GAO

United States General Accounting Office

Report to the Commissioner of Internal 

Revenue

November 2000 INTERNAL REVENUE 

SERVICE

Recommendations to 

Improve Financial and 

Operational 

Management

GAO-01-42

Page 1 GAO-01-42 IRS Financial and Operational Management

Contents

Letter 5

Executive Summary 8

Chapter 1

Introduction

20

Objectives, Scope, and Methodology 21

Chapter 2

Weaknesses in IRS’ 

Management of Unpaid 

Assessments

23

Reporting Unpaid Assessments 23

Maintaining Taxpayer Accounts 27

Collecting Unpaid Assessments 32

Installment Agreements 36

Federal Tax Liens 38

Conclusions 40

Matter for Congressional Consideration 41

Recommendations 41

Agency Comments and Our Evaluation 42

Chapter 3

Weaknesses in Internal 

Controls Over Refund 

Disbursements

44

Preventive Controls 44

Detective Controls 48

Conclusions 51

Matter for Congressional Consideration 51

Recommendations 51

Agency Comments and Our Evaluation 53

Chapter 4

Further Improvements 

Needed to Safeguard 

Manual Tax Receipts 

and Taxpayer 

Information

54

Hiring Practices 54

Courier Security 57

Other Physical Safeguards 59

Conclusions 64

Recommendations 64

Agency Comments and Our Evaluation 65
Contents

Page 2 GAO-01-42 IRS Financial and Operational Management

Chapter 5

Inadequate Accounting 

for and Tracking of 

Property and 

Equipment

66

IRS’ Accounting System 66

Tracking P&E 69

Estimate of P&E Balance 72

Conclusion 73

Recommendations 74

Agency Comments and Our Evaluation 75

Chapter 6

Ineffective Controls 

Over Appropriated 

Funds

77

IRS’ Budgetary Transactions 77

Fund Balance With Treasury 84

Payroll Costs 89

Conclusions 92

Recommendations 92

Agency Comments and Our Evaluation 94

Chapter 7

Deficiencies in the 

Collecting and 

Reporting of IRS’ 

Financial Data

96

Financial Reporting 96

Recording Accounts Payable 99

Reporting Tax Revenues 102

Trust Fund Certifications 104

Conclusions 106

Recommendations 107

Agency Comments and Our Evaluation 108

Appendixes Appendix I: Status of GAO Recommendations on IRS’ Financial and 

Operational Activities 110

Appendix II: Comments From the Internal Revenue Service 125

Related GAO Products 129

Tables Table 1: IRS Delinquent Taxpayer Case Dispositions, Fiscal Years

1997 Through 1999 34

Table 2: Various IRS Enforcement Activities, Fiscal Years 1997

Through 1999 35

Table 3: AUR Workload for Tax Years 1996 Through 1998 49

Table 4: Status of Open GAO Recommendations on IRS’ Financial

and Operational Activities 110
Contents

Page 3 GAO-01-42 IRS Financial and Operational Management

Table 5: New GAO Recommendations on IRS’ Financial and 

Operational Activities 122

Figures Figure 1: Comparison of Unpaid Assessments Before and After 

Audit Adjustments as of September 30, 1999 26

Figure 2: P&E Account Balances—Comparison Between Fiscal 

Years 1998 and 1999 73

Figure 3: Budget Fiscal Year Components of $79 Million 

Deobligation 80

Figure 4: Undelivered Orders as of September 30, 1999, by Ending 

Budget Fiscal Year 81

Abbreviations

ADP automated data processing

AFS Automated Financial System

ALS Automated Lien System

AUR Automated Underreporter System

BMF Business Master File

BPD Bureau of Public Debt

CAWR Combined Annual Wage Reporting

CFO Chief Financial Officer 

CNC currently not collectible

EFDS Electronic Fraud Detection System

EITC earned income tax credit

FBI Federal Bureau of Investigation

FMFIA Federal Managers’ Financial Integrity Act of 1982

FMS Financial Management Service

GAO General Accounting Office

GPRA Government Performance and Results Act of 1993

GSA General Services Administration

IAFIS Integrated Automated Fingerprint Identification System

INOMS Integrated Network and Operations Management System

IRC Internal Revenue Code

IRM Internal Revenue Manual

IRPCA Information Returns Program Case Analysis

IRS Internal Revenue Service

KPI key performance indicator

NFC National Finance Center
Contents

Page 4 GAO-01-42 IRS Financial and Operational Management

OIC offer in compromise

OIG Office of the Inspector General

OMB Office of Management and Budget

OPM Office of Personnel Management

P&E property and equipment

PATS Property Asset Tracking System

PCAS Project Cost Accounting Subsystem

PRIME Prime Systems Integrated Services

RSSA Returned Social Security Administration 

RTS/IPS Request Tracking System/Integrated Procurement System 

SFFAS Statement of Federal Financial Accounting Standards

SGL Standard General Ledger

SSA Social Security Administration

TFRP trust fund recovery penalty

TIGTA Treasury Inspector General for Tax Administration

USDA U.S. Department of Agriculture

W-2 Wage and Tax Statement 
United States General Accounting Office

Washington, D.C. 20548

Page 5 

Letr

November 17, 2000 

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 1999 financial statements. The matters addressed in this report relate to IRS’ 

activities associated with its fiscal year 1999 appropriation of $8.5 billion and issues relating to IRS’ 

collection of federal tax revenue, refunding of overpayments of taxes, and unpaid tax assessments. In 

addition to providing the status of previous recommendations we made to IRS, this report includes a 

number of new recommendations that resulted from our fiscal year 1999 audit. 

During our fiscal year 1999 financial audit, we found improvements in several areas, including 

improvements in courier security. We believe that IRS’ progress during fiscal year 1999 and through 

the completion of our audit was made possible in part by significant involvement of senior 

management, including the Deputy Commissioner for Operations. Continued progress by IRS will 

require a sustained commitment of resources and continued involvement by senior management.

However, as you are aware, longstanding material weaknesses in IRS’ systems and internal controls 

remain. The issues discussed in this report fall into four basic categories:

• fundamentally deficient operational and financial systems,

• inadequate internal controls, policies, and procedures, 

• policies and procedures that are not being consistently followed, and

• inadequate operational and financial information to generate reliable performance data to support 

decisions on resource allocations.

We recognize that resolving these systemic deficiencies is a long-term venture. Throughout this report 

are recommendations relating to capabilities that we believe IRS should incorporate into its systems 

modernization plans. Inadequate internal controls and procedures can generally be resolved with 

short-term improvements, such as strengthening manual controls, that can be incorporated into 

policy memorandums and the Internal Revenue Manual (IRM). However, during fiscal year 1999, we 

continued to find widespread problems with implementing policy memorandums and the IRM. Thus, 

a management program of continual monitoring is needed for key policies and controls to ensure that 

they are consistently applied at the many IRS locations across the country.

IRS has been receptive to our recommendations that it develop cost/benefit data to enable it to 

evaluate its tax collection and enforcement efforts so that it can make informed funding and staffing 

decisions on resource needs for these activities. However, IRS has concerns that, in view of 

congressional and public sensitivity about IRS’ collection and enforcement activities, the Congress 
Page 6 

may not be receptive to IRS’ developing this type of information and including it as part of IRS’ annual 

budget submission. Thus we are presenting as a matter for congressional consideration that the 

Congress require IRS to include in any budget request for additional resources for its various 

collection and enforcement activities relevant and reliable aggregate cost/benefit information.

We also recognize that IRS receives many recommendations from GAO and other organizations. 

Clearly, implementing all recommendations in the short term is not a reasonable expectation. To 

assist you and senior management, we highlight for your attention the following four areas and the 

nine associated short- or long-term GAO recommendations that we consider of highest priority 

(recommendations are listed by number in appendix I). Improvements are needed in 

• the accuracy of taxpayer accounts. Specifically, as we have reported over the last 3 years, we 

found error rates of nearly 50 percent on accounts associated with trust fund recovery penalties 

that could affect as many as 80,000 taxpayers (see recommendations 13 and 15);

• security over hard-copy taxpayer receipts and data. We found in fiscal year 1999 and prior years 

that IRS and related lockbox banks hired individuals to handle taxpayer receipts and data who 

were later found to have unacceptable backgrounds (see recommendations 29 and 73);

• controls over the release of federal tax liens. In fiscal year 1999, we found that in many cases, IRS 

did not release federal tax liens within 30 days of taxpayers’ satisfying their outstanding balances 

(see recommendation 67); and

• the development of reliable performance information for internal management relating to the 

effectiveness of tax collection and enforcement activities. During fiscal year 1999, IRS was unable 

to provide internal managers with reliable information on the net benefit of additional resources 

for programs such as the Automated Underreporter (see recommendations 65, 66, 71, and 72).

We believe that successfully implementing these recommendations would greatly assist IRS in 

improving its customer service while effectively fulfilling its responsibility to enforce the tax code. 

Although we highlight these nine recommendations, we believe that implementing the remaining 

outstanding recommendations would also greatly improve IRS’ operations.

This report contains certain 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 Senator Ted Stevens, Senator Robert C. Byrd, Senator

William V. Roth, Jr., Senator Daniel Patrick Moynihan, Senator Fred Thompson, Senator Joseph I. 

Lieberman, Senator Pete V. Domenici, Senator Frank R. Lautenberg, Senator Ben Nighthorse 

Campbell, Senator Byron L. Dorgan, Senator Orrin G. Hatch, Senator Max S. Baucus, Senator Richard 

J. Durbin, Senator George V. Voinovich, Representative C.W. Bill Young, Representative David R. 
Page 7 

Obey, Representative Bill Archer, Representative Charles B. Rangel, Representative Dan Burton, 

Representative Henry A. Waxman, Representative John R. Kasich, Representative John M. Spratt, Jr., 

Representative Stephen Horn, Representative Jim Turner, Representative Amo Houghton, 

Representative William J. Coyne, Representative Jim Kolbe, and Representative Steny H. Hoyer in 

their capacities as Chair or Ranking Minority Member of Senate and House Committees and 

Subcommittees. We are also sending copies of this report to the Honorable Lawrence H. Summers, 

Secretary of the Treasury; the Honorable Jacob J. Lew, Director of the Office of Management and 

Budget; and other interested parties. Copies will be made available to others upon request.

Please contact me at (202) 512-3406 or Steven J. Sebastian, Acting Director, at (202) 512-9521 if you 

have any questions concerning this report.

Sincerely yours,

Gregory D. Kutz

Director, Financial Management 

and Assurance
Page 8 GAO-01-42 IRS Financial and Operational Management

Executive Summary

Purpose In IRS’ role as the nation’s tax collector, its operations dwarf most other 

financial activities undertaken by any single entity, public or private, in the 

world. IRS collected over $1.9 trillion in tax revenue in fiscal year 1999 and 

generally processes over 200 million individual and business tax returns 

each year. Despite the enormity of this task, in fiscal year 1999, IRS 

responded to some previous GAO audit recommendations with certain 

improvements, such as changes in the safeguarding of taxpayer receipts 

and data. Most important was the clear commitment IRS’ senior 

management demonstrated in fiscal year 1999 to address the issues 

discussed in this report. However, in a report on the results of GAO’s audit 

of IRS’ fiscal year 1999 financial statements and in related testimony before 

Congress,1

 GAO reported the continued existence of serious financial and 

operational systems deficiencies and internal control weaknesses, some of 

which resulted in losses to the federal government and an unnecessary 

burden to taxpayers. These IRS weaknesses cross multiple areas that GAO 

has designated high risk,2

 including tax filing fraud, financial management 

and receivables, tax systems modernization, and information security.3

Over the past 8 years, GAO has issued many reports on internal control 

issues affecting IRS’ operations.4

 This report discusses (1) previously 

reported internal control and compliance issues and the status of related 

recommendations and (2) new issues identified during GAO’s fiscal year 

1999 financial audit, along with new recommendations to address those 

issues.5

Results in Brief While IRS has made improvements since GAO began auditing its financial 

statements in fiscal year 1992, serious internal control and financial and 

operational system weaknesses continued to affect the agency’s ability to 

1

See Financial Audit: IRS’ Fiscal Year 1999 Financial Statements (GAO/AIMD-00-76, 

February 29, 2000) and Internal Revenue Service: Results of Fiscal Year 1999 Financial 

Statement Audit (GAO/T-AIMD-00-104, February 29, 2000).

2

See High-Risk Series: An Update (GAO/HR-99-1, January 1999).

3

Information security weaknesses were reported separately to IRS in a report designated 

“For Limited Official Use” due to its sensitive subject matter (June 30, 2000).

4

See “Related GAO Reports” at the end of this report.

5

See appendix I, tables 4 and 5, respectively.
Executive Summary

Page 9 GAO-01-42 IRS Financial and Operational Management

effectively manage its operations and produce reliable financial 

information during fiscal year 1999. These weaknesses specifically affected 

IRS’ ability to

• manage unpaid assessments, 

• disburse taxpayer refunds,

• safeguard manual tax receipts and taxpayer information,

• account for property and equipment,

• account for appropriated funds, and

• collect and report financial data. 

These problems resulted from (1) deficient operational and financial 

systems, (2) inadequate internal controls, policies, and procedures, and 

(3) policies and procedures that were not being consistently followed. 

To date, because of its systems limitations, much of IRS’ focus has been on 

ad hoc work-arounds to obtain immediate results for the limited purpose of 

reporting reliable annual financial statement information. However, such 

work-arounds have not provided IRS’ management with the systems, 

controls, and timely information needed to manage its operations 

efficiently and effectively. Until IRS makes more systemic, short- and longterm corrections, it will continue to lack the performance information it 

needs to effectively manage its operations, and losses to the federal 

government and the burden to taxpayers will likely continue. GAO 

recognizes that all the problems IRS faces cannot be solved immediately. 

While systems deficiencies will involve long-term efforts, many issues can 

be solved in the short term, such as those involving inadequate manual 

controls or policies and procedures that are not being consistently 

followed.

In addition, IRS has been unable to develop and maintain reliable and 

timely cost/benefit information to evaluate the relative merits of its various 

tax collection and enforcement activities. Such aggregate information is 

necessary in order for IRS to make informed resource allocation decisions. 

This can also help the Congress with information to assist it in determining 

if the level of funding IRS requests for its various programs is appropriate. 

Although IRS has been receptive to GAO’s recommendations regarding 

such an effort, IRS has concerns that in light of congressional and public 

sensitivity over IRS’ collection and enforcement activities, the Congress 

may not be receptive to IRS’ developing this type of information. Thus, 

GAO is presenting a matter for congressional consideration on this issue.
Executive Summary

Page 10 GAO-01-42 IRS Financial and Operational Management

During fiscal year 1999, as previously noted, IRS made a number of 

improvements to address some of the management issues GAO raised in 

previous reports. A high level of involvement by IRS’ senior management 

contributed significantly to this progress. The sustained involvement of 

IRS’ senior management, including monitoring to ensure that IRS’ policies 

and controls are being consistently followed, is paramount to IRS’ 

resolving the serious problems that remain.

Appendix I lists previous GAO recommendations that remain open and new 

recommendations that GAO is making as a result of its fiscal year 1999 

audit (see tables 4 and 5, respectively). GAO recognizes that IRS receives 

numerous recommendations from GAO and other organizations and that 

IRS cannot be expected to implement all recommendations in the short 

term. To assist IRS and senior management, tables 4 and 5 highlight (in 

boldface type) the nine short- or long-term recommendations that GAO 

considers of highest priority.

Background IRS is responsible for collecting and accounting for federal tax revenue and 

refunding and accounting for tax overpayments. In fiscal year 1999, IRS 

collected about $1.9 trillion in tax revenue, issued over $185 billion in tax 

refunds, and had net taxes receivable at year-end of $21 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 banks6

 collected about 

$386 billion in fiscal year 1999. The IRS offices include 10 service centers 

nationwide that have collection, refund, and enforcement responsibilities. 

Many other offices that IRS has established assist taxpayers and also 

perform collection and enforcement activities. Historically, most IRS 

offices other than headquarters have had responsibilities tied to their 

geographic location. However, in response to congressional concerns 

about its operations as embodied in the Internal Revenue Service 

Restructuring and Reform Act of 1998, IRS is undergoing a reorganization 

that will significantly affect the roles and responsibilities of these offices. 

IRS receives the majority of its funding for its operations through three 

appropriations: (1) processing, assistance, and management, (2) tax law 

6

Treasury’s Financial Management Service contracts with such banks on IRS’ behalf. These 

commercial lockbox banks also receive and process taxpayer receipts and then forward the 

tax data to IRS for input and processing. 
Executive Summary

Page 11 GAO-01-42 IRS Financial and Operational Management

enforcement, and (3) information systems. IRS received about $8.5 billion 

in appropriations for fiscal year 1999. IRS also has other appropriations, 

but expenditures related to these appropriations were not material in fiscal 

year 1999.

Principal Findings

Weaknesses in IRS’ 

Management of Unpaid 

Assessments

During fiscal year 1999, IRS was unable to effectively manage unpaid 

assessments and maximize collections. GAO found that IRS (1) continued 

to lack an effective subsidiary ledger, (2) delayed recording assessments, 

payments, and other activities, resulting in both a burden to taxpayers and 

lost revenue to the federal government, and (3) did not actively pursue 

significant amounts in outstanding taxes owed to the federal government, 

primarily, according to IRS, because of resource constraints. 

IRS continues to lack a subsidiary ledger that tracks and accumulates 

unpaid assessments7

 and their status on an ongoing basis. Thus, in fiscal 

year 1999, IRS was (1) unable to promptly identify and focus collection 

efforts on accounts most likely to prove collectible and (2) impeded in its 

ability to prevent or detect and correct errors in taxpayers’ accounts. In 

addition, IRS’ systems cannot automatically link multiple assessments 

made for one tax liability. This deficiency caused particular problems in 

cases involving unpaid payroll taxes where separate officers of a company 

can each be assessed for the payroll tax liability of the company. 

Consequently, if the business or one of its officers paid some or all of the 

outstanding taxes, IRS’ systems were unable to automatically reflect the 

payment as a reduction in the related account or accounts. In fiscal year 

1999, GAO found that this problem existed in nearly half the cases it 

reviewed involving related accounts, and, as of September 30, 1999, over 

170,000 individuals had payroll tax liability assessments. Consequently, this 

deficiency potentially affected a significant number of taxpayer accounts. 

IRS’ efforts to address this serious system deficiency have thus far had 

7

Unpaid assessments consist of (1) taxes due from taxpayers for which IRS can support the 

existence of a receivable through taxpayer agreement or a favorable court ruling (federal 

taxes receivable), (2) compliance assessments, where neither the taxpayer nor the court has 

affirmed that the amounts are owed, and (3) write-offs, which are unpaid assessments that 

IRS does not expect to collect because of factors such as taxpayers’ death, bankruptcy, or 

insolvency. 
Executive Summary

Page 12 GAO-01-42 IRS Financial and Operational Management

limited success in reducing the extent of inaccuracies in taxpayer 

accounts.

IRS continued to experience significant delays in recording both 

assessments and payments in taxpayer accounts. These delays resulted in 

numerous errors, such as issuing refunds to taxpayers who owed taxes and 

erroneously assessing taxpayers who were actually due refunds. GAO also 

found that IRS continued to allow taxpayers to enter into installment 

agreements that did not provide for payment of the full amount of taxes 

due, as required by Section 6159 of the Internal Revenue Code (IRC). In 

addition, IRS did not always promptly release liens filed against the 

property of taxpayers who previously paid off or otherwise satisfied their 

outstanding tax liabilities, as required by Section 6325 of the IRC. The 

failure to promptly release tax liens causes undue hardship to taxpayers 

who are attempting to sell property or apply for commercial credit.

In fiscal year 1999, GAO found that IRS did not pursue significant amounts 

in outstanding taxes owed to the federal government, hindering its ability 

to effectively manage its inventory of unpaid assessments and maximize 

collections. For example, IRS closed a number of cases as “currently not 

collectible” because of new guidance IRS issued in response to, according 

to IRS, a growing workload and resource constraints. GAO identified cases 

that indicated that the taxpayer had financial resources to pay at least some 

of the amounts owed, yet IRS was not pursuing collections from these 

delinquent taxpayers. 

GAO has made or is making a number of recommendations to assist IRS in 

addressing weaknesses in its management of unpaid assessments. These 

include recommendations to (1) in both the short and long-term, eliminate 

duplicate accounts and ensure that payments made are properly reflected 

in all related taxpayer accounts, (2) implement procedures to closely 

monitor the prompt release of tax liens on taxpayer accounts that have 

been paid off or otherwise satisfied, and (3) develop the capability to 

routinely and reliably measure the cost/benefit of its collection activities 

and to make informed resource allocation decisions.
Executive Summary

Page 13 GAO-01-42 IRS Financial and Operational Management

Weaknesses in Internal 

Controls Over Refund 

Disbursements

Weaknesses in IRS’ controls over refund disbursements unnecessarily 

exposed the federal government to losses due to disbursing improper 

refunds.8

 During fiscal year 1999, IRS disbursed about 98 million tax 

refunds totaling over $185 billion. IRS recognizes that taxpayers sometimes 

submit erroneous and, in some cases, fraudulent refund claims. However, 

time constraints,9

 high volume, and the inherent nature of these 

transactions affected the options available to IRS in its efforts to ensure 

that only valid refunds were disbursed. Within these constraints, IRS 

implemented pre-refund controls designed to prevent improper refunds 

from being disbursed. However, these controls did not sufficiently limit 

losses from the payment of improper refunds. Consequently, IRS relies 

extensively on postrefund detective controls to identify for collection 

improper refunds that had been disbursed. However, for tax year 1996 (the 

most recent year for which substantially complete data on estimated 

underreported taxes were available),10 IRS did not follow up on almost 

9 million tax returns estimated to represent about $10 billion of potentially 

underreported tax liabilities, including an unknown amount in improper 

refunds. 

Earned income tax credits (EITCs) have historically been vulnerable to 

high rates of invalid claims. In an attempt to minimize losses due to these 

claims, IRS uses the Electronic Fraud Detection System (EFDS)11 to screen 

EITCs to identify for examination those considered suspicious. However, 

IRS did not screen all EITCs through EFDS or track the number of EITCs it 

did screen. Instead, IRS screened EITCs through EFDS only until it had 

identified the number of suspicious EITCs it believed the agency had 

sufficient resources to examine. Because IRS did not screen all EITCs 

through EFDS, it was unaware of how many of the over 19 million total 

8

An 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.

9

By statute, IRS must generally pay interest on refunds not disbursed within 45 days of 

receipt or due date, whichever is later (26 U.S.C. 6611).

10From the end of a given tax year, it generally takes IRS over 3 years to process 

substantially all the individual tax returns, perform the related document matches, and 

conduct the subsequent follow-up with taxpayers on selected cases. 

11EFDS 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.
Executive Summary

Page 14 GAO-01-42 IRS Financial and Operational Management

EITCs filed in tax year 1999 exhibited suspicious characteristics. Of the 

suspicious EITCs IRS did identify and examine during fiscal year 1999, over 

86 percent were found to be invalid. However, according to IRS, about 

30 percent of these examinations were completed after the refund had 

already been disbursed. 

IRS relies extensively on detective controls to identify improper refunds 

issued and underreported tax liabilities. Among the most important of 

these controls are automated matching programs that are run months after 

tax returns are processed, with subsequent follow-up on some identified 

differences serving as a compensating detective control. However, in 

addition to having run these programs too late to prevent the issuance of 

erroneous or fraudulent refunds in fiscal year 1999, IRS followed up on 

only a portion of the underreported taxes identified.

GAO is making several recommendations to assist IRS in addressing 

weaknesses in its controls over refund disbursements. These include 

recommendations to (1) determine reasons it has not been more effective 

in preventing disbursements of refunds related to questionable EITC 

claims, and (2) develop the capability to routinely and reliably measure the 

cost/benefit of its various enforcement programs and to make informed 

resource allocation decisions.

Further Improvements 

Needed to Safeguard 

Manual Tax Receipts and 

Taxpayer Information 

Although improvements have been made, IRS continued to have 

weaknesses in controls over safeguarding cash, checks, and related hardcopy taxpayer data it manually received from taxpayers during fiscal year 

1999. These weaknesses exposed the government and taxpayers to 

increased risk of losses from financial crimes committed by individuals 

who inappropriately gain access to assets and confidential information 

entrusted to IRS. GAO found that IRS and its lockbox banks employed 

individuals to process cash, checks, and other taxpayer data before 

receiving satisfactory results of their fingerprint checks to determine if the 

employees had a suitable background for these positions. GAO also 

identified other weaknesses, including returned refund checks that were 

not immediately voided or locked up, as required by IRS policy. 

Similar weaknesses were identified at all types of locations that process tax 

returns and taxpayer receipts, including IRS service centers, lockbox 

banks, district offices, and post-of-duty stations. Such systemic 

weaknesses increase IRS’ vulnerability to loss or theft. In fiscal year 1999, 

IRS, itself, identified 45 actual or alleged employee thefts of receipts at its 
Executive Summary

Page 15 GAO-01-42 IRS Financial and Operational Management

field offices and lockbox banks totaling over $1 million; however, the true 

magnitude of actual losses will never be known. 

IRS addressed some of the control deficiencies related to tax receipts and 

taxpayer data that GAO reported in prior years. For example, IRS 

eliminated the use of bicycle or foot couriers to transport deposits to 

financial institutions and issued enhanced courier security procedures 

after fiscal year-end. Nonetheless, it is important that IRS correct the 

remaining vulnerabilities because these issues are critical to IRS’ 

responsibility for safeguarding taxpayer information and its need to meet 

its customer service goals.

GAO has made or is making recommendations to assist IRS in addressing 

these remaining vulnerabilities over tax receipts and taxpayer data, 

including recommendations to prohibit new employees from processing 

tax receipts and handling taxpayer data until fingerprint checks have been 

received and reviewed by management.

Inadequate Accounting for 

and Controlling of Property 

and Equipment

IRS did not record property and equipment (P&E) transactions in its asset 

records as they occurred and did not maintain adequate records for capital 

leases, leasehold improvements, or major systems during fiscal year 1999. 

The systems that track IRS’ acquisitions and disposals of P&E were 

seriously deficient. IRS’ procedures were also not effective in ensuring that 

acquisitions and disposals were promptly and accurately recorded into 

those systems. As a result, IRS was unable to rely on its P&E subsidiary 

records to appropriately account for or report its inventory of P&E assets. 

IRS has known of these fundamental weaknesses since at least 1983. 

However, its primary efforts during fiscal year 1999 focused on deriving 

year-end balances for its financial statements rather than on implementing 

permanent solutions. Specifically, IRS had to abandon use of its subsidiary 

records for financial reporting for fiscal year 1999 and instead brought in 

contractors to derive its ending P&E balance primarily through statistical 

sampling. IRS’ estimate of $1.3 billion of net P&E as of September 30, 1999, 

which GAO concluded was materially reliable, resulted in an increase of 

over $1 billion (600 percent) to its accounting records. In addition to the 

problems previously discussed, this substantial adjustment was necessary 

because IRS excluded over $250 million of systems development costs and 

$65 million of assets under capital lease.
Executive Summary

Page 16 GAO-01-42 IRS Financial and Operational Management

Tests by GAO and IRS’ contractors demonstrated that IRS’ P&E records 

were unreliable. For example, items disposed of still remained on IRS’ 

inventory records, and items physically present at IRS locations were not 

on IRS’ records. Also, GAO continued to find significant errors in the 

quantities of P&E included in IRS’ P&E subsidiary records in fiscal year 

1999. For example, at field offices GAO visited, video conferencing 

equipment and three recently acquired mail-sorting machines that cost over 

$800,000 each were not included in the subsidiary P&E records. GAO also 

noted 200 personal computers that had been disposed of but were still 

included in IRS’ records. The contractors that IRS hired found unrecorded 

P&E at all the sites they tested, as well as valuation errors and items no 

longer in the inventory yet still in IRS’ records. 

GAO has made or is making a number of recommendations to assist IRS in 

strengthening its controls over, and accountability for, its property and 

equipment.

Ineffective Controls Over 

Appropriated Funds

IRS was unable to reliably account for, or report to the Congress or the 

public how it used the approximately $8.5 billion in appropriated funds it 

received in fiscal year 1999. IRS did not have adequate budgetary controls 

to ensure that budgetary balances reported on its financial statements were 

reliable or that its obligations did not exceed budgetary resources. 

Specifically, GAO found that:

• deobligations12 were not performed in a timely manner, 

• obligations were not liquidated upon receipt of goods and services as of 

September 30, 1999, 

• IRS did not promptly charge all expenditures against the appropriations 

authorized to pay them, and

• payroll expenditures were inappropriately reported for customer 

service and compliance. 

GAO previously reported that IRS had not properly reconciled its fund 

balance with Treasury accounts. Instead, IRS recorded unsupported 

adjustments to its records to force them to agree with Treasury’s records. 

12Deobligations are downward adjustments of 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.
Executive Summary

Page 17 GAO-01-42 IRS Financial and Operational Management

Thus, this created the need for IRS to expend extensive efforts during fiscal 

year 1999 to clear out and adjust its accounting records for several years of 

unsubstantiated entries. Although IRS reconciled the year-end balance in 

aggregate, there were still unresolved differences at year-end, most 

significantly $35 million of unresolved payroll transactions that had 

occurred over a period of 5 years. Unresolved differences such as this and 

IRS’ lack of routine and complete reconciliations raise serious concerns 

about IRS’ ongoing ability to ensure that its financial records are accurate 

and that it complies with the laws governing the use of its budget authority.

GAO has made or is making several recommendations to assist IRS in 

improving its controls over, and accountability for, its appropriated funds.

