a

GAO

United States General Accounting Office

Report to the Commissioner of 

Internal Revenue

October 2001 INTERNAL REVENUE 

SERVICE

Progress Made, but 

Further Actions 

Needed to Improve 

Financial Management

GAO-02-35
Page i GAO-02-35 IRS Financial Management

Contents

Letter 1

Results in Brief 2

Background 8

Objectives, Scope, and Methodology 8

Weaknesses Hinder Management of Unpaid Assessments 9

Weaknesses in Controls Over Refunds and Earned Income Tax 

Credits 19

Weaknesses Over Safeguarding of Manual Tax Receipts and 

Taxpayer Data Continue 25

Weaknesses in Management and Accounting for Property and 

Equipment 34

Weak Controls Over Appropriated Funds Continue 41

Deficiencies in the Collection and Reporting of Financial Data 47

Conclusions 57

Agency Comments and Our Evaluation 58

Appendixes

Appendix I: Scope and Methodology 64

Appendix II: Status of GAO Recommendations From Prior IRS Financial 

Audits and Related Financial Management Reports 66

Appendix III: Comments From the Internal Revenue Service 87

Appendix IV: GAO Contacts and Staff Acknowledgments 95

Tables Table 1: Internal Control and Compliance Issues Related to Unpaid 

Assessments 10

Table 2: Internal Control Issues Related to Refunds and Earned 

Income Tax Credit Claims 20

Table 3: AUR Cases With Discrepancies, Cases Investigated, Cases 

Not Investigated and Their Estimated Underreported 

Taxes 24

Table 4: Internal Control Issues Related to Manual Receipts and 

Taxpayer Data 25

Table 5: IRS Employees Hired and Working, After April 3, 2000, 

Prior to IRS Receipt of Fingerprint Check Results 29

Table 6: Internal Control Issues Related to Property and 

Equipment 35

Table 7: Internal Control Issues Related to Appropriated Funds 42
Contents

Page ii GAO-02-35 IRS Financial Management

Table 8: Internal Control and Compliance Issues Related to 

Financial Reporting 49

Table 9: Status of Open GAO Recommendations on IRS’ Financial 

and Operational Activities 67

Table 10: New GAO Recommendations on IRS Financial 

Management 86

Figures Figure 1: Comparison of Unpaid Assessments Before and After 

Adjustments as of September 30, 2000 13

Abbreviations

ADP automated data processing

AUR Automated Underreporter Program

CFO Chief Financial Officer

CI Criminal Investigation Division

CIO Chief Information Officer

DUPREF Duplicate Refunds

EFDS Electronic Fraud Detection System

EITC earned income tax credit

FBI Federal Bureau of Investigation 

FFMIA Federal Financial Management Improvement Act of 1996

FMFIA Federal Managers’ Financial Integrity Act of 1982

FMS Financial Management Service

GPRA Government Performance and Results Act of 1993

IAFIS Integrated Automated Fingerprint Identification System

IRM Internal Revenue Manual

IRS Internal Revenue Service 

JFMIP Joint Financial Management Improvement Program

NFC National Finance Center

OIG Office of the Inspector General

OLTP on-line transaction processing

OMB Office of Management and Budget

OPM Office of Personnel Management

QRR Questionable Refund Report

P&E property and equipment

PCAS Project Cost Accounting Subsystem

PRIME Prime Systems Integrated Services

RTS/IPS Request Tracking System/Integrated Procurement System

SBR Statement of Budgetary Resources

SFFAS Statements of Federal Financial Accounting Standards
Contents

Page iii GAO-02-35 IRS Financial Management

SOC Sub-Object Class

SPIF Single Point Inventory Function

SGL Standard General Ledger

TASL Taxpayer Account Subledger

TAVS Tax Administration Vision and Strategy

TFRP trust fund recovery penalty

TIGTA Treasury Inspector General for Tax Administration

USDA U.S. Department of Agriculture

W-2 Wage and Tax Statement

WCF Working Capital Fund
Page 1 GAO-02-35 IRS Financial Management

United States General Accounting Office

Washington, D.C. 20548

A

October 19, 2001 Letr

The Honorable Charles O. Rossotti

Commissioner of Internal Revenue

Dear Mr. Rossotti:

This report is a follow-on to our report on the results of our audit of the 

Internal Revenue Service’s (IRS) fiscal year 2000 financial statements.1

 In 

fiscal year 2000, IRS was able to produce for the first time combined 

financial statements that were fairly stated in all material respects. This 

achievement was the result of the dedication and months of efforts of IRS’

management and staff working around serious systems deficiencies and 

internal control weaknesses, many of which have plagued IRS since we 

first began auditing its financial statements in 1992. Although this effort 

produced reliable financial statement balances, they were reliable only for 

a single point in time and fell short of addressing the fundamental 

weaknesses in IRS’ systems and internal controls. As a result, we gave an 

unqualified opinion on IRS’ fiscal year 2000 financial statements but also 

concluded that IRS did not maintain effective internal controls. We also 

found two instances of noncompliance with laws and regulations relating 

to IRS’ structuring of installment agreements and the timing of the release 

of tax liens. 

During our fiscal year 2000 audit, we noted that IRS had made many 

improvements to address some of the financial management issues we 

have raised in previous reports. For example, IRS had significantly 

improved its controls over reconciling its appropriated fund balance with 

Treasury accounts and in minimizing the number and dollar amount of 

transactions held in suspense accounts. Additionally, IRS had significantly 

improved the quality of its documentation of unpaid tax assessments. IRS 

had also made important improvements in its handling of taxpayer receipts 

and data, and had made progress in addressing both long-standing 

weaknesses in controls over its property and equipment and weaknesses in 

budgetary controls. IRS’ progress is attributable to the extraordinary 

efforts of IRS senior management and staff and the continued strong 

commitment by senior management to address the agency’s financial 

management issues. 

1

See Financial Audit: IRS’ Fiscal Year 2000 Financial Statements (GAO-01-394, March 1, 

2001).
Page 2 GAO-02-35 IRS Financial Management

Despite this progress, a continued high level of effort by IRS is necessary to 

implement long-lasting solutions to serious systems deficiencies and 

internal control weaknesses. Because of the seriousness of these issues, we 

continue to designate IRS financial management as high risk.2

Furthermore, until these problems are addressed, IRS cannot achieve the 

overriding objective of the Chief Financial Officers (CFO) Act and other 

reform legislation enacted during the last decade—to produce reliable, 

useful, and timely financial and performance information for day-to-day 

decision-making. Addressing these issues will also provide IRS with the 

added benefit of improving its customer service and its operational 

effectiveness as the nation’s tax collector.

The matters addressed in this report relate to IRS’ activities associated with 

its fiscal year 2000 appropriation of $8.3 billion and issues relating to IRS’

collection of federal tax revenue, improper refunds, and unpaid tax 

assessments. This report discusses (1) the status of previously reported 

internal control and compliance issues and related recommendations 

associated with our annual financial statement audits and related financial 

management reviews of IRS3

 and (2) new issues identified during our fiscal 

year 2000 financial audit, along with recommendations to address these 

issues.

Results in Brief During fiscal year 2000, IRS made significant improvements to address 

financial management issues we previously reported, such as those in the 

areas of reconciling its fund balance with Treasury, documenting unpaid 

assessments, and safeguarding taxpayer receipts and data. Nevertheless, 

serious internal control weaknesses and systems deficiencies continue to 

impede the agency’s ability to produce reliable financial information on an 

ongoing basis and to effectively manage its operations. These internal 

control weaknesses and systems deficiencies fall into six major areas: 

(1) unpaid tax assessments, (2) refund disbursements and earned income 

tax credits, (3) security over manual tax receipts and data, (4) property and 

equipment, (5) appropriated funds, and (6) financial reporting.4

 Most of the 

2

See High-Risk Series: An Update (GAO-01-263, January 2001).

3

See Internal Revenue Service: Recommendations to Improve Financial and Operational 

Management (GAO-01-42, November 17, 2000).

4

A seventh major area, computer security, is addressed in separate reports.
Page 3 GAO-02-35 IRS Financial Management

issues in these areas are long-standing. However, we have identified new 

issues in some of these areas during fiscal year 2000 and are making 

additional recommendations to address them. 

Weaknesses in the six areas identified include the following: 

• Unpaid tax assessments. Systems and control weaknesses over the 

management of unpaid assessments have resulted in a burden to 

taxpayers and could result in financial losses to the government. IRS 

continues to lack a detailed list, or subsidiary ledger, to effectively track 

and accumulate unpaid assessments. As a result, IRS must rely on a 

workaround process to derive and report its unpaid assessment 

balances for its financial statements that is both time-consuming and 

labor intensive. Additionally, consistent with prior years, we continued 

to find inaccuracies in taxpayer accounts due to errors in recording 

taxpayer information and significant delays in recording payments and 

releasing tax liens against the properties of taxpayers who have 

satisfactorily discharged their assessed federal taxes. Such errors and 

delays affect IRS’ workaround process for reporting unpaid assessment 

balances in its financial statements, lead to unnecessary taxpayer 

burden, and result in lost opportunities to collect outstanding taxes. 

Also consistent with our prior audit, we continued to find that IRS was 

closing unpaid tax cases without working them—a process IRS refers 

to as “shelving.” As of September 30, 2000, 1.8 million cases totaling 

$8.6 billion had been shelved because IRS judged that resource 

constraints precluded it from actively pursuing collection. However, 

because it lacks reliable financial management data to prepare costbenefit analyses, IRS is hindered in its ability to determine whether it is 

devoting the appropriate level of resources to pursuing the collection of 

unpaid taxes relative to the costs and potential benefits involved. The 

lack of cost-benefit analysis, in turn, could result in billions of dollars 

going uncollected, eroding taxpayers’ confidence in the equity of the 

tax system and adversely affecting future compliance.

• Refund disbursements and Earned Income Tax Credits (EITC).

Long-standing weaknesses in IRS’ controls over refund disbursements 

and other management challenges continue to expose the federal 

government to significant losses through the disbursement of improper 
Page 4 GAO-02-35 IRS Financial Management

refunds, particularly with respect to EITC claims. Time constraints,5

high volume, reliance on information provided by taxpayers, and the 

timing of the filing of information returns by third parties create 

inherent limitations in IRS’ options for addressing this problem. Thus, 

IRS relies principally on controls to detect erroneous or fraudulent 

refunds after they have already been issued instead of relying on 

controls to prevent the issuance of such refunds. These detective 

controls, and the preventive controls IRS has in place, are not fully 

effective because they are not performed on all returns with 

questionable EITC claims or other identified discrepancies. For 

example, from tax years 1996 to 1998, IRS identified over 39 million 

individual tax returns with estimated underreported taxes of over 

$49 billion, yet did not follow up on over 30 million (78 percent) of the 

returns which accounted for about $30 billion (60 percent) of the total 

estimated underreported taxes. According to IRS, resource constraints 

prevented it from further pursuing potentially underreported taxes and 

potentially invalid EITC claims that had been identified. However, 

because of the lack of management information, IRS could not readily 

determine or justify whether it would be cost beneficial to allocate more 

resources to pursue these cases.

• Security over manual tax receipts and data. IRS has made marked 

improvement in the security of tax receipts and taxpayer data it 

manually receives from taxpayers. For example, IRS now obtains the 

results of fingerprint checks on new employees faster and has issued 

more stringent courier security policies. However, certain practices in 

effect during fiscal year 2000 still unnecessarily exposed the 

government and taxpayers to theft or losses from financial crimes. For 

example, we found that contrary to a recently issued IRS policy 

forbidding the hiring of applicants before fingerprint checks are 

completed, 145 employees hired after the policy was issued began 

working at IRS campuses6

 and field offices before IRS received the 

results of their fingerprint checks. Twenty-two of these employees 

(15 percent) were subsequently found to have potentially unsuitable 

backgrounds. Additionally, this policy was not applicable to lockbox 

5

Per 26 U.S.C. 6611, IRS must generally pay interest on refunds not disbursed within 45 days 

of the receipt or due date of the return, whichever comes later.

6

In conjunction with its ongoing reorganization, IRS renamed its service centers 

“campuses.”
Page 5 GAO-02-35 IRS Financial Management

bank7 operations during fiscal year 2000 despite the fact that lockbox 

employees handle receipts and sensitive taxpayer data on a daily basis. 

Lockbox banks were also not required to meet minimum courier 

requirements applicable to IRS campuses. Furthermore, we continued 

to find receipts vulnerable to theft due to other weaknesses in their 

physical security, such as unauthorized access to receipt processing 

areas.

• Property and equipment. IRS made some progress in improving the 

reliability of its property and equipment (P&E) inventory records 

through such actions as conducting an officewide inventory of P&E and 

assigning to a senior-level official responsibility for managing automated 

data processing equipment. Also, IRS devoted substantial efforts to 

compensating for fundamental deficiencies in its financial reporting of 

P&E during fiscal year 2000. Nonetheless, long-standing weaknesses, 

such as inadequate P&E inventory systems, inadequate procedures for 

maintaining current and accurate P&E inventory data, and the lack of an 

integrated property management system, made it difficult for IRS to 

report a reliable P&E balance in its financial statements. We continued 

to find errors in IRS’ inventory systems, including assets acquired or 

disposed of months earlier that had not been entered or updated in the 

inventory systems. Additionally, IRS’ lack of an integrated property 

management system continued to make IRS dependent on extensive 

manual procedures and contractor support to derive a P&E balance that 

was only reliable for its year-end financial statements. More importantly, 

these procedures did not provide IRS management with reliable, useful, 

and timely P&E information throughout the year for day-to-day 

decision-making, thus hindering IRS’ ability to properly manage 

$1.3 billion in assets.

• Appropriated funds. IRS made substantial efforts to address 

previously identified budgetary control weaknesses. For example, IRS 

reduced the number of employees with authority to override automated 

spending controls. Additionally, IRS substantially reduced the number 

and dollar amount of transactions held in suspense and aggressively 

7

A lockbox refers to a commercial bank with a designated post office box to which 

taxpayers are instructed to mail their payments and related tax documents. These lockbox 

banks process the documents, deposit the payments, then forward the documents and data 

to IRS campuses to update taxpayers’ accounts. Treasury’s Financial Management Service 

contracts with 10 lockbox banks on IRS’ behalf.
Page 6 GAO-02-35 IRS Financial Management

implemented procedures to deobligate8 funds no longer required. 

Despite these improvements, IRS’ internal controls over its appropriated 

funds continued to be inadequate. We found that IRS (1) did not always 

establish obligations prior to incurring costs, (2) made erroneous 

adjustments to obligations, and (3) failed to reduce its balance of 

undelivered orders when goods and services were received. As a result, 

IRS was unable to routinely account for and report on its use of 

approximately $8.3 billion in appropriated funds and did not have 

reliable budgetary information it needed on an ongoing basis to 

effectively manage its operations. 

• Financial reporting. During fiscal year 2000, IRS revised the format of 

its statement of net cost and significantly expanded and enhanced the 

related disclosures in its financial statements to address an issue we 

raised in our prior audit regarding the commingling of certain program 

costs in its financial statements. However, IRS continued to be unable to 

routinely and in a timely manner generate reliable information to 

manage its operations on an ongoing basis and to prepare financial 

statements without extensive and costly workaround processes. This 

condition continued to exist because of serious weaknesses in IRS’

financial systems, internal controls, and processes. For example, audit 

trails to support material balances in IRS’ general ledger are lacking or 

inadequate, and material transactions are not recorded until months 

after they occur. Moreover, IRS lacks a cost-accounting system and a 

valid performance monitoring system for reporting cost-based 

performance measures and facilitating cost-benefit analyses. Finally, 

IRS continues to be unable to determine the specific amount of revenue 

it actually collects for various trust funds because taxpayers are not 

required to provide payment information by type of tax when payments 

are made, and IRS’ systems cannot currently record such information. 

As a result, IRS must determine the amounts of revenue to be 

distributed to various excise tax trust funds using a complex and 

cumbersome certifying process that is prone to error. 

We are making 10 new recommendations to IRS, in addition to reaffirming 

the 61 still open as of the date of this report, to improve internal controls 

8

Deobligations are downward adjustments to previously recorded obligations. 

Deobligations can occur for a variety of reasons, such as: the actual expense was less than 

the amount obligated, a project or contract was canceled, an initial obligation was 

determined to be invalid, or previously recorded estimates were reduced.
Page 7 GAO-02-35 IRS Financial Management

over areas such as reporting on and safeguarding P&E, accounting for 

appropriated funds, and collecting and reporting financial data. We are also 

closing 24 recommendations from prior years, 21 of them based on actions 

taken by IRS that effectively address the issues that gave rise to the 

recommendations. 

We believe that implementation of all the recommendations in this report, 

both new ones and those from prior years, is necessary for IRS to address if 

it intends to overcome its problems and achieve its goals, including 

providing top-quality service to the nation’s taxpayers. We continue to 

recognize, however, that IRS cannot be expected to implement all 

recommendations in the short term. Thus, to assist IRS and senior 

management, appendix II highlights (in boldface type) the 9 

recommendations that we consider to be of highest priority.

IRS generally agreed with our findings and recommendations and provided 

information regarding initiatives it has taken to address several of them. We 

will evaluate the effectiveness of these initiatives during future audits. 

Although IRS generally did not dispute the facts we reported, IRS disagreed 

with our including in the report some specific findings related to IRS’

management of P&E, appropriated funds, and financial reporting, because 

IRS believes they do not by themselves constitute material weaknesses. In 

some cases, IRS questioned whether the exceptions discussed in our report 

indicated pervasive problems in controls as opposed to being isolated 

instances. For example, IRS noted that it believed the two examples we 

cited of IRS’ failure to record obligations in a timely manner did not 

support a material weakness and therefore should be excluded from the 

report. However, these were 2 of 10 examples of this condition we found in 

our fiscal year 2000 audit. These exceptions had been brought to the 

attention of IRS staff and management, in writing, throughout the audit. 

Additionally, it is important to note that individually this issue and several 

others discussed in the report are not in and of themselves material 

weaknesses. However, when considered with other issues related to P&E, 

appropriated funds, and financial reporting, these issues in the aggregate 

constitute material weaknesses in IRS’ internal controls over its P&E and 

appropriated funds management, as well as financial reporting. 

Accordingly, we have made recommendations to help IRS improve its 

financial management in these and other areas.
Page 8 GAO-02-35 IRS Financial Management

Background IRS’ mission is to provide taxpayers with top-quality service by helping 

them to understand and meet their tax responsibilities and by applying the 

tax law with integrity and fairness. In fiscal year 2000, IRS collected over 

$2 trillion in tax revenue, issued about $194 billion in tax refunds, and had 

net taxes receivable at year-end of $22 billion. Although most of the 

revenue was collected by intermediaries such as financial depository 

institutions and transferred directly to the Department of the Treasury’s 

general fund, IRS offices and lockbox banks collected $435 billion in fiscal 

year 2000. IRS has 10 campuses nationwide that have collection, refund, 

and enforcement responsibilities. IRS also has other field offices to assist 

taxpayers and perform collection and enforcement activities. Ten 

commercial lockbox banks also receive and process taxpayer receipts, 

then forward the data to IRS for input and processing. In response to 

congressional concerns as embodied in the Internal Revenue Service 

Restructuring and Reform Act of 1998, IRS instituted a reorganization that 

has significantly affected the roles and responsibilities of its offices. 

Fiscal year 2000 marked the first time IRS was able to produce combined 

financial statements covering its tax custodial and administrative activities 

that were fairly stated in all material aspects. This achievement required 

extraordinary human effort and extensive reliance on compensating 

processes to work around IRS’ serious system and control weaknesses to 

derive reliable year-end balances for its financial statements. However, this 

approach does not fix its fundamental weaknesses nor produce the 

reliable, useful, and timely financial and performance information IRS 

needs for ongoing decision-making consistent with the CFO Act of 1990.

Objectives, Scope, and 

Methodology

The objectives of this report are to (1) provide a status of previously 

reported internal control and compliance issues and related 

recommendations and (2) present new issues identified during our audit of 

IRS’ fiscal year 2000 financial statements along with new 

recommendations. Appendix I provides further details on our scope and 

methodology. We performed our work from April 2000 through February 

2001 in accordance with U.S. generally accepted government auditing 

standards. 
Page 9 GAO-02-35 IRS Financial Management

Weaknesses Hinder 

Management of Unpaid 

Assessments

During fiscal year 2000, IRS continued to have serious internal control 

deficiencies that affected its reporting and management of unpaid 

assessments.9

 IRS’ lack of an appropriate general ledger system prevented 

it from properly and routinely classifying unpaid assessments without 

substantial use of specialized computer programs and manual intervention. 

Additionally, significant delays and errors in recording taxpayer payments 

and other information adversely affected the accuracy of taxpayer 

accounts and thus IRS’ ability to ensure taxpayers were not unduly harmed 

or burdened. Also, the lack of valid and timely cost-benefit data hindered 

IRS’ ability to make or justify resource allocation decisions that directly 

affect the management of unpaid assessments and, thus, the collection of 

federal revenue. Collectively, these issues are indications of serious 

internal control deficiencies and constitute a material weakness10 in unpaid 

assessments. Additionally, the continued existence of these issues could 

result in lost revenue to the government, erode taxpayer confidence in the 

equity of the tax system, and adversely affect future compliance. 

Table 1 summarizes the issues we identified related to unpaid assessments, 

their effects, and IRS’ actions to address these issues. These issues were 

also identified in prior years’ audits, for which recommendations have 

already been made.11 Consequently, we are not making any new 

9

As defined by federal accounting standards, 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 in which neither the taxpayer nor the court has affirmed that the amounts are 

owed, and (3) write-offs, which represent unpaid assessments for which IRS expects no 

collection due to factors such as the taxpayer's death, bankruptcy, or insolvency.

10A 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 the auditor’s attention that, in the auditor’s judgment, should be communicated because 

they represent significant deficiencies in the design or operation of internal controls that 

could adversely affect the entity’s ability to ensure that (1) 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 and (2) transactions are 

executed in accordance with laws and regulations 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 

Office of Management and Budget audit guidance.

11See Internal Revenue Service: Custodial Financial Management Weaknesses 

(GAO/AIMD-99-193, August 4, 1999) and GAO-01-42, November 17, 2000.
Page 10 GAO-02-35 IRS Financial Management

recommendations related to unpaid assessments. Appendix II lists these 

previous recommendations and IRS’ actions to address them. 

Table 1: Internal Control and Compliance Issues Related to Unpaid Assessments

Internal control/compliance issues, GAO recommendations, 

and effects IRS actions to address issues

Issues previously reported

Issue and GAO recommendation: IRS lacks a subsidiary ledger to 

accumulate and track the status of its unpaid assessments. To 

compensate, IRS must use ad hoc programs to classify the 

categories of its unpaid assessments for the annual financial 

statements. For GAO recommendation related to this issue, see 

appendix II, recommendation 8.

Effect: IRS can only report reliable balances for taxes receivable and 

other unpaid assessments at a single point in time, several months 

after the end of the fiscal year, and only through a labor-intensive 

process that results in adjustments totaling tens of billions of dollars. 

IRS action: IRS plans to implement a new subsidiary ledger 

system for unpaid assessments as part of its systems 

modernization effort. The new subsidiary ledger is targeted for 

completion in 2004.

GAO response: Weaknesses will continue to exist in this area 

until an effective subsidiary ledger is established. 

Issue and GAO recommendations: Key IRS systems are not linked 

to ensure that all parties with related tax assessments, i.e., “trust 

fund recovery penalties,” receive proper credit for payments against 

those assessments. For GAO recommendations related to this issue, 

see appendix II, recommendations 6 and 25.

Effect: IRS may unknowingly pursue collection actions against 

individuals or businesses for amounts that have already been paid.

IRS action: IRS is developing a system to automate the trust fund 

recovery penalty program to ensure that the related accounts are 

properly linked. This system is targeted for completion in 2002. 

GAO response: Based on our fiscal year 2000 audit results, IRS’ 

efforts to manually fix these problems were not fully effective. 

Weaknesses will continue in this area until an effective system for 

linking related taxpayer accounts, including a mechanism to 

capture and update taxpayer accounts to credit them for payments 

received on related assessment accounts, is established.

Issue and GAO recommendation: IRS did not always enter or 

reverse the freeze or status codes on taxpayer accounts once it had 

determined that the taxpayer might be liable for unpaid taxes. For 

GAO recommendation related to this issue, see appendix II, 

recommendation 44.

Effect: IRS issued refunds to taxpayers with outstanding tax 

liabilities rather than applying the refunds to the amounts owed.

IRS action: IRS plans to issue a memorandum to its field offices 

emphasizing the timely input of freeze codes and is revising its 

Internal Revenue Manual (IRM) to provide for more timely posting 

of trust fund recovery penalty assessments. 

GAO response: We will follow up on the effectiveness of IRS’ 

actions during our fiscal year 2001 financial statement audit. 
Page 11 GAO-02-35 IRS Financial Management

Issue and GAO recommendations: IRS does not have reliable 

cost-benefit data related to collection efforts that would allow it to 

make informed resource allocation decisions. For GAO 

recommendations related to this issue, see appendix II, 

recommendations 47 and 48.

Effect: Billions of dollars in outstanding amounts could go 

uncollected and adversely affect government revenues and future 

compliance.

IRS action: IRS plans to develop a cost accounting module as 

part of its effort to develop and implement an integrated financial 

management system. This is scheduled for completion in October 

2003. IRS also proposes to address this issue as part of a new 

strategic process designed to identify and allocate finite resources 

to processes that would best improve the effectiveness of the 

agency and provide better service to the tax paying public. 

GAO response: IRS will continue to be hindered in its ability to 

make informed decisions involving the allocation of limited 

resources against competing priorities, or to justify such decisions, 

until it can develop reliable cost-benefit data on its collection 

activities. 

Issue and GAO recommendation: IRS did not always process 

pending offers-in-compromise in a timely manner. For GAO 

recommendation related to this issue, see appendix II, 

recommendation 46.

Effect: Interest and penalties continue to accumulate while the offerin-compromise is pending. At the same time, the taxpayers’

economic situation may worsen. These factors may adversely affect 

IRS’ ability to collect on taxes due.

