GAO-03-562R IRS Management Report 

United States General Accounting Office 

Washington, DC 20548 

May 20, 2003 

The Honorable Mark W. Everson 

Commissioner of Internal Revenue 

Subject: Management Report: Improvements Needed in IRS's Internal Controls 

Dear Mr. Everson: 

In November 2002, we issued our report on the results of our audit of the Internal 

Revenue Service’s (IRS) financial statements as of and for the fiscal years ending 

September 30, 2002 and 2001, and on the effectiveness of its internal controls as of 

September 30, 2002.1

 We also reported our conclusions on IRS’s compliance with 

significant provisions of selected laws and regulations and on whether IRS’s financial 

management systems substantially comply with requirements of the Federal 

Financial Management Improvement Act of 1996 (FFMIA). A separate report on the 

implementation status of recommendations from our prior IRS financial audits and 

related financial management reports will be issued shortly. 

The purpose of this report is to discuss issues identified during our fiscal year 2002 

audit regarding accounting procedures and internal controls that could be improved 

for which we do not presently have any recommendations outstanding. Although not 

all of these issues were discussed in our fiscal year 2002 audit report, they all warrant 

management’s attention. 

 

Results in Brief 

During fiscal year 2002, IRS had a number of internal control issues that affected 

financial reporting, which includes safeguarding of assets. These issues concern 

policies and procedures related to (1) employee fingerprint records, (2) enforcement 

of courier service standards, (3) taxpayer receipt processing areas, (4) candling,2

 

(5) acceptance of tax payments in cash, and (6) structuring of installment 

agreements. Each of these control weaknesses posed added risks of losses, 

nonpayment of taxes, or potential burden to taxpayers. 

 

1

U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2002 and 2001 

Financial Statements, GAO-03-243 (Washington D.C.: Nov. 15, 2002). 2

Candling is a process used by IRS to determine whether any contents remain in open 

envelopes before their destruction. Candling is generally performed by placing open 

envelopes in front of a light source.
Page 2 GAO-03-562R IRS Management Report 

Specifically, we found the following: 

• IRS did not always ensure that fingerprint check results for individuals entering 

on duty were under the required 180 day expiration period. The fingerprint check 

results consist of information provided by law enforcement agencies on events 

that occurred before the fingerprint check results are released. The older the 

fingerprint check results are, the greater the risk that IRS might hire applicants 

unsuitable for working with taxpayer receipts and information. 

• IRS did not always ensure that couriers adhered to certain security requirements. 

We found that (1) at half of IRS’s service center campuses, couriers did not 

undergo the specified background investigations or fingerprint checks and (2) a 

courier service had not maintained the required insurance coverage for the 

deposits it transports. 

• IRS did not maintain consistently effective physical security controls over its 

receipt processing areas. We found (1) instances at service centers where 

prohibited items were brought into receipt processing areas and where the 

requirement to carry permitted personal items in clear plastic bags was 

circumvented and (2) at one of two taxpayer assistance centers3

 we visited, 

employees were allowed to store personal belongings with cash payments and 

official receipt certificate vouchers. 

• IRS did not always ensure that emptied envelopes were candled twice or that final 

candling was not performed by a single employee in a remote area.4 

• At some taxpayer assistance centers, IRS did not accept cash payments from 

taxpayers as required by IRS policy, thereby imposing an undue burden on certain 

taxpayers. 

• IRS did not always structure installment agreements with taxpayers to provide for 

full payment of the tax liability as required by the Internal Revenue Code. 

At the end of our discussion of each of the first five of these issues, we make 

recommendations for strengthening IRS’s internal controls. 

In its comments, IRS agreed with our recommendations and described actions it was 

taking or planned to take to address several of the control weaknesses described in 

this report. At the end of our discussion of each of the issues in this report where we 

are making recommendations, we have summarized IRS’ related comments and 

 

3

Taxpayer assistance centers handle questions and accept payments from taxpayers who 

choose to conduct business with IRS in person. They are located in field offices. 4

Final candling occurs at the end of the mail extraction process to ensure that all the contents 

have been removed from each envelope.
Page 3 GAO-03-562R IRS Management Report 

provided our evaluation. We also considered IRS’ comments on our findings and have 

made revisions as appropriate. 