Deficiencies in the 

Collecting and Reporting of 

IRS’ Financial Data

IRS did not have policies and procedures for its accounting and financial 

reporting process that were adequate to provide reasonable assurance that 

its financial statements would be reliable. Like most entities, IRS uses a 

general ledger system to accumulate financial information and summarize 

it for financial reporting purposes. However, IRS’ general ledger comprises 

two independent general ledgers which (1) are not integrated with each 

other or their supporting records and, in fiscal year 1999, and (2) received 

information that was often untimely or erroneous. In addition, IRS’ general 

ledger for its custodial activities does not use an account structure and 

titles that are consistent with those in the U.S. Government Standard 

General Ledger.13 To compensate, IRS had to rely on extensive and laborintensive procedures to prepare its financial statements at year-end. In 

addition, IRS’ supervisory reviews were not always effective in identifying 

and correcting errors that would have adversely affected the financial 

statements. For example, GAO found errors in IRS’ statement of financing 

that would have caused misstatements totaling about $1.3 billion if left 

uncorrected. Although IRS did make some improvements in its financial 

reporting process in fiscal year 1999, significant deficiencies remain. Also, 

although IRS made strides in improving the reporting of accounts payable 

on its financial statements during fiscal year 1999, it continued to have 

inadequate controls over procedures to routinely and accurately determine 

accounts payable. As a result of these problems, IRS could not produce 

13The U.S. Government Standard General Ledger establishes a standard chart of accounts, 

including account titles, definitions, and uses. Its primary purpose is to standardize federal 

agency accounting, support the external reports and financial statements required by the 

Office of Management and Budget and Treasury, and provide comparable information 

among agencies.
Executive Summary

Page 18 GAO-01-42 IRS Financial and Operational Management

reliable annual financial statements and, more importantly, could not 

routinely produce the reliable financial information needed to effectively 

manage its operations. 

IRS also continued to be unable to determine the specific amount of 

revenue it actually collected for Social Security, Hospital Insurance, and 

individual income taxes. In addition, IRS continued to be unable to 

determine reliable collections attributable to trust funds that receive excise 

tax receipts at the time of deposit. These conditions existed primarily 

because IRS did not obtain data from taxpayers on the amounts deposited 

at the time deposits are made. The information needed to attribute deposits 

to the proper trust fund is provided on the tax return, which is received 

months after the tax deposits were made. In addition, with respect to 

excise taxes, delays in the receipt and processing of tax returns have 

resulted in misstatements of amounts certified for a given quarter.

GAO has made or is making a number of recommendations to assist IRS in 

its collection and reporting of financial data.

Matter for 

Congressional 

Consideration

In order to make available information to better assist it in making 

informed decisions regarding the budget and staffing of IRS, the Congress 

should consider requiring that IRS include in any budget request for 

additional resources associated with its various collection and 

enforcement activities reliable cost-based performance indicators and 

other relevant aggregate cost/benefit data that demonstrate the benefits of 

providing for such resources. 

Recommendations GAO is making 37 new recommendations to IRS, in addition to reaffirming 

the 43 still open from prior years, to improve internal controls over areas 

such as managing unpaid assessments, disbursing refunds, safeguarding 

manual tax receipts and taxpayer information, accounting for property and 

equipment, accounting for appropriated funds, and collecting and reporting 

financial data. New recommendations appear at the end of chapters 2 

through 7. In addition, previous recommendations that GAO made to IRS 

and new recommendations are listed in appendix I (tables 4 and 5, 

respectively).

All the recommendations GAO presents in this report are necessary for IRS 

to address if it intends to overcome its problems and reach its goals, 
Executive Summary

Page 19 GAO-01-42 IRS Financial and Operational Management

including providing top-quality service to America’s taxpayers. GAO 

recognizes that IRS cannot be expected to implement all recommendations 

in the short term. Thus, to assist IRS and senior management, tables 4 and 5 

highlight (in boldface type) the nine short- or long-term recommendations 

that GAO considers of highest priority. 

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations and provided information regarding initiatives to 

address many of them. We will evaluate the effectiveness of these 

initiatives during future audits. However, IRS had concerns about our 

recommendations that IRS include in its annual budget submission 

cost/benefit information related to its collection efforts and enforcement 

programs. IRS indicated that submitting such reports for congressional 

review might not be as helpful as recommending that the issues be 

addressed in IRS’ strategic planning process. We agree that addressing 

these issues in IRS’ strategic planning process would be of value and have 

incorporated this in these recommendations. However, we also continue to 

believe that reliable cost/benefit performance information related to these 

programs is necessary in order for IRS to make informed resource 

allocation decisions. Additionally, providing such information with any 

request for additional resources would better assist the Congress in 

determining if the level of funding IRS requests for its various programs is 

appropriate. 

We understand that because of concerns about its past collection and 

enforcement activities, IRS is reluctant to report return on investment 

information to the Congress. However, we believe that billions of dollars of 

valid unpaid taxes could be collected in a cost-beneficial manner. 

Accordingly, we have included a matter for congressional consideration 

asking that the Congress consider requiring IRS to include in any budget 

request for additional resources for its various collection and enforcement 

activities relevant and reliable aggregate pertinent cost/benefit 

information. IRS also provided numerous detailed comments about the 

specific findings in this report, which we have incorporated where 

appropriate, and which are summarized, along with our evaluation, at the 

end of each chapter. The letter from IRS’ Deputy Commissioner of 

Operations responding to a draft of this report is included in appendix II.
Page 20 GAO-01-42 IRS Financial and Operational Management

Chapter 1

Introduction Chapte1r

The Internal Revenue Service (IRS) is the nation’s tax collector. In this 

capacity, its mission is to provide America’s taxpayers with top-quality 

service by helping them understand and meet their tax responsibilities and 

by applying the tax law with integrity and fairness to all. This mission 

encompasses the demanding responsibility of collecting taxes, processing 

tax returns, and enforcing the nation’s tax laws. Each year, IRS processes 

over 200 million tax returns and 1 billion information returns (such as Wage 

and Tax Statements [W-2s]) and examines over 1.5 million tax returns. 

The size and complexity of the IRS organization that fulfills this imposing 

responsibility present challenges to its management that have been further 

complicated by an ongoing reorganization. IRS is a massive, decentralized 

organization with tens of thousands of employees located in offices 

throughout the United States. Historically, most of IRS’ offices other than 

headquarters have had responsibilities tied to their geographical location. 

However, in response to congressional concerns about its operations, IRS 

is currently undergoing a reorganization that will significantly affect the 

roles and responsibilities of these offices. When IRS’ reorganization is 

complete, the functions performed by these offices will be assigned to four 

operating divisions, which will specialize in serving the needs and 

overseeing the taxpaying responsibilities of a specific set of taxpayers with 

similar characteristics.1

 Despite these substantial management challenges, 

IRS achieved a commendable level of success in fiscal year 1999, collecting 

$1.9 trillion in taxes and paying about $185 billion in refunds to taxpayers. 

However, during fiscal year 1999, IRS continued to face many of the 

pervasive systems and internal control weaknesses that we have been 

reporting for years. Moreover, we identified new internal control problems 

during our fiscal year 1999 audit. IRS has been receptive to our suggestions 

that it develop cost/benefit data to enable it to evaluate its tax collection 

and enforcement efforts so that it can provide the Congress with the 

information it needs to determine if the level of funding IRS requests for its 

various programs is appropriate. However, IRS has concerns that, in view 

1

IRS’ four operating divisions will be (1) Wage and Investment, responsible for individual 

taxpayers with wage and investment income only, (2) Small Business and Self Employed, 

responsible for fully or partially self-employed individuals, and corporations and 

partnerships with assets of $5 million or less, (3) Large and Midsize Business, responsible 

for commercial filers with assets over $5 million, and (4) Tax Exempt and Government 

Entities, responsible for pension plans, exempt organizations, government entities’ 

accounting for employment and income tax withholding, and tax exempt bond issuances 

and federally recognized Indian tribes. 
Chapter 1

Introduction

Page 21 GAO-01-42 IRS Financial and Operational Management

of congressional and public sensitivity about IRS’ collection and 

enforcement activities, the Congress would not be receptive to IRS’ 

developing this type of information. Thus we are presenting a matter for 

congressional consideration on this issue.

This report includes past recommendations for remaining issues as well as 

new recommendations to address internal control issues identified during 

our fiscal year 1999 audit. The recommendations we are making will have 

an associated cost to IRS. However, these costs must be weighed against 

the benefits that implementing the recommendations will provide for IRS, 

the Congress, and the taxpayer. Many of our recommendations are aimed at 

improving deficiencies that have direct consequences to the taxpayer. Our 

report discusses many instances in which the federal government and 

taxpayers have been adversely affected by these deficiencies. It is also 

important to note that these examples are only those found during our 

testing, much of which was done through the use of statistical sampling. 

Consequently, the specific examples identified by our testing are likely to 

be representative of the severity of problems in the various aspects of IRS’ 

activities discussed in this report. Therefore, IRS must consider these 

recommendations in the context of its goal to provide quality service to the 

nation’s taxpayers.

Incorporating the recommendations we discuss here into its long- and 

short-term plans, as appropriate, should help IRS overcome problems that 

can be solved in the near term, while it continues its long-term effort to 

modernize its financial and operational systems. We recognize that not all 

the issues IRS faces can be solved immediately; however some, such as 

those involving processes and controls that do not involve automated 

systems, can be solved in the near term. In response to our audit findings 

and recommendations made in the past, IRS has made improvements in 

certain areas, such as in the safeguarding of taxpayer receipts and data. 

Most important, in fiscal year 1999, IRS’ management demonstrated a clear 

commitment to address the issues we discuss in this report. 

Objectives, Scope, and 

Methodology

As part of our audit of IRS’ fiscal year 1999 financial statements, we 

evaluated IRS’ internal controls and its compliance with selected 

provisions of laws and regulations and followed up on the status of open 

recommendations. We designed our audit procedures to test relevant 

controls and included tests for proper authorization, execution, 

accounting, and reporting of transactions. Specifically, we
Chapter 1

Introduction

Page 22 GAO-01-42 IRS Financial and Operational Management

• tested selected statistical samples2 of unpaid assessment, revenue, 

refund, payroll, and undelivered order transactions, and conducted 

analytical procedures;

• tested a nonrepresentative selection of earned income tax credits 

(EITCs) and property and equipment (P&E) at several IRS locations and 

also observed selected P&E inventories taken by IRS’ contractors; 

• tested in detail transactions that represent the underlying basis of 

amounts distributed to the Highway and the Airport and Airway trust 

funds;

• reviewed periodic reconciliations, physical safeguards, and segregation 

of duties over cash and checks received and processed at service 

centers, district offices, post-of-duty offices, and lockbox banks;

• reviewed specific controls over refund processing and financial 

reporting; and

• reviewed IRS’ reconciliations of its fund balance with Treasury.

We performed our work from April 1999 through February 2000 in 

accordance with generally accepted government auditing standards and 

Office of Management and Budget (OMB) Bulletin 98-08, as revised. We 

also used the March 2000 IRS Remediation Plan to determine the status of 

IRS’ actions to address previous GAO recommendations; our status for 

each recommendation is listed in table 4, which appears in appendix I. We 

have previously reported on most of the issues in this report. We also 

published a management letter addressing additional matters that we 

identified during our fiscal year 1999 audit regarding accounting 

procedures and internal controls that could be improved,3

 and issued a 

separate report on computer security issues.4

2

Statistical samples were selected primarily to substantiate, and in some cases derive, 

balances and activity reported on IRS’ financial statements. Consequently, while dollar 

errors or amounts can be statistically projected to the populations from which sample items 

were selected, attributes or issues identified for items tested as part of these samples 

generally cannot be statistically projected to the populations. Nonetheless, given that 

sample items were selected in a statistically valid and random fashion, the attributes or 

issues identified for the items tested are likely to be representative of their respective 

populations.

3

See Management Letter: Suggested Improvements in IRS’ Accounting Procedures and 

Internal Controls (GAO/AIMD-00-162R, June 14, 2000).

4

Information security weaknesses were reported separately to IRS in a report designated 

“For Limited Official Use” due to its sensitive subject matter (June 30, 2000).
Page 23 GAO-01-42 IRS Financial and Operational Management

Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments Chapte2r

During fiscal year 1999, we continued to identify serious internal control 

deficiencies that affected IRS’ management of unpaid assessments.1

 IRS’ 

lack of an appropriate general ledger system prevented it from properly 

and routinely classifying and reporting unpaid assessments without 

substantial use of specialized computer programs and manual intervention. 

Also, because of the lack of a detailed subsidiary ledger for unpaid 

assessments and transaction processing deficiencies and delays, IRS could 

not ensure that taxpayer accounts were accurately maintained, resulting in 

both a burden to taxpayers and lost revenue to the federal government. 

Also, IRS’ failure to actively pursue significant amounts of outstanding 

taxes owed to the federal government hindered its ability to effectively 

manage its inventory of unpaid assessments and maximize collections, 

resulting in potentially billions of dollars in lost revenue. Finally, IRS did 

not comply with two provisions of the Internal Revenue Code (IRC) by

(1) continuing to enter into installment agreements with taxpayers that 

required payment of less than the full amount of taxes owed and (2) not 

promptly releasing tax liens on the property of taxpayers who paid off or 

otherwise satisfied their outstanding tax liabilities, contributing to 

taxpayer hardship and making the federal government vulnerable to 

lawsuits. These issues seriously affected all aspects of IRS’ management of 

unpaid assessments.

Reporting Unpaid 

Assessments

IRS’ general ledger system continued to be unable to distinguish unpaid 

assessments that represent gross and net taxes receivable from those that 

are either compliance assessments or write-offs.2

 Thus, the system could 

not be used to support the amounts for unpaid assessments that were 

reported in the financial statements and their accompanying supplemental 

information. Since IRS could not rely on its general ledger system, it had to 

1

Unpaid assessments consist of taxes and related penalties and interest that IRS has 

identified and recorded as due to the federal government from taxpayers for which payment 

has not yet been received.

2

In accordance with Statement of Federal Financial Accounting Standards No. 7, unpaid 

assessments are classified in one of the following three categories: (1) taxes receivable, 

which are amounts due from taxpayers for which IRS can support the existence of a 

receivable through taxpayer agreement or a court ruling in favor of IRS, (2) compliance 

assessments, for which neither the taxpayer nor the court has affirmed that the amounts are 

owed, and (3) write-offs, which are unpaid assessments that IRS does not expect to collect 

because of factors such as the taxpayer’s bankruptcy, insolvency, or death. Of these three 

categories, only taxes receivable are reported in the financial statements, with compliance 

assessments and write-offs presented as supplemental information.
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 24 GAO-01-42 IRS Financial and Operational Management

use a specialized computer program and other time-consuming and 

labor-intensive ad hoc procedures to derive the amounts appearing in the 

financial statements and accompanying supplemental information. 

However, this approach still required substantial adjustments to the initial 

amounts to present reliable end-of-year balances. 

GAO’s Standards for Internal Controls in the Federal Government3

 requires 

that transactions and other significant events be promptly recorded and 

properly classified to maintain their relevance and value to management in 

controlling operations and making decisions. All transactions and events 

are to be completely and accurately recorded and properly classified in the 

summary records from which reports and financial statements are 

prepared. Therefore, it is essential for IRS to be able to appropriately 

classify its unpaid assessments in order to present reliable information in 

its financial statements. In addition, in accordance with Federal Financial 

Management Systems Requirements,4

 an agency’s core financial system 

should be supported by a general ledger account structure that complies 

with the U.S. Government Standard General Ledger (SGL).5

 To support the 

account balances in these SGL accounts, the general ledger should be 

supported by detailed records, lists, or a subsidiary ledger of individual 

accounts or additional data elements. However, as is discussed later in this 

report, IRS lacks a subsidiary ledger for unpaid assessments. 

To compensate for the lack of an adequate general ledger system and an 

unpaid assessment subsidiary ledger, IRS ran a specialized computer 

program to extract all the unpaid assessments from its master files—its 

only detailed database of taxpayer information—and classify them into the 

three categories of unpaid assessments for annual financial reporting. 

However, this approach is inherently limited. For example, the computer 

3

GAO’s Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, 

November 1999) contains the internal control standards to be followed by executive 

agencies in establishing and maintaining systems of internal controls as required by the 

Federal Managers’ Financial Integrity Act of 1982.

4

These requirements are detailed in the Financial Management Systems Requirements series 

issued by the Joint Financial Management Improvement Program, OMB Circular A-127, 

Financial Management Systems, and OMB’s September 9, 1997, guidance for the 

implementation of the Federal Financial Management Improvement Act of 1996.

5

The U.S. Government Standard General Ledger establishes a standard chart of accounts, 

including account titles, definitions, and uses. Its primary purpose is to standardize federal 

agency accounting, support the external reports and financial statements required by OMB 

and Treasury, and provide comparable information among agencies.
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 25 GAO-01-42 IRS Financial and Operational Management

program could not systemically identify all possible characteristics that 

would determine the appropriate classification of unpaid assessments. In 

addition, the master files against which the program was run do not contain 

all the information necessary to derive a reasonable estimate of 

collectibility for those unpaid assessments determined to be taxes 

receivable. The amounts in the financial statements and supplemental 

information to the financial statements could be reliably estimated only by 

statistically sampling IRS’ unpaid assessments to determine (1) their 

proper classification and (2) estimates of collectibility for those 

assessments properly classified as taxes receivable. This approach 

required nearly 8 months to select the sample cases, assemble the case 

files, manually review the cases, and make significant adjustments 

reclassifying unpaid assessments to properly report them in IRS’ financial 

statements. 

As shown in figure 1, the amounts produced by the computer extraction 

program required material adjustments totaling tens of billions of dollars 

before reliable amounts were derived for each category of unpaid 

assessments for fiscal year 1999.
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 26 GAO-01-42 IRS Financial and Operational Management

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

as of September 30, 1999

Note: The adjusted balance of taxes receivable presented represents the gross

federal taxes receivable (does not include the allowance for doubtful accounts). 

Also note that the total unadjusted unpaid assessments balance of $255 billion

reflected in this figure was adjusted to $231 billion, primarily due to duplicate assessments and errors.

Source: IRS’ master files and fiscal year 1999 financial statements.

The most significant adjustments involved amounts originally classified by 

the extraction process as taxes receivable or compliance assessments that 

were actually write-offs or partial write-offs.6

 Of the 631 unpaid assessment 

cases we and IRS sampled that were initially classified by the computer 

6

Partial 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.

$106

$49

$100

$77

$27

$127

0

20

40

60

80

100

120

140

Taxes

receivable

Compliance

assessments

Write-offs

Before audit adjustments After audit adjustments

Billions of dollars
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 27 GAO-01-42 IRS Financial and Operational Management

extraction program as taxes receivable or compliance assessments, 132 

(21 percent) were actually total or partial write-offs.

Although IRS’ process of extracting information from the master files was 

labor intensive, time-consuming, and reliant on statistical projections to 

derive the amounts to be reported in IRS’ financial statements and 

accompanying supplemental information, it was IRS’ only feasible means 

of reporting reliable year-end information for its unpaid assessments as of 

September 30, 1999. While this process allowed IRS to report auditable 

financial statement information only at fiscal year-end, it was not an 

adequate substitute for appropriate general ledger and subsidiary systems 

for day-to-day operations.

Maintaining Taxpayer 

Accounts

During fiscal year 1999, IRS continued to have weaknesses in the accuracy 

and completeness of taxpayer accounts, which contributed to a burden to 

taxpayers and lost revenue to the federal government. A key to control over 

taxpayer accounts is a subsidiary ledger that tracks and accumulates 

unpaid assessments and their status on an ongoing basis. However, as 

previously noted, IRS’ general ledger system lacks such a subsidiary ledger. 

Lacking such a ledger adversely affected IRS’ ability to (1) determine the 

current condition and status of taxpayer accounts, (2) promptly identify 

and focus collection efforts on accounts most likely to prove collectible, 

and (3) prevent or detect and correct errors in taxpayer accounts.

Subsidiary Ledger As discussed earlier, an entity’s general ledger should be supported by 

detailed subsidiary ledgers. For IRS’ unpaid assessments, such a subsidiary 

ledger should be able to routinely provide information—such as a history 

of payments and defaults, payment terms, and account status—useful in 

managing unpaid assessments and assessing collectibility. In addition, the 

subsidiary ledger should appropriately link related taxpayer accounts to 

ensure that activity is promptly and properly recorded in all related 

accounts. 
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 28 GAO-01-42 IRS Financial and Operational Management

IRS’ lack of a subsidiary ledger for unpaid assessments has direct 

consequences on taxpayers. The unpaid assessment accounts most 

frequently affected have been those representing unpaid payroll taxes, 

where separate accounts are established and assessments recorded for a 

related tax liability.7

 In our fiscal year 1997 and 1998 audits,8 we reported 

that in more than half the cases we reviewed, payments from trust fund 

recovery penalty (TFRP) assessments were not accurately recorded to 

reflect each responsible party’s reduction to his or her tax liability. In some 

cases, this inaccuracy resulted in refunds being withheld from certain 

taxpayers and liens remaining on taxpayers’ personal properties even 

though the liabilities had been paid in full. Similarly, in our fiscal year 1999 

financial audit, of 78 cases we reviewed involving TFRP assessments for 

unpaid payroll taxes, payments in 35 cases (45 percent) were not properly 

recorded to accurately reflect the reduction in each responsible party’s tax 

liability. According to IRS records, as of September 30, 1999, over 170,000 

individuals had outstanding TFRP assessments. Based on the percentage of 

cases we reviewed in fiscal year 1999 that did not appropriately reflect 

payments made to reduce the liability, nearly 80,000 individuals could be 

negatively affected by this problem.

Some of the payments we identified that had not been properly reflected in 

all related taxpayer accounts were made years ago. For example, in one 

case we reviewed, an officer made over $250,000 in payments toward his 

TFRP assessment between July 1987 and April 1993, yet at the conclusion 

of our audit in February 2000, none of these payments had been credited to 

the related business account. In another case, we noted that although two 

officers who were assessed TFRPs had made payments in 1989, over 10 

years ago, these payments still had not been credited to the related 

business account at the conclusion of our audit. We also identified 

instances in which payments made by one officer were not credited to a 

7

When a company does not pay the taxes that have been withheld from employees’ wages, 

such as Social Security or individual income tax withholding, IRS has the authority to assess 

the responsible officers individually for the taxes withheld from employees. This 

assessment is referred to as a trust fund recovery penalty (TFRP). IRS may record TFRP 

assessments against each of several individuals for the employee withholding components 

of the payroll tax liability of a given business in an effort to collect the total tax liability of 

the business. While the assessments made against the business officers are a necessary 

enforcement tool, IRS should collect the unpaid tax only once.

8

See Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements

(GAO/AIMD-98-77, February 26, 1998) and Financial Audit: IRS’ Fiscal Year 1998 Financial 

Statements (GAO/AIMD-99-75, March 1, 1999).
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 29 GAO-01-42 IRS Financial and Operational Management

related officer’s account. In one case we reviewed, an officer made over 

$78,000 in payments toward his TFRP liability between 1990 and 1996, yet 

at the conclusion of our audit, these payments had not been properly 

credited to a related officer’s account. Had the payments been correctly 

recorded, the related officer’s TFRP would have been fully satisfied.

Payments were not being credited to all related accounts because these 

accounts are not automatically linked. The unpaid payroll tax of a business 

is maintained in IRS’ business master file, while the TFRP assessed against 

an individual (or individuals) is maintained in IRS’ individual master file. 

These two separate and distinct databases are not integrated. 

Consequently, if a payment is received from a business, no automated entry 

records the reduction in the individual’s (or individuals’) TFRP account or 

accounts. This lack of an automated link has led to instances in which IRS 

pursued collection against officers of a corporation for amounts that had 

already been paid. Moreover, accounts maintained in the same master file 

are also not automatically linked, resulting in continued instances of 

erroneous taxpayer accounts.

At the end of our fiscal year 1997 audit, we recommended that until IRS’ 

systems are appropriately modernized to ensure that related taxpayer 

accounts are automatically linked, IRS should manually review accounts to 

ensure that activity is appropriately credited to all related taxpayer 

accounts.9

As an alternative to our recommendation, IRS attempted to correct this 

problem by manually entering a certain transaction code on related 

taxpayer accounts to alert IRS personnel that related accounts exist and 

should be reviewed to ensure that all transactions are appropriately 

reflected in each account. However, the use of these codes, referred to as 

“cross-references,” was not fully effective in providing the compensating 

link between related taxpayer accounts. Although these cross-references 

helped to identify some payments made after the cross-references were 

entered, they did not help to identify payments made before these crossreference codes were entered. In 78 cases involving TFRP assessments 

from our sample of 671 unpaid assessments, we noted 10 cases 

(13 percent) in which payments were not posted to all related accounts 

even though these cross-references were present. Consequently, IRS needs 

9

See Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve 

Financial Management (GAO/AIMD-99-16, October 30, 1998).
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 30 GAO-01-42 IRS Financial and Operational Management

to fully address our prior recommendation to manually review taxpayer 

accounts to ensure that all activity is appropriately reflected in the 

accounts.

Recording Assessments We also continued to find significant delays and errors in IRS’ recording of 

assessments and other activities. Because of this problem, which we have 

reported in prior years, IRS issued refunds to taxpayers who owed 

outstanding tax liabilities and paid unnecessary interest on refunds that 

were not promptly paid to taxpayers. For example, we found that because 

IRS delayed posting TFRP assessments to responsible parties, it issued 

refunds to these individuals instead of retaining and applying the refunds to 

the amounts owed. In one case we reviewed, an individual received a 

$15,000 refund when he owed the federal government $350,000 in unpaid 

payroll taxes. In this case, IRS did not post the assessment to the master 

file until 13 months after it had determined that this person was liable for 

the unpaid payroll taxes. During this time, the individual protested the 

assessment, which effectively suspended any enforcement action by IRS, 

and filed an individual tax return claiming a refund. IRS procedures require 

personnel to enter a freeze code on all of a taxpayer’s accounts once IRS 

determines that the taxpayer may be liable for unpaid taxes. This freeze 

code is intended to prevent any refunds from being issued until the tax 

liability has been finally determined. However, in this case, no freeze code 

was entered in the individual’s account; thus, the refund was allowed to be 

issued. As a result, IRS lost the opportunity to collect at least a portion of 

the $350,000 in taxes this individual owed. 

We also noted instances in which IRS delayed abating10 assessments and, as 

a result of this delay, had to pay interest on refunds it owed to taxpayers. In 

one case, it took IRS 293 days from the date it received documentation 

supporting the need for an abatement until the assessment was actually 

abated. In this case, the taxpayer had filed an amended return that showed 

that the taxpayer was due a refund of over $9.2 million. IRS received the 

amended return in April 1998; however, it did not record the abatement 

until over 9 months later, in January 1999. As a result of this delay, IRS had 

to pay an additional $430,000 in interest to the taxpayer.

10Under Section 6404 of the Internal Revenue Code (as well as various other sections), IRS is 

authorized to abate (reduce) an assessment under certain conditions. For example, IRS is 

authorized to abate erroneous assessments, which can be caused by either IRS or taxpayer 

error.
Chapter 2

Weaknesses in IRS’ Management of Unpaid 

Assessments

Page 31 GAO-01-42 IRS Financial and Operational Management

We also noted instances in which taxpayer accounts were inaccurate 

because of IRS errors that were not promptly identified and corrected. For 

example, in one case we reviewed, IRS erroneously entered a taxpayer’s 

$4,668 adjusted gross income as $466,800. As a result, the taxpayer was 

assessed over $160,000 in taxes when he was actually due a refund. It took 

18 months for IRS to abate this erroneous assessment even though 

documentation in the case file indicated that IRS personnel believed the 

assessment was erroneous 10 months before they corrected the account. 

The extent of errors in IRS’ records of taxpayer accounts was significant in 

fiscal year 1999. Although several of the abatements we reviewed were the 

result of taxpayer errors, we noted that many resulted from various IRS 

errors. Specifically, we noted that 5 of the 23 abatement transactions we 

reviewed in fiscal year 1999 (22 percent) were due to IRS assessment 

errors. In one case, IRS erroneously assessed a penalty of nearly 

$250 million against a business partnership because IRS had incorrectly 

entered the number of partners. Instead of calculating a penalty for the 

partnership’s failure to promptly file its tax return based on its actual 

number of partners—two—IRS erroneously calculated the penalty using 

999,000 as the number of partners. Consequently, IRS had to abate the 

erroneous assessment. In another case, IRS applied a tax deposit made by a 

taxpayer to the wrong taxpayer account. As a result, this taxpayer, who 

actually owed nothing, was erroneously assessed over $15 million in taxes, 

which was later abated. 

The magnitude of these errors indicates the need for corrective action by 

IRS. In our previous report on IRS’ custodial financial management 

weaknesses,11 we recommended that IRS (1) analyze and determine the 

factors causing delays in processing and posting TFRP assessments and, 

once these factors are determined, (2) develop procedures to reduce their 

impact and ensure that assessments are promptly posted to all applicable 

accounts and refunds are properly offset against unpaid TFRP assessments 

before they are issued. In addition, in a separate letter to IRS management 

that we issued at the conclusion of our fiscal year 1998 audit,12 we 

suggested that IRS implement appropriate policies and procedures to 

ensure that abatement transactions are promptly processed. We noted that 

11See Internal Revenue Service: Custodial Financial Management Weaknesses

(GAO/AIMD-99-193, August 4, 1999).