IRS action: IRS plans to improve the timeliness in this area by 

centralizing the processing of smaller-dollar, less complex offers. 

GAO response: We will follow up on this issue during our fiscal 

year 2001 financial statement audit. 

Issue and GAO recommendation: IRS did not always process 

abatements in a timely manner. For GAO recommendation related to 

this issue, see appendix II, recommendation 45.

Effect: To the extent the abatements result in the issuance of 

refunds, taxpayers do not have timely access to funds to which they 

are entitled.

IRS action: IRS reported that it has developed automated 

approaches to further study the causes for delays in processing 

abatements. 

GAO response: We will continue to follow up on this issue during 

our fiscal year 2001 financial statement audit.

Issue and GAO recommendation: IRS did not always promptly 

release tax liens after taxpayers had fully satisfied the outstanding 

tax liabilities that gave rise to the imposed liens. For GAO 

recommendation related to this issue, see appendix II, 

recommendation 49.

Effect: Failure to promptly release tax liens could cause undue 

burden and hardship to taxpayers who are attempting to sell 

property or apply for commercial credit. In addition, IRS is not in 

compliance with Section 6325 of the Internal Revenue Code. 

IRS action: IRS reported it enhanced its lien system for more 

timely identification and release of liens, and planned to make 

other changes to improve the release of liens.

GAO response: We continued to find instances in fiscal year 2000 

in which IRS did not release federal tax liens in a timely manner 

after taxpayers had fully satisfied the outstanding tax liabilities. 

Issue and GAO recommendation: IRS did not always ensure that 

installment agreement payments and terms would be sufficient to 

satisfy the taxpayers’ outstanding tax liability. For GAO 

recommendation related to this issue, see appendix II, 

recommendation 26.

Effect: IRS is not always collecting on the full tax liability as required 

by Section 6159 of the Internal Revenue Code.

IRS action: IRS updated its IRM to reiterate that the terms of 

installment agreements must fully satisfy the tax liability and 

reported that it is requiring that IRS campuses monitor 

compliance.

GAO response: We continued to find cases where the terms of 

the installment agreements taxpayers entered into with IRS during 

fiscal year 2000 did not fully satisfy the taxpayers’ liabilities. 

(Continued From Previous Page)

Internal control/compliance issues, GAO recommendations, 

and effects IRS actions to address issues
Page 12 GAO-02-35 IRS Financial Management

Reporting Reliable Balances In an integrated financial management system, the general ledger is 

supported by subsidiary ledgers, which contain detailed records of 

transactions and automatically update the appropriate general ledger 

account balances as transactions occur. Throughout the year, detailed 

records in the subsidiary ledger would then support key account balances 

in the general ledger. However, throughout fiscal year 2000, IRS continued 

to lack an effective subsidiary ledger system that could accumulate and 

track the status of unpaid assessments on an ongoing basis. This deficiency 

continued to necessitate the use of an extensive workaround process in 

order for IRS to derive the balances in the three categories of unpaid 

assessments as defined by federal accounting standards—taxes receivable, 

compliance assessments, and write-offs—for year-end financial reporting. 

This workaround process is costly, labor-intensive, and time-consuming. It 

involves the use of a specialized computer program to extract all unpaid 

assessment data from IRS’ master files—its only detailed database of 

taxpayer information—and classify them for financial reporting. However, 

the master files do not contain all the details necessary to properly and 

fully classify unpaid assessment accounts. Therefore, the workaround 

process also includes the need to select statistical samples of IRS’ unpaid 

assessments and manually review the sampled accounts to (1) determine 

their proper classification and (2) estimate collectibility for those 

assessments properly classified as taxes receivable. As in past years, this 

statistical sampling has resulted in the need to materially adjust the 

amounts generated by the computer extraction program—by tens of 

billions of dollars—to produce reliable amounts for taxes receivable and 

other unpaid assessments. In fiscal year 2000, of a total of 474 unpaid 

assessment sample items selected for detail testing that IRS’ computer 

extraction program originally classified as taxes receivable, 158 items were 

misclassified and were actually write-offs or partial write-offs,12

compliance assessments, or were deemed not to be unpaid assessments. 

Based on our work, we estimate that 12.6 percent of unpaid assessments 

12Partial write-offs are unpaid assessments in which testing indicated that a portion of the 

unpaid assessment balance had no potential for future collection and thus met the criteria 

for write-off. This situation typically occurred for unpaid payroll taxes in which an officer or 

officers were assessed a penalty for an employee’s withholding portion of the unpaid taxes 

and the corporation was defunct with no assets available to repay the outstanding taxes. In 

these circumstances, the portion representing the officer’s penalty for which there was 

some possibility of collection was classified as either a taxes receivable or a compliance 

assessment, depending on whether or not the penalty was agreed to, while the remaining 

portion attributable to the defunct corporation was classified as a write-off.
Page 13 GAO-02-35 IRS Financial Management

originally classified by IRS’ computer extraction program as taxes 

receivable were misclassified.13

Figure 1 below illustrates the problem by showing the level of adjustments 

needed to the amounts generated by the computer extraction program in 

fiscal year 2000 to arrive at reliable amounts for each category of unpaid 

assessments. 

Figure 1: Comparison of Unpaid Assessments Before and After Adjustments as of 

September 30, 2000

Note: The adjusted balance of taxes receivable represents the gross taxes receivable (i.e., does not 

include the allowance for doubtful accounts). Also, the total unadjusted unpaid assessment balance of 

$263 billion was adjusted to $240 billion primarily to compensate for errors and instances in which 

multiple taxpayers are liable for paying the same taxes. The adjusted balances of taxes receivable, 

13We are 95 percent confident that the confidence interval around this estimate ranges from 

7.4 percent to 18 percent.

0

20

40

60

80

100

120

140

Taxes receivable Compliance assessments Write-offs

Billions of Dollars

Before adjustments

After adjustments

113

81

46

30

104

129
Page 14 GAO-02-35 IRS Financial Management

compliance assessments, and write-offs are statistical estimates at a 95-percent confidence level (for 

taxes receivable) and a 90-percent confidence level (for compliance assessments and write-offs). The 

confidence intervals are included in these estimates.

Source: IRSí master files and fiscal year 2000 financial statements.

Although the workaround processes allowed IRS to report reliable year-end 

information for unpaid assessments in its financial statements, these 

balances are reliable only for a single point in time and are not available 

until several months after the end of the fiscal year. Additionally, the 

magnitude of the adjustments needed demonstrate that the data provided 

by IRS’ automated system for unpaid assessments but not supplemented by 

these workaround procedures and adjustments are unreliable for financial 

reporting. They cannot be used to track the overall status of IRS’ unpaid 

assessments and cannot be relied upon by IRS management and Congress 

to make policy and budgetary decisions. 

Maintaining Accurate 

Taxpayer Accounts 

Maintaining accurate taxpayer accounts is important for properly 

managing activity and ensuring the fair and equitable treatment of 

taxpayers, and it is necessary for reliable financial reporting. However, 

significant delays and errors in updating taxpayers’ accounts further 

exacerbated problems related to the reliability of unpaid assessment 

balances in general and the reliability and management of individual 

taxpayer accounts in particular throughout the fiscal year. Errors and 

delays in recording activity also continued to lead to instances in which tax 

liens were not promptly released or not released at all during the period 

covered by our audit. These conditions continued to result in instances of 

taxpayer burden and lost opportunities to collect outstanding taxes owed. 

As in previous years, we found delays and errors in recording payments for 

unpaid payroll taxes where separate accounts are established and 

assessments recorded for a related tax liability.14 IRS' systems cannot 

automatically link to each other the multiple assessments made for the one 

tax liability. Consequently, IRS’ systems are unable to automatically reduce 

the balance in the related account (or accounts) if the business or an 

officer pays some or all of the outstanding taxes. To compensate, IRS 

established procedures to manually link the related accounts. However, we 

still found many instances in which payments were not posted to accounts 

14While IRS can make assessments against more than one officer for payroll taxes collected 

from its employees but not remitted to the government, IRS should collect the unpaid 

payroll tax only once and should credit all related accounts for any payments received.
Page 15 GAO-02-35 IRS Financial Management

that had been linked. The statistical sample of 474 unpaid tax assessment 

cases reviewed included 68 unpaid payroll cases involving multiple 

assessments. Of these 68, we found that 

• 29 cases contained payments that IRS either had not recorded, or had 

failed to record in a timely manner, to all related accounts. Some of 

these amounts were paid by taxpayers in the late 1980s. Based on the 

results of our work, we estimate that 42 percent of the population of 

unpaid payroll tax accounts involving multiple assessments as of 

September 30, 2000, had this characteristic;15 and

• of these 29 cases, 28 (96 percent) had a manual code cross-referencing 

them to related accounts, yet the payments were still not recorded in all 

of the related accounts.

We also found other delays and errors. For example, we found that IRS’

failure to enter or reverse status or freeze codes16 into the taxpayers’

accounts resulted in improper refunds17 being issued—in two cases, more 

than $4,000 each—to taxpayers who had other outstanding liabilities. In 

another case, IRS recorded an estate payment of $68 million to the wrong 

taxpayer account. Though the taxpayer’s estate was owed a refund of 

almost $7 million, this error was not corrected until almost 2 years later, 

and thus the refund was not issued for nearly 2 years after it was owed. 

Delays and errors in recording activity in taxpayer accounts complicate 

IRS’ efforts to derive a reliable balance for taxes receivable and other 

unpaid assessments in its financial statements. The accuracy of taxpayer 

accounts affects the determination of both the appropriate classification of 

these accounts under federal accounting standards and the basis for 

estimating collectibility for those accounts determined to represent taxes 

receivable. For example, to determine whether an unpaid payroll tax 

liability related to a defunct business should be classified as a write-off, IRS 

must first determine that no outstanding penalty assessments against 

15We are 95 percent confident that the confidence interval around this estimate ranges from 

19.6 percent to 64.5 percent.

16Once IRS has determined that a taxpayer may be liable for unpaid taxes, a freeze code is to 

be placed on all accounts belonging to the taxpayer to prevent any refunds from being 

issued before all taxes are paid.

17An 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.
Page 16 GAO-02-35 IRS Financial Management

officers of the business exist or have any future collection potential. If the 

accounts representing penalty assessments against officers continue to 

show outstanding balances solely because payments have not been 

appropriately recorded in these accounts, IRS could erroneously conclude 

that the unpaid tax owed by the business still has some collection potential 

from the officers and thus erroneously classify the account as a tax 

receivable.

Delays in updating taxpayer accounts and taking appropriate actions also 

led to instances in which IRS did not release federal tax liens applied 

against the property of taxpayers within 30 days after the taxpayers had 

satisfactorily discharged their tax liabilities as required by Section 6325 of 

the Internal Revenue Code. In fiscal year 2000, we found that IRS continued 

to experience significant delays in releasing some tax liens. Specifically, in 

3 of the 38 tax lien cases we reviewed in fiscal year 2000, we found that it 

took IRS more than 100 days, and in one case 583 days, to release the liens 

against the taxpayers’ properties after the taxpayers had satisfied their 

outstanding tax liabilities. Based on our work, we estimate that during 

fiscal year 2000, for 11 percent of resolved unpaid assessment cases that 

had tax liens, IRS did not release the liens within the 30-day requirement.18

The failure to promptly release liens could cause undue hardship and 

burden to taxpayers who may want to sell property or apply for 

commercial credit. 

Pursuing Collections of 

Unpaid Taxes

As with any large agency, IRS is confronted by the ongoing management 

challenge of allocating its limited resources among competing priorities. 

However, IRS does not have the management data necessary to prepare 

reliable cost-benefit analyses19 to make more informed decisions about 

how best to allocate its resources. Consequently, IRS is hindered in its 

ability to determine whether it is devoting the appropriate level of 

18We are 95 percent confident that the confidence interval around this estimate ranges from 

3 percent to 26 percent.

19A cost-benefit analysis would consider the costs, both direct and indirect, in increasing 

resources to pursue collections of outstanding taxes along with the associated expected 

benefits. These benefits could include not only increased collections of outstanding taxes, 

but also benefits to taxpayers through earlier action by IRS that might prevent a build-up of 

the outstanding tax liabilities owed by the taxpayer, and improved compliance by taxpayers 

with the nation’s tax laws.
Page 17 GAO-02-35 IRS Financial Management

resources to identifying and pursuing collection of unpaid taxes relative to 

the costs and potential benefits involved. 

During fiscal year 2000, we continued to find that IRS was closing 

delinquent tax cases without working them—that is, without making 

collection contact with taxpayers through either telephone calls or field 

visits. This type of case closure is referred to as “shelving.” The process of 

shelving cases began in mid 1999 in response to an increasing inventory 

workload and IRS’ assessment that resource constraints and decisions 

regarding where to deploy these resources would not permit it to actively 

pursue the cases. According to IRS records, as of September 30, 2000, 

1.8 million cases totaling $8.6 billion—compared to 648,000 cases totaling 

$2.4 billion at September 30, 1999—were shelved because IRS judged that 

resource constraints would not allow it to actively pursue collection on 

these cases.20

We also continued to find unpaid assessment cases that had collection 

potential but were not being actively worked by IRS. We found at least six 

cases in our testing of unpaid assessments constituting taxes receivable for 

which information in the case files indicated some collection potential, but 

for which IRS had taken no collection action. In two of these cases, IRS 

was not actively pursuing collection of taxpayers who owed $23,000 and 

$88,000, respectively, in outstanding taxes and who each had annual 

incomes in subsequent years of at least $110,000. 

How IRS derives its balance for taxes receivable in its financial statements 

is affected by actions taken by IRS to collect outstanding taxes. In 

estimating collectibility for those accounts in its statistical samples that are 

appropriately classified as taxes receivable, IRS reviews case file 

information and considers whether the agency is pursuing collection 

through such means as levies, seizures, offers-in-compromise, or 

installment agreements. To the extent these files contain no evidence of 

such efforts, IRS must assess collectibility for the account at zero. This 

ultimately affects the balance of both net taxes receivable and the related 

allowance for doubtful accounts reported in its financial statements.

20The number of cases and the amount of unpaid assessments, including penalties, and 

interest, has continued to grow since the end of fiscal year 2000. As of March 31, 2001, about 

2.5 million cases totaling almost $12 billion in outstanding taxes, penalties, and interest had 

been shelved. See IRS Modernization: Continued Improvement in Management 

Capability Needed to Support Long-Term Transformation (GAO-01-700T, May 8, 2001).
Page 18 GAO-02-35 IRS Financial Management

IRS’ failure to pursue delinquent taxpayers with at least some ability to pay 

is part of a broader and continued decline in IRS’ enforcement activities 

and disposition of delinquent tax cases. For example, according to IRS 

records, between fiscal years 1998 and 2000, enforcement activities such as 

levy notifications experienced a substantial decline, from more than 9 

percent to less than 1 percent of these unpaid assessment accounts. During 

the same period, the dispositions of delinquent accounts and 

investigations21 as a percentage of total outstanding cases decreased from 

6.1 to 3.5 percent, a reduction of more than 43 percent. According to IRS 

records, collections on delinquent taxpayer accounts also decreased by 

28 percent during this period, from $5.3 billion in fiscal year 1998 to 

$3.8 billion in fiscal year 2000. 

While there is a point at which it ceases to be cost effective to pursue 

collection, we believe that these decisions should be based on reliable costbenefit data. Without valid cost-benefit analyses, IRS is hindered in its 

ability to make sound comparisons among competing priorities and to most 

effectively allocate resources among these priorities. One element that is 

critical to such a cost-benefit analysis is a measure of taxpayers’ voluntary 

compliance with the nation’s tax laws. However, as we have previously 

reported,22 IRS lacks such a measure. Consequently, it does not know the 

impact of the recent declines in enforcement activities and delinquency 

collections on taxpayer compliance. Congress and tax practitioners have 

expressed concerns that declines in pursuing potential unpaid taxes and in 

enforcing and collecting on delinquent accounts may increase incentives 

for taxpayers either to not report or to underreport their tax obligations. 

The lack of reliable cost-benefit information with which to make informed 

decisions could result in billions of dollars in outstanding amounts going 

uncollected and could lead to further erosion in taxpayers’ confidence in 

the equity of the tax system and adversely affect future compliance. 

21Dispositions of delinquent accounts would include, but not be limited to, accounts that are 

paid off, partially paid through an offer-in-compromise, or no longer owed because the 

statutory period for collecting on these cases has expired. Dispositions of investigations 

would include, but not be limited to, investigations closed as a result of assessing taxes or 

determining that the potential amounts owed, in fact, are not owed by taxpayers.

22See GAO-01-263, January 2001; Major Management Challenges and Program Risks: 

Department of the Treasury (GAO-01-254, January 2001); Internal Revenue Service: 

Progress Continues but Serious Management Challenges Remain (GAO-01-562T, April 2, 

2001); and IRS Modernization: Continued Improvement in Management Capability 

Needed to Support Long-Term Transformation (GAO-01-700T, May 8, 2001).
Page 19 GAO-02-35 IRS Financial Management

Weaknesses in 

Controls Over Refunds 

and Earned Income 

Tax Credits

During fiscal year 2000, IRS disbursed over 101 million tax refunds totaling 

about $194 billion. However, because of long-standing weaknesses in IRS’

controls over refund disbursements and other management challenges, the 

federal government continued to be exposed to material losses through the 

issuance of improper refunds, particularly with respect to EITC claims. 

Time constraints,23 high volume, reliance on information supplied by 

taxpayers, and the timing of filing of information returns by third parties 

create inherent limitations in IRS’ options for addressing the problem of 

improper refunds. Consequently, in fiscal year 2000 IRS continued to 

(1) issue improper refunds associated with invalid EITC claims and (2) rely 

extensively on post-refund (detective) controls that were not fully effective 

in identifying and limiting the losses associated with improper refunds. 

This, in turn, continued to expose the government to financial losses, 

possibly in the billions of dollars, through the disbursement of improper 

refunds. 

Table 2 summarizes issues we found relating to refund processing controls, 

their effects, and IRS’ actions to address these issues. These issues were 

also identified in prior years’ audits, for which recommendations have 

already been made. Consequently, we are not making any new 

recommendations related to refund processing controls. Appendix II lists 

the previous recommendations and IRS’ actions to address them.

23Per 26 U.S.C. 6611, IRS must generally pay interest on refunds not disbursed within 45 days 

of the receipt or due date of the return, whichever comes later.
Page 20 GAO-02-35 IRS Financial Management

Table 2: Internal Control Issues Related to Refunds and Earned Income Tax Credit Claims

Internal control issues, GAO recommendations, and effects IRS actions to address issues

Issues previously reported

Issue and GAO recommendations: IRS does not have reliable 

data to perform the necessary cost-benefit analyses that would allow 

it to identify the resources needed to effectively pursue examination 

and any resultant collection efforts for the underreporter matching 

program, previously disbursed improper refunds, and potentially 

invalid EITC claims. For GAO recommendations related to this issue, 

see appendix II, recommendations 53 and 54.

Effect: IRS cannot ensure that it is prioritizing and allocating its 

resources effectively. The potentially lost revenue that might be 

recovered by more active pursuit of these efforts may far exceed the 

cost IRS currently spends on present enforcement activities. 

Furthermore, IRS’ decision to forgo examination and collection 

efforts on some underreported tax liabilities, potentially invalid EITC 

claims, and improper refunds could erode taxpayer confidence in the 

equity of the tax system and reduce compliance with tax laws. 

IRS action: IRS plans to develop a cost accounting module as 

part of its effort to develop and implement an integrated financial 

management system. IRS also proposes to address this issue as 

part of a new strategic process designed to identify and allocate 

finite resources to processes that would best improve the 

effectiveness of the agency and provide better service to the taxpaying public. 

GAO response: IRS will continue to be hindered in its ability to 

make informed decisions involving the allocation of limited 

resources against competing priorities, or to justify such decisions, 

until it can develop reliable cost-benefit data on the underreporter 

matching program, previously disbursed improper refunds, and 

the screening and examination of potentially invalid EITC claims.

Issue and GAO recommendation: IRS did not consistently request 

documentation demonstrating eligibility from taxpayers previously 

denied EITC for improper claims as provided in the Taxpayer Relief 

Act of 1997. For GAO recommendation related to this issue, see 

appendix II, recommendation 52.

Effect: This could result in the issuance of improper 

refunds and in financial losses to the government.

IRS action: IRS reported that it recently implemented procedures 

to automatically freeze EITC-related refunds when there is an 

open examination of the taxpayer EITC eligibility until such time as 

the exam results conclude that the taxpayer was eligible to the 

claim. 

GAO response: We will follow up on this issue as part of our fiscal 

year 2001 audit.

Issue and GAO recommendation: IRS does not compare tax 

returns with W-2 and other third-party data at the time of filing and 

instead relies on comparisons several months later to detect 

differences. For GAO recommendation related to this issue, see 

appendix II, recommendation 12.

Effect: The federal government is exposed to financial losses 

through the disbursement of improper refunds and the incurring of 

additional expenses to fund subsequent collection efforts. 

IRS action: IRS’ Tax Administration Vision and Strategy (TAVS) 

proposed including in IRS’ systems modernization the ability to 

compare electronically submitted W-2 and other third- party 

information to electronically filed tax returns, thus accelerating the 

matching process to help prevent the disbursement of improper 

refunds. If the proposal is approved, IRS estimates that it will be 

implemented by late 2003. 

GAO response: The IRS modernization blueprint architecture 

discusses electronic submission of tax returns and third-party data 

but is unclear about the comparison between the two sets of data. 

Additionally, IRS will continue to have difficulty making such 

comparisons prior to the issuance of refunds due to the 

constraints it faces in issuing refunds in a timely manner and the 

later time frames allowed for the filing of information returns.
Page 21 GAO-02-35 IRS Financial Management

Preventive Controls The options available to IRS in its efforts to ensure that only valid refunds 

are disbursed are currently limited. For example, while it processes 

hundreds of millions of tax returns each filing season, IRS must also issue 

refunds within certain time constraints or be subject to interest charges. At 

the same time, IRS must contend with the fact that third-party information, 

such as form 1099s,24 are not required to be filed prior to the start of the tax 

filing season.25 Comparison of such information with tax return data is 

problematic because IRS does not have time to prepare the third-party data 

for matching prior to the receipt of individual tax returns. Nonetheless, IRS 

does have some preventive controls which, if effectively implemented, 

could help to reduce the level of risk associated with issuing improper 

refunds related to EITC claims. For example, IRS’ Examination Branch is 

responsible for performing examinations on tax returns with potentially 

Issue and GAO recommendation: IRS employees who initiate 

manual refunds do not always monitor taxpayer accounts as required 

to prevent the issuance of duplicate refunds. Additionally, the 

monitoring and related supervisory reviews are not always 

documented. For GAO recommendation related to this issue, see 

appendix II, recommendation 50.

Effect: Duplicate refunds may be disbursed and financial losses 

incurred for uncollectible duplicate refunds. 

IRS action: In October 2000, IRS revised its procedures to require 

the documentation of monitoring actions and the related 

supervisory review of such actions.

GAO response: We confirmed that IRS revised its written 

procedures. We will follow up on the implementation of these 

requirements during our fiscal year 2001 audit.

Issue and GAO recommendation: IRS employees do not always 

review the Questionable Refund Reports (QRR) that list potentially 

duplicate refunds. At the IRS campuses we visited, employees did 

not review the QRR because they thought the computer program 

that generated the QRR was flawed and ineffective, the computer 

program was not generating the report, or responsible employees 

never received the reports. For GAO recommendation related to this 

issue, see appendix II, recommendation 51.

Effect: Duplicate refunds may be disbursed and financial losses 

incurred for uncollectible duplicate refunds.

IRS action: IRS reported that it has refined another program 

instead of the QRR to aid IRS employees in monitoring and 

preventing the issuance of duplicate refunds.

GAO response: We will follow up on the usefulness of this new 

tool during our fiscal year 2001 audit.

(Continued From Previous Page)

Internal control issues, GAO recommendations, and effects IRS actions to address issues

24IRS 1099 forms are used by third parties, such as financial institutions, to report taxpayers’

interest income, dividend distributions, and other miscellaneous income.

25The tax-filing season occurs from January 1 through April 15 of each year. 
Page 22 GAO-02-35 IRS Financial Management

invalid EITC refund claims26 to determine the validity of the claim. 

However, it has not performed a cost-benefit analysis to determine whether 

it is focusing the appropriate level of resources on this effort. Without this, 

IRS is unable to determine the extent to which refunds associated with 

invalid EITC claims could be prevented or minimized had IRS devoted 

more resources to its examination efforts.

The Electronic Fraud Detection System (EFDS)27 is an automated 

screening tool IRS’ Criminal Investigation Division (CI) uses to identify 

EITC refund claims with the highest potential to be fraudulent or invalid. CI 

uses EFDS to score each EITC claim, using a set of screening criteria. CI 

retains those cases that indicate a high potential for fraud for follow-up and 

forwards all other cases that score above a certain level to the Examination 

Branch. For each of its 10 campuses, the Examination Branch determines a 

set number of cases that it perceives as the workload each campus’s 

resources can handle. It then refers cases to each campus for examination 

up to that campus’s established workload amount.

During fiscal year 2000, the Examination Branch reduced the number of 

cases referred by CI for examination by choosing a higher minimum score 

level for each case and reviewing other factors such as how recently the 

taxpayer was last examined. Additionally, it discontinued referring cases 

associated with a particular campus once it reached the determined 

workload level it established for that campus. Consequently, the number of 

EITC refund claims subject to examination by IRS was predetermined by 

the available resources rather than based on an analysis of what the 

optimum score level should be for selecting cases to examine based on the 

expected yield at each level and the associated resource cost.

26Because it is a tax credit, an EITC claim always results in a reduction of the taxpayer’s 

calculated tax liability. However, depending on the taxpayer’s amount of taxes withheld, it 

may or may not result in a refund for a particular tax year. 

