business case is developed at Milestone 2, and an updated baseline business case is

developed at Milestone 3.

The first system to be developed and deployed will be the Customer Communications

System. It will allow the IRS to answer more of the 150 million telephone calls it

receives, while providing a solid foundation for future systems, nearly all of which

require communication with taxpayers.

Enterprise Vision and Architecture – In May 2000, the IRS began a major update to the

original 1997 Modernization Blueprint, which guided the program in the initial period.

The objective of this new project, referred to as Blueprint 2000, is to reflect the

substantial knowledge gained through experience, the changes in the IRS organization,

and the improvements in available technology that have taken place over the last three

years.

One of the most important aspects of Blueprint 2000 is the greater emphasis on

business vision – stating clearly how the main aspects of tax administration will operate

differently in the future with the help of technology.

At the present time, important work is underway on the first of three incremental

releases/versions of Blueprint 2000. The entire tax administration process has been

carefully defined down to three levels of detail, specifying how speed, accuracy, and

timeliness will improve. On the technical side, key topics such as data architecture and

security are being addressed, with the Blueprint being updated to reflect them.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Status of Implementation

Management – While the management process for the program is improving rapidly, it

still needs further maturation to cope with the expanded level of activity that will occur in

FY 2001 and FY 2002. Our goal is to achieve an acknowledged industry management

standard (Capability Maturity Model-Level 2) for systems acquisition by September 30,

2001; this can only be achieved with experience in managing the program.

Projects – On May 22, 2000, the Customer Communications System became the first

project to meet all of the rigorous requirements for deliverables and reviews prior to the

development phase, and on June 22, 2000, a firm fixed price task order was signed.

Implementation is currently planned for the second quarter of FY 2001 - less than two

years after the first release of ITIA funds. In the context of the start-up of an enormous,

highly integrated and complex systems program, this is an exceptionally fast time for the

first major systems deployment.

Following the implementation of the Customer Communications System, other major

systems will be delivered beginning in the second half of FY 2001, and will continue at

regular intervals in FY 2002 and beyond.

In the last few months, four other projects have passed important milestones as defined

in the ELC methodology being used for all projects:

• The Customer Relationship Management (CRM) Examination project will be the first

system to use commercial applications software, allowing IRS examiners of corporate

income tax returns to compute taxes accurately. It completed Milestone 2 on July 10,

2000. Milestone 2 establishes a project concept, its requirements, and design

elements, as a solution for a specific business area or system. A preliminary business

case has been produced.

• The e-services project will accelerate our ability to meet the overall goal of converting

most transactions with taxpayers and their representatives to electronic form. This

project completed Milestone 2 on August 8, 2000, and it will be the first project to be

developed using the competitive solution selection method.

• The Customer Account Data Engine (CADE) project is the most critical building block

in the entire program. CADE will replace the 35 year-old “master file” system, which

contains the authoritative record of all taxpayer accounts. Milestone 2 was completed

on August 8, 2000.

• The Custodial Accounting Project (CAP) will provide the capability to maintain

required financial accounting controls over the approximate $2 trillion of tax revenue

received each year. It received qualified approval to proceed to Milestone 4 on August

4, 2000, and on September 5, 2000, received Executive Steering Committee.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Status Of Implementation (continued)

approval to request release of ITIA funds for the first of four build segments. The

business solution is built in Milestone 4. The system will be integrated with other

business systems, tested, and piloted. The system will then be prepared for deployment

at its intended sites.

In addition, important progress has been made on key infrastructure projects that are

required to support the business systems projects.

Enterprise Vision and Architecture – Subsequent to completion of the Investment

Decision Management (IDM) process and the updated enterprise vision and

architecture, an analysis will be done to develop migration plans and to propose

possible priorities and sequences for all further projects. This plan will be developed

and the prioritization decisions considered in time to continue progress beyond the

currently planned project deliverables in FY 2001 and FY 2002. This planning will be a

key part of the ongoing IDM.

Funding

Funding for the program is provided through the ITIA. This entails four distinct

procedures, each with its own set of steps and organizational components:

appropriations, funding releases, approval from the Core Business Systems Executive

Steering Committee, and contracting.

Through the end of FY 2000, Congress has appropriated $506 million of which $249

million has been released and $200 million has been obligated. Funding releases are

requested through submission of expenditure plans that outline necessary funding with

justification. Expenditure plans address and comply with all requirements and

recommendations from oversight bodies relative to content and format. Expenditure

plans are approved by Treasury and the Office of Management and Budget (OMB) prior

to IRS submission to Congress; a copy of the plan is provided to the General

Accounting Office (GAO) for review concurrent with the delivery to Congress. The first

funding release was in June, 1999 ($35 million), followed by releases in December,

1999 ($33 million), April, 2000 ($148 million), and September, 2000 ($33 million).

For FY 2001, Congress has appropriated an additional $72 million. In November 2000,

IRS received congressional approval for the release of $200 million. This will provide full

fiscal year funding for program level activities and full funding for approved projects to

exit in the next milestone. After completion of the IDM process, IRS plans to submit a

second FY 2001 expenditure plan in February, 2001 to request funds for projects

selected through the IDM process.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Customer Service

In FY 2000, Customer Service again initiated significant enhancements to its telephone

technology, quality review systems, and training programs. Toll-free taxpayer service

continued to be offered 7 days per week, 24 hours per day (7/24), and new services

were installed to allow taxpayers to discuss tax law inquiries with skilled IRS employees

through electronic mail. Also, Intelligent Call Routing (ICR) technology was in place

nationwide to direct a taxpayer’s call, regardless of the taxpayer’s location, to a skilled,

first available assistor or to a menu of recorded scripts. Customer Service met its goal

(58.5%) of answering incoming calls from taxpayers, delivering a level of service of

60.6% as opposed to the FY 1999 level of 53.3%. This increase of 7.3% resulted from

better call routing, and better assistance provided on a first call, eliminating many repeat

callers. The reduction in demand for assistance declined by 27.4%, and a decline in

notice issuance also contributed to the increased level of service.

Due to a change in the way the IRS evaluates the quality of a contact in FY 2000, the

accuracy rating for tax law inquiries continued to drop with a FY 2000 rate of 72.6% as

compared to the FY 1999 rate of 74.1%. In FY 2000, the methodology for determining a

right or wrong answer changed (In prior years an answer was wrong if it had an adverse

impact on a customer; however, for FY 2000 quality was evaluated against the correct

use and following the Internal Revenue Manual (IRM) any deviation from procedures

was considered an error.) resulting in this significant increase in the error rate for both

tax law and account inquiries. Improvements in the quality rates for both tax law and

account related inquiries are not expected to improve significantly in FY 2001 due to the

introduction of the new IRM 21, Chapter 10, and the specialization associated with the

change to the new business units.

Throughout FY 2000, Customer Service continued to simplify notices and written

correspondence with taxpayers and to promote the use of telephone communication in

resolving taxpayer inquiries. The volume of taxpayers seeking assistance at walk-in

taxpayer service sites decreased approximately 5% in FY 2000 resulting in a decrease

of about 500,000 forms distributed. A review of Forms Distribution in both the walk-in

sites and telephone request lines provides some indication that taxpayers are securing

forms through other avenues including the IRS website. Website hits are up 26.2% for

FY 2000 as compared to FY 1999 figures. During FY 2000, the IRS expanded its use of

the multi-lingual interpreter service through the use of the Over-The-Phone Interpreter

Service (OPI).
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Customer Service (continued)

The Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE)

programs, devoted more than 2.2 million hours in assisting more than 3.8 million

taxpayers at more than 18,000 volunteer sites nationwide. FY 2000 also saw a

continued expansion of community based educational activities to help taxpayers meet

compliance requirements with 60 sponsoring organizations assisting 1.7 million of the

elderly using grants totaling $3.95 million.

Other Customer Service initiatives in FY 2000 included toll-free Spanish-speaking

telephone assistance, taxpayer education concerning powers of attorney, and

improvements in the processing timeliness for these taxpayer authorizations. Expanded

intranet resources provided Customer Service Representatives with online access to tax

law references and taxpayer account data in resolving taxpayer inquiries. Electronic

Tax Law Assistance, which offered taxpayers access to tax law specialists through the

internet was expanded. Customer Service also continued the development of customer

satisfaction surveys and used survey results to improve services.

Submission Processing

The IRS receives and processes electronic and paper tax returns and payments to

collect approximately $2 trillion dollars annually. In FY 2000, Submission Processing

conducted another successful filing season processing 212 million primary returns and

issuing 92 million individual refunds. The Service continued its efforts to make it easier

for taxpayers to file their tax returns by providing access to alternative means of filing

such as home computers or telephones and providing access to authoritative guidance

through the award winning “The Digital Daily.” The Service also continued its efforts to

develop tax forms that are easier to understand and prepare. For example, instead of

completing Schedule D (Form 1040), approximately 6 million taxpayers whose only

capital gains were from capital gain distributions used a shorter worksheet in the Form

1040 instructions to figure their tax liabilities. The instructions for the earned income tax

credit (EITC) and the child tax credit (CTC) were also revised to enable taxpayers to

navigate more confidently through the qualification and computation explanations.

“The Digital Daily,” continues to be extremely popular. During the January through

April 2000 filing season, the website received more than 968 million “hits” (information

accesses) compared to over 767 million for the same period in 1999. There were 104

million downloaded files in the January to April 2000 period, up from 57 million

downloaded during the same period in 1999. The IRS website provided numerous

services including the following:
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Submission Processing (continued)

Notice Information on the Web – “Frequently Asked Questions” addressed ten common

IRS notices that are currently on the website. The website answers such questions as

why the taxpayer received the notice, what the taxpayer needs to do to resolve the

issue, and what the taxpayer should do to avoid the problem in the future.

Offer in Compromise (OIC) – Certain wage earners and/or self-employed individuals

could use a new application to determine their eligibility for an OIC. If eligible, taxpayers

can complete a financial statement, a worksheet, and an offer contract on line.

On-line Installment Agreement – Delinquent taxpayers meeting IRS criteria were

allowed to use the website to initiate a payment agreement on overdue taxes. This

application was designed to complete the agreement with secure taxpayer data on the

taxpayer’s personal computer, not on the IRS website. The taxpayer then had the option

of printing, signing and either faxing or mailing the completed agreement to the IRS at

the address provided. Taxpayers still had the option of coming to an office to make

agreements, but this online option reduced the walk-in taxpayer service traffic and

telephone time devoted to installment agreements.

Expanded On-Line Customer Service – Expanded use of online customer service

technologies, such as the “Mailman” application that allows taxpayers to submit

questions to Customer Service Representatives on the website and receive responses

via e-mail, provides greater customer access to IRS help while on “The Digital Daily.”

Questions received via e-mail are similar to those received by telephone in that they can

cover a range of topics from tax law, questions about a specific account, or to request

guidance about a specific issue on a tax form.

In a unique partnership of a federal agency and a non-profit organization, the IRS and

the National Center for Missing and Exploited Children showcased photographs of

missing children in IRS products. The IRS initiated the project, resulting in 240 pictures

on 750 million pages that would have otherwise been blank. The vast circulation of IRS

products provides the optimum opportunity to increase national awareness about

missing children.

The mission of Electronic Tax Administration (ETA) is to revolutionize how taxpayers

transact and communicate with the IRS. A record setting 35.4 million individual

taxpayers, or over 20% more than in 1999, filed using one of the three convenient e-file

options: 25.2 million taxpayers filed their tax returns electronically through an IRS

authorized Electronic Return Originator (ERO); an 18.8% increase over the same period
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Submission Processing (continued)

last year. On-line filing skyrocketed as over 5 million taxpayers filed their tax returns online via their home computers through a third party transmitter, an increase of 104.0%

over last year. 5.2 million taxpayers filed their returns over the telephone using the

TeleFile system. In the 35 states and the District of Columbia that participate in a joint

federal/state e-file initiative, receipts grew 36% to 12 million taxpayers. In spite of the

significant increase in most key ETA programs in FY 2000, TeleFile decreased 9% due

to the changes in tax laws such as the student loan interest deduction and education

credit which made many taxpayers ineligible for the program. Current IRS projections

of electronic filing patterns indicate that the IRS must do more to meet the goals

established by Congress in RRA 98.

Seven million taxpayers filed paperless tax returns as ETA continued its Practitioner

Personal Identification Number (PIN) and e-file Customer Number Pilots (CNP) for the

second year in a row. These pilots involved the use of PINs as the taxpayer’s signature,

eliminating the need to file the paper jurat as e-filing currently requires.

Taxpayer use of electronic payment options increased significantly. Through September

2000, direct debit payments totaled 237,000, this was a 212% increase over last year

when taxpayers authorized either their checking or savings accounts to be debited.

Additionally, credit card payments increased to 209,000, an increase of 264% over

1999.

Over 3 million businesses, including 2.4 million volunteers, are now enrolled in the

Electronic Federal Tax Payment System (EFTPS) and depositing 94% of employment

tax dollars electronically. EFTPS will soon be piloting an internet website that allows

paperless enrollment, on-line payments, on-line research, and customer service.

Compliance

Criminal Investigation

Criminal Investigation (CI) is the premier financial investigative organization in the world.

It is an organization of dedicated, talented and hardworking individuals who carry out

their law enforcement responsibilities in a professional, courteous manner.

During FY 2000, CI developed a new mission statement, which reads: “CI serves the

American public by investigating potential violations of the Internal Revenue Code and

related financial crimes in a manner that fosters confidence in the tax system and

compliance with the law.”
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

 Compliance

Criminal Investigation (continued)

One of the most important steps undertaken in CI’s modernization plan was the

development of the Interim Compliance Strategy. The Strategy is a critical component of

a balanced enforcement program that is designed to promote tax compliance, address

significant emerging areas of fraud, and support national crime initiatives. The Strategy

outlines CI’s commitment to develop and investigate legal source tax investigations.

These tax investigations involve legally earned income in which the primary motive is

the violation of tax statutes. In addition, CI played an important role in development of

the National Money Laundering Strategy. This Strategy was jointly endorsed by the

Department of the Treasury and the Department of Justice and will require the financial

expertise of CI special agents in joint, multi-agency investigations. As the future unfolds,

CI will continue to deploy new technology and a highly skilled workforce aimed at

serving the American public.

Examination

The Service’s response to the increased sophistication of transactions in the financial

world and specialization in the business community is reflected in the cooperatively

developed Market Segment Specialization Program guidelines. The guidelines focus on

the practical problems that occur while examining the tax returns of a specific market

segment, such as the construction industry or a specialized profession such as real

estate agents. In identifying particular issues of interest to the IRS and sharing this

information with professional groups and industry specific associates, employers and

employees in these groups and industries gain greater insight into IRS concerns.

Through September 2000, the Service issued 57 Market Segment guidelines that may

be obtained through the Government Printing Office. In addition, 54 of the guidelines

are also available on “The Digital Daily” at www.irs.gov in the Tax Info for Business

section.

In response to the Service's emphasis on customer service, employees from the

Examination organization provided substantial support to Customer Service programs.

During the FY 2000 filing season, Examination employees expended over 1,000,000

hours on customer service duties, an increase of approximately 26.0% over the prior

year. The support consisted largely of telephone calls answered through the Referralmail (R-mail) system, questions answered through Electronic Tax Law Assistance

(ETLA), return preparation, and technical tax law assistance in Walk-In offices. This

level of support coupled with the demand for subject matter experts in many areas of

modernization development were key factors in the inability for Examination to meet

many of its key performance goals particularly in the closed case and overage areas.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Compliance

Examination (continued)

In an effort to improve quality, communications, and consistency of complex interest

computations, the Service is developing a Complex Interest Quality Measurement

System (CIQMS). The system will allow for a continuous sampling of interest

computations for review by interest experts. The results of these reviews will be

maintained in a database for monitoring, establishing base lines, and stratifying results.

The information can be used when developing training materials, issuing directives,

updating IRMs, obtaining counsel advice, and requesting legislative initiatives. The IRS

has developed the quality standards, database, and report program for this initiative and

has tested these with three independent reviews on closed cases. A methodology for

identifying a random sample is currently being developed and resources for establishing

permanent sites are being requested.

In partnership with private industry, IRS developed the Tip Rate Determination and

Education Program, referred to as the “Tip Initiative,” to assist employers and

employees in complying with statutory provisions relating to tip income. The initiative

includes two voluntary agreements, the Tip Rate Determination Agreement (TRDA) and

the Tip Reporting Alternative Commitment (TRAC). These two alternatives benefit the

employer, employee, and the IRS. Employers can choose to participate in either one of

these agreements.

Tip reporting commitments/agreements provide for a non-burdensome method to help

employers and employees in industries where tipping is customary to accurately report

their tip income. These two initiatives emphasize education as the means to improve

voluntary compliance, without the need of traditional enforcement actions, such as tip

examinations. The benefit to employers is that significant unplanned tax liabilities will

not be assessed against them. Employees benefit from the increased income reported

to their Social Security Administration accounts, the increased payments of Federal

Unemployment Tax on their behalf, and the increased contributions to their retirement

plans. In addition, increased income may improve their financial picture when applying

for mortgage, car, and other loans. To date, IRS has received approximately 1,252

TRDA agreements, representing 2,687 establishments and 10,902 TRAC agreements

covering 32,396 establishments.

 The IRS is finalizing changes to the new and revised tip agreements. Five voluntary

agreements were published in proposed form in Notice 2000-19 Internal Revenue

Bulletin (I.R.B.) in May 2000.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Compliance

Examination (Continued)

1. A revised TRAC agreement for use in the cosmetology and barber industry

2. A revised TRAC agreement for use in the food and beverage industry

3. A revised TRDA for use in the food and beverage industry

4. A new TRAC agreement for use in other industries where tipping is customary

5. A new TRDA agreement for use in other industries where tipping is customary

In addition to the agreements mentioned above, the Service announced a new

program, EmTRAC (Employer designed TRAC). Taxpayers in the food and beverage

industry have expressed interest in designing their own TRAC programs. Notice 2000-

21, 2000-19, Internal Revenue Bulletin (I.R.B.) 967, announced the proposed

requirements and procedures for obtaining approval of an employer-designed

EmTRAC program. Notice 2000-21 also offered interested persons the opportunity to

comment on the proposed program. Once approved, restaurant employers will receive

the same benefits and protections as afforded under the IRS administered TRAC

voluntary compliance agreements.

Collection

The impact of RRA 98 on the IRS continues to be extensive, changing many aspects of

the collection process. During FY 2000 Collection developed additional training

materials, updated procedural manuals, and centralized OIC processing to minimize

taxpayer burden, improve service delivery, and enhance all facets of customer contact.

With the IRS’ continued focus on customer service, Collection again provided

substantial support to Walk-In taxpayer service in FY 2000. Collection continued to

support the Walk-In operation in field offices, providing 400,000 hours of professional

support, an increase of 37.8% over FY 1999 to ensure that walk-in customers are

served timely and efficiently. To address dwindling resources and increasing workload,

Collection has continued to develop systems that prioritize the work and allocate

resources, direct work to the right employee at the right time, predict a taxpayer's ability

to make payment on a tax liability, and remove inventory cases that are deemed

unproductive.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Compliance

Collection (continued)

Collection increased its effort to alleviate increasing inventory levels and address

concerns by outside stakeholders with respect to OIC processing by piloting a

centralized OIC process. Centralization is designed to remove the less complex and

lower dollar OICs from an OIC specialist inventory and assign them to examiners in a

centralized location. This allows the specialist to focus on those cases that require more

technical expertise and improve timeliness of OIC processing. Timeliness of OIC

processing continues to be a concern, with results declining sharply and steadily over

the past three years. Although the number of hours devoted to the offer program

increased, 49.6% in FY 2000 (compared to FY 1999), inventory levels continued to

escalate because OIC receipts continued to outpace dispositions (i.e. offers accepted,

rejected, returned, and withdrawn).