Scope and Methodology 

As part of our audit of IRS’s fiscal years 2002 and 2001 financial statements, we 

evaluated IRS’s internal controls and its compliance with selected provisions of laws 

and regulations. We designed our audit procedures to test relevant controls including 

those for proper authorization, execution, accounting, and reporting of transactions. 

We conducted our audit in accordance with U.S. generally accepted government 

auditing standards. We requested comments on a draft of this report from the Acting 

Commissioner of IRS. We received written comments from the Acting Commissioner 

and have reprinted the comments in enclosure I to this report. Further details on our 

scope and methodology are included in our November 2002 report on the results of 

our fiscal years 2002 and 2001 financial statement audits and are reproduced in 

enclosure II.5 

Enforcement of Expiration Period Policy for Fingerprint Check Results 

In previous years, we found that IRS was hiring individuals and allowing them access 

to cash, checks, and other taxpayer data before it had received satisfactory results of 

their fingerprint checks, thereby subjecting IRS to an increased risk of theft or misuse 

of taxpayer receipts and taxpayer data.6

 During our fiscal year 2002 audit, we found 

that IRS had made substantial progress in this area and as a result had significantly 

reduced its exposure related to the risk of hiring individuals prior to receiving 

satisfactory fingerprint check results.7 However, fingerprint results most accurately 

reflect all the information known by law enforcement authorities on an individual on 

the date the results are obtained. The usefulness of preemployment fingerprint 

results in enabling an employer to assess an individual’s suitability for employment 

therefore decreases as the age of the fingerprint results used increases. 

IRS’s hiring policies require that IRS receive and evaluate fingerprint check results 

before individuals enter on duty and set the expiration period for these results at 180 

days. However, in our fiscal year 2002 audit, we found that IRS did not actively track 

fingerprint results to ensure that they did not exceed the 180-day limit when 

individuals entered on duty. Specifically, we found 53 instances in which new 

employees entered on duty at IRS with fingerprint check results over180 days old. 

 

5

GAO-03-243.

6

U.S. General Accounting Office, Internal Revenue Service: Progress Made, but Further 

Actions Needed to Improve Financial Management, GAO-02-35 (Washington D.C.: Oct. 19, 

2001).

7

GAO-03-243.
Page 4 GAO-03-562R IRS Management Report 

Until IRS enforces its policy on the expiration period for fingerprint check results it is 

exposed to increased risk of hiring applicants with unsuitable backgrounds to handle 

cash, checks, and sensitive taxpayer information. This, in turn, increases the risk of 

potential theft and misuse of taxpayer receipts and data. 

Recommendation

To further reduce IRS’s risk of hiring unsuitable employees to handle and process 

taxpayer receipts and data, we recommend that IRS enforce its policy of a 180-day 

expiration period for fingerprint check results when an individual enters on duty. 

IRS’s Comments and Our Evaluation

IRS agreed with this issue and indicated in its response that it has already taken 

action to address the finding. In its comments, IRS stated that it has a policy of 180 

days for the expiration period of fingerprint results. IRS had initially informed us that 

it did not have such a policy. As a result, we modified the report to stress the 

importance of IRS enforcing this policy. With respect to actions taken to address this 

finding, IRS stated that it had (1) reemphasized its policy to background investigation 

coordinators and personnel officers and (2) created and distributed software 

calculating the fingerprint results expiration date and instructed staff to use this 

software and note the expiration date on the fingerprint check results 

documentation. We will evaluate the effectiveness of IRS’s efforts during our fiscal 

year 2003 financial audit. 

IRS also noted that exceptions could be made to the policy for GS-1811 Criminal 

Investigation Special Agents and executives from outside the IRS, as they must 

complete an additional background investigation prior to their entering on duty. 

However, we had specifically excluded any individual having met these additional 

requirements from our count of 53 instances in which employees entered on duty 

with fingerprint check results past the 180-day expiration period. 