27EFDS enables IRS to electronically screen EITCs and identify those exhibiting specific 

characteristics considered indicative of potentially invalid claims based on past experience, 

such as EITC claimants reporting either (1) business income or (2) head-of-household status 

and whose return contains other suspicious indicators. 
Page 23 GAO-02-35 IRS Financial Management

The government could be losing billions of dollars through improper 

refunds associated with invalid EITC claims. For example, in a study of tax 

year 1997 returns, IRS estimated that of approximately $30.3 billion EITC 

claims received, about $9.3 billion (30.6 percent) were invalid claims. IRS 

did not know the exact amount of the related improper refunds, but based 

on IRS’ fiscal year 1998 refund rate of about 78 percent of EITC claims, we 

estimate the amount of improper EITC refunds to be about $7.3 billion.28 In 

the same study, IRS estimated that it would not be able to recover 84 

percent of the total invalid EITC claims. Applying this rate to the refunds 

portion only, we estimate that $6.1 billion of the improper refunds could be 

unrecoverable. With such a potential for invalid refunds, IRS must better 

ensure that it is devoting the appropriate level of resources to examining 

these claims.

Detective Controls IRS’ primary detective controls are its automated matching programs to 

match tax returns against third-party data. Identified discrepancies may 

indicate underreported tax liabilities and possible improper refunds, to the 

extent that the underreporting resulted in refunds being disbursed. IRS has 

separate automated matching programs for individual and employer tax 

returns which are performed several months after the returns are filed. 

However, IRS did not perform follow-up examinations on millions of 

identified tax returns estimated to have billions of dollars of underreported 

tax liabilities. As a result, to the extent these taxpayers had received 

improper refunds by underreporting their taxes, IRS did not pursue 

recovery of these refunds. Table 3 presents IRS’ workload for the matching 

program for individual returns referred to as the Automated Underreporter 

Program (AUR). 

28When computing our estimate of tax year 1997 invalid EITC refunds, we used the fiscal 

year 1998 refund rate because IRS processed the majority of tax year 1997 returns during 

fiscal year 1998.
Page 24 GAO-02-35 IRS Financial Management

Table 3: AUR Cases With Discrepancies, Cases Investigated, Cases Not Investigated 

and Their Estimated Underreported Taxes

Source: Unaudited IRS data using IRS estimates.

As shown in this table, in tax years 1996 through 1998, IRS did not 

investigate over 30 million AUR cases with about $30 billion in estimated 

underreported taxes which may have also resulted in the issuance of 

improper refunds. Because IRS did not investigate these cases, the exact 

amount of underreported taxes due and any resulting improper refunds 

disbursed are unknown. 

Allocating Resources for 

Refund Controls

IRS’ decision to forgo follow-up examinations and collection efforts on 

potentially underreported tax liabilities, improper refunds, and invalid 

EITC claims was based on perceived resource constraints. However, as 

discussed later in this report, IRS’ financial management systems do not 

currently provide reliable information for cost-benefit analyses. 

Consequently, IRS management cannot determine whether the cost 

associated with the level of resources it expends on various refund control 

projects is commensurate with the benefits that could be realized from 

such efforts. Additionally, IRS cannot determine whether it is effectively 

directing its resources to the areas with the most potential benefit. As a 

result, billions of dollars of improper refunds could be disbursed as a result 

of invalid EITC claims and underreported tax liabilities and could remain 

uncollected. This in turn could erode taxpayer confidence in the equity of 

the tax system and reduce compliance with the tax laws. 

(Counts and dollars in millions)

Tax year Individual returns 

with discrepancies Returns investigated 

Returns not 

investigated 

Count Amount Count Amount Count Amount

1996 11.9 $15,490 3.1 $5,255 8.8 $10,235

1997 13.4 18,556 3.0 7,831 10.4 10,725

1998 14.1 15,434 2.5 6,479 11.6 8,955

Total 39.4 $49,480 8.6 $19,565 30.8 $29,915
Page 25 GAO-02-35 IRS Financial Management

Weaknesses Over 

Safeguarding of 

Manual Tax Receipts 

and Taxpayer Data 

Continue

IRS’ controls over cash, checks, and related hard-copy taxpayer data it 

receives from taxpayers continue to be inadequate. While IRS has made 

some improvements, further action and policy changes are needed to 

further mitigate risks. Without adequate controls, IRS cannot ensure proper 

safeguarding of assets and taxpayer data. Table 4 summarizes the issues we 

identified in this area, their effects, and IRS’ actions to address these 

issues. Most of these issues were also identified in prior years’ audits,29 for 

which recommendations have already been made. Appendix II lists these 

previous recommendations and IRS’ actions to address them.

Table 4: Internal Control Issues Related to Manual Receipts and Taxpayer Data

29See GAO-01-42, November 17, 2000.

Internal control issues, GAO recommendations, and effects IRS actions to address issues

Issues previously reported

Issue and GAO recommendations: New hires were allowed to 

process taxpayer receipts and taxpayer data before IRS received 

and evaluated the results of their fingerprint checks. This occurred in 

part because, in many instances, newly hired employees were not 

fingerprinted until or after their entrance on duty dates. For GAO 

recommendations related to this issue, see appendix II, 

recommendations 15, 16, and 17.

Effect: IRS may unknowingly place individuals with unsuitable 

backgrounds in positions that could compromise the security of 

cash, checks, and sensitive taxpayer data. 

IRS action: In 1999, IRS issued policy memos that required 

fingerprinting applicants at the earliest possible time in the job 

application process. In April 2000, IRS issued another policy 

requiring managers to receive and evaluate the results of 

fingerprint checks before an IRS employee could begin working. 

GAO response: Our analysis of IRS’ FY 2000 hiring data revealed 

that IRS hiring offices did not always comply with these policies. 

IRS continued to allow new hires to work prior to obtaining and 

evaluating the results of their fingerprint checks, even after the 

issuance of the April 2000 policy. In addition, many employees 

were not fingerprinted until or after their entrance on duty dates. 
Page 26 GAO-02-35 IRS Financial Management

Issue and GAO recommendation: Hiring policies and courier 

security standards for lockbox banks were less stringent than those 

required for IRS locations. For example, lockbox banks are not 

prohibited from hiring permanent employees prior to the bank’s 

receipt and evaluation of the results of the applicants’ fingerprint 

checks, and are not required to conduct fingerprint checks on 

temporary employees. Additionally, while IRS courier standards 

required that two bonded couriers be present for each IRS deposit 

pick-up, there was no similar requirement for lockbox courier 

services. For GAO recommendation related to this issue, see 

appendix II, recommendation 55.

Effect: With less stringent standards for hiring practices and courier 

services, IRS has less assurance that lockbox staff processing 

taxpayer receipts and data are appropriate for the job and that 

lockbox courier services consistently provide adequate security for 

deposits in transit. Both of these conditions increase the 

government’s and the taxpayers’ exposure to loss or theft.

IRS actions: IRS reported that security and hiring standards for 

lockbox banks consistent with those required of IRS campuses 

were approved and would be included in the fiscal year 2002 

lockbox contracts. These include background investigation and 

courier standards that are consistent with those required of IRS 

operations.

GAO response: We will follow up on these actions as part of our 

audit of IRS’ fiscal year 2001 financial statements. 

Issue and GAO recommendations: Receipts particularly 

vulnerable to theft were not adequately safeguarded and accounted 

for in accordance with IRS policies and procedures. For example, 

returned refund checks were not consistently stamped 

“nonnegotiable” when extracted. “Discovered remittances”

a

 were not 

always stored in locked containers and recorded on control logs 

upon discovery. Checks written out to “IRS” were not always 

overstamped with the words “Internal Revenue Service” or “United 

States Treasury” upon receipt. For GAO recommendations related to 

this issue, see appendix II, recommendations 21, 22, and 27.

Effect: These weaknesses expose the government and taxpayers to 

theft or loss. Moreover, since some checks contain taxpayer 

information such as social security numbers, taxpayers are exposed 

to losses from financial crimes committed by individuals who 

inappropriately gain access to confidential information entrusted to 

IRS. 

IRS action: In May 2000, IRS changed its policy from requiring 

staff to void returned refund checks upon extraction to placing 

them in bins for periodic review by more experienced employees to 

determine if the checks should be processed or voided. This 

change in policy was due to less experienced staff voiding other 

government checks which, unlike returned refund checks, could 

be processed and deposited. In the meantime, IRS is developing 

new procedures to place restrictive endorsements on returned 

refund checks as soon as they are they are extracted. Additionally, 

in February 1999, IRS issued instructions emphasizing the 

safeguarding of and accounting for “discovered remittances.”

GAO response: During our review of IRS campuses and field 

offices as part of our fiscal year 2000 audit, we continued to find 

IRS employees failing to comply with IRS policies to adequately 

safeguard and account for taxpayer receipts. Additionally, IRS’

current practice of placing unvoided returned refund checks in 

open bins increases their risk of theft and misuse. We will follow up 

on this issue as part of our audit of IRS’ fiscal year 2001 financial 

statements. 

(Continued From Previous Page)

Internal control issues, GAO recommendations, and effects IRS actions to address issues
Page 27 GAO-02-35 IRS Financial Management

Issue and GAO recommendations: Policies and procedures to 

establish minimum standards for the safeguarding and accounting of 

taxpayer receipts were not consistently applied to all IRS units that 

collected and processed taxpayer receipts. For example, IRS 

currently prohibits personal belongings from being stored in receipts 

processing areas at IRS campuses but not at field offices where 

payments from walk-in taxpayers are received. Various units that 

handle taxpayer receipts within field offices also did not have 

consistent policies and procedures for such receipts, such as 

stamping restrictive endorsements on checks. For GAO 

recommendations related to this issue, see appendix II, 

recommendations 23, 27, 56, and 57.

Effect: Inconsistent application of policies and procedures to 

safeguard and account for taxpayer receipts will continue to expose 

such receipts to theft or loss and make such incidents difficult to 

detect in units that handle receipts but are not subject to such 

policies and procedures. 

IRS actions: IRS reported that it would expand deterrent controls 

implemented at IRS campuses to other field offices to ensure 

uniformity and consistency in its implementation of these controls 

by 2001. IRS also reported that its Director of Security and Privacy 

Oversight would lead efforts to ensure consistent implementation 

of policies and procedures. 

GAO response: Until IRS establishes and successfully 

implements consistent, minimum standards to safeguard and 

account for taxpayer receipts for all units that process receipts, 

receipts in some units are placed at greater risk of loss or theft 

than those at other units. For example, at three of the five field 

offices we visited in fiscal year 2000 we continued to find personal 

belongings being stored in receipt processing areas. We will follow 

up on this issue as part of our audit of IRS’ fiscal year 2001 

financial statements. 

Issue and GAO recommendations: Controls to deter unauthorized 

access to receipt processing areas at IRS campuses and field 

offices were not always adequate. For example, campuses whose 

receipt processing areas did not have perimeter walls to adequately 

deter unauthorized access did not always have compensating 

controls, such as intrusion detecting devices. Some field offices did 

not have physical barriers or secured/locked doors restricting 

unauthorized access to receipt processing areas. For GAO 

recommendations related to this issue, see appendix II, 

recommendations 9, 27, and 57.

Effect: The lack of effective barriers and other compensating 

devices to hinder unauthorized access to receipt processing areas at 

campuses and field offices increases IRS’ exposure to loss or theft.

IRS actions: IRS reported that it would assess the physical 

security status of restricted access areas in campuses and 

develop a plan to correct deficiencies. IRS also reported that it 

would expand deterrent controls implemented at IRS campuses to 

other field offices to ensure uniformity and consistency in its 

implementation of these controls. IRS intends to strengthen these 

controls by 2001.

GAO response: We will follow up on this issue as part of our audit 

of IRS’ fiscal year 2001 financial statements.

Newly reported issue

Issue: 18 U.S.C. 5038 prevents the release of records on juveniles, 

i.e., youths under 18 years of age, when the request for information 

is related to an application of employment. Consequently, IRS’

current process of screening out questionable applicants is 

ineffective for juveniles. 

Effect: IRS can unknowingly hire juveniles with unsuitable 

backgrounds thus increasing the risk of theft of receipts and misuse 

of sensitive taxpayer data. 

IRS action: IRS reported that its Personnel Policy Division began 

reviewing relevant regulations and discussing with the Office of 

Personnel Management a policy consistent with applicable laws 

and regulations that IRS can use to screen out questionable 

juvenile applicants. Based on these efforts, IRS plans to issue a 

policy to serve the needs and protect the interest of IRS as well as 

the applicant and issue operating guidelines to field personnel 

offices. 

GAO response: We will follow up on this issue as part of our audit 

of IRS’ fiscal year 2001 financial statements.

a “Discovered remittances” are cash or checks discovered by IRS units outside the specially secured receipts processing areas. This usually occurs because 

the cash or checks were overlooked during the normal extraction process.

(Continued From Previous Page)

Internal control issues, GAO recommendations, and effects IRS actions to address issues
Page 28 GAO-02-35 IRS Financial Management

Hiring Practices for IRS 

Employees

As part of its procedures to determine suitability of an applicant for 

employment, IRS requires permanent and temporary applicants to undergo 

a fingerprint prescreening check. During a fingerprint check, an applicant’s 

fingerprints are processed through the FBI’s national database to identify 

those with arrest records. However, further review of the disposition of the 

case is necessary to determine if the applicant was convicted of the crime. 

We previously reported on several weaknesses related to this fingerprinting 

process.30 Although IRS significantly improved the turnaround time for 

obtaining the fingerprint results, other weaknesses persisted. IRS issued 

new policies to address these weaknesses. However, we found that the new 

policies were not consistently applied throughout IRS during fiscal year 

2000. Additionally, Treasury Inspector General for Tax Administration 

(TIGTA) auditors found that the IRS’ current fingerprinting process was 

ineffective in screening out juvenile applicants with questionable 

backgrounds. 

In response to a recommendation we had made previously, IRS issued, on 

April 3, 2000, a policy that prohibited the hiring and placement of an 

applicant at any IRS location until the applicant’s fingerprint checks had 

been received and case disposition evaluated. This policy applied to 

permanent and temporary employees. However, we found that IRS offices 

did not consistently comply with this new hiring policy. Out of the 

approximately 19,600 employees hired during fiscal year 2000, about 4,900 

(25 percent) were hired and began working prior to IRS’ receipt and 

evaluation of their fingerprint checks. As IRS did most of its hiring from 

October through April in preparation for the peak tax-filing period, the new 

policy was not in place in time to affect many of these new hires.31 

Nonetheless, there were about 2,700 persons hired after the April 2000 

policy was issued, of which 145 (5 percent) were hired and began working 

with taxpayer receipts and sensitive taxpayer data without IRS first 

receiving the results of their fingerprint checks. The following table shows, 

on a monthly basis, the number of persons who were hired and reported for 

duty without IRS having first received the results of their fingerprint checks 

out of the total number hired after the issuance of the April 3, 2000, hiring 

policy. Although the table shows a downward trend in the number of 

violations after the April 2000 policy, we cannot determine to what extent 

30See GAO-01-42, November 17, 2000.

31During fiscal year 2000, IRS hired almost 94 percent of the total applicants given job offers 

(18,356 of the 19,571 hired in fiscal year 2000) from October 1999 through April 2000.
Page 29 GAO-02-35 IRS Financial Management

this is due to compliance with the new policy or due to IRS’ not hiring as 

many staff in May through September. 

Table 5: IRS Employees Hired and Working, After April 3, 2000, Prior to IRS Receipt 

of Fingerprint Check Results 

Source: Unaudited IRS Security Entry and Tracking System data for fiscal year 2000.

To compound this problem, IRS staff also did not comply with its April and 

June 1999 policies which require the fingerprinting of all filing season 

applicants at the earliest possible time in the job application process. 

According to IRS’ personnel database, about 2,200 employees out of 

approximately 19,600 (11 percent) hired during fiscal year 2000 were not 

fingerprinted until they first reported for duty or several days—and in some 

instances months—later. The delays in initiating the fingerprinting process 

delayed IRS management’s receipt of the fingerprint results. This, 

combined with the pressing need for more resources to meet the increased 

workload during the tax-filing period, was a contributing cause for new 

employees entering on duty before the results of fingerprints were 

received. Consequently, as a result of noncompliance with IRS’ hiring 

policies, IRS managers could have unknowingly allowed employees with 

unsuitable backgrounds to handle cash, checks, and sensitive taxpayer 

information, thus increasing their risk of theft and misuse. In fact, from 

April through September, of the 145 persons who entered on duty before 

IRS received their fingerprint checks, 22 (15 percent) were subsequently 

found to have had potentially unsuitable backgrounds, such as drug use 

and assault.

Month

Hired and working without

fingerprint results

Total hired after April 3,

2000, hiring policy

April 4 – 30 62 1,508

May 32 132

June 26 167

July 13 287

August 7 145

September 5 484

Total 145 2,723
Page 30 GAO-02-35 IRS Financial Management

Additionally, a TIGTA audit32 completed in May 2000 found that IRS’

fingerprint prescreening procedures were ineffective for juvenile 

applicants, i.e., those under 18 years of age, due to mitigating 

circumstances involving the release of juvenile records. IRS campuses 

often hire high school students to fill short-term positions to process 

income taxes. IRS’ policy to complete fingerprint prescreening checks 

applies to all new hires, even short-term temporary employees. 

As of April 2000, TIGTA found that at the two campuses it reviewed, 192 

juveniles were hired to work in the receipts processing areas and all of 

them had fingerprint checks completed. However, 18 U.S.C. 5038 states 

that information about a juvenile’s record may not be released when the 

request for information is related to an application for employment. It 

further states that responses to such inquiries shall not be different from 

responses made about persons who have never been arrested. Therefore, 

the case disposition from any juvenile arrest could not be released or 

otherwise known. According to TIGTA, because juveniles’ records are 

sealed, it was not certain whether local authorities, which provide 

information for the FBI’s national database, forward juvenile arrest records 

to the FBI. Even if the fingerprint check identified a juvenile arrest record, 

current laws prevent investigators from determining whether the juvenile 

was convicted or acquitted. TIGTA recommended that IRS develop a 

process to more effectively screen out juvenile applicants with 

questionable backgrounds for receipt processing positions. IRS agreed to 

look into this matter.

IRS’ lack of a process to screen out juvenile applicants with questionable 

backgrounds could result in IRS’ unknowingly hiring persons with 

unsuitable backgrounds to process receipts and sensitive taxpayer data, 

thus increasing the risk of theft. In fact, TIGTA special agents have already 

investigated juvenile employees for theft of receipts. Given these risks, we 

agree with TIGTA’s recommendation for IRS to develop procedures to more 

effectively screen out juvenile employees with questionable backgrounds.

32See The Internal Revenue Service Should Take Additional Actions to Protect Taxpayer 

Remittances (Treasury Inspector General for Tax Administration, Report No. 2000-30-153, 

September 25, 2000).
Page 31 GAO-02-35 IRS Financial Management

Hiring Practices for 

Lockbox Employees

We found that the scope of background checks required of lockbox bank 

employees was inconsistent with IRS’ hiring policy and was less than that 

required of IRS employees. The Treasury’s Financial Management Service 

(FMS) contracts with 10 commercial banks to process taxpayers’ payments 

and tax data for IRS. Lockbox banks are staffed with both permanent bank 

employees and temporary employees. 

As previously discussed, the new IRS hiring policy prohibits the hiring and 

placement of an IRS applicant, for permanent or temporary position, at any 

IRS location until the applicant’s fingerprint checks have been received and 

evaluated. Despite the fact that lockbox employees also handle taxpayer 

receipts and data, IRS’ new hiring policy does not apply to them. At two 

lockbox banks we visited, we found that 63 permanent employees were 

hired and began working in fiscal year 2000 prior to the banks’ receipt of 

their fingerprint checks. We also found that fingerprint checks were not 

required at all for temporary lockbox employees. Neither the IRS 

guidelines for lockbox operations nor the FMS contracts with lockbox 

banks required fingerprint checks for temporary employees of the 

lockbox.33 The lockbox guidelines required only a police check for all 

temporary employees. However, a police check, which is a records check 

for arrests and legal proceedings, is limited to the jurisdictions that the 

employee states he or she resided in within the past 7 years. In contrast, the 

FBI fingerprint checks required of IRS applicants do not depend on the 

individual to accurately state where he or she lives because the FBI obtains 

information for its national database from law enforcement agencies.

We also found that the length of time it took for the lockbox banks to get 

the results of fingerprint checks varied widely. For example, officials at one 

of the lockbox banks we visited informed us they received the results of the 

fingerprint checks in 8 business days while the officials at a second 

lockbox bank stated they received the results in 3 to 6 months. As a result 

of the above weaknesses in lockbox hiring practices, taxpayers and the 

government were unnecessarily exposed to potential financial losses and 

fraud that could have occurred if lockbox employees with unsuitable 

backgrounds were unknowingly hired to process sensitive taxpayer 

information and receipts. 

33The FMS contracts set forth the duration of the contract, the compensation, and the terms 

of services to be provided by lockbox banks. The lockbox guidelines are developed and 

annually updated by IRS for lockbox banks and set forth specific standard operating 

procedures for lockbox processing of receipts and tax data as well as hiring requirements. 
Page 32 GAO-02-35 IRS Financial Management

IRS Courier Practices We previously reported on various security weaknesses related to courier 

services. IRS uses couriers to transport deposits of taxpayer receipts to 

financial institutions. On March 14, 2000, IRS issued a revision to its 

minimum courier service requirements for IRS campuses to address the 

security weaknesses we previously reported.34 As a result of this new 

policy, we noted additional improvements over courier security that helped 

reduce the vulnerability of taxpayer receipts and taxpayer data recorded on 

checks from theft, loss, or misuse. For example, the revised courier 

standards limit courier access on campus premises and require campus 

personnel to deliver the deposits to a designated point of transfer. At two 

campuses we visited, we observed that the campus personnel complied 

with this policy. 

However, some weaknesses still remain. For example, the courier 

standards require two courier service employees to pick up and deliver 

deposits in order to increase security and help ensure that such deposits 

are never left unattended while in the courier service’s custody. At one of 

the campuses we visited, only one courier showed up to pick up the 

deposits. According to IRS campus officials, this was because IRS did not 

directly contract with the courier service. Instead, the contract was 

between the depository institution and the courier service. Therefore, IRS 

had less control over the security requirements included in the courier 

contract. Regardless of who contracts directly with the courier service, IRS 

has a fiduciary responsibility to the taxpayers and the government to 

safeguard taxpayer receipts with which it was entrusted. An IRS official 

stated that IRS plans to issue new guidance that will require all IRS campus 

courier service contracts to include IRS’ minimum courier security 

standards, regardless of who contracts for the courier services. 

Recognizing its responsibility to protect taxpayer information and receipts, 

IRS has clearly made a concerted effort to address courier security 

weaknesses by adopting a more stringent requirement on courier security 

standards. However, unless IRS consistently implements this policy, 

34IRS field offices also receive payments directly from taxpayers but in a much smaller 

amount and volume relative to IRS campuses. The IRS policy requires field offices to 

transmit these receipts to their respective campuses by traceable overnight mail. As such, 

IRS field offices do not use courier services to transport deposits to financial institutions. 

Therefore, the March 2000 minimum security requirements for courier services do not apply 

to field offices.
Page 33 GAO-02-35 IRS Financial Management

taxpayers and the government will still be unnecessarily exposed to 

financial losses. 

Lockbox Bank Courier 

Practices

We also found that lockbox banks were not required to have the same level 

of courier security as IRS campuses. The lockbox courier service 

requirements are listed in the Lockbox Processing Guidelines. Based on 

our comparison of the January 2000 lockbox processing guidelines to IRS’

courier requirements in effect during our review, significant requirements 

from IRS’ courier guidelines were absent from the lockbox processing 

guidelines. For example, the lockbox guidelines did not require use of two 

insured couriers nor did they require all courier service employees to pass 

a limited background investigation. During our site visits at two lockbox 

banks, we noted that a single courier was used at both locations. 

IRS officials stated that the fiscal year 2002 lockbox contracts would 

contain courier standards for lockbox banks consistent with requirements 

at IRS campuses. However, until these standards are required and 

implemented, taxpayer receipts and data are unnecessarily exposed to 

theft and fraud, such as identity theft schemes, while in the custody of the 

lockbox courier services. 

Other Taxpayer Receipts 

and Taxpayer Data Control 

Weaknesses

Despite some improvements, we continued to find other internal control 

weaknesses over the safeguarding and accounting of manual payments and 

taxpayer data. Appendix II lists the improvements IRS made in this area 

during fiscal year 2000. However, during our fiscal year 2000 visits to 

various IRS locations and lockbox banks, we found that other previously 

reported weaknesses, such as the issues outlined in table 4, persisted. 

For example, we continued to find weaknesses regarding access to receipt 

processing areas. IRS security guidelines designate the receipts processing 

area as a restricted area to be accessed only by authorized personnel. As 

such, this area should be physically secured from the rest of the processing 

units of the IRS campus. Nonauthorized persons entering the receipt 

processing area must sign in with a door monitor, wear a special badge, and 

be escorted. Cleaning personnel are only to be allowed access to this area 

during operating hours when they can be observed. However, at one 

campus, a GAO auditor was allowed access through the rear entrance of 

the receipt processing area by an employee who did not know the auditor, 

and the auditor had unescorted access once inside. At four field offices, we 

found similar access problems where entrances to walk-in payment 
Page 34 GAO-02-35 IRS Financial Management

processing areas were left open or were inadequate to prevent 

nonemployees from entering. In the same TIGTA review discussed earlier, 

TIGTA found that physical barriers for receipt processing areas at two 

other campuses were not adequate for various reasons, such as (1) receipt 

processing areas with walls or partitions that were inadequate to secure the 

areas and not supplemented by intrusion detecting devices, (2) doors that 

were left open after hours, and (3) door locks that did not meet minimum 

security standards. At the same campuses, they also found that cleaning 

personnel were allowed unescorted access to receipt processing areas 

during nonoperating hours. At one of these campuses, the security guards 

did not respond to motion sensor alarms set off by a TIGTA auditor before 

regular duty hours because, according to the guards, they assumed that the 

alarms were set off by the janitor who was generally in that area at that 

time. 

