Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement
Published: 1998-11-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a legislative requirement, GAO reviewed the Internal Revenue Service's (IRS) physical controls over receipts and taxpayer data.
section_title: What GAO Found
paragraphs: GAO noted that: (1) IRS' controls over receipts and taxpayer data do not adequately reduce the vulnerability of the federal government and taxpayers to loss from theft; (2) this condition existed because of the length of time required to conduct background investigations, delays in receiving results of fingerprint checks, and processing demands which required the hiring of thousands of employees during the peak filing season; (3) placing new hires in sensitive positions prior to, at a minimum, receiving the results of fingerprint check increases the vulnerability of receipts and taxpayer data to theft; (4) in fact, of the 80 thefts IRS investigated at service centers from January 1995 to July 1997, 12 were committed by individuals who had previous arrest records that were not identified prior to their employment; (5) GAO also noted weaknesses in the physical controls over service center and district office receipts; (6) while service center receipts are required to be processed only by authorized individuals in the Receipt and Control Branch, which is a restricted access area, numerous receipts were found in unrestricted areas accessible to other IRS employees and to non-employees not authorized to handle receipts; (7) receipts particularly vulnerable to theft also were not adequately secured; (8) while it is important to adequately protect cash and checks received at IRS facilities, it is similarly essential to ensure that these receipts are properly protected during transport to depository institutions; (9) GAO found that single, unarmed couriers in ordinary civilian vehicles were used to transport IRS deposits totalling hundreds of millions of dollars to the depository institutions during the peak filing season; (10) the theft of one peak season deposit could place a significant administrative burden on IRS to contact taxpayers and initiate stop payment orders on tens of thousands of checks; (11) although receipts and taxpayer information will always be vulnerable to theft, IRS has a responsibility to protect the government and taxpayers from such losses; (12) many of the actions GAO is recommending to minimize these vulnerabilities and thus better protect taxpayer receipts and data would not result in significant costs, and several other actions GAO is recommending are already required by IRS policy or are currently under consideration by IRS management; and (13) IRS has prepared two corrective action plans to reduce its vulnerability to theft or loss of receipts and taxpayer data.

section_title: Letter
paragraphs: This letter presents the results of our review of the Internal Revenue Service’s (IRS) physical controls over receipts and taxpayer data. As reported in our audit of IRS’ fiscal year 1997 custodial financial statementsand in subsequent congressional hearings on IRS financial management issues, IRS’ internal controls at service centers were not adequate to sufficiently ensure that cash and checks received from taxpayers were properly credited to taxpayers’ accounts and deposited to the Department of the Treasury general fund. We further reported that these control weaknesses and inherent vulnerabilities expose IRS and taxpayers to losses.
To follow up on these weaknesses and to assess physical security conditions at IRS during the peak filing season, we observed physical controls over receipts and taxpayer data at service centers and district offices in April 1998 as part of our ongoing audit of IRS’ fiscal year 1998 financial statements. This report discusses additional internal control weaknesses over the safeguarding of receipts and taxpayer data that we identified in April 1998 and provides our recommendations for improvement.
subsections: section_title: Background
paragraphs: In fiscal year 1997, IRS collected more than $1.6 trillion in tax revenue. Most of this revenue was collected by intermediaries, such as financial depository institutions, and transferred directly to the Treasury general fund. However, the remainder—estimated at over $100 billion in fiscal year 1997—was collected directly by IRS through its many service centers and district offices. Receipts IRS collected directly consist primarily of cash and checks mailed to IRS service centers with accompanying tax returns or payment vouchers and payments made in person at one of the service centers or district offices.
While adequate physical safeguards over receipts should exist throughout the year, it is especially important during the peak filing season. Each year, during the weeks before and immediately after April 15, an IRS service center may receive and process daily over 100,000 pieces of mail containing returns, receipts, or both. The dollar value of receipts each service center processes increases to hundreds of millions of dollars a day during this time period. In addition, the number of staff increases significantly to handle and process the additional volume. For example, IRS hired over 20,000 seasonal employees nationwide for the 1998 filing season. The increased number of seasonal staff IRS employs to handle and process this large volume of receipts and returns increases IRS’ vulnerability to theft.
In addition to adequately safeguarding taxpayer receipts, it is equally important for IRS to protect sensitive taxpayer data. Tax returns, schedules, and supporting documentation contain sensitive identifying information such as name, address, social security number, and details on the taxpayer’s financial holdings. Although none of the financial crimes and identity fraud incidents we noted in our previous report on identity fraud were reported as being linked to data stolen from IRS, sensitive information similar to that processed by IRS has been used to commit such crimes nationwide. Commonly reported financial crimes and identity fraud include using someone’s personal information to fraudulently establish credit, run up debt, or take over and deplete existing financial accounts. According to a Secret Service official, identified losses to victimized individuals and institutions due to financial crimes involving identity fraud increased from $442 million in fiscal year 1995 to $745 million in fiscal year 1997.