Enforcement of Courier Service Standards 

During previous audits of IRS’s financial statements, we found that IRS did not have 

effective controls in place to ensure that its courier service requirements were 

enforced. Since November 1998, we have reported that IRS lacks effective controls 
Page 5 GAO-03-562R IRS Management Report 

over courier services responsible for transporting taxpayer receipts.8

 To address 

some of these matters, we recommended that IRS (1) clarify that the intent of the 

requirement for background investigations is meant to apply to personnel being 

entrusted with taxpayer receipts and information rather than just personnel being 

granted access to an IRS facility and (2) develop policies intended to ensure that 

contracts related to courier services do not unduly expose the government or 

taxpayers to losses in the event that deposits are lost, stolen, or damaged in transit. 

IRS has made an effort to address courier security weaknesses we identified by 

adopting more stringent security standards for couriers who transport IRS’s daily 

deposits to depositary institutions. Specifically, as a result of our recommendations, 

IRS established a policy that couriers requiring access to IRS facilities undergo a 

limited background investigation, including a fingerprint check. IRS subsequently 

extended the requirement for background investigations to all personnel entrusted 

with taxpayer receipts and information. In addition, the courier service standards 

were revised to include, in particular, a requirement that courier services have and 

maintain insurance coverage valued at $1 million to cover the costs of reconstructing 

a lost, stolen, or destroyed deposit. However, during our fiscal year 2002 audit, we 

identified two issues related to IRS’s enforcement of its courier service standards that 

increased the risk that (1) taxpayer receipts and taxpayer data could be lost, stolen, 

or misused by couriers who transport these items and (2) taxpayers and the 

government could be unnecessarily exposed to the risk of financial loss. 

Specifically, we found that at 5 of IRS’s 10 service centers for which agreements for 

courier services were negotiated by the Department of the Treasury’s Financial 

Management Service (FMS), there was no requirement that couriers undergo 

background investigations or FBI fingerprint checks.9

 Such a requirement does exist 

for the 5 service center campuses for which courier services agreements were 

negotiated by IRS. According to FMS, these background check requirements were not 

 

8

U.S. General Accounting Office, Internal Revenue Service: Physical Security Over 

Taxpayer Receipts and Data Needs Improvement, GAO/AIMD-99-15 (Washington D.C.: 

Nov. 30, 1998); Internal Revenue Service: Custodial Financial Management Weaknesses,

GAO/AIMD-99-193 (Washington D.C.: Aug. 4, 1999); Internal Revenue Service: 

Recommendations to Improve Financial and Operational Management, GAO-01-42 

(Washington D.C.: Nov. 17, 2000); Management Report: Improvements Needed in IRS's 

Accounting Procedures and Internal Controls, GAO-02-746R (Washington D.C.: July 18, 

2002); and GAO-02-35.

9

Courier service agreements for IRS service center campuses are negotiated by either IRS or 

FMS, depending on the type of depositary institution IRS uses to deposit campus receipts. 

IRS has the option of depositing campus receipts into a Federal Reserve Bank or into a 

general depositary. General depositaries are designated commercial banks that have been 

specifically authorized by Treasury to maintain a Treasury General Account for the purpose 

of accepting deposits for Treasury. When receipts are to be deposited to an FRB, IRS 

contracts for the courier services. When receipts are to be deposited to a general depositary, 

FMS negotiates an agreement with the depositary to perform services for FMS. There are five 

service center campuses with FMS-negotiated agreements and five service center campuses 

with IRS-negotiated agreements.
Page 6 GAO-03-562R IRS Management Report 

incorporated in the FMS-negotiated courier agreements because FMS had been 

waiting since 2000 for IRS to issue a final revision of its courier service standards—

IRS issued revised standards on September 6, 2002. As of the end of our fiscal year 

2002 audit fieldwork, FMS-negotiated agreements for couriers had not been revised. 

As a result, through fiscal year 2002, couriers under FMS-negotiated contracts were 

not required to undergo background investigations. 

While IRS relies on FMS to enter into agreements with general depositaries, IRS 

nonetheless retains the responsibility to ensure that resulting contracts reflect the 

standards it establishes as necessary for personnel entrusted with taxpayer deposits. 

Until all couriers who are entrusted with IRS deposits are required to undergo 

background investigations, including fingerprint checks, IRS runs an increased risk 

that taxpayer receipts and taxpayer data may be vulnerable to theft, loss, or misuse. 