12See Management Letter: Suggested Improvements in IRS’ Accounting Procedures and 

Internal Controls (GAO/AIMD-99-182R, June 30, 1999). 
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these policies should establish appropriate time frames for processing 

abatements, a methodology for monitoring the timeliness of abatement 

processing, and procedures for identifying the causes for delays and 

formulating corrective actions. These measures, if acted on by IRS, should 

significantly reduce the severity and frequency of the errors and 

inaccuracies in taxpayer accounts, as well as minimize the extent of lost 

revenue or additional costs to the government associated with these 

problems.

Collecting Unpaid 

Assessments

During fiscal year 1999, we found that IRS did not actively pursue 

delinquent taxpayer accounts that had some collection potential, 

contributing to its overall decline in collections in recent years. IRS closed 

some of these cases with no further collection effort, and other cases, 

although not closed, also remained unworked. IRS’ failure to pursue certain 

taxpayers owing taxes to the federal government could result in billions of 

dollars in outstanding amounts going uncollected and adversely affect 

future compliance.

There is a point at which it ceases to be cost effective to pursue collections. 

Many cases in our sample of unpaid assessments provided little or no hope 

of immediate collections and were closed as “currently not collectible” 

(CNC)13 at the time we conducted our review. In fact, IRS records indicate 

that over 6.8 million of the 26.3 million outstanding unpaid assessments 

cases (26 percent) at September 30, 1999, were so designated. However, we 

also identified many cases, including some cases designated CNC by IRS, in 

which available information indicated that the taxpayer had financial 

resources to pay at least some of the amounts owed, yet these cases were 

not being actively pursued. We found a number of cases that appeared to 

have some potential for at least partial collection if they were actively 

worked, yet IRS was not pursuing collections from the delinquent 

taxpayers. For example, in one case, a doctor with a 1998 adjusted gross 

income of approximately $190,000 owed over $100,000 in unpaid taxes. 

While this taxpayer had improved his recent compliance record, the earlier 

taxes, which had accumulated over 6 years, remained outstanding. At the 

time we conducted our fieldwork, this case was unassigned and thus was 

not being worked. 

13For cases closed as CNC, IRS does not actively pursue collection from the taxpayer 

because it has concluded that the taxpayer currently does not have the financial resources 

to pay the outstanding tax obligation.
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In another case, we found that IRS’ efforts to pursue collection ended when 

the responsible revenue officer was reassigned. This case involved an 

insolvent corporation owing over $180,000 in unpaid payroll taxes, for 

which three responsible officers had been assessed trust fund recovery 

penalties. One of these officers was involved in five corporations owing 11 

quarters in delinquent payroll taxes, while the other two officers were 

involved in four corporations owing 13 quarters of unpaid payroll taxes. 

While one officer entered into an offer in compromise (OIC), and another 

officer’s assets were tied up in litigation, the third officer’s case was 

returned to a holding file14 of unassigned cases even though his most recent 

available reported adjusted gross income (in 1997) was over $100,000. The 

file indicated that the case was returned to the holding file because the 

revenue officer who had been pursuing collection was reassigned to 

customer service duties. 

Another case involved two officers of a now defunct corporation who were 

each assessed approximately $2.8 million in TFRPs. One officer was 

involved in four corporations with 50 quarters of delinquent taxes, while 

the other officer was involved in three corporations with 44 quarters of 

delinquent taxes. The first officer declared bankruptcy, and his tax debts 

were fully discharged. The second officer, whose remaining tax liability 

with interest and penalty accruals had increased to $4 million, refused to 

file returns and attempted to transfer his assets to his ex-wife. IRS 

collection personnel determined that the taxpayer’s divorce and transfer of 

assets and real property to his ex-wife were a deliberate attempt to avoid 

his tax liability and seized a $31,000 condominium owned by the officer. 

IRS was in the process of auctioning the condominium off to collect on at 

least a portion of these taxes, when, for no reasonable explanation, IRS 

pulled the property from auction and later returned it to the taxpayer. 

We also found a number of cases that IRS closed as CNC based solely on 

new guidance that IRS issued in March 1999. The guidance was issued in 

response to an increasing inventory workload and IRS’ judgment that 

resource constraints would not permit the agency to actively pursue 

certain cases. The guidance was designed to allow field offices more 

flexibility in designating cases CNC to reduce the number of cases that 

needed to be actively worked. Until recently, the CNC designation was 

typically used when the taxpayer owing the outstanding taxes had financial 

14IRS uses an automated holding file for delinquent tax accounts that are awaiting 

assignment to revenue officers for collection.
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difficulties or other hardships that made collection highly unlikely. 

However, under the new guidance, cases can be designated CNC without 

normal investigative action, such as collecting income/expense and 

asset/liability information from the taxpayer. IRS’ records indicated that in 

fiscal year 1999, the number of cases designated CNC using the criteria in 

this guidance increased by a factor of 34—from 19,000 to 648,000. The total 

dollar value associated with these cases also rose, from $126 million in 

fiscal year 1998 to approximately $2.4 billion in fiscal year 1999. 

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

is part of a broader decline in IRS’ disposition of cases and its enforcement 

activity in recent years. According to IRS records, between fiscal years 

1997 and 1999, the number of unpaid assessment accounts increased by a 

net 670,000, from 25.6 million accounts in fiscal year 1997 to 26.3 million at 

September 30, 1999. However, as shown in table 1, at the same time the 

inventory of cases was increasing, IRS records indicate that IRS’ 

dispositions of delinquent accounts and investigations15 significantly 

declined. In addition, the number16 of revenue officers responsible for these 

dispositions also declined substantially during this period.

Table 1: IRS Delinquent Taxpayer Case Dispositions, Fiscal Years 1997 Through 

1999 

Source: Unaudited IRS data.

Over the same period during which case dispositions declined, IRS also 

experienced a dramatic reduction in enforcement activity. As table 2 

15Dispositions of delinquent accounts would include, but not be limited to, any 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.

16In full-time equivalents.

Fiscal year 1997 Fiscal year 1998 Fiscal year 1999

Number of accounts 25.6 million 26.1 million 26.3 million

Number of dispositions 2.0 million 1.6 million 1.2 million

Tax collections $6.0 billion $5.3 billion $4.4 billion

Revenue officers 7,008 6,577 6,378
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shows, various enforcement activities, such as lien filings, levy 

notifications, and seizures, declined substantially between fiscal years 1997 

and 1999.

Table 2: Various IRS Enforcement Activities, Fiscal Years 1997 Through 1999

Source: Unaudited IRS data.

At the same time that enforcement activities declined, the number of 

pending OICs over 6 months old significantly increased in IRS’ ending 

unpaid assessments inventory. The number rose from 7,661 in fiscal year 

1998 to 17,976 in fiscal year 1999, despite a drop in the number of offers 

received from taxpayers with outstanding tax liabilities during the same 

period. This is consistent with delays in IRS’ processing of OICs that we 

observed in our review of unpaid assessments in fiscal year 1999. 

According to its own procedures, IRS is to determine within 14 days of 

receipt of an offer from a taxpayer whether the offer is “processable,” 

including whether the taxpayer is current in his or her return filings. OIC 

investigations are to be completed within 6 months of receipt of the offer 

unless extraordinary circumstances exist (which are to be documented in 

the case file).

Activity Fiscal year 1997 Fiscal year 1998 Fiscal year 1999

Lien filings 544,000 383,000 168,000

Levy notifications 3.7 million 2.5 million 504,000

Seizures 10,090 2,307 161
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While we found examples of delays in OIC processing that were outside 

IRS’ control (such as delays caused by the taxpayer’s failure to promptly 

provide appropriate documents to enable IRS to assess the merits of the 

OIC request), we also found examples of excessive delays in IRS’ 

processing of submitted OICs. In the worst case involving excessive delays 

that we found in our sampling of unpaid assessments, IRS took 484 days to 

accept an OIC, yet neither the case file documents nor IRS officials could 

explain the reason for the delay. In another case, IRS took about 5 months 

to determine whether a case could be processed. These findings are 

consistent with an earlier IRS internal audit (performed by what is now the 

Office of the Treasury Inspector General for Tax Administration [TIGTA]) 

report17 that studied the timeliness of OIC rejection decisions, without 

regard to the cause for the rejection. The audit found that in a majority of 

the sampled cases, IRS had periods of inactivity that lasted 60 days or 

more. 

According to IRS, the overall drop in its dispositions and enforcement 

activities was due to a decrease in staff, reassignment of collection 

employees to support customer service activities, and the additional 

processing time associated with meeting the requirements of the Internal 

Revenue Service Restructuring and Reform Act of 1998. However, IRS has 

not presented information on the costs and associated benefits related to 

its collection activities that could assist both IRS and the Congress in 

making informed decisions with regard to resources and funding levels for 

these activities. The March 1999 CNC guidance and the reassignment of 

resources from collection to noncollection activities reduced the number 

of delinquent taxpayer cases actively being pursued by IRS. The associated 

outstanding balances for these cases will continue to age and will increase 

as interest and penalties continue to accrue. Our prior work has shown that 

the likelihood of collecting delinquent taxes declines with age. As a result, 

IRS’ failure to pursue a growing number of taxpayers owing taxes to the 

federal government could result in billions of dollars in outstanding 

amounts going uncollected and adversely affect future compliance.

Installment 

Agreements 

Our fiscal year 1999 audit continued to identify installment agreements that 

did not provide for payment of the full amount of taxes due, as required by 

Section 6159 of the IRC. We first disclosed this issue in our audit of IRS’ 

17Review of the Offers in Compromise Program (Reference No. 091603 December 7, 1998).
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fiscal year 1998 financial statements. However, even though IRS issued 

instructions in 1998 reiterating the requirement for full payment of the tax 

liability, it continued to enter into installment agreements with taxpayers 

during fiscal year 1999 for less than the full amounts due and thus did not 

always comply with the IRC.

Section 6159 of the IRC authorizes IRS to enter into installment agreements 

with taxpayers to satisfy their tax liability. In March 1998, IRS’ Assistant 

Commissioner (Collections) issued a memorandum clearly stating that for 

any new installment agreement, taxpayers must fully satisfy their tax 

liability. This memorandum was followed in August 1998 by a 

memorandum from the Chief Operations Officer issuing guidelines on 

installment agreements pending updates to the Internal Revenue Manual 

(IRM). The guidelines required installment agreements to provide for full 

payment of the liability. To ensure compliance with Section 6159 of the IRC, 

we recommended18 that IRS identify and institute procedures to monitor 

compliance of new installment agreements with the IRC and the recent 

guidance IRS issued. We noted, for example, that IRS management could 

monitor compliance by randomly selecting installment agreements from its 

operating units and reviewing them for compliance with the requirements.

However, during our fiscal year 1999 audit, we continued to identify unpaid 

assessment cases involving installment agreements entered into in fiscal 

year 1999 with terms that will not fully pay the outstanding taxes. 

Specifically, of 40 unpaid assessment cases involving installment 

agreements that IRS and taxpayers entered into in fiscal year 1999, 

3 (8 percent) had payment terms that will be insufficient to satisfy the full 

tax liability before the statutory collection period for these tax liabilities 

expires.19 For example, IRS entered into an installment agreement with a 

taxpayer who had a total outstanding balance of $115,000. However, by 

paying the $800 monthly payments required under the installment 

agreement, the taxpayer will pay only $43,000 (37 percent) before the 

statutory collection period for these tax liabilities expires, assuming that 

18See GAO/AIMD-99-193, August 4, 1999.

19The statutory collection period for taxes is generally 10 years from the date of the tax 

assessment. However, this period can be extended under a variety of circumstances, such as 

agreements by the taxpayer to extend the collection period, bankruptcy litigation, and court 

appeals. Consequently, some tax assessments can and do remain on IRS’ records for 

decades.
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the taxpayer continues to make the payments through the statutory 

collection period. 

In responding to our report on the results of our fiscal year 1999 financial 

statement audit,20 IRS stated that the instances of noncompliance we 

identified reflected errors occurring during the transition to its new 

procedure. We will assess IRS’ success in complying with the statute during 

our fiscal year 2000 financial audit. 

Federal Tax Liens Our fiscal year 1999 audit disclosed that IRS did not have adequate 

procedures in place to ensure that federal tax liens filed against taxpayers’ 

property were promptly released when taxpayers fully paid or otherwise 

satisfied their outstanding tax liabilities. Errors and delays in posting 

activity and apparent systems deficiencies led to numerous instances in 

which tax liens were not promptly released or not released at all during the 

period covered by our audit. This condition could result in significant 

hardship to the taxpayer.

Under the IRC, IRS has a lien against the property of any taxpayer who 

neglects or refuses to pay all assessed federal taxes. During fiscal year 

1999, IRS filed about 168,000 federal tax liens. The lien becomes effective 

when it is filed with a designated office, such as a courthouse in the county 

where the taxpayer’s property is located. The lien serves to protect the 

interest of the federal government and as public notice to current and 

potential creditors of the government’s interest in the taxpayer’s property. 

For example, federal tax liens are disclosed in credit reports of individuals. 

Under Section 6325 of the IRC, IRS is required to release a federal tax lien 

within 30 days after the date the tax liability is satisfied or has become 

legally unenforceable.

Our fiscal year 1999 audit disclosed that IRS did not have adequate systems 

and processes in place to ensure that federal tax liens were always released 

within 30 days of satisfaction of related tax liabilities, as required by the 

Code. In 6 of 23 cases (26 percent) in which the taxpayer’s total outstanding 

tax liabilities were either paid off or abated during fiscal year 1999, IRS did 

not release the applicable federal tax lien within the required 30 days. 

These delays ranged from 1 to 14 months.

20See Financial Audit: IRS’ Fiscal Year 1999 Financial Statements (GAO/AIMD-00-76, 

February 29, 2000).
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For example, in two cases, we found that the taxpayers had paid off their 

outstanding tax liabilities by September and October 1998, respectively; 

however, as of December 1999—14 months later—IRS had not filed the 

necessary information to formally release the lien against these taxpayers’ 

properties. In both cases, IRS officials could not explain why the liens had 

not been released. However, these accounts were shown as being fully paid 

in IRS’ master files, indicating that the breakdown occurred in transmitting 

the “fully paid” status of these accounts from the master files to IRS’ 

Automated Lien System (ALS).21

In another case, a lien had been filed covering four separate tax liabilities 

owed by the taxpayer, each of which was recorded in a separate account 

for the taxpayer. Although the statutory collection period had expired for 

one of the four liabilities and was updated in the master file, this 

information was not transmitted to ALS. In addition, due to a previous 

input error, ALS contained an incorrect collection expiration date for the 

account in which this liability was recorded. After the statutory collection 

period for this account expired, in May 1999, the taxpayer paid off the 

remaining three liabilities, and these payments were appropriately 

reflected in the master files. However, because the tax lien covered all four 

accounts and ALS continued to show the fourth tax liability account as 

outstanding, ALS did not generate a certificate of release of the tax lien. 

This issue was not resolved until early December 1999, when IRS manually 

released the lien after being notified that the account had been selected for 

review as part of our audit.

In other cases, the causes for the delays in releasing the tax liens were a 

combination of human error and system limitations. For example, in one 

case, IRS took 359 days to release a tax lien filed against a taxpayer’s 

property. More than 100 days of the 359-day delay were due to IRS’ 

erroneously entering information related to the last payment made by the 

taxpayer to the master files. Because of these errors, the master file did not 

generate a transaction code indicator to alert ALS of the need to release the 

21IRS uses ALS to issue and release federal tax liens. ALS is updated for new liens and tax 

accounts by revenue officers at IRS’ district offices. ALS generates a certificate of release of 

lien automatically for liens that expire after a set period of time or when the statutory 

collection period for an account expires. For accounts that are fully paid or otherwise 

satisfied, the certificate of release of lien is generated by ALS only after ALS receives the 

“fully paid” status of the account through a weekly interface with the master files. The 

certificate of release of lien is sent to the county courthouse where the lien was originally 

filed for formal release of the lien.
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federal tax lien. This initial delay was exacerbated by IRS’ untimely 

follow-up on researching and correcting this and other errors subsequently 

recorded in the taxpayer’s account.

Our findings are consistent with a report issued by the TIGTA in September 

1998.22 This report cites a significant number of liens in the Northeast 

region that were not promptly released and, in fact, some that were 

released only after being identified by the auditors. Among the findings, the 

report identifies deficiencies in the weekly interface between the master 

files and ALS and the lack of appropriate controls to ensure that ALS prints 

the certificates of release of tax liens and that these certificates are sent to 

the county courthouse for the liens to be formally released.

The failure to release federal tax liens filed against taxpayers’ property has 

significant implications for taxpayers and IRS. Failure to promptly release 

tax liens could cause an undue burden and hardship to taxpayers who are 

attempting to sell property or apply for commercial credit. Additionally, as 

enacted in the Omnibus Taxpayer Bill of Rights, taxpayers can sue the 

federal government if IRS knowingly or negligently fails to release a lien 

within the 30-day statutory period. 

In February 2000, after we completed our work for the fiscal year 1999 

audit, IRS issued a draft memorandum outlining a new utility program that 

it plans to run weekly to confirm that all tax liabilities related to a lien are 

properly indicated as satisfied so that the lien can be released in a timely 

manner. IRS will track the progress of the lien release process by storing 

and saving data files that can be sampled and tested on request in one 

selected test district in each of its four regions. IRS also plans to monitor 

lien release transactions more closely in its accounting operations in light 

of the issues identified in our fiscal year 1999 audit. We will assess the 

progress of the proposed monitoring program and other planned follow-up 

efforts as part of our fiscal year 2000 financial audit. 

Conclusions Serious control deficiencies continued to affect IRS’ management of unpaid 

assessments during fiscal year 1999. These deficiencies prevented IRS from 

having the routine information it needed to make informed decisions and 

hindered its ability to properly and routinely report reliable information on 

22Controls for Ensuring That Federal Tax Liens are Promptly Released in the Northeast 

Region (Report No. 682302, September 8, 1998).
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unpaid assessments to interested parties. As a result, IRS could not ensure 

that taxpayers were not unduly harmed or burdened by its errors, nor could 

it maximize collections. Also, IRS’ failure to actively pursue taxpayers 

owing delinquent taxes to the federal government could result in billions of 

dollars going uncollected, erode the confidence of taxpayers in the equity 

of the nation’s tax system, and, in turn, adversely affect future compliance.

Matter for 

Congressional 

Consideration

In order to make available information to better assist it in making 

informed decisions regarding the budget and staffing of IRS, the Congress 

should consider requiring that IRS include in any budget request for 

additional resources associated with its various collection and 

enforcement activities reliable cost-based performance indicators and 

other relevant aggregate cost/benefit data that demonstrate the benefits of 

providing for such resources.

Recommendations To increase IRS’ ability to collect outstanding amounts owed by taxpayers, 

we recommend that IRS better monitor adherence to its own 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.

To improve the accuracy of taxpayer accounts, reduce the potential for a 

taxpayer burden, and reduce the cost associated with interest IRS must pay 

on refunds issued to taxpayers, we recommend that IRS

• 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.

To reduce delays in processing offers-in-compromise, we recommend that 

IRS implement procedures to monitor the age of all pending offers and to 
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require supervisors to follow up with staff to determine within 6 months 

whether to accept or reject the offer.

To provide IRS management with the information it needs to make 

informed funding and staffing decisions regarding resource needs for 

federal tax revenue collection activities, we recommend that IRS

• in the short term, 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, administrative support), as well as the expected additional tax 

collections generated, and 

• in the long term, 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.

To improve compliance with Section 6325 of the IRC, we recommend that 

IRS implement procedures to closely monitor the release of tax liens so 

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. 

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations related to the management of unpaid assessments and 

provided information regarding initiatives to address many of them. We will 

evaluate the effectiveness of these initiatives during future audits. 

However, IRS had concerns about our recommendations that it include in 

its annual budget submission cost/benefit information related to its 

collection efforts. IRS indicated that submitting such reports for 

congressional review may not be as helpful as recommending that these 

issues be addressed in IRS’ strategic planning process. We agree that 

addressing these issues in IRS’ strategic planning process would be of value 

and have incorporated this in our recommendation. However, we also 

continue to believe that reliable cost/benefit performance information 

relating to these programs is necessary in order for IRS to make informed 

resource allocation decisions. Additionally, providing such information 
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with any request for additional resources would better assist the Congress 

in determining if the level of funding IRS requests for its various programs 

is appropriate. 

We understand that because of concerns about its past collection and 

enforcement activities, IRS is reluctant to report return on investment 

information to the Congress. However, we believe that additional billions of 

dollars of valid unpaid taxes could be collected in a cost-beneficial manner. 

Accordingly, we have included a matter for congressional consideration 

asking that the Congress consider requiring IRS to include in any budget 

request for additional resources for its various collection and enforcement 

activities relevant and reliable aggregate cost/benefit information. IRS also 

provided numerous detailed comments about the specific findings in this 

chapter, which we have incorporated where appropriate. The letter from 

IRS’ Deputy Commissioner of Operations responding to this report is 

included in appendix II.
Page 44 GAO-01-42 IRS Financial and Operational Management

Chapter 3

Weaknesses in Internal Controls Over Refund 

Disbursements Chapte3r

Weaknesses in IRS’ controls over refund disbursements unnecessarily 

exposed the federal government to losses due to the issuance of improper 

refunds during fiscal year 1999.1

 During this period, IRS disbursed about 

98 million tax refunds totaling over $185 billion. Time constraints, high 

volume, and reliance on information submitted by taxpayers affect IRS’ 

ability to ensure that all refunds are proper. However, while IRS recognizes 

that taxpayers sometimes submit erroneous or fraudulent refund claims, its 

preventive (pre-refund) and detective (post-refund) controls did not 

sufficiently limit losses due to payment of improper refunds. IRS’ 

preventive controls were not always effectively and consistently applied, 

and its key detective controls were not applied to millions of tax returns 

estimated to represent billions of dollars of underreported tax liabilities. 

The full magnitude of improper refunds disbursed by IRS is unknown, but 

could be billions of dollars. 

Preventive Controls IRS’ controls to prevent improper refund disbursements were not effective 

during fiscal year 1999. Statutory requirements generally call for IRS to 

disburse refunds within 45 days of the receipt or due date of the return, 

whichever is later.2

 Within this framework, IRS implemented various 

internal controls to prevent improper refunds from being issued. These 

controls include the electronic screening of tax returns to identify invalid 

refund claims, a procedure that successfully prevents thousands of 

improper refunds each year.3

 However, other IRS preventive controls were 

less effective, such as (1) procedures to identify and examine suspicious 

earned income tax credits (EITCs) to identify invalid claims and (2) the 

review of taxpayer accounts before disbursing manual refunds to verify 

that IRS is not duplicating a previously issued refund. For example, 

(1) EITC claims were not all subject to IRS’ primary EITC screening 

program, and when suspicious EITCs were identified, they often were not 

1

An 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 in his or her return. 

2

By statute, IRS must generally pay interest on refunds not disbursed within 45 days of 

receipt or due date, whichever is later {26 U.S.C. 6611}.

3

Additional controls over tax return accuracy and validity include (1) identifying and 

correcting computation errors and qualifying errors, (2) screening electronic tax 

submissions for accuracy and completeness, (3) checking the qualifications of tax preparers 

who apply to participate in the electronic filing program, and (4) checking for missing or 

incorrect social security numbers.
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examined until after related refunds were disbursed, and (2) procedures to 

identify and stop duplicate refunds were not always conducted promptly 

and consistently.

Historically, EITCs have been vulnerable to high rates of invalid claims.4

Since most EITC claims result in refunds, the risk of disbursing improper 

refunds is significantly increased. During fiscal year 1999, about $26 billion 

(87 percent) of the over $30 billion in total EITCs resulted in refunds.5

However, IRS’ preventive controls did not sufficiently reduce its exposure 

to losses from payment of improper refunds based on invalid EITCs. To 

prevent such payments, IRS relied on its Electronic Fraud Detection 

System (EFDS),6

 and other less significant related efforts,7 to screen EITCs 

and identify those considered suspicious. Suspicious EITCs were then 

subject to examination to identify actual invalid claims.8

 EFDS is IRS’ most 

comprehensive program for EITC screening in terms of the scope of the 

characteristics it checks. However, IRS did not screen all EITCs with 

EFDS. Instead, IRS screened EITCs with EFDS only until it had identified 

the number of suspicious EITCs it believed the agency had sufficient 

resources to examine. Since IRS did not screen all EITCs through EFDS, it 

was unaware of how many of the more than 19 million EITCs filed in fiscal 

year 1999 actually exhibited suspicious characteristics. In addition, IRS did 

not keep a record of how many EITCs it did screen through EFDS. 

Consequently, IRS did not have a basis for judging if the numbers of EITCs 

it screened through EFDS and examined were appropriate in relation to the 

risks and losses involved. Also, because suspicious EITCs often were not 

4

See High-Risk Series: An Update (GAO/HR-99-1, January 1999); Major Management 

Challenges and Program Risks: Department of the Treasury (GAO/OCG-99-14, January 

1999); and GAO/AIMD-00-76, February 29, 2000.

5

The remaining about $4 billion was used to reduce tax assessments.

6

EFDS 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.

7

These related IRS efforts include targeting (1) multiple taxpayers claiming the same 

qualifying child and (2) taxpayers whose previous EITC had been denied.

8

In these examinations, IRS tax examiners correspond with taxpayers through the mail and 

request from the taxpayers third-party documentation, such as copies of business receipts 

and expenses, school records, birth certificates, and social security cards, supporting the 

taxpayer’s and, if applicable, qualifying child’s, EITC eligibility.
Chapter 3

Weaknesses in Internal Controls Over 

Refund Disbursements

Page 46 GAO-01-42 IRS Financial and Operational Management

examined until after any related refund had been disbursed, examinations 

did not always prevent improper refunds. 

In fiscal year 1999, IRS examined about 573,000 EITCs claiming 

$1.25 billion that were considered suspicious and found that about 

$1.08 billion in claims (86 percent) was invalid. However, according to IRS, 

about 30 percent of these examinations (over 171,000 EITCs) were 

conducted after the refund had been disbursed. Based on an average 

refund per EITC of 87 percent of the amount claimed, over $280 million 

may have been refunded on these invalid EITCs before they were 

examined. In addition, we found that procedures designed to hold a refund 

while an examination was in progress were not always effective in 

preventing refunds based on invalid EITCs. If a refund related to a 

suspicious EITC has not yet been disbursed, IRS procedures require that 

the refund be held until after the EITC claim has been examined. However, 

in a nonrepresentative selection of 67 examination cases we reviewed at 

three service centers, we found that 7 cases (10 percent) involved invalid 

EITC claims that resulted in refund disbursements totaling about $14,000 

before the examination was completed. According to IRS, 5 of these were 

due to processing errors, 1 was refunded before it was examined,9

 and 1 

occurred because of time constraints.10

The Taxpayer Relief Act of 1997 requires that beginning with tax year 1997, 

taxpayers who were denied an EITC through an examination must provide 

supporting evidence of eligibility before they can claim the EITC in 

subsequent years.11 However, at two service centers, we reviewed IRS’ 

procedures intended to ensure compliance with this requirement and found 

that the procedures were not always effective. Of the 67 EITC examination 

cases that we reviewed, we found 6 cases (at two service centers) whose 

1997 EITC claims IRS found to be invalid. Of these 6 cases, 3 (50 percent) 

9

This was one of the more than 171,000 returns examined after the refund had been 

disbursed.

10IRS service centers have from 1 to 10 days to stop a questionable refund from being 

disbursed.

11Although taxpayers claiming the EITC must meet certain eligibility criteria, new claimants 

or claimants who were not denied credit in tax year 1997 are not required to submit 

evidence of having met these criteria. The Taxpayer Relief Act of 1997 also has provisions 

that are intended to prevent a taxpayer from receiving an EITC for (1) the next 10 years if 

IRS determined that the taxpayer had fraudulently claimed the credit or (2) the next 2 years 

if IRS determined that the taxpayer negligently claimed the credit.
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Page 47 GAO-01-42 IRS Financial and Operational Management

resulted in refunds, totaling about $11,000, that were disbursed in 1998 

without the taxpayers’ providing the documentation required by the act. As 

a result, an unknown number of taxpayers did not substantiate their 1998 

EITC even though, through examination, their 1997 EITC was found to be 

improper. The amount of improper refunds disbursed related to these 

claims is unknown. 

IRS has also had a problem with issuing duplicate refunds. This occurs 

because IRS’ (1) automated and manual refund systems are not adequately 

coordinated to prevent duplicate refunds,12 (2) manual refunds bypass 

most of IRS’ automated validity checks, and (3) manual refunds may not be 

posted to the master file until 6 weeks after the refund is issued. If a 

duplicate automated refund is issued within that period, the master file will 

not reflect that a previous refund has already been disbursed. To prevent 

duplicate refunds from being issued, IRS implemented the following 

short-term corrective actions; however, these actions had significant 

problems that limited their effectiveness.

• IRS policy requires employees who have initiated a manual refund that 

has not yet been posted to the affected taxpayer account to monitor that 

account to ensure that a duplicate automated refund does not post in 

the interim as a pending transaction. The posting of an automated 

refund indicates that disbursement is imminent, and the employee is 

supposed to take the necessary action to stop it. However, we found that 

IRS employees did not always follow this policy, and supervisors did not 

always promptly review monitoring actions to ensure that these actions 

were being properly conducted. There were no written policies and 

procedures requiring (1) employees to document their monitoring 

actions on case history sheets13 or (2) supervisors to review the 

monitoring actions to ensure that they were performed or to document 

their review.

• IRS developed a computer program to generate a “Questionable Refund 

Report,” which is intended to identify multiple refunds posted to the 

same taxpayer account that are within $10 for review as potential 

12IRS issues most refunds through an automated system; however, refunds meeting certain 

criteria are separated for manual processing, including (1) refunds over $1 million, 

(2) refunds below $1, and (3) refunds based on a taxpayer’s request for immediate payment 

due to hardship.