IRS has also suffered losses due to various financial crime schemes. Between October 1995 and September 1997, IRS closed investigations on 22 cases involving theft of receipts at its district offices. In addition, between January 1995 and July 1997, IRS investigated 80 thefts of receipts totaling $5.3 million that occurred at its service centers. Of this amount, $4.6 million was attributable to one individual who stole not only checks but also original tax returns. This individual sent the checks to members of an organized crime ring in New York, who then altered or in some cases, “cloned” the checks for subsequent negotiation. For example, one taxpayer’s check was cloned by the perpetrators into multiple smaller checks and negotiated in England and Germany. The cloning scheme was discovered when the taxpayer’s accountants noticed that the check written to IRS was never cashed and that there were multiple additional checks cashed for amounts for which they had no supporting documentation.
Financial crimes and identity fraud committed through the theft of receipts and tax return data can cause damage to many parties. Banks suffer financial loss when held accountable for damages resulting from cloned checks. The federal government may suffer losses in cases involving IRS’ failure to safeguard receipts and taxpayer data. Taxpayers can suffer injury to their reputations when credit is fraudulently established and debts incurred in their names. Bad credit could in turn lead to difficulties in obtaining loans or jobs and require a lengthy and expensive process to clear one’s personal records.
While IRS inspectors have identified thefts of receipts and taxpayer data, the true magnitude of such crimes that have occurred within IRS will likely never be known. An IRS inspector stated that the $5.3 million of investigated thefts at service centers is understated for several reasons. For example, during investigations, prosecuted individuals confessed that they had stole other checks but could not remember the full amount. With the weaknesses and vulnerabilities identified, there are likely many thefts that have gone undetected. Furthermore, although IRS has identified instances of original tax returns stolen from service centers, the extent to which criminals have taken advantage of stolen taxpayer information is less measurable and thus largely unknown. However, the potential for using such data to commit identity fraud is great.
Instances of financial crimes committed at IRS and their possible consequences demonstrate the importance of establishing and maintaining adequate physical controls over receipts and taxpayer data. We recognize that due to the high volume and sensitive nature of IRS’ activities, particularly during the peak filing season, no system of internal control can eliminate the vulnerability of receipts and sensitive taxpayer information to theft. However, a sound system of internal control should minimize the extent of this vulnerability to ensure that the government and taxpayers are not unduly exposed to loss of funds and misuse of taxpayer data, both of which could undermine the public’s trust in IRS’ ability to safeguard taxpayer funds and personal information.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of our review were to (1) follow-up on cash receipt weaknesses identified in our audit of IRS’ fiscal year 1997 Custodial financial statements, and (2) observe operations during the peak filing season as part of our fiscal year 1998 financial statement audit. We conducted our visits from April 20 through April 23, 1998, at the Atlanta, Georgia, Austin, Texas, Ogden, Utah, and Philadelphia, Pennsylvania, service centers. These service centers were selected based on the dollar amount of receipts processed during fiscal year 1997 and on the dollar amount of reported thefts that occurred between January 1995 and July 1997.
We also conducted observation work at the Los Angeles, Northern California, and North Texas district offices. Two of these three district offices were selected because they had teller units responsible for making deposits of walk-in payments to the banks via courier. We also selected one district office that did not have a teller unit and therefore sent all receipts, along with tax returns, to a service center to be processed.
We conducted observations of the activities and the physical controls over the processing of receipts and tax returns at these service centers and district offices, and had limited discussions with IRS personnel at these sites. As agreed with IRS’ Chief Financial Officer, we limited our inquiry of IRS employees during these visits so we would not hinder operations during the peak filing season. However, we subsequently followed-up with IRS service center and national office personnel to obtain clarification and further explanation of IRS procedures. We reviewed internal audit reports and interviewed IRS internal auditors and inspectors at the Philadelphia and Ogden service centers to supplement our understanding and to obtain additional information and insight. We interviewed the Regional Inspector for the Northeast Region to obtain details on incidents of thefts at IRS service centers. We also reviewed IRS’ Summary Action Plan: Protection of Monetary Instruments, dated May 20, 1998, to consider IRS’ proposed actions on previously identified control weaknesses over monetary instruments, as well as IRS’ action plan dated June 4, 1998, to address control deficiencies over recruitment, background, and security investigations. We have not performed subsequent site visits to verify completed corrective actions reported by IRS. However, we intend to follow up on the status of these corrective actions as part of our fiscal year 1998 financial statement audit.