In the last three years, there has been a general decline in Collection field function case

dispositions and enforcement activities (seizures, issuance of liens, levies). As of

September FY 2000, compared to the same period last fiscal year, Taxpayer

Delinquency Account (TDA) (excluding systemic Currently Not Collectible (CNC) and

Taxpayer Delinquency Investigation (TDI) dispositions have declined 9.0% and 13.7%,

respectively. The percentage of overage cases increased 5.4% for TDAs and 1.6% for

TDIs, in September of FY 2000 as compared to September FY 1999. These declines

can be traced to a decrease in staffing and an increase in the number of employees

providing assistance to other functions such as Customer Service, resulting in fewer

employees available to work Collection cases. The continued shift in work priorities in

Collection is also a factor. Collection continued to provide service to taxpayers that

initiated contact in areas such as OIC, Bankruptcy, Foreclosures and Liens. This shifted

resources away from the traditional cases such as TDAs and TDIs. For example, since

FY1996, staff hours devoted to TDAs have steadily declined from 11,000,000 to

8,000,000 and for TDIs from 1,000,000 to 300,000. The downward trend is expected to

continue through FY 2001. Collection continues to collaborate with Examination to

enhance the Innocent Spouse program. The Innocent Spouse Handbook, the end

product of a cross-functional task group convened in FY 1999, was completed. In

addition, Collection updated the Integrated Collection System (ICS) to automatically

upload and download Innocent Spouse transaction codes and tracking information that

enables Collection employees to identify active innocent spouse claims associated with

accounts. Collection is currently working with Corporate Education to train employees

on a new transaction code created for Innocent Spouse cases. This new code is

scheduled for pilot in January 2001. 
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Compliance

Employee Plans and Exempt Organizations (Superseded by Tax-Exempt and

Government Entities Division (TE/GE))

FY 2000 saw the successful stand-up of the new Tax-Exempt and Government Entities

Division (TE/GE). This effort entailed the transfer of 1,900 former Employee Plans (EP)

and Exempt Organizations (EO) employees to TE/GE and the selection of a new senior

leadership team. The TE/GE division will continue to serve the tax administration needs

of EP and EO customers. In addition, new organizational components will address the

specialized needs of Government Entities’ customers and provide dedicated telephone

and correspondence assistance to all TE/GE customers. New programs developed

within each customer segment reflect the organization’s increased emphasis on

Customer Education and Outreach and Voluntary Compliance.

TE/GE Customer Service oversight was transferred to the Director, Customer Account

Services (CAS). CAS maintained a high level of service in the face of a doubling call

demand, answering an additional 113,000 calls through September. During FY 2000,

CAS began to recruit and train additional assistors in anticipation of an increased call

demand in FY 2001.

A Government Entities’ office was established to address the needs of customers

previously served – federal, state, and local governments; Indian tribal governments;

and Tax Exempt Bonds (TEB). This organization has already established partnerships

with major stakeholders and developed new outreach materials.

Meanwhile, efforts to centralize determination letter processing for EP and EO

customers in Cincinnati, Ohio, continued in FY 2000. Building on survey responses,

TE/GE completed a customer satisfaction pilot project in connection with the

determination letter process leading to the adoption of many recommendations for

improving customer information. Among other changes, the Determination Request

Acknowledgement Notice was revised and a new notice piloted to inform customers of

the status of their application and to allow them to contact the IRS employee working

their case directly.

During FY 2000, TE/GE initiated the Service’s first Operating Division Partnership

Council with the National Treasury Employees Union (NTEU), reinforcing its

commitment to productive and cooperative labor-management relations.

TE/GE continued to promote compliance through its traditional determination letter and

examination programs as well as through new voluntary compliance initiatives.

Employee Plan voluntary correction activities were organized into a distinct program

with Rulings and Agreements, while the Partnerships for Compliance program provided
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Compliance

Employee Plans and Exempt Organizations (Superseded by Tax-Exempt and

Government Entities Division (TE/GE) (continued))

educational information to help increase understanding and compliance with the tax law

applicable to 403(b) tax-sheltered annuities.

Another major accomplishment this year was the prompt addressing of new notice and

reporting requirements for Section 527 political organizations. TE/GE quickly developed

new filing procedures and issued guidance to affected customers. A revenue ruling on

the reporting requirements for Section 527 organizations was issued as well as a new

release announcing the creation of the first completely internet-based filing option being

offered by the IRS. The electronic filing option arrives just four months after the new law

imposed filing and reporting requirements on these organizations, and in time for the

post-general election filing due on December 7, 2000.

International

International administers U.S. international tax laws, encourages the highest degree of

voluntary compliance involving international tax matters, and is responsible for all of

IRS’ various international tax activities. Tax administration advisory assistance to other

countries is facilitated through project teams, training, and the international visitors

program. Specifically, during FY 2000, International hosted 281 foreign visitors to IRS

during 53 visits, and continued providing in-country assistance to the Republic of

Georgia, Greece, Turkey, and Russia.

The number of tax returns electronically filed from overseas U.S. taxpayers grew during

FY 2000 with 104,300 returns filed electronically as compared to 103,000 for FY 1999.

Electronic filing sites for embassy employees have been set-up in Ottawa and Manila.

E-filing software has been distributed to over 400 military installations overseas and in

the U.S. International is continuing its work with ETA to bring e-filing to eligible returns

from Puerto Rico. International also oversees tax treaties and tax information exchange

agreements on behalf of the U.S. government through the competent authority process.

In FY 2000, International continued two long-term technical assistance projects in

Greece and Puerto Rico, providing on-site assistance in the areas of examination,

collection, communications, strategic planning, customer service, and internal audit. In

early FY 2000, another long-term project was initiated in Trinidad and Tobago. This

project focuses on examination, information systems, large case audits, strategic

planning, and organizational structure. Short-term assistance during FY 2000 included
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

PROGRAMMATIC HIGHLIGHTS

Compliance

International (continued)

missions to South Africa (Statistics of Income), Republic of Georgia (organizational

structure), Puerto Rico (information systems), and the Ukraine (gaming industry

auditing). International also worked with the Treasury Assistance Program (TAP) to help

staff other projects in Romania, Macedonia, the Ukraine, and the Republic of Georgia.

In conjunction with the United States Agency for International Development (USAID),

International also participated in a needs assessment of the Tanzania Revenue

Authority. USAID is expected to fund a long-term project in Tanzania based upon this

assessment in FY 2001.

Office of Chief Counsel

In FY 2000, much of Counsel's work continued to be focused on pre-filing activities that

help taxpayers comply with the tax laws. Pre-filing activities by Counsel attorneys

include guidance and assistance work such as: regulations, revenue rulings, revenue

procedures, legislation, private letter rulings, and advance pricing agreements. Most of

the guidance work in Counsel continues to be done by the functions located in the

National Office, and since most work on RRA 98 issues was done by the National Office

functions, some guidance and assistance time was diverted to address these issues.

Counsel attorneys also continued to represent the Commissioner in docketed cases in

the United States Tax Court, and provided advice and support in other litigation cases

and related matters.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

5. SYSTEM CONTROLS AND LEGAL COMPLIANCE

The IRS is providing “qualified assurance” that internal control systems are adequate

and effective in achieving the objectives of the Financial Manager’s Financial Integrity

Act (FMFIA). The qualified assurance is based on our identification of material

weakness and national significant control deficiencies that have been addressed by

corrective action plans. As part of the FMFIA reporting, three national significant control

deficiencies and one material weakness have been closed. In addition, IRS reported

under the Federal Financial Management Improvement Act (FFMIA) that financial

management systems do not substantially comply with the FFMIA. Plans are being

revised to resolve material weaknesses causing this condition, and the initiatives

associated with these plans will be contained in Blueprint 2000, as appropriate.

To focus top level efforts on correction of control weaknesses, the Deputy

Commissioner established the Financial and Management Controls Executive Steering

Committee (FMC ESC), which he chairs. The ESC, which is made up of Division

Commissioners and the Chief Financial Officer, has initiated a variety of actions to

address financial and management control issues in the Service.

As an example, the FMC ESC is making a concerted effort to address long-term issues

related to property and security using subcommittees for each of these areas. The two

subcommittees formed under the FMC ESC are Property and Equipment (P&E) and

Security. Both coordinate the agency-wide improvement in these areas. The P&E

Subcommittee will reengineer our business processes, establish a common identifier to

link system information, develop a replacement property system, and establish a

comprehensive inventory strategy. The Security Subcommittee will follow-up and

provide periodic reports to address current deficiencies and develop an overall longterm approach for security to identify issues, determine their impact, and prioritize

corrective actions.

 The FMC ESC is addressing control issues by focusing corrective action efforts on these

identified high priority areas and by developing new and innovative solutions to address

continuing problem areas. Additionally, all aspects of prioritization of business solutions

and monitoring of planned corrective actions are accomplished by the Deputy

Commissioner and other senior executives.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

6. FUTURE EFFECTS OF EXISTING, CURRENTLY-KNOWN DEMANDS, RISKS,

 UNCERTAINTIES, EVENTS, CONDITIONS AND TRENDS

Management Challenges and High Risks

The IRS faces many challenges and opportunities as it modernizes, including

implementation of the RRA 98. The IRS is creating a modernized structure built around

taxpayer needs. This structure includes revamped business practices, four operating

divisions that focus on customer needs, management roles with clear responsibility,

balanced measurements of performance, and new technology. Over the last several

years, the GAO and TIGTA have issued reports identifying management challenges and

high risk areas within the IRS. The new management structure and technology focus,

created as part of IRS’s modernization effort, is designed to address and reduce these

high risks and mitigate their chance of occurring in the future. The following list

summarizes these challenges and risks as of 9/30/00: Tax Filing Fraud; Systems

Modernization Efforts; Receivables; Financial Management; Improve Security Controls

Over Information Systems; Customer Service; Impact of Global Economy on Tax

Administration; and Modernization of the IRS—Organizational Restructuring, Revenue

Protection, and Implementation of the GPRA.

Most Unpaid Assessments Are Not Receivables And Are Largely Uncollectible

As reflected in the supplemental information to IRS' fiscal year 2000 Financial

Statements, the unpaid assessment balance was about $240 billion as of September

30, 2000. This unpaid assessment balance represents assessments resulting from

taxpayers filing returns without sufficient payment; as well as from the Service’s

enforcement programs such as Examination, Underreporter, Substitute for Return, and

Combined Annual Wage Reporting. A significant portion of this balance is not

considered a receivable. Also, a substantial portion of the amounts considered

receivables is largely uncollectible.

Under federal accounting standards, unpaid assessments require taxpayer or court

agreement to be considered federal taxes receivable. Assessments not agreed to by

taxpayers or the courts are considered compliance assessments and are not considered

federal taxes receivable. Assessments with little or no future collection potential are

called write-offs.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

FUTURE EFFECTS OF EXISTING, CURRENTLY-KNOWN DEMANDS, RISKS,

 UNCERTAINTIES, EVENTS, CONDITIONS AND TRENDS

Management Challenges and High Risks (continued)

Exhibit 4 depicts the components of the unpaid assessments balance as of September

30, 2000.

Exhibit 4: Components of IRS'

$240 Billion of Unpaid Assessments

 

Of the $240 billion balance of unpaid assessments, $129 billion represents write-offs.

Write-offs principally consist of amounts owed by defunct taxpayers, including many

failed financial institutions resolved by the Federal Deposit Insurance Corporation

(FDIC) and the former Resolution Trust Corporation (RTC). The remaining amounts

consist of amounts owed by taxpayers with extreme economic and/or financial

hardships, deceased taxpayers, and taxpayers left insolvent due to bankruptcy.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

FUTURE EFFECTS OF EXISTING, CURRENTLY-KNOWN DEMANDS, RISKS,

 UNCERTAINTIES, EVENTS, CONDITIONS AND TRENDS

Management Challenges and High Risks (continued)

Exhibit 5 depicts the components of the write-off balance as of September 30, 2000.

Exhibit 5: Components of IRS' 

$129 Billion of Write-offs

 

In addition, $30 billion of unpaid assessments represent amounts that have not been

agreed to by either the taxpayer or a court. These assessments result primarily from the

Service’s various enforcement programs to promote voluntary compliance. Due to the

lack of agreement, these compliance assessments are less likely to have potential for

future collection than the unpaid assessments that are considered federal taxes

receivable.

The remaining $81 billion of unpaid assessments represent federal taxes receivable.

About $59 billion (73%) of this balance is estimated to be uncollectible due primarily to

the taxpayer's economic situation, including individual taxpayers who are unemployed,

are currently in bankruptcy, or have other financial problems. However, IRS may

continue collection action for 10 years after the assessment or longer under certain IRS

conditions. Thus, these accounts may still ultimately have some collection potential if

the taxpayer's economic condition improves.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

FUTURE EFFECTS OF EXISTING, CURRENTLY-KNOWN DEMANDS, RISKS,

 UNCERTAINTIES, EVENTS, CONDITIONS AND TRENDS

Management Challenges and High Risks (continued)

About $22 billion, or about 27%, of federal taxes receivable is estimated to be

collectible. Components of the collectible balance include installment agreements with

estates and individuals, confirmed payment plans through bankruptcy, as well as

relatively newer amounts due from individuals and businesses who have a history of

compliance. The taxes receivable amount from September 30, 1999, to September 30,

2000, increased $4 billion, from $77 billion to $81 billion. However, the percent

estimated to be collectible at September 30, 2000 (27%), was the same as September

30, 1999.

Exhibit 6 depicts the taxes receivable balance that is considered collectible and

uncollectible as of September 30, 2000.

Exhibit 6: Components of IRS' 

$81 Billion of Taxes Receivable

 

It is also important to note that the unpaid assessment balance consists of the unpaid

assessed tax, penalty and interest, as well as accrued penalty and interest computed

through September 30, 2000. About $154 billion (64%) of the unpaid assessment

balance as of September 30, 2000, represents interest and penalties, as depicted in

Exhibit 7, which are also largely uncollectible.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

FUTURE EFFECTS OF EXISTING, CURRENTLY-KNOWN DEMANDS, RISKS,

 UNCERTAINTIES, EVENTS, CONDITIONS AND TRENDS

Management Challenges and High Risks (continued)

Exhibit 7: Unpaid Taxes and Interest

and Penalty Components of $240

Billion in Unpaid Assessments

 

Interest and penalties are such a high percentage of the balance because IRS must

continue to accrue them through the 10-year statutory collection date, regardless of

whether an account meets the criteria for financial statement recognition or has any

collection potential. For example, interest and penalties continue to accrue on writeoffs, such as FDIC and RTC cases, as well as on exam assessments where taxpayers

have not agreed to the amount assessed. The overall growth in unpaid assessments

during fiscal year 2000 was mostly attributable to the accrual of interest and penalties.

Trends, Issues, Problems

Success in achieving IRS’s mission, goals, and objectives is influenced by the

environment in which we operate and determines the strategies we use to achieve our

goals. Each of the IRS’s major organizational units conducted an assessment of their

internal and external environment to identify trends, issues, and problems (TIPS) that

were affecting business operations. They identified dozens of TIPs and developed

strategies to address them. The most significant TIPs have been organized around

twelve themes: Service to Taxpayers; Communication with Taxpayers; Pre-filing

Agreements; Electronic Tax Administration; Complexity of the Tax Law; Global Trading;

Compliance Services; Areas of Low Compliance; Measuring Compliance; Human

Resources Issues; Technology in Support of Business Operations; and Shared Services

in Support of Business Operations.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

FUTURE EFFECTS OF EXISTING, CURRENTLY-KNOWN DEMANDS, RISKS,

UNCERTAINTIES, EVENTS, CONDITIONS AND TRENDS

Trends, Issues, Problems (continued)

For the IRS to better understand the problems experienced by its customers, the

Taxpayer Advocate Service (TAS) reported on its “20 most severe problems list,” as

presented in the FY 2000 Annual Report to Congress. This listing was compiled through

TAS casework data as well as input from the Citizen Advocacy Panels, the opinions of

the external stakeholder groups, and finally the internal stakeholders. Complexity of tax

law remains the number one problem facing taxpayers, and it is the root-cause of many

of the other problems on the “Top 20” list. Topping the list in this year’s report are:

1)complexity of individual tax law; 2) complexity of business tax law; 3) clarity and tone

of IRS correspondence; 4) inability to access toll-free number; 5) burden on small

business; 6) administration of earned income tax credit; 7) lack of one-stop service; 8)

lack of acknowledgement of correspondence payments; 9) penalty administration; and

10) processing issues with the OIC program. Each reported problem is assigned an

action plan, and success in resolving the problems is measured by a system of periodic

reports and reviews conducted by senior IRS leadership.
INTERNAL REVENUE SERVICE

Management Discussion and Analysis

For the Fiscal Year Ended September 30, 2000

7. FINANCIAL STATEMENTS

The IRS approach to completing its FY 2000 financial statements is primarily the same

as it was in FY 1999. The only exception is in the Property and Equipment area.

Previously, in FY 1999, since pertinent data was unavailable, estimated net book value

was determined based on estimates derived statistically from a sample of assets. For

FY 2000, ADP and telecommunication equipment acquired after September 30, 1999,

will be recorded at cost. Also, for FY 2000, depreciation on these assets is calculated

with a half year depreciation taken in the year of acquisition.

Audit Opinion

Due to the combined efforts of the IRS and GAO, the GAO auditors, have rendered an

“unqualified" or clean opinion on all of the IRS’s financial statements (both revenue and

administrative). This means that the IRS could properly account for our total

appropriated dollars of over $8 billion, its revenue collections of over $2 trillion, and its

refunds of over $190 billion. Our success can be greatly attributed to the hard and

dedicated work of our staff, our significant improvements made to IRS’ internal controls,

and the management level focus we have placed on the audit.

Limitations to the Financial Statements

 The financial statements have been prepared to report the financial position and results

of operations of the IRS pursuant to the requirements of 31. U.S.C. 3515(b). While the

statements have been prepared from the books and records of the IRS in accordance

with the formats prescribed by OMB, the statements are in addition to the financial

reports used to monitor and control budgetary resources which are prepared from the

same books and records. The statements should be read with the realization that they

are for a component of the U.S. Government, a sovereign entity. One implication of this

is that liabilities cannot be liquidated without legislation that provides resources to do so.

