Financial Audit: Examination of IRS' Fiscal Year 1995 Financial Statements
Published: 1996-07-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a legislative requirement, GAO reviewed the Internal Revenue Service's (IRS) financial statements for fiscal years 1995 and 1994.
section_title: What GAO Found
paragraphs: GAO found that: (1) it could not express an opinion of the 1995 IRS financial statement due to limitations in the scope of its work; (2) the information in the 1995 statement may be unreliable; (3) ongoing financial management problems include IRS inability to verify or reconcile taxpayer revenue and refunds to accounting records, substantiate amounts reported for various types of taxes collected, verify nonpayroll operating expenses, and reconcile reported appropriations with Department of the Treasury records, and determine the unreliability of estimated accounts receivable balances; (4) IRS has not resolved many of its financial management problems, but it has developed software to capture detailed revenue and refund transactions and is completing documentation of its financial management systems to aid in system improvements; (5) significant material weaknesses in IRS controls over recordkeeping exist, including lax computer security; (6) it could not test IRS compliance with applicable laws and regulations; and (7) IRS has completed 17 of 59 recommendations for improving its financial management systems.

section_title: Letter
paragraphs: In accordance with the Chief Financial Officers Act of 1990, this report presents the results of our efforts to audit the Principal Financial Statements of the Internal Revenue Service (IRS) for fiscal years 1995 and 1994.
As in prior years, limitations on the scope of our audit and the problems that we found made it impossible to provide an affirmative opinion on:
The Principal Financial Statements for 1995. Thus, the accompanying statements may be unreliable. Internal controls. Management did not assert that IRS controls were effective and we noted major weaknesses in recordkeeping and systems.
Compliance with laws and regulations. We were unable to test the laws we considered necessary; accordingly, we are unable to report on the Internal Revenue Service’s compliance with laws and regulations.
The report discusses IRS’ continuing financial management problems and certain related matters. It also contains our formal opinions and reports on IRS’ financial statements, internal controls, and compliance with laws and regulations and our audit objectives, scope, and methodology. We make no new recommendations in this report. Appendix I describes the status of IRS’ efforts to implement the 59 recommendations we made in prior years.
We are sending copies of this report to the Commissioner of Internal Revenue, the Secretary of the Treasury, the Director of the Office of Management and Budget, the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight, and other interested congressional committees. Copies will be made available to others upon request.
This report was prepared under the direction of Gregory M. Holloway, Director, Governmentwide Audits, with the support of IRS’ Internal Audit staff and staff from the Accounting and Information Management Division’s Governmentwide Audits Group and Audit Support and Quality Assurance Group. Mr. Holloway may be reached at (202) 512-9510.
Charles A. Bowsher Comptroller General of the United States United States General Accounting Office Washington, D.C. 20548 Comptroller General of the United States To the Commissioner of Internal Revenue In accordance with the Chief Financial Officers (CFO) Act of 1990, the Internal Revenue Service (IRS) prepared the accompanying Principal Financial Statements for the fiscal years ended September 30, 1995 and 1994. In our attempt to audit these principal financial statements for fiscal year 1995, we found the following.
We are unable to give an opinion on the fiscal year 1995 Principal Financial Statements of the IRS because of the limitations on the scope of our work, which are discussed below. Thus, the Principal Financial Statements may be unreliable.
Material weaknesses in internal controls resulted in ineffective controls over safeguarding assets from material loss, assuring material compliance with laws governing the use of budget authority and with other relevant laws and regulations, and assuring that there were no material misstatements in the Principal Financial Statements.
We are unable to report on compliance with laws and regulations because of limitations on the scope of our work.
The following five financial management problems, which have undermined our ability to attest to the reliability of IRS’ financial statements for the past 4 fiscal years, provide the basis for these conclusions.
One, the amounts of total revenue ($1.4 trillion) and tax refunds ($122 billion) cannot be verified or reconciled to accounting records maintained for individual taxpayers in the aggregate.
Two, the amounts reported for various types of taxes collected (social security, income, and excise taxes, for example) cannot be substantiated.
Three, the reliability of reported estimates of $113 billion for valid accounts receivable and $46 billion for collectible accounts receivable cannot be determined.
Four, a significant portion of IRS’ reported $3 billion in nonpayroll operating expenses cannot be verified.