13Case history sheets are forms maintained by refund initiators for manual refund cases and 

are used to document actions taken while the manual refund is being processed.
Chapter 3

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Page 48 GAO-01-42 IRS Financial and Operational Management

duplicates. However, at the two service centers we visited, IRS was not 

using this program because either officials considered it to be flawed 

and ineffective in detecting potential duplicate manual refunds as 

intended or the program was not generating this report. At the time of 

our review, IRS had not determined the nature of the problem with this 

program. 

These weaknesses indicate that in addition to the basic limitations on 

preventive controls that are inherent in refund transactions, the preventive 

controls IRS implemented were not always effectively and consistently 

applied. 

Detective Controls IRS also had weaknesses in its detective controls that limited its 

effectiveness in identifying improper refunds not caught and stopped by its 

preventive controls. Among IRS’ most important detective controls are its 

programs to compare tax returns to third-party documentation, such as 

W-2s, which are intended to identify underreported income so that related 

taxes due can be assessed and collected. To the extent that individuals with 

underreported income had been issued refunds, some or all of that amount 

might have been improper. Because of the high volume of refund 

transactions, time constraints involving payment of refunds, and the timing 

of the receipt of third-party data, IRS does not perform these comparisons 

when the tax returns are processed. Rather, IRS compares them months 

later using automated matching programs.14 Identified discrepancies are 

then selectively investigated, and collection efforts are initiated for 

underreported taxes and previously issued refunds that are identified as 

improper. However, in addition to having been run months after the tax 

returns were processed and the refunds disbursed, these controls were not 

applied to tens of millions of tax returns estimated to have represented 

billions of dollars of underreported tax liabilities over the last several 

years. The magnitude of improper refunds disbursed to these taxpayers is 

unknown. 

14The primary purpose of IRS’ matching programs is to identify underreported income and 

estimate the amount of taxes due for potential follow-up and collection. However, these 

programs also identify overreported taxes that result in refunds. In tax year 1996, IRS’ 

Information Returns Program Case Analysis (IRPCA) identified about $97 million in refunds 

due. 
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Page 49 GAO-01-42 IRS Financial and Operational Management

IRS’ Automated Underreporter Program (AUR) follows up on 

discrepancies identified by IRS’ Information Returns Program Case 

Analysis (IRPCA), which electronically compares information taxpayers 

report to IRS on tax returns to related information employers and financial 

institutions provide on information returns. AUR then categorizes cases 

with discrepancies by income type and calculates the estimated 

underreported tax for each case. IRS decides how many discrepancy cases 

it believes it has sufficient resources to investigate out of the total number 

identified. IRS then selects specific income types for investigation based on 

past experience of taxes actually assessed. 

As shown in table 3, IRS investigated only a small percentage of total AUR 

cases with identified discrepancies from tax years 1996 through 1998. In 

addition, while the number of cases with identified discrepancies increased 

by over 18 percent during this period, the rate at which IRS investigated 

discrepancy cases decreased by over 32 percent. According to IRS, 

resource constraints precluded it from working on a larger percentage of 

discrepancy cases.

Table 3: AUR Workload for Tax Years 1996 Through 1998 (in millions)

a

IRS estimate.

Source: Unaudited IRS data.

For tax year 1996,15 the 3.1 million returns investigated accounted for about 

$5.2 billion in underreported taxes due. However, according to IRS data, 

Tax year

1996

Tax year

1997

Tax year

1998

Number of individual tax returns matched by 

IRPCA

155.0 159.4 164.3a

Number of individual tax returns identified with 

discrepancies

11.9 13.4 14.1

Number of cases selected for investigation by 

AUR

3.1 3.0 2.5

Cases selected for investigation as a 

percentage of cases identified with 

discrepancies

26.1% 22.4% 17.7%

15At the time of our review, tax year 1996 was the most recent year for which substantially 

complete matching program results were available.
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the almost 9 million cases IRS did not investigate represented about 

$10 billion in potential underreported taxes. In tax years 1996 through 1998, 

IRS did not investigate over 30 million AUR cases. Because IRS did not 

investigate these cases, the actual amount of underreported taxes due is 

unknown. In addition, IRS did not have data available to demonstrate 

whether pursuing these 30 million cases would have benefited the 

government.

In an attempt to maximize the tax revenues IRS realizes on the cases it does 

investigate, IRS developed a model to predict the expected actual effect 

working on the cases would have on the amount of tax assessed (net of the 

cost of salaries and benefits of staff working on the cases), which IRS 

refers to as the “average yield.” However, the average yield excludes 

nonpersonnel costs, such as supplies and utilities. Additionally it is 

calculated based on the amount assessed, not on the amount actually 

collected. Consequently, although the average yield may be a useful tool for 

selecting cases to work on, it is not an accurate measure of AUR costeffectiveness.

IRS uses another matching program, the Combined Annual Wage Reporting 

(CAWR) program, to compare employers’ data provided to IRS with data 

provided to the Social Security Administration (SSA). CAWR consists of 

two basic components: the Business Master File (BMF) component, which 

is operated by IRS, and the Returned Social Security Administration 

component, which is performed by SSA.16 The CAWR-BMF component 

compares the employer’s data provided to IRS on the employer’s federal tax 

returns with the data provided to SSA on information returns such as W-2s. 

In addition, CAWR compares data provided on information returns with the 

employer’s federal tax returns as part of CAWR balancing.17 According to 

IRS, of approximately 11 million employers’ tax returns CAWR-BMF 

16IRS takes part in the Returned Social Security Administration (RSSA), which is designed to 

determine if taxpayers filed all W-2s and to ensure that taxpayers’ social security wage 

accounts are properly credited. SSA compares the same documents as CAWR-BMF, with the 

exception of various forms. SSA initiates correspondence with employers if there is a 

mismatch. If such attempts are unsuccessful in resolving the discrepancy, SSA refers the 

cases to IRS because SSA does not have authority to assess or collect taxes or penalties 

from employers. RSSA does not affect the amount of taxes due IRS or the amount of refunds 

due taxpayers.

17CAWR balancing is the process of reconciling dollar amounts employees report to IRS, 

such as federal income tax withheld, to corresponding dollar amounts employers report to 

the SSA.
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Page 51 GAO-01-42 IRS Financial and Operational Management

analyzed in tax years 1996 and 1997, about 1.3 million (12 percent) were 

determined to have differences. However, according to IRS, it has not 

funded the BMF component of the CAWR program since fiscal year 1995. 

As a result, no CAWR-BMF program cases were investigated, and the 

amount of underreported taxes and improper refunds is unknown. 

Conclusions Weaknesses in IRS’ controls over refund payments have allowed the 

potential disbursement of billions of dollars in improper refunds. 

Characteristics inherent in the nature of the processing of refund 

transactions narrow IRS’ ability to effectively respond to the many 

erroneous and, in some cases, fraudulent refund claims it receives. 

However, within these limitations, opportunities exist for IRS to reduce the 

losses incurred by the federal government from these improper refund 

claims. Controls IRS has implemented to prevent or detect improper 

refunds have achieved a level of success. However, the effectiveness of 

these controls was hampered by flawed implementation and, according to 

IRS management, resource constraints.

Matter for 

Congressional 

Consideration

In order to make available information to better assist it in making 

informed decisions regarding the budget and staffing of IRS, the Congress 

should consider requiring that IRS include in any budget request for 

additional resources associated with its various collection and 

enforcement activities reliable cost-based performance indicators and 

other relevant aggregate cost/benefit data that demonstrate the benefits of 

providing for such resources.

Recommendations To ensure that IRS staff members who initiate manual refund processing 

appropriately monitor taxpayer accounts in accordance with IRS policy, we 

recommend that IRS 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.

To improve procedures for electronically identifying duplicate refunds to 

prevent their issuance, we recommend that IRS determine why the 

program that generates the Questionable Refund Report was not 
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functioning as intended during fiscal year 1999 and implement appropriate 

corrective actions.

To maximize the effectiveness of existing IRS initiatives in reducing the 

rate of improper EITCs, we recommend that IRS 

• determine why service centers have not been more effective in stopping 

refunds associated with questionable EITCs and make changes to 

current procedures as appropriate, 

• review its procedures for enforcing taxpayer compliance with the 

Taxpayer Relief Act of 1997 and implement actions to prevent taxpayers 

who had been denied an EITC for tax year 1997 or any subsequent year 

from being granted an EITC in successive years until such time as they 

have provided the requisite supporting documentation, and

• track the total number of and dollars in EITCs subjected each year to 

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.

To provide IRS management with the information it needs to make 

informed funding and staffing decisions concerning (1) IRS’ AUR and 

CAWR programs, (2) IRS’ screening and examination of EITC claims, and 

(3) identifying and collecting previously disbursed improper refunds, we 

recommend that IRS

• in the short term, and using the best available information, develop 

reliable cost/benefit data to estimate the tax revenue collected by, and 

the amount of improper refunds returned to, IRS for each dollar spent 

pursuing these outstanding amounts. These data would include (1) an 

estimate of the full cost incurred by IRS in performing each of these 

efforts, including the salaries and benefits of all staff involved, as well as 

any related nonpersonnel costs, such as supplies and utilities, and 

(2) the actual amount (a) collected on tax amounts assessed and 

(b) recovered on improper refunds disbursed.

• in the long term, incorporate in its systems modernization blueprint and 

strategic planning process capabilities for routinely and reliably 

measuring the cost/benefit of each of these efforts, based on the factors 

indicated above, and make informed resource allocation decisions. 
Chapter 3

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Page 53 GAO-01-42 IRS Financial and Operational Management

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations related to controls over refunds and provided 

information regarding initiatives to address many of them. We will evaluate 

the effectiveness of these initiatives during future audits. However, IRS had 

concerns about our recommendations that IRS include in its annual budget 

submission cost/benefit information related to its enforcement and 

collection programs. IRS indicated that submitting such reports for 

congressional review may not be as helpful as recommending that the 

issues be addressed in IRS’ strategic planning process. We agree that 

addressing these issues in IRS’ strategic planning process would be of value 

and have incorporated this in our recommendation. However, we also 

continue to believe that reliable internal cost/benefit analyses related to 

these programs is necessary in order for IRS to make informed resource 

allocation decisions. Additionally, providing such information with any 

request for additional resources would better assist the Congress in 

determining if the level of funding IRS requests for its various programs is 

appropriate. 

We understand that because of concerns about its past collection and 

enforcement activities, IRS is reluctant to report return on investment 

information to the Congress. However, we believe that billions of dollars of 

valid unpaid taxes could be collected in a cost-beneficial manner. 

Accordingly, we have included a matter for congressional consideration 

asking that the Congress consider requiring IRS to include in any budget 

request for additional resources for its various collection and enforcement 

activities relevant and reliable aggregate cost/benefit information. 

IRS also stated that it does screen all EITCs through EFDS and keeps a 

record of the results of the screening. However, as of the date of this report, 

IRS had not provided support for this statement. IRS also provided 

numerous detailed comments about the specific findings in this chapter, 

which we have incorporated where appropriate. The letter from IRS’ 

Deputy Commissioner of Operations responding to this report is included 

in appendix II.
Page 54 GAO-01-42 IRS Financial and Operational Management

Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information Chapte4r

During fiscal year 1999, IRS’ internal controls over cash, checks, and hardcopy taxpayer data subjected IRS to unnecessary risk of theft or loss of tax 

receipts and exposed taxpayers to increased risk of losses from financial 

crimes committed by individuals who inappropriately gain access to 

confidential information entrusted to IRS. We recognize that because 

receipts and taxpayer data are inherently vulnerable, some theft is 

inevitable. IRS made improvements in this area; however, additional 

actions and policy changes are needed to further mitigate such risks. For 

example, since fiscal year 1997, we have reported that delays in obtaining 

the results of fingerprint checks have resulted in IRS’ employing individuals 

with backgrounds that were unsuitable for handling taxpayer receipts and 

data. Although IRS started using electronic fingerprinting equipment, 

which helped reduce the number of illegible fingerprints, and began 

fingerprinting applicants earlier in the hiring process, IRS still allowed 

thousands of employees to handle tax receipts and taxpayer data during 

the 1999 tax return filing season before it received the results of their 

fingerprint checks. 

IRS improved security over transporting receipts and data to depository 

institutions with measures such as eliminating bicycle couriers; however, 

we continued to find other control weaknesses over the transport of IRS 

deposits. Other previously reported weaknesses also remained, such as the 

failure to secure returned refund checks in locked containers. While IRS 

responded to our prior reports on many of these weaknesses by issuing 

new policies or memos reiterating existing policies, we found that this 

guidance was not consistently complied with and, thus, did not adequately 

address these weaknesses. In fiscal year 1999, IRS identified 45 actual or 

alleged employee thefts of receipts at its field offices and lockbox banks 

totaling over $1 million; however, the true magnitude of actual losses will 

never be known. Until IRS’ management actively addresses these 

weaknesses, taxpayer receipts and data will continue to be vulnerable to 

theft, loss, or misuse.

Hiring Practices IRS allowed new employees to begin work and handle tax receipts and 

taxpayer data before it received and evaluated the results of their 

fingerprint checks. During the hiring for the 1999 peak filing season, the 

most recent peak season completed as of the end of our audit, IRS did not 

fingerprint applicants early enough in the application process or have a 

system to quickly process fingerprints before the new staff reported to 

work. As a result, IRS unknowingly hired new employees with unsuitable 

backgrounds and allowed them to begin working before it knew whether 
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 55 GAO-01-42 IRS Financial and Operational Management

they were suitable for the positions hired. This control weakness existed at 

most IRS service centers and at the IRS district offices and lockbox banks 

we reviewed. 

Generally in the fall, IRS begins hiring thousands of employees for the 

upcoming peak filing season. IRS’ policy is to require fingerprint checks of 

all permanent, seasonal, and temporary employees to identify those who 

might pose a potential threat to IRS’ operations and resources. In early 

1999, many of IRS’ locations upgraded their manual fingerprinting process 

to an electronic one. However, at the time of our audit, not all locations had 

been upgraded; thus some locations still used the manual system, whereby 

IRS manually fingerprinted applicants and mailed the fingerprint cards to 

the Office of Personnel Management (OPM). In the manual system, OPM 

recorded selected data—such as the applicant’s name, social security 

number, and date of birth—and then sent the information with the manual 

fingerprint cards to the Federal Bureau of Investigations (FBI) for analysis. 

FBI analyzed the fingerprints and sent the results to OPM who then 

forwarded them to IRS. According to FBI and OPM officials, this process 

ideally should have taken about 25 days. However, as we reported in prior 

years, there were often delays in obtaining the results, with some delays 

lasting several months.1

Our Standards for Internal Controls in the Federal Government calls for 

employees to have personal and professional integrity and to maintain a 

level of competence that allows them to accomplish their assigned duties. 

Because IRS employees are entrusted with handling taxpayer information, 

as well as billions of dollars in receipts, ensuring worker suitability through 

a carefully managed recruiting and hiring program is an area demanding 

special attention from IRS management.

However, IRS often did not have the results of fingerprint tests before 

assigning new employees to work because (1) it did not fingerprint 

applicants early in the application process and (2) the process to obtain the 

results of the fingerprint checks took too long. For example, one service 

center did not fingerprint applicants until 2 weeks before the applicants 

reported for work; thus, all 1,414 staff hired at that service center for the 

1999 filing season began working before IRS obtained the results of their 

fingerprint checks. Nationwide, for the seven service centers that provided 

1

See Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs 

Improvement (GAO/AIMD-99-15, November 30, 1998).
Chapter 4

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Information

Page 56 GAO-01-42 IRS Financial and Operational Management

hiring data, 4,835 employees were hired to process receipts and/or taxpayer 

data for the 1999 filing season before IRS obtained the results of their 

fingerprint checks. Results of fingerprint checks for these employees later 

revealed that 65 had unsuitable backgrounds, and these employees were 

terminated from IRS.

By the spring of 1999, IRS had installed electronic fingerprint scanning 

machines at its service centers. These machines were expected to be 

compatible with the FBI’s Integrated Automated Fingerprint Identification 

System (IAFIS). This equipment was installed too late to affect the hiring 

for the 1999 filing season. However, IRS officials expected OPM to be 

connected to IAFIS by about July 1999 so that IRS would be able to obtain 

expedited fingerprint results in time for the 2000 filing season. However, as 

of September 1999, this connection had not yet been established.

In the interim, IRS used the electronic scanning machines to begin 

automating the fingerprint process. The sites that had the equipment began 

taking fingerprints electronically rather than using the manual paper cards 

and ink pads. The machines provide staff with immediate feedback while 

the applicant is still there about whether the fingerprints taken are legible 

or need to be retaken. Once accepted, the fingerprints can be electronically 

sent to OPM. However, because there was still no direct link to IAFIS, OPM 

had to print out the fingerprints and send them by post to the FBI for 

research. As a result, even after the machines were operational, IRS still 

experienced delays in obtaining the results of fingerprint checks. For 

example, at one service center, IRS submitted fingerprints in July 1999 and 

still had not obtained the results at the time of our September 1999 visit 2 

months later. 

To help address such delays, IRS issued guidance on April 30, 1999, 

directing staff to fingerprint applicants as early as possible in the job 

application process. The guidance states that filing season hires should be 

fingerprinted at the time of application or testing, which may occur months 

before new hires report for work. Since this new policy was to be 

implemented by September 1, 1999, it generally did not affect the hiring for 

the 1999 filing season.2

 IRS also recently reported that OPM now has a 

direct connection to IAFIS and will be able to electronically transmit 

fingerprints directly to the FBI for analysis, thus reducing the amount of 

time it takes to obtain the results of fingerprint checks. We will examine the 

2

Most seasonal hiring takes place from about October to March preceding the April peak.
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 57 GAO-01-42 IRS Financial and Operational Management

effect that this system and other initiatives in this area have on IRS hiring 

during our audit of IRS’ fiscal year 2000 financial statements.

We also found that temporary employees at lockbox banks were processing 

taxpayer receipts and data before the results of their fingerprint checks 

were received. IRS reported that it revised the February 2000 Statement of 

Work for lockboxes, requiring that police clearance checks be performed 

for all temporary employees before they are employed. According to IRS, 

these measures were completed in March 2000. We will also monitor 

implementation of this requirement during our fiscal year 2000 audit.

Courier Security IRS made some significant improvements in the security of receipts in 

transport to its financial depository institutions.3

 For example, district 

offices no longer transport deposits on foot or by bicycle, and we did not 

observe couriers leaving deposits unattended nor friends and family 

members accompanying couriers as we had in the past. Nonetheless, we 

continued to find other weaknesses with IRS’ courier services. For 

example, one lockbox courier was not wearing and did not possess an 

identification badge that identified him as an authorized messenger for the 

courier service, which is contrary to IRS’ minimum security standards.4

Also, service center deposits were not always taken directly to the bank in 

accordance with IRS policy. 

Our Standards for Internal Control in the Federal Government states that 

an agency must establish physical control to secure and safeguard assets. 

At IRS, such assets include billions of dollars of cash and checks and 

taxpayer data that are transported daily to depository institutions. 

Therefore, adequate courier security is important for protecting these 

assets. In response to our previously reported findings in this area, IRS 

issued a policy in April 1999 establishing new requirements for courier 

security. 

In general, IRS service centers are surrounded by perimeter fencing with 

gates and posted security guards. The security guards posted at the gates 

3

IRS uses various commercial couriers to transport its daily deposits from the service 

centers and lockbox banks to depository institutions. In addition, district and post-of-duty 

office receipts are transported daily to designated service centers.

4

Internal Revenue Manual (IRM) 1(16)12-4, “Managers Security Handbook.”
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Information

Page 58 GAO-01-42 IRS Financial and Operational Management

are required to verify the identification of visitors and contractors and to 

deny access to the grounds if these individuals are not listed on an 

authorized access list. However, at one service center we visited, the 

security guards did not verify the specific name or check the identification 

of the courier even though he was not the regular courier. In that instance, 

the security guards only verified that the courier wore a uniform with the 

courier company’s name. Once this substitute courier passed the guards 

and gained access to the service center grounds, IRS service center 

officials did not verify the courier’s photo badge before handing him a 

$28 million dollar deposit. Similarly, we noted that the regular courier at 

one of the lockbox banks we visited was not wearing an identification 

badge and did not have a badge with him. Although there was no 

contractual requirement that the courier have a badge, without proper 

credentials that identify authorized couriers and procedures to verify their 

identities, taxpayer receipts and data are exposed to increased risk of 

losses. 

IRS’ April 1999 policy required couriers to go directly to the financial 

depository institution with no stops in between. However, we found that 

couriers at one service center did not do so. Because of the large volume of 

receipts, this service center used two couriers to deliver its receipts in two 

deposits to two separate banks. One courier drove the first deposit 100 

miles from the service center and transferred it to another of his company’s 

couriers to drive the remaining 100 miles to the bank depository. As a 

result, receipts were not adequately secured from the time they were 

received at the service center or lockbox bank until the time they were 

delivered to the financial depository institutions. 

To further improve courier security, IRS issued a revised courier policy in 

November 1999. The revised policy requires that all couriers be bonded or 

insured for $6 million. The policy also requires service centers to 

(1) maintain a typed list of authorized courier service employees on the 

company’s official letterhead with each employee’s name, title, signature, 

and social security number and (2) daily validate the courier employee 

against a company-issued photo identification badge. Furthermore, the 

policy requires that deposits not be transferred to another courier or 

courier vehicle after the deposits are picked up, except in emergency 

situations, and that the courier deliver government packages or containers 

to their destination on the same day he or she receives them from IRS. We 

will follow up in future audits on the implementation of these new 

requirements.
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Manual Tax Receipts and Taxpayer 

Information

Page 59 GAO-01-42 IRS Financial and Operational Management

Other Physical 

Safeguards

We continued to find additional weaknesses in IRS’ controls to safeguard 

and account for tax receipts and taxpayer data similar to those reported in 

prior years. For example, we found personal belongings in areas where 

receipts were processed and certain vulnerable checks stored in unlocked 

containers. GAO’s Standards for Internal Control in the Federal 

Government specifies that an agency establish physical control to secure 

and safeguard vulnerable assets, such as cash and checks. Taxpayer data, 

which contains personal and financial information, should also be 

safeguarded from unauthorized disclosure and use in the commission of 

financial crimes. IRS management has issued new policies and procedures 

as well as memos reiterating existing policies and procedures to address 

some of these weaknesses. However, our visits to IRS service centers, 

lockbox banks, and district and post-of-duty offices revealed that the 

policies and procedures had not been fully implemented or were not being 

consistently followed.

Storing Personal Belongings 

in Receipt Processing Areas 

Previously, we reported that IRS allowed its staff to store personal 

belongings, such as purses and lunch boxes, in receipt processing areas.5

Since some past thefts have involved IRS employees who concealed stolen 

receipts in personal belongings, the restriction of such items from receipt 

processing areas is a prudent business practice. IRS originally cited space 

and cost considerations for lockers as a cause for this condition. However, 

IRS subsequently began installing lockers at service centers that did not 

have them. IRS did not expect to complete installation of lockers at all 

service centers until December 1999. Consequently, during our September 

1999 site visits, we found personal belongings in receipt processing areas at 

two service centers. 

Although installing lockers and requiring their use should address the 

problem at service centers, these measures did not address this issue at 

other locations. For example, at one district office, we observed purses and 

briefcases under counters and workstations where employees received and 

processed receipts submitted by walk-in taxpayers. District management 

informed us that these items belonged to temporary employees who did not 

have assigned cabinets, as permanent staff do, to lock up their personal 

belongings. At one lockbox bank, we observed several employees bringing 

personal belongings into receipt processing areas, even though it was 

5

See GAO/AIMD-99-193, August 4, 1999.
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 60 GAO-01-42 IRS Financial and Operational Management

against lockbox policy. Until the restriction of personal belongings in 

receipt processing areas is fully implemented and enforced, individuals will 

have increased opportunity to conceal stolen receipts and taxpayer data. 

Safeguarding Checks We previously reported weaknesses in the safeguarding of certain receipts 

susceptible to theft, such as returned refund checks and “discovered 

remittances.” The latter are receipts inadvertently forwarded to units 

outside the receipt processing area of the service center and discovered by 

other units within the center. Although IRS took steps to address these 

issues, we found that these weaknesses persisted: 

• Returned refund checks were not immediately voided or stored in 

locked containers. These are Treasury refund checks that taxpayers 

have returned uncashed to IRS, usually to apply against other 

outstanding tax liabilities. In November 1998, IRS issued a 

memorandum to all service centers instructing them to stamp returned 

refund checks “nonnegotiable” as soon as they are extracted from their 

envelopes.6

 However, we found this stamping was not being done as 

soon as the checks were removed from the envelopes and that these 

checks were stored in open bins or unlocked containers. Both lockbox 

and district office guidelines7

 contain similar requirements, yet we 

found unvoided, returned refund checks stored in open baskets at two 

lockbox banks. In some cases, district office units did not void the 

checks before sending them to a service center for processing. Because 

some of these checks may already be endorsed by taxpayers, returned 

refund checks are highly negotiable and susceptible to theft. For 

example, one IRS employee was prosecuted for stealing an endorsed 

returned refund check of over $25,000. 

6

IRS also included this guideline in the January 2000 update of the Internal Revenue Manual.

7

IRS’ procedures manuals Internal Revenue Manual 592(12).2, “Perfection of Remittance” 

and Internal Revenue Manual 21.4.3.3, “Initial Processing of Returned Checks” instruct 

collection support function and customer service staff to void returned refund checks.
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 61 GAO-01-42 IRS Financial and Operational Management

• Discovered remittances were not being logged in upon receipt or stored 

in locked containers. While the receipt processing area is a restricted 

access area, most units outside the receipt processing area are 

accessible to most IRS employees, as well as to contractors, vendors, 

and visitors. Consequently, discovered remittances found outside the 

receipt processing area are more vulnerable to theft or loss. According 

to IRS requirements, employees must secure discovered remittances in 

locked containers if they are not immediately delivered to the receipt 

processing area and record them in a control log as each cash amount or 

check is discovered.8

 Although IRS issued a February 1999 

memorandum to reemphasize the above requirements, in September 

1999, we found discovered remittances stored in open baskets at two 

service centers. At one of these sites, the basket was clearly labeled 

“discovered remittances.” In addition, at three service centers, these 

receipts were not recorded in control logs immediately upon discovery. 

Under these conditions, not only are unsecured discovered remittances 

exposed to greater risk of theft, but the timely detection of such theft is 

hampered if IRS has no record of ever receiving the payment. 

Until IRS fully implements additional safeguards or enforces compliance 

with existing guidelines over unmatched checks, returned refund checks, 

and discovered remittances, such checks will be exposed to greater risk of 

theft. 

Securing Receipts at 

Smaller Field Offices 

We found that district office walk-in units, which assist walk-in taxpayers, 

did not always store receipts in locked containers, record them in control 

logs, or reconcile receipts to control logs to ensure completeness. Although 

IRS had issued a memorandum to its walk-in units reiterating its policy in 

these areas, we found that issuance of a memo did not ensure compliance 

with the guidelines. Furthermore, we found that similar weaknesses 

existed in other units that handle receipts at district and post-of-duty 

offices. Since instances of theft and embezzlement have occurred at district 

offices, it is important that proper controls be instituted to help deter such 

instances.

In March 1999, IRS issued a memorandum to reiterate its current security 

requirements. The memorandum required that staff working in the walk-in 

8

These guidelines are contained in Internal Revenue Manual 38(43) 3.2, section (10) “Service 

Center Deposit Activity.”
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 62 GAO-01-42 IRS Financial and Operational Management

units store cash and noncash payments in a locked container and limited 

the number of employees who had access to such containers. At two 

district office walk-in units, we found that the receipts were stored in 

locked containers, but everyone in the unit could gain access to the 

contents of the containers. At one of these units, as many as 20 employees 

had access to keys for the container. The memorandum also required 

walk-in unit staff to record receipts in control logs before depositing them 

in locked containers and to reconcile the control log to receipts before 

submitting them to another unit for payment processing. However, at three 

district offices visited, walk-in unit staff did not record receipts in control 

logs until the day following receipt. At one district office, walk-in unit staff 

did not reconcile receipts to control logs before submitting them to the 

service center for payment processing. In several instances, local managers 

stated that they were not aware of these requirements.

When we expanded our review beyond the walk-in unit, we found similar 

problems in other units that handle receipts at district and post-of-duty 

offices, such as the Collection and Terminal Remittance units. In these 

units, receipts were stored in unlocked containers or open bins and were 

not always reconciled to control logs before submission to the service 

center. Although the March 1999 memorandum applies only to walk-in 

units, cash and checks are just as vulnerable to theft or loss in these other 

units. 

Until all field offices and units within those offices are required to meet 

consistent, minimum security standards and these standards are effectively 

implemented, the potential for theft of receipts at field offices remains 

unnecessarily high. 
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 63 GAO-01-42 IRS Financial and Operational Management

Protecting Checks Against 

Alteration and Misuse

Although not as inherently vulnerable to theft as cash, checks are still 

negotiable instruments. Therefore, preventive controls are necessary to 

protect tax payment checks IRS receives against alteration and diversion. 

In recognition of this, IRS guidelines require walk-in unit and collection 

support function staff to stamp checks and money orders with the words 

“United States Treasury” if the payee section is blank or made out to “IRS” 

to reduce the potential for altering the name of the payee and thus the 

potential for theft.9

 However, we found this stamping was not always done 

at three district offices we visited. Since IRS has identified instances in 

which stolen checks made out to “IRS” were easily altered and cashed, this 

control is necessary to help prevent the theft of such checks.