Department of the Treasury

Internal Revenue Service

•

Financial Statements and Notes

•

Fiscal Year 2000

The accompanying notes are an integral part of these statements

Department of the Treasury

Internal Revenue Service

Balance Sheet

As of September 30, 2000

(In Millions)

ASSETS

Intragovernmental:

Fund balance with Treasury and cash (Note 2) $ 2,008

Due from Treasury (Note 12) 1,040

Accounts receivable, Net (Note 3) 11

Advances to government agencies 163

Total Intragovernmental 3,222

With the Public:

Federal Taxes receivable, net of

Allowance for doubtful accounts of $59,000 (Notes 5, 12) 22,000

Accounts receivable, Net (Note 3) 4

Advances to the public 14

Other assets (Note 4, 12) 93

Total with the Public 22,111

Property and equipment, Net (Note 6) 1,266

Total Assets $ 26,599

LIABILITIES

Intragovernmental:

Due to Treasury (Notes 5, 12) 22,000

Accrued expenses (Note 7) 71

Other liabilities (Note 8) 87

Total Intragovernmental 22,158

Federal tax refunds payable (Note 12) 1,040

Accounts payable (Note 7) 43

Accrued expenses (Note 7) 513

Other liabilities (Note 8) 909

Capital lease liability (Note 9) 21

Contingencies (Note 10) 12

Total Liabilities $ 24,696

NET POSITION

Net Position (Note 11) 1,903

Total Liabilities and Net Position $ 26,599
The accompanying notes are an integral part of these statements

Department of the Treasury

Internal Revenue Service

Statement of Net Cost

For the Fiscal Year Ended September 30, 2000

(In Millions)

Program

Full Cost

Exchange

Revenue

Net Cost of

Operations

Submission Processing

Telephone and Correspondence

Taxpayer Advocate Service

Document Matching

Criminal Investigation

Examination

Collection

Tax Exempt/Government Entities

Statistics of Income

Chief Counsel

$ 1,561

1,955

152

105

628

2,852

1,069

226

45

341

$ (9)

(81)

-

-

(56)

(17)

(4)

(32)

(1)

(11)

$ 1,552

1,874

152

105

572

2,835

1,065

194

44

330

Subtotal $ 8,934 $ (211) 8,723

Net Cost of Operations (Note 17) $ 8,723
The accompanying notes are an integral part of these statements

Department of the Treasury

Internal Revenue Service

Statement of Changes in Net Position

For the Fiscal Year Ended September 30, 2000

(In Millions)

Net Cost of Operations $ 8,723

Financing Sources (other than exchange revenue)

Appropriations used 8,344

Transfers to General Fund and other (48)

Imputed financing 396

Total Financing Sources 8,692

Net Results of Operations (31)

Net Change in Cumulative Results of Operations (31)

Decrease in Unexpended Appropriations (Note 11) (179)

Change in Net Position (210)

Net Position – Beginning of Period – Restated (Note 11) 2,113

Net Position – End of Period $ 1,903
The accompanying notes are an integral part of these statements

Department of the Treasury

Internal Revenue Service

Statement of Budgetary Resources

For the Fiscal Year Ended September 30, 2000

(In Millions)

Budgetary Resources

Budget authority $ 8,319

Unobligated balances – beginning of period - Restated (Note 11) 933

Spending authority from offsetting collections 107

Adjustments (12)

Total Budgetary Resources $ 9,347

Status of Budgetary Resources

Obligations incurred $ 8,556

Unobligated balances – available (Note 11) 346

Unobligated balances – unavailable (Note 11) 445

Total Status of Budgetary Resources $ 9,347

Outlays

Obligations incurred $ 8,556

Less: Spending authority from offsetting collections and adjustments (180)

Obligated balance, net – beginning of period – Restated (Note 11) 1,240

Less: Obligated balance, net – end of period (1,232)

Total Outlays $ 8,384
The accompanying notes are an integral part of these statements

Department of the Treasury

Internal Revenue Service

Statement of Financing

For the Fiscal Year Ended September 30, 2000

(In Millions)

Obligations and Nonbudgetary Resources

Obligations incurred $ 8,556

Less: Spending authority from offsetting

collections and adjustments (180)

Financing source - imputed financing 396

Exchange revenue not in the budget (115)

Transfer of fixed assets (8)

Total Obligations, as Adjusted, and

 Nonbudgetary Resources $ 8,649

Resources That Do Not Fund the Net Cost of Operations

Change in amount of goods, services, and

benefits ordered but not yet received or provided $ 24

Change in unfilled customer orders (1)

Costs capitalized on the Balance Sheet (380)

Financing sources that fund costs of prior periods 8

Total Resources That Do Not Fund the Net Cost of Operations $ (349)

Costs That Do Not Require Resources

Depreciation and amortization $ 362

Expenditure offset for pending refund 5

Total Costs That Do Not Require Resources $ 367

Financing Sources Yet to be Provided $ 56

Net Cost of Operations $ 8,723
The accompanying notes are an integral part of these statements

Department of the Treasury

Internal Revenue Service

Statement of Custodial Activity

For the Fiscal Year Ended September 30, 2000

(In Billions)

REVENUE ACTIVITY

Collections of Federal Tax Revenue (Note 15)

Individual income, FICA/SECA, and other $ 1,765

Corporate income 235

Excise 55

Estate and gift 29

Railroad retirement 5

Federal unemployment 7

Total Collections of Federal Tax Revenue 2,096

Increase in federal taxes receivable, net 1

Total Federal Tax Revenue 2,097

Distribution of federal revenue to Treasury (2,096)

Increase in amount due to Treasury (1)

NET FEDERAL REVENUE ACTIVITY $ -

FEDERAL TAX REFUND ACTIVITY (Note 16)

Total Refunds of Federal Taxes $ 194

Appropriations Used for Refund of Federal Taxes (194)

NET FEDERAL TAX REFUND ACTIVITY $ -
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

A. Reporting Entity

The Internal Revenue Service (the Service) is a bureau of the U.S. Department of the Treasury (Treasury).

The Service originated in 1862, when Congress established the Office of the Commissioner of the Internal

Revenue. In 1952, the Bureau was reorganized by Congress and in 1953 became the Internal Revenue

Service (IRS).

In FY 2000, the Service progressed with the implementation of a plan to reorganize the structure and

management of the Service in accordance with legislation enacted by Congress in 1998. The legislation

directed the Commissioner to modify the geographic organizational structure of national, regional and district

divisions to establish units serving groups of taxpayers with similar needs, and to ensure an independent

appeals process. Over time, the legislation will have a pervasive and significant impact throughout the

organization and in addition to its effect within the Service, will require conforming changes to numerous

statutes, regulations and delegations.

The Treasury Inspector General for Tax Administration (TIGTA) is a Treasury agency established under the

IRS Restructuring and Reform Act of 1998 and was included in the Service’s reporting entity through fiscal

year (FY) 1999. The reporting entity has changed in FY 2000 as TIGTA received its own appropriation for

FY 2000 and is not included in the Service’s FY 2000 financial statements.

The mission of the Service is to provide America’s taxpayers top quality service by helping them understand

and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Note 1.

Summary of

Significant

Accounting

Policies

B. Basis of Presentation

The accompanying financial statements report the Service’s financial position as of September 30, 2000, and

its net cost of operations, changes in net position, budgetary resources, financing and custodial activity for

the year then ended. These statements include the accounts of all funds under the Service’s control, which

have been established to account for the resources of the Service, as well as funds for the purpose of

recording tax revenues and refunds. They were prepared from the Service’s accounting and financial

management systems in accordance with Office of Management and Budget (OMB) Bulletin No. 97-01,

Form and Content of Agency Financial Statements, as amended, and the Service’s accounting policies which

are summarized in this note.

C. Basis of Accounting

The accompanying financial statements are presented on a basis in accordance with generally accepted

accounting principles (GAAP).

Balance Sheet, Statement of Net Cost, Statement of Changes in Net Position

These statements are presented on the accrual basis of accounting. Under the accrual method, revenues are

recognized when earned, and expenses are recognized when costs are incurred or goods or services are

received, without regard to receipt or payment of cash. The statement of net cost presents the full cost

associated with the Service’s major programs. Note 17 describes additional accounting policies applicable to

the Statement of Net Cost.

Statement of Budgetary Resources

The statement of budgetary resources is presented using the budgetary basis of accounting. Budgetary

accounting facilitates compliance with legal constraints and controls over the use of federal funds. This

financial statement is in addition to the reports prepared by the Service throughout the year pursuant to OMB

directives for purposes of monitoring and controlling the Service's obligation and expenditure of budgetary

resources.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Statement of Financing

The statement of financing is presented using both an accrual and a budgetary basis of accounting as a means

to facilitate understanding of the differences between the two accounting bases.

Statement of Custodial Activity

The statement of custodial activity is presented primarily on the modified cash basis of accounting.

Specifically, total federal revenue is recognized when received and is reported net of the change in federal

taxes receivable. The related distribution of all such collections to the U.S. Treasury, however, is reported on

the cash basis. Refunds of taxes and interest, as well as Earned Income Tax Credit (EITC) and child tax

credit payments, are also reported on the modified cash basis. Specifically, refunds, EITC payments, and

child tax credit payments are recognized when disbursed and are reported net of the change in federal tax

refunds payable.

D. Financing Sources and Exchange Revenue

The Service receives the majority of its funding through annual, multi-year, no-year, and trust fund

appropriations that are available for use within statutory limits for operating and capital expenditures.

Appropriations are recognized as financing sources when the related expenses are incurred. The following

are the different types of operating appropriations:

Processing, Assistance and Management

This appropriation provides funds for processing tax returns and related documents; assisting

taxpayers in the filing of their returns and in paying taxes that are due; matching information returns

with tax returns; conducting internal audit reviews and internal security investigations; and managing

financial resources, rent and utilities.

Tax Law Enforcement

The purpose of this appropriation is to provide funds for the examination of tax returns, and the

administrative and judicial settlement of taxpayer appeals of examination findings. It also provides

for issuing technical rulings, monitoring employee pension plans, determining qualifications of

organizations seeking tax-exempt status, examining tax returns of exempt organizations, enforcing

statutes relating to detection and investigation of criminal violations of the internal revenue laws,

collecting unpaid accounts, compiling statistics of income and compliance research, and securing

unfiled tax returns and payments.

Information Systems

This appropriation funds costs for data processing and information and telecommunication support

for the Internal Revenue Service activities, including developmental information systems and

operations information systems. The operational systems are located in a variety of sites including

the Martinsburg Computing Center, the Detroit Computing Center, the Tennessee Computing Center,

and in regional and district offices and service centers.

Other

These budgetary accounts consist of an aggregate of smaller multi-functional funds that support the

Service’s mission to collect the proper amount of tax and provide improved customer service to the

taxpayer. The Information Technology Investments appropriation is the largest of these funds and

may be obligated as Congress approves expenditure plans.

In addition, the Service incurs certain costs that are paid in total or in part by other federal entities,

such as pension costs administered by the Office of Personnel Management and legal judgments paid

by the Treasury Judgment Fund. These constitute subsidized costs and are recognized by the Service

on its statements of changes in net position and financing as an imputed financing source equal to the

cost paid by the other federal entity.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

E. Fund Balance with Treasury and Cash

The fund balance with Treasury is the aggregate amount of funds in the Service’s accounts including

appropriated funds from which the Service is authorized to make expenditures and pay liabilities; as well as

funds in deposit, suspense, and clearing accounts. Generally, cash receipts and disbursements are processed

by the Treasury. Imprest funds are maintained by Headquarters and field offices in commercial bank

accounts.

F. Accounts Receivable, Net

Accounts receivable consists of amounts due from federal agencies, state and local governments, and the

public. The balance of accounts receivable for reimbursable services includes both billed and unbilled

receivables. Unbilled accounts receivable are recorded, and reimbursable revenues are recognized, as the

services are performed and costs are incurred. The unbilled receivables are later transferred to billed

accounts receivable when bills are rendered to the buying agencies. The allowance for uncollectible accounts

is based on an annual review of groups of accounts by region, age and account type and includes accounts

receivable balances older than one year.

G. Advances

Advances to government agencies primarily represent funds paid to the Treasury Working Capital Fund

(WCF). Amounts in the fund are available for expenses of operating and maintaining common

administrative services of Treasury that can be performed more economically as a centralized service.

Centralized services funded through the Treasury WCF for the Service consist primarily of

telecommunications services and payroll processing. In accordance with established WCF procedures,

Treasury Departmental Offices collect funds for these services in advance from Treasury Bureaus. Advances

are expensed as services are provided by the WCF. This account also includes amortized advances

(amortized over seven years) representing assets with a useful life greater than one year.

The majority of advances to the public are for investigations and employee travel advances, which are

expensed upon receipt of required expense reports.

H. Property and Equipment

The net book value of Property and Equipment as of September 30, 2000, consists of the following

components:

General Property and Equipment acquired before October 1, 1999

The estimated net book value of ADP equipment, telecommunication equipment, office equipment and

furniture, investigative equipment, and vehicles as of September 30, 1999, was derived based upon estimates

of the net book value of a statistically selected sample of assets, using techniques prescribed by the Uniform

Standards of Appraisal Practice. These estimated net book values were then projected to the entire

population of assets. With the exception of small expendable computer peripherals such as keyboards and

cables, all property and equipment in the categories described above and acquired before October 1, 1999, is

capitalized regardless of the dollar amount of individual assets. Depreciation on these assets is calculated

using the straight line method and is based on the estimated net book values and projected remaining useful

lives of the assets as of September 30, 1999.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

ADP and Telecommunication Equipment acquired after September 30, 1999

The method used by the Service to report the capitalized ADP and telecommunication assets acquired after

September 30, 1999 is described as “pooling.” Under pooling, all ADP and telecommunication equipment

acquired after September 30, 1999 are recorded at cost. Separate pools are established for each class of ADP

and telecommunication assets, as distinguished by the useful life of the assets. In FY 2000, there are two

pools -- one for equipment with a useful life of three years, and the other for assets with a useful life of seven

years. With the exception of small expendable computer peripherals, the pools accumulate the cost of all

ADP and telecommunication assets acquired after September 30, 1999 -- regardless of the dollar amount of

the individual assets. Depreciation on these assets is calculated using the straight line method over the

estimated useful lives established by the Service with a half-year of depreciation taken in the year of

acquisition.

Office Equipment and Furniture, Investigative Equipment, and Vehicles acquired

after September 30, 1999

The Service capitalized office equipment and furniture, investigative equipment, and Criminal Investigation

Division vehicles acquired after September 30, 1999 with an individual asset acquisition cost of $5,000 or

more. Depreciation on these assets is calculated using the straight line method over the estimated useful lives

established by the Service (10 years for office equipment and investigative equipment, 8 years for furniture, 5

years for vehicles) with a half-year of depreciation taken in the year of acquisition.

Major Systems

The Service has 10 systems it considers major systems as of September 30, 2000. Major systems are defined

as any system where the projected costs are expected to exceed $20 million. Costs included in the major

systems category include labor and certain indirect costs for the design, acquisition, and implementation of

the major systems. Other costs associated with these major systems, such as hardware, software,

transportation charges, and installation costs are included in the property and equipment categories

previously described. Costs associated with preparation of facilities to house the systems are classified as

leasehold improvements.

Separate categories are established for major systems and major systems in process. Major systems are

considered placed in service when development is complete; the system is in all important respects ready for

use, deployment of the system is underway, and significant systems’ changes are not anticipated. Until

placed in service, major systems are shown as Work in Process (WIP). Major systems are depreciated using

the straight line method over an estimated useful life of seven years with a half-year of depreciation taken in

the year placed in service.

Leasehold Improvements

This category of assets is shown at historical cost less estimated depreciation. Depreciation on these assets is

calculated using the straight line method with 10 years as the estimated useful life of the improvements with

a half-year of depreciation taken in the year of acquisition. For projects initiated before October 1, 1999, a

$50,000 threshold was used to identify projects capitalized as leasehold improvements; all leasehold

improvement projects initiated after September 30, 1999 are capitalized regardless of cost.

I. Capital Lease Liability

Certain computer equipment related to the Main Frame Consolidation Project and other office equipment is

leased under Lease-To-Ownership-Plans (LTOP). The terms of these LTOPs provide for 36 monthly

payments (for computers) and 48 monthly payments (for other equipment). Under each LTOP, the equipment

is owned as of the last monthly payment. These LTOP leases are classified as capital leases. The liability

reported represents the present value of future lease payments required by the terms of the capital leases.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

J. Permanent and Indefinite Funds

The Service uses a special class of funds, designated as “permanent and indefinite”, to disburse tax refund

principal and related interest. These permanent and indefinite funds are not subject to budgetary ceilings set

by the Congress during the annual appropriation process. Because the refunds, from a budgetary standpoint,

are permanently funded by the Congress, refunds payable at year-end are fully funded. The asset “Due from

Treasury” designates this approved funding to pay year-end tax refund liabilities, which are reflected in the

funds used for refund of federal taxes on the statement of custodial activity along with tax refund payments

for the year.

Although funded through the appropriation process, refund activity is reported as a custodial activity of the

Service. This presentation is appropriate because refunds are, in substance, a custodial revenue-related

activity in that they are a direct result of taxpayer overpayments of their tax liabilities. Federal tax revenue

received from taxpayers is not available for use in the operation of the Service and is not reported on the

statement of net cost. Likewise, the resultant refunds of overpayments are not available for use by the

Service in operations. Consequently, to present refunds as an expense of the Service on the statement of net

cost with related appropriations used would be inconsistent with the reporting of the related federal tax

revenue and would materially distort the costs incurred by the Service in meeting its strategic objectives.

K. Tax Assessments and Abatements

Under the Internal Revenue Code Section 6201, the Commissioner of the IRS, as delegated by the Secretary

of the Treasury, is authorized and required to make inquiries, determinations, and assessments of all taxes

which have been imposed and accruing under any internal revenue law but which have not been duly paid

(including interest, additions to the tax, and assessable penalties). Unpaid assessments result from taxpayers

filing returns without sufficient payments; as well as from the Service’s enforcement programs, such as

examination, underreporter, substitute for return, and combined annual wage reporting.

The Commissioner of the IRS also has authority to abate the paid or unpaid portion of an assessed tax,

interest, and penalty. Abatements occur for a number of reasons and are a normal part of the tax

administration process (e.g., a qualifying corporation claimed a net operating loss that created a credit that

can be carried back to reduce a prior year’s tax liability, amended tax returns, correction of an assessment

from an enforcement program, taxes discharged in bankruptcy, accepted offers in compromise, penalty

abatements for reasonable cause, contested assessments made due to mathematical or clerical errors, and

assessments contested after the liability has been satisfied). Abatements may result in claims for refunds or a

reduction of the unpaid assessed amount.

L. Federal Taxes Receivable

Federal taxes receivable and the corresponding liability, “Due to Treasury,” are not accrued until related tax

returns are filed, or assessments made, and prepayments netted against liabilities. Accruals are made to

reflect penalties and interest on taxes receivable through the balance sheet date.

Taxes receivable consist of unpaid assessments (taxes and associated penalties and interest) due from

taxpayers for which the Service can support the existence of a receivable through taxpayer agreement, such

as filing of a tax return without sufficient payment, or a court ruling in favor of the Service. Taxes receivable

are shown on the balance sheet net of an allowance for doubtful accounts. The allowance for doubtful

accounts reflects an estimate of the portion of total taxes receivable deemed to be uncollectible.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Compliance assessments are unpaid assessments for which neither the taxpayer nor a court has affirmed that

the taxpayer owes amounts to the Federal Government. Examples include assessments resulting from an IRS

audit or examination of which the taxpayer does not agree with the results. These amounts are not reported

on the balance sheet; however, statutory provisions require that these accounts be maintained until the statute

for collection expires.

Write-offs consist of unpaid assessments for which the Service does not expect further collections due to

factors such as taxpayers’ bankruptcy, insolvency, or death. These amounts are also not reported on the

balance sheet; however, statutory provisions require that these accounts be maintained until the statute for

collection expires.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Fund balance with Treasury and cash as of September 30, 2000, consist of the following:

Appropriated and other funds $ 2,005

Imprest funds 3

Fund Balance with Treasury and Cash $ 2,008

Note 2. Fund

Balance with

Treasury and

Cash

(In Millions)

The Information Technology Investments fund represents $430 million of the appropriated fund balance,

which can only be obligated pursuant to an expenditure plan approved by Congress. Other funds primarily

consist of user fees, suspense, deposit, and clearing funds.

Accounts receivable and allowances for uncollectible accounts as of September 30, 2000, consist of the

following:

IntraGovernmentalWith the

Public

Accounts receivable $ 19 $ 6

Allowance for uncollectible accounts (8) (2)

Accounts Receivable, Net $ 11 $ 4

Note 3.

Accounts

Receivable,

Net

(In Millions)

Note 4.

Other Assets

Other assets, as of September 30, 2000, consist of the following:

(In Millions) IntraGovernmental

With the

Public

Other custodial assets $ - $ 87

Federal tax lien revolving fund - 6

Total Other Assets $ - $ 93

Other custodial assets primarily represent voluntary deposits received from taxpayers, pending application of

the funds to unpaid tax assessments. This category also includes seized monies of $3 million, which are held

pending the results of criminal investigations. As described in Note 12, other custodial assets are classified

as “Non-Entity Assets” and are offset by an equal liability in other custodial liabilities.

The Federal tax lien revolving fund primarily consists of real property held for resale to the public. In

accordance with Section 7425 of the Internal Revenue Code and Section 2410 of Title 28, the revolving fund

can be used to redeem real property foreclosed upon by a holder of a lien, which is superior to the tax lien.

Real property is redeemed when the Service pays the lienholder the amount bid at sale plus interest and

certain post-sale expenses. The Service may then sell the property, reimburse the fund, and apply the net

proceeds to the outstanding tax obligation.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Note 5.

Federal Taxes

Receivable,

Net

Federal taxes receivable (gross) was $81 billion as of September 30, 2000, and consisted of tax assessments,

penalties, and interest which were not paid or abated, and which were agreed to by the taxpayer and the

Service, or upheld by the courts.

Federal taxes receivable, net, equaled $22 billion as of September 30, 2000, and is the portion of federal

taxes receivable (gross) estimated to be collectible. It is based on projections of collectibility from a

statistical sample of taxes receivable. An allowance for doubtful accounts of $59 billion was established for

the difference between the gross federal taxes receivable and the portion estimated to be collectible. Due to

Treasury is the offsetting liability to federal taxes receivable, representing amounts to be transferred to

Treasury when collected.