Additionally, at one of two IRS service center campuses we visited, we found that the 

campus did not verify that the courier service had insurance coverage as required by 

the courier service standards. According to the courier’s insurance agency, it had not 

provided insurance coverage to the courier service for the last year. Until IRS ensures 

that courier services are complying with courier service standards, taxpayers and the 

government will be unnecessarily exposed to the risk of financial loss. 

Recommendations

We recommend that IRS 

• confirm with FMS that IRS’ requirements for background and fingerprint 

checks for courier services are met regardless of whether IRS or FMS 

negotiates the service agreement, and 

• establish procedures to verify that courier services are adhering to the 

standards established for them by IRS, including the requirement that the 

courier services have insurance coverage. 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendations. IRS noted that (1) FMS had amended the 

Courier Memorandum of Understanding to include the requirement that all courier 

employees under contracts negotiated by FMS satisfy the basic investigation 

requirements, (2) IRS had established a campus contact at each of its 10 service 

center campuses to ensure that all required information is submitted to the National 

Background Investigation Center (NBIC) and that a clearance is granted, and (3) it 

had requested NBIC to provide it with a monthly report of campus compliance. IRS 

also noted that its Security Review Team of Receipt and Control reviews compliance 

with the courier requirements monthly and that it had (1) requested that the 5 

campuses where IRS holds the courier contracts produce insurance certificates for 

the couriers during these reviews and (2) requested FMS to direct the depositary 
Page 7 GAO-03-562R IRS Management Report 

banks holding the courier contracts for the 5 remaining campuses to provide the 

insurance certificates to IRS. We will evaluate the effectiveness of IRS’ efforts during 

our fiscal year 2003 financial audit. 

Controls in Receipt Processing Areas 

During our fiscal year 2002 audit, we identified weaknesses in IRS’s controls over its 

receipt processing areas that increased the risk that taxpayer receipts and taxpayer 

information could be lost or stolen. These weaknesses relate to the presence of 

certain personal belongings that employees bring into receipt processing areas. 

GAO’s Standards for Internal Control in the Federal Government requires agencies 

to establish controls to secure and safeguard vulnerable assets. 

In our prior audits, we found that IRS did not have consistent controls over personal 

belongings brought into receipt processing areas; we recommended that IRS 

(1) restrict personal items that can be brought into the receipt processing areas, such 

as handbags, briefcases, and bulky outerwear, (2) provide lockers and require their 

use for storing personal belongings outside of the receipt processing areas, and 

(3) expand IRS’s review of service center deterrent controls to include similar 

analyses of controls at IRS field offices in areas such as safeguarding of receipts by 

storing them in locked containers.10 In response to our recommendations, IRS issued 

policies requiring that (1) employees display in clear plastic bags certain other 

personal items that can be kept at their desks and transported in and out of the 

receipt processing area, (2) employees store such items as purses, backpacks, lunch 

bags, CD cases, newspapers, and magazines in lockers before they enter the receipt 

processing area, and (3) taxpayer assistance centers secure cash payments and 

receipts in locked containers. 

In each of our fiscal year 2001 and 2002 audits, we found that at one of two service 

center campuses we visited, many of the clear plastic bags employees used to bring 

personal belongings into the receipt processing area contained so many items that it 

would have been easy for employees to use the bags to conceal and remove checks 

from the area. At one of these campuses, we found that employees carried prohibited 

items such as CD cases, newspapers, and magazines—all items in which taxpayer 

receipts could be easily concealed—into the receipt processing area in plastic bags. 

At another campus, we observed employees using large clear plastic backpacks and 

tote bags to carry multiple personal belongings such as lunch bags, makeup bags and 

items of clothing. Such practices are at odds with the purpose intended in IRS’s 

policies----namely limiting personal items allowed into the receipts processing area 

and requiring that all items allowed in be clearly visible. Until campuses are required 

to adhere to policies concerning employees’ personal belongings in a consistent 

 

10U.S. General Accounting Office, Internal Revenue Service: Immediate and Long-Term 

Actions Needed to Improve Financial Management, GAO/AIMD-99-16 (Washington D.C.: 

Oct. 30, 1998) and GAO/AIMD-99-193. 
Page 8 GAO-03-562R IRS Management Report 

manner and until these policies are effectively enforced, taxpayer receipts and 

taxpayer information are vulnerable to theft or loss. 