Five, the amounts IRS reported as appropriations available for expenditure for operations cannot be reconciled fully with Treasury’s central accounting records showing these amounts, and hundreds of millions of dollars in differences have been identified.
IRS worked toward the goal of resolving these issues in time for our fiscal year 1995 financial statement audit. Progress was made, but many of IRS’ efforts were not yet completed at the conclusion of the audit. IRS has continued its efforts to correct these problems with a goal of having these matters resolved in time for the fiscal year 1996 financial statement audit. Some of the corrective actions, particularly where they involve reprogramming software for IRS’ antiquated systems and developing new systems, will require longer term solutions. Therefore, the focus of key IRS efforts are on interim solutions to facilitate reliable reporting while IRS works to put longer term corrective actions in place.
IRS advised us that, as of the end of May 1996, its status in correcting the problems our audit identified was as follows: IRS stated that it had developed software programs to capture, from its revenue financial management system, the detailed revenue and refund transactions that, in the short term, would support reported amounts in its future financial statements until longer term system fixes could be made to achieve more reliable reporting of these amounts. In addition, IRS is attempting to complete documentation of its revenue financial management system to (1) aid in identifying better interim reporting solutions for reporting revenues and refunds, (2) provide better insights on the longer term systems fixes needed to enable IRS to readily and reliably provide the underlying support for its reported revenue and refund amounts, and (3) demonstrate that the level of misstatement related to its inability to reconcile the detailed transactions it identifies in its interim reporting efforts to its summary account records would not be material. IRS asserted that it would continue its efforts to determine a means of using its current revenue financial management system’s coding to identify its accounts receivable. IRS’ efforts are focused on correcting known current coding errors through reviewing 100 percent of all receivables over a certain dollar threshold. In addition, through intensified training efforts and better internal control policies and procedures, it said it would seek to ensure more accurate input and processing of transactions that underpin accounts receivable. IRS stated that it had completed the reconciliation of its Fund Balance with Treasury accounts except for IRS’ suspense accounts that contained reconciling items that were more than 6 months old. However, IRS said it was still in the process of making the necessary adjustments required to its general ledger and the related Department of the Treasury records to complete this effort.
IRS stated that it believed the core issue for correcting its receipt and acceptance problems related to properly accounting for transactions with other federal agencies. IRS stated that it was performing a study of transactions with other federal agencies to determine and correct the problems in this process that are due to IRS policies and procedures and to identify those that need to be corrected governmentwide.
We could not verify the results of IRS’ efforts as of the close of our fiscal year 1995 audit since they were not yet complete. However, we will continue to monitor IRS’ progress and advise IRS as it attempts to identify and implement solutions for correcting its underlying financial management problems.
These financial management problems and certain other related matters are discussed further in the Significant Matters section of this report. Our conclusions on IRS’ financial statements, internal controls, and compliance with laws and regulations are also included in the following sections.
subsections: section_title: Significant Matters
paragraphs: The overriding problem in providing an opinion on IRS’ financial statements, reporting on its internal controls, and reporting on its compliance with laws and regulations is that IRS has not yet been able to provide support for major portions of the information presented in its financial statements and, in some cases where it was able to do so, the information was found to be in error. The principal purpose of our financial audits is to attest to the reliability of information presented in the financial statements and to independently verify management’s assertions about the effectiveness of internal controls and whether the agency complied with laws and regulations. When information that underpins the reported financial statements is not available for audit, it sometimes results in the auditor being unable to render an opinion on the financial statements as a whole. This is because the auditor cannot evaluate sufficient evidence as a basis for forming an opinion on whether the information presented in the financial statements is correct, determining whether all significant internal controls through which the information was managed and processed were effective, and testing whether or not the agency, in this case IRS, complied with laws and regulations. This situation was the case for IRS for fiscal year 1995.