Property and equipment as of September 30, 2000, consist of the following:

Category

Useful

Life

Net Book

Value

9/30/99

Acquisitions/

Transfers Depreciation

Net Book

Value

9/30/2000

Property and Equipment 3 to 10 years $ 774 $ 210 $ (305) $ 679

Other Major Systems 7 years 34 358 (31) 361

Major Systems – Work in

Process 254 (226) - 28

Leasehold Improvements 10 years 197 23 (23) 197

Construction in Progress 14 (13) - 1

TIGTA Vehicles and

Investigative Equipment 8 (8) - -

Total Property and Equipment $ 1,281 $ 344 $ (359) $ 1,266

Note 6.

Property and

Equipment

(In Millions)

IRS’s FY 1999 financial statements included as an asset the net book value of vehicles and investigative

equipment belonging to the Treasury Inspector General for Tax Administration (TIGTA). These assets were

transferred to TIGTA during FY 2000.

Note 7.

Accounts

Accounts payable and accrued expenses as of September 30, 2000, consist of the following:

Payable and

Accrued

IntraGovernmentalWith the

Public

Accounts payable $ - $ 43

Accrued expenses 30 233

Accrued payroll and benefits 41 280

$ 71 $ 556

Expenses

(In Millions)

Total Accounts Payable and Accrued Expenses
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Note 8.

Other

Other liabilities as of September 30, 2000, consist of the following:

Liabilities

(In Millions)

IntraGovernmentalWith the

Public

Workers’ compensation $ 82 $ 440

Accrued annual leave - 382

Suspense 5 -

Other custodial liabilities - 87

Total Other Liabilities $ 87 $ 909

Workers’ compensation is paid to employees injured on the job or incurring work-related illnesses, as

required by the Federal Employees Compensation Act. The Act provides income, medical cost protection

and death benefits to covered federal civilian employees and their beneficiaries. The program is

administered by the U.S. Department of Labor, which initially pays valid claims and subsequently seeks

reimbursement from federal agencies. This liability of $522 million at September 30, 2000, includes a

current portion of $82 million and estimated future costs of $440 million. Estimated future costs have been

actuarially determined and are regarded as a liability to the public because neither the costs nor

reimbursement have been recognized by the Department of Labor. Workers’ Compensation is included in

Liabilities not Covered by Budgetary Resources, as described in Note 13.

Accrued annual leave consists of employees’ unpaid leave balances at September 30, 2000, and reflects

current wage rates in effect at fiscal year end. Accrued annual leave is included in Liabilities Not Covered by

Budgetary Resources, as described in Note 13.

Other custodial liabilities (the offsetting liability to other custodial assets) primarily consist of liabilities to

taxpayers for deposits pending application of the funds to outstanding tax deficiencies and liability for seized

monies.

Note 9.

Leases

The capital lease liability as of September 30, 2000, is as follows:

Total 9/30/01 9/30/02 9/30/03

Main Frame

Consolidation $ 14 $ 13 $ 1 $ -

Mail Sorters 10 4 4 2

Copiers and Office

Equipment 2 1 1 -

Total Lease

Obligations 26 $ 18 $ 6 $ 2

Less: Interest (5)

Present Value of

Lease Payments $ 21

(In Millions)
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Certain computer equipment related to the Main Frame Consolidation Project and other office equipment is

leased under Lease-To-Ownership-Plans (LTOP). The terms of these LTOPs provide for 36 monthly

payments (for computers) and 48 monthly payments (for other equipment). Under each LTOP, the

equipment is owned as of the last monthly payment. Interest rates range from 9 to 10 percent. Capital lease

liability is included in Liabilities Not Covered by Budgetary Resources, as described in Note 13.

Office equipment and similar items are also leased under operating leases. The substantial majority of these

items are leased under one-year contracts. In addition, some vehicles are leased under annual lease

arrangements from the General Services Administration (GSA) based on the needs of the individual offices.

While many of these vehicles are used for several years under annual lease renewals, the vehicles are

returned to the GSA when they are no longer needed or are not functioning properly. These leases are also

classified as operating leases. GSA also serves as the lessor for the office space occupied by the Service.

Note 10.

Contingencies

As of September 30, 2000, the Service provided an accrual for contingent losses of $12 million for pending

and threatened legal matters that, in the opinion of Chief Counsel, are considered probable. No additional

losses are considered probable by Chief Counsel. Of these amounts, certain settlements and awards may be

payable from the Treasury Judgment Fund in accordance with 31 U.S.C. 1304. Of the $12 million accrued

by the Service, all is estimated to be payable from the Treasury Judgment Fund for settlements and awards

relating to these claims.

The Service does not have contractual commitments for payments on obligations related to canceled

appropriations.

Net position as of September 30, 2000, consists of the following:

Unexpended Appropriations:

Unobligated balances

Available $ 326

Unavailable 445

Undelivered orders 614

Total Unexpended Appropriations 1,385

Cumulative results of operations 518

Total Net Position $ 1,903

Note 11.

Net Position

(In Millions)

Unexpended appropriations represent the Service’s unobligated appropriation balances and undelivered

orders as of September 30, 2000. Available unobligated balances represent no-year and multi-year

appropriation funds that can be obligated after September 30, 2000. Available balances are shown net of $20

million in user fees that were not allocated to appropriations as of September 30, 2000. Unavailable

unobligated balances are expired appropriations no longer available to incur new obligations. Unobligated

balances include $305 million of the Information Technology Investment Account ($211 million available

and $94 million unavailable). In prior fiscal years, the Service received appropriations totaling $506 million

for Information Technology Investments which can only be obligated pursuant to an expenditure plan

approved by Congress. Congress has approved $249 million, of which $200 million has been obligated.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

During FY 2000, the Service performed a review of obligations as of September 30, 1999 and determined

that undelivered orders had been overstated by $308 million. Of this $308 million, $63 million represented

accrued expenses. Accordingly, the balance of net position - beginning of period has been restated as $2,113

million, a decrease of $63 million from the $2,176 million balance previously reported for the fiscal year

ended September 30, 1999. Additionally, based on the review, the Service deobligated $245 million in

undelivered orders as of September 30, 1999.

Balances on the statement of budgetary resources for the fiscal year ended September 30, 2000 are affected

by the restatement as follows:

Obligated balances, net – beginning of period on the statement of budgetary resources have been restated as

$1,240 million, a decrease of $287 million from the $1,527 million balance previously reported for the fiscal

year ended September 30, 1999. The decrease of $287 million reflects the deobligation of $245 million and a

decrease in budgetary obligations of $42 million at September 30, 1999.

Unobligated balances – beginning of period on the statement of budgetary resources have been restated as

$933 million, an increase of $252 million from the $681 million previously reported for the fiscal year ended

September 30, 1999. The increase of $252 million reflects the deobligation of $245 million in undelivered

orders at September 30, 1999. It also reflects an increase in user fees and other of $7 million previously not

included in unobligated balances as of September 30, 1999.

Balances on the statement of changes in net position for the fiscal year ended September 30, 2000 are

affected as follows:

The decrease in unexpended appropriations reflects a decrease in the beginning balance of unexpended

appropriations of $63 million from $1,627 to $1,564 at September 30, 1999.

Note 12.

Non-entity

Assets

(In Millions)

Non-entity assets arise from the Service’s custodial duty to collect taxes, disburse tax refunds and maintain

proper accounting for these activities in the books and records of the Service. Non-entity assets as of

September 30, 2000 consist of the following:

IntraGovernmentalWith the

Public

Due from Treasury

Federal taxes receivable, net of

 Allowance for doubtful accounts of $59,000

Other custodial assets

$ 1,040

-

-

 $ -

22,000

 87

Due from Treasury represents tax refunds due to taxpayers but not disbursed as of September 30, 2000.

Federal taxes receivable are transferred to Treasury upon receipt. An amount equal to federal taxes

receivable has been recognized as an offsetting intragovernmental liability – Due to Treasury. Federal taxes

receivable is described in more detail in Note 5.

Other custodial assets, also discussed in Note 4, primarily relate to the deposits received from taxpayers,

pending application of the funds to unpaid tax assessments and seized monies.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Note 13.

Liabilities Not

Liabilities not covered by budgetary resources as of September 30, 2000, consist of the following:

Covered by

Budgetary

IntraGovernmentalWith the

Public

Resources

(In Millions) Workers’ compensation

Accrued annual leave

Contingencies

Capital Lease Liability

$ 82

 -

 -

-

$ 440

382

 12

21

Liabilities not covered by budgetary resources are liabilities which are not funded by direct budgetary

authority and result from the receipt of goods and services, or the occurrence of eligible events, for which

appropriations, revenues, or other financing sources necessary to pay the liabilities have not yet been made

available through Congressional appropriation. See Note 8 for further description of workers’ compensation

and accrued annual leave, Note 9 for capital lease liability and Note 10 for contingencies.

Note 14.

Comparison of

Statement of

Budgetary

Resources and

Submission to

President’s

Budget

(In Millions)

Balances reported in the Statement of Budgetary Resources and the Service’s submission to the President’s

Budget (Submission) are shown in the table below for each of the major appropriations and the Information

Technology Investment Account. The table excludes other minor appropriations. Differences between the

Statement of Budgetary Resources and the Submission are primarily due to the following:

There are significant differences in definitional requirements. For example, Treasury requires expired

balances to be included in unobligated balances on the Statement of Budgetary Resources but OMB

requirements exclude expired balances from the unobligated balances on the Submission. Also, adjustments

include downward adjustments of obligations in both expired and unexpired funds on the Statement of

Budgetary Resources but the Submission includes adjustments to obligations of unexpired funds only.

As discussed in Note 11, the Service restated beginning balances for obligated and unobligated balances.

Because the deadline for the Submission preceded the deadline for the financial statements, the impact of the

restatement was not fully reflected in the Submission. Additionally, other financial statement adjustments

made after the deadline are not reflected in the Submission.

Statement of

 Budgetary Resources

FY 2000

Submission to

President’s Budget

FY 2000 Actual

Processing Assistance and Management:

Budgetary Resources

Budgetary Authority $3,376 $3,380

Unobligated Balances – Beginning of Period 143 13

Spending Authority from Offsetting Collections 28 27

Adjustments (22) (32)

Total Budgetary Resources 3,525 3,388

Status of Budgetary Resources

Obligations Incurred 3,357 3,360

Unobligated Balances – Available 20 20

Unobligated Balances – Unavailable 148 8

Total Status of Budgetary Resources 3,525 3,388

Outlays $3,318 $3,324
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Statement of

 Budgetary Resources

FY 2000

Submission to

President’s Budget

FY 2000 Actual

Tax Law Enforcement:

Budgetary Resources

Budgetary Authority $3,283 $3,285

Unobligated Balances – Beginning of Period 76 -

Spending Authority from Offsetting Collections 61 62

Adjustments - -

Total Budgetary Resources 3,420 3,347

Status of Budgetary Resources

Obligations Incurred 3,330 3,342

Unobligated Balances – Available - -

Unobligated Balances – Unavailable 90 5

Total Status of Budgetary Resources 3,420 3,347

Outlays $3,205 $3,204

Information Systems:

Budgetary Resources

Budgetary Authority $1,502 $1,502

Unobligated Balances – Beginning of Period 209 22

Spending Authority from Offsetting Collections 12 9

Adjustments 9 71

Total Budgetary Resources 1,732 1,604

Status of Budgetary Resources

Obligations Incurred 1,545 1,544

Unobligated Balances – Available 90 53

Unobligated Balances – Unavailable 97 7

Total Status of Budgetary Resources 1,732 1,604

Outlays $1,649 $1,649
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Statement of

 Budgetary Resources

FY 2000

Submission to

President’s Budget

FY 2000 Actual

Information Technology Investment Account:

Budgetary Resources

Budgetary Authority $ - $ -

Unobligated Balances – Beginning of Period 481 480

Spending Authority from Offsetting Collections - -

Adjustments - -

Total Budgetary Resources 481 480

Status of Budgetary Resources

Obligations Incurred 176 176

Unobligated Balances – Available 211 304

Unobligated Balances – Unavailable 94 -

Total Status of Budgetary Resources 481 480

Outlays $ 76 $ 76

The Service transfers total tax collections to the U.S. Treasury. Collection activity, by financial statement

line item and tax year, was as follows for the fiscal year ended September 30, 2000:

Collections

Received Tax Year

FY 2000 2000 1999 1998 Prior years

Individual income,

FICA/SECA, and other

Corporate income

Excise

Estate and gift

Railroad retirement

$1,765

235

55

29

5

$1,132*

156**

39

-

4

$ 613

70

15

26

1

$ 12

1

-

1

-

$ 8

8

1

2

-

Federal unemployment 7 5 2 - -

Total $2,096 $1,336 $ 727 $ 14 $ 19

100% 64% 34% 1% 1%

Note 15.

Collections of

Federal Tax

Revenue

(In Billions)

* Includes other collections of $503 million.

** Includes tax year 2001 corporate income tax receipts of $7 billion.

Individual income, FICA/SECA, and other include $47 billion in payroll taxes collected from other federal

agencies. Of this amount, $10 billion represents the portion paid by the employers.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Refund activity, broken out similarly to collection activity by tax year, was as follows for the fiscal year

ended September 30, 2000:

Refunds

Disbursed Tax Year

FY 2000 2000 1999 1998 Prior years

Individual income,

FICA/SECA, and other

Corporate income

Excise

Estate and gift

Railroad retirement

$ 161

31

1

1

-

$ 1

1

-

-

-

$ 148

11

1

-

-

$ 9

7

-

1

-

$ 3

12

-

-

-

Federal unemployment - - - - -

Total $ 194 $ 2 $ 160 $ 17 $ 15

100% 1% 82% 9% 8%

Note 16.

Federal Tax

Refund

Activity

(In Billions)

Individual income, FICA/SECA, and other refunds amount includes EITC and child tax credit refunds.

The statement of net cost reports the costs incurred by the Service in performing its mission, net of related

exchange revenues, classified as follows:

Submission Processing

Filing and pre-filing activities for all taxpayer groups (including Tax Exempt/Government Entities (TE/GE)), as

well as, the printing and distribution of tax forms and publications, and the processing of tax forms filed

electronically. Exchange revenue consists of reimbursable income.

Telephone and Correspondence

Initial correspondence to and from taxpayers, along with telephone inquires, regardless of the type of taxpayer

(includes TE/GE). Includes the operation of the toll-free telephone systems, correspondence audits, and telephone

collection activity. Exchange revenue consists mainly of installment agreement user fees, with the remainder

coming from reimbursable income.

Taxpayer Advocate Service

Resolves taxpayer problems, regardless of which organization the taxpayer is assigned to (including TE/GE), and

conducts analysis of major issues for its annual report to Congress.

Document Matching

Identifies areas of noncompliance with tax laws for all entities (including TE/GE) by matching tax return data

with reported information. Provides staffing, training, and direct support to execute the Automated Underreporter

(AUR), Underreporter Combined Annual Wage Reporting (CAWR), Federal Unemployment Tax Act (FUTA),

Diverse Adverse Tax Consequences (DATC), and Alternative Strategies for Tax Administration (ASTA)

programs.

Note 17.

Statement of

Net Cost

Criminal Investigation

Identifies areas of criminal noncompliance with tax and other federal laws and pursues enforcement strategies,

regardless of the type of taxpayer or the organization to which the taxpayer is assigned (includes TE/GE).

Includes currency transaction reporting and assistance to other federal law enforcement agencies. Exchange

revenue consists of reimbursable income.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Examination

Identifies areas of civil noncompliance with tax laws and pursues compliance strategies by various means,

such as taxpayer education, tax return examination (audits), and research. Does not include correspondence

audits, as these costs are included in Telephone and Correspondence. In addition, it does not include TE/GE

except for some ancillary activities. Exchange revenue consists mainly of reimbursable income, with the

remainder coming from installment agreement and other user fees.

Collection

Secures delinquent federal tax returns and resolves delinquent accounts in the field, as well as assists

taxpayers at the field walk-in sites (including TE/GE). Does not include initial telephone and/or

correspondence with taxpayers or telephone collection activity, which are reported under Telephone and

Correspondence. Exchange revenue consists of reimbursable income and income from installment

agreement user fees.

Tax Exempt/Government Entities

Provides guidance to tax exempt and government entities and ensures compliance with applicable tax law.

The following activities performed centrally for TE/GE are not included in this line item: Submission

Processing, Telephone and Correspondence, Taxpayer Advocate Service, Document Matching, Criminal

Investigation, Collection, Statistics of Income, and Chief Counsel. Examination activities related to TE/GE

are included in this line item. Exchange revenue consists mainly of TE/GE user fees for letter rulings and

determinations with the remainder coming from reimbursable income.

Statistics of Income

Collects and publishes statistics based on information reported on Federal tax returns filed by taxpayers and

conducts the Service's studies on the operations of the tax laws with respect to all taxpayer groups (including

TE/GE). Exchange revenue consists of reimbursable income.

Chief Counsel

Provides legal services to all organizations within the Service (including TE/GE), both tax and nontax

related. Also provides legal interpretations for selected tax matters to the public upon request. Exchange

revenue consists mainly of user fees for letter rulings and determinations, with the remainder coming from

reimbursable income.

Exchange Revenues

The preponderance of exchange revenues earned by the Service are derived from fees for (1) determinations

of tax exempt status of employee plans and exempt organizations (TE/GE), (2) reimbursable agreements with

other federal agencies for various goods and services, and (3) new and restructured installment agreements,

under which taxpayers pay their tax liabilities over an agreed upon timeframe. The United States Code

(U.S.C.) 31 Sections 1535 and 9701, and Public Law 100-203 provide the statutory basis for the fees the

Service charges customers for providing these goods and services.

With respect to TE/GE, the statute requires that the Service charge a reasonable fee. For tax administration

reasons, the Service has determined that some fees be charged at a level below cost. For reimbursable

agreements, the statute requires recovery of the actual cost of the work performed. In the case of installment

agreements, the statute requires the recovery of full cost. The Service follows OMB A25 in calculating full

cost. The Service interprets actual cost as the incremental cost of providing goods and services. During

fiscal year 2000, the fees that the Service charged for establishing and restructuring installment agreements

were less than the full cost for tax administration reasons. The Service has been working with the Office of

Management and Budget to modify the Installment Agreement fee structure.
Internal Revenue Service

Notes to the Financial Statements

For the Fiscal Year Ended September 30, 2000

Overhead and Indirect Cost Allocation Methodology

Overhead and indirect costs were as closely identified to the front line activities as possible, based on the

relationship between the programs and their consumption of resources. Examples of these costs include

Unemployment Compensation - assigned based on actual claim history, Pension – allocated based on labor

dollars, Information Systems - assigned and/or allocated based on the consumption of resources by project,

and Depreciation – directly assigned where feasible (such as vehicles, investigation equipment, and major

systems) with the remainder allocated based on full-time equivalents (FTE). The cost of activities considered

support in nature, including but not limited to, Rent, Utilities, Financial Operations, Human Resources, and

Agency-Wide Shared Services, were allocated based on FTE mix.

Budget Functional Classification

All of the Service’s gross costs and earned revenues are included in the President’s budget in the budget

functional classification of General Government.

Department of the Treasury

Internal Revenue Service

•

Supplemental Information

•

Fiscal Year 2000

Internal Revenue Service

Supplemental Information - Unaudited

For the Fiscal Year Ended September 30, 2000

Other Claims

for Refund

Management has estimated amounts that may be paid out as other claims for tax refunds. This estimate

represents an amount (principal and interest) that may be paid for claims pending judicial review by the Federal

courts or, internally, by Appeals. The total estimated payout (including principal and interest) for claims

pending judicial review by the Federal courts is $8.4 billion and by Appeals is $13.5 billion. Although these

refund claims have been deemed to be probable, they do not meet the criteria in SFFAS No. 5 for reporting the

amounts in the balance sheet or for disclosure in the notes to the financial statements. However, they meet the

criteria in SFFAS No. 7 for inclusion as supplemental information.

Federal Taxes

Receivable,

Net

(In Billions)

In accordance with SFFAS No. 7, some unpaid assessments do not meet the criteria for financial statement

recognition as discussed in Note 1 to the financial statements. Although compliance assessments and write-offs

are not considered receivables under federal accounting standards, they represent legally enforceable claims of

the IRS - acting on behalf of the federal government. There is, however, a significant difference in the collection

potential of these categories.