We performed our work from April 1998 through August 1998 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Commissioner of Internal Revenue or his designee. The Commissioner provided us with written comments, which are discussed in the “Agency Comments and Our Evaluation” section and are reprinted in appendix I.
section_title: Delays in Obtaining Background Information Compromise the Security of Taxpayer Data and Receipts at Service Centers
paragraphs: Despite the sensitivity of taxpayer data, we recognize that fully limiting access to such data is not feasible given the nature of IRS’ operations. Because the primary nature of IRS operations is to process tax returns, most of the units within the service center work with tax returns or other forms of tax data. Therefore, sensitive taxpayer information is accessible all over the service center. As a result, the vulnerability of this data to theft or misuse is heightened. This vulnerability thus underscores the need for effective deterrent controls to aid in reducing the exposure of tax data to such theft or misuse.
To reduce the inherent risk in this exposure, IRS’ policy is to screen out job applicants that may pose a potential threat to IRS operations. IRS requires a fingerprint check on all permanent, seasonal, and temporary employees hired to identify any prior arrests and convictions. In addition, IRS requires a background investigation on all employees with a 90-day appointment or longer. However, IRS internal auditors reported that, in at least some instances, and for numerous reasons which we discuss later in this report, the results of these checks were not completed before the individuals were placed in positions responsible for handling cash receipts and taxpayer data.
The Comptroller General’s 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 sensitive taxpayer information of a financial and personal nature, as well as billions of dollars in receipts, ensuring worker integrity through a carefully managed recruiting and hiring process is an area demanding special attention from IRS management.
One way to assist in determining worker integrity is to ensure that background investigations of an appropriate level are performed on IRS employees. A background investigation may involve contacting prior employers, schools, and law enforcement agencies to inquire about the applicant’s qualifications, character, and other pertinent factors. The extent of the investigation depends on the employing agency’s risk assessment of the sensitivity of the position to be occupied based on guidelines defined by the Office of Personnel Management (OPM). Currently, IRS classifies some Receipt and Control Branch employees as occupying “low risk” positions. These “low risk” employees handle thousands of taxpayer receipts and sensitive taxpayer information which require a high degree of public confidence and trust. Because “low risk” positions require the least comprehensive type of investigation, background investigations for such employees may fail to uncover all pertinent information regarding the suitability of an individual to process taxpayer data and receipts.
However, background investigations are lengthy. According to OPM, even limited investigations take an average of 75 calendar days to complete. Because of the length of time it takes, IRS only requires a background investigation for employees hired for periods of 90 days or more. To help screen individuals, such as seasonal and temporary employees who are hired for less than 90 days, and to more quickly identify potential problems with long-term employees before their background investigations are completed, IRS initiates fingerprint checks of all newly hired staff prior to employment. IRS submits candidates’ fingerprints and preliminary background information on each individual to OPM. OPM then inputs the demographic information into its database and transmits the information with the fingerprints to the Federal Bureau of Investigations (FBI) to check against national records. According to IRS, OPM indicated that results of fingerprint checks can be provided within 21 workdays. However, extensive delays in receiving fingerprint check results prevented IRS from obtaining such pertinent information promptly. The IRS internal audit review mentioned previously reported that the turnaround time for fingerprint checks averaged 68 days, with some fingerprint checks taking as long as 141 days, instead of the 21 days indicated by OPM.
The internal audit review also found that some service centers did not take fingerprints of applicants or did not submit fingerprints in a timely manner. Furthermore, the review found that one service center did not prescreen any 30-day temporary employees, while another service center did not follow procedures requiring that service centers prescreen employees prior to sending background investigation packages for processing. The review also found that IRS personnel offices were reluctant to use the fingerprint prescreening process because the results were not received before employees reported to work.
In February 1998, IRS convened a task team to study the service center prescreening process. The task team found that the delays with fingerprint checks are due to a number of causes that are partially attributable to IRS and partly to the FBI. According to the task team, not all service centers were fingerprinting applicants at the earliest possible point. Additionally, in some instances, fingerprints had to be retaken because of their poor quality and thus could not be processed by the FBI. The task team also found that the FBI’s manual processing of fingerprints is labor intensive, particularly for those prints that result in a possible match to the FBI’s database of arrest records. The task team found that the FBI had a backlog of 600,000 cases to process as of the date of their study and that the FBI places a higher priority on processing law enforcement requests for fingerprint checks than on requests related to personnel investigations.