The following discusses the five material weaknesses we found. Each weakness was identified in IRS’ Federal Managers’ Financial Integrity Act (FMFIA) report for fiscal year 1995.
subsections: section_title: Revenues and Accounts Receivable Remain Unsubstantiated
paragraphs: Revenues, including the related refunds and accounts receivable, are the two key areas in IRS’ efforts to report Custodial financial statements. IRS collects tax receipts, receives tax returns, makes tax refunds to, and corresponds with hundreds of millions of taxpayers each year. IRS also tries to obtain compliance by enforcing the tax laws through its monitoring of accounts receivable. These activities involve processing and tracking billions of paper documents and, in fiscal year 1995, handling a reported $1.4 trillion in tax receipts and a reported $122 billion in tax refunds. Processing this volume of money and paperwork requires substantive coordination among IRS’ more than 600 offices worldwide, approximately 12,000 financial institutions, and 12 Federal Reserve Banks throughout the country.
subsections: section_title: Revenue
paragraphs: For fiscal year 1995, IRS made several attempts at extracting taxpayer information from its masterfiles—the only detailed record of taxpayer information IRS maintains—to support the amounts it reported for revenues in its financial statements. However, IRS has not been able to make these amounts agree to the amounts included in its financial management systems and Treasury records. Further, IRS is unable to determine that the correct amounts are transferred to the ultimate recipient of the collected taxes. For fiscal year 1995, the detailed transactions from its masterfile accounts were not provided to us in a timely manner to substantiate the reported amounts and thus we could not determine the amount of the differences.
The core financial management control weaknesses that contribute greatly to these problems are that IRS does not have comprehensive documentation on how its financial management system works. It has not yet put into place the necessary procedures to routinely reconcile activity in its summary account records with that maintained in its detailed masterfile records of taxpayer accounts. This problem is further exacerbated by IRS’ financial management system, which was not designed to support financial statement presentation, and thus significantly hinders IRS’ ability to identify the ultimate recipient of collected taxes.
This occurs because the system requires that corporate and individual taxpayers pay multiple taxes at the same time without readily identifying the application of the payments to the various taxes paid. As a result, IRS is forced to make the allocation of collections to the recipient based on the total tax owed as identified on the related tax return. The tax return is filed at a later date and may not contain sufficient information if the amount of taxes owed on the return does not agree with the amount paid, as is sometimes the case.
IRS has developed computer programs to extract the detailed masterfile data from its records but continues to be unable to reconcile the detailed extracted data to the summary accounts. In an interim effort to prepare reliable financial statement information, IRS is attempting to demonstrate the maximum exposure likely attributable to the unexplained differences and provide the necessary information to fix the identified system flaws. This interim plan involves IRS continuing its efforts to develop detailed comprehensive documentation of its current financial management system. We are monitoring IRS’ efforts closely, providing guidance and recommendations, and reporting at regular intervals to IRS’ senior management on the agency’s progress and actions needed to correct these problems in the short and long term.
As reported since our audit of IRS’ fiscal year 1992 financial statements, IRS cannot ensure that it distributes excise taxes based on collections, as required by law, because it bases these distributions on the amount reported on the tax return, that is, the assessed amount. However, during fiscal year 1995, IRS analyzed excise taxes by specific trust funds to determine if there were significant differences between taxes paid and amounts reported as owed on the return and found that these differences were insignificant. Because IRS completed this analysis after our audit was completed, we were unable to examine and determine the reliability of this information.
section_title: Accounts Receivable
paragraphs: For fiscal year 1995, IRS attempted to test a statistical sample of its inventory of open assessments to categorize them between financial accounts receivable and compliance assessments. For all the 4 fiscal years we have audited IRS’ financial statements, IRS has had difficulty separating, in its masterfile records of taxpayer accounts, its financial accounts receivable, from the amounts it has assessed only for compliance purposes because the design of IRS’ masterfiles commingles these amounts.
In fiscal year 1995, IRS expanded its previous years’ efforts by trying to first separate the inventory of assessments into accounts receivable and compliance assessments based on its coding of these assessments in its financial management system and then testing the accuracy of this coding to separate accounts receivable from compliance assessments on a taxpayer account basis. However, these efforts were unsuccessful because of mistakes made in performing the statistical tests and errors found in the coding of the assessments in IRS’ financial management systems which made the sample results unreliable for projecting to the total inventory of outstanding assessments. Our tests of the fiscal year 1995 data found significant errors at levels that made the result of any projections from the samples taken unreliable.