The components of the total unpaid assessments and derivation of net federal taxes receivable at September 30,

2000 were as follows:

Total unpaid assessments $ 240

Less: Compliance assessments (30)

Write-offs (129)

Gross Federal Taxes Receivable 81

Less: Allowance for doubtful accounts (59)

Federal Taxes Receivable, Net $ 22

The Service cannot reasonably estimate the amount of allowance for doubtful accounts pertaining to its

compliance assessments, and thus cannot determine their net realizable value or the value of the pre-assessment

work-in-process.

To eliminate double-counting, the compliance assessments reported above exclude trust fund recovery penalties,

totaling $14 billion, assessed against officers and directors of businesses who were involved in the non

remittance of federal taxes withheld from their employees. The related unpaid assessments of those businesses

are reported as taxes receivable or write-offs, but the Service may also recover portions of those businesses’

unpaid assessments from any and all individual officers and directors against whom a trust fund recovery penalty

is assessed.

Earned

Income Tax

Credit

The Earned Income Tax Credit (EITC) was originally authorized by the Tax Reduction Act of 1975 (Public Law

94-12) and made permanent by the Revenue Act of 1978 (Public Law 95-600). The EITC is a special credit for

taxpayers who work and whose earnings fall below the established allowance ceiling. Qualified taxpayers can

receive partial credit in advance in each paycheck. In fiscal year 2000, the Service issued $26.1 billion in EITC

refunds, of which $81.0 million was applied to advance EITC. An additional $5.1 billion of the EITC was

applied to reduce taxpayer liability.
Internal Revenue Service

Supplemental Information - Unaudited

For the Fiscal Year Ended September 30, 2000

Agency

Fund Balance

with Treasury

Due from

Treasury

Accounts

Receivable,

Net

Advances to

Government

Agencies

Treasury $2,005 $1,040 $ 7 $ 122

Other 4 41

Total $2,005 $1,040 $ 11 $ 163

IntraGovernmental

Assets

(In Millions)

Agency

Due to

Treasury

Accrued

Expenses

Accrued Payroll

and

Benefits

Other

Liabilities

Treasury $ 22,000 $ - $ - $ -

General Services Adm. 7

Department of Labor 82

Office of Pers. Mgmt 10 41

Other 13 5

Total $ 22,000 $ 30 $ 41 $ 87

IntraGovernmental

Liabilities

(In Millions)
Internal Revenue Service

Supplemental Information - Unaudited

For the Fiscal Year Ended September 30, 2000

Processing

Assistance &

Management

Tax Law

Enforcement

Information

Services

Information

Technology

Investment

Account and

Other Total

Budgetary Resources

Budget authority

Unobligated balances – beginning

of period

Spending authority from

offsetting collections

Adjustments

$3,376

143

28

 (22)

$3,283

76

61

-

$1,502

209

12

9

$158

505

 6

1

$8,319

933

107

 (12)

Total Budgetary Resources $3,525 $3,420 $1,732 $670 $9,347

Status of Budgetary Resources

Obligations incurred

Unobligated balances – available

Unobligated balances –

unavailable

$3,357

20

148

$3,330

-

90

$1,545

90

97

$324

236

110

$8,556

346*

445

Total Status of Budgetary

Resources $3,525 $3,420 $1,732 $670 $9,347

Outlays

Obligations incurred

Less: spending authority from

offsetting collections and

adjustments

Obligated balances, net –

beginning of period

Less: obligated balances, net –

end of period

$3,357

(49)

405

(395)

$3,330

 (74)

236

 (287)

$1,545

 (50)

549

 (395)

$324

 (7)

50

 (155)

$8,556

 (180)

1,240

(1,232)

Total Outlays $3,318 $3,205 $1,649 $212 $8,384

Schedule of

Budgetary

Resources by

Major Budget

Accounts

(In Millions)

* The Information Technology Investments fund comprised $211 of the unobligated available balance but cannot

be obligated until an expenditure plan is approved by Congress.
SUPPLEMENTAL INFORMATION

Federal Managers' Financial Integrity

Act (FMFIA)

In accordance with the requirements of

the Federal Managers' Financial Integrity

Act, the Service evaluated its systems of

internal controls for the fiscal year ending

September 30, 2000.

During the year, the Financial and

Management Controls Executive Steering

Committee (FMC ESC) reviewed audit

findings and Service operations to

determine if new weaknesses should be

reported. This summer, IRS managers

conducted a thorough self-assessment of

the management controls for their

operations and reported issues for

National Office review. The Business

Owners reviewed the issues and

recommended to the FMC ESC the

actions taken or planned for each issue.

The FMC ESC also reviewed existing

weaknesses and national significant

control deficiencies throughout the year

to assess progress and determine if any

could be closed.

Section 2

The Service is closing three national

significant control deficiencies:

Recruitment Background and Security

Investigations, Management Controls Over

BMF Empowerment Zone Employment (EZE)

Credit Data for Treasury/Congress, and Year

2000: Century Date Change.

Section 4

The Service is closing one material

weakness: Non-Rebate Erroneous Refunds.

Annual Assurance Statement

Fiscal Year 2000

Federal Managers' Financial Integrity Act

(FMFIA)

The Service provides qualified assurance

that Section 2 and Section 4 objectives

are being achieved. Qualified assurance

is provided that, overall, IRS internal

control systems are adequate and

effective in achieving the objectives of the

Integrity Act. This qualified assurance is

based on our identification of material

weaknesses and national significant

control deficiencies that have been

addressed by corrective action plans.

Federal Financial Management

Improvement Act (FFMIA)

As of September 30, 2000, the Service's

financial management systems did not

substantially comply with the FFMIA.

Plans are being revised to resolve the

material weaknesses causing this

condition, and the initiatives associated

with these plans will be contained in the

IRS Modernization Blueprint, as

appropriate.

Commissioner of Internal Revenue
SECTION A: STATISTICAL SUMMARY OF PERFORMANCE

Section 2, Internal Control

Number of Material Weaknesses

Number reported

for the first

time in:

For the year,

number that have

been corrected:

For that year,

number still

pending:

Prior Years 59 50 9

1998 Report 1 1 0

1999 Report 2 0 2

2000 Report 0 0 0

Total 62 51 11

Of the total number corrected, how many were corrected in 2000? 0

Section 4, Financial Management Systems

Number of Material Weaknesses

Number reported

for the first

time in:

For the year,

number that have

been corrected:

For that year,

number still

pending:

Prior Years 176 173 3

1998 Report 0 0 0

1999 Report 1 0 1

2000 Report 0 0 0

Total 177 173 4

Of the total number corrected, how many were corrected in 2000? 1

Department of the Treasury

Internal Revenue Service

•

Other Accompanying Information

•

Fiscal Year 2000

Internal Revenue Service

Other Accompanying Information - Unaudited

For the Fiscal Year Ended September 30, 2000

Child Tax

Credit

The child tax credit was originally authorized by the Taxpayer Relief Act of 1997 (Public Law 105-34). The

child tax credit is a special credit for taxpayers who work, whose earnings fall below the established allowance

ceiling, and who have a qualifying child. In fiscal year 2000, the Service issued $809 million in child tax credit

refunds. An additional $19.2 billion of child tax credits were applied to reduce taxpayer liability.

Tax Gap The tax gap is the aggregate amount of tax imposed by the tax laws for any given tax year that is not paid

voluntarily and timely, excluding interest and penalties. Although there is a tax gap for each type of tax, the

Service does not have current information upon which to base a reasonable estimate of their magnitude.

The collection gap is the cumulative amount of assessed taxes, including penalties and interest, which the Service

expects to remain uncollectible. In essence, it represents the difference between the total balance of unpaid

assessments and the net taxes receivable reported on the Service’s balance sheet. The tax gap and the collection

gap are related and overlapping concepts. The collection gap includes all of the uncollectible taxes for a

particular tax year of the tax gap, and uncollectible taxes from prior years.

Tax Burden

and Tax

Expenditures

The Internal Revenue Code provides for progressive rates of tax, whereby higher incomes are generally subject to

higher rates of tax. The tables below present the latest available information on income tax and on related

income, deductions, and credits for individuals by income level and for corporations by size of assets. The

information illustrates the tax burden borne by different income and asset brackets. The tables are only

representative of more detailed data and analysis available from the Statistics of Income (SOI) office.

Total tax expenditures are the foregone federal revenue resulting from deductions and credits provided in the

Internal Revenue Code. Since tax expenditures directly affect funds available for government operations,

decisions to forego federal revenue are as important as decisions to spend federal revenue.

The tax expenditures for deductions is calculated using the tax burden percentage of gross income (gross receipts

for corporations) applied to the total deductions. Total credits against tax liability result directly in tax

expenditure.
Internal Revenue Service

Other Accompanying Information - Unaudited

For the Fiscal Year Ended September 30, 2000

(All figures are estimates based on samples provided by the Statistics of Income office)

Individual Income Tax Returns (Tax Year 1998 Data)

Size of Adjusted Gross Income (in thousands)

Under $15 $15 under

$30

$30 under

$50

$50 under

$100

$100 under

$200

Greater than

$200

Total returns 40,185,658 30,017,032 23,108,693 23,107,805 6,266,258 2,085,210

Gross income $244,788,823 $662,404,951 $911,149,007 $1,600,986,435 $833,000,473 $1,215,173,868

Adjusted gross income $241,187,654 $655,967,345 $903,288,852 $1,588,255,154 $822,620,525 $1,204,653,318

Tax $8,471,127 $47,580,911 $91,614,035 $203,384,619 $144,634,586 $317,883,579

Tax burden % of gross income 3.46% 7.18% 10.05% 12.70% 17.36% 26.16%

Average Tax per Return $211 $1,585 $3,964 $8,802 $23,081 $152,447

Deductions on Taxable Income

Standard deduction

Itemized deduction

 Medical & dental expense

 Interest paid

 Charitable contributions

 Other itemized deductions

$175,571,449

15,391,190

5,590,224

5,335,423

1,093,881

3,371,662

$143,733,533

47,110,977

8,585,210

19,063,831

5,593,808

13,868,128

$87,531,106

99,777,139

6,988,038

44,851,655

12,033,861

35,903,585

$47,449,414

243,286,611

7,816,523

107,708,681

31,976,948

95,784,459

$4,023,816

135,012,186

2,262,398

54,494,001

19,611,686

58,644,101

$1,148,056

135,882,236

741,911

40,170,721

38,929,894

56,039,710

Total Deductions

Total Expenditures

- Deductions

$190,962,639

$6,607,307

$190,844,510

$13,702,636

$187,308,245

$18,824,479

$290,736,025

$36,923,475

$139,036,002

$24,136,650

$137,030,292

$35,847,124

Credits Against Tax Liability

Child care credit

Credit for elderly and disabled

Foreign tax credit

EITC, offset tax liability

Other Credits

$34,755

24,977

9,149

158,252

458,364

$598,513

10,709

37,722

2,073,595

4,038,432

$686,237

0

74,218

178

5,714,847

$1,020,689

0

289,491

0

8,177,382

$265,731

0

576,619

0

861,275

$54,646

0

3,689,824

0

1,200,328

Total Credits

Total Expenditures – Individual

$685,497

$7,292,804

$6,758,971

$20,461,607

$6,475,480

$25,299,959

$9,487,562

$46,411,037

$1,703,625

$25,840,275

$4,944,798

$40,791,922
Internal Revenue Service

Other Accompanying Information - Unaudited

For the Fiscal Year Ended September 30, 2000

(All figures are estimates based on samples provided by the Statistics of Income office)

Corporation Income Tax Returns (Tax Year 1997 Data)

Size of Total Assets (in thousands)

Under $1,000 $1,000 under

$10,000

$10,000 under

$50,000

$50,000 under

$100,000

$100,000 under

$250,000

Greater than

$250,000

Total returns 4,251,826 388,011 44,499 8,732 7,998 9,017

Total receipts $2,230,122,165 $2,319,443,690 $1,396,669,802 $534,328,542 $779,785,500 $9,349,357,603

Taxable income $31,667,732 $27,266,215 $26,497,656 $16,526,056 $30,806,780 $550,484,908

Total tax $8,198,548 $8,474,313 $8,678,505 $5,398,875 $9,905,916 $143,519,836

Tax burden –

% of gross total receipts 0.37% 0.37% 0.62% 1.01% 1.27% 1.54%

Average Tax per Return $1,928 $21,840 $195,027 $618,286 $1,238,549 $15,916,584

Deductions on

Taxable Income

Net operating loss

Dividends received

Public utility

dividends paid

$10,621,184

2,116,064

15

$5,371,525

1,054,429

-

$4,513,693

1,701,525

-

$2,599,096

1,596,531

-

$3,955,878

4,188,210

11

$33,335,518

175,965,936

51,957

Total Deductions $2,175,575,509 $2,274,230,949 $1,363,241,635 $515,318,987 $739,599,396 $8,636,275,760

Total Expenditures –

Deductions $8,049,629 $8,414,655 $8,452,098 $5,204,722 $9,392,912 $132,998,647

Credits against Tax

Liability

Foreign tax credit

U.S. possessions tax

credit

Non conventional source

fuel credit

General business credit

Other credits

$445,087

7,270

13,705

150,200

131,598

$54,260

30,685

3,981

78,744

135,564

$151,040

147,334

9,880

104,639

131,913

$151,147

168,993

4,864

85,348

83,116

$437,706

369,168

9,274

172,909

146,228

$40,960,318

1,998,729

1,041,627

4,494,528

3,501,334

Total Credits $747,860 $303,234 $544,806 $493,468 $1,135,285 $51,996,536

Total Expenditures

- Corporation $8,797,489 $8,717,889 $8,996,904 $5,698,190 $10,528,197 $184,995,183

Department of the Treasury

Internal Revenue Service

•

Auditor’s Report

•

Fiscal Year 2000

Page 5 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

United States General Accounting Office

Washington, D.C. 20548

Comptroller General

of the United States

AudtRosir’eport

To the Commissioner of Internal Revenue

In accordance with the Chief Financial Officers (CFO) Act of 1990, as 

expanded by the Government Management Reform Act of 1994, this report 

presents the results of our audit of the financial statements of the Internal 

Revenue Service (IRS) for fiscal year 2000. The financial statements report 

the assets, liabilities, net position, net costs, changes in net position, 

budgetary resources, reconciliation of net costs to budgetary obligations, 

and custodial activity related to IRS’ administration of its responsibilities 

for implementing federal tax legislation. The financial statements do not 

include a measurement of the amount of taxes legally owed the federal 

government but which have not been identified by IRS, often referred to as 

the “tax gap.”

In its role as the nation’s tax collector, IRS has a demanding responsibility 

in collecting taxes, processing tax returns, and enforcing the nation’s tax 

laws. The size and complexity of IRS’ operations present additional 

challenges to management. IRS is a large, complex, decentralized 

organization with about 100,000 people in 10 service centers,1

 3 computing 

centers, and many other field offices throughout the United States. 

Historically, most IRS offices other than headquarters have had 

responsibilities tied to their geographical locations. However, in response 

to congressional concerns about IRS’ operations embodied in the Internal 

Revenue Service Restructuring and Reform Act of 1998, IRS is undergoing a 

reorganization that is significantly affecting the past roles and 

responsibilities of these offices. In fiscal year 2000, IRS collected over 

$2 trillion in taxes, processed over 210 million tax returns, and paid about 

$194 billion in refunds to taxpayers. 

1

As part of its ongoing reorganization, IRS now calls these offices “campuses.”
Page 6 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

IRS continues to face most of the pervasive systems and internal control 

weaknesses that we have reported each year since we began auditing IRS’ 

financial statements in fiscal year 1992.2

 Despite these weaknesses, in fiscal 

year 2000, IRS was able to produce for the first time combined financial 

statements covering its tax custodial and administrative activities that are 

fairly stated in all material respects.3

 This achievement was the culmination 

of 2 years of extraordinary effort on the part of IRS to develop 

compensating processes to work around its serious systems and control 

weaknesses to derive year-end balances for its financial statements and 

address several of the management issues we raised in previous reports. 

IRS laid the groundwork for sustainable improvements in several critical 

areas. However, IRS’ approach to obtaining this unqualified opinion on its 

fiscal year 2000 financial statements relied heavily on costly, timeconsuming processes; statistical projections; external contractors; 

substantial adjustments; and monumental human efforts that extended 

well after the September 30, 2000, fiscal year-end. The tremendous 

commitment on the part of both IRS senior management and staff was the 

key to IRS’ ability to achieve its goal of receiving an unqualified audit 

opinion on its financial statements for fiscal year 2000. At the same time, 

these costly efforts would not be necessary if IRS’ systems and controls 

operated effectively. In addition, the absence of effective systems and 

controls means that IRS lacks the timely, accurate, and useful information 

to make informed management decisions and ensure adequate 

accountability on an ongoing basis.

IRS’ achievement is an important milestone. At the same time, sustaining 

this success will require a continued high level of involvement by IRS 

senior management and further efforts to obtain lasting solutions to its 

fundamental systems and internal control deficiencies. IRS has made 

notable progress in several areas. Specifically, we noted significant 

improvements in IRS’ policies and procedures over its fund balance with 

Treasury and transactions held in suspense and in its documentation of 

2

Financial Audit: Examination of IRS’ Fiscal Year 1992 Financial Statements

(GAO/AIMD-93-2, June 30, 1993).

3

In fiscal year 1997, IRS received for the first time unqualified audit opinions on separate 

financial statements covering its tax custodial activities (by GAO) and its administrative 

activities (by the Department of Treasury Office of Inspector General). In fiscal year 1998, 

IRS combined its tax custodial and administrative activities in one set of financial 

statements. GAO was able to determine in fiscal years 1998 and 1999 that the taxes 

receivable balance reported on the balance sheet and the tax revenue and refunds reported 

in the statement of custodial activity were fairly stated.
Page 7 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

unpaid tax assessments that, if effectively sustained in the future, should 

prevent a reemergence of the problems that we found in these areas in 

prior years. IRS also made improvements in computer security and 

handling of taxpayer receipts and data, although further improvement is 

needed in each of these areas. In addition, IRS is working aggressively to 

address issues we have raised regarding controls over its budgetary 

activity. While more efforts are needed in this area, measurable progress 

has been made. 

IRS senior management has continued to demonstrate a strong 

commitment to address the operational and financial management issues 

discussed in this report. This high level of involvement by IRS senior 

management has greatly contributed to actions taken to resolve some of 

the issues we have raised. Continued involvement at this level is critical to 

IRS’ success in addressing the serious internal control and systems 

problems that remain. While IRS was able to produce financial statements 

that were fairly stated in all material respects using compensating 

processes, this approach does not produce the reliable, useful, and timely 

financial and performance information IRS needs for decision-making on 

an ongoing basis which is the goal of the CFO Act. Also, this approach does 

not address the underlying financial management and operational issues 

that adversely affect IRS’ ability to effectively fulfill its responsibilities as 

the nation’s tax collector. We reported on these continuing significant 

challenges for IRS in our recently issued high-risk and performance and 

accountability series4

 and other reports. 

The challenge for IRS will be to build on the improvements made in fiscal 

year 2000 to not only improve its compensating processes but, more 

importantly, to develop and implement the fundamental long-term 

solutions that are needed to address the management challenges we have 

identified. Some of these solutions can be addressed in the near term 

through the continued efforts and commitment of IRS senior management 

and staff. Others, which involve modernizing IRS’ financial and operational 

systems, will take years to fully achieve. Until IRS’ systems and processes 

are overhauled and internal controls are strengthened, “heroic” efforts will 

have to be sustained for IRS to continue to receive an unqualified audit 

opinion in future years.

4

High-Risk Series: An Update (GAO-01-263, January 2001) and Major Management 

Challenges and Program Risks: Department of the Treasury (GAO-01-254, January 2001). 
Page 8 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Opinion on IRS’ 

Financial Statements

IRS’ financial statements, including the accompanying notes, present fairly, 

in all material respects, in conformity with U.S. generally accepted 

accounting principles, IRS’ assets, liabilities, net position, net costs, 

changes in net position, budgetary resources, reconciliation of net costs to 

budgetary obligations, and custodial activity, as of and for the fiscal year 

ended September 30, 2000.

However, misstatements may nevertheless occur in other financial 

information reported by IRS as a result of the internal control weaknesses 

described in this report.

IRS’ financial statements report tax revenues collected during the fiscal 

year and the cumulative amounts of unpaid taxes where there is agreement 

with IRS, either by the taxpayer or court, as to the amounts owed. 