The delays in fingerprint checks are particularly serious when they are applied to seasonal and temporary employees. According to IRS data, a total of more than 20,000 seasonal employees were employed in 1998, of which more than 5,000 were new seasonal employees. These seasonal and temporary employees work an average of 8 to 10 weeks during the peak filing season, and may have already finished their term of employment before IRS receives the results of these fingerprint checks. In fact, the internal audit review discussed above found that in four service centers where information was available, as many as 5 percent of the 3,059 temporary and seasonal employees hired and placed in the Receipt and Control Branch during fiscal years 1996 and 1997 had backgrounds that contained arrests or convictions. If the results of fingerprint checks are not received promptly by IRS, these individuals can be placed in positions to steal receipts and taxpayer data.
The failure to ensure that background investigations and fingerprint checks are completed before employment in sensitive areas increases the vulnerability of billions of dollars of cash and checks, as well as taxpayer data, to theft and fraud. According to the internal audit review, of the 80 thefts of receipts at service centers reported between January 1995 and July 1997, 12 were committed by employees with previous arrest records for theft, assault, or drug charges that were not identified prior to employment. The fingerprint prescreening results were not received before six of these employees reported for work and fingerprint prescreenings were not performed for the other six employees.
To help address the slow turnaround time in receiving the results of fingerprint checks, the Philadelphia Service Center (PSC) has negotiated with local law enforcement to provide police checks on prospective IRS employees. Due to technical problems, PSC missed its August 1998 target date to establish a working, on-line connection between its fingerprinting machine and the local law enforcement’s fingerprint database. However, once these problems are resolved, the connection should enable PSC to transmit electronic fingerprint images so that the local law enforcement’s database can be checked and PSC alerted of arrest records on IRS applicants within 24 hours. While this should result in a marked improvement, the database can only identify crimes committed locally.
On a nationwide basis, IRS has begun to address the fingerprint check problem. In response to a long-term solution recommended by the IRS task team, IRS is in the process of procuring equipment that will be compatible with the FBI’s Integrated Automated Fingerprint Identification System. This system will allow for an automated fingerprint classification. According to IRS, the electronic fingerprints, demographic information, and results from the FBI’s search will be channeled through OPM so that OPM can upload the information into its database. The FBI’s goal with this system is to process civil fingerprint checks within 24 hours. IRS expects to receive the results of the fingerprint check within 5 days. IRS’ target date for implementation of this system is August 1999.
In the meantime, IRS is exploring short-term solutions recommended by the IRS task team to address problems with delayed fingerprint results. According to IRS’ action plan, it has retrained employees to take better quality fingerprints. Other planned short-term actions include 1) developing a policy to take fingerprints of filing season applicants upon their first contact with IRS, 2) issuing guidelines for service centers to contact local police agencies to determine if they will provide police checks on prospective employees, 3) determining the feasibility of moving employees from other units so that only employees with completed fingerprint checks are assigned to process receipts, and 4) bringing all service center personnel offices on-line with OPM so that the offices can receive background checks from OPM as soon as the results from FBI are uploaded to OPM’s database. These additional actions, however, have not yet been implemented.
subsections: section_title: Recommendations
paragraphs: To ensure that employees assigned to process receipts and sensitive taxpayer data are subjected to the appropriate level of background check, we recommend that the Commissioner reevaluate the risk classification of all positions in IRS’ Receipt and Control Branch and reclassify such positions where appropriate.
To reduce the incidence of applicants not subjected to fingerprint checks, we recommend that the Commissioner (1) establish procedures to review the applications and associated documents for all applicants given job offers to ensure that fingerprint checks are initiated on these individuals and (2) implement procedures to provide supervisory feedback on these reviews as necessary to ensure that personnel staff are aware of and follow IRS’ policy requiring fingerprint checks.
To assist in the prompt receipt of fingerprint results of applicants, we recommend that the Commissioner 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.
We also recommend that until the problems with delays in fingerprint checks are resolved, the Commissioner develop and implement a policy prohibiting new employees from being assigned to process receipts until results of fingerprint checks are received and reviewed by management.
To obtain background information on a more timely basis, we recommend that the Commissioner continue the agency’s efforts to explore the feasibility of obtaining local police checks on IRS applicants and evaluate the efficiency and effectiveness of PSC’s electronic fingerprinting system in order to supplement FBI fingerprint checks.
In the long term, to decrease the turnaround time for FBI fingerprint check results, we recommend that the Commissioner 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 program by August 1999.
section_title: Physical Safeguards Are Inadequate to Protect Cash Receipts
paragraphs: The Comptroller General’s Standards for Internal Controls in the Federal Government requires that access to resources and records, such as IRS receipts and taxpayer data, be limited to authorized individuals in order to reduce the risk of unauthorized use or loss to the government. However, at the service centers and district offices we visited, we identified internal control weaknesses that allowed unauthorized access to such resources and records. Specifically, we found that IRS service centers did not (1) have adequate controls to limit unauthorized access to receipts and accompanying tax returns and (2) implement adequate safeguards over returned refund and unmatched checks. At district offices, we found that IRS did not (1) adequately secure receipts as required by the Internal Revenue Manual (IRM) and (2) perform necessary reconciliations to ensure accountability for district office receipts. Because IRS service centers and district offices directly collected over $100 billion in fiscal year 1997 and are responsible for processing all taxpayer data submitted by taxpayers, such weaknesses increase the vulnerability of receipts and taxpayer data to theft or misuse.