The actions needed to resolve the key financial management control weaknesses in accounts receivable are consistent with recommendations from our prior reports and are as follows: (1) better review and approval procedures are needed before assessment information is entered into IRS’ masterfile system, (2) clearer lines of authority and responsibility are needed between IRS’ taxpayer service and the Chief Financial Officer’s operations to ensure that internal control procedures are properly identified and strictly adhered to, (3) procedures need to be developed for processing in-process accounts and properly applying them to the respective taxpayer accounts, and (4) periodic detailed taxpayer account reviews should be performed as a quality review measure to ensure that the proper coding is taking place for taxpayer accounts. In addition, IRS needs to (1) continue its efforts to review taxpayer accounts with amounts owed to ensure that they are properly coded and accounted for and (2) perform more macro analysis of its inventory of assessments to identify aberrations and other systemic problems that will need to be corrected to accurately report on accounts receivable. We will continue to monitor IRS’ progress in this area and provide guidance and recommendations as it proceeds.
section_title: Administrative Operations Have Improved but More Improvement Is Needed
paragraphs: For fiscal year 1995, IRS had a reported $8.1 billion in operating expenses and related assets and liabilities used and incurred in its administrative operations. The key asset in its administrative operations is its Fund Balance with Treasury accounts and the related Unexpended Appropriations accounts. Its operating expenses can be readily separated between its efforts to account for and report, in fiscal year 1995, its $5.3 billion in payroll costs and $2.8 billion in nonpayroll costs.
IRS has made progress in accounting for and reporting its administrative operations. In fiscal year 1992, for the most part, we were unsuccessful in our attempts to audit IRS’ records for its administrative operations. IRS’ accounting records were in total disarray, and it could not substantiate large portions of the reported amounts. In addition, internal control policies and procedures were either nonexistent, inappropriately focused, or not followed. For fiscal year 1995, IRS had a core accounting system in place that tracked its financial management activity. Two critical problems, however, have continued to persist that were identified in our fiscal year 1992 audit: (1) IRS’ Fund Balance with Treasury accounts remain unreconciled, though some progress has been made toward that end and (2) IRS has not been able to provide support as to whether and when certain nonpayroll goods and services paid for were received and, in instances where support existed, we found that the cost associated with the purchase was often recorded and reported in the wrong fiscal year.
subsections: section_title: Fund Balance With Treasury
paragraphs: IRS’ Fund Balance with Treasury accounts historically were not being reconciled. For the most part, IRS’ personnel were only tracking the gross differences between their accounting records and what Treasury (the equivalent of their bank) reported to them for their administrative receipts and disbursements. This resulted in years of unreconciled amounts accumulating that were never researched and resolved and that were made difficult to research and resolve when the amounts were required to be audited.
These accounts have been unreconciled in each of the years of our prior audits—1992 through 1994—with net reconciling differences in the millions of dollars that were made up of gross reconciling differences in the hundreds of millions of dollars. We were not provided the information to fully determine the gross amount of the differences for fiscal year 1995 and, thus, while we do know the accounts remain unreconciled, we do not know by how much.
Over the last 2 fiscal years, IRS has made adjustments to its accounting records to write off large portions of the gross unreconciled amounts where it could not determine what the correct disposition of the difference should be after several efforts at researching the items. In addition, it hired a contractor to identify the differences between its accounting records and what it had reported to Treasury as its activity in its Fund Balance with Treasury accounts. IRS, though, has still not fully reconciled its differences between its records and Treasury’s records that are reported to IRS through its budget clearing accounts—for items that are more than 6 months old that remain unreconciled—and that are identified on its statement of differences—for similar items that are less than 6 months old.
Similarly, IRS still needs to investigate and resolve amounts in its suspense accounts, many of which have been in suspense for 1 year or more. In addition, IRS has not disposed of some of the reconciling items between its accounting records and what it reported to Treasury that were identified by the contractor. Through further contractor assistance or more intensified internal efforts, IRS must get these accounts fully reconciled. In addition, IRS needs to look more closely at the skill mix of its staff assigned with the responsibility of completing this reconciliation process.