Additionally, during our fiscal year 2002 audit, we found that at one of two taxpayer 

assistance centers we visited, employees were allowed to store cash payments and 

official receipt certificate vouchers with their personal belongings in desk drawers, 

overhead cabinets, and lockers. IRS employees could use these personal belongings 

to conceal and remove funds from the receipt processing area. Unlike service 

centers, IRS does not have a policy concerning personal belongings at taxpayer 

assistance centers. Thus, there is nothing preventing employees at taxpayer 

assistance centers from storing personal belongings with cash payments and receipts. 

Until IRS ensures that cash payments and receipts are not stored with employees’ 

personal belongings, taxpayer receipts are vulnerable to theft, loss, or misuse. 

Recommendations

We recommend that IRS 

• enforce consistent implementation of its policy limiting personal belongings in 

receipt processing areas at service center campuses and 

• prohibit the storage of employees’ personal belongings with cash payments and 

receipts at IRS’s taxpayer assistance centers. 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendations and stated it would (1) issue a memorandum 

requiring managers in receipt processing areas at service center campuses to ensure 

that employees are adhering to the established security procedures and (2) require 

unit managers in these areas to conduct random reviews of employee compliance 

with all security policies. IRS also stated it would review managerial adherence to 

this direction on a monthly basis as well as have its security review team perform 

unannounced reviews. We will evaluate the effectiveness of IRS’ efforts in future 

audits. 

Candling Procedures 

During our fiscal year 2002 financial audit, we found that IRS’s candling procedures 

were not adequate to minimize the risk that taxpayer receipts and information could 

be destroyed, lost, or stolen. GAO’s Standards for Internal Control in the Federal 

Government requires agencies to establish physical controls to secure and safeguard 

vulnerable assets. 

IRS receives mail of different dimensions and separates and uses different methods 

to extract the contents depending on their dimensions. The extraction methods IRS 
Page 9 GAO-03-562R IRS Management Report 

employs to separate the envelopes from their contents are not always fully effective. 

To help ensure that items that were not removed from envelopes during extraction 

are not subsequently destroyed with the envelopes, IRS established a candling 

process. 

The candling procedures are documented in two separate sections of IRS’s Internal 

Revenue Manual (IRM). The first section addresses the extraction of envelope 

contents and requires that envelopes be candled after their contents have been 

removed. The second section states that “those envelopes to be destroyed shall be 

reviewed again before destruction.” However, these procedures do not provide 

sufficient guidance as to what specific candling procedures need to be followed in 

each of the two candlings. During our fiscal year 2002 audit, as well as in our previous 

audits, we observed instances where taxpayer receipts or taxpayer data were not 

removed from envelopes during the extraction phase and would have been destroyed 

had they not been discovered through a final candling just prior to destruction of the 

envelopes and using a light source to illuminate the envelopes. Yet, in fiscal year 

2002, we found that at one of two IRS service center campuses we visited, some 

envelopes were not candled at the point of extraction. Thus, these envelopes 

received, at most, one candling prior to destruction. Until IRS clarifies its candling 

requirements to ensure that emptied envelopes are candled twice and to specify the 

precise candling methods to be used based on the dimensions of the mail processed 

and the extraction method used for each of the two candlings, IRS’s risk of loss of 

taxpayer receipts and information is increased. 

We also found that at one of the two IRS service center campuses we visited, a single 

employee performed the final candling of envelopes in an area removed from other 

ongoing work in the receipts processing area - - a procedure not prohibited by IRS’s 

policies and procedures. The initial candling, because it is performed immediately 

upon extraction, generally occurs in the presence of other employees in the receipt 

processing area. However, final candling often occurs in a less-populated area of 

receipt processing. By not prohibiting a single employee in a remote location from 

performing the final candling, IRS’s risk of theft of taxpayer receipts and information 

increases. 