IRS guidelines require the district collection support function to endorse 

the back of each check with the words “For Credit to U.S. Treasury.”10

While not required of other units, such as the walk-in unit, similar 

requirements should be followed to better safeguard checks received from 

taxpayers. We observed that staff from various units at four district offices 

did not restrictively endorse checks before forwarding them to the service 

centers for payment processing. While not required at walk-in units, this 

control is even more critical now that district offices no longer deposit 

checks directly to banks but instead forward the checks to service centers 

where the checks are exposed to additional handlers before they are finally 

deposited. 

9

Internal Revenue Manual 21.1.6.6.1 “Non-Cash Payments” and Internal Revenue Manual 592 

(12).2 “Perfection of Remittances” provide the stamping guidelines for checks received by 

walk-in unit and collection support staff.

10Internal Revenue Manual 5923.2 “Endorsement to be Shown on Remittances” contains the 

guidelines for restrictive endorsement of checks.
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 64 GAO-01-42 IRS Financial and Operational Management

Conclusions Although most of the $1.9 trillion in fiscal year 1999 tax revenue was 

collected electronically or by depository institutions, taxpayers paid almost 

$400 billion of the total directly to an IRS service center, district or post-ofduty office, or lockbox bank. Consequently, the potential for financial loss 

and the resultant taxpayer burden is great if these receipts and the related 

taxpayer data are not adequately protected. If a deposit were lost or stolen, 

IRS would have to expend substantial efforts to initiate actions to recover 

stolen checks and prevent them from being negotiated. Even if the stolen 

checks were not cashed, they could be used for check cloning schemes,11

and sensitive personal information on these checks could be used to 

perpetrate identity fraud. Such an incident of loss or theft could result in 

the loss of funds and other financial damage, imposing a considerable 

burden on taxpayers and greatly reducing the taxpayers’ confidence in IRS’ 

ability to safeguard tax receipts and taxpayers’ personal data.

We recognize that the inherent risk of theft or loss of taxpayer receipts and 

data can never be completely eliminated and that IRS made significant 

progress in addressing many of the weaknesses we previously reported. 

Nonetheless, further improvements, which would not require substantial 

effort or resources to implement, could reduce the risk even further and 

help prevent the type of thefts IRS reported in fiscal year 1999. Overall, the 

types of weaknesses we have identified can be fixed with short-term 

corrective actions that will go a long way toward reducing taxpayer burden 

and ensuring the public that its money and personal information are being 

adequately protected. Therefore, it is imperative that IRS make further 

improvements to mitigate these losses.

Recommendations To improve controls at IRS lockbox banks, we recommend that IRS work 

with Treasury’s Financial Management Service (FMS) to revise the current 

lockbox contracts to emphasize security requirements and to specifically 

require that

• fingerprint checks be completed before employees begin working,

11Once a perpetrator obtains information from a valid check, such as the bank and account 

number, that information can be used to “clone” or duplicate the original check into multiple 

fraudulent blank checks. These blank checks can then be made out to different payees, the 

signature forged, and the checks deposited into the perpetrator’s accounts.
Chapter 4

Further Improvements Needed to Safeguard 

Manual Tax Receipts and Taxpayer 

Information

Page 65 GAO-01-42 IRS Financial and Operational Management

• temporary employees be subjected to background checks that are 

consistent with those required for IRS employees, and

• at a minimum, the lockbox bank courier services meet the service 

center requirements contained in IRS’ November 16, 1999, policy.

To obtain a minimum level of consistency in the policies and procedures 

related to the safeguarding of receipts, all IRS units receiving collections 

should have consistent policies and procedures to safeguard and account 

for cash receipts.

To help ensure that staff consistently comply with new policies and 

procedures issued, we recommend that IRS perform and document 

periodic observations and reviews to monitor and enforce compliance with 

policies addressing the safeguarding of cash receipts. 

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations related to safeguarding manual taxpayer receipts and 

taxpayer information and provided information regarding initiatives to 

address them. We will evaluate the effectiveness of these initiatives during 

future audits. IRS also provided additional detailed comments about the 

specific findings in this chapter, which we have incorporated where 

appropriate. The letter from IRS’ Deputy Commissioner of Operations 

responding to this report is included in appendix II.
Page 66 GAO-01-42 IRS Financial and Operational Management

Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment Chapte5r

During fiscal year 1999, IRS continued to have seriously flawed systems 

and controls over its property and equipment (P&E). IRS was not recording 

P&E transactions in its asset records as they occurred and was not 

maintaining adequate records for capital leases, leasehold improvements, 

or major systems. In addition, IRS had serious deficiencies in the systems 

that track its acquisitions and disposals of P&E. IRS’ procedures were also 

not effective in ensuring that acquisitions and disposals were promptly and 

accurately recorded into those systems. As a result, IRS was unable to rely 

on its P&E subsidiary records to account for or report on its inventory of 

P&E assets. 

IRS has known of these fundamental weaknesses since at least 1983.1

However, its primary efforts during fiscal year 1999 focused on procedures 

to derive year-end balances for its financial statements, rather than on 

implementing permanent solutions to its P&E problems. IRS spent 

significant internal resources and over $1 million on contracting services to 

derive year-end P&E balances for fiscal year 1999. These efforts resulted in 

an estimate of $1.3 billion in net P&E at September 30, 1999—an increase of 

more than $1 billion (600 percent) over IRS’ September 30, 1998, balance. 

Federal accounting standards permit estimation of the value of existing 

P&E if necessary historical information has not been maintained. However, 

this estimate of the P&E balance was a one-time effort and is not the 

solution to the fundamental weaknesses that remain. 

IRS’ Accounting 

System 

IRS does not have an integrated property management system that records 

P&E additions and disposals as they take place. Its two inventory systems 

that serve as subsidiary records for P&E are not linked to the general 

ledger. In addition, P&E transactions are not recorded on IRS’ asset records 

as they occur. Instead, IRS relies on extensive manual procedures to 

determine adjustments to P&E general ledger accounts at fiscal year-end. 

Because of these deficiencies, IRS had to hire a contractor to develop the 

P&E balance as of September 30, 1999, for financial reporting purposes. 

1

We have reported system and management control weaknesses 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 Federal Managers’ 

Financial Integrity Act of 1982 report.
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 67 GAO-01-42 IRS Financial and Operational Management

Accounting System for 

Recording P&E Costs

IRS’ accounting system was not designed to capture certain key 

information that is necessary to properly record and report P&E balances 

in accordance with federal accounting standards. IRS initially records P&E 

purchases as expenses rather than as assets. This includes transactions 

related to capital leases, leasehold improvements, or the development of 

major systems. Statement of Federal Financial Accounting Standards

(SFFAS) No. 6 states that P&E includes assets acquired through capital 

leases2

 and leasehold improvements and that the cost of general P&E 

acquired under a capital lease shall be equal to the amount recognized as a 

liability for the capital lease3

 at its inception. However, IRS did not have 

procedures to identify and record either the assets or the corresponding 

liability that results from capital lease agreements as these transactions 

occurred. Before fiscal year 1999, IRS recorded no capital leases on its 

financial statements. In addition, IRS’ method for recording lease costs on 

its two P&E systems was inconsistent. IRS records leased automated data 

processing (ADP) equipment at the monthly lease cost, but non-ADP 

equipment at the annual lease cost. There was no distinction made between 

assets acquired under capital leases and operating leases. 

Because IRS’ systems did not record the information needed to properly 

report financial information on capital leases, IRS did not report any 

liability for capital leases on its accounting records in fiscal year 1998 or 

prior years. In fiscal year 1999, IRS engaged contractors to identify and 

compile financial information on capital lease agreements. The contractors 

identified capital lease liabilities of $65 million that had not been 

recognized in IRS’ accounting records because of IRS’ inadequate 

accounting systems. Contractors were able to compile IRS’ capital lease 

liabilities by gathering lease agreements and reviewing them to determine if 

the agreements should be properly classified as operating or capital leases. 

IRS did not adjust its inventory records to record the asset cost at the 

amount recognized as a liability. Instead, IRS valued the related P&E assets 

in the statistical estimate of P&E. 

2

Capital leases are leases that transfer substantially all the benefits and risks of ownership 

to the lessee.

3

SFFAS No. 5, Accounting for Liabilities of the Federal Government (February 28, 1997), 

states that the liability for capital leases shall be the lesser of the net present value of the 

lease payments or the fair value of the asset. 
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 68 GAO-01-42 IRS Financial and Operational Management

To meet its reporting requirements, at fiscal year-end, IRS had to analyze 

expenditures charged to repairs and space alterations to determine 

whether the expenditures should be recorded as leasehold improvements. 

This analysis is labor intensive and time consuming because it requires 

obtaining and reviewing documentation for a full year of expenditures. In 

fiscal year 1999, IRS hired contractors to perform this analysis. The 

analysis took several months to complete and, based on our review, needed 

significant changes to (1) correct prior year inaccuracies in the 

amortization of leasehold improvements and (2) adjust the useful life to 

better reflect IRS’ utilization of leasehold improvements. 

IRS spent hundreds of millions of dollars to develop the major systems that 

it uses to perform its mission. However, in fiscal year 1998 and prior years, 

IRS did not report any development cost for major systems on its financial 

statements. During our fiscal year 1998 audit, we identified two major 

systems that had incurred substantial development costs.4

 To meet fiscal 

year 1999 reporting requirements, IRS hired a contractor to analyze prior 

years’ expenditures charged to its major projects and to compile costs by 

major system. The contractor identified fiscal year 1998 and 1999 

development costs totaling $104 million for the two systems we identified 

in 1998. However, this initial amount did not include costs associated with 

these two major systems that were incurred by IRS during fiscal year 1997. 

We also identified three additional major systems that had significant 

associated development costs. Based on this, IRS’ contractor determined 

that IRS had actually expended $288 million to develop the five major 

systems. In addition, we found that $34 million recorded as work-inprocess should have been allocated to portions of the major systems that 

were complete and in use. 

During their review, the contractors hired by IRS to compile the cost for the 

major systems found that expenditures were not always charged to the 

correct accounting codes. The contractors found that of 50 expenditures 

reviewed, 3 (6 percent) were charged to an incorrect account. 

Expenditures totaling $1.5 million for ADP equipment had been improperly 

charged to data processing services. The contractors also found that 

charges to accounting codes totaling $5.7 million, or 8 percent of the 

$71 million total for the Integrated Submission and Remittance Processing 

System, did not agree with supporting documentation. Accurately 

4

See Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage 

Operations (GAO/AIMD-99-196, August 9, 1999).
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 69 GAO-01-42 IRS Financial and Operational Management

recording expenditures to the various accounting codes is important 

because IRS uses these records to determine major system costs at fiscal 

year-end. If expenditures are not charged to the correct accounting codes, 

IRS will be unable to rely on those codes to compile the cost of major 

systems. 

In addition, IRS is undertaking a major initiative to modernize its outdated 

systems using a Prime Systems Integrated Services (PRIME) contract. To 

date, IRS has received $506 million in appropriations to fund its systems 

modernization and has requested another $494 million. However, during 

fiscal year 1999, IRS did not have a system in place to capture all costs 

related to its systems modernization efforts.

IRS also did not have procedures to reliably report the cost of internally 

developed software, as federal accounting standards will require in fiscal 

year 2001. SFFAS No. 10, Accounting for Internal Use Software, requires 

federal agencies to capitalize the cost of internal use software, whether it is 

purchased externally, developed by contractor, or developed internally. IRS 

spends millions of dollars each year to develop the application and 

operating software it uses in its operations. Beginning October 1, 2000, IRS 

needed to have procedures in place to track and report the costs of its 

software projects. 

Tracking P&E IRS’ records for physically tracking its P&E continued to be inadequate 

during fiscal year 1999. IRS maintains two separate automated systems to 

track its P&E: the Property Asset Tracking System (PATS), which tracks 

acquisitions and disposals of non-ADP assets, and the Integrated Network 

and Operations Management System (INOMS), which tracks acquisitions 

and disposals of ADP equipment. However, in fiscal year 1999, as in prior 

years, we found these systems records to be unreliable because IRS’ 

procedures were not effective in ensuring that acquisitions and disposals 

were promptly and accurately recorded.

IRS owns hundreds of thousands of P&E items at over 1,000 locations 

throughout the country. On a daily basis, new items are received, old ones 

disposed of, and others transferred to new locations. Maintaining accurate 

records and control for a vast inventory that is constantly changing 

requires that IRS have in place clear, well-documented procedures; 

personnel who are adequately trained and knowledgeable of IRS’ 

procedures; and adequate management oversight. IRS’ policies and 

procedures for control and inventory of P&E are documented in various 
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 70 GAO-01-42 IRS Financial and Operational Management

manuals and guidebooks, which have been updated by the issuance of 

policy memorandums. Consequently, personnel responsible for 

maintaining inventory records did not have a comprehensive, authoritative 

reference source that specified policies and procedures for the accounting 

and reporting of P&E. In addition, IRS has not established a senior-level 

position with overall responsibility for the accounting and reporting of 

P&E. 

IRS relies on individuals across the country to inform those responsible for 

maintaining the PATS and INOMS records of any P&E additions, transfers, 

or disposals. Individuals responsible for purchasing, receiving, and 

disposing of P&E notify the individuals responsible for recording P&E 

transactions by telephone, fax, or e-mail that P&E has been received, 

moved, or disposed of. However, there was no effective process to ensure 

that the individuals responsible for updating the P&E records ever received 

accurate or timely notification of P&E transactions. IRS’ inventory 

procedures state that new assets should be recorded within 10 working 

days of receipt, but we found that some P&E purchases were not promptly 

recorded in INOMS or PATS. For example, three automated mailprocessing systems, costing $865,000 each, were installed from January 

through April 1999, yet they were not recorded on the PATS inventory 

records as of September 1999. Tests of IRS’ P&E records indicate that 

unrecorded P&E was widespread throughout IRS during fiscal year 1999. 

For example, contractors hired by IRS to develop a statistical projection of 

the fiscal year 1999 P&E balance found unrecorded P&E at all 15 sites they 

tested.

We also found that some locations were not recording P&E when it was 

received but when it was placed in use, which in some cases was months 

later. OMB Circular A-123 states that each agency shall establish and 

maintain control of assets. However, at one location, we found ADP 

equipment at a cost of $1.8 million that was received on September 30, 

1999, but still had not been recorded on the inventory system at December 

1999. At another location, 60 telecommunications equipment items costing 

$2,600 each were received in August 1999, but had not been recorded as 

late as December 1999 because the equipment had not been installed. 

IRS’ ability to maintain reliable P&E records was further compromised 

because its procedures were not adequate to ensure that inventory records 

were promptly updated when items were disposed of or moved to other 

locations. Consequently, IRS was unable to locate some of the P&E items 

recorded on PATS and INOMS. The contractor hired by IRS also found that 
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 71 GAO-01-42 IRS Financial and Operational Management

some P&E items on IRS’ inventory records could not be located. At various 

locations, we found computers, printers, software, videoconferencing 

equipment, and a forklift that were not recorded on IRS’ P&E inventory 

records. In addition, property is sometimes disposed of without having 

inventory records updated to reflect the disposal. For example, at one 

location we visited, a leased automobile that had been disposed of in April 

1999 was still on the inventory records on June 30, 1999. At another 

location, 200 disposed personal computers were still on IRS’ inventory 

records. Accurate records are essential for maintaining control over P&E 

to ensure that assets are properly and effectively used and not 

misappropriated. 

TIGTA has reported similar weaknesses in IRS’ controls over its P&E, such 

as the following.

• In February 1999,5

 TIGTA reported that a significant amount of 

telecommunications equipment sampled from the floor of IRS sites was 

not recorded on the inventory records. At the Tennessee Computing 

Center, only 4 of 27 telecommunications equipment items were 

recorded, and at the Cleveland Customer Service site, only 6 of 55 items 

were recorded. 

• In December 1999,6

 TIGTA reported that IRS’ inventory significantly 

understated the amount of telecommunications equipment in use 

throughout IRS. When it compared samples of telecommunications 

equipment at 24 IRS sites to the inventory records, TIGTA found that 

only 45 percent of the items at the sites were included in the inventory. 

P&E Data Entry IRS’ data entry controls did not adequately ensure that the entries made to 

inventory records were accurate and complete. Additions, deletions, and 

edits to inventory records were not reviewed to ensure that entries were 

valid and accurate. We found numerous errors in the data entered on IRS’ 

inventory records. For example, we found a software license that cost over 

$8 million that was recorded twice. 

5

Review of the Internal Revenue Service’s Year 2000 Efforts to Inventory 

Telecommunications and Commercial Off-the-Shelf Products (Reference No. 092402, 

February 10, 1999). 

6

The Internal Revenue Service Needs to Significantly Improve the Inventory Used to 

Monitor Its Year 2000 Conversion Efforts (Reference No. 2000-20-021, December 1999).
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 72 GAO-01-42 IRS Financial and Operational Management

In addition, we found numerous items on IRS’ inventory records with 

incorrect data, such as incorrect serial or model numbers and 

manufacturer names. We also found errors in the recorded status of P&E. 

For example, at one location, two mail processing equipment items that 

had been disposed of were still on the inventory. In addition, two copy 

machines were still on the inventory records even though the lease had 

expired and the equipment had been replaced; this was due to an error in 

recording the code to reflect the disposal of the equipment. 

Estimate of P&E 

Balance 

IRS has reported deficiencies in its property management records since 

1983. In its fiscal year 1999 Federal Managers’ Financial Integrity Act of 

1982 (FMFIA) report, IRS again reported that it had a material weakness in 

procedures and controls over the use and accountability of its P&E. IRS 

also reported that without a reliable system of accounting for its property, 

it is unable to determine if property is being properly used or 

misappropriated. Without current and accurate P&E records, IRS 

management does not have the information that it needs to effectively 

manage and safeguard its assets. A recent example of the impact of not 

having reliable P&E records occurred when IRS’ Chief Information Officer 

had to have a costly inventory of computer equipment and software 

conducted to ensure that all of IRS’ critical systems were Year 2000 

compliant.

Because of the weaknesses described above, IRS was unable to rely on its 

accounting and P&E inventory systems during fiscal year 1999. SFFAS No. 

6 permits estimation of the value of existing P&E if necessary historical 

information has not been maintained. Therefore, in fiscal year 1999, as 

noted previously, IRS hired a contractor to develop a balance for its P&E 

based on a statistical estimate and to compile the historical costs for 

leasehold improvements, capital leases, and major systems. At a cost of 

over $1 million, IRS determined that a reasonable estimate of its P&E 

balance as of September 30, 1999, was $1.3 billion—nearly a 600-percent 

increase over the $164 million reported on its prior-year balance sheet.7

 As 

shown in figure 2, prior year P&E at IRS was materially understated.

7

We reported in our audit of the fiscal year 1998 financial statements that the P&E balance 

was likely materially understated. See GAO/AIMD-99-75, March 1, 1999.
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 73 GAO-01-42 IRS Financial and Operational Management

Figure 2: P&E Account Balances—Comparison Between Fiscal Years 1998 and 1999 

Source: IRS’ fiscal year 1998 and 1999 financial statements.

Although we found the estimate to be materially reliable, this estimate of 

the P&E balance was a one-time effort that resulted in a balance only at a 

point in time; it is not the solution to the fundamental weaknesses that 

remain. Before IRS undertook its costly year-end estimate of P&E, we 

recommended that management first ensure that systems and controls 

were in place to reliably control and report its P&E assets. At the 

conclusion of our fieldwork, IRS had yet to derive a means of sustaining the 

one-time effort.

Conclusion The pervasive weaknesses in systems and management controls over P&E 

that we first reported in our audit of IRS’ financial statements in fiscal year 

1992 continued to exist in fiscal year 1999. As a result, IRS invested 

substantial internal personnel resources, as well as significant funds to 

procure contracting services, to derive year-end balances for its fiscal year 

1999 financial statements. While this approach improved the reliability of 

IRS’ reported September 30, 1999, year-end financial information, it did not 

address the underlying deficiencies in IRS’ systems and controls. Until IRS 

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Capital

leases

Leasehold

improvements

Major

systems

P&E

estimate

Total

P&E

FY 1998 FY 1999

Millions of dollars
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 74 GAO-01-42 IRS Financial and Operational Management

corrects the fundamental problems with its systems and controls, it will not 

have timely, reliable information to properly manage and report on the 

hundreds of millions of dollars that it spends annually on P&E and the 

billions of dollars it will be spending to modernize its computer systems. 

Recommendations We recommend that the Commissioner of Internal Revenue implement the 

following interim measures to help ensure proper accounting and 

accountability over fiscal year 2000 and future P&E additions and 

disposals. 

• Develop a subsidiary ledger for leasehold improvements and implement 

procedures to record leasehold improvement costs as they occur.

• Implement procedures and controls so that expenditures for P&E are 

charged to the correct accounting codes to provide reliable records for 

extracting the costs for major systems and leasehold improvements. 

• Establish a system to capture all costs related to the PRIME effort to 

modernize IRS’ computer systems.

• 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.

• 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.

• Assign a senior-level position with overall responsibility for verifying 

that P&E records are accurate and P&E are properly accounted for.

• 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.

• 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 

received, in accordance with SFFAS No. 6, rather than when P&E is 

placed in service. 

• 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.
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 75 GAO-01-42 IRS Financial and Operational Management

• Review, and correct as necessary, data in inventory records, such as 

serial or model numbers and manufacturer names, during periodic 

inventories of P&E.

• 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. 

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations related to P&E and provided information regarding 

initiatives to address many of them. We will evaluate the effectiveness of 

these initiatives during future audits. However, IRS disagreed with our 

recommendation that it establish a system to capture all costs related to 

the “PRIME” effort to modernize IRS’ computer systems. IRS noted that 

PRIME is not a project but a contractual instrument for specific projects, 

and that related costs should not be capitalized. However, the intent of our 

recommendation was that IRS establish a system to accumulate full costs 

related to all projects initiated under PRIME, whether capitalizable or not, 

so that IRS will be able to determine the full cost of its systems 

modernization initiative. This is particularly of interest to congressional 

oversight committees who are closely monitoring IRS’ systems 

modernization.

IRS also indicated that our discussion of its P&E did not appropriately 

reflect (1) its approach to property valuation in fiscal year 1999 or (2) the 

pooling concept IRS subsequently adopted. With respect to the first issue, 

we disagree. Our report discusses IRS’ use of a contractor and statistical 

sampling methodology to develop a reliable P&E balance at year-end. 

However, as our report also states, this approach was made necessary by 

the pervasive and long-standing weaknesses in IRS’ controls over its P&E 

that rendered it unable to rely on the detailed P&E records that it had been 

using to support its general ledger P&E balance in previous years. The 

second issue, IRS’ current pooling approach, is not discussed in our report 

because (1) it was adopted after the period covered by this report and 

(2) similar to the statistical estimation process used by IRS in fiscal year 

1999, IRS’ problems current pooling concept derives a reliable balance only 

at a point in time, as well as deriving estimates of additions and 

dispositions. It is not a solution to IRS’ establishing and maintaining 

accountability over P&E that is the subject of this report. IRS’ 

implementation of this pooling approach will be reviewed as part of our 

audit of IRS’ fiscal year 2000 financial statements.
Chapter 5

Inadequate Accounting for and Tracking of 

Property and Equipment

Page 76 GAO-01-42 IRS Financial and Operational Management

IRS also provided additional detailed comments about the specific findings 

in this chapter, which we have incorporated where appropriate. The letter 

from IRS’ Deputy Commissioner of Operations responding to this report is 

reprinted in appendix II.
Page 77 GAO-01-42 IRS Financial and Operational Management

Chapter 6

Ineffective Controls Over Appropriated Funds Chapte6r

Because of material weaknesses in internal controls over budgetary 

resources and lack of cost accounting capability, IRS could not reliably 

determine or report how it expended its budgetary resources. IRS was 

unable to generate reliable cost-based performance or budgetary 

information to enable management, the Congress, or the public to assess 

the effectiveness of its operations. Because of these weaknesses, IRS was 

also unable to reliably assess the level of additional resources it believes it 

needs to achieve desired future results. Thus, IRS is unable to provide 

assurance to the Congress concerning the benefits to be expected if the 

requested funding is provided. 

IRS’ Budgetary 

Transactions

IRS did not ensure that budgetary activity and balances reported on its 

financial statements were reliable or that its obligations did not exceed its 

available budgetary resources. This condition contributed to our inability 

to determine whether four of IRS’ six financial statements for the fiscal 

year ending September 30, 1999, were reliable, as well as whether the 

components of net position as of September 30, 1999, were reliable. More 

important, IRS did not have current, accurate budgetary information 

needed to effectively manage operations on an ongoing basis. We found 

that

• deobligations1

 were not performed in a timely manner, 

• obligations were not liquidated upon receipt of goods and services as of 

September 30, 1999, and

• IRS did not promptly charge all expenditures against the appropriations 

authorized to pay them.

We also found weaknesses in IRS’ automated controls over budgetary 

resources. IRS has indicated that these problems have been resolved. We 

will follow up in future audits to assess IRS’ response to this issue.

1

Deobligations are downward adjustments of previously recorded obligations. 

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

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

determined to be invalid, or previously recorded estimates were reduced.
Chapter 6

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Funds

Page 78 GAO-01-42 IRS Financial and Operational Management

Deobligating Funds IRS was not effectively identifying obligated funds that were no longer 

needed and should have been deobligated. According to the IRM, 

unliquidated obligations may be deobligated at any time during the year if it 

is known that the obligations are no longer valid or needed. Furthermore, 

IRS policy requires financial plan managers2

 to review aged obligation 

reports on a quarterly basis and identify all obligations that are no longer 

active and thus would need to be deobligated. Our testing of undelivered 

orders3

 and a previous IRS internal audit report4 indicate that the 

procedure was not effectively executed. We also reported in fiscal year 

19945

 that obligations were not being reviewed and recommended that IRS 

periodically review them, adjusting the records to amounts expected to be 

paid.

We found 11 cases (8 percent) from a statistical sample of 130 undelivered 

orders at September 30, 1999, in which IRS did not deobligate undelivered 

orders that were no longer valid. For instance, we found $2.8 million for an 

undelivered order relating to computer services that was still obligated 

even though the services had been completed and the last invoice for these 

services was paid in fiscal year 1996. In another example, we found a 

$1 million undelivered order relating to lockbox fees for fiscal year 1998, 

when all services had already been delivered and paid for.

2

Financial plan managers are responsible for managing the spending plans under their 

control.

3

Undelivered orders represent the value of goods and services that were ordered and 

obligated but have not been received. This term is synonymous with unliquidated 

obligations.

4

Review of the Need to Deobligate Unliquidated Obligations (IRS Internal Audit Report No. 

084602, June 26, 1998).

5

Financial Management: IRS Does Not Adequately Manage Its Operating Funds 

(GAO/AIMD-94-33, February 9, 1994).
Chapter 6

Ineffective Controls Over Appropriated 

Funds

Page 79 GAO-01-42 IRS Financial and Operational Management

Before we tested the ending undelivered orders, we tested the beginning 

(September 30, 1998) undelivered orders balance to help IRS identify and 

correct any errors that might exist in the ending (September 30, 1999) 

balance. We found 7 cases (16 percent) from a statistical sample of 45 

undelivered orders as of September 30, 1998, that should have been 

deobligated. For example, for $1 million worth of a fiscal year 1997 printing 

obligation, no expenditures had been incurred and, according to IRS, none 

would be incurred in the future against the obligation. IRS recorded and 

charged other obligations for printing services and, during the deobligation 

process, overlooked that this outstanding obligation was no longer needed. 

In another case, an undelivered order for an employee’s relocation 

expenses remained on IRS’ accounting records although the relocation was 

completed in fiscal year 1997 and no further charges were expected. Based 

on our findings, IRS performed a year-end analysis of outstanding 

undelivered orders and, as shown in figure 3, deobligated $79 million worth 

of obligations from budget fiscal years6

 1995 to 1997. 

6

Budget fiscal year is the fiscal year to which the obligation was charged.
Chapter 6

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Funds

Page 80 GAO-01-42 IRS Financial and Operational Management

Figure 3: Budget Fiscal Year Components of $79 Million Deobligation

Source: Unaudited IRS data.

However, this action did not completely resolve the issue, as evidenced by 

our year-end testing. Figure 4 shows the undelivered orders as of 

September 30, 1999, classified by ending budget fiscal year. As shown in 

this figure, 14 percent of the total undelivered orders of about $950 million 

had ending budget fiscal years of 1998 or earlier. 

23

25

31

0

5

10

15

20

25

30

35

Budget fiscal year

1995 1996 1997

Dollars in millions
Chapter 6

Ineffective Controls Over Appropriated 

Funds

Page 81 GAO-01-42 IRS Financial and Operational Management

Figure 4: Undelivered Orders as of September 30, 1999, by Ending Budget Fiscal 

Year

Source: Unaudited IRS data.

Our testing and the $79 million deobligation of old undelivered orders 

performed by IRS indicates that the older the undelivered orders are, the 

more likely that they are not valid. For example, of the September 30, 1998, 

balance of undelivered orders, approximately $123 million were from 1997 

or before, and IRS deboligated $79 million (or 64 percent) of these orders 

after performing the analysis we recommended. 

By not promptly deobligating funds, IRS affected its ability to reliably 

report on the status of its budgetary resources and to use its financial 

resources effectively. For example, had IRS deobligated the funds within 

the period of availability, the funds could have been used for other 

initiatives and programs. In addition, for the past several years, IRS has 

been given legislative authority to carry forward 50 percent of the prior 

year’s unobligated balances available for salaries and expenses to the 

current year. In fiscal year 1999, IRS carried over $5.6 million from fiscal 

year 1998. To the extent that IRS failed to deobligate fiscal year 1998 

undelivered orders, it could not include these amounts in the unobligated 

funds to be carried forward to the next year.