Cumulative unpaid tax assessments where there is no future collection 

potential or where there is no agreement as to the amounts owed are not 

reported in the financial statements, but are reported as write-offs and 

compliance assessments, respectively, in supplemental information to IRS’ 

financial statements. However, to the extent that taxes owed in accordance 

with the nation’s tax laws are not reported by taxpayers and are not 

identified through IRS’ various enforcement programs, in accordance with 

U.S. generally accepted accounting principles, they are not reported in the 

financial statements nor in supplemental information to the financial 

statements. As IRS discusses in the other accompanying information to the 

financial statements, IRS does not have current information upon which to 

base a reasonable estimate of the magnitude of these unidentified and 

unpaid taxes—referred to as the “tax gap.” We have discussed this issue in 

our recently issued high risk series.5

5

High Risk Series: An Update (GAO-01-263, January 2001).
Page 9 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Opinion on Internal 

Controls

Because of the material weaknesses6 in internal controls discussed below, 

IRS did not maintain effective internal controls over financial reporting 

(including safeguarding of assets) or compliance with laws and regulations, 

and thus did not provide reasonable assurance that losses, misstatements, 

and noncompliance with laws material in relation to the financial 

statements would be prevented or detected in an ongoing manner and on a 

timely basis. 

Despite the material weaknesses in internal controls, IRS was able to 

prepare, through compensating processes and approaches to work around 

its serious internal control and systems deficiencies, financial statements 

that were fairly stated in all material respects for fiscal year 2000. 

Nonetheless, IRS continues to face the following key issues which 

represent material weaknesses in internal controls and management 

challenges: 

• an inadequate financial reporting process, resulting in IRS not having 

current and reliable ongoing information to support management 

decision-making and to prepare cost-based performance measures;

• weaknesses in controls and other limitations affecting its ability to 

properly manage unpaid assessments, resulting in both taxpayer burden 

and potentially billions of dollars in lost revenue to the government;

• weaknesses in controls over tax refunds, permitting the disbursement of 

potentially billions of dollars of improper refunds;

• inadequate controls over property and equipment, resulting in IRS’ 

inability to reasonably ensure that its property and equipment is 

safeguarded and used only in accordance with management policy;

• inadequate budgetary controls, resulting in IRS’ inability to routinely 

ensure that its budgetary resources are being properly accounted for, 

reported, and controlled; and

• weaknesses in computer security controls that may allow unauthorized 

individuals to access, alter, or abuse proprietary IRS programs and 

electronic data and taxpayer information.

6

A material weakness is a condition that precludes the entity’s internal control from 

providing reasonable assurance that material misstatements in the financial statements 

would be prevented or detected on a timely basis. Reportable conditions are matters coming 

to our attention that, in our judgment, should be communicated because they represent 

significant deficiencies in the design or operation of internal controls that could adversely 

affect IRS’ ability to meet the objectives described in this report.
Page 10 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

The material weaknesses in internal control noted above may adversely 

affect any decision by IRS’ management that is based, in whole or in part, 

on information that is inaccurate because of these weaknesses. In addition, 

unaudited financial information reported by IRS, including budget and 

performance information, may also contain misstatements resulting from 

these weaknesses. 

In addition to the material weaknesses discussed above, we identified two 

reportable conditions which, although not material weaknesses, represent 

significant deficiencies in the design or operation of internal controls that 

could adversely affect IRS’ ability to meet the internal control objectives 

described in this report. These conditions concern:

• deficiencies in controls over hardcopy tax receipts and taxpayer data 

that increase the government’s and taxpayers’ risk of loss or 

inappropriate disclosure of taxpayer data; and

• deficiencies and limitations in revenue reporting and excise tax 

distributions, resulting in IRS’ inability to separately report revenue 

collected for three of the federal government’s four largest revenue 

sources and errors in quarterly distributions of excise tax revenue to 

trust funds.

We have reported on these material weaknesses and reportable conditions 

in prior audits and have provided IRS numerous recommendations to 

address these issues, of which over 80 were still open as of the date of this 

letter. We will follow up in future audits to monitor IRS’ progress in 

implementing these recommendations. For more details on these issues, 

see appendix I.

Compliance with Laws 

and Regulations and 

FFMIA Requirements

Our tests of compliance with selected provisions of laws and regulations 

disclosed two instances of noncompliance with laws and regulations that 

are reportable under U.S. generally accepted government auditing 

standards or OMB guidance. These relate to IRS’ structuring of installment 

agreements to collect delinquent taxes and the timing of the release of tax 

liens on taxpayers’ property. Also, IRS’ financial management systems did 

not substantially comply with the following requirements of the Federal 

Financial Management Improvement Act of 1996 (FFMIA): (1) Federal 

Financial Management Systems Requirements, (2) applicable federal 

accounting standards (U.S. generally accepted accounting principles), and 

(3) the U.S. Government Standard General Ledger (SGL) at the transaction 

level. IRS has readily acknowledged that its financial management systems 
Page 11 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

do not comply with FFMIA and the need to overhaul these systems as part 

of its broader systems modernization efforts. For more details on these 

issues, see appendix I.

Except as noted above, our tests for compliance with the laws and 

regulations disclosed no other instances of noncompliance that would be 

reportable under U.S. generally accepted government auditing standards or 

OMB audit guidance. However, the objective of our audit was not to 

provide an opinion on overall compliance with laws and regulations. 

Accordingly, we do not express such an opinion.

Consistency of Other 

Information

Management’s Discussion and Analysis, required supplemental 

information, and other accompanying information contain a wide range of 

data, some of which are not directly related to the financial statements. We 

did not audit and do not express an opinion on this information. However, 

we compared this information for consistency with the financial 

statements and discussed the methods of measurement and presentation 

with IRS officials. Based on this limited work, we found no material 

inconsistencies with the financial statements or nonconformance with 

OMB guidance. Under OMB Bulletin 97-01, as amended, agencies are asked 

to strive to develop and report objective measures that, to the extent 

possible, provide information about the cost-effectiveness of their 

programs. However, we found that IRS cannot report reliable cost-based 

performance measures relating to its various programs in accordance with 

the Government Performance and Results Act of 1993. 

Objectives, Scope, and 

Methodology

Management is responsible for (1) preparing the annual financial 

statements in conformity with U.S. generally accepted accounting 

principles, (2) establishing, maintaining, and assessing internal control to 

provide reasonable assurance that the broad control objectives of 31 U.S.C. 

§3512, (c), (d), (Federal Managers’ Financial Integrity Act (FIA)) are met, 

(3) complying with applicable laws and regulations, and (4) ensuring that 

the agency’s financial management systems substantially comply with the 

requirements of FFMIA. 

We are responsible for obtaining reasonable assurance about whether 

(1) the financial statements are presented fairly, in all material respects, in 

conformity with U.S. generally accepted accounting principles and 
Page 12 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

(2) management maintained effective internal controls, the objectives of 

which are the following: 

• Financial reporting—transactions are properly recorded, processed, 

and summarized to permit the preparation of financial statements in 

conformity with U.S. generally accepted accounting principles and 

assets are safeguarded against loss from unauthorized acquisition, use, 

and disposition. 

• Compliance with laws and regulations—transactions are executed in 

accordance with laws governing the use of budget authority and with 

other laws and regulations that could have a direct and material effect 

on the financial statements and any other laws, regulations, and 

governmentwide policies identified by OMB audit guidance. 

We are also responsible for testing compliance with (1) selected provisions 

of laws and regulations that have a direct and material effect on the 

financial statements, (2) laws for which OMB audit guidance requires 

testing, and (3) FFMIA requirements. In addition, we are responsible for 

performing limited procedures with respect to certain other information 

appearing in these annual financial statements. For more details on our 

methodology, see appendix II.

We did not evaluate all internal controls relevant to operating objectives as 

broadly described by FIA, such as controls relevant to preparing statistical 

reports and ensuring efficient operations. We limited our internal control 

testing to testing controls over financial reporting and compliance. 

We did not test compliance with all laws and regulations applicable to IRS. 

We limited our tests of compliance to legal provisions that we considered 

applicable to the financial statements for the fiscal year ended September 

30, 2000, and were either included in the Internal Revenue Code or required 

to be tested by OMB guidance. We caution that noncompliance other than 

that discussed in this report may occur and not be detected by these tests 

and that such testing may not be sufficient for other purposes. 

We performed our work in accordance with U.S. generally accepted 

government auditing standards and OMB audit guidance. 

Agency Comments and 

Our Evaluation

In responding to this report, IRS recognized the extraordinary efforts 

necessary to overcome its serious systems deficiencies and internal control 

weaknesses in order to prepare financial statements for fiscal year 2000 
Page 13 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

that were fairly stated in all material respects. IRS also acknowledged the 

need to sustain these efforts and to continue to address its systems and 

control deficiencies but noted that ultimately, long-term resolutions to 

many of these issues can only be addressed through its ongoing systems 

modernization efforts. IRS highlighted its accomplishments thus far in 

addressing these issues, and summarized many of the corrective actions it 

has in progress or planned which it believes will ultimately achieve this 

goal. For example, IRS cited improvements in areas such as routine 

reconciliations of its fund balance, proper classification of program costs, 

review and management of its suspense accounts, and substantiation of 

unpaid assessments through better documentation. IRS also cited 

continuing efforts to address issues such as accountability over property 

and equipment, computer security, and security of hard copy tax receipts 

and taxpayer data. We will evaluate the effectiveness of these efforts during 

future audits. 

IRS generally agreed with our discussion of its problems with financial 

reporting, but believed that our discussion of the quality of the data in its 

general ledger systems could mislead readers. We clarified our discussion 

of this issue to address IRS’ concern. However, we did not accept IRS’ 

suggested alternate language because we believe it gives the impression 

that the problem with IRS’ general ledger data integrity relates primarily to 

IRS’ practice of not posting certain types of transactions until year-end, 

such as the capitalization of costs incurred in purchasing property and 

equipment (P&E). However, as discussed in appendix I to this report, as of 

September 30, 2000, IRS’ general ledger did not include material amounts of 

fiscal year 2000 transactions, and in fact, these transactions were not 

recorded until months after the end of the year. In addition to the 

capitalization of P&E and related depreciation expense, these included 

many other material transactions, such as recognition of expenses for 

goods and services received during fiscal year 2000 but not yet recorded. 

IRS also recorded material adjustments to correct misstatements caused by 

previous delays in recording transactions, such as fiscal year 1999 

expenses that were not recorded until fiscal year 2000. 

In commenting on this report’s discussion of unpaid assessments, IRS 

noted that the cost-benefit analysis discussed in this report would not 

produce more resources nor necessarily indicate that the programs subject 

to such an analysis should be expanded. The purpose of such analysis is 

not to increase resources. Rather, the objective is to provide IRS 

management with the basic information needed to make decisions 

involving allocation of limited resources among competing priorities, and 
Page 14 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

once such decisions are made, to enable IRS to justify its decisions. This 

analysis would also better position IRS to determine if increases in total 

resources are warranted and to support related budgetary requests to 

Congress. IRS indicated a preference for addressing this issue through its 

strategic planning and budgeting process. However, in the absence of basic 

cost-benefit information to support this process, the basis for IRS’ 

decisions will remain unclear. 

IRS generally agreed with the report’s discussion of weaknesses in controls 

over P&E, but believed that our report did not put into proper perspective 

the progress IRS believes it achieved in P&E management in fiscal year 

2000. As we state in appendix I, we noted progress in IRS’ efforts to 

improve the timeliness and accuracy of its P&E records, nonetheless, while 

improvements were made, we found that these efforts were not fully 

effective as demonstrated by the significant number of errors in IRS’ 

property records we continued to find during our testing. In addition, it was 

only through an interim process involving enormous manual efforts by IRS 

employees, and the costly assistance of a contractor, that IRS was able to 

report a reliable P&E balance in its financial statements. Throughout fiscal 

year 2000, the lack of an integrated property management system 

precluded IRS’ ability to report timely, reliable P&E information. We 

recognize the extraordinary efforts of IRS staff and we applaud 

management’s commitment to working to correct the long-standing 

weaknesses that we identified. However, the progress that IRS made in 

fiscal year 2000 was not sufficient to correct the fundamental deficiencies 

in its property management system. We will continue to evaluate the 

effectiveness of IRS’ initiatives to correct deficiencies during future audits 

and to assist it in its efforts with suggestions and recommendations.
Page 15 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

IRS had several other specific comments to the draft report. These 

comments, along with the complete text of IRS’ response, are included in 

appendix III. 

David M. Walker

Comptroller General

of the United States

February 9, 2001
Page 84 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Appendix I

Material Weaknesses and Management Apendxies

Challenges, Reportable Conditions, and 

Compliance Issues ApendxiI

Material Weaknesses 

and Management 

Challenges

During our audit of IRS’ fiscal year 2000 financial statements, we identified 

six material weaknesses in internal controls. Some of these material 

weaknesses and their related management challenges have allowed 

inappropriate refunds to be paid, reduced IRS’ effectiveness in enforcing 

the tax code, and resulted in errors in taxpayer accounts and increased 

taxpayer burden. The issues that we have identified and discuss in this 

report relate to IRS’ controls over (1) the financial reporting process, 

(2) management of unpaid assessments, (3) refunds, (4) property and 

equipment, (5) budgetary activities, and (6) computer security. We reported 

on each of these issues last year.1

 We highlight these issues in the following 

sections and plan to provide more details on them, as well as 

recommendations for corrective actions, in a subsequent report. Less 

significant matters involving IRS’ system of internal controls and its 

operation will be separately reported in a management letter to IRS.

In our previous report on the results of our audit of IRS’ fiscal year 1999 

financial statements, we reported on a material weakness with respect to 

IRS’ failure to routinely reconcile its fund balance with Treasury. During 

fiscal year 2000, IRS implemented monthly reconciliation procedures for its 

fund balance with Treasury that were operating effectively during fiscal 

year 2000. Accordingly, we no longer consider this to be a material 

weakness.

Financial Reporting In fiscal year 2000, as in prior years, IRS did not have adequate internal 

controls over its financial reporting process. IRS was unable to routinely, 

reliably, and timely generate the information needed to prepare its financial 

statements and manage operations on an ongoing basis. IRS does not 

(1) have an adequate general ledger system for financial reporting and 

management purposes, (2) record material transactions in its general 

ledger system in a timely manner, and (3) have adequate detailed 

supporting records for several material accounts. To compensate for these 

weaknesses, IRS depended on extensive, labor-intensive ad hoc procedures 

to enable it to report reliable balances in its financial statements. 

1

Financial Audit: IRS’ Fiscal Year 1999 Financial Statements (GAO/AIMD-00-76, February 29, 

2000).
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 85 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

IRS’ general ledger system (1) comprises two independent general ledgers 

that are not integrated with each other nor with their supporting records 

for material balances,2

 (2) is not current or accurate, and (3) is not 

supported by adequate audit trails for property and equipment, federal tax 

revenue, federal tax refunds, taxes receivable, or budgetary activity. In 

addition, IRS’ general ledger for its custodial activities does not use the 

standard federal accounting classification structure. Because of these 

deficiencies, IRS’ general ledger system does not conform with the U.S. 

Government Standard General Ledger (SGL) as required by the Core 

Financial System Requirements of the Joint Financial Management 

Improvement Program3

 or the requirements of FFMIA. Consequently, IRS 

continued to be unable to rely on its general ledger system to fully support 

its financial statements.

IRS often does not record material transactions in its general ledger system 

until months after they occur. As a result, material balances in the general 

ledger systems cannot be used by managers as a reliable source of current 

financial data at interim periods. Consequently, for IRS to use its general 

ledger system for financial reporting or other management purposes, IRS 

must first supplement it with extensive analysis and material adjustments 

to recognize transactions that have not yet been recorded. This approach is 

costly, labor-intensive, and typically requires several months to complete. 

For fiscal year 2000, this process was not completed until February 2001, 

and required billions of dollars in adjustments to recognize fiscal year 2000 

transactions that were not yet recorded in the general ledger. This 

approach is also prone to errors that are not always caught and corrected 

by management. For fiscal year 2000, substantial additional audit 

adjustments were necessary to prevent the resultant financial statements 

from being materially misstated. As a result of these problems, IRS cannot 

produce reliable financial statements or financial performance information 

throughout the year as a management tool, as is standard practice in 

private industry and some federal entities.

2

IRS’ two independent general ledgers support its administrative and custodial operations. 

3

The Joint Financial Management Improvement Program (JFMIP) is a cooperative 

undertaking of the Office of Management and Budget, the Department of the Treasury, the 

Office of Personnel Management, and GAO working in cooperation with each other and 

with operating agencies to improve financial management practices.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 86 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

We previously reported that IRS commingled customer service and 

compliance costs on its statement of net costs.4

 To address this issue, IRS 

revised the format of its statement of net cost and significantly expanded 

and enhanced the related disclosures in fiscal year 2000. The resulting 

presentation appropriately classified the cost of IRS’ programs.

Management of Unpaid Tax 

Assessments

During fiscal year 2000, we found that serious internal control issues and 

other management challenges continued to affect IRS’ management of 

unpaid assessments. IRS was able to report amounts for taxes receivable 

and other unpaid assessments5

 in its financial statements and supplemental 

information that were fairly stated in all material respects, using statistical 

sampling techniques and estimation procedures. However, the lack of an 

effective subsidiary ledger; errors and delays in recording taxpayer 

information, payments, and other activities; and the inability to actively 

pursue significant amounts in outstanding taxes owed to the federal 

government continue to hinder IRS’ ability to effectively manage unpaid 

assessments. 

4

 GAO/AIMD-00-76, February 29, 2000.

5

Unpaid assessments consist of (1) taxes due from taxpayers for which IRS can support the 

existence of a receivable through taxpayer agreement or a favorable court ruling (federal 

taxes receivable), (2) compliance assessments where neither the taxpayer nor the court has 

affirmed that the amounts are owed, and (3) write-offs, which represent unpaid assessments 

for which IRS does not expect further collections due to factors such as the taxpayer’s 

death, bankruptcy, or insolvency. Of these three classifications of unpaid assessments, only 

federal taxes receivable are reported on the principal financial statements. As of September 

30, 2000, IRS reported $22 billion (net of an allowance for doubtful accounts of $59 billion), 

$30 billion, and $129 billion in these three categories, respectively.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 87 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

IRS continues to lack a detailed listing, or subsidiary ledger, that tracks and 

accumulates unpaid assessments and their status on an ongoing basis. The 

lack of such a subsidiary ledger renders IRS unable to promptly identify 

and focus collection efforts on accounts most likely to prove collectible6

and impedes its ability to prevent or detect and correct errors in taxpayers’ 

accounts. As in prior years,7

 IRS’ records contained errors and there were 

significant delays in IRS recording activity in taxpayer accounts. While 

these conditions in isolation may not rise to the level of material weakness, 

collectively they are indications of serious internal control deficiencies. 

These conditions continued to result in instances of unnecessary taxpayer 

burden and lost opportunities to collect outstanding taxes owed. 

During our testing of statistical samples of 5088

 unpaid tax assessment 

cases as part of our fiscal year 2000 audit, we found the following:

• Significant delays—of up to 12 years—in recording payments made by 

taxpayers to related taxpayer accounts. We also found payments that 

were not recorded at all in related taxpayer accounts. Some of these 

delayed or unrecorded payments were made in the late 1980s.

• Delays in updating information in taxpayer accounts. In some instances, 

because IRS delayed entering taxpayer information such as bankruptcy 

status or codes to prevent the release of refunds, it lost opportunities to 

offset refunds owed to taxpayers for subsequent tax periods against 

their outstanding tax liabilities. In two cases, IRS’ failure to input or 

reverse information resulted in refunds that should not have been issued 

because the taxpayer had other outstanding tax liabilities. In each of 

these cases, the inappropriate refund was for more than $4,000.

• Other errors in taxpayer’s accounts. We found at least eight cases in our 

sample in which errors other than those noted above existed in taxpayer 

accounts. In some cases, the errors directly affected the taxpayer. In one 

6

It should be noted that although certain taxpayer accounts have little likelihood of 

collection, IRS would generally continue some collection efforts to reinforce continued 

compliance by taxpayers who appropriately report and pay their tax obligations and to 

increase compliance by taxpayers who are delinquent in reporting and paying their tax 

obligations.