We have previously reported, and continued to find, receipts in receipt 

processing areas vulnerable to theft or loss because accountability for 

them was not always established as soon as they were received and 

because the receipts were stored in easily accessible containers. As such, 

physical access controls to these areas are particularly important to reduce 

the risk of theft of taxpayer receipts and data. The weaknesses cited above 

unnecessarily expose taxpayer receipts and accompanying data to theft by 

unauthorized persons.

Weaknesses in 

Management and 

Accounting for 

Property and 

Equipment

During fiscal year 2000, IRS made progress in improving the reliability of its 

property and equipment (P&E) inventory records. IRS began implementing 

a new process for managing and maintaining records for its automated data 

processing (ADP) P&E, assigned a senior-level official responsibility for 

management and control of ADP P&E, and conducted an officewide 

inventory of all P&E. IRS also continued to develop and implement interim 

procedures to compensate for fundamental deficiencies in its financial 

accounting system. Specifically, it developed manual procedures to extract 

the costs of P&E acquisitions from its accounting records. 

Although these efforts allowed IRS to report in its fiscal year 2000 financial 

statements a P&E balance that was fairly stated, these compensating 

procedures were labor intensive and required extensive contractor support 

to arrive at a reliable P&E balance months after fiscal year-end. 

Additionally, these procedures did not address long-standing, fundamental 

weaknesses in IRS’ property and financial systems. As a result, we 

continued to find problems with (1) the accuracy and reliability of IRS’
Page 35 GAO-02-35 IRS Financial Management

P&E inventory records and (2) IRS’ ability to record P&E transactions in its 

financial system as transactions occur. Until these problems are addressed, 

IRS will continue to rely on costly and labor-intensive compensating 

procedures to arrive at a P&E balance that is only reliable for its year-end 

financial statements. More importantly, the procedures IRS employed 

during fiscal year 2000 did not provide management with reliable, useful, 

and timely P&E information throughout the year for day-to-day decisionmaking, thus hindering IRS’ ability to properly manage $1.3 billion in 

assets. Table 6 summarizes the issues relating to P&E, along with their 

effects and IRS’ actions to address these issues. 

Table 6: Internal Control Issues Related to Property and Equipment

Internal control issues, GAO recommendations, and effects IRS actions to address issues

Issues previously reported

Issue and GAO recommendations: IRS’ P&E inventory systems 

and procedures for maintaining those systems were not adequate 

for maintaining accountability over its property. Acquisitions, 

disposals, and transfers were not always promptly and accurately 

recorded. Information needed to identify and locate property, such 

as serial numbers and locations were also incorrect in some 

cases. For GAO recommendations related to this issue, see 

appendix II, recommendations 35, 62, 64, 66, 67, and 68.

Effect: Incomplete and inaccurate data make it difficult to identify 

and locate specific assets, thus compromising IRS’ ability to 

ensure that its assets are properly safeguarded from misuse and 

theft. 

IRS action: To address the deficiencies in its current P&E inventory 

systems, IRS has begun to implement a new inventory system and 

expects to complete implementation by late 2002. In the interim, IRS 

has issued guidelines and begun implementing revised procedures 

to improve the reliability of its current ADP inventory system. 

Specifically, during fiscal year 2000, IRS began implementing the 

Single Point Inventory Function (SPIF), for which it intends to 

establish a dedicated staff at local sites around the country with 

identified responsibilities and procedures for the management and 

execution of ADP P&E. IRS also reported that it is currently 

consolidating all policies and procedures for ADP P&E. 

GAO response: As of our September 2000 visits to IRS sites, we 

found that the SPIF procedures were not fully implemented and SPIF 

teams not completely staffed at various IRS locations. Furthermore, 

we continued to find errors in IRS’ P&E inventory records. 
Page 36 GAO-02-35 IRS Financial Management

Tracking of P&E in 

Inventory Systems

For many years, IRS’ P&E records were not adequate for maintaining 

accountability over its property. IRS has acknowledged the deficiencies in 

its property management controls since 1983.35 In the long-term, IRS plans 

to acquire and implement a new P&E inventory management system to 

address the deficiencies in its current P&E inventory systems. In the 

interim, IRS has taken steps to improve the reliability of its P&E inventory 

records during fiscal year 2000. However, these interim measures have not 

Issue and GAO recommendations: IRS does not record P&E 

transactions as they occur and does not have an integrated 

property and accounting system that facilitates the recording of 

such transactions in accordance with federal accounting 

standards. Instead, acquisitions of capitalizable P&E and their 

related liabilities, such as leasehold improvements, are initially 

expensed and adjustments made after fiscal year-end. 

Consequently, during fiscal year 2000, account balances for P&E 

were understated, and capital lease liabilities and expenses were 

overstated. For GAO recommendations related to this issue, see 

appendix II, recommendations 2, 39, 40, 41, 58, 59, 61, 65, and 

86.

Effect: Current and reliable P&E data are not available on an 

ongoing basis for managing assets and for financial reporting. A 

significant investment in time and resources is needed to extract, 

analyze, and compile the data needed to adjust P&E and expense 

account balances at fiscal year-end. 

IRS action: IRS plans to install, by late 2004, an integrated financial 

system as part of its overall systems modernization. This system will 

integrate its P&E inventory system with its accounting system.

GAO response: Until IRS fully implements its integrated financial 

system and begins recording P&E transactions as they occur, IRS 

will continue to go through a laborious, time-consuming process to 

produce financial statement balances months after the fiscal yearend that will not help in the ongoing management of its resources.

Newly reported issue

Issue and GAO recommendation: Current definitions of 

accounting codes do not facilitate the recording of P&E 

transactions in the correct general ledger accounts because, in 

some instances, they allow IRS to record both capitalizable and 

noncapitalizable costs under the same code. For GAO 

recommendation related to this issue, see appendix II, 

recommendation 87.

Effect: Extensive year-end analysis of charges in these accounts 

is necessary to ensure that all costs for capitalizable P&E are 

included and all noncapitalizable expenses are excluded to derive 

a reliable balance for P&E in IRS’ financial statements. 

IRS action: IRS has not yet reported plans to address this issue.

(Continued From Previous Page)

Internal control issues, GAO recommendations, and effects IRS actions to address issues

35We have reported system and management control weaknesses related to IRS’ P&E since 

we began auditing IRS’ financial statements in fiscal year 1992. See Financial Audit: 

Examination of IRS’ Fiscal Year 1992 Financial Statements (GAO/AFMD-93-2, June 30, 

1993). IRS has reported deficiencies in its property management controls since 1983 in its 31 

U.S.C. 3512 (Federal Managers’ Financial Integrity Act) report.
Page 37 GAO-02-35 IRS Financial Management

been fully implemented, and we continued to find errors in IRS’ P&E 

inventory records during our fiscal year 2000 financial audit.

IRS maintains two P&E inventory systems, one to manage ADP P&E and 

another to track non-ADP P&E. These systems provide data, such as a 

description of the item, its location, and current status (e.g., disposed 

versus in service) that assist property managers and officials in managing 

property. In an effort to address its long-standing inability to maintain 

complete and accurate records in the ADP inventory system, IRS issued 

interim Single Point Inventory Function (SPIF) operating guidelines and 

procedures in June 2000. SPIF centralized responsibility for managing ADP 

property and maintaining ADP inventory records into a single dedicated 

unit at each IRS location, thus establishing clear accountability for the 

receipt, management, and disposal of ADP assets. 

Although this was a significant step, we found during our visits to IRS 

campuses and field offices in September 2000 that SPIF teams had not been 

fully staffed and SPIF procedures had not been fully implemented at all IRS 

facilities. Thus, as in prior years,36 we found that IRS’ procedures for 

recording P&E acquisitions, disposals, and transfers still did not ensure 

that transactions were promptly recorded. Specifically, we found that 35 of 

220 P&E items we selected from IRS records at 22 sites could not be 

located at the time of our review.37 These items were eventually accounted 

for when IRS later reported that 23 of the items had been disposed of 

months earlier (including one disposed of in 1998) but IRS had failed to 

update the records, 8 items were subsequently located, and 4 items were 

erroneous records of software. Nonetheless, based on our work, we 

estimate that 16 percent of the items in IRS’ P&E inventory records at 

September 30, 2000, were erroneously included as IRS assets.38

36See GAO-01-42, November 17, 2000.

37For our book-to-floor sample, we obtained a representative selection of P&E items with a 

two-stage cluster sample. In the first stage, we selected a representative sample of 22 

buildings. In the second stage, we selected a representative sample of 10 assets located at 

each of the 22 buildings from the asset records of the ADP and non-ADP P&E inventory 

tracking systems. 

38We are 90 percent confident that the confidence interval around this estimate ranges from 

10.7 percent to 21 percent.
Page 38 GAO-02-35 IRS Financial Management

The GAO Standards for Internal Control in the Federal Government39

requires that qualified and continuous supervision be provided to ensure 

that internal control objectives are achieved. It is particularly important for 

IRS to have strong management oversight to help compensate for the 

limitations of its current P&E systems. IRS partially addressed the issue of 

management oversight in November 1999 by providing its Chief 

Information Officer (CIO) the authority over and overall responsibility for 

ownership, management, and control of all ADP property.40 In addition, 

SPIF procedures assigned ADP property managers responsibility for 

reviewing the accuracy and completeness of P&E information. Specifically, 

the IRS policy states that ADP property managers are responsible for 

maintaining a management and quality review program to ensure the 

timeliness, completeness, and accuracy of the inventory records and to 

conduct annual property management evaluations at selected sites. These 

types of managerial review serve as a key internal control in ensuring the 

accuracy, completeness, and timely recording of inventory data that will 

subsequently be used to prepare reports for management decision-making. 

However, based on the errors we found during our testing of the P&E 

inventory records, these managerial reviews did not appear to be effective. 

Consequently, the information in IRS’ P&E inventory tracking systems was 

unreliable and fell short of meeting management reporting needs.

Recording P&E in the 

Accounting System

As in prior years, IRS was unable to record P&E assets and corresponding 

liabilities in its accounting system as the transactions occurred due to 

inadequate accounting procedures and systems design flaws. 

Consequently, IRS hired a contractor who implemented extensive and timeconsuming manual procedures to derive a reliable P&E balance for IRS’

financial statements. 

IRS did not have policies and procedures in accordance with federal 

accounting standards to identify and record in its general ledger accounts 

its P&E assets and corresponding liabilities as the transactions occurred. 

For example, federal accounting standards require agencies to record a 

capital lease asset and its corresponding liability at the inception of the 

39Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, 

November 1999).

40The Chief Information Officer will eventually have oversight over non-ADP P&E as well 

once it is consolidated with ADP P&E in the new property management system. 
Page 39 GAO-02-35 IRS Financial Management

lease agreement.41 However, neither IRS’ inventory system nor its 

accounting system was designed to capture key information on capital 

leases to enable it to report the asset or the corresponding capital lease 

liability as the transactions occurred. IRS expensed all property purchases 

during the year, including major acquisitions such as capital leases, 

leasehold improvements, and major systems.42 A contractor then analyzed 

and extracted from IRS’ automated expense records purchases of P&E, 

leasehold improvements, major systems, and capital leases based on codes 

within IRS’ accounting system to derive the fiscal year-end amounts that 

should have been capitalized as P&E. IRS then recorded adjusting entries 

to transfer these P&E acquisitions to the appropriate general ledger 

account. This process was time-consuming and did not always result in 

accurate information as we found during our review of fiscal year 2000 

nonpayroll expenses and P&E transactions. For example:

• Of 156 statistically sampled nonpayroll expenses we reviewed, 3 

transactions totaling $1.7 million that should have been recorded as 

P&E had not been properly extracted by the contractors from the 

population of fiscal year 2000 expenses and transferred to the P&E 

general ledger account. Based on our work, we estimate that the most 

likely understatement of the P&E balance as a result of P&E 

transactions being incorrectly recorded as expenses was $50 million, 

with an upper error limit of $127 million.43

• Of 60 statistically sampled P&E transactions we reviewed, 8 

transactions totaling $879,000 were inappropriately identified by the 

contractors as fiscal year 2000 P&E acquisitions. Two of the 8 

transactions were fiscal year 1999 transactions, and the remaining 6 

items were non-P&E items that should have remained as expenses. 

Based on our work, we estimate that the most likely overstatement of 

41A capital lease is a lease that transfers substantially all the benefits and risks of ownership 

to the lessee. 

42All relevant costs for the purchase of an asset that is material and will benefit several 

accounting periods should be capitalized, recorded as an asset, and depreciated over the 

useful life of that asset. In contrast, costs associated with other acquisitions that do not 

meet the above criteria should be expensed when purchased. 

43Our estimate is based on a 95-percent confidence level and the use of a test materiality of 

$87 million.
Page 40 GAO-02-35 IRS Financial Management

the P&E balance as a result of transactions incorrectly recorded as 

fiscal year 2000 P&E was $61 million, with an upper error limit of 

$106 million.44

Additionally, IRS uses financial accounting codes that classify expenses by 

type to extract P&E, leasehold improvements, major systems, and capital 

leases from its automated records of expenses. These Sub-Object Class 

(SOC) codes appear on all basic accounting documents and provide 

detailed cost data on the types of expenses that are significant to IRS’

operations. However, IRS recorded both capitalizable and noncapitalizable 

P&E transactions under the same SOC codes. This complicated the process 

of extracting capitalizable P&E transactions based on SOC codes because 

additional analysis was required to determine whether the transactions 

represented an expense or a capitalizable P&E purchase. For example, in 

fiscal year 2000, the contractor determined that more than $43 million in 

software license fees, which should have been expensed, were charged to 

an SOC code defined as capitalized software. 

Lack of an Integrated 

Inventory and Accounting 

System

IRS’ costly, time-consuming process for determining a year-end P&E 

balance was necessary because IRS’ procurement system, inventory 

tracking systems, and the general ledger are not integrated. In an integrated 

financial management system, the general ledger is supported by 

subsidiary ledgers, which contain detailed records of transactions and 

automatically update the appropriate general ledger balances as 

transactions occur. Therefore, on an on-going basis, detailed records in the 

subsidiary ledgers should support the P&E balances in the general ledger. 

However, during fiscal year 2000 IRS did not have subsidiary ledgers for its 

P&E. Instead, the two inventory tracking systems served as subsidiary 

records for P&E. However, property acquisitions and dispositions recorded 

in the inventory tracking systems did not automatically update appropriate 

P&E balances in the general ledger system because the two systems were 

not integrated. Additionally, unlike true subsidiary ledgers, the inventory 

tracking systems did not record the cost of assets that tie to the general 

ledger balances at a summary level. Consequently, P&E balances recorded 

in general ledger P&E accounts could not be easily reconciled to IRS’

44Our estimate is based on a 95-percent confidence level and the use of a test materiality of 

$87 million.
Page 41 GAO-02-35 IRS Financial Management

subsidiary records to verify that such balances were supported by actual 

assets recorded in the inventory tracking systems. 

IRS plans to install an integrated financial system by late 2004 to address 

the design flaws of its current systems. In the meantime, due to the systems 

and control weaknesses discussed above, IRS management continues to 

rely on a contractor and a labor-intensive procedure to derive a reliable 

P&E balance for its financial statements. Because this procedure only 

provides a reliable balance for the fiscal year-end date, IRS does not have 

reliable P&E data on an ongoing basis to make operational decisions 

related to the purchase, disposition, and use of its P&E. Moreover, errors in 

IRS’ inventory tracking systems continue to compromise IRS 

management’s ability to safeguard $1.3 billion of government assets. 

Recommendations To address weaknesses in the timely recording of P&E transactions while 

an integrated P&E financial system is being developed, we recommend that 

IRS implement policies and procedures to record capitalizable acquisition 

costs for property and equipment, capital leases, leasehold improvements, 

and major systems in the appropriate P&E general ledger accounts as 

transactions occur. 

To ensure that SOC codes facilitate compilation of capitalizable P&E 

transactions in the proper general ledger asset accounts and, if applicable, 

lease liability accounts, we recommend that IRS revise the definitions of 

SOC codes pertaining to P&E or establish new codes so that individual SOC 

codes cannot be used for both capitalizable purchases (assets) and 

noncapitalizable purchases (expenses). For example, the SOC code used to 

record capitalizable software costs should not be used to record 

noncapitalizable software license fees. 

Weak Controls Over 

Appropriated Funds 

Continue

In fiscal year 2000, IRS made substantial progress in addressing previously 

identified budgetary control weaknesses. IRS (1) reduced the number of 

employees with authority to override automated spending controls; 

(2) decreased the number, dollar amount, and duration of items held in 

suspense; and (3) implemented procedures to deobligate funds no longer 

required for a specific purpose. 

Despite this progress, IRS’ internal controls were inadequate for providing 

reasonable assurance that the $8.3 billion in fiscal year 2000 budgetary 
Page 42 GAO-02-35 IRS Financial Management

authority45 was routinely accounted for, reported, and controlled. 

Specifically, we found that IRS (1) incurred costs prior to establishing an 

obligation, (2) inappropriately recorded unrelated activities as adjustments 

to obligations, and (3) failed to reduce undelivered orders46 when goods 

and services were received. As a result, IRS was unable to ensure the 

reliability of key budgetary information it needs on an ongoing basis to 

effectively manage its operations and ensure that its resources do not 

exceed budgetary authority. While these conditions in isolation may not 

rise to the level of material weakness, collectively they are indications of 

serious deficiencies in internal controls over appropriated funds. Table 7 

summarizes the issues we identified related to obligations and undelivered 

orders, along with their effects and IRS’ actions to address these issues.

Table 7: Internal Control Issues Related to Appropriated Funds

45Budget authority is the authority provided by law to enter into financial obligations that 

will result in immediate or future outlays involving federal government funds. An 

appropriation is the most common means of providing budget authority. 

46Undelivered orders represent the value of goods and services that have been ordered and 

obligated but have not been received. This term is synonymous with unliquidated 

obligations.

Internal control/compliance issues, GAO recommendations, 

and effects IRS actions to address issues

Issue previously reported

Issue and GAO recommendations: IRS personnel did not 

accurately record receipt of goods and services in the accounting 

system based on the date the goods were received or services 

rendered. For GAO recommendations related to this issue, see 

appendix II, recommendations 76 and 77.

Effect: IRS’ undelivered orders were overstated, and accrued 

expenses were understated.

IRS actions: IRS reported that it issued guidance requiring that its 

staff record the receipt of goods and services based on the date the 

goods were received or services performed, regardless of whether 

an invoice was received.

GAO response: During our fiscal year 2000 review, we still found 

instances in which IRS did not record the receipt of goods and 

services until the related invoice was received. We will continue to 

monitor IRS’ progress in implementing its procedures in this area.

Newly reported issues

Issue and GAO recommendation: IRS incurred costs before 

recording the corresponding obligation in its accounting system. 

For GAO recommendation related to this issue, see appendix II, 

recommendation 88.

Effect: IRS could incur expenses without sufficient budget 

authority to fund them.

IRS actions: IRS has not yet reported plans to address this issue.
Page 43 GAO-02-35 IRS Financial Management

Recording Obligations In the federal budgeting process, agencies’ operations are funded by 

appropriations. Appropriations typically provide agencies with budgetary 

authority, i.e., the legal right to obligate—and ultimately to spend—funds 

for specific purposes, within a specific period of time, up to a specific 

amount. An obligation is a definite commitment by an agency of the 

government, which creates a legal liability to another party. To prevent 

obligations in excess of available funding, OMB Circular A-34 gives 

instructions to federal agencies as to when an obligation of funds should be 

recorded in the agency’s financial system. For example, an obligation for 

reimbursable travel expenses incident to employee relocation should be 

recorded when a travel order is approved; an obligation for a contract 

should be recorded in the month that the contract is let; and an obligation 

for an order for goods or services is to be recorded at the time the order is 

placed. In addition, GAO’s Standards for Internal Control in the Federal 

Government requires that transactions be promptly recorded to maintain 

their relevance and value to management in controlling operations and 

making decisions. However, during our fiscal year 2000 audit, we found 

that IRS did not always record obligations in its accounting system prior to 

incurring costs. For example:

• IRS received software maintenance services for the period May 1, 2000, 

through April 31, 2001, totaling $415,000. However, IRS did not generate 

a purchase order to record the obligation of funds until July 28, 2000—

almost 3 months after the services were received. 

• An IRS site accepted delivery of services for which funds were not 

available at that site. In this instance, a contracting officer at an IRS site 

ordered services totaling more than $15,000 for transporting and 

installing systems furniture in June 1999. However, the obligation was 

Issue and GAO recommendation: IRS recorded as adjustments 

to prior yearsí obligations activities that were not adjustments to 

prior yearsí obligations. For GAO recommendation related to this 

issue, see appendix II, recommendation 89. 

Effect: IRS’ draft Statement of Budgetary Resources (SBR) 

contained inaccuracies in some line items that required substantial 

adjustments to materially comply with U.S. generally accepted 

accounting principles. The Standard Form 133 used to report IRS’

September 30, 2000, budgetary activities to OMB contained some 

line items that were misstated and therefore unreliable.

IRS actions: IRS has not yet reported plans to address this issue.

(Continued From Previous Page)

Internal control/compliance issues, GAO recommendations, 

and effects IRS actions to address issues
Page 44 GAO-02-35 IRS Financial Management

not recorded before the cost was incurred. When the voucher was 

submitted in November 1999, IRS discovered that the amount exceeded 

what was available to the site at the time the order was placed. Although 

IRS was able to make up for the deficiency by transferring fiscal year 

1999 funds from another site, had there not been funds available at that 

time IRS may have run the risk of spending more than it was authorized 

to spend. 

As a result of not recording obligations in a timely manner, IRS cannot 

routinely rely on its financial records to provide reliable information on the 

status of its budgetary resources for day-to-day decision-making. Until the 

obligation of funds is recorded, the balance in obligations incurred would 

be understated. This could lead IRS management to believe that the agency 

has more funding than is actually available. Consequently, IRS management 

and personnel might enter into additional obligations in excess of the 

budgetary authority made available by Congress. 

Adjusting Obligations During fiscal year 2000, IRS recorded certain activities as adjustments to 

prior years’ obligations47 that were not valid adjustments to those 

obligations. In fiscal year 2000, $167 million of the $277 million (over 60 

percent) that were recorded in IRS’ accounting system as adjustments to 

prior years’ obligations were not valid upward or downward adjustments. 

IRS subsequently adjusted its records to correct these erroneous 

transactions. However, these errors adversely affected IRS’ ability to 

routinely report accurate and reliable information on total budgetary 

resources and obligations. 

GAO’s Standards for Internal Control in the Federal Government requires 

that transactions and other significant events be properly classified to 

maintain their relevance and value to management in controlling 

operations and making decisions. Furthermore, transactions and events are 

to be completely and accurately recorded and classified in the summary 

records from which reports and financial statements are prepared. 

Adjustments to prior years’ obligations are recorded when the obligation 

amount that was previously recorded is affected by a subsequent event, 

such as a change in the price or quantity of goods or services. For example, 

47An adjustment to a prior year’s 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.
Page 45 GAO-02-35 IRS Financial Management

if an undelivered order for a good was established for $1,000, but the good 

was delivered in a later year at $1,250, then an upward adjustment of $250 

to obligations would be recorded. An upward adjustment would increase 

obligations incurred and reduce the unobligated balance. Similarly, if an 

undelivered order was established for $1,000 but the good was delivered in 

a later year for $750, then a downward adjustment to prior years’

obligations of $250 would be recorded. 

However, we found that IRS overstated both the upward and downward 

adjustment accounts during fiscal year 2000. Many activities that were 

recorded as adjustments to the prior years’ obligations were not actual 

upward or downward adjustments but were related to changes in 

accounting codes, travel, and adjustments for doubtful accounts. Of the 

$277 million in adjustments IRS recorded in its accounting system in fiscal 

year 2000, $82 million in upward adjustments and $85 million in downward 

adjustments were not valid adjustments to the prior years’ obligated 

balance. These errors were attributed to IRS’ accounting system, which, 

according to IRS personnel, recorded all adjustments that affect a prior 

year’s appropriation, including those that did not affect the obligated 

amount, as upward or downward adjustments to prior years’ obligations.

Through adjusting entries totaling $167 million, IRS was able to correct 

these errors in time to prevent the financial statements from being 

misstated. However, upward adjustments to prior years’ obligations are 

also reported on the SF133 Report on Budget Execution and Budgetary 

Resources that federal agencies submit to OMB quarterly48 as “obligations 

incurred,” while downward adjustments to prior years’ obligations are 

reported on the SF133 as “recoveries to prior year obligations.” Because 

the upward and downward adjustment accounts were misstated during the 

year, data IRS reported to OMB on its budgetary activities may not be 

reliable. Specifically, the September 2000 SF133 IRS submitted to OMB 

misstated both the obligations incurred and recoveries to prior years’

obligations line items. 

48OMB requires that each agency submit SF133s on a quarterly basis to report on each 

agency’s budget execution as well as the status of its budgetary resources. The Statement of 

Budgetary Resources (SBR) is one of the annual audited financial statements required of 

federal agencies. Both provide similar information.
Page 46 GAO-02-35 IRS Financial Management

Recording Receipt of 

Undelivered Orders

IRS records an undelivered order when it orders a good or service for use 

in its operations. It then reduces the undelivered order balance and records 

an expense when the good or service is received. However, we found 

instances in which IRS did not reduce the balance in undelivered orders 

when the goods and services were received. As a result, the balance of 

undelivered orders and accrued expenses were misstated. 

We tested statistical samples of 83 and 78 transactions from fiscal year 2000 

beginning and ending balances of undelivered orders, respectively.49 For 

both samples, we found instances in which IRS received goods and 

services during one fiscal year but did not reduce the undelivered orders 

balance reflected in its accounting system until the following fiscal year. 

This was caused, in part, by IRS personnel’s incorrectly recording into its 

accounting system the dates that the goods and services were received. 

This resulted in IRS’ overstating the beginning and the ending fiscal year 

2000 undelivered order balances and understating accrued expenses. For 

example:

• In fiscal year 2000, IRS recorded an obligation and a corresponding 

undelivered order for computer equipment totaling $7.9 million. As of 

September 30, 2000, IRS had received equipment totaling $3.4 million. 