14%

40%

44%

2%

1998 or prior 1999 2000/2001 no year

About $950 million total
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Ineffective Controls Over Appropriated 

Funds

Page 82 GAO-01-42 IRS Financial and Operational Management

Liquidating Obligations IRS records an obligation when it orders goods and services for use in its 

operations. Outstanding obligations should be liquidated when goods and 

services are received, with simultaneous recording of accounts payable. 

IRS’ year-end procedures require program personnel to review outstanding 

obligations to determine whether goods and services have been received 

before year-end. However, we found that program office personnel 

generally did not provide receipt and acceptance acknowledgment to the 

accounting office until they received an invoice. Often, IRS did not receive 

invoices until months after the goods were delivered or the services had 

been performed. In these situations, IRS did not attempt to estimate a 

liability even though the charges may have been for services that were 

performed consistently from month to month and were known to have 

been received. We also found several cases in which IRS personnel used 

the date that they entered the receipt and acceptance into the accounting 

system as the acceptance date rather than the actual date the goods and 

services were received. For example, we found several cases where IRS 

personnel entered receipt and acceptance in October 2000 for goods and 

services received as of September 30, 1999. As a result, in addition to 

undelivered orders being overstated, the accounts payable was understated 

at year-end.

We found 42 cases (32 percent) from a statistical sample of 130 undelivered 

orders at September 30, 1999, in which IRS had already received the goods 

or services, yet the amount still was not removed from IRS’ undelivered 

orders. For example, we found $16 million in unliquidated obligations for 

fiscal year 1999 lockbox bank fees at year-end that IRS still showed as an 

undelivered order although services were performed during the fiscal year. 

In another case, we found $2.2 million of computer services that had been 

received before September 30, 1999, but which were still shown as an 

undelivered order. In both cases, IRS did not receive the corresponding 

invoices until well after the fiscal year-end, but did have a basis on which to 

estimate a liability. In another case, a $7.5 million licensing agreement 

entered into in fiscal year 1999 was still shown as an undelivered order 

because receipt and acceptance was entered into the accounting system in 

October 1999 and the input date was incorrectly used as the acceptance 

date. The accounts payable and corresponding liquidation of the 

undelivered order were recorded in fiscal year 2000. These results were 

consistent with our testing of accounts payable, where we found a 

significant number of cases in which liabilities were not recorded for goods 

and services received on or before September 30, 1999. 
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Page 83 GAO-01-42 IRS Financial and Operational Management

Recording Certain 

Expenditures Against 

Appropriations

As we previously reported,7 IRS did not promptly record all expenditures in 

the accounts of the appropriations authorized to pay them. To help ensure 

that funds are actually used for the appropriated purposes and within 

prescribed dollar limits, agencies need to promptly match disbursements 

against applicable obligations. However, for some expenditures for which 

the funding information, supporting documentation, or both are 

incomplete, IRS recorded the transactions in suspense accounts while 

awaiting supporting documentation. Reasons for placing items in the 

suspense account included (1) not having received a breakdown of the 

charges from the billing agency, (2) not having a receipt and acceptance 

certification, and (3) not having sufficient funds obligated.8

 IRS 

substantially improved its handling of suspense items. In fiscal year 1998, 

IRS’ records showed a net9

 suspense balance of $140 million. IRS was able 

to reduce the net suspense balance to about $8 million as of September 30, 

1999. Nonetheless, transactions continued to remain in the suspense 

account for months. 

It is unclear just how long some of the items had been in suspense as a 

result of inconsistencies between IRS’ general ledger and a log IRS 

maintains of suspense items. The general ledger reflects balances in the 

suspense account dating back as far as fiscal year 1989. However, IRS’ log 

of suspense account items shows transactions dating back to fiscal year 

1997. Thus it is unclear precisely how old some of the items were that made 

up the $8 million in the suspense account at September 30, 1999.

Most of the dollar value remaining in the suspense account related to 

transactions in which another federal agency charged IRS for goods or 

services using Treasury’s electronic bill-paying system. For example, IRS 

had a number of charges from the General Services Administration (GSA) 

that were recorded in its suspense account from 1996. In one case, GSA 

charged IRS $832,000 on November 21, 1996, for motor vehicle purchases. 

IRS did not begin clearing the transaction out of the suspense account until 

July 29, 1999, and a balance of $268,000 remained as of September 30, 1999. 

In another case, GSA charged IRS $820,000 on August 23, 1996, for supplies. 

7

See GAO/AIMD-99-196, August 9, 1999.

8

If IRS receives an invoice for more than 10 percent above the obligated amount, the 

transaction will be posted to the suspense account until additional funds are obligated.

9

Net amount represents the net of debits (positive) and credits (negative).
Chapter 6

Ineffective Controls Over Appropriated 

Funds

Page 84 GAO-01-42 IRS Financial and Operational Management

IRS did not begin recording the charge until October 29, 1999, because it 

first had to record an increase to the obligation to cover the expenditure, 

which was done on October 14, 1999. Transactions where sufficient funds 

have not been obligated are of particular concern because, until the funds 

are obligated, IRS does not have reliable information on the status of its 

budgetary resources. Also, to the extent that there were outstanding 

amounts in the suspense account for which obligations had not been 

recorded, obligations would be understated.

Until the transactions in IRS’ suspense account are recorded in the proper 

appropriation account, IRS cannot ensure that its outstanding obligations 

and disbursements do not exceed available budget authority. In addition, 

IRS cannot report reliable budget information until its suspense account is 

cleared. 

Fund Balance With 

Treasury

Despite substantial efforts on its part, IRS was unable to reconcile its 

administrative fund balance with Treasury accounts10 throughout fiscal 

year 1999. Although we were able to conclude that the amount reported by 

IRS on its balance sheet for fund balance with Treasury was reliable at 

September 30, 1999, unresolved reconciling items continue to raise serious 

questions about IRS’ ability to ensure that its operating funds are being 

properly spent and that it complies with the laws governing its use of 

budget authority. Treasury policy and prudent financial management 

practices require an agency to reconcile its fund balance with Treasury 

accounts to Treasury’s records monthly. These reconciliations should 

identify differences between IRS’ and Treasury’s records. Resolving such 

differences could involve adjustments to either IRS’ records, Treasury’s 

records, or both. This process, while more complex, is similar to 

companies or individuals reconciling their checkbooks to monthly bank 

statements.

10Like other agencies, IRS records administrative budget spending authorizations in the 

asset account titled “Fund balance with Treasury.” The funds maintained in the fund balance 

with Treasury account are used to fund IRS’ operations. IRS’ fund balance with Treasury 

account includes 43 appropriation accounts. IRS increases or decreases these accounts as it 

receives or disburses funds.
Chapter 6

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Funds

Page 85 GAO-01-42 IRS Financial and Operational Management

We reported IRS’ failure to promptly and routinely reconcile its fund 

balance with Treasury accounts in previous years, dating back to 1992, the 

first year that IRS’ financial statements were subject to audit. We had 

previously recommended that IRS perform prompt reconciliations, 

including investigating and resolving reconciling items. In fact, we reported 

in our fiscal year 1996 audit report11 that IRS had completed a major effort 

to clear up unresolved differences between its records and Treasury’s that 

dated back years. In that effort, IRS used the help of contractors to analyze 

and resolve old unreconciled differences in the fiscal year 1996 fund 

balance with Treasury accounts. With this effort, IRS was able to reconcile 

its fund balance with Treasury accounts to Treasury records to within an 

immaterial amount. However, IRS’ failure to continue routinely reconciling 

its fund balance with Treasury accounts after this substantial cleanup effort 

eventually led to its inability to reconcile its fund balance with Treasury 

accounts in fiscal years 1997 and 1998. This, in turn, led to our inability to 

determine whether IRS’ recorded fund balance with Treasury amount at 

September 30, 1998, was reliable. In our August 1999 report on IRS’ 

weaknesses in internal controls over its administrative activities,12 we again 

recommended that IRS perform prompt reconciliations, including 

investigating and resolving the differences between its records and 

Treasury’s for appropriation account balances and adjusting account 

balances accordingly.

11See Financial Audit: Examination of IRS’ Fiscal Year 1996 Administrative Financial 

Statements (GAO/AIMD-97-89, August 29, 1997).

12See GAO/AIMD-99-196, August 9, 1999.
Chapter 6

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Page 86 GAO-01-42 IRS Financial and Operational Management

In August 1999, IRS began extensive efforts to reconcile its fund balance 

with Treasury accounts, first to determine the appropriate balances at the 

beginning of the fiscal year, and then to attempt to determine reliable 

balances as of March 31, 1999, and June 30, 1999. These efforts included 

bringing in temporary assistance from the Department of Veterans Affairs, 

as well as employing a significant number of its own staff. However, IRS’ 

efforts were hindered due to past extensive, unreconciled differences and 

unsupported adjustments. Specifically, IRS’ failure to properly and 

routinely reconcile its fund balance with Treasury accounts resulted in the 

accumulation of substantial differences between its records and Treasury’s 

over the last several years. In an attempt to resolve these differences, IRS 

recorded unsupported adjustments to its general ledger in fiscal years 1997 

and 1998 to force its records to match Treasury’s—in essence, to “plug” its 

balance.13 These adjustments for fiscal years 1997 and 1998 totaled 

approximately $84 million and $60 million, respectively.

IRS posted these adjustments in fiscal years 1997 and 1998 without first 

performing the necessary research to determine whether adjustments to 

the general ledger were, in fact, needed or whether some or all of these 

differences were attributable to errors in Treasury’s records. This is similar 

to an individual not reconciling his or her checkbook with monthly bank 

statements for years, and then adjusting the checkbook to agree with the 

balance on the latest bank statement without first verifying that the bank 

had not made any mistakes. Because some of IRS’ adjustments related to 

differences going back as far as fiscal year 1995, its ability to research and 

properly correct entries was further hindered. IRS had to devote significant 

time and staff resources to try to correct its records for the effects of these 

adjustments. 

IRS management decided to abandon its efforts to reconcile its fund 

balance with Treasury accounts as of March 31, 1999, and June 30, 1999, 

because of its inability to correct its records for the unsupported plug 

adjustments it made to its general ledger in fiscal years 1997 and 1998. 

Instead, IRS management elected to focus its efforts on completing the 

September 30, 1999, reconciliation of its fund balance with Treasury 

accounts and to resolve the uncorrected errors existing in the fund balance 

13The problems related to adjusting agency records to match the amounts reported by 

Treasury have been noted in other GAO reports. For example, see Financial Audit: Issues 

Regarding Reconciliations of Fund Balance With Treasury Accounts (GAO/AIMD-99-271, 

September 17, 1999).
Chapter 6

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Page 87 GAO-01-42 IRS Financial and Operational Management

with Treasury accounts that resulted from the absence of reconciliations 

over the past several years. This effort identified the need for IRS to adjust 

its records for approximately $77 million in errors and for Treasury to 

adjust its records for approximately $55 million in errors. 

In addition, because IRS had not implemented the necessary controls, such 

as management review, to ensure that its fund balance with Treasury 

accounts would be promptly and routinely reconciled, other related 

problems went undetected until the 1999 fiscal year-end cleanup effort. For 

example, IRS made several of the adjustments to its records to account for 

voluntary separation incentive payments14 and administrative billing and 

collection15 transactions that the U.S. Department of Agriculture’s (USDA) 

National Finance Center (NFC)16 reported to IRS, but which IRS had never 

previously recorded in its general ledger. These transactions, which were 

recorded against IRS’ appropriation accounts at Treasury, accounted for 

approximately $12 million of the difference between IRS’ and Treasury’s 

records.

Another problem that IRS identified through this cleanup effort concerned 

certain entries IRS budget staff had made in the past that resulted in 

overstatements of IRS’ fund balance with Treasury. Specifically, when 

trying to post entries to establish “no-year” monies into new Treasury 

symbols within the general ledger, IRS’ budget staff failed to delete the 

same entries that had been automatically posted by the general ledger 

system. Consequently, the entries posted by the budget staff represented 

duplicate postings to the fund balance with Treasury accounts, resulting in 

an overstatement of the general ledger balances. This condition resulted in 

approximately $43 million of overstatements in IRS’ fund balance with 

Treasury accounts. IRS officials informed us that they have developed 

plans to electronically reconcile the proprietary balances with budgetary 

balances for the fund balance with Treasury accounts beginning in fiscal 

14Voluntary separation incentive payments are buyout payments provided to employees who 

voluntarily leave jobs. The amount is determined by the employee’s length of service and 

salary, but in no event should the buyout payment exceed $25,000.

15Administrative billing and collection transactions represent receivables and collections 

owed to IRS by its employees. These receivables are usually due to salary overpayments, 

holdover benefit payments made by IRS for seasonal employees who maintain benefits 

while they are not working, and other overpayments or errors.

16The NFC processes IRS’ payroll and reports the expense amounts associated with the 

payroll to IRS for accounting purposes.
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year 2000. However, had IRS been promptly and routinely reconciling its 

fund balance accounts over the past several years, it would have identified 

these problems in the reconciliation and had an early opportunity to 

address them. 

IRS was able to provide sufficient evidence that its September 30, 1999, 

reported fund balance with Treasury amount was reliable. Although IRS’ 

September 30, 1999, reconciliation showed differences between IRS’ and 

Treasury’s records, these differences were not material enough to affect the 

reliability of the year-end overall reported balance. The most significant 

unresolved differences identified in the reconciliation were related to 

payroll transactions. According to IRS, the payroll differences resulted 

from NFC’s reporting to Treasury’s FMS17 cash disbursement information 

related to payroll expense charges that was different from what IRS had 

actually recorded in its financial records. However, this explanation could 

not be supported by any readily available documentation. Consequently, 

IRS was unable to record an adjustment to its general ledger or advise 

Treasury of the need to adjust its records. These payroll differences totaled 

approximately $35 million at September 30, 1999, $17.8 million of which we 

believe could be the maximum misstatement (overstatement) of IRS’ fund 

balance with Treasury at September 30, 1999. IRS is continuing to do the 

research necessary for resolving this difference. 

The unresolved differences and other identified problems discussed above 

relating to IRS’ lack of routine and complete reconciliations raise serious 

concerns about IRS’ ongoing ability to ensure that it complies with the laws 

governing the use of its budget authority. Without this crucial control, it is 

difficult, if not impossible, for IRS to determine if operating funds are being 

properly spent or if reported amounts for program costs, assets, and 

liabilities are reliable. This concern is illustrated by the $35 million of 

unresolved payroll transactions discussed above. If these differences were 

the result of errors in IRS records, such errors could have resulted in the 

exclusion of payroll expenses from various appropriations expense totals. 

This exclusion would have made it difficult for IRS to determine if total 

program costs associated with the affected appropriations were accurate. 

Consequently, IRS may not have been able to ensure compliance with 

budget or spending authority provisions associated with these 

appropriations. 

17FMS provides agencies such as IRS with banking services, including assistance in the 

monthly reconciliation of their fund balance with Treasury accounts.
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IRS has indicated that it has already implemented procedures to ensure 

that reconciliations are performed monthly. We will follow up on the status 

of IRS’ efforts as part of our fiscal year 2000 financial audit. 

Payroll Costs In fiscal year 1999, IRS reported about $6 billion in total payroll costs, 

which make up over 70 percent of IRS’ $8.5 billion total program costs. 

However, as we previously reported,18 IRS’ policies and procedures did not 

provide reasonable assurance that its payroll and related costs were 

appropriately classified in its financial statements or that they could be 

used as a basis for reliable cost-based performance information. 

Specifically, IRS intermingled the costs of customer service and 

compliance, making it unable to reliably report the full cost of either 

program. In addition, IRS’ payroll system did not reliably capture costs at 

the individual project level. Consequently, IRS was unable to generate 

reliable cost-based performance information to support measurement of its 

success in meeting goals reported in accordance with the Government 

Performance and Results Act (GPRA) of 1993.19 In addition, IRS had not 

implemented adequate control procedures to verify the accuracy of its 

payroll information processed by NFC and, therefore, lacked assurance 

that its reported payroll costs were reliable.

Classifying Customer 

Service and Compliance 

Program Costs

In our testing of IRS’ payroll transactions for fiscal year 1999, we found a 

significant number of employees who were assigned to support 

compliance-related activities, such as examinations or collections, but had 

charged their time to customer service. In our review of a statistical sample 

of 70 payroll transactions, we found that in 8 cases (11 percent), employees 

working on compliance-related activities charged their time to the 

customer service accounting code. As a result, substantial portions of the 

total reported cost of these programs were misclassified on the statement 

18See GAO/AIMD-00-76, February 29, 2000.

19GPRA requires IRS 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, and technology and the 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 outcomes of each program activity, (4) provide a basis 

for comparing actual program results, and (5) verify and validate the measured values or 

results.
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of net cost. According to IRS, this was the result of a policy decision, 

effective October 1, 1996, to reorganize by combining the staffs and 

functions of the Assistant Commissioners for Taxpayer Services and 

Collection under a single Customer Service Division. Resources affected 

were realigned to mirror the related personnel actions and funding through 

customer service.

IRS’ Cost Accounting 

System

IRS’ payroll system did not track personnel time charges in a manner that 

could support full cost accounting for its programs and activities as 

required by SFFAS No. 4, Managerial Cost Accounting Standards, and 

consistent with GPRA. In addition, effective fiscal year 2001, federal 

accounting standards will require IRS to account for the full cost of internal 

use software.20 IRS’ lack of full cost information will present a major 

obstacle to it conforming with this standard as well. IRS employees’ time 

charges are accumulated into an accounting code, known as a management 

activity code, that identifies the broad area of work being performed, such 

as collection or customer service. However, this level of information does 

not provide the detailed information needed to support a cost accounting 

system that captures the full costs of specific projects, jobs, and activities 

the employees’ work supports. 

While IRS has implemented the Project Cost Accounting Subsystem 

(PCAS) coding structure to capture cost at the detailed project and 

subproject level, this system was not being consistently and accurately 

used to capture the full cost of individual projects. For example, IRS 

employees were required to use PCAS codes only for charging costs related 

to information system projects. Use of PCAS codes was not required for 

activities related to either of IRS’ two largest appropriations—Processing 

Assistance and Management and Tax Law Enforcement—which accounted 

for over 77 percent of IRS’ total administrative appropriations in fiscal year 

1999. 

20See SFFAS No. 10, Accounting for Internal Use Software (June 1998).
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In our review of a statistical sample of 70 payroll transactions, we noted 

that employees had their time charged to a management activity code. 

However, PCAS codes were identified with the time charges of only six 

employees (9 percent), three of whom were assigned to information 

systems projects. Sixty-four (91 percent) of the sample items did not 

identify a PCAS code or otherwise provide information that could be used 

to generate detailed cost information below the management activity level. 

In addition, we found two instances in which employees performed duties 

to help prepare IRS’ automated systems to meet the year 2000 challenges 

but did not charge PCAS codes that had been specifically designated to 

capture this type of cost. As a result, IRS was unable to capture the full cost 

of its activities to prepare for the Year 2000. This finding was consistent 

with that of the TIGTA, who reported that IRS employees who are required 

to use PCAS codes did not charge their time to these codes consistently or 

accurately.21

Also, it is unclear whether IRS’ current plans to improve its financial 

management systems will address its need to report the full cost of its 

programs or to provide reliable cost-based performance information. In 

June 2000, IRS updated its Federal Financial Management Improvement 

Act Remediation Plan to address cost accounting. However, the plan did 

not specify the nature of the cost accounting capability that IRS is planning. 

We plan to follow up on this issue as part of our future audits of IRS’ 

financial statements.

Processing IRS’ Payroll 

Costs

IRS did not implement sufficient internal control procedures to verify that 

its payroll costs were properly accounted for and controlled by USDA’s 

NFC, the service organization IRS relies on to process the biweekly payroll 

for its employees. As we previously reported,22 any agency that uses a 

service organization, such as NFC, to process payroll transactions should 

establish adequate policies and procedures to verify that payroll data 

received by the agency are reliable. Such procedures are particularly 

critical when it has been determined that the service organization’s internal 

controls do not provide reasonable assurance that payroll transactions are 

processed and reported accurately. 

21See Review of the Internal Revenue Service’s Effectiveness in the Monitoring and 

Reporting of Year 2000 Funds (Reference No. 092204, January 1999).

22See GAO/AIMD-99-182R, June 30, 1999.
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Page 92 GAO-01-42 IRS Financial and Operational Management

In the case of NFC, the USDA Office of the Inspector General (OIG)23 and 

GAO24 have reported material weaknesses in controls over its payroll 

processing, including those affecting the accuracy and reliability of data 

processed by NFC. Also, as the OIG has noted, the accuracy and reliability 

of data processed by NFC and any resulting reports ultimately depend on 

the user agency, such as IRS, and any controls implemented by that agency. 

However, IRS had not implemented compensating controls to ensure that 

NFC accurately processed and reported its $6 billion in payroll and related 

benefits. Although IRS did have procedures in place to verify that NFC’s 

records reflected the appropriate number of hours, these procedures did 

not verify that the total dollars expended agreed with IRS’ records. 

Through our audit procedures, we were able to determine that payroll 

reports generated by NFC were consistent with the information IRS 

provided to NFC for the processing of its payroll activity. However, IRS’ 

lack of controls over data received from NFC increased the risk that errors 

in payroll costs could have occurred and not been detected in time to 

prevent affecting reported cost information.

Conclusions Because of material weaknesses in its internal controls over its budgetary 

resources and cost accounting, IRS was unable to reliably report how it 

expended its resources in fiscal year 1999. IRS could not generate reliable 

cost-based performance or budgetary information for management, the 

Congress, or the public to use in assessing the cost/benefit of its 

operations. Because of these weaknesses, IRS was also unable to reliably 

assess, and support its requests for, the level of additional resources it 

believes it needs to achieve desired future results. Thus, IRS has been 

unable to assure the Congress of the benefits of the requested funding.

Recommendations To effectively manage and report its undelivered orders, we recommend 

that the office of IRS’ Chief Financial Officer (CFO) periodically analyze 

outstanding obligations. This would include developing and analyzing an 

aging of obligations to identify potential items that may require 

23See U.S. Department of Agriculture Office of Inspector General Fiscal Year 1998 National 

Finance Center: Review of Internal Control Structure (Audit Report No. 11401-4-FM, 

September 1999).

24See USDA Information Security: Weaknesses at National Finance Center Increase Risk of 

Fraud, Misuse, and Improper Disclosure (GAO/AIMD-99-227, July 30, 1999).
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deobligation. The CFO office should then coordinate with the financial plan 

managers to help ensure that invalid undelivered orders are promptly 

deobligated. This would enable IRS to use those funds deobligated within 

the period of obligational authority to acquire items it needs.

To assist IRS in resolving and clearing outstanding items in its suspense 

account, we recommend that IRS develop a subsidiary ledger 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.

To help ensure that payroll and related costs of IRS’ programs are reliably 

and clearly reported in IRS’ financial statements, we recommend that IRS 

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.

To (1) assist in the management of IRS’ programs and (2) enable IRS to 

generate and report reliable cost-based performance data for all programs 

and activities to support its reporting under GPRA and in accordance with 

federal accounting standards, we recommend that IRS 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. 

To obtain reasonable assurance that its payroll information is not adversely 

affected by weaknesses in NFC’s internal controls, we recommend that IRS 

review the USDA OIG annual audit report on NFC’s 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 risks associated with the weaknesses identified in NFC’s 

payroll processing systems. These procedures could include but are not 

limited to (1) selecting a random sample of NFC payroll disbursements, at 

least quarterly (e.g., 25 per quarter), and comparing the payroll cost 

information received from NFC to corresponding data provided to NFC and 

(2) periodically analyzing overall payroll expenses to determine their 
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Page 94 GAO-01-42 IRS Financial and Operational Management

reasonableness. IRS should appropriately document how it implements 

and executes these compensating controls.

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations related to controls over appropriated funds and 

provided information regarding initiatives to address them. We will 

evaluate the effectiveness of these initiatives during future audits. 

However, IRS disagreed with our conclusion that it was unable to reliably 

account for or report how it used its approximately $8.5 billion in 

appropriated funds in fiscal year 1999, and stated its belief that it is in 

conformance with SFFAS No. 4. IRS also stated that its statement of net 

cost had been formatted in accordance with our suggestions and that we 

had not informed them that this format would prevent IRS from reliably 

reporting on the costs of its programs. IRS noted that payroll accounted for 

over 70 percent of IRS’ appropriated funds, and that we have never taken 

exception to IRS’ reported total payroll expenses. 

We disagree with IRS’ belief that it is in conformance with SFFAS No. 4, 

whose central requirement is reliable reporting on the costs of federal 

programs. As we reported,25 IRS was unable to reliably report on the costs 

of its programs for fiscal year 1999 due to a lack of evidence about its 

opening balances for fund balance with Treasury, P&E, accounts payable, 

and net position. Moreover, IRS’ payroll system is not designed to track 

costs by job or task, nor can IRS generate reliable cost-based performance 

measures to facilitate decision-making. We agree that IRS’ reported total 

payroll costs were reliable for fiscal year 1999. However, we disagree with 

IRS’ suggestion that this constituted adequate reporting on the use of its 

approximately $8.5 billion budget during fiscal year 1999. 

IRS’ total payroll costs are not adequate information to enable IRS 

management to make informed decisions concerning IRS’ resources. 

Details concerning how payroll costs were applied to IRS’ various 

programs are also needed. However, as we have reported, IRS could not 

reliably report how its total payroll was actually used in fiscal year 1999 

because (1) IRS employees’ time was often being charged to a program 

other than the one they were working on and (2) IRS’ PCAS system for 

accumulating costs was unreliable during fiscal year 1999. During fiscal 

25See GAO/AIMD-00-76, February 29, 2000.
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Page 95 GAO-01-42 IRS Financial and Operational Management

year 1999, most IRS employees were not required to use PCAS, and 

employees that did use PCAS did not always use correct PCAS codes. We 

also disagree with IRS’ suggestion that the format of its statement of net 

cost prevented it from reliably reporting the cost of its programs. 

As discussed above, it was deficiencies in IRS’ underlying cost accounting 

system that rendered IRS unable to reliably report the cost of its major 

programs on its statement of net cost. Federal financial reporting 

standards, not system deficiencies, should drive the format of IRS’ financial 

statements. 

IRS indicated it has initiated internal controls to compensate for the 

material weaknesses in NFC’s internal control environment reported by the 

USDA OIG and GAO, including reviewing the reasonableness of payroll 

expenses each pay period and verifying that total dollars expended for 

payroll agree with IRS’ records. We will follow up during our fiscal year 

2000 audit to assess the effectiveness of these compensating controls. IRS 

also provided additional detailed comments about the specific findings in 

this chapter, which we have incorporated where appropriate. The letter 

from IRS’ Deputy Commissioner of Operations responding to this report is 

reprinted in appendix II.
Page 96 GAO-01-42 IRS Financial and Operational Management

Chapter 7

Deficiencies in the Collecting and Reporting 

of IRS’ Financial Data Chapte7r

Because of serious deficiencies in its systems and internal controls and 

processes, IRS was unable to report reliable information in its financial 

statements without extensive workaround processes. These processes 

have thus far provided IRS only limited success in reporting certain reliable 

information, and what reliable information was derived from these 

processes was available only after fiscal year-end. Consequently, the 

information was not routinely available and thus could not be used 

throughout the year for day-to-day decision-making. These weaknesses 

adversely affected IRS’ ability to (1) prepare reliable financial reports, 

(2) account for and manage accounts payable, (3) accurately report on tax 

revenues, and (4) certify excise taxes distributed to trust funds.

Financial Reporting In fiscal year 1999, IRS prepared six financial statements that reported to 

the Congress and the public on IRS’ (1) custodianship of the more than

$1.9 trillion in federal taxes it collected, $185 billion in payments it 

refunded, and $21 billion in net taxes receivable due from taxpayers and 

(2) management of its approximately $8.5 billion appropriated by the 

Congress. IRS’ controls over financial reporting have improved since our 

audit of its fiscal year 1998 financial statements. However, these 

improvements in controls did not ensure that IRS’ financial statements 

were fairly presented. Through extensive audit procedures, we were able to 

determine that IRS’ ad hoc procedures had resulted in custodial activities 

that were fairly stated, as was its balance sheet, with the exception of the 

components of net position. However, we were unable to determine if IRS’ 

statements of budgetary resources, changes in net position, financing, and 

net cost were reliable. 

According to our Standards for Internal Controls in the Federal 

Government, internal controls should provide reasonable assurance that 

financial reports are reliable. During our audit of IRS’ fiscal year 1999 

financial statements, we found that IRS’ financial reporting process did not 

meet these standards because (1) IRS’ general ledger system does not 

support the preparation of financial statements and (2) deficiencies in IRS’ 

process of preparing financial statements allowed material errors to occur 

without prompt detection or correction.
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of IRS’ Financial Data

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IRS’ General Ledger Like most entities in government and private industry, IRS relies on a 

general ledger system to accumulate and summarize financial information 

for financial reporting purposes. IRS’ overall general ledger system consists 

of two independent general ledger systems, one for its custodial activities 

and one for its administrative activities.1

 However, the two general ledgers 

IRS uses have not been adequate for financial reporting purposes. They are 

not integrated with each other or their supporting subsidiary records nor 

are they current, accurate, or supported by adequate audit trails for 

material balances. IRS’ custodial general ledger does not have adequate 

audit trails for federal taxes receivable, federal tax revenue, or federal tax 

refunds. Similarly, IRS’ administrative general ledger lacks audit trails for 

P&E and program costs. Consequently, IRS’ general ledgers did not provide 

the information that IRS needed to prepare reliable annual financial 

statements and other financial reports in fiscal year 1999. In addition, IRS’ 

custodial general ledger commingled tax revenue and refund transactions 

during the year, thereby distorting balances in both types of accounts until 

year-end, when adjustments were recorded to correct this problem. Also, 

neither of IRS’ two general ledgers complies with the U.S. Government 

Standard General Ledger (SGL) at the transaction level and cannot be used 

to support the preparation of financial statements without material 

financial reporting adjustments.