7

GAO/AIMD-00-76, February 29, 2000; and Financial Audit: IRS’ Fiscal Year 1998 Financial 

Statements (GAO/AIMD-99-75, March 1, 1999).

8

These statistical samples were selected primarily to substantiate, and in some cases derive, 

balances and activity reported on IRS’ financial statements. Consequently, dollar errors or 

amounts can and have been statistically projected to the population of transactions from 

which they were selected. 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 88 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

case, we found that a deceased individual’s estate sent a payment of 

$68 million to IRS in January 1999, but IRS recorded the payment to the 

wrong taxpayer account. The taxpayer’s estate was actually owed a 

refund of almost $7 million. This input error was not corrected until 

almost 2 years later. Consequently, IRS did not pay the refund to the 

estate for nearly 2 years after it was owed. 

We have found and reported on these issues in previous audits.9

 IRS has 

acknowledged the seriousness of these issues and continues to take 

remedial steps to correct them, but has noted in the past and continues to 

note that the ultimate solution to many of these issues is modernization of 

its systems. As in prior years, the unpaid assessment accounts in which we 

found significant delays in recording payments primarily were those 

representing unpaid payroll taxes, where separate accounts are established 

and assessments recorded for a related tax liability.10 IRS’ current systems 

cannot automatically link each of the multiple assessments made for the 

one tax liability. Consequently, if the business or an officer pays some or all 

of the outstanding taxes, IRS’ systems are unable to automatically reflect 

the payment as a reduction in the related account or accounts. In 29 of 68 

(43 percent) unpaid payroll tax cases we reviewed involving multiple 

assessments, we found that payments were not accurately recorded to 

reflect each responsible party’s reduction in tax liability. This is 

approximately the same rate of occurrence that we identified during our 

1999 audit (45 percent). IRS has attempted to compensate for the lack of an 

automated link between related accounts by manually inputting a code in 

each account that cross-references it to other related accounts. However, 

in the 29 cases mentioned above, 28 (96 percent) had cross-references, yet 

the payments still were not accurately recorded. 

9

GAO/AIMD-00-76, February 29, 2000; GAO/AIMD-99-75, March 1, 1999.

10When a company does not pay the taxes that have been withheld from employees’ wages, 

such as Social Security or individual income tax withholdings, IRS has the authority to 

assess the responsible officers individually for the taxes withheld from employees. Thus, 

IRS may record the assessments against each of several individuals for the employeewithholding component of the payroll tax liability of a given business in an effort to collect 

the total tax liability of the business. While the assessments made against business 

officers—known as trust fund recovery penalties—are a necessary enforcement tool, IRS 

should only collect the unpaid tax once. 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 89 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

As with any large agency, IRS is confronted by the ongoing management 

challenge of allocating its limited resources among competing priorities. As 

we reported previously, IRS does not have the management data necessary 

to prepare reliable cost-benefit analyses to ensure that its resource 

allocation decisions are appropriate. Consequently, IRS is hindered in its 

ability to determine whether it is devoting an appropriate level of resources 

to collecting unpaid taxes relative to the costs and potential benefits 

involved. During fiscal year 2000, we found potential additional collection 

opportunities that IRS was not pursuing, according to IRS, due to resource 

constraints. We continued to identify instances in which IRS was not 

actively pursuing accounts that appeared to have some collection potential. 

IRS officially stopped collection efforts on some of these cases11 while 

other cases remained unworked although collection efforts were not 

officially stopped. In our review of one of our statistical samples of unpaid 

tax assessments consisting of 474 cases, we found (1) 9 cases in which IRS 

officially stopped collection activity due to resource constraints and 

(2) several other cases for which information in the case files we reviewed 

indicated some collection potential but on which IRS had not taken 

collection action. For example, in one case, a taxpayer owed over $23,000 

in taxes, and despite this taxpayer’s annual income in subsequent years of 

over $110,000, IRS was not actively pursuing collection. There is a point at 

which pursuing collection on a case ceases to be cost effective, and clearly 

many cases in our sample provided little or no hope of future collections. 

IRS’ challenge is to determine the appropriate level of resources needed to 

fulfill its mission and the most appropriate utilization of its existing 

resources. Without sound management data in which to make these 

decisions, IRS is hindered in its ability to justify its resource utilization 

decisions, which could result in billions of dollars in outstanding amounts 

going uncollected and could affect future compliance.

In fiscal year 2000, we noted substantial improvement in IRS’ ability to 

locate and provide adequate supporting documentation for unpaid 

assessments. The cases we reviewed in fiscal year 2000 generally contained 

sufficient detailed information to determine the appropriate classification 

11These accounts had been designated by IRS as “currently not collectible.” Until recently, 

the designation “currently not collectible” was typically used for cases in which the taxpayer 

was experiencing financial difficulties or other hardships that made collection highly 

unlikely. However, during fiscal year 1999, IRS modified the criteria under which unpaid 

assessment cases could be designated as currently not collectible in response to an 

increasing inventory workload and its judgment that resource constraints would not permit 

the agency to actively pursue the cases.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 90 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

of the unpaid assessment and to provide a basis for estimating collectibility 

for cases determined to be taxes receivable. We identified only one case 

this year in which IRS’ inability to provide documentation resulted in the 

need to reclassify the case.

Controls Over Refunds As we have reported in previous audits, weaknesses in IRS’ controls over 

refund disbursements and other management challenges expose the 

federal government to material losses due to disbursing improper 

refunds.12 During fiscal year 2000, IRS disbursed tax refunds totaling about 

$194 billion. IRS has implemented various controls, such as electronic 

screening, that prevent thousands of improper refunds from being 

disbursed each year. However, time constraints,13 high volume, and reliance 

on information supplied by taxpayers affected the options available to IRS 

in its efforts to prevent improper refunds from being disbursed. 

Consequently, IRS relies extensively on postrefund (detective) controls, 

such as automated matching of returns with third-party data such as W-2s 

(wage and tax statements), to identify for collection improper refunds that 

have been disbursed. However, each year, IRS does not apply these 

controls to millions of tax returns it estimates to have billions of dollars of 

underreported tax liabilities. Consequently they cannot be considered 

effective detective controls. Inevitably, IRS must balance the cost of all its 

refund controls against the benefits to be realized through their use. 

However, as we previously reported,14 IRS’ financial management systems 

do not provide the reliable information needed to support such decisions. 

12An improper refund is defined as any refund of tax payments from IRS to which the 

taxpayer is not entitled. The taxpayer may or may not have made an intentional 

misstatement on his or her return.

13By statute, IRS must pay interest on refunds not paid within 45 days of receipt or due date, 

whichever is later (26 U.S.C. 6611).

14Internal Revenue Service: Recommendations to Improve Financial and Operational 

Management (GAO-01-42, November 17, 2000).
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 91 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

IRS does not always review Earned Income Tax Credit (EITC) claims in 

time to identify invalid claims before issuing refunds. Historically, EITCs 

have been vulnerable to high rates of invalid claims,15 and because most 

EITCs result in refunds,16 the risk of disbursing improper refunds is 

significantly increased. In an effort to minimize this risk, IRS, relying on 

past experience, screens tax returns claiming EITCs to identify (for 

detailed examination) those considered most likely to be invalid. During 

fiscal year 2000, IRS examiners completed the detail examinations of about 

257,000 tax returns claiming approximately $587 million in EITC and found 

that about 173,000 of these tax returns claiming $395 million in EITC 

(67 percent) were invalid. When performed before refunds are disbursed, 

these examinations are an important control to prevent disbursement of 

improper refunds. However, because IRS often performs them after any 

related refunds are disbursed, they are not an effective preventive control 

overall.17 The full magnitude of refunds resulting from invalid EITCs is 

unknown. However, in September 2000, IRS estimated that in tax year 1997, 

taxpayers filed about $9.3 billion in invalid EITCs,18 of which $1.5 billion 

(16 percent) either was recovered or was expected to be recovered through 

compliance efforts. The dollar amount of improper refunds disbursed 

related to these EITCs is unknown. However, based on the refund rate of 

about 78 percent of EITC in tax year 1997, IRS may have disbursed 

approximately $7.3 billion in improper refunds for EITC in tax year 1997, 

about $6.1 billion (84 percent) of which may never be recovered. IRS began 

implementing a 5-year initiative in fiscal year 1998 to address 

noncompliance problems with EITCs. 

To compensate for the inherent limitations of its preventive controls, IRS 

performs automated matches between tax returns and related third-party 

data to identify underreported taxes, improper refunds, and other errors. 

However, these programs are not run until months after the returns have 

15High-Risk Series: An Update (GAO-01-263, January 2001); Major Management Challenges 

and Program Risks: Department of the Treasury (GAO-01-254, January 2001); and 

GAO/AIMD 00-76, February 29, 2000.

16During fiscal year 2000, IRS processed about $31 billion in EITCs. Of this amount, about 

$26 billion (84 percent) was refunded, and the rest reduced tax assessments.

17IRS estimated that of the 573,000 EITC tax returns examined in fiscal year 1999, 

approximately 172,000 (30 percent) were conducted after the refund had been disbursed 

(GAO/AIMD-00-76, February 29, 2000). 

18Compliance Estimates for Earned Income Tax Credit Claimed on 1997 Returns (Internal 

Revenue Service, September 2000).
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 92 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

been filed. As a result, they are used too late to prevent improper refunds 

from being disbursed. There are factors that affect IRS’ ability to accelerate 

the timing of its automated matches, such as the limitations of its current 

automated systems and the timing of filing requirements for preparers of 

third-party documents, which are beyond IRS’ control. In response to a 

previous GAO recommendation, IRS indicated that it has incorporated in 

its systems modernization blueprint the capability to perform automated 

matching against available data before issuing refunds. However, 

implementing this feature is still years in the future.

As noted above, IRS does not have the management data necessary to 

prepare reliable cost-benefit analyses to ensure that its resource allocation 

decisions are appropriate. Consequently, IRS is hindered in its ability to 

determine the appropriate level of resources to devote to following up on 

the underreported taxes and improper refunds identified by its automated 

matching programs. However, the results of IRS efforts to follow up on the 

findings of its automated matches in recent years suggests that a 

substantial amount of additional revenue might be realized if additional 

resources were devoted to these efforts.19 For example, for tax year 1998, 

IRS’ screening program for individuals identified 14.1 million individual tax 

returns that had potential underreported taxes totaling at least 

$15.4 billion. IRS investigated about 2.5 million (18 percent) of these cases 

accounting for about $6.5 billion (42 percent) of the total potential 

underreported taxes. Also, IRS did not investigate any of the 636,000 

discrepancies its matching program found for employment tax returns filed 

by employers during tax year 1998. According to IRS, resource constraints 

prevented it from investigating more of these discrepancies. However, 

because of the lack of management information discussed above, IRS 

cannot determine whether it would be cost beneficial to allocate more 

resources to its automated matching programs and related follow-up. 

As previously discussed, we also continued to find instances in which 

inappropriate refunds were issued as a result of delays in recording 

information in taxpayers’ accounts. IRS also continued to be vulnerable to 

issuing duplicate refunds allowed by gaps in its internal controls. IRS’ 

manual and automated systems are not properly coordinated to prevent 

identical refunds from being processed through both systems, and controls 

designed to compensate for this are not always effective. All the above19GAO-01-42, November 17, 2000.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 93 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

mentioned conditions expose the government to potentially significant 

losses due to inappropriate refund disbursements.

Property and Equipment During fiscal year 2000, IRS continued to work to compensate for serious 

deficiencies in systems and controls over its property and equipment 

(P&E). Specifically, IRS worked hard to improve the reliability of its P&E 

inventory records by conducting physical inventories at its headquarters 

and its field offices, and used the results of these physical inventories to 

update its P&E inventory records. Also, IRS worked to sustain a reliable 

balance for P&E on its fiscal year 2000 financial statements by engaging the 

services of a contractor to extract and compile P&E transaction data for 

year-end financial reporting. IRS’ efforts resulted in it being able to report a 

balance for P&E on its financial statements at September 30, 2000, that was 

fairly stated in all material respects. Nonetheless, serious weaknesses in its 

P&E systems and controls continue to prevent it from having P&E 

information available on an ongoing basis for management purposes and 

from having reasonable assurance that its assets are properly safeguarded 

and used only in accordance with management policy. IRS has reported a 

material weakness in its controls over P&E in its assurance statement to 

Treasury under 31 U.S.C. §3512 (c), (d) (Federal Managers’ Financial 

Integrity Act (FIA)) every year since 1983.

In prior years, IRS’ procedures were not effective in ensuring that 

acquisitions, disposals, and transfers were promptly and accurately 

recorded in its P&E inventory records. As a result, IRS’ P&E records were 

not adequate to maintain accountability over its property. While we noted 

progress in IRS’ efforts to improve the timeliness and accuracy of recording 

P&E activity, we nonetheless continued to find a significant number of 

errors in IRS’ property records. Specifically, IRS was unable to locate 35 of 

220 sample items (16 percent) selected from P&E records, including 

computers, monitors, printers, and computer software. IRS later 

determined that 23 of these 35 items had been disposed of months earlier, 

but P&E records had not been updated to reflect the disposal. In addition, 

we found that 14 of 219 sample items (6 percent) selected at 22 sites we 

visited could not be traced to IRS’ P&E records. At 18 of the 22 IRS 

buildings we visited, we found inaccurate P&E records consisting of either 

items not at the site as recorded or items at the site but not on the records. 

Accurate records are essential for maintaining control over P&E to ensure 

that assets are properly accounted for and safeguarded. 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 94 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

As we have previously reported, IRS does not have an integrated property 

management system that appropriately records P&E additions and 

disposals as they occur and links cost recorded in the accounting records 

to property records. Instead, IRS expenses property purchases during the 

year, and then records adjustments at year-end to remove property 

purchases from expenses and capitalize them as P&E based on analyses of 

expense records. For its September 30, 1999, P&E balance, IRS recorded a 

balance based primarily on a statistical estimation process developed and 

implemented by a contractor.20 While the effort resulted in a reasonable 

estimate of the September 30, 1999, P&E balance, it did nothing to address 

the fundamental deficiencies in IRS’ accounting and property management 

systems. Consequently, for fiscal year 2000, IRS hired a contractor to 

develop and implement an interim process to enable IRS to continue to 

report a reliable P&E balance in its financial statements until it has an 

integrated accounting and property system.21

Although we determined through detailed tests of transactions and 

analyses of the contractor’s work that IRS’ reported September 30, 2000, 

P&E balance was fairly stated, longstanding weaknesses in IRS’ property 

and accounting systems continue to affect IRS’ ability to account for its 

property and report a reliable P&E balance. In addition, these weaknesses 

result in a recurring annual expense of hiring a contractor to develop a P&E 

balance at fiscal year-end. 

Budgetary Controls During fiscal year 2000, IRS devoted substantial effort to addressing the 

budgetary control weaknesses that we reported in fiscal year 1999.22 For 

example, during the fiscal year, IRS significantly reduced the number of 

employees with authority to override automated spending controls. Also, 

IRS substantially reduced the dollar amount and duration of transactions 

held in suspense. Finally, IRS issued numerous policy memoranda and 

implemented procedures to deobligate funds no longer required for a 

specific purpose. However, IRS’ internal controls continued to be 

inadequate in providing reasonable assurance that its budgetary resources 

20GAO/AIMD-00-76, February 29, 2000.

21IRS plans to acquire and install, in October 2003, an integrated financial system that will 

include recording P&E as assets when purchased and generating detailed records for P&E 

that reconcile to the financial records. 

22GAO/AIMD-00-76, February 29, 2000.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 95 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

were routinely accounted for, reported, and controlled. These weaknesses 

significantly affect the reliability of key budgetary information IRS needs 

on an ongoing basis to effectively manage its operations and ensure that its 

resources do not exceed budgetary authority. 

We found that undelivered orders23 were not always reduced to reflect 

goods and services received or were understated due to inappropriate 

deobligating of funds. For example, in our testing of statistical samples of 

both the beginning and ending balances of undelivered orders, we found 

error rates of 32 and 25 percent, respectively, for the transactions tested. 

These errors were primarily due to goods and services having been 

received but not deducted from undelivered orders. For example, in testing 

one fiscal year 2000 undelivered order totaling $7.9 million for computer 

equipment, we found that approximately $3.4 million of the equipment had 

been delivered but had not been removed from the undelivered orders 

balance. We also found instances in which IRS incurred costs before the 

obligations were recorded in the accounting system. In one case tested in 

our sample of beginning year undelivered orders, an obligation for over $9 

million for software and maintenance was not recorded in the accounting 

system until September 30, 1999, although the software was received and 

maintenance commenced by the end of July 1999. Incurring costs without 

timely recording obligations in the accounting system creates the risk that 

IRS personnel could rely on an overstatement of available budget authority 

to enter into additional obligations for which there is inadequate budget 

authority to cover. We also found that IRS’ efforts to address the need to 

deobligate amounts no longer needed resulted in instances in which the 

amounts were prematurely deobligated. In testing a separate statistical 

sample of deobligations, we found that in 17 percent of the cases, IRS later 

had to reobligate funds in whole or in part. These errors resulted in 

misstatements of IRS’ beginning and ending undelivered orders balances 

and its records of outstanding obligations.

Also, we found significant errors in IRS’ accrued expenses recorded at the 

end of fiscal year 1999, which resulted in misstating the beginning balance 

of undelivered orders for fiscal year 2000. In testing a statistical sample of 

these accruals, we identified errors in 36 percent of the sample cases. For 

example, IRS allocated $209,500 of the total invoice cost of $260,130 related 

to an information systems service contract to fiscal year 1999, and the 

23Undelivered orders represent the value of goods and services ordered that have been 

obligated but have not been received.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 96 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

remaining $50,630 to fiscal year 2000. However, based on the terms of the 

service contract, we determined that only $1,724 of the invoice cost related 

to services for fiscal year 1999, while the remaining $258,406 related to 

services to be rendered in fiscal year 2000. This resulted in an 

overstatement of the expense for fiscal year 1999 and an understatement of 

the beginning undelivered order balance for fiscal year 2000. We identified 

errors throughout IRS’ $121 million of accruals that resulted in both 

understatements and overstatements of the beginning undelivered orders 

balance. 

We also found that, during fiscal year 2000, IRS recorded incorrect activity 

as adjustments to obligations.24 IRS recorded a total of $277 million in 

adjustments to obligations in fiscal year 2000. However, in reviewing 

statistical samples of these adjustments, we found that 61 percent of the 

items we reviewed were not valid adjustments and, in fact, many were 

simply changes in internal accounting codes. For example, in one case we 

reviewed, IRS recorded a change in an internal accounting code as a new 

$15 million obligation and erroneously adjusted the original $15 million 

obligation downward, thereby misstating its reported level of adjustments 

to obligations. While adjustments were made to correct the amounts 

recorded in the financial statements, errors such as these affect the 

accuracy and reliability of routine information on both total budgetary 

resources and obligations. 

Computer Security IRS has corrected a significant number of the computer security 

weaknesses identified in our previous reports and is implementing a 

servicewide computer security planning and management program that 

should, when fully implemented, help IRS effectively manage its computer 

security risks. However, IRS has not yet fully implemented its security 

program across the service. 

Much remains to be done to resolve the significant control weaknesses that 

continue to exist within the IRS computing environment. IRS places 

extensive reliance on computer information systems to perform basic 

functions such as processing tax returns and payments, maintaining 

sensitive taxpayer data, calculating interest and penalties, and generating 

refunds. These computer control weaknesses could impair IRS’ ability to 

24An adjustment to an obligation is recorded when the dollar amount previously recorded is 

affected by a subsequent event, such as a change in the price of goods or services.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 97 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

perform these vital functions and increase the risk of the unauthorized 

disclosure, modification, or destruction of taxpayer data.

We found that IRS continued to have serious weaknesses with general 

controls designed to protect computing resources such as networks, 

computer equipment, software programs, data, and facilities from 

unauthorized use, modification, loss, and disclosure. IRS did not always 

• effectively implement physical controls to prevent or detect individuals 

from gaining unauthorized access to its data processing facilities, 

• adequately restrict logical access to its computer networks and systems, 

• appropriately segregate system administration and security 

administration responsibilities, 

• optimally configure system software to ensure the security and integrity 

of system programs, files, and data, 

• sufficiently plan or test the activities required to restore critical business 

systems when unexpected events occur, and 

• adequately monitor key networks and systems to identify unauthorized 

activities and inappropriate system configurations. 