If these accounts remain unreconciled, it will continue to be difficult to provide an opinion on either IRS’ administrative financial statements or management’s assertion about the effectiveness of internal controls. It will also continue to be impossible to determine whether IRS has complied with all of the appropriate laws and regulations to which it is subject. Notwithstanding the problems these unreconciled accounts present for rendering an opinion, these accounts make it impossible, or at best difficult, for IRS or anyone else to know whether its operating funds have been improperly spent and calls into question the accuracy of its reported operating expenses, assets, and liabilities.
section_title: Receipt and Acceptance
paragraphs: IRS did not provide support as to whether and when it received goods and services for significant portions of its nonpayroll operating expenses and, in several instances where the support was provided, we found that the cost should have been included in another period. Simply stated, this situation is much like when IRS audits a taxpayer. If the taxpayer cannot show independent evidence that an expense that was deducted on the tax return was incurred in the year under audit, the expense would be disallowed and the taxpayer’s tax liability increased. Likewise, when IRS cannot provide support for its reported expenses or the support shows that the expenses should be properly included in a different fiscal year, the auditor cannot provide an opinion on the amounts. Simply put, we cannot determine whether this expense was an expense of the current period—when no support exists—or whether it must be adjusted from the current year’s expenses—when the support shows it is in the wrong period. Our interim testing of IRS’ accounting records covering the first 10 months of fiscal year 1995 showed significant amounts of nonpayroll costs that were either unsupported or recorded in the wrong period.
IRS’ nonpayroll expenses that we reviewed included purchases from other federal agencies as well as from commercial vendors for printing services, postage, computer equipment, and many other costs. IRS’ lack of control over receipt and acceptance of goods and services, combined with its problems in linking the controls over goods and services purchased to the payment for these goods and services, makes it especially vulnerable to vendors, both federal and commercial, billing IRS for goods and services not provided or for amounts in excess of what was provided. This would be comparable to an individual or business receiving an invoice and paying it without verifying that the purchased item had been received and accepted, based on an assumption that someone else in the household or business received it. For example, IRS has an inventory management system that tracks when printed tax forms are received and used. However, the information tracked in this system is not used or integrated with the payment system for making vendor payments nor with any other system used to account for and report IRS’ operating expense for printing these forms.
section_title: Computer Security
paragraphs: In our prior year reports, we stated that IRS’ computer security environment was inadequate. Our review of controls over IRS’ computerized information systems, done to support our fiscal year 1995 audit, found that IRS has made some progress in addressing and initiating actions to resolve prior years’ computer security issues; however, some of the fundamental security weaknesses we previously identified continued to exist in this fiscal year. We will be studying these issues further and reporting on them in greater detail in a future report.
These deficiencies in internal controls may adversely affect any decision by management which is based, in whole or in part, on information that is inaccurate because of the deficiencies. Unaudited financial information reported by the Internal Revenue Service, including budget information, also may contain misstatements resulting from these deficiencies.
section_title: Disclaimer of Opinion on Principal Statements
paragraphs: As described above, we are unable to give an opinion on the Principal Financial Statements for fiscal year 1995. In addition, we were unable to give an opinion on the Principal Financial Statements for fiscal year 1994.
section_title: Statement on Internal Controls
paragraphs: We gained an understanding of internal controls designed to safeguard assets against loss from unauthorized acquisition, use, or assure the execution of transactions in accordance with laws governing the use of budget authority and with other laws and regulations that have a direct and material effect on the Principal Financial Statements or that are listed in Office of Management and Budget (OMB) audit guidance and could have a material effect on the Principal Financial Statements; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements and to maintain accountability for assets.
For fiscal years 1995 and 1994, we do not express an opinion on internal controls because the scope of our work was limited to determining our procedures for auditing the financial statements, not to express an opinion on internal controls. However, we found that the material weaknesses, described in the Significant Matters section of this report, resulted in ineffective controls that could lead to losses, noncompliance, or misstatements that are material in relation to the financial statements. Our internal control work would not necessarily disclose all material weaknesses.
section_title: Compliance With Laws and Regulations
paragraphs: Because of the limitations on the scope of our work as discussed above, we were unable to test the laws we considered necessary; accordingly, we are unable to report on IRS’ compliance with laws and regulations.
section_title: Status of Recommendations and Future Steps Needed
paragraphs: In our prior year reports (see footnote 1), we made 59 recommendations aimed at resolving IRS’ financial management problems. In our assessment this year, we determined that IRS had completed 17 of these recommendations. See appendix I for the status of IRS’ implementation efforts on the 59 recommendations from our prior year reports. IRS has stated its intention to commit the necessary resources and management oversight to resolve its financial management weaknesses and receive its first opinion on the fiscal year 1996 financial statements. In this regard, we are providing advice to IRS on how to resolve its long-standing and pervasive financial management problems.
section_title: Objectives, Scope, and Methodology
paragraphs: preparing the annual financial statements in conformity with the basis of accounting described in note 1 of the Administrative and Custodial financial statements; establishing, maintaining, and assessing the internal control structure to provide reasonable assurance that the broad control objectives of the Federal Managers’ Financial Integrity Act (FMFIA) are met; and complying with applicable laws and regulations.