In addition to not supporting accurate year-end reporting, IRS’ general 

ledgers could not be relied on to provide the reliable information needed 

throughout the year as a management tool. This is because (1) there were 

often significant delays in IRS’ recording of material financial transactions 

in its general ledgers, (2) weaknesses in controls over recording 

transactions allowed significant errors to occur without prompt detection 

or correction, and (3) tax revenue and refund transactions were 

commingled in the same custodial general ledger accounts during the year. 

For example:

• IRS did not record significant transactions during the year as they 

occurred (such as capitalizing P&E, as previously discussed, and 

recognizing related depreciation expense); rather, IRS recorded them 

1

IRS’ custodial activities consist of tax receipts collected, refunds paid, and amounts 

recognized for unpaid taxes due. Administrative activities consist of the budgetary 

resources that fund the custodial activities and the costs incurred in performing those 

activities. 
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of IRS’ Financial Data

Page 98 GAO-01-42 IRS Financial and Operational Management

once at year-end. As a result, affected balances in IRS’ administrative 

general ledger were inaccurate at interim periods during the year.

• Several accounts in IRS’ administrative general ledger remained 

incorrect for at least 13 months because errors totaling $102 million in 

IRS’ fiscal year 1999 opening balances were not corrected until 

November 1999. 

• Several accounts in IRS’ custodial general ledger remained inaccurate 

during fiscal year 1999 until year-end because IRS commingled refund 

transactions in tax receipt accounts. This included (1) $1.5 billion in 

excess Federal Insurance Contribution Act reimbursements from the 

Social Security Administration, (2) $403.5 million of excise tax refunds, 

and (3) $95 million of advance earned income tax credits. Ultimately, the 

financial statements were not affected because all these amounts were 

reclassified out of the tax receipt accounts at fiscal year-end.

In addition, IRS provides a service to taxpayers involving issuing 

determination letters and rulings on (1) organizations’ requests for 

exemption from federal income taxes and (2) retirement plans’ compliance 

with regulations, for which it received $39 million in user fee revenue in 

fiscal year 1999. Because IRS deposits these fees directly in Treasury and 

does not use them in its operations, it records them in its custodial general 

ledger system, in a manner similar to its recording of tax revenue. However, 

because IRS incurs costs and provides a service for these fees, they are 

considered exchange revenue and, unlike tax revenue, are appropriately 

reported on the statement of net costs along with the costs incurred by IRS 

in providing these services. However, since IRS uses its administrative (not 

custodial) general ledger system to prepare its statement of net cost, these 

user fees were initially omitted from the statement of net cost. This 

omission was corrected based on a proposed audit adjustment posted 

before the financial statements were issued. 

As previously discussed, IRS’ general ledgers were not supported by 

adequate audit trails for taxes receivable, P&E, or program costs. This was 

also true for federal tax revenue and federal tax refunds. The transactionlevel details for federal tax revenue and federal tax refunds are contained 

in IRS’ master files, which are not integrated with IRS’ custodial general 

ledger. As a result, since IRS’ general ledgers were not supported by 

adequate audit trails, they did not comply with the SGL at the transaction 

level. In addition, IRS’ custodial general ledger system does not use an 

account structure and account titles that are consistent with those in the 

SGL.
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of IRS’ Financial Data

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Financial Statement 

Preparation

IRS did not have adequate controls over its financial reporting process to 

provide reasonable assurance that the data in its accounting records were 

properly reflected in its financial statements. As a result, material errors 

occurred during IRS’ financial reporting process that were not promptly 

detected and corrected. For example, on the statement of financing, 

depreciation expense totaling $332 million was initially reported as a 

reduction in costs that do not require resources, rather than as a 

component of these costs, and capitalized costs totaling $614 million were 

initially omitted. 

Based on audit adjustments, these errors were corrected in time to prevent 

the financial statements from being misstated. However, errors such as 

these contributed to our inability to determine if IRS’ statements of 

financing or budgetary resources were reliable.

To compensate for its financial reporting weaknesses, IRS relied on timeconsuming ad hoc procedures to generate reliable balances. However, 

since this approach, when successful, yields reliable balances only once 

each year at a point in time, it is inherently incapable of producing the 

accurate, timely information managers need as a basis for informed 

decision-making throughout the year. Some of the problems that forced IRS 

to follow this approach are the limitations of the automated systems that 

IRS currently relies on, and these problems will likely continue until these 

systems are enhanced or replaced. However, there were also weaknesses in 

controls over existing financial reporting processes, and correcting these 

should not require long-term efforts. We previously recommended that IRS 

establish procedures for the review of financial statements at the 

appropriate levels within the CFO’s office.2

 However, the problems noted 

above indicate that for IRS’ fiscal year 1999 financial statements, this 

recommendation had not been effectively implemented. 

Recording Accounts 

Payable

As an improvement over last year, IRS was able to provide us with a list of 

accounts payable that could be tested for completeness and validity. 

However, we found that the list was incomplete and included invalid items, 

principally because liabilities generally were not recorded for goods and 

services when received but later, when an invoice was received. Also, 

receipt and acceptance and the related electronically processed accounts 

2

See GAO/AIMD-99-196, August 9, 1999.
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of IRS’ Financial Data

Page 100 GAO-01-42 IRS Financial and Operational Management

payable were not promptly recorded for capture in the year-end accounting 

records. Until it enhances its procedures and controls, IRS will continue to 

face challenges in readily determining at any given point whom it owes and 

how much it owes.

In fiscal year 1998, IRS was only able to generate a transaction history that 

included all transactions that had been recorded in accounts payable since 

1991, including amounts that had since been paid and were therefore no 

longer payables. The transaction history included numerous debit and 

credit entries of hundreds of millions of dollars each. In fiscal year 1999, 

with the assistance of a contractor, IRS performed extensive procedures to 

match and remove the related entries from the list and was able to offset 

most of the entries, leaving an immaterial amount of debits.

However, we found a significant number of exceptions when testing the 

underlying data supporting the accounts payable list. In testing a sample of 

30 items from the accounts payable list, we found that 3 (10 percent) were 

not valid accounts payable. For example, in one case, IRS inappropriately 

included in its fiscal year 1999 accounts payable balance $12 million in 

printing services to be rendered in fiscal year 2000. In another case, the 

fiscal year 1999 accounts payable list inappropriately included a $200,000 

invoice that was received in, and related mostly to services to be rendered 

in, fiscal year 2000. Conversely, we also found that of 66 items selected in a 

statistical sample of subsequent disbursements, 13 (20 percent) were 

inappropriately excluded from accounts payable. For example, IRS’ 

September 30, 1999, accounts payable list excluded $362,037 of unpaid 

fiscal year 1999 rent charges and $2.7 million for unpaid lockbox bank 

services provided from October 1998 through March 1999. These results 

were consistent with our testing of undelivered orders, in which we found a 

significant number of cases in which accounts payable were not recorded 

for goods and services that were received before year-end but not paid (see 

chapter 6).

IRS records an accounts payable when an invoice has been received and 

receipt and acceptance of the goods or services have been entered into the 

accounting system. IRS purchases its goods and services from both outside 

vendors and other government agencies. For most of the purchases from 

outside vendors, IRS’ program offices enter receipt and acceptance of 

goods and services through the Request Tracking System/Integrated 

Procurement System (RTS/IPS). When the receipt and acceptance is 

entered into the procurement system, an accounts payable is automatically 

generated in the general ledger through an electronic interface. Most of the 
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Deficiencies in the Collecting and Reporting 

of IRS’ Financial Data

Page 101 GAO-01-42 IRS Financial and Operational Management

purchases from government agencies, however, are processed outside of 

RTS/IPS. In these cases, the program offices notify the accounting office 

(by mailing or faxing receiving reports) that goods and services have been 

received. The accounting office then matches the invoice with the receiving 

report and manually records an accounts payable into the general ledger. 

IRS’ controls over September 30, 1999, accrual procedures were not 

completely effective for transactions processed both electronically into 

RTS/IPS and outside RTS/IPS. IRS’ year-end accrual procedures require IRS 

personnel to enter electronic receipt and acceptance in RTS/IPS for goods 

and services received as of September 30. The accounts payable is then 

automatically recorded, through an electronic interface, in the year-end 

accounting records for transactions entered with an acceptance date of 

September 30 or earlier. However, in our statistical sample of accounts 

payable, we found several cases in which IRS personnel entered the date 

on which they electronically input receipt and acceptance into RTS/IPS as 

the receipt and acceptance date rather than the date they actually received 

the goods and services. For example, we found that IRS personnel entered 

the electronic receipt and acceptance in October (data input date) for 

goods and services received as of September 30, 1999. As a result, accounts 

payable at September 30, 1999, was incomplete.

For transactions processed outside RTS/IPS, IRS year-end procedures 

require personnel to review outstanding obligations to determine which 

goods and services have been received before year-end but will be paid for 

in the next fiscal year. This process is extremely labor intensive and 

dependent on IRS’ program offices’ providing the accounting office with 

information on goods and services received. We found that the program 

offices generally provided receipt and acceptance information only when 

an invoice was received. However, based on the results of our statistical 

sampling, invoices were not always provided to IRS on a timely basis. For 

example, IRS did not receive an invoice for computer services performed in 

September 1999 until December 1999, 3 months after the fiscal year-end. 

IRS did not estimate a liability for these services even though the computer 

service charges were consistent from month to month. Thus, if IRS had not 

yet received the invoice, or the incorrect acceptance date was entered into 

RTS/IPS, liabilities would generally not have been recorded in the 

accounting records as of fiscal year-end.
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of IRS’ Financial Data

Page 102 GAO-01-42 IRS Financial and Operational Management

Reporting Tax 

Revenues 

During fiscal year 1999, IRS continued to be unable to determine the 

specific amount of revenue it actually collected for three of the federal 

government’s four largest revenue sources—Social Security, Hospital 

Insurance, and individual income taxes. In addition, IRS continued to be 

unable to reliably determine collections at the time of deposit attributable 

to the Highway Trust Fund and other trust funds that receive excise tax 

receipts. These conditions existed primarily because taxpayers are not 

required to provide information on the specific taxes that they are paying at 

the time of deposit and because IRS’ systems are not capable of capturing 

such information for reporting purposes. These conditions limit IRS’ ability 

to report tax revenue collections in its financial statements and have 

resulted in the need to use a complex and error-prone process to distribute 

excise taxes to the relevant trust funds.

The accounting information needed to attribute tax deposits to the proper 

trust fund is provided on the tax return, which IRS receives months after 

the deposits are made. Further, the information on the return pertains only 

to the amount of the tax liability by type of tax, not to the distribution of the 

amounts previously collected. This condition limits IRS in its reporting of 

federal tax collections. Specifically, IRS is unable to separately report 

Social Security, Hospital Insurance, and individual income taxes in its 

financial statements or other financial reports. Also, to the extent that the 

taxpayer does not pay the full amount of taxes owed, the government’s 

general revenue fund subsidizes the Social Security and Hospital Insurance 

trust funds for the amount that annual payroll tax collections are less than 

the actual tax liabilities.3

 However, the annual amount of this subsidy is 

unknown because IRS cannot determine the specific amount of revenue it 

actually collects for Social Security and Hospital Insurance taxes.4

 Having 

the capability to report actual collections of significant taxes such as Social 

3

This is in accordance with existing statute. Specifically, under 42 U.S.C. sections 401 and 

1395i, amounts to be transferred by Treasury to the Social Security and Hospital Insurance 

trust funds are based on applying the applicable Federal Insurance Contribution Act and/or 

Self-Employment Contribution Act tax rates to wage amounts certified by the 

Commissioner of Social Security.

4

As of September 30, 1999, the estimated amount of unpaid taxes and interest in IRS’ unpaid 

assessments balance was approximately $43 billion for Social Security and Hospital 

Insurance. While these totals do not include amounts no longer in the unpaid assessment 

balance because the statutory collection period expired, they nevertheless indicate the 

cumulative amount of the subsidy provided from the general fund.
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Page 103 GAO-01-42 IRS Financial and Operational Management

Security would enable IRS to report information useful to interested 

parties, including the Congress.

In addition, IRS uses a complex and cumbersome process to distribute 

excise tax revenue to the appropriate trust funds. Generally, taxpayers are 

required to make semimonthly deposits to IRS for their expected excise tax 

liability each quarter. However, taxpayers are not required to file their 

quarterly Form 720 excise tax returns until up to 2 months after the end of 

the quarter. Because data on the specific tax type are not available to 

allocate excise taxes to the appropriate trust funds when deposits are 

made, Treasury uses a process to estimate the initial distribution of excise 

taxes. This process involves the use of economic models prepared by 

Treasury’s Office of Tax Analysis to estimate the initial distribution of tax 

receipts. Treasury’s FMS uses these estimates to prepare entries for the 

initial distribution to the trust funds. These entries are then recorded by 

Treasury’s Bureau of Public Debt (BPD) in the books and records of the 

trust funds maintained by Treasury. After the initial distribution, IRS 

certifies quarterly the amounts that should have been distributed to the 

excise-tax-related trust funds using its records of deposits made and tax 

returns. FMS uses these certifications to prepare adjustments to the initial 

trust fund distributions, which are then recorded by BPD. This process is 

complex, cumbersome, and prone to error. 

During fiscal year 1999, IRS completed a study to consider whether it 

should require taxpayers to provide detailed information on the type of tax 

they are paying when they make their semimonthly deposits. The study 

showed that taxpayers could provide this information for Social Security 

and Hospital Insurance taxes. However, the study also concluded that it 

would be potentially burdensome for taxpayers to provide this information 

for excise taxes because large corporations would have to collect this 

information from multiple plants in various states. The study cited some 

respondents as saying that it would be impossible for them to collect this 

information during the quarter. In addition, IRS concluded that the quality 

of the data would be poor because the respondents stated that if required 

to provide this information with their deposits, they would use an estimate 

based on the previous quarter rather than actual amounts from the current 

quarter. 

IRS officials also stated that their current systems cannot capture the 

additional detailed information. As we reported in 1998, Treasury’s 

Electronic Federal Tax Payment System, which allows taxpayers to deposit 

federal taxes electronically, can capture the detailed payment data 
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necessary to record collections by trust fund. However, IRS’ systems are 

unable to record and report trust-fund-related data. Specifically, the 

systems account for transactions by aggregate tax class, which combines 

several tax types (e.g., trust fund categories) into one category. Although 

the tax returns do contain the details of amounts owed by subcategory, in 

some cases, the returns are not required to be filed until as late as 4-1/2 

months after the quarterly tax deposits are made. Consequently, IRS is 

working on developing an information database to accommodate this type 

of information in the future and plans to initiate another study in 3 to 4 

years to gauge taxpayer readiness at that time.

Trust Fund 

Certifications

IRS’ process for certifying excise taxes to be distributed to recipient trust 

funds is complex and cumbersome, resulting in delays and errors in 

amounts distributed to the trust funds. These delays and errors, in turn, 

could result in the misstatement of annual receipts in trust fund financial 

statements and could affect the amounts of certain highway funds 

distributed to states in a given year.

Since IRS is unable to determine the amount of distributions to excise tax 

trust funds until it receives and processes the related tax returns, delays in 

the receipt and processing of tax returns result in misstatements of 

amounts certified. At the conclusion of our fiscal year 1998 financial audit, 

we recommended that IRS establish procedures to ensure that returns are 

promptly processed and implement controls to ensure that excise tax 

returns are promptly recorded and included in the appropriate quarterly 

trust fund certifications. Although IRS implemented procedures to 

expedite the processing of returns of over $1 million as a result of our prior 

report,5

 these delays continued.

During our fiscal year 1999 audit, we continued to find that not all tax 

returns were filed in a timely manner by taxpayers and that IRS did not 

record all tax returns in time to include them in the quarterly certifications. 

For example, the amount IRS certified to the Highway Trust Fund for the 

quarter ending March 31, 1999, included approximately $699 million that 

was related to excise taxes from previous quarters. Of this amount, 

$527 million was a result of the late posting of one return from a large 

petroleum company. The amounts certified to the Airport and Airway Trust 

5

See GAO/AIMD-99-193, August 4, 1999.
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Fund also included amounts related to excise tax returns from previous 

quarters, exceeding 1 percent of the total, for three of the four quarters 

during fiscal year 1999. These amounts ranged from $27 million to 

$104 million. 

Although these misstatements are corrected in the following quarters when 

the tax returns are recorded and related collections are certified to the 

trust funds, the condition demonstrates that IRS’ certification process did 

not ensure that amounts distributed to excise-tax-related trust funds were 

promptly adjusted. This delay could result in the misstatement for financial 

reporting of annual trust fund receipts, which are affected by a fiscal year 

cutoff. This misstatement could reduce the amount of interest income the 

trust funds earn on federal tax receipts. In turn, for excise taxes collected 

for and distributed to the Highway Trust Fund, distributions to the states 

would be affected because the Federal Highway Administration uses these 

financial reporting data as a source for determining amounts to be 

distributed to the states in a given year. 

In addition to the delays in certifying the amounts collected, in fiscal year 

1999, we found that IRS continued to have other fundamental weaknesses 

in internal controls over the certification process. These weaknesses 

included inadequate supervisory reviews and the lack of written 

procedures, both of which allowed errors in the certification process to go 

undetected. 

GAO’s Standards for Internal Controls in the Federal Government specifies 

that qualified and continuous supervision is to be provided to ensure that 

internal control objectives are achieved. The lack of adequate supervisory 

review can lead to incorrect certifications and inaccurate distributions to 

trust funds.

Although IRS implemented additional review procedures as a result of our 

prior audit recommendations,6

 these reviews have not been fully effective. 

We continued to find errors during fiscal year 1999, including (1) taxpayer 

errors on excise tax returns that IRS did not identify, (2) data input errors 

made by IRS when recording excise tax information in its master files, and 

(3) errors made in IRS’ preparation of the excise tax certifications. For 

example, during our tests of transactions at the Cincinnati Service Center, 

6

See Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions to the 

Trust Funds (GAO/AIMD-99-17, November 9, 1998).
Chapter 7

Deficiencies in the Collecting and Reporting 

of IRS’ Financial Data

Page 106 GAO-01-42 IRS Financial and Operational Management

we found one case in which a taxpayer claimed an erroneous credit of 

$187,000, but IRS nevertheless posted it to the master file, inappropriately 

reducing the taxpayer’s liability. In another case, IRS entered a $1.4 million 

credit to a taxpayer’s account twice, once as a refund and again as a credit 

transferred to the next year. IRS corrected this error only after being 

notified by the taxpayer. In our examination of IRS’ certifications of excise 

tax distributions, we again found errors that were not detected by 

supervisory review. In one instance, the analyst transferred the wrong 

amounts from supporting documentation and understated certified refunds 

to the Highway Trust Fund by $8 million. In another instance, the analyst 

erroneously reduced the amount of a prior period adjustment, causing 

certified receipts to excise tax trust funds to continue to be overstated by 

$17.6 million through the quarter ending December 31, 1999.

IRS’ lack of detailed written procedures for its certification process also 

contributed to undetected errors, despite supervisory reviews of the 

certifications. Because the process is complex and involves many manual 

transfers of data, it is essential that IRS document the steps taken to derive 

the amounts it reports to FMS. Moreover, the process for certifying excise 

tax distributions was fully understood by only one full-time analyst, 

increasing the need for detailed written procedures in case this individual 

were to leave or be otherwise unavailable to continue to perform this 

function. Without clearly defined procedures to follow, reviewers also have 

difficulty comprehending from the supporting schedules what is being 

done on the certifications. For example, when we notified IRS of the error 

related to the prior-period adjustment, the analyst attempted to correct this 

error on a subsequent certification. However, he erroneously recorded the 

correcting entry, increasing certified receipts by the adjustment amount 

rather than decreasing them. The subsequent certification was reviewed by 

another individual, but because the reason for this adjustment was not fully 

documented, the reviewer had little basis for determining whether the 

adjustment was valid. Consequently, the resulting $17.6 million 

overstatement to total certified receipts was not detected or prevented.

Conclusions The substantial deficiencies in IRS’ internal controls and underlying 

systems and processes continued to preclude it from reporting reliable, 

timely, and routine information critical for effectively managing its 

operations. Although the use of extensive and labor-intensive workaround 

processes and procedures enabled IRS to report certain year-end 

information that was reliable, this effort was costly and time consuming 

and, in several critical areas, was not successful. These internal control and 
Chapter 7

Deficiencies in the Collecting and Reporting 

of IRS’ Financial Data

Page 107 GAO-01-42 IRS Financial and Operational Management

systems deficiencies continued to affect IRS’ ability to report fully reliable 

financial statements and prevented IRS from having the information it 

needed for day-to-day decision-making. Moreover, some of these 

deficiencies affected other entities and recipients of tax revenue 

collections.

Recommendations For IRS’ financial statements to be supported by, and traceable to, a general 

ledger that accurately and promptly recognizes all of IRS’ financial 

transactions, we recommend that, in the short term, IRS establish policies 

and procedures to help ensure that all administrative and, to the extent 

possible, custodial transactions are promptly recorded in the appropriate 

general ledger accounts, preferably within 30 days of the transaction.

In the long term, we recommend that IRS 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, (2) is integrated with its 

supporting subsidiary records, and (3) is fully compliant with the SGL at 

the transaction level. 

To effectively determine its accounts payable balance, we recommend that 

IRS enhance its year-end accrual procedures and controls by helping to 

ensure that

• procedure manuals 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. 

• the acceptance date entered in RTS/IPS represents the date that IRS 

received the goods and services rather than the date acceptance was 

entered into the system. 

To implement the procedures successfully, we recommend that IRS provide 

training to key program offices on the accrual process.

To ensure consistency, strengthen internal controls, and reduce IRS’ 

dependence on one individual for its process of certifying excise tax 

distributions to trust funds, we recommend that IRS develop, document, 

and implement detailed written procedures for summarizing data used to 

produce the trust fund certifications. IRS should clearly define the steps 
Chapter 7

Deficiencies in the Collecting and Reporting 

of IRS’ Financial Data

Page 108 GAO-01-42 IRS Financial and Operational Management

being performed and consistently apply them throughout the year. 

Whenever deviations are required, such as for prior-period adjustments, 

explanations should be properly documented.

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, IRS generally agreed with our 

recommendations related to financial reporting and provided information 

regarding initiatives to address them. We will evaluate the effectiveness of 

these initiatives during future audits. IRS also provided additional detailed 

comments about the specific findings in this chapter, which we have 

incorporated where appropriate. The letter from IRS’ Deputy 

Commissioner of Operations responding to this report is reprinted in 

appendix II.
Chapter 7

Deficiencies in the Collecting and Reporting 

of IRS’ Financial Data

Page 109 GAO-01-42 IRS Financial and Operational Management
Page 110 GAO-01-42 IRS Financial and Operational Management

Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities ApendxiI

Appendix I consists of two tables. Table 4 lists our recommendations from 

prior audits and reports. Table 5 lists new recommendations resulting from 

our fiscal year 1999 audit. From prior years’ reports on IRS’ financial 

activities,1

 61 recommendations remained open as of September 30, 1999 

(1 through 61 in table 4). We are closing 18 of these recommendations 

primarily because IRS has acted to address them or because they are being 

superseded by updated or more detailed recommendations. Thus, 43 of 

these prior recommendations remain open. The column “GAO status of 

recommendations” in table 4 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 inadequate 

internal controls, policies, and procedures or procedures that are not being 

consistently followed) or whether each would require long-term changes 

for fundamentally deficient operational and financial systems or other 

more extensive changes.2

 We are also making 36 new recommendations in 

this report as a result of our fiscal year 1999 audit (numbered 62 through 97 

in table 5, with short- or long-term changes also indicated). Consequently, 

80 recommendations are open as of the date of this report. In both tables, 

we have highlighted in bold the nine recommendations we consider of 

highest priority for IRS to address. These are recommendations 13, 15, 29, 

65, 66, 67, 71, 72, and 73. We will continue to monitor IRS’ progress toward 

addressing each of these recommendations during our fiscal year 2000 

audit.

Table 4: Status of Open GAO Recommendations on IRS’ Financial and Operational Activities

1

See GAO/AIMD-99-193, August 4, 1999, and GAO/AIMD-99-196, August 9, 1999.

2

In making this determination, we are 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.

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.

Open. IRS reported that it completed a 

manual inventory of ADP assets in 

December 1999. In addition, it is planning to 

replace its current ADP equipment inventory 

system by late 2002.

Open. (Long-term)
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 111 GAO-01-42 IRS Financial and Operational Management

 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. Recommendation not addressed in 

IRS remediation plan.

Open. (Short-term)

 3. Develop an interim means to capture relevant 

costs related to in-house software development.

Open. Recommendation not addressed in 

IRS remediation plan.

Closed. This recommendation is 

superseded by recommendation 91.

Financial Management: Important IRS Revenue Information Is Unavailable or Unreliable

(GAO/AIMD-94-22, December 21, 1993)

4. 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 its contractor 

developed a comprehensive set of policies 

and procedures for preparing its custodial 

financial statements. It also reported that it 

completed a comprehensive analysis of the 

administrative financial statement process.

Open. IRS has developed a set of 

policies and procedures for preparing 

its custodial financial statements, but 

has not yet formalized such 

procedures for its administrative 

financial statements. Additionally, to 

close this recommendation IRS needs 

to address proper review procedures 

to limit the types of errors we found in 

the draft fiscal year 1999 financial 

statements that had not been detected 

by IRS. (Short-term)

5. 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 its Total Interest 

Program (TIPS) to automate manual interest 

calculations should be fully functional in the 

first quarter of fiscal year 2001. Training will 

be provided and accuracy measured in fiscal 

year 2000.

Open. (Short-term)

Financial Management: IRS Does Not Adequately Manage Its Operating Funds

(GAO/AIMD-94-33, February 9, 1994)

6. Perform periodic reviews of obligations, 

adjusting the records for obligations to amounts 

expected to be paid and removing expired 

appropriation balances from IRS records as 

stipulated by the National Defense Authorization 

Act for Fiscal Year 1991.

Open. Recommendation not addressed in 

IRS remediation plan.

Closed. This recommendation is 

superseded by recommendation 88.

7. Revise procedures to incorporate the 

requirements that accurate receipt and 

acceptance data on invoiced items are obtained 

prior to payment and that supervisors ensure that 

these procedures are carried out.

Closed. IRS reported that it completed a 

Receipt and Acceptance Guide and 

conducted receipt and acceptance training.

Closed. IRS has taken corrective 

action to address this 

recommendation.

8. Revise document control procedures to require 

IRS units that actually receive goods or services 

to promptly forward receiving reports to payment 

offices so that payments can be promptly 

processed.

Closed. IRS reported that it implemented 

procedures to disseminate automatic 

notices to requisitioners and approvers 

reminding them to promptly input receiving 

reports after the anticipated due dates for 

goods or services ordered had passed.

Closed. IRS has taken corrective 

action to address this 

recommendation.

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 112 GAO-01-42 IRS Financial and Operational Management

9. Use the Automated Financial System’s 

enhanced cost accumulation capabilities to 

monitor and report costs by project in all 

appropriations.

Open. Recommendation not addressed in 

IRS remediation plan.

Closed. This recommendation is 

superseded by recommendation 91.

10. Require payment and procurement personnel, 

until the integration of the Automated Financial 

System (AFS) and the procurement system is 

completed as planned, to periodically (monthly or 

quarterly) reconcile payment information 

maintained in the AFS to amounts in the 

procurement records and promptly resolve any 

discrepancies.

Closed. Closed. The procurement system is 

fully integrated with AFS.

Financial Audit: Examination of IRS’ Fiscal Year 1993 Financial Statements

(GAO/AIMD-94-120, June 15, 1994)

11. Establish a method to continuously monitor 

and correct actions to ensure that progress is 

achieved.

Closed. Closed. We are closing this 

recommendation and will evaluate IRS’ 

monitoring and corrective actions 

taken on individual recommendations.

12. Use current information to periodically update 

estimated future Tax Systems Modernization 

costs.

Open. Recommendation not addressed in 

IRS remediation plan.

Open. (Short-term)

Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management

(GAO/AIMD-99-16, October 30, 1998)

13. 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 has a target date of calendar 

year 2001 for completion.

Open. IRS’ efforts to manually 

eliminate duplicate or other 

assessments that have already been 

paid in full from taxpayer accounts 

have been ineffective as payments 

were not properly recorded to 

accurately reflect each responsible 

party’s reduction in tax liability. (Shortterm)

14. 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.

Open. Although substantial 

improvements were noted during the 

fiscal year 1999 audit, IRS continued 

to experience problems in providing 

support for nonestate installment 

agreements and older cases. As these 

memos were issued after fiscal year 

1999, we will follow-up during our 

fiscal year 2000 audit. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 113 GAO-01-42 IRS Financial and Operational Management

15. 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 is planning a Custodial 

Accounting Project that will include the 

development of a Taxpayer Account 

Subledger to provide the ability to identify 

duplicate trust fund recovery assessments, 

taxes receivable, compliance assessments, 

and write-offs for financial reporting 

purposes. It also plans to develop an on-line 

transaction processing system to ensure 

that duplicate trust fund recovery 

assessments are properly credited when 

payments are received. The Custodial 

Accounting Project is currently targeted for 

2004.