However, its records as of September 30, 2000, still showed that the 

entire undelivered order amount was still outstanding, i.e., $3.4 million 

was not yet removed from the undelivered order balance. 

• Telephone support services for the month of September 1999 were 

entered into the receipt and acceptance system as being received on 

October 5, 1999. Consequently, the beginning fiscal year 2000 balance in 

undelivered orders was overstated. 

• IRS failed to remove more than $4.1 million from the ending undelivered 

order balance for lockbox services received from July through 

September 2000. Consequently, the fiscal year 2000 ending undelivered 

order balance was overstated.

The errors in the beginning undelivered orders balance totaled $2.9 million, 

while errors in the ending undelivered orders balance totaled $12.4 million. 

Based on our work, we estimate (1) the most likely overstatement of the 

fiscal year 2000 beginning undelivered orders balance as a result of these 

49These samples were selected using a 95-percent confidence level. The test materiality 

associated with these samples is $87 million.
Page 47 GAO-02-35 IRS Financial Management

errors was $65 million, with an upper error limit of $111 million and (2) the 

most likely overstatement of the ending undelivered orders balance and 

corresponding understatement of accrued expenses was $47 million, with 

an upper error limit of $87 million. 

Because of the deficiencies in controls over the accurate recording of 

undelivered orders, IRS’ balances in undelivered orders and accrued 

expenses were misstated during fiscal year 2000. These deficiencies 

continued to affect IRS’ ability to report reliable, timely, and routine 

information critical for making sound day-to-day decisions and effectively 

managing its operations. 

Recommendations To ensure effective management of available funding and accurate 

reporting of obligations, we recommend that IRS perform periodic reviews 

to monitor and ensure that obligations are promptly established in the 

accounting system. Such reviews would assist IRS in maintaining accurate 

and complete records of its obligations, and in reducing the risk of 

obligations exceeding available funding.

To ensure that reported budget data are reliable on a routine basis, we 

recommend that IRS incorporate into its systems modernization blueprint 

the capability to differentiate prior-year adjustments between activities that 

are valid upward and downward adjustments to obligations and activities 

that are not valid adjustments to obligations. Such actions would help 

ensure that activities that are not valid adjustments to obligations are not 

recorded as adjustments to obligations. 

Deficiencies in the 

Collection and 

Reporting of Financial 

Data

In fiscal year 2000, IRS revised the format of its statement of net cost and 

significantly expanded and enhanced the related disclosures in its financial 

statements to address an issue we had raised in our prior audit regarding 

the commingling of certain program costs in its financial statements. The 

resulting presentation appropriately classified the cost of IRS’ programs. 

However, in fiscal year 2000, as in prior years,50 IRS was unable to generate 

reliable financial information on a day-to-day basis to support decisionmaking. IRS lacked a financial management system that complies with the 

requirements of the Federal Financial Management Improvement Act of 

50See GAO-01-42, November 17, 2000.
Page 48 GAO-02-35 IRS Financial Management

1996 (FFMIA).51 In addition, IRS did not record transactions in a timely 

manner and perform routine reconciliations necessary to ensure the 

reliability of general ledger data. Finally, IRS lacked an effective system 

that can report on the full costs of its activities and on cost-based 

performance measures consistent with the Government Performance and 

Results Act (GPRA) of 1993.52 These weaknesses affected IRS’ ability to 

(1) routinely prepare reliable periodic financial reports, (2) generate 

routine and reliable cost-based information, (3) accurately determine the 

amount of revenue collected for specific tax types, and (4) certify excise 

taxes distributed to trust funds. Collectively, these issues are indications of 

serious internal control deficiencies and constitute a material weakness in 

controls over financial reporting. 

As noted earlier, in fiscal year 2000, due to monumental efforts and 

extensive workaround processes, IRS was able to produce for the first time 

combined financial statements that were fairly stated in all material 

respects. However, the information reported in the financial statements 

was reliable only for a single point in time. Financial data not subjected to 

these compensating procedures may not be reliable and cannot be used to 

effectively manage IRS’ day-to-day operations. Ultimately, Congress, IRS 

management, and the public do not routinely have timely and accurate 

information to evaluate IRS’ performance and make informed management 

and policy decisions. Table 8 summarizes the issues we identified in this 

area, together with their effects and IRS’ actions to address these issues. 

51FFMIA requires that agencies implement and maintain financial management systems that 

substantially comply with Federal Financial Management System Requirements, applicable 

federal accounting standards, and the U.S. Government Standard General Ledger at the 

transaction level.

52GPRA requires federal agencies to prepare an annual performance plan covering each 

program activity set forth in the budget. This plan is required to (1) establish performance 

goals and express them in objective, quantifiable, and measurable form; (2) describe the 

operational processes, skills, technology, and human capital information or other resources 

required to meet the performance goals; (3) establish performance indicators to be used in 

measuring or assessing the relevant outputs, service levels, and outcomes of each program 

activity; (4) provide a basis for comparing actual program results; and (5) verify and validate 

the measured values or results.
Page 49 GAO-02-35 IRS Financial Management

Table 8: Internal Control and Compliance Issues Related to Financial Reporting

Internal control/compliance issues, GAO recommendations, 

and effects IRS actions to address issues

Issues previously reported

Issue and GAO recommendation: IRS’ financial management 

systems do not comply with Federal Financial Management 

System Requirements, federal accounting standards, and the U.S. 

Government Standard General Ledger. For GAO 

recommendations related to this issue, see appendix II, 

recommendation 75.

Effect: IRS cannot rely on its financial management systems to

support related amounts on the principal financial statements. It 

must rely on costly, labor-intensive, and time-consuming 

workaround processes to extract data, analyze it, and make 

significant adjustments to it before it can produce reliable annual 

financial statements. Consequently, IRS cannot routinely generate 

periodic statements or other reliable information as a management 

tool.

IRS action: IRS plans to implement an integrated financial 

management system that will meet the necessary federal 

requirements as part of its systems modernization effort. In the 

meantime, IRS must continue to use ad hoc processes and 

procedures to prepare its financial statements.

GAO response: Weaknesses will continue to exist in this area until 

an effective financial management system that complies with federal 

requirements and is integrated with supporting subsidiary records is 

established. 

Issue and GAO recommendations: IRS does not record 

transactions in its general ledger in a timely manner and ensure 

that ongoing monitoring of the general ledger occurs in the normal 

course of operations consistent with GAO’s Standards for Internal 

Control in the Federal Government. For GAO recommendations 

related to this issue, see appendix II, recommendations 74, 90, 91, 

and 92.

Effect: IRS’ fiscal year 2000 draft financial statements contained 

material inaccuracies and required extensive modifications and 

adjustments to materially comply with U.S. generally accepted 

accounting principles.

IRS actions: IRS reported that it is in the process of developing and 

implementing internal procedures to ensure timely recording of 

transactions in the general ledger. It also reported that it has 

established procedures that require a multilevel review of the 

financial statements. 

GAO response: Based on our fiscal year 2000 financial audit, IRS’

procedures were not adequate to prevent material inaccuracies in 

IRS’ draft financial statements. Until IRS develops an effective 

system of internal controls over financial reporting, weaknesses will 

continue to exist in this area. 

Issue and GAO recommendations: IRS cannot track and report, 

in appropriate detail, the full costs of its activities and programs. 

For GAO recommendations related to this issue, see appendix II, 

recommendations 47, 48, 53, 54, 71, 72, 93, and 94.

Effect: IRS is unable to report on the costs of projects and 

subprojects, and is therefore unable to report cost-based 

performance information consistent with the Government 

Performance and Results Act.

IRS actions: IRS plans to acquire a cost accounting module as part 

of its effort to develop and implement an integrated financial 

management system. 

GAO response: Weaknesses will continue to exist in this area until 

an effective cost accounting module is implemented that can track 

and report, in appropriate detail, the full costs of IRS’ activities and 

programs.

Issue and GAO recommendation: IRS’ workaround processes 

used to generate its custodial balances rely on extensive technical 

expertise with IRS’ master files that only a limited number of 

individuals possess. For GAO recommendation related to this 

issue, see appendix II, recommendation 30.

Effect: Should these individuals become unavailable for any 

reason, IRS would experience significant difficulty in preparing 

reliable custodial balances for its financial statements.

IRS action: IRS has hired additional staff to assist in these 

workarounds but recognizes that more staff are needed to fully 

address this recommendation. 

GAO response: We will continue to assess IRS’ efforts to address 

and correct this problem.
Page 50 GAO-02-35 IRS Financial Management

Reporting Year-End 

Balances

As the table above indicates, IRS does not have an adequate financial 

management system. As a result, IRS is hindered in its ability to produce 

reliable financial statements and to generate timely and accurate 

information needed to make management and operational decisions.

An adequate financial management system is one that can provide 

complete, reliable, consistent, timely, and useful financial management 

information. Such a system comprises, among other elements, an 

integrated general ledger system using common data elements and 

transaction processing that is supported by transactional details and a 

system of internal controls to ensure that reliable data are obtained, 

maintained, and disclosed in reports. Such a system is also capable of 

Issue: IRS is unable to routinely track and report actual revenue 

collected for specific trust funds and individual income taxes.

Effect: IRS must go through a complex process to determine 

(certify) the amounts that should be distributed to the excise tax 

trust funds and cannot separately report the amount of revenue 

collected for Social Security, Hospital Insurance, and individual 

income taxes.

IRS actions: IRS plans to include in its new financial management 

system the ability to capture revenue by type of tax and to conduct a 

new study in 3 to 4 years to gauge taxpayer ability and readiness to 

provide detailed information by type of tax at the time of payment.

GAO response: Weaknesses will continue to exist in this area until 

an effective financial management system is established to capture 

revenue by type of tax and until taxpayers are ready to provide 

detailed tax type information at the time of payment. 

Issue and GAO recommendation: IRS does not record excise 

tax return information in its systems in a timely manner. For GAO 

recommendation related to this issue, see appendix II, 

recommendation 29.

Effect: The amounts initially distributed to excise tax-related trust 

funds may not be adjusted in a timely manner through IRS’

certification process. As a result, these trust funds may not be 

receiving the proper amounts on a timely basis.

IRS actions: IRS implemented procedures in 1999 to improve timely 

recording of excise tax returns by requiring IRS campuses to 

express mail their Form 720s to the Cincinnati campus daily, 

ensuring that Form 720s over $1 million are batched separately and 

expedited, and by closely following up on overdue returns.

GAO response: Based on our fiscal year 2000 audit results, IRS’

efforts to record excise tax returns in a timely manner were not 

effective. We continued to find delays in recording tax return 

information in IRS systems that resulted in collections being omitted 

from certifications for a given quarter. 

Newly reported issue

Issue and GAO recommendation: IRS could not provide 

documentary evidence that key performance indicators provided in 

the fiscal year 2000 “Management Discussion and Analysis” were 

reviewed for accuracy and completeness. For GAO 

recommendation related to this issue, see appendix II, 

recommendation 95.

Effect: This increases the risk that errors or omissions in key 

performance indicators could occur and not be detected and 

corrected in a timely manner. 

IRS actions: IRS has not yet developed plans to address this issue.

(Continued From Previous Page)

Internal control/compliance issues, GAO recommendations, 

and effects IRS actions to address issues
Page 51 GAO-02-35 IRS Financial Management

capturing and reporting reliable performance information. However, IRS’

financial management system is made up of two independent general 

ledgers—custodial and administrative—that are not integrated with each 

other nor with their supporting records for material balances.53 Specifically, 

IRS’ custodial general ledger does not have adequate audit trails for federal 

taxes receivable, federal tax revenue, or federal tax refunds, while its 

administrative general ledger lacks audit trails for P&E and program costs. 

For example, as discussed earlier in this report, the lack of clear 

traceability between the general ledger and underlying financial 

transactions required IRS to use extensive ad hoc procedures and 

statistical methods to derive reliable balances for taxes receivable and 

other unpaid assessments. In addition, as discussed further below, because 

of weaknesses in internal controls, IRS could not demonstrate that 

reported performance indicators were reliable. Consequently, neither of 

IRS’ two general ledgers complies with the requirements of the U.S. 

Government Standard General Ledger54 (SGL) at the transaction level and 

cannot be used to support the preparation of financial statements without 

material financial reporting adjustments, nor do they comply with the 

requirements of FFMIA. 

One important requirement of an effective financial management system is 

that it can be relied upon to support the timely production of auditable 

financial statements. At IRS, this is not the case. Although IRS was able to 

produce financial statements that were fairly stated in all material respects 

for fiscal year 2000, these statements required monumental human efforts 

that extended well after the September 30, 2000, fiscal year-end. In 

addition, information produced by IRS’ financial management system 

required billions of dollars in adjustments to derive reliable financial 

statement balances. As mentioned earlier, substantial adjustments totaling 

53IRS’ custodial activities consist of tax receipts collected, refunds paid, and taxes 

receivable. Administrative activities consist of the budgetary resources that fund the 

custodial activities and the costs incurred in performing those activities. 

54The U.S. Government Standard General Ledger establishes a standard chart of accounts 

with common account titles, definitions, and uses to standardize federal agency accounting, 

support the external reports and financial statements required by OMB and Treasury, and 

provide comparable information among agencies. These and other financial management 

system requirements are detailed in the Financial Management Systems Requirements 

series issued by the Joint Financial Management Improvement Program, OMB Circular A127, Financial Management Systems, and OMB’s January 4, 2001, revised guidance for the 

implementation of FFMIA.
Page 52 GAO-02-35 IRS Financial Management

billions of dollars had to be made to reliably report the balance for taxes 

receivable. These adjustments, as well as the balance in net taxes 

receivable, were not available until well after the fiscal year had ended. 

Similarly, fiscal year 2000 administrative activities totaling over $3.7 billion 

were either recorded in the wrong general ledger accounts or were not yet 

recorded in IRS’ general ledger as of September 30, 2000. For example, as 

of fiscal year-end, accrued payroll and depreciation expenses totaling 

$480 million had yet to be recorded in IRS’ general ledger, while P&E 

acquisitions that should have been capitalized were recorded as expenses. 

These activities had to be analyzed and recorded or reclassified, a timeconsuming process that took several months to complete. 

Though IRS achieved an important milestone in receiving an unqualified 

opinion on its fiscal year 2000 financial statements, the approach used to 

achieve this goal did not address the underlying purpose of sound financial 

management as envisioned by the CFO Act—to produce reliable, useful, 

and timely financial and performance information on a routine basis for 

day-to-day decision-making. Furthermore, until lasting improvements are 

achieved, IRS will have to continue to rely on extensive efforts to produce 

reliable financial statements. 

Maintaining Accurate and 

Timely Financial Data

During fiscal year 2000, IRS did not timely record transactions and perform 

the necessary reconciliations to ensure that the data contained in its 

general ledger systems were up-to-date and accurate. Consequently, IRS 

did not have reliable, timely, and routine financial information to effectively 

manage its operations.

GAO’s Standards for Internal Control in the Federal Government requires 

that transactions and events be recorded accurately and timely and that 

ongoing monitoring occur in the course of normal operations to provide 

reasonable assurance that financial reporting is reliable. These internal 

control processes and procedures are crucial to ensuring that an agency’s 

financial management systems produce information that is reliable, timely, 

and useful. Without these processes and procedures, a modern and 

integrated financial management system by itself does not guarantee that 

an agency will be able to prepare financial statements that are fairly stated 

and generate financial data that can be relied upon for day-to-day decisionmaking. 

During fiscal year 2000, IRS’ internal controls over financial reporting were 

not consistent with these standards. Specifically, IRS did not record 
Page 53 GAO-02-35 IRS Financial Management

material transactions in the general ledger until months after they 

occurred. For example: 

• Depreciation expenses totaling more than $350 million were not 

recorded throughout the year, but only at year-end. As a result, the 

balance in depreciation was inaccurate at interim periods during the 

year.

• Imputed financing costs totaling nearly $400 million were not recorded 

in the general ledger throughout the year but rather as a lump sum 

amount several months after the fiscal year-end. While IRS made the 

necessary adjustments to produce reliable year-end financial 

statements, the balance for imputed financing costs was incorrect 

throughout fiscal year 2000. 

In addition, IRS lacked adequate policies and procedures for ensuring that 

financial data would be adequately reviewed on an ongoing basis. 

Specifically, IRS management informed us that it did not have policies and 

procedures requiring systematic reviews and analyses of account balances 

at interim periods. Consequently, errors and omissions were allowed to 

arise without prompt detection and correction, and adjusting entries that 

should have been made throughout the year were allowed to build up until 

they became material and time-consuming to correct. IRS also did not have 

policies and procedures requiring reconciliation between its proprietary 

and budgetary accounts during fiscal year 2000.55 IRS had to make 

adjustments totaling more than $160 million several months after the fiscal 

year-end to bring the net cost of operations derived from the budgetary 

accounts and the net cost of operations derived from the proprietary 

accounts into agreement. The failure to maintain accurate and up-to-date 

financial data impeded IRS management in its ability to use the general 

ledger as a reliable source of financial data at interim periods to make 

managerial and operational decisions.

55The budgetary accounting system is used to track spending authority at all stages from 

appropriation to expenditure. Proprietary accounts are used to record all nonbudgetary 

activity, such as information about the entity’s assets, liabilities, and operations. However, 

many activities in the proprietary accounts affect obligated budgetary resources and need to 

have related entries in the budgetary records. Consequently, routine reconciliations are 

necessary to ensure that these two sets of accounts are consistent and reliable during 

interim periods.
Page 54 GAO-02-35 IRS Financial Management

Reporting on and Managing 

Performance

IRS did not track the cost accounting information needed to prepare costbased performance information consistent with GPRA. Deficiencies in IRS’

systems and internal controls discussed above mean that IRS cannot 

routinely generate reliable financial and performance data for cost-benefit 

analyses. This could adversely affect IRS management’s and Congress’

ability to make informed management decisions related to resource 

allocation and other aspects of IRS’ operations throughout the year.

The Joint Financial Management Improvement Program’s (JFMIP) System 

Requirements for Managerial Cost Accounting requires that, at a 

minimum, agencies have cost accounting information to support the 

aggregation of financial information related to programs and projects, each 

of which could have several levels, such as subprograms. In order for IRS 

to aggregate cost information by program and project to conform to this 

standard, it must first capture costs at the detail level as they are incurred. 

However, IRS did not have a systematic process in place to capture costs at 

the project level during fiscal year 2000. Though IRS had a Project Cost 

Accounting Subsystem (PCAS) coding structure that can capture personnel 

costs at the detailed project and subproject level, IRS did not require that 

all of its employees use PCAS to itemize the time spent on specific projects 

on their time cards.56 Consequently, during fiscal year 2000, IRS staff did 

not use PCAS codes for time charged to either of IRS’ two largest 

appropriations, which collectively accounted for 74 percent of IRS’

budgetary resources.57

Similarly, except for information technology projects, PCAS did not collect 

nonpersonnel costs such as equipment depreciation, rent, and utilities by 

projects and subprojects. At year-end, IRS extracted data from its 

accounting system, imported the data into a database, and used a 

spreadsheet to allocate these nonpersonnel costs to the different projects 

and subprojects in an effort to derive reliable net operating cost data for 

the Statement of Net Cost. However, these data were not available until 

months after the fiscal year-end, were only reliable for a single point in 

time, and thus were not available on an ongoing basis for management 

56Only employees who worked on information technology projects or various projects 

supporting financial statement audits were required to record time spent on these projects 

using PCAS. 

57IRS’ two largest appropriations are (1) Processing, Assistance, and Management and 

(2) Tax Law Enforcement.
Page 55 GAO-02-35 IRS Financial Management

purposes. The failure to fully and accurately capture cost at the project 

level affected IRS’ ability to produce reliable cost data. Specifically, IRS 

was unable to report on the costs associated with each of the 15 key 

performance indicators it reported in the “Management Discussion and 

Analysis” that accompanied its fiscal year 2000 financial statements. As a 

result, IRS cannot be consistent with GPRA in reporting cost-based 

performance measures related to its various programs. 

In addition, IRS was unable to provide evidence that supervisory review 

was performed to ensure that the performance indicators, and data used to 

derive these indicators, were complete, accurate, and reliable. For 

example, IRS did not have documentation demonstrating that a responsible 

official had reviewed the data to ensure that all data that should be 

collected for a specific performance indicator was collected, and that only 

pertinent data was included. This increases the risk that any errors or 

omissions affecting IRS’ key performance indicators will not be detected 

and corrected in a timely manner.

Finally, IRS faces an additional challenge in the fact that its custodial and 

administrative general ledgers are independent of each other and are not 

integrated. Since cost data are primarily contained in the administrative 

general ledger while critical performance data comes from the custodial 

general ledger, IRS needs to be able to link these two general ledgers before 

it can calculate reliable, cost-based performance measures. IRS plans to 

implement a major portion of an integrated financial and taxpayer account 

management system by fiscal year 2005. Consequently, this link between 

the custodial and administrative general ledgers will not occur before then. 

Reporting Tax Revenues IRS continues to be unable to determine the specific amount of revenue it 

actually collects for Social Security, Hospital Insurance, individual income 

taxes, and excise tax trust funds. These conditions exist primarily because 

(1) at the time of payment, taxpayers are not required to provide 

information on the specific taxes that they are paying and (2) IRS’ systems 

are not capable of capturing such information. Although the tax returns, 

which the taxpayers file months after the deposits are made, do contain a 

breakdown on the type of tax, this information pertains only to the amount 

of the tax liability and not to the amount of taxes paid to IRS. This 

condition restricts IRS’ ability to report actual collections of significant 

taxes, such as Social Security, that would be of interest to many parties, 

including Congress. IRS is developing a system to capture detailed 
Page 56 GAO-02-35 IRS Financial Management

collection information by type of tax and plans to initiate a study, in 3 to 4 

years, to gauge taxpayers’ readiness to provide such detailed information.

Trust Fund Certification Because data are not available for the allocation of excise taxes to the 

appropriate trust funds when deposits are made, IRS uses a certification 

process that is complex, cumbersome, and prone to error in order to 

distribute excise tax receipts to the respective trust funds. In response to 

our previous reports, IRS implemented procedures to improve controls 

over the certification process. However, we continued to find weaknesses 

in the excise tax certification process. For example, due to delays in 

recording tax return information in its systems, the amount IRS certified to 

the Highway Trust Fund for the quarter ended September 30, 1999,58

included nearly $346 million in collections from previous quarters. These 

delays resulted in delays in transferring these amounts to the trust funds, 

thus reducing the amount of interest income the trust funds earn on these 

receipts. This reduction in interest income could adversely affect 

distributions of trust fund receipts to the states because the amounts 

distributed would be based on inaccurate data.

Recommendations To reduce the magnitude of year-end adjustments and assist IRS in 

improving the reliability of its financial data on a routine basis, we 

recommend that IRS develop, document, and implement policies and 

procedures to require 

• monthly reconciliations between proprietary and budgetary accounts so 

that differences can be identified promptly and, if necessary, adjusted;

• routine reviews and analyses of general ledger account balances to 

promptly identify errors and omissions; and 

• recording corrections and adjusting entries throughout the year to 

reduce the magnitude of year-end adjustments and improve the 

reliability of interim financial data. 

To improve IRS’ ability to collect and report on the full costs of its 

activities, we recommend that IRS implement policies and procedures to 

58Since 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 fiscal year 2000 excise tax distributions.
Page 57 GAO-02-35 IRS Financial Management

• require that all employees itemize the time spent on specific projects on 

their time cards and 

• allocate nonpersonnel costs to programs and activities routinely 

throughout the year.

To provide assurance on the reliability of performance data, we 

recommend that IRS document reviews performed to validate that 

performance data are complete, accurate, and reliable.

Conclusions Many of the issues presented throughout this report have existed for 

several years, and IRS has noted that the ultimate solution to many of these 

issues is modernization of its systems. As part of this modernization 

initiative, IRS plans to implement a new financial system that includes a 

cost accounting module as well as integrated administrative and custodial 

general ledgers that are supported by subsidiary ledgers containing the 

transactional details for key accounts such as taxes receivable and 

property and equipment. The modernized environment is expected to 

provide IRS with, among other things, the ability to (1) track and report on 

the status of each unpaid assessment category, amount, and taxpayer, 

(2) record P&E transactions in its general ledger accounts as they occur, 

and (3) prepare cost-benefit analyses and cost-based performance 

measures. However, these systems will take years to implement. 

IRS continues to make progress in addressing its financial management 

challenges. The strong commitment and dedication to financial 

management reform by IRS senior management has played a crucial role in 

the progress the agency has made to date and is critical for future 

improvements.

IRS has developed many workaround processes that resulted in its ability 

to produce reliable financial statements for fiscal year 2000. However, 

these processes take considerable time, effort, and expense and do not fix 

many of the fundamental financial management issues that continue to 

plague the agency. Until these issues are addressed, IRS cannot achieve the 

overriding objective of the CFO Act and other reform legislation enacted 

during the last decade—to produce reliable, useful, and timely financial 

and performance information for day-to-day decision-making. 
Page 58 GAO-02-35 IRS Financial Management

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS agreed that, in order to 

improve financial management, it must sustain a high level of effort to 

implement solutions that will address systems deficiencies and internal 

control weaknesses. IRS also provided information regarding past and 

current initiatives to address GAO’s audit recommendations. For example, 

during fiscal year 2000, IRS (1) routinely reconciled its fund balance, 

(2) reviewed and managed suspense items, (3) eliminated unneeded 

obligations, (4) installed and used live-scan fingerprint equipment, and 

(5) implemented procedures and processes to improve the reliability of 

P&E records. IRS also noted that it has undertaken additional initiatives to 

address remaining internal control deficiencies. For example, it noted that 

it implemented a new inventory system for its P&E and enforced standards 

to improve inventory practices, developed a standard checklist and 

conducted monthly security reviews in fiscal year 2001, and hired 

additional staff to support the master file extract process. We will follow up 

during our fiscal year 2001 audit to assess the effectiveness of these 

initiatives. 