We attempted to perform audit procedures on the limited information IRS was able to provide; however, for the reasons stated above, we were unable to perform the necessary audit procedures to opine on IRS’ Principal Financial Statements.
Except for the limitations on the scope of our work on (1) the Principal Financial Statements, (2) internal controls, and (3) compliance with laws and regulations described above, we did our work in accordance with generally accepted government auditing standards and OMB Bulletin 93-06, “Audit Requirements for Federal Financial Statements.”
We requested written comments on a draft of this report from you or your designee. Your office provided us with written comments which are discussed in the following section and reprinted in appendix II.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting (see appendix II) on a draft of this report, IRS generally agreed with the facts as stated in our report. In addition, IRS reaffirmed its commitment to ensuring the integrity of its financial data.
section_title: Principal Financial Statements
paragraphs: Statement of Financial Position (Administrative)
Statement of Operations (Administrative)
Notes to Principal Financial Statements (Administrative)
Statement of Financial Position (Custodial)
Notes to Financial Statements (Custodial)
Statement of Financial Position (Revolving Fund)
Note to Financial Statements (Revolving Fund)
The results of our efforts to audit IRS’ fiscal year 1992, 1993, and 1994 Principal Financial Statements were presented in our reports entitled Financial Audit: Examination of IRS’ Fiscal Year 1992 Financial Statements (GAO/AIMD-93-2, June 30, 1993), Financial Audit: Examination of IRS’ Fiscal Year 1993 Financial Statements (GAO/AIMD-94-120, June 15, 1994), and Financial Audit: Examination of IRS’ Fiscal Year 1994 Financial Statements (GAO/AIMD-95-141, August 4, 1995). The system and internal control weaknesses identified in the 1992 report and recommendations to correct them were discussed in more detail in six reports. In fiscal year 1993, we issued one report that included the system and internal control weaknesses and recommendations. For fiscal year 1994, we issued one report that contained no new recommendations.
We determined the status of the following recommendations based on our audit work at IRS during fiscal year 1995 and on our discussions with IRS officials. Our assessments of IRS’ actions for the most significant recommendations are discussed in the report. However, we have not fully assessed the appropriateness or effectiveness of all of the responses identified in the following table. We plan to update our assessment of IRS’ responses as part of our fiscal year 1996 audit.
Financial Audit: IRS Significantly Overstated Its Accounts Receivable (GAO/AFMD-93-42, May 6, 1993)
Provide the IRS Chief Financial Officer authority to ensure that IRS accounting system development efforts meet its financial reporting needs. At a minimum, the Chief Financial Officer’s approval of related system designs should be required. (continued)
Take steps to ensure the accuracy of the balances reported in IRS financial statements. In the long term, this will require modifying IRS systems so that they are capable of (1) identifying which assessments currently recorded in the Master File System represent valid receivables and (2) designating new assessments that should be included in the receivables balance as they are recorded. Until these capabilities are implemented, IRS should rely on statistical sampling to determine what portion of its assessments represent valid receivables.
Clearly designate the Chief Financial Officer as the official responsible for coordinating the development of performance measures related to receivables and for ensuring that IRS financial reports conform with applicable accounting standards.
Modify the IRS methodology for assessing the collectibility of its receivables by —including only valid accounts receivable in the analysis; —eliminating, from the gross receivables balance, assessments determined to have no chance of being collected; —including an analysis of individual taxpayer accounts to assess their ability to pay; —basing group analyses on categories of assessments with similar collection risk characteristics; and —considering current and forecast economic conditions, as well as historical collection data, in analyses of groups of assessments. (continued)
Once the appropriate data are accumulated, IRS may use modeling to analyze collectibility of accounts on a group basis, in addition to separately analyzing individual accounts. Such modeling should consider factors that are essential for estimating the level of losses, such as historical loss experience, recent economic events, and current and forecast economic conditions. In the meantime, statistical sampling should be used as the basis for both individual and group analyses.