subsections: section_title: Service Centers Lacked Adequate Deterrent Controls to Limit Unauthorized Access to Receipts
paragraphs: During the peak filing season, the processing of receipts and returns occurs 24 hours a day. IRS handles and processes taxpayer receipts and returns in several stages. The Receipt and Control Branch at each IRS service center is responsible for the receipt and initial processing of mail containing receipts and returns delivered to the service centers. The branch is to be located in a restricted access area limited to authorized personnel. Staff extract the contents of envelopes mailed by taxpayers, post the payment data to credit taxpayers’ accounts for the amounts received, and then endorse and prepare the checks for deposit. After the payments are processed, units outside the Receipt and Control Branch review the tax returns and post the tax return data to taxpayers’ accounts. The units that post the tax return data are not located in restricted areas and are thus accessible to all employees and nonemployees who have access to an IRS service center.
IRM 1(16)41 Physical Security Handbook, section 257.4, requires that the mail extraction operation—the first stage of processing—take place in a secured and restricted access area. However, at the four service centers we visited, mail that contained tax returns and receipts was left in carts in open, unrestricted corridors or rooms. Because of limited space at the service centers, these areas served as overflow storage when the units responsible for extracting mail could not accommodate all the mail received during the peak filing season. At two of the service centers, both unopened mail and opened mail that had been separated and clearly labeled as either “with remittances” or “without remittances” were stored in these areas. These overflow areas were not located in restricted access areas and, thus, were easily accessible to anyone in the service center, such as employees not authorized to process receipts or visitors who had no need to access receipts or taxpayer data. In fact, at one service center, the corridor used as an overflow area was a heavily travelled corridor used by employees carrying gym bags to access a fitness center. During our observations, no guards patrolled these areas in three of the four service centers visited. Although one service center used surveillance cameras to monitor activities in the corridor, the cameras’ views of activities were obstructed by 7-foot-high carts used to store unsorted and sorted mail.
At the end of the extraction process, IRS staff illuminate, or “candle,” all envelopes which have already gone through the extraction process to ensure that all contents are actually removed prior to the envelopes’ destruction. The final candling activity at one service center was located in an unsecured room off an unrestricted corridor. Since the final candling activity is an extension of the extraction of receipts and taxpayer data, this operation should be located in a secured and restricted access area, as required by IRM 1(16)41 Physical Security Handbook section 257.4. Because many checks are found during the candling process, the lack of security over the candling area increases IRS’ vulnerability to theft or loss of checks.
We also found that receipts discovered outside the Receipt and Control Branch were not adequately accounted for and secured. IRM 38(43)3.2, section (10), Service Center Deposit Activity, requires that “discovered remittances” not delivered immediately to the units responsible for depositing these receipts are to be held in locked containers. “Discovered remittances” are cash and/or checks that were either erroneously overlooked during the extraction process or that bypassed extraction because the receipts were sent unopened to other units, such as the Offer-in-Compromise Unit. The IRM further requires that as each such receipt is discovered, it is to be recorded by a supervisor on a control log. At two service centers, we observed numerous checks left on desks, shelves, or file folders in unsecured areas, such as the Code and Edit Unit and the Offer-in-Compromise Unit.
At one of the service centers where we performed additional work, we found that these checks were not recorded on control logs until they were ready to be taken for receipt processing and deposit. We were informed that during the peak filing season, these checks were recorded on control logs and submitted to the appropriate unit for receipt processing on an hourly basis. However, prior to doing so, unsecured and unattended checks outside restricted areas were susceptible to theft by any individual who had access to the service center.
Prior IRS internal audits and other internal reviews have identified other weaknesses in controls over the safeguarding of receipts. In response to these findings, each service center provided IRS management with its respective corrective action plan, which was then incorporated into IRS’ Summary Action Plan: Protection of Monetary Instruments, dated May 20, 1998. The plan reported corrective actions pending and some completed for weaknesses noted at specific service centers. However, the plan did not specifically address the use of overflow areas for storing receipts, nor did it address the weaknesses over “discovered remittances”. Additionally, the plan addressed the candling issue only at sites other than the one where we noted the weakness.
section_title: Service Centers Lacked Additional Safeguards Over Unmatched and Returned Refund Checks
paragraphs: Certain receipts that are particularly vulnerable to theft, such as “unmatched” and returned refund checks, were not properly secured. Unmatched checks are those checks that were inadvertently separated from their accompanying vouchers or tax returns or were mailed to the service center without any instructions from the taxpayers as to how the payments should be applied. Without such instructions, such checks must be set aside until they can be researched to determine which taxpayers’ accounts should be credited. At all service centers, unmatched checks are not subject to additional security but are stored in open baskets accessible to all who have access to the Receipt and Control Branch. As a result, these unmatched checks are particularly vulnerable to theft because they are not immediately processed and are stored in open baskets for long periods of time.