While agreeing with the overall thrust of our report, IRS disagreed with 

some of the specific report findings and recommendations. Specifically, in 

the area of P&E, IRS disagreed that in the short term, property acquisitions 

should be recorded as capital assets as the transactions occur. IRS noted 

that, until an integrated property management system is acquired, it should 

continue the current practice of recording property acquisitions as 

expenses and then transferring these expenses to capital assets in the 

general ledger after a review process. We disagree. As our report states, 

IRS’ process for deriving a reliable P&E balance for its annual financial 

statements involves the use of extensive manual procedures by a 

contractor to extract and analyze IRS’ data on expenses to identify items 

that should be classified as assets. This process is time-consuming, occurs 

months after the acquisition of the assets, and only provides a reliable 

balance for P&E for a single point in time. This process does not provide 

IRS with reliable P&E data on an ongoing basis for use in operational 

decision-making. 

IRS also disagreed with our conclusions regarding the timeliness of IRS’

recording of obligations. IRS believed that the 2 instances we cited of IRS’

failure to timely record obligations were isolated and thus did not 

constitute a material weakness in controls over appropriated funds. The 2 

instances cited in our report were illustrative examples of IRS’ failure to 

record obligations before goods and services were received, and did not 
Page 59 GAO-02-35 IRS Financial Management

represent the total number of errors found in our testing. In fact, we found 

10 instances in which IRS failed to record obligations before goods and 

services were received. These exceptions were brought to the attention of 

IRS staff and management, in writing, throughout the audit. These 10 

instances together represent more than isolated instances of IRS’ not 

recording obligations before goods and services are received. It is also 

important to note that we did not characterize in our report the issue of IRS 

not timely recording obligations in and of itself as a material weakness. 

However, taken collectively, this, plus other issues in the area of 

appropriated funds management, constitute a material weakness in IRS’

internal controls over its appropriated funds that preclude IRS from 

providing reasonable assurance that material misstatements would be 

prevented or detected on a timely basis. 

In addition, IRS disagreed that we should include its failure to properly 

record adjustments to obligations as a material weakness. IRS also 

requested that we reconsider our recommendation that it include in its 

systems modernization blueprint the capability to differentiate between 

valid and invalid adjustments to prior-year obligations. IRS stated that the 

issue stemmed from our and its different interpretations of the definition of 

upward and downward adjustments. IRS believed that it had successfully 

resolved this issue because it made audit adjustments we proposed prior to 

issuing its final fiscal year 2000 financial statements and stated that it 

would continue to make these adjustments in the future. 

While we agree that IRS made the audit adjustments we proposed to its 

financial statements, we disagree that this issue has been resolved and 

should be excluded from our report. As discussed above, our report does 

not characterize this issue in and of itself as a material weakness. As stated 

in our report, we requested that IRS make adjustments in instances 

involving changes in accounting codes and travel entries that do not meet 

the definition of upward and downward adjustments. IRS made these 

adjustments to its fiscal year 2000 financial statements. These adjustments 

eliminated the type of known errors found during our testing and reduced 

the dollar amounts of these accounts to levels not considered material for 

purposes of fairly presenting the financial statements as a whole. These 

adjustments do not, however, correct the underlying problems that gave 

rise to the errors in these accounts that required adjusting. Also, while IRS 

took exception to our recommendation, it noted that the CFO has included 

this issue in the functional requirements for IRS’ new financial 

management system, and that, in the short term, it will continue to make 

these adjustments manually. These corrective actions, if effectively 
Page 60 GAO-02-35 IRS Financial Management

implemented, should address our recommendation regarding this issue. We 

will evaluate the effectiveness of these actions during the fiscal year 2001 

audit.

IRS also contested our including an example in the report to illustrate its 

failure to record the liability for goods and services when received. IRS 

stated that it had entered into an agreement with us to exclude invoices 

received after November 30, 2000, from fiscal year 2000 audit procedures. 

As the invoice for this particular transaction was received on December 6, 

2000, IRS believed that this transaction fell outside the agreed-to cutoff 

date and should thus not be cited. 

We disagree with IRS’ characterization of what was agreed to. The 

agreement between IRS and us related to our testing of subsequent 

disbursements. In previous years, we tested disbursements made within 

the 3 months following fiscal year-end to identify transactions that should 

have been, but were not, recorded as a transaction in the year under audit. 

In fiscal year 2000, we agreed to reduce the test period to 2 months 

following the fiscal year-end, that is, we would test only subsequent 

disbursements made from October 1 through November 30 after the fiscal 

year-end. However, the particular example in our report that IRS is taking 

issue with was identified during our testing of IRS’ ending undelivered 

orders balance—this was separate and apart from the testing of subsequent 

disbursements. Further, lockbox services are recurring transactions 

covered by 5-year contracts. Consequently, IRS had the capability to accrue 

for these services without waiting for the invoice. As our report states, the 

most likely misstatement of the ending undelivered orders balance 

resulting from the failure to timely record receipt of undelivered orders 

was $47 million, with an upper error limit of $87 million. The magnitude of 

these errors reinforces the need for IRS to act to ensure that goods and 

services are recorded when received. 

With respect to financial reporting, IRS took issue with our findings that 

material inaccuracies were found in the fiscal year 2000 financial 

statements and that these inaccuracies were not effectively detected in IRS’

review of these financial statements. IRS disagreed that these findings 

should be cited as a material reporting weakness. IRS further stated that it 

was aware of only two material adjustments we proposed that fell within 

the purview of financial reporting. 

Again, we disagree. Each of the internal control deficiencies over financial 

reporting cited in our report do not individually constitute a material 
Page 61 GAO-02-35 IRS Financial Management

weakness—it is the combination of these deficiencies that constitutes a 

material weakness. Further, as our report states, IRS’ draft financial 

statements contained material inaccuracies and the review procedures 

instituted by IRS were not effective in identifying and addressing errors and 

omissions material to the financial statements. For example, the first two 

draft financial statements prepared in January and early February 2001 

omitted a material footnote comparing IRS’ Statement of Budgetary 

Resources with the President’s Budget as required by U.S. generally 

accepted accounting principles and OMB 97-01, despite the fact that we 

had indicated to IRS in October 2000 that the footnote was necessary. An 

effective review procedure would have identified this material omission. 

Further, we proposed not 2, but 14 audit adjustments, which IRS accepted 

and recorded. The aggregate absolute value impact of these adjustments 

was (1) $160 million to assets and liabilities, (2) $140 million to net cost, 

and (3) $227 million to the statements of financing and budgetary 

resources. 

In the area of refunds, IRS disagreed with our finding that IRS does not 

screen all EITC claims through EFDS. IRS stated that all EITC claims are 

run through the EFDS program, which prioritizes returns according to 

criteria that were based on the 1997 EITC Compliance study. We agree that 

all cases with EITC refund claims are run through the EFDS program by 

IRS’ Criminal Investigation Division and assigned a score to assist in 

prioritizing which cases to work. CI, in turn, refers cases above a certain 

score to the Examination Branch for examination. However, the 

Examination Branch only examines a subset of those cases referred for 

examination based upon its perceived level of available resources without 

collecting the data necessary to determine whether it is focusing the 

appropriate level of resources on this effort. Without such data, IRS is 

unable to determine the extent to which refunds associated with invalid 

EITC claims could be prevented or minimized had IRS devoted more 

resources to its examination efforts. We have modified our report to 

provide a more detailed explanation of the EITC examination selection 

process.

IRS also disagreed with our recommendation that it implement policies and 

procedures requiring all employees to itemize their time on their time 

cards. IRS stated that it currently tracks itemized information for most 

employees through its functional tracking systems. We will follow up 

during our fiscal year 2001 audit to assess the adequacy of this approach.
Page 62 GAO-02-35 IRS Financial Management

Again, we recognize that IRS achieved an important milestone in producing 

for the first time combined financial statements in fiscal year 2000 that 

were fairly stated in all material respects. However, as we state in our 

report, the tremendous efforts undertaken by IRS staff and management to 

produce reliable financial statements do not result in reliable, useful, and 

timely financial and performance information IRS needs for decisionmaking on an ongoing basis. 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. As we have reported for several years, long-term and systematic 

improvements in IRS’ processes and systems are needed to address the 

management challenges we have identified. 

During fiscal year 2000, IRS demonstrated a strong commitment to address 

the operational and financial management issues raised by us in previous 

financial statement audits. It successfully implemented a number of 

initiatives to address outstanding financial-related recommendations and 

laid the groundwork for continued sustainable improvements in financial 

management. We will continue to work closely with IRS to build on the 

improvements made in fiscal year 2000 and to achieve sustained progress 

in these areas. 

The complete text of the IRS’ Deputy Commissioner for Operations’

response to this report is reprinted in appendix III.

This report contains new recommendations to you. The head of a federal 

agency is required by 31 U.S.C. 720 to submit a written statement on 

actions taken on these recommendations. You should send your statement 

to the Senate Committee on Governmental Affairs and the House 

Committee on Government Reform within 60 days after the date of this 

report. A written statement also must be sent to the House and Senate 

Committees on Appropriations with the agency’s first request for 

appropriations made over 60 days after the date of this report.

We are sending copies of this report to the Chairmen and Ranking Minority 

Members of the Senate Committee on Appropriations; Senate Committee 

on Finance; Senate Committee on Governmental Affairs; Senate Committee 

on the Budget; Subcommittee on Treasury, General Government, and Civil 

Service, Senate Committee on Appropriations; Subcommittee on Taxation 

and IRS Oversight, Senate Committee on Finance; Subcommittee on 

Oversight of Government Management, Restructuring, and the District of 
Page 63 GAO-02-35 IRS Financial Management

Columbia, Senate Committee on Governmental Affairs; House Committee 

on Appropriations; House Committee on Ways and Means; House 

Committee on Government Reform; House Committee on the Budget; 

Subcommittee on Government Efficiency, Financial Management, and 

Intergovernmental Relations, House Committee on Government Reform; 

and Subcommittee on Oversight, House Committee on Ways and Means. In 

addition, we are sending copies of this report to the Chairman and ViceChairman of the Joint Committee on Taxation, the Secretary of the 

Treasury, the Director of the Office of Management and Budget, the 

Chairman of the IRS Oversight Board, and other interested parties. Copies 

will be made available to others upon request. 

This report was prepared under the direction of Steven J. Sebastian, Acting 

Director, Financial Management and Assurance, who can be reached at 

(202) 512-3406. If I can be of further assistance, please call me at (202) 512-

2600.

Sincerely yours,

Jeffrey C. Steinhoff

Managing Director

Financial Management and Assurance
Page 64 GAO-02-35 IRS Financial Management

Appendix I

Scope and Methodology ApApenednxidexiIs

As part of our audit of IRS’ fiscal year 2000 financial statements, we 

evaluated IRS’ internal controls and its compliance with selected 

provisions of laws and regulations, and we followed up on the status of 

open recommendations from prior financial audits and related financial 

management reports. We designed our audit procedures to test relevant 

controls and included tests for proper authorization, execution, 

accounting, and reporting of transactions. Specifically, we 

• Tested selected statistical samples of unpaid assessment, revenue, 

refund, accounts payable, accrued expense, payroll, nonpayroll and 

undelivered order transactions. These statistical samples were selected 

primarily to substantiate, and in some cases derive, balances and 

activities 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. In testing 

these samples, certain attributes were identified that indicated 

significant deficiencies in the design or operation of internal control. 

These attributes can be and have been statistically projected to the 

appropriate populations.

• Conducted analytical testing procedures where appropriate.

• Evaluated relevant internal controls over financial reporting and 

reviewed the overall form and content of the financial statements.

• Reviewed the IRS contractor’s methodology and procedures for 

compiling the fiscal year 2000 P&E additions.

• Tested detailed purchasing transactions of P&E, major systems, capital 

leases, and leasehold improvements and a statistical sample of P&E 

items at several IRS locations.

• Compared EITC amounts from IRS and Treasury reports, and reviewed 

EITC audit cases.

• Tested transactions that represent the underlying basis of amounts 

distributed to various trust funds, primarily the Highway Trust Fund and 

Airport and Airway Trust Fund.

• Reviewed the IRS certifications of excise tax revenue distributed to the 

Highway Trust Fund and Airport and Airway Trust Fund.

• Reviewed IRS’ reconciliations and specific controls over refund 

processing and financial reporting.

• Observed physical safeguards over cash and checks received and 

processed at campuses, field offices, and lockbox banks.

• Interviewed and observed management and personnel at campuses, 

field offices, and lockbox banks.

• Reviewed relevant audit reports from the Office of the Treasury 

Inspector General for Tax Administration.
Appendix I

Scope and Methodology

Page 65 GAO-02-35 IRS Financial Management

• Reviewed IRS’ fiscal year 2000 Federal Managers’ Financial Integrity Act 

Annual Assurance Statement, IRS’ January 2001 letter to Congress 

responding to Recommendations to Improve Financial and 

Operational Management (GAO-01-42), and IRS’ April 2001 

Remediation Plan.1

We performed our work from April 2000 through February 2001 in 

accordance with U.S. generally accepted government auditing standards. 

We have also issued a management letter addressing additional matters 

that we identified during our fiscal year 2000 audit regarding accounting 

procedures and internal controls that could be improved, and we have 

issued separate reports on computer security issues.

1

The Federal Financial Management Improvement Act of 1996 (FFMIA) requires that if the 

head of an agency determines that the agency’s financial management systems do not 

comply with the requirements of FFMIA, then the head of the agency shall establish a 

remediation plan that includes resources, remedies, and intermediate target dates necessary 

to bring the agency’s financial management systems into substantial compliance.
Page 66 GAO-02-35 IRS Financial Management

Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports ApendxiI

Appendix II consists of two tables. Table 9 lists our recommendations from 

prior financial statement audits and related financial management reports. 

Table 10 lists new recommendations resulting from our fiscal year 2000 

audit. From our previous reports on IRS’ financial activities,1

 85 

recommendations remained open as of the date of this report (1 through 85 

in table 9). We are closing 24 of these recommendations primarily because 

IRS has addressed them or because they are being superseded by updated 

or more detailed recommendations. Thus, 61 of these prior 

recommendations remain open. The column “GAO status of 

recommendations” in table 9 lists the current status of these 

recommendations and indicates whether we believe that each open 

recommendation could be addressed in the short term (such as enforcing 

policies that are not being consistently followed) or whether each would 

require long-term changes for fundamentally deficient financial systems or 

other more extensive changes.2

 We are also making 10 new 

recommendations in this report, numbered 86 through 95 in table 10, with 

short- or long-term changes also indicated. Consequently, 71 

recommendations are open as of the date of this report. We have 

highlighted in bold the 9 recommendations we consider of highest priority 

for IRS to address. These are recommendations 6, 8, 17, 47, 48, 49, 53, 54, 

and 55. We will continue to monitor IRS’ progress toward addressing each 

of the recommendations in this appendix during our fiscal year 2001 audit.

1

See GAO-01-42, November 17, 2000 and Management Letter: Improvements Needed in IRS’

Accounting Procedures and Internal Controls (GAO-01-880R, July 30, 2001).

2

In making this determination, we are primarily defining as short-term recommendations 

those that could be addressed within the next 1 to 2 years and would not require any 

computer systems changes. We are defining as long-term recommendations those that 

would require computer systems changes and thus would likely take several years to fully 

implement.
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 67 GAO-02-35 IRS Financial Management

Table 9: Status of Open GAO Recommendations on IRS’ Financial and Operational Activities

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations

Financial Management: IRS Lacks Accountability Over Its ADP Resources (GAO/AIMD-93-24, August 5, 1993)

1. Oversee efforts for ensuring that property and 

equipment (P&E) inventory data, including 

telecommunications and electronic filing 

equipment, are complete and accurate.

Closed. IRS reported that it had 

completed an inventory of its 

Automatic Data Processing (ADP) 

assets.

Closed – superseded. Although IRS 

conducted an inventory, we continued to find 

inaccuracies in the property records. We will 

continue to track IRS’ efforts to improve the 

accuracy of the property records under 

recommendation number 35 below. 

2. Determine what information related to ADP 

resources, such as equipment condition and 

remaining useful life, would be most useful to IRS 

managers for financial management purposes 

and develop a means for accounting for these 

data.

Open. IRS intends to implement a 

system that will integrate its P&E 

inventory system with its financial 

system. This integrated system, 

currently targeted for late 2004, is 

expected to include information 

related to equipment resources and 

to incorporate a means of accounting 

for such data. 

Open. We will continue to monitor IRS’

progress in implementing the new system. 

(Long-term)

Financial Management: Important IRS Revenue Information Is Unavailable or Unreliable 

(GAO/AIMD-94-22, December 21, 1993)

3. Identify reporting information needs, develop 

related sources of reliable information, and 

establish and implement policies and procedures 

for compiling this information. These procedures 

should describe any (1) adjustments that may be 

needed to available information and (2) analyses 

that must be performed to determine the ultimate 

disposition and classification of amounts 

associated with in-process transactions and 

amounts pending investigation and resolution.

Closed. IRS reported that it had 

developed a comprehensive set of 

policies and procedures for preparing 

its custodial financial statements. It 

also reported that it had completed a 

comprehensive analysis of the 

administrative financial statement 

process.

Closed. We confirmed that IRS has taken the 

actions stated.

4. Monitor implementation of actions to reduce 

the errors in calculating and reporting manual 

interest on taxpayer accounts, and test the 

effectiveness of these actions.

Open. IRS reported that it is testing a 

software package to automate its 

manual interest calculations and 

expects to complete testing, 

implementation, and staff training by 

June 2002.

Open. We will monitor IRS’ progress during 

our fiscal year 2001 financial statement audit 

of IRS. (Short-term)

Financial Audit: Examination of IRS’ Fiscal Year 1993 Financial Statements 

(GAO/AIMD-94-120, June 15, 1994)

5. Use current information to periodically update 

estimated future Tax Systems Modernization 

costs.

Closed. The Tax Systems 

Modernization Project is now part of 

IRS’ overall modernization and thus, 

the recommendation is no longer 

applicable.

Closed. As reported in recommendation 60 

below, IRS captured and capitalized major 

systems costs in fiscal year 2000. 
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 68 GAO-02-35 IRS Financial Management

Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management

(GAO/AIMD-99-16, October 30, 1998)

6. Manually review and eliminate duplicate or 

other assessments that have already been 

paid off to assure all accounts related to a 

single assessment are appropriately credited 

for payments received. 

Open. IRS reported that it is 

developing a system to automate the 

trust fund recovery penalty (TFRP) 

program. IRS expects that this will 

eliminate the opportunity for errors 

that plague the current manual 

process. The new system is currently 

targeted to be completed in late 

2002.

Open. The ability to track and link multiple 

TFRP assessments depends on IRS 

personnel’s manually inputting the crossreference information needed to link these 

assessments. This process is labor intensive 

and, as we found in FY 2000, often ineffective. 

Specifically, of 29 unpaid payroll tax cases we 

reviewed involving multiple assessments for 

which payments were not posted to all related 

accounts, 28 of these had the crossreferences. We will continue to monitor the 

effectiveness of IRS’ efforts to address this 

issue. (Short-term)

7. Establish minimum documentation standards 

or checklists for collection files. These standards 

or checklists should include minimum 

documentation and file organization requirements 

for all taxes receivable and compliance 

assessment cases, specifying the types of 

documentation required, standard file 

organization, and the retention period that will 

ensure that such documents are maintained until 

the statute of limitations has expired.

Closed. IRS reported that it issued 

two memos in November and 

December 1999 that addressed case 

file management guidelines and 

records retention requirements.

Closed. 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 for determining the 

appropriate classification and estimating 

collectibility for cases determined to be taxes 

receivable.

8. Ensure that IRS' modernization blueprint 

includes developing a subsidiary ledger to 

accurately and promptly identify, classify, 

track, and report all IRS unpaid assessments 

by amount and taxpayer. This subsidiary 

ledger must also have the capability to 

distinguish unpaid assessments by category 

in order to identify those assessments that 

represent taxes receivable versus compliance 

assessments and write-offs. In cases 

involving trust fund recovery penalties, the 

subsidiary ledger should ensure that (1) the 

trust fund recovery penalty assessment is 

appropriately tracked for all taxpayers liable 

but counted only once for reporting purposes 

and (2) all payments made are properly 

credited to the accounts of all individuals 

assessed for the liability.

Open. IRS’ Custodial Accounting 

Project includes the development of 

a Taxpayer Account Subledger 

(TASL) which is expected to provide 

the ability to identify duplicate trust 

fund recovery assessments, taxes 

receivable, compliance 

assessments, and write-offs for 

financial reporting purposes. Its online transaction processing (OLTP) 

system is expected to identify 

duplicate trust fund recovery 

assessments and assure that 

payments are properly credited when 

received. Development of both TASL 

and OLTP is underway, and they are 

targeted for completion in January 

2006.

Open. We will continue to monitor IRS’

progress in developing these systems to 

address the weaknesses noted during our 

fiscal year 2001 audit. (Long-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 69 GAO-02-35 IRS Financial Management

9. Examine and consider options to increase 

deterrent controls at service centers.b

 Some 

options IRS should examine and consider include

installing surveillance cameras to monitor staff 

when they are opening, extracting, and sorting 

the mail and when they are processing receipts, 

restricting personal items that can be brought into 

the receipt processing areas, such as handbags, 

briefcases, and bulky outerwear, and 

providing lockers and requiring their use for 

storing personal belongings outside of the receipt 

processing areas. 

Closed. IRS reported that it (1) hired 

a contractor in June 2001 to conduct 

a risk assessment to determine 

proper mitigating security controls in 

the Receipt and Control areas, 

(2) established cross-functional 

review teams to conduct monthly 

reviews at each campus using a 

standard checklist, and (3) plans to 

reemphasize that personal 

belongings are prohibited in receipt 

processing areas. 

Open. Though we noted improvements in 

some deterrent controls, such as the 

installation of lockers, controls were not 

consistently enforced at all locations. We will 

continue to evaluate the effectiveness of IRS’

efforts during our fiscal year 2001 audit. 

(Short-term)

10. Provide adequate training and monitoring of 

extraction unit staff to ensure staff are informed 

and properly trained on the proper procedures, 

and that the procedures are being followed.

Closed. IRS reported that it 

developed a national training course 

that began December 1999 and 

continued through April 2000 as new 

staff were brought on board.

Closed. We confirmed that IRS had provided 

the training to extraction staff. 

11. Limit the units that may receive unopened 

mail directly to only those units that require 

confidentiality due to the nature of their work. At a 

minimum, mail addressed to off-site locations 

should be routed through the service center first 

to identify mail that may contain taxpayer receipts.

Closed. IRS reported that it had 

updated the Internal Revenue 

Manual (IRM) to reflect the policy of 

routing mail through Receipt and 

Control beginning January 1, 1999, 

and had also issued revised 

procedures on January 1, 2000.

Closed. We confirmed that almost all mail, 

with a few exceptions, was routed through the 

Mail Unit.

12. Ensure that IRS' modernization blueprint 

includes the ability to compare W-2 and other 

third-party information to tax returns as they are 

processed to further prevent improper refunds 

from being issued.

Closed. IRS reported that version 1.0 

of the Modernization Blueprint, 

issued January 2001, includes at a 

high level a process to match 

information return data to tax returns 

and to prevent erroneous refund 

situations. 

Open. We will review IRS’ most recent 

modernization blueprint to verify that these 

features are included during our fiscal year 

2001 financial statement audit. (Short-term)

Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions to the Trust Funds 

(GAO/AIMD-99-17, November 9, 1998)

13. Revise the Form 720 tax return to reflect a 

separate column adjacent to the column for 

entering the tax assessment, by abstract number, 

for the taxpayer to report on pages 1 and 2 of the 

tax return claims and adjustments, by abstract 

number, based on the information the taxpayer 

reports on Schedule C.

Open. IRS reported that it plans to 

implement a programming change by 

2002 for processing and validating 

Schedule C data that uses credit 

reference numbers for claimed 

credits with respect to each abstract 

number.

Open. We will continue to monitor IRS’ efforts 

and implementation in future audits. (Shortterm)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 70 GAO-02-35 IRS Financial Management

14. Develop, document, and implement review 

procedures over the adjustment and 

summarization of assessment data used in the 

certifications. Specifically, IRS should require that 

detailed supervisory review be performed and 

documented to ensure that adjustments are 

reasonable and adequately supported, 

calculations are appropriately performed, and the 

certification letter agrees with the supporting 

schedules.

Closed. IRS reported that two 

additional staff had been added to 

analyze the certifications and three 

separate check sheets had been 

developed to ensure the quality of 

each Excise Tax Certification. In 

addition, IRS reported that it had 

prepared written procedures for 

preparing the certifications and 

changed their review process to now 

require a second level review to 

ensure accuracy.

Open. In fiscal year 2000, IRS prepared and 

implemented written procedures for their 

excise tax certification process. While we 

noted improvements in the certification 

process, we continued to find weaknesses 

such as inadequate reviews that resulted in 

undetected errors in the data used for 

certification. We will continue to evaluate the 

effectiveness of IRS’ efforts in our fiscal year 

2001 financial statement audit of IRS.

Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement 

(GAO/AIMD-99-15, November 30, 1998)

15. Establish procedures to review the 

applications and associated documents for all 

applicants given job offers to ensure that 

fingerprint checks are initiated on those 

individuals. Implement procedures to provide 

supervisory feedback on these reviews as 

necessary to ensure personnel staff are aware of 

and follow IRS’ policy requiring fingerprint checks. 

Closed. IRS reported that it 

established procedures in July 1999 

to better ensure that fingerprint 

checks are initiated and supervisory 

feedback is provided to ensure that 

IRS staff comply with fingerprint 

check requirements. 

Open. We continued to find that in many 

instances IRS did not take fingerprint checks 

until after the new employees reported on 

duty. We will continue to evaluate the 

effectiveness of IRS’ efforts during the fiscal 

year 2001 financial statement audit. (Shortterm)

16. Continue with the agency’s plans to develop 

and implement a policy to fingerprint filing season 

applicants at the earliest possible time in the job 

application process.

Closed. IRS issued policies in 1999 

that required fingerprinting all filing 

season applicants at the earliest 

possible time in the job application 

process. 