Open. The ability to track and link 

multiple TFRP assessments depends 

on service center personnel manually 

inputting the cross-reference 

information needed to link these 

assessments. This process is labor 

intensive and not always effective, as 

we found cases in which payments 

were not posted to all related accounts 

even though the cross-references 

were present. Thus, even after the 

subsidiary ledger is implemented, it 

will require significant manual effort to 

ensure that it functions as needed. 

(Long-term)

16. Examine and consider options to increase 

deterrent controls at service centers. 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.

Open. IRS reported that it explored and 

analyzed all potential deterrents, and 

implemented various physical security 

enhancements. In addition, it procured 

lockers and expected them to be installed by 

July 2000. Once these are installed, it 

considers this recommendation closed.

Open. We continued to find 

weaknesses in service center 

deterrent controls during our 

September 1999 visits. We will 

continue to follow up during our fiscal 

year 2000 audit. (Short-term)

17. 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.

Open. We will follow up on IRS’ 

implementation during our fiscal year 

2000 audit. (Short-term)

18. 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 updated the 

Internal Revenue Manual (IRM) to reflect the 

policy of routing mail through Receipt and 

Control beginning January 1, 1999, and also 

issued revised procedures on January 1, 

2000.

Open. We will follow up on IRS’ 

implementation during our fiscal year 

2000 audit. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 114 GAO-01-42 IRS Financial and Operational Management

19. Conduct a cost/benefit study to evaluate 

whether preventive controls, such as manually 

comparing W-2 and other third party information 

to tax returns at the time returns are received 

rather than many months later, would be cost 

beneficial. This study should include a complete 

analysis of the projected costs and associated 

benefits of increases to preventive controls. If 

such controls are determined to be beneficial, IRS 

should implement them to the extent practical to 

reduce the amount of inappropriate refund 

payments.

Closed. IRS reported that it completed the 

cost/benefit study and found the cost to be 

prohibitive. However, it reported requesting a 

programming change to better identify 

returns that may have discrepancies, 

expected to be implemented in the 2001 

processing year.

Closed. Based on additional 

information obtained and further study 

of this issue, we have formulated an 

alternative recommendation (see 

recommendation 71).

20. 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 its modernization 

blueprint now subjects all returns with 

earned income tax credit (EITC) claims to 

further fraud analysis. It reported that the 

blueprint also provides for the comparison of 

returns against data available prior to refund 

issuance. This processing is expected to be 

installed beginning 2003.

Open. We will review IRS’ most recent 

modernization blueprint to verify that 

these features are included. (Shortterm)

21. Implement Phase 0 of IRS’ systems 

modernization plan as quickly as possible. In 

doing so, IRS should incorporate plans to ensure 

that the resulting system can routinely generate 

timely and reliable financial management reports 

which can be used by internal and external users 

and which will increase the timeliness of 

preparation and audit of its annual financial 

statements. Until Phase 0 is implemented, IRS 

should continue to utilize special computer 

programs and prepare manual adjustments, as 

needed, to derive amounts to be reported in the 

financial statements. 

Closed. Phase 0 of the systems 

modernization plan has been superseded by 

a data warehouse that IRS believes will 

produce timely and reliable financial 

information with full traceability. IRS is 

scheduled to implement this feature in 2004. 

Until then, current procedures for extracting, 

reconciling, and reporting financial data will 

continue to be used. 

Closed. As Phase 0 is no longer 

planned, we will follow up on the 

implementation of the new initiative in 

future audits.

Excise Taxes: Internal Control Weaknesses Affect Accuracy of Distributions to the Trust Funds

(GAO/AIMD-99-17, November 9, 1998)

22. Determine if it would be cost-effective to 

develop and implement procedures requiring 

either key verification of the assessment amount 

by excise tax type before final processing or to 

implement other post-input controls to verify the 

accuracy of assessment amounts by tax type. In 

making the determination, IRS should consider 

establishing a dollar threshold that would ensure 

coverage of 90 percent of total excise tax 

assessments from the tax returns. 

Closed. IRS reported that it established 

post-input controls to review all returns with 

assessments of $1 million and over and all 

returns reporting coal tax assessments of 

$100,000 or more. IRS estimated that this 

review would cover 92 percent of the excise 

tax assessments. 

Closed. We noted during our audit that 

these controls were implemented. 

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 115 GAO-01-42 IRS Financial and Operational Management

23. 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 formed a task 

group to examine ways to amend Form 720 

reporting, with implementation by 2002.

Open. (Short-term)

24. 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 were added to analyze the 

certifications, and three separate check 

sheets developed to ensure the quality of 

each Excise Tax Certification as of 

December 1998.

Open. During our fiscal year 1999 

audit, we found that the check sheets 

were used and properly signed off by 

the supervisors. However, we still 

found errors attributed to the lack of 

written procedures that provide a 

description of the process and a guide 

to the logic for the procedures used. 

Written procedures would help 

supervisors better determine if both 

the math accuracy and procedures to 

arrive at the correct amounts were 

adequate. (Short-term)

25. Establish and implement specific procedures 

requiring that IRS personnel review the 

distribution rates provided by the Office of Tax 

Analysis (OTA) prior to those rates being used in 

the certification of Highway Trust Fund 

distributions and document evidence of those 

reviews. 

Closed. As of August 1998, IRS’ legal 

counsel verified OTA’s rate charts for each of 

the trust fund agencies.

Closed. During our fiscal year 1999 

audit, we found that staff from IRS’ 

chief counsel’s office reviewed and 

documented the OTA-developed tax 

rate table.

Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement

(GAO/AIMD-99-15, November 30, 1998)

26. Re-evaluate the risk classification of all 

positions in IRS’ Receipt and Control Branch and 

reclassify such positions where appropriate.

Closed. IRS reported that it determined that 

no reclassifications were needed in the 

Receipt and Control positions, adding that it 

had taken several other steps to mitigate the 

risk of theft in Receipt and Control.

Closed. Action not planned. IRS stated 

that it chose to use other options to 

mitigate the risks in the Receipt and 

Control Branch. We will continue to 

follow up on these other options to 

determine if they adequately mitigate 

the risk.

27. 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 issued a 

memorandum in July 1999 establishing 

procedures to better ensure that fingerprint 

checks are initiated and supervisory 

feedback is provided to ensure that IRS staff 

comply with fingerprint check requirements.

Open. Because IRS issued this new 

guidance after the 1999 hiring season, 

we will monitor IRS’ implementation 

during the fiscal year 2000 financial 

statement audit. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 116 GAO-01-42 IRS Financial and Operational Management

28. 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 April and June 

1999 that required fingerprints of all filing 

season applicants at the earliest possible 

time in the job application process.

Open. As these policies were issued 

too late to affect hiring for the 1999 

filing season, we will monitor IRS’ 

implementation of this policy during 

the fiscal year 2000 financial 

statement audit. (Short-term)

29. 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.

Open. As of the end of fieldwork, IRS had 

not yet issued such a policy.

Open. We will continue to monitor 

implementation in our fiscal year 2000 

audit. (Short-term)

30. 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.

Open. IRS reported that in August 1999 it 

approved a recommendation not to adopt a 

servicewide policy requiring local police 

checks on applicants due to various 

limitations outlined in a decision document. 

IRS reported that it would evaluate the 

effectiveness of the pilot with the 

Philadelphia Police Department when the 

report is issued July 2000.

Open. (Short-term)

31. Continue the agency’s efforts to negotiate with 

OPM and the FBI and procure the necessary 

equipment so that it can participate in the FBI’s 

Integrated Automated Fingerprint Identification 

System (IAFIS) program by August 1999.

Closed. IRS reported that as of November 

29, 1999 it was participating in FBI’s IAFIS. 

The live-scan fingerprint equipment had 

been procured and installed at OPM and 22 

IRS sites, including the 10 service centers.

Open. We will evaluate the 

effectiveness and timeliness of IRS’ 

participation in IAFIS during our fiscal 

year 2000 audit. (Short-term)

32. 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.

Open. IRS reported that while all 10 service 

centers have mail in secured and restricted 

areas during off-peak times, some store mail 

in unrestricted areas during peak times due 

to space and resource limitations. IRS 

reported that it intended to ensure yearround compliance with this recommendation 

by April 2000.

Open. Although improved, we 

continued to find locations that needed 

correction. (Short-term)

33. Ensure that all final candling activities are 

consistently located in a restricted access area.

Closed. IRS reported that as of January 1, 

2000 the final candling activities at all 10 

service centers were located in restricted 

access areas.

Closed. We confirmed that IRS has 

corrected this problem.

34. 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. 

Open. During our September 1999 

visits, we continued to find discovered 

remittances stored in unlocked 

containers at sites where they were 

not immediately logged in when they 

were discovered. We will continue to 

monitor this area. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 117 GAO-01-42 IRS Financial and Operational Management

35. Ensure that all unmatched checks are stored 

in locked containers until they can be researched 

and processed for deposit.

Closed. IRS reported that because these 

checks are located in Receipt and Control 

and they have taken other steps to mitigate 

the risk of theft in Receipt and Control, no 

further action is planned.

Closed. Action not planned. IRS stated 

that it chose to use other options to 

mitigate the risks in the Receipt and 

Control Branch. We will continue to 

follow -up on these other options to 

determine if they adequately mitigate 

the risk.

36. Ensure that all returned refund checks are 

stamped “nonnegotiable” as soon as they are 

extracted.

Closed. IRS reported that it updated the IRM 

in January 1999 to reflect the policy of 

stamping all returned refund checks as 

“nonnegotiable” as soon as they are 

extracted.

Open. We continued to find returned 

refund checks that were not stamped 

“nonnegotiable” upon extraction that 

were also being stored in unlocked 

containers. (Short-term)

37. 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 communicated 

these requirements to the field offices 

through its new Customer Service Operating 

Guidelines for fiscal year 2000.

Open. We continued to find violations 

of policy in this area. (Short-term)

38. 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.

Open. We will monitor IRS’ 

implementation during the fiscal year 

2000 financial statement audit. (Shortterm)

39. Study the feasibility of improving security for 

deposits in transit. In conducting this study, IRS 

should consider a number of alternatives 

including the use of depositories in close 

proximity to its various field locations and 

employing security guards to accompany couriers 

to the depositories.

Closed. After studying this issue, IRS issued 

new courier requirements in April and 

November 1999 and reported that it would 

continue to conduct reviews at service 

centers to ensure that the requirements are 

followed.

Closed. If effectively implemented, the 

new courier policies should greatly 

reduce the vulnerability and risk 

associated with transporting IRS 

deposits by courier.

40. Develop a policy to ensure that contracts 

related to courier services do not unduly expose 

the government to losses in the event of lost, 

stolen, or damaged deposits in transit. 

Closed. IRS issued new minimum courier 

requirements and reported that it would 

continue to conduct reviews at service 

centers to ensure that the requirements are 

followed.

Closed. If effectively implemented, the 

new courier policies should greatly 

reduce the vulnerability and risk 

associated with transporting IRS 

deposits by courier.

41. Ensure that courier access is limited to 

service center premises. Deposit Unit employees 

should deliver the deposits to couriers waiting at 

the guard station instead of providing courier 

badges allowing them unnecessary service 

center access. 

Closed. IRS issued new courier procedures 

that limited courier access within service 

center premises. IRS was confident that all 

service centers complied with this 

procedure.

Closed. We confirmed that couriers 

are no longer allowed access to 

service centers beyond the guard 

stations.

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 118 GAO-01-42 IRS Financial and Operational Management

Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, August 4, 1999)

42. 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 2001 for 

implementation.

Open. We will evaluate the 

effectiveness and timeliness of IRS’ 

automated TFRP system during future 

audits. (Short-term)

43. 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 noted improved 

compliance after IRS issued its 

memorandum and guidelines, 

implementation of the guidelines 

remained a problem. We will continue 

to monitor compliance during our fiscal 

year 2000 audit. (Short-term)

44. 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 at the district 

and post-of-duty offices. Completion dates 

are not yet determined.

Open. (Short-term)

45. IRS should work with Treasury’s Financial 

Management Service (FMS) to revise the current 

lockbox contracts to specifically require that

• fingerprint checks be completed before 

employees begin working,

• temporary employees be subjected to 

background checks that are consistent with 

those required of IRS employees, and

• taxpayer data and receipts in transit to and from 

the lockbox banks be appropriately protected.

Closed. IRS reported that it revised the 

February 2000 Statement of Work for 

lockboxes requiring that police clearance 

checks be performed for all temporary 

employees prior to employment. Temporary 

employees are required to provide specific 

background information and fingerprints, 

and additional measures for courier 

transport are now required. According to 

IRS, these measures were completed in 

March 2000.

Closed. This recommendation is 

superseded by recommendation 73.

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 119 GAO-01-42 IRS Financial and Operational Management

46. 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 implementing new 

procedures by January 2000 for all service 

centers. These included posting signs in 

lobbies reminding taxpayers to request a 

receipt if a payment is made, maintaining an 

inventory of Form 809 cash receipts and a 

master logbook of the receipts issued, 

storing the logbook and receipt books in 

locked containers, and reconciling the 

receipts and the logbook.

Open. As of the end of fieldwork, we 

noted that receipts were not routinely 

provided for all types of payments and 

that signs were not posted reminding 

taxpayers to request receipts. (Shortterm)

47. 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. Although the Cincinnati Service 

Center established expedited 

processing procedures for tax returns 

$1 million and over, we continue to find 

delays in IRS’ certifications of receipts. 

We still found cases involving 

significant amounts that were not 

promptly recorded and included in the 

proper quarterly excise tax trust fund 

certifications. (Short-term)

48. 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, 

additional staff are needed for extractions 

and analysis.

Open. (Short-term)

Financial Management: Serious Weaknesses Impact IRS’ Ability to Reliably Report and Manage Its Operations (GAO/AIMD-99-

196, August 9, 1999)

49. 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 by October 1999 it 

had developed a series of new reports and 

worksheets to assist in the cash 

reconciliation process, finalized fiscal year 

1998 and 1999 reconciliations, and 

reconciled unresolved differences. 

Open. While IRS was able, in January 

2000, to furnish explanations and 

support to allow us to conclude that its 

September 30, 1999, fund balance 

with Treasury was reliable, 

unreconciled differences between IRS 

and Treasury still existed. We will 

evaluate the actions IRS reported as 

part of our fiscal year 2000 audit. 

(Short-term)

50. 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.

Open. IRS reported that it would implement 

an edit on the suspense account that 

prevents entries older than 5 fiscal years, 

develop an aging report for suspense items, 

and develop a new process requiring a 

monthly reconciliation certifying the validity 

of all suspense items.

Open. In fiscal year 1999, IRS made 

substantial progress in clearing out its 

suspense account. However, this was 

primarily due to an extensive year-end 

effort. IRS should investigate and clear 

outstanding balances monthly until 

substantially all amounts are resolved. 

(Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 120 GAO-01-42 IRS Financial and Operational Management

51. 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. Recommendation not addressed in 

IRS remediation plan.

Open. In fiscal year 1999, IRS was 

able to provide us with lists of accounts 

payable and outstanding undelivered 

orders, but only after performing laborintensive ad hoc procedures to 

develop the lists. IRS should develop a 

subsidiary ledger from which it can 

routinely provide outstanding 

balances. Also, IRS was unable to 

provide us with a list of current year 

nonpayroll operating expenses. (Longterm)

52. Develop the data to support meaningful cost 

information categories and cost-based 

performance measures.

Open. Recommendation not addressed in 

IRS remediation plan.

Open. (Short-term)

53. 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. IRS reported that it has planned 

actions to transition to a new property 

management process for automated data 

processing (ADP) equipment by early 2001. 

Open. IRS’ plan does not address 

improving the accuracy of its non-ADP 

equipment records. We found 

numerous problems with the accuracy 

of the detailed P&E records for both 

ADP and non-ADP property. (Shortterm)

54. 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. 

Open. IRS performed an inventory of ADP 

equipment as of December 31, 1999, and 

changed the inventory cycle for non-ADP 

equipment to an annual cycle. It reported 

that it is currently developing interfaces to 

automate its hardware and software 

inventory by late 2001 and replace its 

current ADP inventory system by late 2002.

Open. IRS could not rely on its 

property records to determine a 

September 30, 1999, P&E balance 

and thus, developed a balance based 

on statistical and other estimates 

provided by a consulting firm. 

However, it still has not developed 

effective procedures to ensure the 

ongoing accuracy of its records. 

(Short-term)

55. 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 in March 2000 it 

established interim procedures to ensure the 

reliability of its fiscal year 2000 ADP 

equipment inventory. It also reported that it 

validates both ADP and non-ADP P&E 

amounts through annual financial and 

Federal Managers’ Financial Integrity Act of 

1982 (FMFIA) reviews.

Open. We found that IRS has yet to 

establish an effective property 

management system for either its ADP 

or non-ADP equipment. Despite its 

annual reviews, we continue to find 

errors in its detailed P&E records each 

year. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 121 GAO-01-42 IRS Financial and Operational Management

a

The “Status of GAO recommendations reported by IRS” is based primarily on the following IRS 

documents: Internal Revenue Service Remediation Plan, March 31, 2000, and an October 6, 1999, 

letter from IRS to Congress responding to recommendations in GAO/AIMD-99-196.

56. 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. 

Open. IRS did report, as of September 

30, 1999, $288 million as the cost of 

major systems. However, IRS still 

needs to implement an effective 

system to capture and capitalize all 

costs incurred to bring P&E to a form 

and location suitable for its intended 

use, including costs that are not 

included as part of the property item’s 

invoice. (Short-term)

57. Revise the current capitalization policy to 

ensure that material P&E acquisitions are not 

expensed.

Open. IRS reported it revised its 

capitalization policy but did not expect to 

formalize this policy until June 2000.

Open. We will monitor implementation 

during our fiscal year 2000 audit. 

(Short-term)

58. 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 beginning April 1, 2000. The CFO’s 

office will then review to determine whether 

they represent capital leases. IRS reported 

that by September 30, 2000, the CFO’s 

office will also review leases for all leased 

assets acquired prior to April 1, 2000, and 

make adjustments as necessary.

Open. We will monitor implementation 

during our fiscal year 2000 audit. 

(Short-term)

59. 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 it intends to acquire 

and install an integrated financial system 

that will meet this recommendation as part 

of its overall systems modernization. It 

expects to complete its systems plan by 

June 30, 2000.

Open. (Long-term)

60. 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.

Open. IRS reported that it has added new 

management team members to the CFO 

organization to add stability and expertise to 

the accounting operations and financial 

statement process and is conducting a 

training program for its accounting staff.

Open. We will evaluate the 

implementation of these actions during 

our fiscal year 2000 audit. (Short-term)

61. 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 

an evaluation process to include two levels 

of management review in the CFO 

organization.

Open. We identified errors in the draft 

fiscal year 1999 financial statements 

indicating that this has not been 

effectively implemented. We will 

continue to evaluate the 

implementation of these actions during 

our fiscal year 2000 audit. (Short-term)

(Continued From Previous Page)

Recommendations

Status of GAO recommendations 

reported by IRSa GAO status of recommendations
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 122 GAO-01-42 IRS Financial and Operational Management

Table 5: New GAO Recommendations on IRS’ Financial and Operational Activities

Recommendations

Recommended effort 

involved

Internal Revenue Service: Recommendations to Improve Financial and Operational Management 

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

62. 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.

Short-term

63. 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.

Short-term

64. Implement procedures to monitor the age of all pending offers and to require supervisors to follow up with 

staff to determine within 6 months whether to accept or reject the offer.

Short-term

65. As an alternative to prematurely suspending active collection efforts, and using the best available 

information, develop reliable cost/benefit data relating to collection efforts for cases with some 

collection potential. These cost/benefit data would include the full cost associated with the increased 

collection activity (i.e., salaries, benefits, and administrative support) as well as the expected additional 

tax collections generated.

Short-term

66. Incorporate into its systems modernization blueprint and strategic planning process the capability to 

routinely and reliably measure the cost/benefit of its collections activities and make informed resource 

allocation decisions.

Long-term

67. 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.

Short-term

68. 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.

Short-term

69. Determine why the program that generates the Questionable Refund Report was not functioning as intended 

during fiscal year 1999 and implement appropriate corrective actions.

Short-term

70. Determine why service centers have not been more effective in stopping refunds associated with 

questionable EITCs and make changes to current procedures, as appropriate,

• review procedures for enforcing taxpayer compliance with the Taxpayer Relief Act of 1997 and implement 

actions to prevent taxpayers who had been denied an EITC for tax year 1997 or any subsequent year from 

being granted an EITC in successive years until they have provided the requisite supporting documentation, 

and

• track the total number of and dollars in EITCs subjected each year to the 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.

Short-term
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 123 GAO-01-42 IRS Financial and Operational Management

71. 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 cost/benefit data to estimate the 

tax revenue collected by, and the amount of improper refunds returned to, IRS for each dollar spent 

pursuing these outstanding amounts. These data would include (1) an estimate of the full cost incurred 

by IRS in performing each of these efforts, including the salaries and benefits of all staff involved, as 

well as any related nonpersonnel costs, such as supplies and utilities, and (2) the actual amount 

(a) collected on tax amounts assessed and (b) recovered on improper refunds disbursed.

Short-term

72. 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 71 and 

make informed resource allocation decisions.

Long-term

73. Work with Treasury’s Financial Management Service (FMS) to revise the current lockbox contracts to 

emphasize security requirements and to specifically require that

• fingerprint checks be completed before employees begin working,

• temporary employees be subjected to background checks that are consistent with those required for 

IRS employees, and

• at a minimum, the lockbox bank courier services meet the service center requirements contained in 

IRS’ November 16, 1999, policy.

Short-term

74. Ensure that all IRS units receiving collections have consistent policies and procedures to safeguard and 

account for cash receipts.

Short-term

75. Perform and document periodic observations and reviews to monitor and enforce compliance with policies 

addressing the safeguarding of cash receipts.

Short-term

76. Develop a subsidiary ledger for leasehold improvements and implement procedures to record leasehold 

improvement costs as they occur.

Long-term

77. Implement procedures and controls to ensure that expenditures for P&E are charged to the correct 

accounting codes to provide reliable records for expenditures as a basis of extracting the costs for major 

systems and leasehold improvements.

Short-term

78. Establish a system to capture all costs related to the PRIME effort to modernize IRS’ computer systems. Short-term 

79. 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.

Short-term

80. Consolidate and update the P&E policies and procedures currently documented in various handbooks and 

policy memorandums into a comprehensive document that personnel responsible for maintaining inventory 

records can use as a reference.

Short-term

81. Assign a senior-level position with overall responsibility for ensuring that P&E records are accurate and P&E 

is properly accounted for.

Short-term

82. 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. 

Short-term

83. 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.

Short-term

84. 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.

Short-term

(Continued From Previous Page)

Recommendations

Recommended effort 

involved
Appendix I

Status of GAO Recommendations on IRS’ 

Financial and Operational Activities

Page 124 GAO-01-42 IRS Financial and Operational Management

85. Review, and correct as necessary, data in inventory records, such as serial or model numbers and 

manufacturer names, during periodic inventories of P&E.

Short-term

86. Perform sufficient supervisory reviews to help ensure that transactions recorded on P&E inventory records 

are accurately entered into subsidiary records and appropriately supported by documentation.

Short-term

87. Periodically analyze outstanding obligations, including an aging of obligations to identify potential items that 

may require deobligation, and remove expired appropriation balances from IRS records as stipulated by the 

National Defense Authorization Act for Fiscal Year 1991. The CFO office should then coordinate with the 

financial plan managers to help ensure that invalid undelivered orders are promptly deobligated.

Short-term

88. Develop a subsidiary ledger 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.

Short-term

89. 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.

Short-term

90. 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.

Long-term

91. Review the 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.

Short-term

92. Establish policies and procedures to ensure that all administrative and, to the extent possible, custodial 

transactions are promptly recorded in the general ledger, preferably within 30 days of the transaction. 

Short-term

93. 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 SGL at the 

transaction level.

Long-term

94. 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.

Short-term

95. 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.

Short-term

96. Provide training to key program offices on the accrual process. Short-term

97. 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.

Short-term

(Continued From Previous Page)

Recommendations

Recommended effort 

involved
Page 125 GAO-01-42 IRS Financial and Operational Management

Appendix II

Comments From the Internal Revenue ServiceApendxiI

Note: The enclosures 

referred to in this letter were 

provided by IRS in 

response to our draft report. 

These enclosures contain 

additional detailed 

comments that we reviewed 

and, where appropriate, 

incorporated into this 

report. However, as we 

discussed with IRS, only 

the letter from Deputy 

Commissioner Wentzel is 

reproduced in this report.
Appendix II

Comments From the Internal Revenue 

Service

Page 126 GAO-01-42 IRS Financial and Operational Management
Appendix II

Comments From the Internal Revenue 

Service

Page 127 GAO-01-42 IRS Financial and Operational Management
Appendix II

Comments From the Internal Revenue 

Service

Page 128 GAO-01-42 IRS Financial and Operational Management
Page 129 GAO-01-42 IRS Financial and Operational Management

Related GAO Products

Management Letter: Suggested Improvements in IRS’ Accounting 

Procedures and Internal Controls (GAO/AIMD-00-162R, June 14, 2000).

Internal Revenue Service: Results of Fiscal Year 1999 Financial Statement 

Audit (GAO/T-AIMD-00-104, February 29, 2000).

Financial Audit: IRS’ Fiscal Year 1999 Financial Statements

(GAO/AIMD-00-76, February 29, 2000).

Standards for Internal Control in the Federal Government

(GAO/AIMD-00-21.3.1, November 1999).

Financial Audit: Issues Regarding Reconciliations of Fund Balance with 

Treasury Accounts (GAO/AIMD-99-271, September 17, 1999).

Internal Revenue Service: Serious Weaknesses Impact Ability to Report on 

and Manage Operations (GAO/AIMD-99-196, August 9, 1999).

Internal Revenue Service: Custodial Financial Management Weaknesses

(GAO/AIMD-99-193, August 4, 1999).

Payroll Taxes: Billions in Delinquent Taxes and Penalties Due But Unlikely 

to Be Collected (GAO/T-AIMD/GGD-99-256, August 2, 1999).

Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty 

Assessments Are Owed (GAO/AIMD/GGD-99-211, August 2, 1999).

USDA Information Security: Weaknesses at National Finance Center 

Increase Risk of Fraud, Misuse, and Improper Disclosure 

(GAO/AIMD-99-227, July 30, 1999).

Management Letter: Suggested Improvements in IRS’ Accounting 

Procedures and Internal Controls (GAO/AIMD-99-182R, June 30, 1999).

Internal Revenue Service: Results of Fiscal Year 1998 Financial Statement 

Audit (GAO/T-AIMD-99-103, March 1, 1999).

Financial Audit: IRS’ Fiscal Year 1998 Financial Statements

(GAO/AIMD-99-75, March 1, 1999).

Major Management Challenges and Program Risks: Department of the 

Treasury (GAO/OCG-99-14, January 1999).
Related GAO Products

Page 130 GAO-01-42 IRS Financial and Operational Management

High-Risk Series: An Update (GAO/HR-99-1, January 1999).

IRS Systems Security: Although Significant Improvements Made, Tax 

Processing Operations and Data Still at Serious Risk (GAO/AIMD-99-38, 

December 14, 1998).

Internal Revenue Service: Physical Security Over Taxpayer Receipts and 

Data Needs Improvement (GAO/AIMD-99-15, November 30, 1998).

Excise Taxes: Internal Control Weaknesses Affect Accuracy of 

Distributions to the Trust Funds (GAO/AIMD-99-17, November 9, 1998).

Internal Revenue Service: Immediate and Long-Term Actions Needed to 

Improve Financial Management (GAO/AIMD-99-16, October 30, 1998).

Internal Revenue Service: Composition and Collectibility of Unpaid 

Assessments (GAO/AIMD-99-12, October 29, 1998).

Internal Revenue Service: Remaining Challenges to Achieve Lasting 

Financial Management Improvements (GAO/T-AIMD/GGD-98-139, April 15, 

1998).

Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial 

Statements (GAO/AIMD-98-77, February 26, 1998).

Tax Systems Modernization: Blueprint Is a Good Start But Not Yet 

Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/GGD-98-54, 

February 24, 1998).

Financial Audit: Examination of IRS’ Fiscal Year 1996 Custodial Financial 

Statements (GAO/AIMD-98-18, December 24, 1997).

Financial Audit: Examination of IRS’ Fiscal Year 1996 Administrative 

Financial Statements (GAO/AIMD-97-89, August 29, 1997).

Financial Audit: Examination of IRS’ Fiscal Year 1995 Financial Statements 

(GAO/AIMD-96-101, July 11, 1996).

Financial Audit: Examination of IRS’ Fiscal Year 1994 Financial Statements 

(GAO/AIMD-95-141, August 4, 1995).
Related GAO Products

Page 131 GAO-01-42 IRS Financial and Operational Management

Financial Audit: Examination of IRS’ Fiscal Year 1993 Financial Statements 

(GAO/AIMD-94-120, June 15, 1994).

Financial Management: IRS Does Not Adequately Manage Its Operating 

Funds (GAO/AIMD-94-33, February 9, 1994).

Financial Management: Important IRS Revenue Information is Unavailable 

or Unreliable (GAO/AIMD-94-22, December 21, 1993).

Financial Audit: Examination of IRS’ Fiscal Year 1992 Financial Statements

(GAO/AFMD-93-2, June 30, 1993).

Financial Audit: IRS Significantly Overstated its Accounts Receivable 

Balance (GAO/AFMD-93-42, May 6, 1993).

Federal Tax Deposit System: IRS Can Improve the Federal Tax Deposit 

System (GAO/AFMD-93-40, April 28, 1993).

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