Recommendations

We recommend that IRS 

• revise its candling procedures to specify the precise candling methods to be used 

based on the dimensions of the mail processed and the extraction method used 

for both the first and the final candling and 

• establish and implement procedures prohibiting a single employee from 

performing the final candling in a remote location. 
Page 10 GAO-03-562R IRS Management Report 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendations and stated it would provide us with copies of 

the procedures developed to address these recommendations by May 30, 2003. 

Cash Acceptance Procedures at Taxpayer Assistance Centers 

During our fiscal year 2002 audit, we found that IRS did not have controls in place to 

ensure that its taxpayer assistance centers adhere to its cash payment acceptance 

requirement. IRS policy states that IRS must accept cash payments from taxpayers 

who do not have a check or money order, are unable to obtain one, or insist on 

paying in cash. However, during our fiscal year 2002 audit, we found that the 

taxpayer assistance center at one of two IRS field offices we visited, as well as other 

taxpayer assistance centers in the area, did not accept cash payments. At the 

taxpayer assistance center we visited, employees would direct taxpayers to a nearby 

financial institution where they could obtain a money order, but that institution did 

not maintain the same hours as the center and was regularly closed during parts of 

the day. 

These centers’ refusal to accept cash payments could place undue burden on 

taxpayers who do not have a check or money order or are unable to obtain one. To 

obtain a money order, they must find an open financial institution and then pay a fee. 

The burden associated with these extra efforts and costs could adversely impact 

IRS’s collection of taxes owed. 

Recommendations

We recommend that IRS 

• determine which taxpayer assistance centers do not accept payment of taxes in 

cash and issue a memorandum reminding them of the requirement that cash be 

accepted and 

• establish a mechanism to periodically review adherence to this policy. 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendations. In its comments, IRS noted that (1) it had 

included guidelines in its Fiscal Year 2003 Field Assistance Office Operating 

Procedures stating that all taxpayer assistance centers (TACs) would accept all 

standard forms of payment including checks, money orders, and cash, (2) signs are to 

be posted in all TACs, specifying that exact change must be remitted as IRS cannot 

make change, and (3) it will be reviewing adherence to these procedures. 
Page 11 GAO-03-562R IRS Management Report 

Structuring of Installment Agreements 

During our fiscal year 2002 financial audit, we found that IRS did not always structure 

installment agreements to provide for full payment of the tax liability as required by 

section 6159 of the Internal Revenue Code. As we noted in our fiscal year 2002 audit 

report, the presence of cases in fiscal year 2002 that were not structured to obtain full 

payment indicates that IRS was not in compliance with the Internal Revenue Code.11 

IRS’s failure to properly structure taxpayer installment agreements could result in the 

loss to the federal government of legally collectible tax revenue. 

Section 6159 of the Internal Revenue Code grants IRS the power to enter into written 

agreements with certain taxpayers to allow them to pay their full tax liability (along 

with additional interest) in installments. Both the Internal Revenue Code and IRS’s 

procedures require that installment agreements fully satisfy the tax debt (including 

future accruals of interest and penalties) before the statutorily allowed period for 

collection on the liability expires.12 However, in our testing of a statistical sample of 

59 installment agreements entered into during fiscal year 2002, we found 4 instances 

in which the terms of the agreements did not require full satisfaction of the tax 

liability. Based on the results of our work, we estimate that nearly 7 percent of the 

new installment agreements entered into during fiscal year 2002 had payment terms 

that would not fully satisfy the tax liability within the statutory collection period.13

In each of these cases, we found that the installment agreements did not fully satisfy 

the tax debt because IRS did not consider accruals of interest and penalties in 

calculating the total amount to be paid under the installment agreements. This 

occurred for two reasons. First, customer service representatives relied on IRS’s 

Integrated Data Retrieval System (IDRS) to determine the amount of the taxpayer’s 

liability in structuring the terms of the installment agreement. However, IDRS 

includes only assessed balances rather than the total amount of tax owed, which 

must also include interest and penalties. While IRS procedures require that its 

customer service representatives use a special command function that takes various 

accruals into account when entering into installment agreements, these procedures 

were not followed in these cases. 