Open. Despite these policies, we found that 

IRS continued to hire employees and allowed 

them to report on duty prior to initiating a 

fingerprint check. We will continue to evaluate 

the effectiveness of IRS’ efforts to implement 

this policy during the fiscal year 2001 financial 

statement audit. (Short-term)

17. Until the problems with delays in 

fingerprint checks are resolved, develop and 

implement a policy prohibiting new 

employees from being assigned to process 

receipts until the results of fingerprint checks 

are received and reviewed by management.

Closed. In April 2000 IRS issued a 

policy memo requiring fingerprint 

checks be received and results 

evaluated before an employee in any 

IRS office can begin working, and it 

issued a further clarifying memo in 

August 2000.

Open. Although IRS issued this policy, it did 

not consistently implement it. Through the end 

of fiscal year 2000 IRS continued to hire 

employees before it received the results of 

their fingerprint checks. We will continue to 

evaluate the effectiveness of IRS’

implementation efforts in our fiscal year 2001 

audit. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 71 GAO-02-35 IRS Financial Management

18. Continue the agency’s efforts to explore the 

feasibility of obtaining local police checks on IRS 

applicants and evaluate the efficiency and 

effectiveness of the Philadelphia Service Center’s 

electronic fingerprinting system in order to 

supplement FBI fingerprint checks.

Closed. IRS reported that it 

evaluated the effectiveness of the 

pilot with the Philadelphia Police 

Department in June 2000 and 

determined that with the 

implementation of the Integrated 

Automated Fingerprint Identification 

System (IAFIS) in November 1999 

and the April 2000 policy prohibiting 

the employment of new hires until the 

results of FBI fingerprint checks are 

received and evaluated, the pilot 

program no longer adds value. 

Closed. An alternative action effectively 

addressed the weakness for which this 

recommendation was made. Specifically, we 

found that IAFIS reduced the turnaround time 

for IRS to receive the FBI fingerprint check 

results for its applicants to an average of 11 

days, thus addressing the need to obtain 

earlier indications of potential background 

problems than IRS had previously. Effective 

implementation of the April 2000 policy would 

further improve the process. 

19. Continue the agency’s efforts to negotiate 

with the Office of Personnel Management (OPM) 

and the FBI and procure the necessary 

equipment so that it can participate in the FBI’s 

IAFIS program by August 1999.

Closed. IRS reported that as of 

November 29, 1999 it was 

participating in IAFIS. The live-scan 

fingerprint equipment had been 

procured and installed at OPM and 

22 IRS sites, including the 10 service 

centers.

Closed. We confirmed that IRS is participating 

in IAFIS, and we found that IAFIS has 

significantly reduced IRS’ turnaround time for 

receiving the results of fingerprint checks.

20. Improve the physical security over receipts 

and returns stored in unsecured overflow areas. 

These controls might include limiting 

unnecessary traffic by temporarily designating 

these overflow areas as restricted access areas 

and/or posting additional security guards over 

such areas during the peak filing season.

Closed. IRS reported that all service 

centers were in compliance with this 

recommendation by April 2000.

Closed. We noted marked improvement in 

their storage of receipts and returns in 

overflow areas. 

21. Provide secure containers for service center 

employees to store “discovered remittances” prior 

to inventory and submission to the Receipt and 

Control Branch. Immediately upon discovery, the 

receipts should be recorded into a control log, the 

receipts secured in a locked container, and the 

discovered receipts reconciled to the control log 

prior to submission for processing.

Closed. IRS reported that each 

service center currently has locked 

containers to store the discovered 

remittances. In addition, IRS 

reported that it issued instructions to 

the service centers on February 17, 

1999, to emphasize the handling and 

recording of these remittances to 

ensure reconciliation. IRS also 

reported that it had developed 

revised procedures for handling 

discovered remittances and plans to 

include a review of discovered 

remittance procedures in its monthly 

reviews of each service center 

campus. 

Open. During our fiscal year 2000 visits, we 

continued to find discovered remittances that 

were not stored in locked containers and were 

not immediately logged in when they were 

discovered. We will continue to evaluate IRS’

efforts in our fiscal year 2001 financial 

statement audit of IRS. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 72 GAO-02-35 IRS Financial Management

22. Ensure that all returned refund checks are 

stamped “nonnegotiable” as soon as they are 

extracted.

Open. IRS reported that it plans to 

require that checks be stamped at 

the moment of extraction with a new 

stamp that reads “unless for credit to 

the U.S. Treasury, this instrument is 

nonnegotiable.” It plans to implement 

this procedure in January 2002.

Open. We continued to find returned refund 

checks that were not stamped “nonnegotiable”

upon extraction that were also being stored in 

unlocked containers. We will continue to 

evaluate IRS’ efforts in our fiscal year 2001 

financial statement audit of IRS. (Short-term)

23. Require district office employees to store 

walk-in payments in secure containers in 

accordance with IRM 1(16) 41, section 500. 

District office management should ensure that 

this policy is followed and should limit the number 

of employees with access to the keys or 

combinations to these containers. 

Closed. IRS reported that it had 

communicated these requirements to 

the field offices through its new 

Customer Service Operating 

Guidelines for fiscal year 2000 and 

that it plans to conduct monthly onsite reviews of field offices using a 

checklist to test compliance with 

current policies and procedures.

Open. During our September 2000 visits, we 

continued to find instances in which walk-in 

payments were not stored in locked containers 

or access to the keys to locked containers 

were not always secured. We will continue to 

evaluate IRS’ efforts in our fiscal year 2001 

financial statement audit of IRS. (Short-term)

24. Ensure that walk-in payment receipts are 

recorded in a control log prior to depositing the 

receipts in the locked container and ensure that 

the control log information is reconciled to 

receipts prior to submission of the receipts to 

another unit for payment processing. To ensure 

proper segregation of duties, an employee not 

responsible for logging receipts in the control log 

should perform the reconciliation.

Closed. IRS reported that it issued 

guidance to the field in August 1999 

and updated the IRM in January 

2000 to include instructions for a 

control log and reconciliation of 

receipts and that it plans to conduct 

monthly on-site reviews of field 

offices using a checklist to test 

compliance with current policies and 

procedures.

Open. We continued to find instances in which 

walk-in payments were not logged as soon as 

they were received and payments were not 

reconciled before being shipped to the 

designated service center. We will continue to 

evaluate IRS’ efforts in our fiscal year 2001 

financial statement audit of IRS. (Short-term)

Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, August 4, 1999)

25. Analyze and determine the factors causing 

delays in processing and posting trust fund 

recovery penalty assessments. Once these 

factors have been determined, IRS should 

develop procedures to reduce the impact of these 

factors and to ensure timely posting to all 

applicable accounts and proper offsetting of 

refunds against unpaid assessments before 

issuance. 

Open. IRS reported that it has 

convened a task group to design an 

automated TFRP system that can 

properly cross-reference payments 

received and thus eliminate the 

opportunity for errors that plague the 

current manual process. IRS has 

targeted fiscal year 2002 for 

implementation.

Open. We will continue to monitor the 

timeliness and completeness of IRS’

processing of these transactions during our 

fiscal year 2001 audit. (Short-term)

26. Identify and institute procedures to monitor 

compliance of installment agreements. Such 

monitoring should ensure that the installment 

agreements provide for full payment of the taxes 

owed. For example, management could randomly 

select installment agreements from all of its units 

to review for compliance with the Internal 

Revenue Code.

Closed. IRS updated the IRM and 

issued a new one in October 1999 to 

state that installment agreements 

must stipulate full payment for 

liabilities. Service centers are also 

required to monitor compliance. 

Open. While we continued to note improved 

compliance, the guidelines were not always 

followed. We still found instances of 

installment agreements entered into in fiscal 

year 2000 that did not comply with the Internal 

Revenue Code. We will continue to evaluate 

IRS’ compliance during our fiscal year 2001 

financial statement audit of IRS. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 73 GAO-02-35 IRS Financial Management

27. Expand IRS’ current review of service center 

deterrent controls to include similar analyses of 

controls at IRS district offices and post-of-duty 

offices in areas such as courier security, 

safeguarding of receipts in locked containers, 

requirements for fingerprinting employees, and 

requirements for promptly over-stamping checks 

made out to the “IRS” with “Internal Revenue 

Service” or “United States Treasury.” Based on 

the results, IRS should make appropriate 

changes to strengthen its physical security 

controls.

Open. IRS reported that it will initiate 

efforts to expand deterrent controls 

implemented at service centers to 

ensure uniformity and consistency, 

and that it intends to strengthen 

these controls by 2003. In addition, 

IRS reported that it plans to conduct 

monthly on-site reviews of field 

offices using a checklist to test 

compliance with current policies and 

procedures. 

Open. We will continue to evaluate the 

effectiveness of IRS’ efforts in our fiscal year 

2001 audit. (Short-term)

28. Require service center staff to provide 

receipts to all walk-in taxpayers regardless of the 

method of payment. In addition, IRS should post 

signs reminding taxpayers to request receipts. At 

service centers not normally equipped to receive 

walk-in payments, payments received should be 

logged in and witnessed to ensure that they are 

properly accounted for and deposited by the 

deposit unit.

Closed. IRS reported issuing a 

memo in June 2000 to reinforce and 

clarify its policy regarding payments 

made at service centers. Specifically, 

signs must be posted in lobbies 

reminding taxpayers to request a 

receipt if a payment is made, receipts 

are to be provided to all taxpayers 

making such payments, and all 

receipts are to be logged in as well 

as entered in the Form 809 cash 

receipts book.

Closed. We noted that service centers visited 

generally issued receipts for all types of 

payments and that signs were posted 

reminding taxpayers to request receipts.

29. Establish procedures to ensure the prompt 

recording of tax returns. IRS should implement 

controls to ensure that excise tax returns are 

recorded timely and included in the quarterly 

excise tax trust fund certifications.

Closed. IRS reported implementing 

several IRM procedures throughout 

1999 to address this issue. These 

include requiring service centers to 

express mail their Form 720s to the 

Cincinnati service center daily, 

ensuring that Form 720s over 

$1 million are batched separately 

and expedited, and closely following 

up on overdue returns.

Open. During our fiscal year 2000 review we 

still found tax returns involving significant 

amounts that were not promptly recorded and 

thus not included in the proper quarterly 

excise tax trust fund certifications. We will 

continue to evaluate IRS’ efforts in our fiscal 

year 2001 financial statement audit of IRS. 

(Short-term)

30. Ensure that additional staff are employed or 

existing staff appropriately cross-trained to be 

able to perform the master file extractions and 

other ad hoc procedures needed for IRS to 

continually develop reliable balances for financial 

reporting purposes.

Open. IRS reported hiring two 

additional persons to perform master 

file extractions and other ad hoc 

procedures. However, IRS 

acknowledged that additional staff 

are still needed for extractions and 

analysis.

Open. We will continue to evaluate IRS’

progress during our fiscal year 2001 financial 

statement audit of IRS. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 74 GAO-02-35 IRS Financial Management

Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations 

(GAO/AIMD-99-196, August 9, 1999)

31. Promptly resolve differences between IRS 

and Treasury records of IRS' appropriation 

account balances and adjust accounts 

accordingly. For example, reconciliations should 

be performed promptly every month, with 

Treasury and IRS amounts in agreement and 

reconciling items properly resolved. 

Closed. IRS reported that it had 

committed additional resources to 

resolve identified differences and 

adjust accounts accordingly. This 

included establishing a system in 

fiscal year 2000 to provide 

management oversight to assure that 

the accounts are reconciled each 

month.

Closed. During our FY 2000 audit, we found 

that IRS had successfully implemented 

policies and procedures to promptly identify 

differences between IRS and Treasury records 

of IRS’ appropriation account balances and to 

appropriately resolve identified differences.

32. Strengthen control over IRS’ operating funds 

by promptly investigating and clearing suspense 

account items. For example, outstanding amounts 

in the suspense account should be reviewed 

every month to try to resolve and clear 

outstanding balances.

Closed. IRS reported that it had 

implemented an edit on the 

suspense account that prevents 

entries older than 5 fiscal years, 

developed an aging report for 

suspense items, and developed a 

new process requiring a monthly 

reconciliation certifying the validity of 

all suspense items.

Closed. In fiscal year 2000, IRS substantially 

reduced the amount and duration of 

transactions held in suspense as compared to 

prior years. At fiscal year-end, we found no 

material transactions in the suspense account 

that were older than one year. 

33. Develop subsidiary records for its accounts 

payable and undelivered orders and a list of 

current year nonpayroll operating expenses that 

will provide reliable accounts payable, 

undelivered orders, and nonpayroll operating 

expense data. 

Open. Using ad hoc programs, IRS 

provided GAO with listings of 

accounts payable, undelivered 

orders, and nonpayroll operating 

expense data for the fiscal year 2000 

audit. It reported plans to implement 

an enhanced financial system to 

include subsidiary records for 

accounts payable, undelivered 

orders, and nonpayroll operating 

expenses in late 2003.

Closed. In fiscal year 2000, IRS provided the 

listings stated. 

34. Develop the data to support meaningful cost 

information categories and cost-based 

performance measures.

Open. IRS reported that its 

integrated financial management 

system, currently under 

development, will include a cost 

accounting system that will provide 

management with timely and 

accurate cost information on 

programs as well as products and 

services. It is currently targeted for 

implementation in late 2003.

Open. IRS addressed the need for meaningful 

cost information categories by expanding the 

format of its statement of net cost to provide 

more cost information on a larger number of 

programs in a manner that is consistent with 

information provided in related funding 

requests. However, it does not yet have the 

means to measure cost-based performance. 

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 75 GAO-02-35 IRS Financial Management

35. Develop and implement procedures and 

controls to ensure that detailed property and 

equipment (P&E) records are accurately 

maintained. These procedures and controls 

would include ensuring that physical inventories 

at field locations are effectively performed, 

including prompt resolution of discrepancies 

found in the inventories and appropriate 

adjustment of detailed records. 

Open. In fiscal year 2000 IRS issued 

guidelines establishing a Single Point 

Inventory Function (SPIF) to 

establish accountability for its ADP 

assets. This includes establishing 

SPIF teams at each service center, 

computing center, and district office. 

IRS also reported that it had 

converted all data to a new inventory 

system and had established an Asset 

Management Office to monitor the 

resolution of inventory discrepancies.

Open. During our fiscal year 2000 audit we 

continued to find problems with the accuracy 

of the detailed P&E records for both ADP and 

non-ADP property. We also found that 

property management reviews were not 

effective during the year to ensure the 

timeliness, completeness, and accuracy of the 

records. We will continue to evaluate IRS’

efforts during our fiscal year 2001 financial 

statement audit of IRS. (Long-term)

36. Consider directing that a physical inventory of 

P&E be performed with adjustments being made 

to IRS’ detailed records accordingly. To ensure 

that such efforts are not wasted IRS first needs to 

establish and implement effective procedures to 

ensure that the accuracy of detailed records, 

once corrected, is maintained. 

Closed. IRS now performs annual 

physical inventories of both ADP and 

non-ADP assets. It has also begun 

establishing SPIF teams to improve 

the accuracy of its property and 

equipment records.

Closed. We confirmed that annual physical 

inventories are now being performed. 

However, because of long-standing problems 

with its overall property system, IRS still 

cannot ensure the accuracy of its detailed 

records. We will continue to monitor the 

accuracy of its property and equipment 

records under recommendation 35 above.

37. In conjunction with or shortly after a physical 

inventory, we recommend that IRS perform a 

systematic validation of the P&E amounts 

(valuation) for items in IRS’ detailed records.

Closed. IRS reported that it validates 

its P&E amounts through annual 

financial and Federal Managers’

Financial Integrity Act of 1982 

(FMFIA) reviews.

Closed. IRS no longer records the cost of P&E 

in its detailed ADP property records. Instead, 

IRS has implemented interim procedures to 

determine year-end balances for its P&E 

accounts until its new integrated financial 

system is implemented, currently targeted for 

late 2004. We will monitor IRS’ recording of 

P&E under this new system under 

recommendation number 41.

38. Develop a means to capture and capitalize all 

costs incurred to bring P&E to a form and location 

suitable for its intended use in accordance with 

SFFAS No. 6, including design and installation 

costs and the cost of externally developed 

software.

Closed. IRS reported that as of 

March 31, 2000, invoiced costs such 

as shipping, delivery, and installation 

are captured in the process of 

identifying and capitalizing the costs 

of the assets. 

Closed. IRS has issued a policy to account for 

software costs and has implemented an 

interim process for reporting the full cost of 

P&E at fiscal year-end until its integrated 

financial system is implemented. We will 

monitor IRS’ progress in properly capturing 

and capitalizing P&E costs in the new 

integrated financial system under 

recommendation 41.

39. Revise the current capitalization policy to 

ensure that material P&E acquisitions are not 

expensed.

Open. IRS reported that its pooling 

approach of capitalizing ADP 

equipment essentially reduces the 

capitalization threshold to zero, thus 

ensuring that material acquisitions 

are not expensed. It reported that it 

plans to include internal use software 

in this approach in fiscal year 2001, 

and that management emphasis and 

oversight will reduce the risk of 

expensing material P&E acquisitions. 

Open. As of the fiscal year 2000 audit, IRS 

has not formalized its policy for capitalization 

of major projects and has not revised its 

capitalization policy for ADP and non-ADP 

P&E. We will continue to evaluate IRS’ efforts 

in our fiscal year 2001 financial statement 

audit of IRS. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 76 GAO-02-35 IRS Financial Management

40. Review all lease agreements to determine 

whether they meet the criteria for capital leases 

and capitalize and properly record any leases that 

meet the criteria.

Open. IRS reported that contracting 

officers are required to notify the 

office of the Chief Financial Officer 

(CFO) of all lease acquisitions with 

total payments in excess of $50,000 

so that the CFO’s office can review 

them to determine whether they 

represent capital leases. IRS also 

reported that in November 2000 the 

CFO’s office completed reviewing 

documentation for all leased assets 

acquired in fiscal year 2000 to 

determine the status of prior year 

balances, whether additional capital 

lease liabilities should be recorded, 

and to make other accounting 

adjustments as necessary. IRS 

reported that it now reviews all lease 

agreements on a periodic basis to 

identify capital leases.

Open. For fiscal year 2000, IRS hired a 

contractor to review its lease agreements to 

identify those that met the criteria for capital 

leases. However, IRS still does not have a 

systematic process for ensuring that capital 

leases are properly identified and recorded. In 

addition, for fiscal year 2001 IRS will also 

need to review contracts for software license 

fees to determine whether those contracts 

meet capitalization criteria. (Short-term)

41. Make enhancements to IRS financial systems 

to include recording P&E and capital leases as 

assets when purchased and to generate detailed 

records for P&E that reconcile to the financial 

records. 

Open. IRS reported that its new 

integrated financial system, currently 

targeted for late 2004, will allow 

recording P&E and capital leases as 

assets when purchased and will 

generate detailed records for P&E 

that will reconcile to the financial 

records.

Open. We will continue to evaluate IRS’

progress in addressing these issues in its new 

system. (Long-term)

42. Ensure that additional knowledgeable staff 

are employed or that existing staff are 

appropriately cross-trained to be able to develop 

IRS’ financial statements and perform its 

accounting and financial functions or are able to 

perform the necessary supervision needed to 

obtain reliable and supportable financial data on 

time.

Closed. IRS reported that it has 

added new management team 

members to the CFO organization to 

add stability and expertise, is 

conducting a training program for 

accounting staff, and is cross-training 

accounting staff to reduce reliance 

on single individuals.

Open. We confirmed individuals have been 

hired and put in place to develop IRS’ financial 

statements and perform accounting and 

financial functions. However, in fiscal year 

2000 we continued to find problems with IRS’

preparation and development of its financial 

statements. We will evaluate the effectiveness 

of the new team in our fiscal year 2001 audit. 

(Short-term)

43. Establish procedures for the financial 

statements to undergo review at the appropriate 

levels within the CFO office, with documented 

evidence of the reviews. 

Closed. IRS reported that it has 

developed procedures that require a 

multilevel review of the financial 

statements and documentation of 

such reviews. 

Open. As in prior years, we identified errors 

and omissions in the draft fiscal year 2000 

financial statements indicating that this has 

not been effectively implemented. We will 

continue to evaluate the effectiveness of these 

actions during our fiscal year 2001 financial 

statement audit. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 77 GAO-02-35 IRS Financial Management

Internal Revenue Service: Recommendations to Improve Financial and Operational Management 

(GAO-01-42, November 17, 2000)

44. Better monitor IRS’ procedures requiring that 

a freeze code be entered on all accounts of a 

taxpayer whom IRS has determined is potentially 

liable for unpaid payroll taxes. This should be 

done on all such accounts to prevent the 

inadvertent release of refunds to the taxpayer 

until IRS determines the validity of the tax liability.

Open. IRS reported that it will issue a 

memorandum to the field 

emphasizing the timely input of the 

freeze code and will revise the IRM 

procedures to allow 30 days for the 

assessment of the trust fund penalty 

after input of the freeze code.

Open. We will evaluate the effectiveness of 

IRS’ actions during our fiscal year 2001 

financial statement audit. (Short-term)

45. Revise policies and procedures governing the 

processing of abatement transactions to establish 

(1) appropriate time frames for processing 

abatements, (2) a methodology for monitoring the 

timeliness of abatement processing, and (3) 

procedures to identify the causes for delays and 

formulate corrective actions; and, examine 

abatement transactions arising from IRS errors to 

determine the causes for the errors and, based 

on this examination, formulate and implement 

appropriate procedures to reduce the level of 

errors made when entering data into taxpayer 

accounts.

Closed. IRS reported that it has 

begun using a new Customer 

Service Management Information 

Report, which includes categories of 

cases that often result in tax 

abatements, and has developed 

other automated approaches to 

further study the causes for delays in 

processing abatements. IRS 

reported that it has existing 

procedures for processing claims for 

abatements that are specific to the 

type and amount claimed.

Open. We continued to find delays in the 

processing of abatements during our fiscal 

year 2000 financial statement audit. We will 

evaluate the effectiveness of IRS’ actions 

during our fiscal year 2001 financial statement 

audit. (Short-term)

46. Implement procedures to monitor the age of 

all pending offers and to require supervisors to 

follow up with staff to determine within 6 months 

whether to accept or reject the offer.

Open. IRS reported plans to 

centralize the processing of smallerdollar, less complex offers by the end 

of fiscal year 2001. As managers 

currently conduct regular workload 

reviews, IRS believes this 

centralization will better address this 

problem.

Open. We will evaluate the effectiveness of 

IRS’ actions during our fiscal year 2001 audit. 

(Short-term)

47. As an alternative to prematurely 

suspending active collection efforts, and 

using the best available information, develop 

reliable cost-benefit data relating to collection 

efforts for cases with some collection 

potential. These cost-benefit data would 

include the full cost associated with the 

increased collection activity (i.e., salaries, 

benefits, and administrative support) as well 

as the expected additional tax collections 

generated.

Open. IRS reported that it planned to 

address this issue in its new strategic 

planning process, which is designed 

to identify and allocate finite 

resources to processes that would 

best improve the effectiveness of the 

agency and provide better service to 

the tax paying public. IRS reported 

that because it is not possible to 

provide cost-benefit data in its 

current financial system, this issue 

will be addressed through the 

implementation of a JFMIPcompliant standard general ledger, 

currently targeted for implementation 

in late 2004.

Open. We agree that addressing these issues 

in IRS’ strategic planning process is 

beneficial. However, we continue to believe 

that reliable internal cost-benefit data and 

analysis related to these programs is 

necessary for IRS to make informed resource 

allocation decisions. We will continue to 

evaluate IRS’ efforts in our fiscal year 2001 

financial statement audit of IRS. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 78 GAO-02-35 IRS Financial Management

48. Incorporate into its systems 

modernization blueprint and strategic 

planning process the capability to routinely 

and reliably measure the cost-benefit of its 

collection activities and make informed 

resource allocation decisions.

Open. IRS reported that in its plans 

for a data warehouse and a JFMIPcompliant standard general ledger, it 

will include the structure for a cost 

accounting system. Implementation 

is currently targeted for late 2004.

Open. We will continue to monitor IRS’

progress in this area. (Long-term) 

49. Implement procedures to closely monitor 

the release of tax liens to ensure that they are 

released within 30 days of the date the related 

tax liability is fully satisfied. As part of these 

procedures, IRS should carefully analyze the 

causes of the delays in releasing tax liens 

identified by our work and prior work by IRS’

former internal audit function and ensure that 

such procedures effectively address these 

issues.

Open. IRS reported taking actions to 

better ensure that liens that should 

be released are not overlooked and 

is in the process of negotiating 

changes in procedures to improve 

the identification and timeliness of 

liens to be released. 

Open. We will evaluate the effectiveness of 

IRS’ efforts during our fiscal year 2001 audit. 

(Short-term)

50. Revise the IRM to require that

IRS employees who initiate manual refunds 

document their monitoring actions on case history 

sheets and supervisors review monitoring actions 

and document their review.

Closed. In October 2000, IRS revised 

their procedures to require 

documentation and supervisory 

review of monitoring actions.

Closed. We confirmed that IRS has revised its 

written procedures. We will follow up on 

implementation of these requirements during 

our fiscal year 2001 financial statement audit.

51. Determine why the program that generates 

the Questionable Refund Report was not 

functioning as intended during fiscal year 1999 

and implement appropriate corrective actions.

Closed. IRS reported that it had 

refined its criteria for identifying 

potential duplicate refunds under 

Duplicate Refund (DUPREF) 

transcripts and had worked with the 

service centers to implement a new 

diagnostic tool for verifying 

payments.

Open. Similar to our finding in fiscal year 

1999, in fiscal year 2000 we found that the 

QRR was not consistently reviewed by 

responsible employees because they did not 

receive the report. We will follow up on the 

effectiveness of IRS’ corrective actions in this 

area during our fiscal year 2001 audit. (Shortterm)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 79 GAO-02-35 IRS Financial Management

52. IRS should (1) determine why service centers 

have not been more effective in stopping refunds 

associated with questionable EITCs and make 

changes to current procedures, as appropriate; 

(2) review procedures for enforcing taxpayer 

compliance with the Taxpayer Relief Act of 1997 

and implement actions to prevent taxpayers who 

were denied an EITC for tax year 1997 or any 

subsequent year from being granted an EITC in 

successive years until they provide the requisite 

supporting documentation; and (3) track the total 

number of and dollars in EITCs subjected each 

year to Electronic Fraud Detection System 

(EFDS) screening and related efforts to enable 

IRS to estimate the full magnitude of suspicious 

EITCs and determine the level of resources to be 

devoted to EFDS screening and investigative 

follow-up appropriate for the risks and potential 

losses involved.