Returned refund checks are Treasury refund checks that are sent to taxpayers and subsequently returned uncashed to IRS as payment against other tax liabilities. IRM 3.8.43, Service Center Direct Receipts - Service Center Deposit Activity, section 43.4.2.47, requires refund checks returned to IRS by taxpayers to be stamped “non-negotiable.” Although the IRM does not state when the returned refund checks should be voided, some of these checks were already endorsed by the taxpayers, making them highly negotiable. Consequently, they should be voided as soon as they are extracted. However, at two service centers, returned refund checks discovered by the Extraction Unit were handled by several employees before they were voided. These returned refund checks were left in unsecured bins or file folders on desks prior to being stamped “non-negotiable,” significantly increasing the risk of theft. According to internal auditors at one service center, seven returned refund checks totalling $300,000 were stolen from that service center. This demonstrates the susceptibility of these refund checks to theft.
IRS internal audit similarly identified weaknesses over the handling of returned refund checks and recommended establishing tighter controls over these instruments. According to IRS’ Summary Action Plan: Protection of Monetary Instruments, IRS is pursuing a plan of action to address this weakness. However, no changes have yet been implemented.
section_title: District Offices Did Not Adequately Secure Receipts
paragraphs: Although district offices do not receive the same volume of receipts as service centers, it is nonetheless important for such offices to diligently control access to and accountability for their receipts. However, as in the service centers, we found weaknesses in the internal controls over district office receipts that expose them to risk of theft or loss.
Procedures for handling receipts at district offices vary slightly depending on whether the district office has a teller function. In all cases, however, the Customer Service Unit at the district office collects walk-in payments and tax returns from the taxpayers. If the district office has a teller function, walk-in payments are submitted to the Teller Unit, which posts receipt data into the IRS database in the same way the service centers do.These district offices use couriers to deliver their checks for deposit to the bank and to deliver any accompanying tax returns to the service centers for processing. If the district office does not have a teller function, the Customer Service Unit collects walk-in payments and returns and transmits all the documents via courier to the service center for processing.
IRM 1(16)(41), Physical Security Handbook, section 500, “Minimum Protection Standards,” establishes a nationwide, uniform method of protecting items which require safeguarding. Specifically, it requires that checks and currency be stored in locked containers and that the keys to access those containers also be stored in a locked container. At the three district offices visited, we observed receipts stored in unlocked containers during the day and, at two district offices, in containers accessible to numerous employees overnight. Specifically, we found the following:
At one district office, Customer Service employees left their desks unattended during the day, even though receipts were stored in drawers and the keys were still in the locks. At the end of the day, employees emptied their desk drawers of receipts in order to store them in a file cabinet overnight. If an employee left early, another employee would empty the drawer of receipts for overnight storage. The key to the file cabinet was accessible to all employees assigned to that unit.
At another district office, Customer Service employees stored receipts in an unlocked cash box. The Customer Service area was accessible to all IRS employees at the district office. The receipts were locked in a file cabinet at the Teller Unit area overnight, and the key to the cabinet was stored in an unlocked desk. Several employees in the unit were aware of where the key was stored. In the third district office, receipts were stored in an open bin during the day. These receipts were stored overnight in a locked cabinet. At this district office, access to the cabinet was limited to two people in the unit.
The use of unsecured containers to store receipts, or the failure to limit storage container accessibility to employees designated to open such containers, increases the potential for theft.
section_title: District Offices Did Not Perform Necessary Reconciliation to Ensure Accountability
paragraphs: To ensure proper access to and accountability for resources, the Comptroller General’s Standards for Internal Controls in the Federal Government specifies that periodic comparisons should be made between resources and records and that the frequency of such comparisons be determined by the vulnerability of the asset. However, at all three district offices we visited, receipts were not recorded in control logs or transmittal sheets until a few hours after receipt or even the following day. Additionally, no one reconciled the receipts against the control logs prior to or after overnight storage and prior to submitting them to the district office teller unit or to the service centers for processing. Given the weaknesses in securing receipts discussed above, the failure to immediately record receipts in control logs and to reconcile these control logs to receipts on hand decreases the likelihood of the timely detection of theft of receipts. Under current practices, incidents of theft may not come to IRS’ attention until taxpayers receive erroneous default notices or identify anomalies in their cancelled checks or bank statements and contact IRS.
section_title: Recommendations
paragraphs: To ensure that the mail extraction process takes place in a secure and restricted access area, as required by the IRM, we recommend that the Commissioner improve the physical security controls 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.