Second, taxpayers may apply for an installment agreement through the Telephone 

Routing Interactive System. However, the balance due amounts in this system, like 

those in the IDRS, do not include accrued interest and penalties, and thus understate 

the total amount of tax owed. 

After we discussed these findings with IRS, management reinforced the current 

installment agreement guidance, provided additional training, and issued a memo to 

 

11GAO-03-243. 

12The statutory collection period for taxes is generally 10 years from the date of the tax 

assessment. However, this period can be extended by agreement with the taxpayer.

13We are 95 percent confident that the error rate could be as high as 15 percent. 
Page 12 GAO-03-562R IRS Management Report 

the customer service representatives that stressed the importance of following this 

guidance. In addition, IRS revised the Telephone Routing Interactive System to 

include both interest and penalty accruals in its calculation of installment agreement 

balances. We commend IRS for its prompt action to develop and implement 

corrections to the installment agreement controls and will evaluate the effectiveness 

of these corrective actions during our fiscal year 2003 financial audit. 

- - - - - 

This report contains 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 submit your statement to the Senate Committee on 

Governmental Affairs and the House Committee on Government Reform within 60 

days of the date of this report. A written statement must also be sent to the House 

and Senate Committees on Appropriations with the agency’s first request for 

appropriations made more than 60 days after the date of the report. 

This report is intended for use by the management of IRS. We are sending copies to 

Chairmen and Ranking Minority Members of the Senate Committee on 

Appropriations; Senate Committee on Finance; Senate Committee on Governmental 

Affairs; Senate Committee on the Budget; Subcommittee on Transportation, Treasury, 

and General Government, Senate Committee on Appropriations; Subcommittee on 

Taxation and IRS Oversight, Senate Committee on Finance; and the Subcommittee on 

Oversight of Government Management, the Federal Workforce, and the District of 

Columbia, Senate Committee on Governmental Affairs. We are also sending copies to 

the Chairmen and Ranking Minority Members of the House Committee on 

Appropriations; House Committee on Ways and Means; House Committee on 

Government Reform; House Committee on the Budget; Subcommittee on 

Transportation, Treasury, and Independent Agencies, House Committee on 

Appropriations; Subcommittee on Government Efficiency and Financial Management, 

House Committee on Government Reform; and the Subcommittee on Oversight, 

House Committee on Ways and Means. In addition, we are sending copies of this 

report to the Chairman and Vice-Chairman of the Joint Committee on Taxation, the 

Secretary of the Treasury, the Director of the Office of Management and Budget, the 

Chairman of the IRS Oversight Board, and other interested parties. Copies will be 

made available to others upon request. The report is also available free on GAO’s 

web site at http://www.gao.gov. 
Page 13 GAO-03-562R IRS Management Report 

We acknowledge and appreciate the cooperation and assistance provided by IRS 

officials and staff during our audit of IRS’s fiscal years 2002 and 2001 financial 

statements. If you have any questions or need assistance in addressing these matters, 

please contact Paul Foderaro, Assistant Director, at (202) 512-2535. 

Sincerely yours, 

Steven J. Sebastian 

Director 

Financial Management and Assurance 
Enclosure I 

Page 14 GAO-03-562R IRS Management Report 

Comments from the Internal Revenue Service 

See comment 1. 
Enclosure I 

Page 15 GAO-03-562R IRS Management Report 

See comment 2. 
Enclosure I 

Page 16 GAO-03-562R IRS Management Report 
Enclosure I 

Page 17 GAO-03-562R IRS Management Report 

See comment 3. 
Enclosure I 

Page 18 GAO-03-562R IRS Management Report 
Enclosure I 

Page 19 GAO-03-562R IRS Management Report 

The following are GAO’s comments on the Internal Revenue Service’s letter dated 

April 28, 2003. 

GAO Comments

1. IRS stated it has a policy of 180 days for the expiration period of fingerprint 

results. IRS had initially informed us that it did not have such a policy. As a result, 

we modified our report to stress the importance of IRS enforcing its policy and 

modified our recommendation accordingly. 

2. IRS had previously informed us of these exceptions. As a result, we had 

specifically excluded any individual having met these additional requirements 

from our count to arrive at the total of 53 instances in which employees entered 

on duty with fingerprint check results over the 180 day expiration period. 