Closed. IRS reported that it has 

recently implemented several 

measures to help prevent improper 

EITC refunds, such as automatically 

freezing refunds when there is an 

open examination, using expanded 

data such as child support orders to 

identify questionable claims, and 

reducing examination cycle time. IRS 

reported that it is currently reviewing 

its procedures to ensure that they are 

in accordance with the Taxpayer 

Relief Act of 1997 and has 

implemented an indicator to help 

prevent taxpayers from receiving an 

EITC if they have previously been 

found ineligible. IRS reported that in 

fiscal year 2000 it began collecting 

data on the number and dollar 

amount of EITC claims screened 

through EFDS.

Open. We confirmed that in fiscal year 2000 

IRS retained the data on the number and 

dollar amount of claims screened through 

EFDS. We will follow up on the effectiveness 

of the remaining measures during our fiscal 

year 2001 financial statement audit. (Shortterm)

53. For (1) IRS’ Automated Underreporter and 

Combined Annual Wage Reporting programs, 

(2) screening and examination of EITC claims, 

and (3) identifying and collecting previously 

disbursed improper refunds, use the best 

available information to develop reliable costbenefit data to estimate the tax revenue 

collected by, and the amount of improper 

refunds returned to, IRS for each dollar spent 

pursuing these outstanding amounts. These 

data would include (1) an estimate of the full 

cost incurred by IRS in performing each of 

these efforts, including the salaries and 

benefits of all staff involved, as well as any 

related nonpersonnel costs, such as supplies 

and utilities, and (2) the actual amount 

(a) collected on tax amounts assessed and 

(b) recovered on improper refunds disbursed.

Open. IRS reported that it plans to 

address this issue in its new strategic 

planning process, which is designed 

to identify and allocate finite 

resources to processes that would 

best improve the effectiveness of the 

agency and provide better service to 

the tax paying public. IRS reported 

that because it is not possible to 

provide cost-benefit data in its 

current financial system, this issue 

will be addressed through the 

implementation of a JFMIPcompliant standard general ledger, 

currently targeted for implementation 

in late 2004.

Open. We agree that addressing these issues 

in IRS’ strategic planning process is 

beneficial. However, we continue to believe 

that reliable internal cost-benefit data and 

analysis related to these programs is 

necessary for IRS to make informed resource 

allocation decisions. We will continue to 

evaluate IRS’ efforts in our fiscal year 2001 

financial statement audit of IRS. (Short-term)

54. Incorporate in IRS’ systems modernization 

blueprint and strategic planning process 

capabilities for routinely and reliably 

measuring the cost-benefit of each of the 

efforts listed in recommendation 53 and make 

informed resource allocation decisions.

Open. IRS reported that in its plans 

for a data warehouse and a JFMIPcompliant standard general ledger, it 

will include the structure for a cost 

accounting system. Implementation 

is currently targeted for late 2004.

Open. We will continue to monitor IRS’

progress in this area. (Long-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 80 GAO-02-35 IRS Financial Management

55. Work with Treasury’s Financial 

Management Service (FMS) to revise the 

current lockbox contracts to emphasize 

security requirements and to specifically 

require that 

(1) fingerprint checks be completed before 

employees begin working; 

(2) temporary employees be subjected to 

background checks that are consistent with 

those required for IRS employees; and 

(3) at a minimum, lockbox bank courier 

services meet the service center requirements 

contained in IRS’ November 16, 1999, policy.

Open. IRS reported that security 

standards for lockbox banks 

consistent with security requirements 

at IRS campuses have been 

approved and will be included in the 

lockbox contracts effective January 

1, 2002. According to IRS, these 

standards include courier and 

background investigation standards 

that are consistent with IRS campus 

requirements.

Open. We will monitor IRS’ progress in 

implementing these requirements during our 

fiscal year 2001 financial statement audit of 

IRS. (Short-term)

56. Ensure that all IRS units receiving collections 

have consistent policies and procedures to 

safeguard and account for cash receipts.

Closed. IRS reported that it plans to 

conduct monthly on-site reviews of 

service center campuses and field 

offices using a checklist to test 

compliance with existing policies and 

procedures. 

Open. We will continue to monitor IRS’

progress in this area during our fiscal year 

2001 financial statement audit. (Short-term)

57. Perform and document periodic observations 

and reviews to monitor and enforce compliance 

with policies addressing the safeguarding of cash 

receipts.

Closed. IRS reported that it plans to 

conduct monthly on-site reviews of 

service center campuses and field 

offices using a checklist to test 

compliance with existing policies and 

procedures.

Open. We will continue to monitor IRS’

progress in this area during our fiscal year 

2001 financial statement audit. (Short-term) 

58. Develop a subsidiary ledger for leasehold 

improvements and implement procedures to 

record leasehold improvement costs as they 

occur.

Open. IRS reported that a subsidiary 

ledger for leasehold improvements 

will be acquired as part of an 

integrated financial system that IRS 

plans to implement as part of its 

overall systems modernization effort. 

It is currently targeted for late 2004.

Open. We will continue to evaluate the 

effectiveness of IRS’ efforts in this area. 

(Long-term)

59. Implement procedures and controls to ensure 

that expenditures for P&E are charged to the 

correct accounting codes to provide reliable 

records for expenditures as a basis of extracting 

the costs for major systems and leasehold 

improvements.

Closed. IRS reported that as of 

December 2000 its accounting 

system requires entering the Project 

Cost Accounting System code to 

identify expenditures for specific 

major systems. At the same time, 

IRS reported that it has implemented 

an interim procedure to use the 

subobject code to track leasehold 

improvements. 

Open. We will evaluate the effectiveness of 

IRS’ efforts during our fiscal year 2001 audit of 

IRS. (Short-term)

60. Establish a system to capture all costs related 

to the PRIME effort to modernize IRS’ computer 

systems.

Closed. IRS reported that projects 

under the PRIME contract that meet 

the definition of a major system will 

be capitalized under each system.

Closed. We confirmed that IRS capitalized its 

major systems costs in fiscal year 2000.

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 81 GAO-02-35 IRS Financial Management

61. Develop procedures and systems to capture 

and capitalize the cost of internally developed 

software in accordance with SFFAS No. 10, 

Accounting for Internal Use Software.

Closed. IRS reported that in October 

2000 it implemented a tracking 

system to capture internally 

developed software data.

Open. We will evaluate the effectiveness of 

this new system in meeting SFFAS No. 10 

requirements during our fiscal year 2001 

financial statement audit. (Short-term) 

62. Consolidate and update the P&E policies and 

procedures currently documented in various 

handbooks and policy memorandums into a 

comprehensive document that personnel 

responsible for maintaining inventory records can 

use as a reference.

Open. IRS reported that a task force 

is currently consolidating all ADP 

IRM and supplemental procedural 

guide system documentation into a 

single IRM for asset management. It 

plans to merge non-ADP equipment 

into its new integrated property 

system, which will then control all of 

IRS’ P&E.

Open. We will monitor IRS’ progress during 

our fiscal year 2001 financial statement audit. 

(Short-term) 

63. Assign a senior-level position with overall 

responsibility for ensuring that P&E records are 

accurate and P&E is properly accounted for.

Closed. IRS reported that the Chief 

Information Officer now has the 

authority and responsibility for 

management and control of all ADP 

property. Once non-ADP property is 

consolidated into the new, single 

inventory system, the CIO will have 

responsibility for all property.

Closed. We are closing this recommendation 

based on the action taken by IRS. However, 

we will continue to monitor IRS’ progress in 

developing a new property system and the 

effectiveness of management’s P&E policies 

and procedures.

64. Develop and implement procedures so that 

personnel responsible for maintaining P&E 

inventory records receive prompt notification 

when P&E is received, moved, or disposed of. 

Procedures should help ensure that those 

responsible for maintaining inventory records 

promptly receive documentation supporting P&E 

transactions, such as receiving reports, invoices, 

and disposal documents. 

Open. IRS reported that effective 

fiscal year 2000, SPIF procedures 

were established to ensure prompt 

notification of P&E when received, 

moved, or disposed of. IRS also 

reported that on-line tools have been 

developed to ensure that appropriate 

procurement information is recorded 

on assets received by SPIF 

personnel.

Open. During fiscal year 2000 we found that 

SPIF teams were not staffed at all sites and 

SPIF procedures had not been fully 

implemented. We continued to find problems 

with the timely recording of P&E acquisitions 

and disposals and with the accuracy of data 

on detailed P&E records. We will continue to 

evaluate IRS’ efforts in our fiscal year 2001 

financial statement audit of IRS. (Short-term)

65. Revise guidance on recording P&E to clearly 

state that P&E is to be recorded when title passes 

to IRS or when delivered, based on the terms of 

the contract regarding shipping and delivery. This 

is to clarify that P&E and related accounts 

payable should be promptly recorded when P&E 

is received, in accordance with SFFAS No. 6, 

rather than when it is placed in service.

Closed. IRS reported that new 

procedures had been established to 

require project offices to notify the 

SPIF corporate office of P&E 

deployments and that a new module 

had been established in the SPIF 

system to allow assets to be received 

and validated electronically.

Open. During fiscal year 2000 we continued to 

find unrecorded items. We will evaluate the 

effectiveness of IRS’ procedures during our 

fiscal year 2001 audit. (Short-term)

66. Provide training on P&E policy and 

procedures to personnel responsible for 

maintaining inventory records to help ensure that 

P&E transactions are promptly and accurately 

recorded.

Open. IRS reported that SPIF 

personnel have now received formal 

training related to recording 

transactions in the ADP inventory 

system.

Open. We will evaluate the effectiveness of 

IRS’ actions during our fiscal year 2001 

financial statement audit. (Short-term) 

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 82 GAO-02-35 IRS Financial Management

67. Review, and correct as necessary, data in 

inventory records, such as serial or model 

numbers and manufacturer names, during 

periodic inventories of P&E.

Closed. IRS reported that it has 

begun an effort at database cleanup, 

and that new SPIF procedures have 

been developed and implemented for 

fiscal year 2001. 

Open. During fiscal year 2000 we continued to 

find errors in IRS’ P&E records. We will 

evaluate the effectiveness of IRS’ corrective 

actions during our fiscal year 2001 audit. 

(Short-term) 

68. Perform sufficient supervisory reviews to help 

ensure that transactions recorded on P&E 

inventory records are accurately entered into 

subsidiary records and appropriately supported 

by documentation.

Closed. IRS reported that it recently 

developed quality review procedures 

that require an annual audit of each 

site’s property records and inventory 

results. These audits will verify that 

property management procedures 

are being followed, are effective, and 

that inventories are being properly 

conducted. IRS also reported that it 

has drafted Quality Assurance 

Standards and will begin performing 

quality reviews in fiscal year 2002. 

Open. We will evaluate the effectiveness of 

these planned actions during our fiscal year 

2001 financial statement audit. (Short-term) 

69. Periodically analyze outstanding obligations, 

including an aging of obligations to identify 

potential items that may require deobligation. The 

CFO office should then coordinate with the 

financial plan managers to help ensure that 

invalid undelivered orders are promptly 

deobligated.

Closed. IRS reported that it has 

implemented procedures to 

periodically review obligations, 

including requiring managers to 

justify keeping obligations on the 

books. This will be an ongoing effort 

that the CFO will oversee.

Closed. During our fiscal year 2000 audit, we 

found that IRS analyzed its obligations and 

deobligated those that it deemed were no 

longer valid. 

70. Develop a subsidiary ledger (for suspense 

accounts) that shows underlying detailed 

transactions and reconciles by year to the 

balances in the administrative general ledger. IRS 

should first clear old outstanding items in the 

general ledger to reflect actual balances by fiscal 

year.

Closed. IRS reported that it had 

developed a subsidiary ledger that 

reconciles to the general ledger.

Closed. In fiscal year 2000, IRS provided a 

detailed listing of suspense items that 

reconciled to its general ledger and 

substantially reduced the number and dollar 

value of items in the suspense account.

71. Develop policies and procedures to classify 

program costs according to the nature of the work 

performed and in a manner commonly 

understood by users of financial statements. This 

classification should also be consistent with the 

classification of related funding requirements in 

IRS' budgetary requests to the Congress.

Open. IRS reported that as it 

reorganizes and implements a cost 

accounting system, it will classify 

program costs to ensure program 

managers are accountable for the full 

costs of their programs and in a 

manner understandable to the users 

of its financial statements.

Open. We will continue to monitor IRS’

progress in this area. (Short-term)

72. Incorporate into its tax systems modernization 

plans, as they relate to financial management, the 

development of a cost accounting system that will 

track and report, in appropriate detail, the full 

costs associated with its activities and programs 

at the project and subproject level. This system 

should include a payroll system that provides for 

activity-based costing of individual jobs to which 

staff are assigned.

Open. IRS reported that it plans to 

include the structure for a cost 

accounting process in its plans for a 

data warehouse and JFMIPcompliant general ledger for both its 

custodial and administrative 

accounting. Implementation is 

currently targeted for late 2004.

Open. We will continue to monitor IRS’

progress in this area. (Long-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 83 GAO-02-35 IRS Financial Management

73. Review the U.S. Department of Agriculture’s 

(USDA) Office of the Inspector General (OIG) 

annual audit report on the National Finance 

Center’s (NFC) internal control structure and any 

relevant GAO reports, evaluate the risk in the 

control environment at NFC, and implement 

control procedures as necessary to mitigate the 

risk associated with the weaknesses identified in 

NFC’s payroll processing systems. These 

procedures could include but not be limited to 

(1) selecting a random sample of NFC payroll 

disbursements, at least quarterly (e.g., 25 per 

quarter), and comparing the payroll information 

received from NFC to corresponding data 

provided to NFC and (2) periodically analyzing 

overall payroll expenses to determine their 

reasonableness. IRS should appropriately 

document how it implements and executes its 

compensating controls.

Closed. IRS reported implementing 

compensating control procedures, 

including checking the 

reasonableness of payroll expenses 

by pay period, verifying dollars 

expended per Treasury against IRS’

general ledger, and testing the 

accuracy of payroll data against 

timesheets and personnel records for 

a random sample of employees.

Closed. We tested the reasonableness of 

payroll expenses, verified and confirmed that 

total dollars disbursed by NFC agreed with 

that shown in IRS’ general ledger, and 

reviewed IRS’ random sample of employees, 

and we found no discrepancies.

74. Establish policies and procedures to ensure 

that all administrative and, to the extent possible, 

custodial transactions are promptly recorded in 

the general ledger, preferably within 30 days of 

the transaction. 

Open. IRS reported developing 

internal procedures to ensure that 

transactions are recorded in a timely 

manner in the administrative general 

ledger and plans to discuss the 

reporting of custodial revenue and 

refund transactions with OMB and 

Treasury.

Open. During our fiscal year 2000 financial 

statement audit, we found substantial delays 

in the recording of transactions in the custodial 

and administrative general ledgers. We will 

continue to monitor IRS’ progress in this area. 

(Short-term) 

75. Incorporate into its systems modernization 

plan requirements and specifications for a general 

ledger system that (1) accumulates and 

summarizes IRS’ custodial and administrative 

transactions for financial reporting purposes, 

(2) is integrated with its supporting subsidiary 

records and (3) is fully compliant with the U.S.

Standard General Ledger at the transaction level.

Open. IRS reported that these 

requirements have been included in 

the blueprint for its systems 

modernization.

Open. We will continue to monitor IRS’

progress in this area. (Long-term)

76. Revise procedure manuals to require that 

accruals be recorded when services have been 

performed and goods received, regardless of 

whether an invoice has been received. This may 

require recording estimates of costs incurred 

based on reliable data. In these cases, additional 

detailed guidance should be provided in 

determining the amounts.

Closed. IRS reported that it had 

issued guidance requiring that 

accruals be recorded when services 

have been performed or when goods 

are received, regardless of whether 

an invoice has been received.

Open. During our fiscal year 2000 review, we 

continued to find accruals of goods and 

services that were not recorded in a timely 

manner. We will continue to monitor the 

effectiveness of IRS’ efforts in this area. 

(Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 84 GAO-02-35 IRS Financial Management

77. Ensure that the acceptance date entered in 

Request Tracking System/Integrated 

Procurement System (RTS/IPS) represents the 

date that IRS received the goods and services 

rather than the date acceptance was entered into 

the system.

Closed. IRS reported that it had 

issued guidance directing staff to 

record the date that goods and 

services are received as the 

acceptance date, rather than the 

date the acceptance was input into 

the system.

Open. During our fiscal year 2000 review, we 

continued to find errors related to the date 

used to record acceptance of goods and 

services. We will continue to monitor the 

effectiveness of IRS’ efforts in this area. 

(Short-term)

78. Provide training to key program offices on the 

accrual process.

Closed. IRS reported that its Annual 

Close Guidelines for closing out the 

year-end books includes a 

discussion of the accrual process.

Closed. IRS revised its accrual process in 

fiscal year 2000 and no longer relies on 

program managers to determine the accrual 

amounts. Instead, for fiscal year 2000, IRS 

based its accrual estimates on payments 

processed, manual document tracking and 

estimated costs for major contracts.

79. Develop, document, and implement detailed 

written procedures for summarizing data used to 

produce the trust fund certifications. IRS should 

clearly define the steps being performed and 

consistently apply them throughout the year. 

Whenever deviations are required, such as for 

prior period adjustments, explanations should be 

properly documented.

Closed. Procedures were revised 

and documented to provide a more 

comprehensive instruction on the 

steps necessary to prepare excise 

tax certifications.

Closed. In fiscal year 2000, IRS prepared and 

implemented written procedures for their 

excise tax certification process. We found no 

manual errors in our fiscal year 2000 review of 

IRS certifications.

Management Letter: Improvements Needed in IRS’ Accounting Procedures and Internal Controls (GAO-01-880R, July 30, 2001)

80. Develop a mechanism to track and report the 

actual costs associated with reimbursable 

activities.

Open. IRS reported that it plans to 

prepare and issue guidance on the 

costing of reimbursable agreements 

and on acceptable methods to track 

actual costs as work is accomplished 

and billed. IRS reported that, in the 

long term, its new financial system 

will include a cost management 

system.

Open. We will continue to monitor IRS’

progress in this area. (Short-term)

81. Establish procedures to periodically reconcile 

the subsidiary records to the control account for 

reimbursable receivables to ensure that the 

balance is adequately supported.

Open. IRS reported that it is using 

newly designed subsidiary reports 

that detail all transactions related to 

reimbursable activities to ensure the 

accuracy of its general ledger 

balance for reimbursable receivables.

Open. We will continue to monitor IRS’

progress in this area. (Short-term)

82. Routinely age and review currently open 

reimbursable receivable accounts to identify 

accounts that are no longer valid or collectible.

Closed. IRS reported that it is 

currently aging open reimbursable 

receivable accounts, reviewing all 

reimbursable and accounts 

receivable, and forwarding accounts 

older than 180 days for collection or 

write-off. IRS also reported that it is 

reviewing all advance collections to 

ensure that they are properly 

applied. 

Open. We will continue to monitor IRS’

progress in this area. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 85 GAO-02-35 IRS Financial Management

83. Develop and implement procedures to require 

that prepayments be recorded as assets routinely 

at the time the cost is incurred in accordance with 

GAAP. Services that are provided to IRS that will 

benefit IRS for more than 1 year should be 

established as prepaid expenses and amortized 

over the period of the benefit.

Closed. IRS indicated that it is 

charged depreciation expenses and 

not the full cost of the assets 

acquired under the Working Capital 

Fund (WCF). 

Open. Most of the equipment purchased by 

the WCF that benefits IRS for more than 1 

year is expensed by the WCF in the year of 

purchase because it does not meet the WCF’s 

capitalization threshold. Therefore, by using 

WCF data as a basis for determining how 

much of the cost of an asset should be 

expensed, IRS effectively expenses this 

equipment in the year of purchase even 

though it will benefit IRS for more than 1 year. 

We will follow up during our fiscal year 2001 

audit. (Short-term)

84. Ensure that IRS personnel maintain effective 

oversight of the completeness and accuracy of 

contractor-generated information.

Closed. IRS reported that it is 

overseeing contractors and reviewing 

contractor-generated information.

Open. We will continue to monitor IRS’

progress in this area. (Short-term)

85. Ensure compliance with Treasury regulations 

requiring that all transfers of funds between 

appropriations be properly approved and 

documented prior to being recorded in the 

financial records.

Closed. IRS reported that it has 

developed reports to track transfers, 

and that it has implemented 

procedures to verify that each 

transfer is validated by supporting 

documentation.

Open. We will continue to monitor IRS’

progress in this area. (Short-term)

a The “Status of GAO recommendations reported by IRS” is based primarily on the following IRS documents: Internal Revenue Service Remediation Plan, 

April 30, 2001, a January 16, 2001 letter from IRS to Congress responding to recommendations in GAO-01-42, November 17, 2000, and a schedule 

provided by IRS on August 31, 2001, of IRS actions to address GAO’s recommendations related to IRS’ financial and operational activities. 

b As part of its ongoing reorganization, IRS now calls these offices “campuses.”

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix II

Status of GAO Recommendations From Prior 

IRS Financial Audits and Related Financial 

Management Reports

Page 86 GAO-02-35 IRS Financial Management

Table 10: New GAO Recommendations on IRS Financial Management

Recommendations Recommended effort involved

Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management 

(GAO-02-35, October 19, 2001)

86. Implement policies and procedures to record capitalizable acquisition costs for property and 

equipment, capital leases, leasehold improvements and major systems in the appropriate P&E 

general ledger accounts as transactions occur. 

Short-term

87. Revise the definitions of Sub-Object Class (SOC) codes pertaining to P&E or establish new 

codes so that individual SOC codes cannot be used for both capitalizable purchases (assets) and 

noncapitalizable purchases (expenses). For example, the SOC code used to record capitalizable 

software costs should not be used to record noncapitalizable software license fees. 

Short-term

88. Perform periodic reviews to monitor and ensure that obligations are promptly established in the 

accounting system. Such reviews would assist IRS in maintaining accurate and complete records of 

its obligations and in reducing the risk of obligations exceeding available funding.

Short-term

89. Incorporate into the systems modernization blueprint the capability to differentiate prior-year 

adjustments between activities that are valid upward and downward adjustments to obligations and 

activities that are not valid adjustments to obligations. Such actions would help ensure that activities 

that are not valid adjustments to obligations are not recorded as adjustments to obligations.

Short-term

90. Develop, document, and implement policies and procedures to require that reconciliations 

between proprietary and budgetary accounts be performed monthly so that differences can be 

identified promptly, and if necessary, adjusted.

Short-term

91. Develop, document, and implement policies and procedures to require that routine reviews and 

analyses of general ledger account balances be conducted to promptly identify errors and 

omissions.

Short-term

92. Develop, document, and implement policies and procedures to require that corrections and 

adjusting entries be recorded throughout the year to reduce the magnitude of year-end adjustments 

and improve the reliability of interim financial data.

Short-term

93. Implement policies and procedures to require that all employees itemize on their time cards the 

time spent on specific projects.

Short-term

94. Implement policies and procedures to allocate nonpersonnel costs to programs and activities on 

a routine basis throughout the year.

Short-term

95. Document reviews performed to validate that performance data are complete, accurate, and 

reliable.

Short-term
Page 87 GAO-02-35 IRS Financial Management

Appendix III

Comments From the Internal Revenue ServiceApendxiI
Appendix III

Comments From the Internal Revenue 

Service

Page 88 GAO-02-35 IRS Financial Management
Appendix III

Comments From the Internal Revenue 

Service

Page 89 GAO-02-35 IRS Financial Management
Appendix III

Comments From the Internal Revenue 

Service

Page 90 GAO-02-35 IRS Financial Management
Appendix III

Comments From the Internal Revenue 

Service

Page 91 GAO-02-35 IRS Financial Management
Appendix III

Comments From the Internal Revenue 

Service

Page 92 GAO-02-35 IRS Financial Management
Appendix III

Comments From the Internal Revenue 

Service

Page 93 GAO-02-35 IRS Financial Management
Page 94 GAO-02-35 IRS Financial Management
Page 95 GAO-02-35 IRS Financial Management

Appendix IV

GAO Contacts and Staff Acknowledgments ApendxiIV

GAO Contacts Steve Sebastian, (202) 512-3406

Doreen Eng, (206) 287-4858

Acknowledgments In addition to those named above, Tuyet-Quan Thai, Delores Lee, Richard 

Harada, George Jones, and William Cordrey made key contributions to this 

report.

191002 Letr
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Page 3 GAO-02-35 IRS Financial Management

Contents

Table 1: Internal Control and Compliance Issues Related to Unpaid 

Assessments 10

Table 2: Internal Control Issues Related to Refunds and Earned 

Income Tax Credit Claims 20

Table 3: AUR Cases With Discrepancies, Cases Investigated, Cases 

Not Investigated and Their Estimated Underreported 

Taxes 24

Table 4: Internal Control Issues Related to Manual Receipts and 

Taxpayer Data 25

Table 5: IRS Employees Hired and Working, After April 3, 2000, 

Prior to IRS Receipt of Fingerprint Check Results 29

Table 6: Internal Control Issues Related to Property and 

Equipment 35

Table 7: Internal Control Issues Related to Appropriated Funds 42

Table 8: Internal Control and Compliance Issues Related to 

Financial Reporting 49

Table 9: Status of Open GAO Recommendations on IRS’ Financial 

and Operational Activities 67

Table 10: New GAO Recommendations on IRS Financial 

Management 86
Page 4 GAO-02-35 IRS Financial Management

Contents

Figure 1: Comparison of Unpaid Assessments Before and After 

Adjustments as of September 30, 2000 13