To limit exposure to theft and provide adequate monitoring in accordance with IRM requirements, we recommend that the Commissioner ensure that all final candling activities are consistently located in a restricted access area.
To reduce the vulnerability of receipts found outside restricted access areas, we recommend that the Commissioner 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.
To reduce the vulnerability of receipts that are especially susceptible to theft and misuse, we recommend that the Commissioner ensure that all unmatched checks are stored in locked containers until they can be researched and processed for deposit.
To reduce the vulnerability of returned refund checks to theft, we recommend that the Commissioner ensure that all returned refund checks are stamped “non-negotiable” as soon as they are extracted.
To better safeguard receipts at district offices, we recommend that the Commissioner 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 combination to these containers.
To improve accountability for walk-in payments received, we recommend that the Commissioner ensure that these 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 the submission of the receipts to another unit for payment processing. To ensure proper segregation of duties, the reconciliation should be performed by an employee not responsible for logging receipts in the control log.
section_title: Courier Security Does Not Adequately Protect Deposits and Sensitive Taxpayer Data From Theft or Loss
paragraphs: Proper safeguarding of assets requires that IRS ensure adequate security over receipts from the time they are received at the service center until the time they are deposited at financial depository institutions. However, at all four service centers we visited, receipts for deposits were picked up from the service centers by a single unarmed, plain-clothes courier for delivery to the depositing bank. During our visits, these couriers were entrusted with transporting peak season deposits ranging from $100 million to almost $200 million for each deposit twice a day. At one district office, we observed that the courier was a bicycle messenger entrusted with over $1 million of receipts during nonpeak season to more than $100 million per deposit during the peak season.
Deposits were also improperly safeguarded during pickup. At one service center, we observed that the courier left deposits unattended in the car while he returned inside the service center to pick up another batch of deposits. At another service center, we observed that the courier left deposits worth over $200 million unattended in the vehicle with the window open while he returned a borrowed cart to the interior of the service center. Onlookers at this service center were aware of the nature of the courier’s visit.
According to a commercial bank and courier company officials, banking industry practice is generally to use unarmed couriers to transport checks and armored vehicles to transport currency. Therefore, IRS’ current practice of transporting checks via unarmed couriers is similar to current banking industry practices. However, because of the magnitude of IRS’ deposits, both in dollars and the number of checks, and the sensitivity of taxpayer information contained on the checks, the security provided by the unarmed courier services may be inadequate to meet IRS’ responsibility to protect government assets and personal taxpayer information.
During the peak filing season, one service center deposit typically has tens of thousands of checks. 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. However, even if stolen checks are not cashed, they can be used for check cloning schemes, and sensitive personal information on these checks can be used to perpetrate identity fraud. Such an incident of loss or theft could result in the loss of funds and financial damage and could impose considerable burden on the taxpayers. Any such incident would greatly reduce the taxpayer’s confidence in IRS’ ability to safeguard tax receipts and the taxpayer’s personal data.
Due to differences in courier contracts, IRS is not consistently covered in the event of deposits being lost, stolen, or damaged in transit. In some contracts, the bank provides the courier service and the liability insurance for deposits in transit. In these instances, the bank is liable for the loss, theft, or destruction of any deposit from the time it is picked up from IRS by the bank’s courier. If the deposits are stolen, the bank is liable for any loss that IRS cannot recover after IRS has notified the taxpayers, issued stop payment orders, and received replacement checks. However, in other cases where IRS directly contracts with the courier service, the courier service is only liable up to the limit specified in the contract. This limit varies between $350,000 in a contractual agreement for one service center to $1 million for another service center, while other contracts did not specifically refer to liability coverage. Because of the high dollar value and the volume of checks involved in one peak season shipment of deposits, the government could be exposed to losses which exceed the courier’s contractual liability if all the lost or stolen checks cannot be recovered.
We also observed inconsistencies in the physical access rights to service centers that IRS provided to the couriers. At three of the service centers, IRS employees delivered the daily deposits from the Receipt and Control Branch to the couriers in the lobby or outside the building. However, at one service center, the courier was provided a restricted access area badge after checking in with the guard. This type of badge provided the courier greater access within the service center than most service center employees because it entitled the courier access to both unrestricted and restricted areas within the service center. This courier then proceeded to walk unescorted through the service center where tax returns were processed and entered the payment processing area through one of the restricted access doors not guarded by a door monitor. Because tax returns were stored unsecured and sometimes unattended throughout the service center and unprocessed receipts were stored in open baskets throughout the payment processing area, taxpayer data and checks were accessible to an individual who did not have a need to access them.
subsections: section_title: Recommendations
paragraphs: To ensure that IRS meets its responsibility to protect government assets and taxpayer information, we recommend that the Commissioner study the feasibility of improving security for its deposits in transit. In conducting this study, IRS should consider a number of alternatives, including the use of depositories in closer proximity to its various field locations and employing security guards to accompany couriers to the depositories.