3. In our draft report, we initially recommended that IRS establish a supervisory 

mechanism to monitor the effectiveness of the additional guidance and training in 

addressing the deficiencies noted in the structuring of installment agreements. In 

its comments, IRS stated that its policy is to require managers to approve 

installment agreements where the unpaid assessment balance exceeds $25,000 or 

where the balance cannot be fully paid within 5 years, regardless of the size of the 

balance. We do not find that this policy is unreasonable at this time and have thus 

revised our report accordingly.
Enclosure II 

Page 20 GAO-03-562R IRS Management Report 

Details on Audit Methodology 

To fulfill our responsibilities as the auditor of IRS’s financial statements, we: 

• Examined, on a test basis, evidence supporting the amounts and disclosures in the 

financial statements. This included testing selected statistical samples of unpaid 

assessment, revenue, refund, accounts payable, accrued expenses, payroll, 

nonpayroll, property and equipment, and undelivered order transactions. These 

statistical samples were selected primarily to substantiate balances and activities 

reported in IRS’s financial statements. Consequently, dollar errors or amounts can 

and have been statistically projected to the population of transactions from which 

they were selected. In testing these samples, certain attributes were identified that 

indicated either significant deficiencies in the design or operation of internal 

control or compliance with provisions of laws and regulations. These attributes, 

where applicable, can be and have been statistically projected to the appropriate 

populations. 

• Assessed the accounting principles used and significant estimates made by 

management. 

• Evaluated the overall presentation of the financial statements. 

• Obtained an understanding of internal control related to financial reporting 

(including safeguarding assets), compliance with laws and regulations (including 

the execution of transactions in accordance with budget authority), and 

performance measures reported in the Management’s Discussion and Analysis. 

• Tested relevant internal control over financial reporting (including safeguarding 

assets) and compliance, and evaluated the design and operating effectiveness of 

internal control. 

• Considered the process for evaluating and reporting on internal control and 

financial management systems under the Federal Managers’ Financial Integrity 

Act of 1982. 

• Tested compliance with selected provisions of the following laws and regulations: 

Anti-Deficiency Act, as amended (31 U.S.C. §1341(a)(1) and 31 U.S.C. §1517(a)); 

Agreements for payment of tax liability in installments (26 U.S.C. §6159); Purpose 

Statute (31 U.S.C. §1301); Release of lien or discharge of property (26 U.S.C. 

§6325); Interest on underpayment, nonpayment, or extensions of time for payment 

of tax (26 U.S.C. §6601); Interest on overpayments (26 U.S.C. §6611); 

Determination of rate of interest (26 U.S.C. §6621); Failure to file tax return or to 

pay tax (26 U.S.C. §6651); Failure by individual to pay estimated income tax (26 

U.S.C. §6654); Failure by corporation to pay estimated income tax (26 U.S.C. 

§6655); Prompt Payment Act (31 U.S.C. §3902 (a), (b), and (f), and 31 U.S.C. 
Enclosure II 

Page 21 GAO-03-562R IRS Management Report 

§3904) ; Fair Labor Standards Act of 1938, as amended (29 U.S.C. §206); Civil 

Service Retirement Act of 1930, as amended (5 U.S.C. §§5332, 5343); Federal 

Employees' Retirement System Act of 1986, as amended (5 U.S.C. §§8422 and 

8423); Social Security Act, as amended (26 U.S.C. §3101 and 3121, and 42 U.S.C. 

§430); and Federal Employees Health Benefits Act of 1959, as amended (5 U.S.C. 

§§8905, 8906, and 8909). 

• Tested whether IRS’s financial management systems substantially comply with 

the three FFMIA requirements.
Enclosure III 

Page 22 GAO-03-562R IRS Management Report 

GAO Contacts and Staff Acknowledgments 

GAO Contacts 

Paul Foderaro, (202) 512-2535 

Alain Dubois, (202) 512-6365 

Acknowledgments 

Staff making key contributions to this report were: William Cordrey, Laurie King, Yola 

Lewis, and J. Lawrence Malenich. 

(196001) 
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