IRS Information Systems: Weaknesses Increase Risk of Fraud and Impair Reliability of Management Information (GAO/AIMD-93-34, September 22, 1993)
Limit access authorizations for individual employees to only those computer programs and data needed to perform their duties and periodically review these authorizations to ensure that they remain appropriate.
Monitor efforts to develop a computerized capability for reviewing user access activity to ensure that it is effectively implemented.
Establish procedures for reviewing the access activity of unit security representatives.
Use the security features available in IRS’ operating systems software to enhance system and data integrity.
Require that programs developed and modified at IRS headquarters be controlled by a program librarian responsible for (1) protecting such programs from unauthorized changes including recording the time, date, and programmer for all software changes, and (2) archiving previous versions of programs. (continued)
Establish procedures requiring that all computer program modifications be considered for independent quality assurance review.
Formally analyze Martinsburg Computing Center’s computer applications to ensure that critical applications have been properly identified for purposes of disaster recovery.
Test the disaster recovery plan.
Monitor service center practices regarding the development, documentation, and modification of locally developed software to ensure that such software use is adequately controlled.
Review the current card key access system in the Philadelphia Service Center to ensure that only users who need access to the facilities protected by the system have access and that authorized users each have only one unique card key.
Establish physical controls in the Philadelphia Service Center to protect computers with access to sensitive data that are not protected by software access controls. (continued)
Financial Management: IRS’ Self-Assessment of Its Internal Control and Accounting Systems Is Inadequate (GAO/AIMD-94-2, October 13, 1993)
The Senior Management Council should coordinate, monitor, or oversee activities to (1) establish and implement proper written procedures that provide for the identification, documentation, and correction of material weaknesses, (2) provide classroom training and guidance materials to all review staff, (3) develop effective corrective action plans that address the fundamental causes of the weaknesses, and (4) verify the effectiveness of corrective actions before removing reported weaknesses from IRS’ records.
Financial Management: Important IRS Revenue Information Is Unavailable or Unreliable (GAO/AIMD-94-22, December 21, 1993)
Develop a method to determine specific taxes collected by trust fund so that the difference between amounts assessed and amounts collected is readily determinable and excise tax receipts can be distributed as required by law. This could be done by obtaining specific payment detail from the taxpayer, consistent with our April 1993 FTD report. Alternatively, IRS might consider whether allocating payments to specific taxes based on the related taxpayer returns is a preferable method.
Determine the trust fund revenue information needs of other agencies and provide such information, as appropriate. If IRS is precluded by law from providing needed information, IRS should consider proposing legislative changes. (continued)
Identify reporting information needs, develop related sources of reliable information, and establish and implement policies and procedures for compiling this information. These procedures should describe any (1) adjustments that may be needed to available information and (2) analyses that must be performed to determine the ultimate disposition and classification of amounts associated with in-process transactions and amounts pending investigation and resolution.
Establish detailed procedures for (1) reviewing manual entries to the general ledger to ensure that they have been entered accurately and (2) subjecting adjusting entries to supervisory review to ensure that they are appropriate and authorized.
Monitor implementation of actions to reduce the errors in calculating and reporting manual interest, and test the effectiveness of these actions.
Give a priority to the IRS efforts that will allow for earlier matching of income and withholding information submitted by individuals and third parties.
Financial Management: IRS Does Not Adequately Manage Its Operating Funds (GAO/AIMD-94-33, February 9, 1994)
Monitor whether IRS’ new administrative accounting system effectively provides managers up-to-date information on available budget authority.
Promptly resolve differences between IRS and Treasury records of IRS’ cash balances and adjust accounts accordingly.
Promptly investigate and record suspense account items to appropriate appropriation accounts. (continued)
Perform periodic reviews of obligations, adjusting the records for obligations to amounts expected to be paid, and removing expired appropriation balances from IRS records as stipulated by the National Defense Authorization Act for Fiscal Year 1991.
Monitor compliance with IRS policies requiring approval of journal vouchers and enforcing controls intended to preclude data entry errors.
Review procurement transactions to ensure that accounting information assigned to these transactions accurately reflects the appropriate fiscal year, appropriation, activity, and sub-object class.