To limit exposure to losses of deposits in transit, we recommend that the Commissioner 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.
To limit courier access to sensitive taxpayer information and unguarded receipts in the Receipt and Control Branch, we recommend that the Commissioner 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 couriers badges allowing them unnecessary service center access.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on this report, the Commissioner of Internal Revenue generally agreed with our findings and recommendations and noted that IRS has or would be taking action to address the issues raised in the report. These actions include conducting an analysis of risk classifications of positions in the Receipt and Control Branch to ensure background checks are commensurate with the level of risk associated with the position; ensuring IRS has the necessary equipment to participate in the FBI’s Integrated Automated Fingerprint Identification System program by August 1999; working with each service center to determine appropriate methods for securing overflow areas and ensuring all final candling areas are located in restricted access areas; exploring various options for security containers for unmatched checks and implementing a process for such storage by August 1999; revising procedures to require stamping all returned refund checks “non-negotiable” as soon as they are extracted from envelopes; revising procedures for safeguarding receipts received in walk-in facilities and for maintaining a control log of receipts received and deposited or transferred to another unit by January 1999; and studying alternative methods for transporting deposits to depositories and service center practices for limiting courier access to service centers.
These actions are generally consistent with the recommendations contained in our report and, if effectively implemented, would assist IRS in reducing the risk of loss or misuse of receipts and taxpayer information. However, there are a number of our recommendations for which IRS’ responses do not appear to adequately address. Specifically, IRS stated it would work with the Office of Personnel Management and IRS’ General Legal Services to determine when job applicants can be fingeprinted and would, to the extent possible, prohibit new employees from processing receipts until the results of fingerprint checks are received and reviewed by management. However, IRS noted that to wait for the results of fingerprint checks before hiring seasonal employees in the service centers would adversely affect IRS’ ability to collect and process tax returns. IRS also stated that it would not always be possible to prohibit new employees from processing receipts during its April peak returns processing period. However, it is particularly during these peak periods when receipts and taxpayer information are most susceptible to theft. Consequently, we believe that to further reduce such risk, IRS should carefully consider the need to have fingerprint checks performed prior to hiring new employees and have the results of all fingerprint checks reviewed prior to allowing personnel to handle taxpayer receipts and data.
With regard to our recommendation that IRS provide secure containers for service center employees to store discovered remittances prior to inventory and submission to the Receipt and Control Branch and to maintain an inventory of these remittances on a control log, IRS noted that it currently has procedures which require service centers to store such remittances in a secure container and to record remittance information. However, we found that these procedures were not uniformly followed by the service centers. Consequently, IRS will need to be proactive in providing secure containers to the service centers and in ensuring records are maintained of discovered remittances.
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 send your statements to the Senate Committee on Governmental Affairs and the House Committee on Governmental Reform and Oversight within 60 days after the date of this letter. 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 letter.
We are sending copies of this report to the Secretary of the Treasury and the Director of the Office of Management and Budget. We are also sending it to the Chairmen and Ranking Minority Members of the Senate Committee on Appropriations and its Subcommittee on Treasury and General Government; Senate Committee on Finance and its Subcommittee on Taxation and IRS Oversight; Senate Committee on Governmental Affairs; Senate Committee on the Budget; House Committee on Appropriations and its Subcommittee on Treasury, Postal Service, and General Government; House Committee on Ways and Means; House Committee on Government Reform and Oversight and its Subcommittee on Government Management, Information and Technology; House Committee on the Budget; and other interested congressional committees. Copies will be made available to others upon request.
Please contact me at (202) 512-9505 or Steven J. Sebastian, Assistant Director, at (202) 512-9521 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II.
section_title: Comments From the Internal Revenue Service
paragraphs: The following is GAO’s comment on the Internal Revenue Service’s letter dated October 29, 1998.
subsections: section_title: GAO Comment
paragraphs: 1. Discussed in the “Agency Comments and Our Evaluation” section.
section_title: Major Contributors to This Report
subsections: section_title: Accounting and Information Management Division, Washington, D.C.
section_title: Atlanta Field Office
section_title: Dallas Field Office
section_title: San Francisco Field Office
section_title: Los Angeles Field Office
section_title: Seattle Field Office
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