In addition, internal controls over IRS’ key computer applications that IRS 

personnel used to process tax returns, research and adjust taxpayer 

records, generate notices, and detect and investigate fraudulent tax returns 

do not provide adequate assurance that only authorized personnel have 

access to the application and related taxpayer data. 

These weaknesses increased the risk that data processed by IRS’ computer 

systems were not reliable and were vulnerable to unauthorized disclosure. 

For example, IRS did not promptly revoke the access privileges of 

separated employees to a key system used to view and adjust taxpayer 

records. Weak physical security at one of IRS’ data processing facilities 

could have allowed separated employees to enter the facility without 

challenge, gain physical access to the system’s terminals, and use their 

unrevoked system access privileges to make unauthorized changes to 

taxpayer records. If IRS does not adequately mitigate these weaknesses, 

unauthorized individuals could gain access to critical hardware and 

software where they may intentionally or inadvertently add, alter, or delete 

sensitive data or computer programs. Such individuals could also obtain 

personal taxpayer information and use it to commit financial crimes in the 

taxpayer’s name (identity fraud), such as fraudulently establishing credit 

and running up debts. 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 98 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Reportable Conditions In addition to the material weaknesses and management challenges 

discussed above, we identified two reportable conditions. These conditions 

concern weaknesses in IRS’ (1) internal controls over manually processed 

tax receipts and taxpayer information and (2) revenue reporting and 

distribution process. We reported on both issues in prior years.25

Manual Tax Receipts and 

Taxpayer Information

IRS has acted to address some of its control deficiencies related to 

safeguarding cash, checks, and related hardcopy taxpayer data it manually 

receives from taxpayers. For example, IRS has significantly reduced the 

average amount of time it takes to obtain the results of employee applicant 

fingerprint checks, now requires the use of two bonded or insured couriers 

to transport service center deposits, and has limited courier access within 

service center premises. However, weaknesses that we have reported in 

prior years continue to exist. To address these issues, IRS issued new 

policies and procedures regarding handling of taxpayer receipts and data at 

sites that collect and process tax revenue. However, we found that some of 

these sites were not aware of the new policies, other sites did not adhere to 

them, and some sites were not covered by the new policies and procedures 

because they were not contractually bound to IRS. 

We previously reported that IRS was hiring individuals and allowing them 

access to cash, checks, and other taxpayer data before it received 

satisfactory results of their fingerprint checks.26 In response, IRS issued a 

new policy in April 2000 prohibiting the hiring of applicants in any IRS 

office until fingerprint checks were completed. However, we found that 

throughout the rest of the fiscal year, some new employees began working 

before the hiring office received the results of fingerprint checks. Because 

most of IRS’ hiring occurs in the several months leading up to the April 

peak processing period, the policy was not yet in place to affect most of its 

fiscal year 2000 hiring. However, we found that 83 of the 2,526 staff hired 

from the time the policy was issued through September 30, 2000, began 

working before IRS received the results of their fingerprint checks.

IRS also issued a new policy in fiscal year 2000 strengthening its courier 

requirements for all IRS locations, and we noted marked improvements at 

25GAO/AIMD-00-76, February 29, 2000; GAO/AIMD-99-75, March 1, 1999.

26GAO/AIMD-00-76, February 29, 2000.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 99 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

most sites we visited. The new policy’s requirements include that the 

courier services use two bonded or insured couriers, that all courier 

service employees with IRS access pass a limited background investigation 

and have the courier company be insured for $1 million. 

We did continue to find other weaknesses in controls over taxpayer 

receipts and taxpayer data that have not yet been adequately addressed. 

For example, we continued to find field office receipts and discovered 

remittances stored in open, unlocked containers, contrary to IRS policy. 

Also, we noted that certain problem areas have been addressed at service 

centers but not at other field offices that handle taxpayer receipts. For 

example, although IRS installed lockers at service centers for employees 

that handle receipts to store their personal belongings, we continued to 

find personal belongings such as handbags stored in receipt processing 

areas at several field offices. 

These inconsistencies by type of location are further illustrated by 

weaknesses found at commercial lockbox banks that process tax receipts 

on behalf of IRS. Since these lockbox banks operate under contract with 

Treasury’s Financial Management Service (FMS), many of IRS policies are 

not applicable to their operations. For example, under their contract with 

FMS, the lockbox banks are not required to follow IRS’ policy prohibiting 

the hiring of any new employee before the results of fingerprint checks are 

received and reviewed. Consequently, at the lockbox banks we visited, we 

found that fingerprint checks were not required for either permanent or 

temporary employees. Similarly, IRS’ new courier policy that applies to all 

IRS locations has not been extended to the lockbox banks.

These weaknesses increase IRS’ vulnerability to theft or loss and expose 

taxpayers to increased risk of losses from financial crimes committed by 

individuals who inappropriately gain access to confidential information 

entrusted to IRS. Although we do not consider these to be material 

weaknesses for financial reporting purposes, it is important that IRS 

continue efforts to address these matters because they are critical to IRS’ 

successfully meeting its customer service goals. 

Revenue Reporting and 

Distribution 

IRS continues to be unable to determine the specific amount of revenue it 

actually collects for three of the federal government’s four largest revenue 

sources—Social Security, Hospital Insurance, and individual income taxes. 

In addition, IRS continues to be unable to determine, at the time payments 

are received, collections for the Highway Trust Fund or other trust funds 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 100 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

that receive excise tax receipts. This is primarily because the accounting 

information needed to validate the taxpayer’s liability and record the 

payment to the proper trust fund is provided on the tax return, which is 

received months after the payment is submitted. Further, the information 

on the return pertains only to the amount of the tax liability, not to the 

distribution of the amount previously collected. As a result, IRS cannot 

report the specific amount of revenue it actually collected for these large 

revenue sources without first requiring taxpayers to submit the needed 

information at the time of payment. IRS believes that imposing such a 

requirement could create an additional burden to taxpayers.

Because collection data are not available to allocate excise taxes to the 

appropriate trust funds when deposits are made, Treasury’s Office of Tax 

Analysis uses economic models to estimate the initial distribution of excise 

tax receipts. Six months later, to prepare adjustments to the initial 

distribution, IRS certifies the amounts that should have been distributed to 

the excise-tax-related trust funds using its records of payments received 

and the subsequently provided tax returns. This certification process is 

complex, cumbersome, and error-prone. Because of continued weaknesses 

in fundamental internal controls, such as inadequate reviews, undetected 

errors in the certification process occurred that directly affected the 

distribution of revenue to the trust funds. Although IRS had implemented 

additional review procedures over its certification process in response to 

our previous reports, these reviews have not been fully effective. For 

example, IRS’ failure to follow required review procedures at the service 

center resulted in unsubstantiated credits or reductions made to the tax 

liability of taxpayers who had not submitted required documentation with 

their return. 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 101 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Also, we continued to find delays in posting tax returns that resulted in IRS 

omitting collections from certifications for a given quarter. For example, 

the amount IRS certified to the Highway Trust Fund for the quarter ended 

September 30, 1999,27 included nearly $346 million in collections from 

previous quarters, and the amount it certified for the Airport and Airway 

Trust Fund for the quarter ended June 30, 2000, included nearly $34 million 

in collections from previous quarters. Delays by IRS in processing tax 

returns and late filing of returns by taxpayers, the latter of which is outside 

IRS’ control, are factors that contributed to delays in posting return 

information. 

Taxpayers are not required to provide detailed information on the type of 

tax when they pay their taxes. Also, IRS officials stated that their systems 

cannot capture the additional detailed information. Consequently, IRS is 

working on systems improvements to accommodate this type of 

information in the future. In addition, IRS plans to initiate in 3 to 4 years a 

follow-up study to a previous study to gauge taxpayer ability and readiness 

to provide detailed information by type of tax at the time of payment 

without imposing an additional burden on taxpayers. Until IRS has the 

systems capability to record, and makes a decision with respect to whether 

taxpayers should provide, specific information on the type of taxes being 

paid at the time of payment, it will continue to be unable to report revenue 

actually collected for three of the federal government’s four largest revenue 

sources and continue using a process for distributing excise tax revenue to 

trust funds that is susceptible to errors.

Noncompliance With 

Laws and Regulations 

and FFMIA 

Requirements

Our tests of compliance with selected provisions of laws and regulations 

disclosed two instances of noncompliance that are reportable under U.S. 

generally accepted government auditing standards and OMB guidance. 

These relate to IRS’ structuring of installment agreements to collect 

delinquent taxes and the timing of the release of federal tax liens against 

taxpayers’ property. We also found that IRS’ financial management systems 

do not substantially comply with the requirements of FFMIA. 

27Since certifications usually are not completed until 6 months after the end of the quarter, 

the certification for the quarter ended September 30, 1999, was actually performed in fiscal 

year 2000 and thus affected excise tax distributions in fiscal year 2000.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 102 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

IRS’ Structuring of 

Installment Agreements Did 

Not Always Comply With 

the Internal Revenue Code

Section 6159 of the Internal Revenue Code authorizes IRS to enter into 

installment agreements with taxpayers to fully satisfy the taxpayer’s 

liability. During two previous audits,28 we identified instances in which IRS 

entered into installment agreements with payments and terms that would 

not be sufficient to satisfy the taxpayers’ outstanding tax liability, including 

future interest accruals, before the statutory collection period for these tax 

liabilities expires.29 In March 1998, IRS issued a memorandum requiring 

that installment agreements provide for the full payment of a taxpayer’s 

outstanding tax liability. However, as in our fiscal year 1999 audit, we 

continued to find that these guidelines were not consistently followed in 

fiscal year 2000. Consequently, IRS continued to be noncompliant with 

Section 6159 of the Internal Revenue Code.

In fiscal year 1999, we found that of 40 unpaid tax cases involving new 

installment agreements, 8 (20 percent) did not comply with the Internal 

Revenue Code. In our testing of 86 unpaid assessments involving taxpayers 

who entered into installment agreements to pay their outstanding tax 

liabilities in fiscal year 2000, we found 2 cases (2 percent) that contained 

payment terms that will be insufficient to satisfy the full tax liability before 

the statutory collection period for these tax liabilities expires. The 

presence of such cases in fiscal year 2000 indicates that IRS continues to be 

noncompliant with this provision of the Internal Revenue Code. 

IRS Did Not Always Release 

Federal Tax Liens in 

Accordance With the 

Internal Revenue Code

The Internal Revenue Code grants IRS the power to file a lien against the 

property of any taxpayer who neglects or refuses to pay all assessed federal 

taxes. The lien becomes effective when it is filed with a designated office, 

such as a courthouse in the county where the taxpayer’s property is 

located. The lien serves to protect the interest of the federal government 

and serves as a public notice to current and potential creditors of the 

government’s interest in the taxpayer’s property. For example, federal tax 

liens are disclosed in credit reports of individuals. Under Section 6325 of 

the Internal Revenue Code, IRS is required to release a federal tax lien 

within 30 days after the date the tax liability is satisfied or has become 

28GAO/AIMD-00-76, February 29, 2000 and Financial Audit: IRS’ Fiscal Year 1998 Financial 

Statements (GAO/AIMD-99-75, March 1, 1999).

29The statutory collection period for taxes is generally 10 years from the date of the tax 

assessment. However, this period can be extended by agreement with the taxpayer.
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 103 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

legally unenforceable or the Secretary of the Treasury has accepted a bond 

for the assessed tax.

During our fiscal year 1999 audit, we found that IRS did not release the 

applicable federal tax lien within the 30-day requirement stipulated in the 

Internal Revenue Code for 26 percent of the cases we reviewed where the 

tax liability was either paid off or abated. While we noted significant 

improvement, we found that this condition continued to exist during fiscal 

year 2000. Specifically, in our testing of 38 tax cases with liens in which the 

taxpayers’ total outstanding tax liabilities were either paid off or abated 

during fiscal year 2000, we found 3 instances (8 percent) in which IRS did 

not release the applicable federal tax lien within the 30-day statutory 

requirement. The time between satisfaction of the liability and release of 

the lien ranged from about 100 to over 500 days. In one case, we found that 

although the taxpayer had paid off the outstanding tax liability by August 

1998, IRS did not formally release the lien against the taxpayer’s property 

until March 2000—583 days later. The failure to promptly release tax liens 

could cause undue burden to taxpayers who are attempting to sell property 

or apply for commercial credit.

IRS’ Financial Management 

Systems Are Not in 

Compliance With FFMIA 

Requirements

In fiscal year 2000, we continued to find that IRS’ financial management 

systems did not substantially comply with the requirements of the Federal 

Financial Management Improvement Act of 1996. Specifically, IRS’ systems 

did not comply with Federal Financial Management Systems Requirements, 

federal accounting standards (U.S. generally accepted accounting 

principles), and the SGL at the transaction level. We found that IRS 

(1) cannot rely on information from its general ledger to prepare its 

financial statements, (2) does not have a general ledger that conforms to 

the SGL, (3) lacks a subsidiary ledger for its unpaid assessments, (4) lacks a 

reliable subsidiary ledger for its P&E, and (5) lacks an effective audit trail 

from its general ledger back to subsidiary detailed records and transaction 

source documents for material balances. Other material weaknesses we 

discussed earlier—controls over refunds, P&E, budget, and computer 

security—are also conditions indicating that IRS’ systems do not comply 

with FFMIA. 

As a result, IRS’ financial management systems cannot produce auditable 

financial statements and related disclosures in conformance with federal 

accounting standards (U.S. generally accepted accounting principles) 

without substantial compensating processes and significant adjustments. 

These weaknesses also indicate that IRS’ systems cannot routinely 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 104 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

accumulate and report the full cost of its activities. Since IRS’ systems do 

not comply with FFMSR, federal accounting standards (U.S. generally 

accepted accounting principles), and the SGL, they also do not comply with 

OMB Circular A-127, Financial Management Systems. In its FIA assurance 

statement to Treasury, IRS reported that its financial management systems 

did not substantially comply with FFMIA in fiscal year 2000. 

IRS’ FFMIA remediation plan issued on September 30, 2000, did not always 

describe the resources devoted to address the issues that prevent IRS’ 

financial management systems from complying with the requirements of 

the act. FFMIA requires that if the head of an agency determines that its 

financial management systems do not substantially comply with the act, a 

remediation plan must be developed, in consultation with OMB, that 

describes the resources, remedies, and intermediate target dates for 

achieving substantial compliance. The act also requires OMB concurrence 

with any plan not expected to bring the agency’s systems into substantial 

compliance with the act no later than 3 years after a determination of 

noncompliance is made. IRS structures its FFMIA remediation plan to 

respond to the recommendations of GAO and other auditors, such as the 

Treasury Inspector General for Tax Administration (TIGTA), who review 

various aspects of IRS’ operations. However, of the 16 GAO 

recommendations that IRS and GAO considered open at the time this 

remediation plan was issued, 8 (50 percent) did not specify the resources to 

be devoted to the actions planned. These include recommendations related 

to IRS’ weaknesses in controls over P&E, operating funds, and refunds. In 

addition, IRS’ remediation plan did not specify steps to ensure that 

adequate security is built into new systems and networks before they are 

placed in operation to prevent future recurrence of the computer security 

weaknesses in its existing systems that we have been reporting. Also, 

although some of IRS’ remedial actions were not scheduled for completion 

within the 3-year statutory time frame, IRS had requested but not yet 

received OMB concurrence with the extended time frames of these plans as 

of the end of our fieldwork.

These findings are consistent with those of TIGTA, which reported similar 

deficiencies in IRS’ December 31, 1999, FFMIA remediation plan.30 When 

IRS updated its remediation plan on December 31, 2000, we noted marked 

30Improvements Are Needed in the Internal Revenue Service’s Federal Financial 

Management Improvement Act Remediation Plan (Reference Number 2000-10-105, August 

2000). 
Appendix I

Material Weaknesses and Management 

Challenges, Reportable Conditions, and 

Compliance Issues

Page 105 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

improvement, and IRS considered two additional recommendations to 

have been closed. However, of the 14 remaining recommendations, IRS’ 

plans to address 2 (14 percent) still did not indicate the resources to be 

devoted to implementing them.
Page 106 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Appendix II

Details on Audit Methodology ApendxiI

To fulfill our responsibilities as the auditor of IRS’ financial statements, we 

• examined, on a test basis, evidence supporting the amounts and 

disclosures in the financial statements, 

• assessed the accounting principles used and significant estimates made 

by management, 

• evaluated the overall presentation of the financial statements, 

• obtained an understanding of internal controls related to financial 

reporting (including safeguarding assets and compliance with laws and 

regulations, including the execution of transactions in accordance with 

budget authority), and performance measures reported in Management’s 

Discussion and Analysis, 

• tested relevant internal controls over financial reporting (including 

safeguarding assets) and compliance, and evaluated the design and 

operating effectiveness of internal controls, 

• considered compliance with the process for evaluating and reporting on 

internal controls and financial management systems under FIA, 

• tested compliance with selected provisions of the following laws and 

regulations: Anti-Deficiency Act, as amended (31 U.S.C. §1341 (a)(1)); 

Agreements for Payment of Tax Liability in Installments (26 U.S.C. 

§6159); Use of Appropriations (31 U.S.C. §1301); Release of Lien as 

Discharge of Property (26 U.S.C. §6325); Interest on Underpayment, 

Nonpayment, or Extension 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); Civil Service Reform Act of 1978 (5 U.S.C. §§5332, 

5303, 5304); Fair Labor Standard Act of 1938, as amended (29 U.S.C. 

§206); Civil Service Retirement Act of 1930, as amended (5 U.S.C. 

§8334); Federal Employees’ Retirement System Act of 1986, as amended 

(5 U.S.C. §8423); Social Security Act, as amended (26 U.S.C. §§3101, 

3121 and 42 U.S.C. §430); Federal Employees Health Benefits Act of 

1959, as amended (5 U.S.C. §§8905, 8906, and 8909); and Federal 

Employees’ Group Life Insurance Act of 1980 (5 U.S.C. §§8701, 8702, 

8704, 8707, and 8708), and 

• tested whether IRS’ financial management systems substantially comply 

with FFMIA requirements, using the implementation guidance and OMB 

guidance.
Page 107 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Appendix III

Comments From the Internal Revenue ServiceApendxiI
Appendix III

Comments From the Internal Revenue 

Service

Page 108 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements
Appendix III

Comments From the Internal Revenue 

Service

Page 109 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements
Appendix III

Comments From the Internal Revenue 

Service

Page 110 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements
Appendix III

Comments From the Internal Revenue 

Service

Page 111 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements
Appendix III

Comments From the Internal Revenue 

Service

Page 112 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements
Appendix III

Comments From the Internal Revenue 

Service

(919500) Letr Page 113 GAO-01-394 IRS’ Fiscal Year 2000 Financial Statements

Department of the Treasury

Internal Revenue Service

•

Agency Information

•

Fiscal Year 2000

Agency Information

Charles O. Rossotti Bob Wenzel

Commissioner Deputy Commissioner

David A. Mader John Reece

Assistant Deputy Commissioner Deputy Commissioner of Modernization / CIO

Nina Olson Pamela J. Carlson

National Taxpayer Advocate Chief, Agency-Wide IS Services

Daniel L. Black William E. Boswell

National Chief of Appeals Chief, Agency-Wide Shared Services

David R. Williams Stuart Brown

Chief, Communications and Liaison Chief Counsel

Mark E. Matthews David C. Williams

Chief, Criminal Investigation Treasury Inspector General For

Tax Administration

Tax Exempt and Government Entities Division

Evelyn Petschek Darlene Berthod

Commissioner Deputy Commissioner

Large and Mid-Size Business Division

Larry Langdon Deborah Nolan

Commissioner Deputy Commissioner

Small Business and Self-Employed Division

Joseph Kehoe Dale Hart

Commissioner Deputy Commissioner

Wage and Investment Division

John M. Dalrymple John Duder

Commissioner Deputy Commissioner

Internal Revenue Service

1111 Constitution Avenue, NW

Washington, DC 20224

(202) 622-5000

Anyone with access to the internet can view this report electronically, along with a wide variety of other

taxpayer-oriented information, at the IRS Digital Daily (www.irs.gov) home page. Go to: Forms & Pubs

(Pub. 3385).