Provide (1) detailed written guidance for all payment transactions, including unusual items such as vendor credits, and (2) training to all personnel responsible for processing and approving payments.
Revise procedures to require that vendor invoices, procurement orders, and receipt and acceptance documentation be matched prior to payment and that these documents be retained for 2 years.
Revise procedures to incorporate the requirements that accurate receipt and acceptance data on invoiced items be obtained prior to payment and that supervisors ensure that these procedures are carried out.
Revise document control procedures to require IRS units that actually receive goods or services to promptly forward receiving reports to payment offices so that payments can be promptly processed.
Monitor manually computed interest on late payments to determine whether interest is accurately computed and paid. (continued)
Enforce existing requirements that early payments be approved in accordance with OMB Circular A-125.
Require payment and procurement personnel, until the integration of AFS and the procurement system is completed as planned, to periodically (monthly or quarterly) reconcile payment information maintained in AFS to amounts in the procurement records and promptly resolve noted discrepancies.
Require the description and period of service for all invoiced items to be input in AFS by personnel responsible for processing payments, and enhance the edit and validity checks in AFS to help prevent and detect improper payments.
Establish procedures, based on budget categories approved by OMB, to develop reliable data on budget and actual costs.
Use AFS’ enhanced cost accumulation capabilities to monitor and report costs by project in all appropriations.
Financial Management: IRS Lacks Accountability Over Its ADP Resources (GAO/AIMD-93-24, August 5, 1993)
Provide the agency’s CFO with the authority to ensure that data maintained by IRS’ ADP inventory system meet its management and reporting needs.
Provide that any software purchases, development, or modifications related to this system are subject to the CFO’s review and approval. (continued)
Develop and implement standard operating procedures that incorporate controls to ensure that inventory records are accurately maintained. Such controls should include  — establishing specific procedures to ensure the prompt and accurate recording of acquisitions and disposals in IRS’ ADP fixed asset system, including guidance addressing the valuation of previously leased assets; — reconciling accounting and inventory records monthly as an interim measure until the successful integration of inventory and accounting systems is completed as planned; and — implementing mechanisms for ensuring that annual physical inventories at field locations are effectively performed, that discrepancies are properly resolved, and that inventory records are appropriately adjusted.
Oversee IRS efforts for ensuring that property and equipment inventory data, including telecommunications and electronic filing equipment, is complete and accurate.
Determine what information related to ADP resources, such as equipment condition and remaining useful life, would be most useful to IRS managers for financial management purposes and develop a means for accounting for these data.
Develop an interim means to capture relevant costs related to in-house software development. (continued)
Financial Audit: Examination of IRS’ Fiscal Year 1993 Financial Statements  (GAO/AIMD-94-120, June 15,1994)
Ensure that system development efforts provide reliable, complete, timely, and comprehensive information with which to evaluate the effectiveness of its enforcement and collection programs; Establish and implement procedures to analyze the impact of abatements on the effectiveness of assessments from IRS’ various collection programs; and Reconcile detailed revenue transactions for individual taxpayers to the master file and general ledger.
Establish and implement procedures to proactively identify errors that occur during processing of data, and design and implement improved systems and controls to prevent or detect such errors in the future.
Monitor its systems and controls to regularly identify problems as they occur by establishing clear lines of responsibility and communication from top management to the lowest staff levels, Develop action plans that are agreed upon by all affected groups and individuals to correct problems identified, and Continuously monitor corrective actions to ensure that progress is achieved.
Periodically compare information in payroll records to supporting personnel information, Use current information to periodically update estimated future TSM costs, and (continued)
Develop reliable detailed information supporting its reported accounts payable balances.
Develop and implement systems and standard operating procedures that incorporate controls to ensure that seized asset inventory records are accurately maintained, which include Establishing specific procedures to ensure the prompt and accurate recording of seizures and disposals, including guidance addressing the valuation of seized assets; Reconciling accounting and inventory records monthly as an interim measure until the successful integration of inventory and accounting systems is completed; and Implementing mechanisms for ensuring that annual physical inventories at field locations are effectively performed, that discrepancies are properly resolved, and that inventory records are appropriately adjusted.
Determine what information related to seized assets, such as proceeds and liens and other encumbrances, would be most useful to IRS managers for financial management purposes and develop a means for accounting for these data.
section_title: Comments From the Internal Revenue Service
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